1997 (12) TMI 104 - SC - Income Tax

Whether the balance-sheet figures as on March 31, 1972, should be taken for ascertaining the break-up value of the shares gifted and not the balance-sheet figures as on March 31, 1973 ? Held that - Having regard to the fact that the gift was made on the verge of the close of the accounting year ending on March 31, 1973, the balance-sheet as on March 31, 1973, should be taken as the basis for ascertaining the break-up value of the shares as on March 28, 1973. However, suitable adjustments will have to be made if there has been any variation in the value of the assets of the company between March 28, 1973, and March 31, 1973. That, however, is not the case of the assessee. Under these circumstances, the judgment under appeal is upheld. The appeal is dismissed.

Issues: Valuation of unquoted shares for gift tax purposes based on balance-sheet figures as on March 31, 1972, or March 31, 1973.

The Supreme Court addressed a question referred by the Tribunal regarding the valuation of unquoted shares transferred on March 28, 1973, for the assessment year 1973-74 under the Gift-tax Act, 1958. The dispute centered around whether the break-up value of the shares should be ascertained based on the balance-sheet figures as on March 31, 1972, or March 31, 1973. Both the department and the assessee agreed to use the break-up method for valuation, but disagreed on the balance-sheet date to be considered. The department argued for March 31, 1973, as it was closer to the transfer date, while the assessee contended for March 31, 1972, being the latest available balance-sheet. The court emphasized the importance of determining the correct value of the shares at the date of the gift, which was three days before the financial year ending on March 31, 1973. It concluded that the balance-sheet figures as on March 31, 1973, would provide a more realistic valuation, considering any changes in the company's assets. The court rejected the assessee's argument to use the balance-sheet figures as on March 31, 1972, as it could lead to an absurd result depending on the gift date. The break-up value method aimed to reflect the shares' true value at the gift date, making the March 31, 1973, balance-sheet more relevant for valuation.

The court referenced a Madras High Court decision emphasizing the importance of considering balance-sheets close to the gift date to capture any developments affecting the company's net worth and share value. It agreed with this approach, stating that the balance-sheet figures as on March 31, 1972, provided a snapshot of the company's assets up to that date, but subsequent developments could impact the share value. The court highlighted the need to consider the balance-sheet as on March 31, 1973, for a realistic valuation. Another Madras High Court judgment highlighted the principle of valuing unquoted shares based on balance-sheets before and after the gift date to approximate the assets' break-up value accurately. In this case, the balance-sheet as on March 31, 1973, was available for valuation, providing a clear picture of the share value as of March 28, 1973.

The court concluded that the balance-sheet as on March 31, 1973, should be the basis for determining the break-up value of the shares transferred on March 28, 1973. It noted that adjustments might be necessary if there were variations in the company's asset value between the two dates, but this was not the case here. Therefore, the judgment under appeal was upheld, and the appeal was dismissed with no order as to costs.

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