1990 (1) TMI 101 - AT - Income Tax

Summary

Issues Involved:
1. Validity of proceedings under section 16(1)(a) of the Gift-tax Act.
2. Valuation of shares gifted.
3. Estimate of the value of goodwill at Rs. 81 per share.
4. Application of Rule 10(2) of the Gift-tax Rules.

Issue-wise Detailed Analysis:

1. Validity of Proceedings under Section 16(1)(a) of the Gift-tax Act:
The assessee objected to the validity of the proceedings initiated under section 16(1)(a) of the Gift-tax Act. The Gift-tax Officer (GTO) issued a notice on the reasoning that the shares were transferred for inadequate consideration, thus constituting a deemed gift under section 4(1)(a) of the Gift-tax Act. The CIT(A) upheld the proceedings, and the Tribunal did not find it necessary to delve into the legalities due to the decision on the merits.

2. Valuation of Shares Gifted:
The primary issue was whether the shares were transferred at fair market value. The assessee sold shares at Rs. 200 per share, which was accepted for income-tax and wealth-tax purposes. The GTO, however, valued the shares at Rs. 348 per share, including Rs. 81 for goodwill. The Tribunal noted that the valuation method prescribed under Rule 1D of the Wealth-tax Rules was accepted by the Bombay High Court and should be applied consistently. The Tribunal concluded that the value of Rs. 200 per share should be adopted for Gift-tax purposes as well.

3. Estimate of the Value of Goodwill at Rs. 81 per Share:
The GTO added Rs. 81 per share for goodwill, which was contested by the assessee. The Tribunal referenced decisions from various courts and concluded that goodwill should not be added while valuing unquoted equity shares under Rule 10(2) of the Gift-tax Rules. This method of valuation was deemed incorrect, and the Tribunal rejected the addition of goodwill.

4. Application of Rule 10(2) of the Gift-tax Rules:
The Tribunal examined whether Rule 10(2) of the Gift-tax Rules was correctly applied. The assessee argued that the value of goodwill should not be included, citing decisions from other cases. The Tribunal agreed, noting that the value of goodwill should not be considered while valuing unquoted equity shares. The Tribunal emphasized that the valuation method under Rule 1D of the Wealth-tax Rules should be consistently applied, as it is the only statutorily recognized method.

Conclusion:
The Tribunal allowed the appeal, canceling the orders of the CIT(A) and the IAC of Gift-tax. The valuation of shares at Rs. 200 per share, as accepted for income-tax and wealth-tax purposes, was upheld for Gift-tax purposes. The Tribunal found no element of deemed gift under section 4(1)(a) of the Gift-tax Act and rejected the inclusion of goodwill in the valuation. The appeal was allowed on merit, and other legal aspects were not considered necessary to address.