1993 (1) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Correct method of valuation for shares under the Gift-tax Act.
2. Applicability of Rule 10(2) of the Gift-tax Rules for valuing shares.
3. Rejection of the profit-earning method for valuation.
4. Justification for depressing the value of shares due to restrictive transfer provisions.
5. Determination of the date of gift for tax purposes.
6. Relevant balance-sheet for determining the break-up value of shares.
7. Inclusion of goodwill in the total assets for valuation.

Detailed Analysis:

1. Correct Method of Valuation for Shares:
The primary issue was whether the Tribunal was justified in using the break-up value method instead of the yield or profit-earning method to determine the value of shares under Section 6 of the Gift-tax Act. The Tribunal had rejected the assessee's contention for using the profit-earning method. However, the court referred to the Supreme Court's decision in CGT v. Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai, which held that the profit method is the correct method for such valuations. Consequently, the court concluded that the authorities and the Tribunal were wrong in applying the break-up value method, and the correct method should be the yield or profit-earning method.

2. Applicability of Rule 10(2) of the Gift-tax Rules:
The Tribunal had applied Rule 10(2) of the Gift-tax Rules, which prescribes the break-up value method when the articles of association of a private company contain restrictive provisions as to the alienation of shares. The court, however, noted that the Supreme Court did not consider Rule 10 in its decision in Ambalal Sarabhai's case. Therefore, the court held that the decision of the Supreme Court should be followed, making the yield method the appropriate one, despite Rule 10(2).

3. Rejection of the Profit-Earning Method for Valuation:
The Tribunal had also rejected the profit-earning method proposed by the assessee. The court, referencing the Supreme Court's ruling, held that the profit-earning method should be adopted for valuing shares of a running concern like Gaskets and Radiators Private Limited. Thus, the Tribunal's rejection of this method was incorrect.

4. Justification for Depressing the Value of Shares Due to Restrictive Transfer Provisions:
The Tribunal held that there was no justification to depress the value of shares due to restrictive provisions on their transfer. The court did not provide a direct answer to this issue, as it became moot in light of the decision to adopt the profit-earning method for valuation.

5. Determination of the Date of Gift for Tax Purposes:
The Tribunal and the Commissioner had differing views on the date of the gift. The Tribunal confirmed that the gift was made on April 28, 1976, rather than December 28, 1976, the date when the shares were transferred to the trustees. The court upheld this finding, agreeing that the gift date should be April 28, 1976.

6. Relevant Balance-Sheet for Determining the Break-up Value of Shares:
The Tribunal had used the balance-sheet as of December 31, 1975, for valuation, whereas the Commissioner used the balance-sheet as of December 31, 1974. The court did not address this issue directly, as it became irrelevant due to the adoption of the profit-earning method.

7. Inclusion of Goodwill in the Total Assets for Valuation:
The Tribunal had excluded goodwill from the total assets for valuation, as it was not indicated as an asset in the balance-sheet. The court upheld this exclusion, agreeing that goodwill should not be considered in the absence of its indication in the balance-sheet.

Conclusion:
In conclusion, the court answered questions Nos. 1, 2, and 3 in G.T.R. No. 1 of 1981 in the negative, favoring the assessee and against the Revenue. Question No. 4 did not require an answer. In G.T.R. No. 2 of 1981, question No. 1 was answered affirmatively in favor of the assessee, while questions Nos. 2 and 3 did not require answers. The references were disposed of without any order as to costs.