1961 (3) TMI 136 - HC - Income Tax

Summary

Issues Involved:
1. Method of valuation of shares under the Gift-Tax Act.
2. Comparison of valuation methods under the Gift-Tax Act and Wealth-Tax Act.
3. Validity of the assessment order and notice of demand.
4. Jurisdiction and applicability of Article 226 of the Constitution.

Issue-wise Detailed Analysis:

1. Method of valuation of shares under the Gift-Tax Act:
The petitioner made a gift of shares and submitted a voluntary return based on their face value. The Gift-Tax Officer assessed the value based on the latest balance-sheets of the companies, but the method of valuation was not disclosed. The petitioner argued that the valuation was arbitrary and lacked transparency. The Gift-Tax Officer later clarified that the valuation was done per Rule 10(2) of the Gift-Tax Rules, 1958, using the wealth-tax assessments of the companies. The court emphasized that under Section 6 of the Gift-Tax Act, the value should reflect what the shares would fetch in the open market, considering all liabilities, including proposed dividends and provisions for taxation.

2. Comparison of valuation methods under the Gift-Tax Act and Wealth-Tax Act:
The court noted that the valuation method under the Wealth-Tax Act differs from the Gift-Tax Act. The Wealth-Tax Act considers "net wealth" as assets minus debts, not liabilities, while the Gift-Tax Act requires considering liabilities. The court highlighted the distinction between "debts" and "liabilities," stating that all debts are liabilities, but not all liabilities are debts. The Gift-Tax Act mandates considering all liabilities to determine the real value of assets, unlike the Wealth-Tax Act, which only considers debts.

3. Validity of the assessment order and notice of demand:
The court found that the assessment was erroneously done using the Wealth-Tax Act's method, which is not applicable under the Gift-Tax Act. The assessment order failed to disclose the method of calculation, making it impossible for the petitioner to understand or challenge it effectively. The court ruled that the assessment order and the notice of demand were based on an incorrect application of the law and must be quashed.

4. Jurisdiction and applicability of Article 226 of the Constitution:
The respondents argued that there was no error on the face of the proceedings, and thus, an application under Article 226 did not lie. However, the court held that under Article 265 of the Constitution, no tax shall be levied or collected except by authority of law. Since the assessment was made on an incorrect legal basis, the application under Article 226 was justified. The court stated that the petitioner could not have effectively appealed due to the lack of clarity in the assessment order.

Conclusion:
The court quashed the assessment order and the notice of demand, directing the respondents to reassess the gift-tax in accordance with the correct legal provisions. The interim orders were vacated, and no order as to costs was made. The rule was made absolute.