1993 (9) TMI 149 - AT - Income Tax

Summary

Issues Involved:
1. Appropriate method for valuing shares gifted by the assessee.
2. Applicability of Rule 10(2) of the Gift-tax Rules.
3. Relevance of Supreme Court judgments in similar cases.
4. Interpretation of Section 6 of the Gift-tax Act.

Detailed Analysis:

1. Appropriate Method for Valuing Shares Gifted by the Assessee:
The primary issue in this appeal is the method of valuation of shares gifted by the assessee. The assessee valued the shares based on the profit earning method, supported by a registered valuer's report. The Gift-tax Officer, however, adopted the break-up value method, resulting in a higher valuation of the shares.

2. Applicability of Rule 10(2) of the Gift-tax Rules:
The Gift-tax Officer contended that Rule 10(2) of the Gift-tax Rules mandated the use of the break-up value method for valuing shares of non-investment companies. However, the CIT (A) and the appellate tribunal disagreed, stating that Rule 10(2) is applicable only if the shares cannot be valued under Section 6(1) of the Gift-tax Act. The tribunal noted that the profit earning method should be applied if the company is a going concern, as established by the Supreme Court in Mahadeo Jalan and Smt. Kusumben D. Mahadevia cases.

3. Relevance of Supreme Court Judgments in Similar Cases:
The tribunal relied heavily on Supreme Court judgments, particularly in Smt. Kusumben D. Mahadevia and Mahadeo Jalan, which established that the profit earning method is appropriate for valuing shares of a going concern. The tribunal also referenced the Bombay High Court's interpretation in Seth Hemant Bhagubhai Mafatlal, which reaffirmed the primacy of the profit earning method over the break-up value method for such valuations.

4. Interpretation of Section 6 of the Gift-tax Act:
Section 6(1) of the Gift-tax Act requires the value of gifted property to be estimated at the price it would fetch if sold in the open market. The tribunal held that this section should be applied first. Only if the value cannot be estimated under Section 6(1) should Section 6(3) and Rule 10(2) be invoked. The tribunal concluded that the profit earning method aligns with Section 6(1) for a going concern, thus ruling out the applicability of Section 6(3) and Rule 10(2).

Conclusion:
The tribunal upheld the CIT (A)'s order directing the Gift-tax Officer to value the shares based on the profit earning method. The appeal was dismissed, affirming that the profit earning method is the appropriate valuation method for shares of a non-investment company that is a going concern. The tribunal emphasized that Rule 10(2) of the Gift-tax Rules is not mandatory and does not override the valuation principles established by the Supreme Court.