1987 (7) TMI 154 - AT - Income Tax

Summary

Issues:
1. Valuation of shares for gift-tax assessment.
2. Consideration of actuarial valuation of gratuity liability.
3. Application of valuation methods for determining share value.
4. Relevance of financial condition of the company on the date of gift.

Detailed Analysis:

1. Valuation of Shares:
The primary issue in the appeals was the valuation of shares of M/s. Saraya Sugar Mills for gift-tax assessment. The assessee had initially disclosed the value of 70,000 shares at Rs. 2,62,500. However, during assessment, it was argued that the liability for the provision of gratuity should be deducted, and a 30% deduction should be allowed due to the shares not being readily saleable. The Gift-tax Officer valued the shares under Rule 1D of the Wealth-tax Rules at 75% of the value, not accepting the plea for gratuity deduction.

2. Actuarial Valuation of Gratuity Liability:
The Commissioner of Gift-tax (Appeals) considered two main contentions regarding the valuation of shares. Firstly, it was argued that the yield method, not the break-up method, should be applied for valuation. Secondly, the deduction of actuarial value of the liability for gratuity was contested. The Commissioner accepted the plea of the assessee, allowing the deduction for the actuarial value of gratuity liability and determined the share value at Rs. 5.96 per share.

3. Application of Valuation Methods:
The Appellate Tribunal noted the Supreme Court's decision that the break-up method could not be applied for gift-tax valuation unless the company was ready for winding up. The Tribunal emphasized the consideration of profits when dividends were not indicative of value. It also referred to the Madras High Court's ruling that actuarial valuation of gratuity should be deducted for wealth-tax, gift-tax, and estate duty purposes.

4. Financial Condition of the Company:
The Tribunal highlighted the importance of considering the financial condition of the company on the date of gift for share valuation. It noted the challenging circumstances faced by the sugar industry during the relevant period and directed the Commissioner to ascertain the value of shares based on the company's position on the date of gift. The Tribunal upheld the approach of applying the yield method and allowing the deduction for actuarial value of gratuity liability while considering the company's financial status at the time of the gift.

In conclusion, the Appellate Tribunal dismissed the Departmental appeal and allowed the assessee's appeal for statistical purposes, directing a reassessment of the share value based on the company's financial condition at the time of the gift.