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Issues Involved:
1. Whether there was undervaluation of shares sold by the assessee, leading to deemed gift assessment. 2. Whether the Commissioner of Income-tax (Appeals) was correct in allowing a 30% discount while arriving at the break-up value of the shares. Detailed Analysis: Issue 1: Undervaluation of Shares and Deemed Gift Assessment The Tribunal referred two questions regarding the assessment years 1973-74 and 1974-75 under section 26(1) of the Gift-tax Act, 1958. The first issue was whether there was an undervaluation of shares sold by the assessee, leading to deemed gift assessment. The Gift-tax Officer believed the market value of the shares was higher than reported by the assessee, resulting in additional tax assessments of Rs. 3,12,702 for 1973-74 and Rs. 9,45,786 for 1974-75. Both the Gift-tax Officer and the assessee used the break-up value method for share valuation, but differed on which balance-sheet to use: the officer used the balance-sheet post-sale, while the assessee used the pre-sale balance-sheet. The Commissioner of Income-tax (Appeals) followed guidelines from CGT v. Prema Srinivasan [1978] 114 ITR 78 and found no undervaluation, thus deleting the additions. The Department's appeal to the Tribunal argued that the Commissioner incorrectly applied rule 1D of the Wealth-tax Rules, which they claimed was inapplicable to gift-tax proceedings. However, the Tribunal upheld the Commissioner's decision, stating that the method used was well-known and prescribed for wealth-tax purposes, thus no presumption of understatement existed. The Tribunal's decision was supported by the Supreme Court's ruling in Bharat Hari Singhania v. CWT [1994] 207 ITR 1, which mandated rule 1D's application. The Tribunal found no infirmity in using the balance-sheet preceding the sale date, as per Explanation I to rule 1D, which aligns with the decision in CGT v. Gopal Srinivasan [1995] 214 ITR 637. Issue 2: Allowance of 30% Discount in Share Valuation The second issue was whether the Commissioner of Income-tax (Appeals) correctly allowed a 30% discount while arriving at the break-up value of the shares, considering factors like non-declaration of dividends and restrictive clauses in the articles of association. The Tribunal allowed a 30% discount for shares of Sundaram Private Ltd., India Motor Parts and Accessories Ltd., and Sundaram Fasteners Ltd., due to restrictive clauses and non-declaration of dividends. The Department contended that the discount should not exceed 15% as per rule 1D. However, the Tribunal justified the 30% discount due to the specific restrictive factors and non-declaration of dividends for 4-6 years. The Tribunal's decision was consistent with the principles outlined in CGT v. S. Venu Srinivasan [1978] 112 ITR 771 and CGT v. Prema Srinivasan [1978] 114 ITR 78, which emphasized the market value of shares as on the date of the gift, considering any restrictive clauses. The Tribunal found the 30% discount reasonable and based on the facts of the case. Conclusion: The High Court affirmed the Tribunal's decision on both issues, ruling that there was no undervaluation of shares and that the 30% discount was reasonable given the specific circumstances. Both questions were answered in the affirmative and against the Department, with no costs awarded.
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