1984 (3) TMI 173 - AT - Income Tax

Adequate Consideration, Break Up Method, Deemed Gift, Fair Market Value, Gift Tax Act, Proposed Transfer, Quoted Equity Shares, Unquoted Shares, Wealth Tax

Summary

Issues Involved:
1. Determination of market value for unquoted shares.
2. Applicability of Rule 1D of the Wealth-tax Rules, 1957.
3. Validity of a 15% discount for restrictions on transfer of shares.
4. Adequacy of consideration in the context of gift-tax assessments.

Issue-wise Detailed Analysis:

1. Determination of Market Value for Unquoted Shares:
The assessees sold shares of a private limited company at Rs. 3,450 per share, claiming this represented the market value. The sale price was justified using the intrinsic (break-up) value method as per the balance sheet as on 31-3-1977, adjusted for accretion to assets until the sale date. The GTO contested this, arguing that the break-up value method was inappropriate for a going concern and that the shares should be valued higher. The first appellate authority found the method reasonable and cited supporting judicial precedents, including the Mysore High Court's decision in CED v. J. Krishna Murthy and the Madras High Court's decision in CWT v. S. Ram.

2. Applicability of Rule 1D of the Wealth-tax Rules, 1957:
The GTO argued that Rule 1D was not mandatory for gift-tax purposes. However, the first appellate authority and the Tribunal emphasized that Rule 1D, while not mandatory, represents a recognized method for valuing unquoted shares. The Tribunal noted that both the assessee and the GTO agreed on using the break-up value method, with the only dispute being the applicability of a discount for restrictions on share transfer.

3. Validity of a 15% Discount for Restrictions on Transfer of Shares:
The GTO disallowed the 15% discount for restrictions on share transfer, which would have increased the share value to Rs. 4,042. The first appellate authority and the Tribunal upheld the discount, citing Rule 1D and other judicial precedents. The Tribunal highlighted that restrictions on share transfer in private companies depress market value, justifying the discount. The Tribunal also referenced authoritative texts and judicial decisions supporting the allowance of such discounts.

4. Adequacy of Consideration in the Context of Gift-tax Assessments:
Section 4(1)(a) of the Gift-tax Act deems a gift where property is transferred for inadequate consideration. The Tribunal found that the sale price of Rs. 3,450 per share was justified and not indicative of inadequate consideration. The Tribunal emphasized that the best evidence of market value is the actual transaction price, especially when multiple transactions occur at the same price among different parties, including trustees acting on behalf of beneficiaries. The Tribunal also referenced judicial interpretations of "adequate consideration," concluding that the consideration in this case was honest, reasonable, and free from suspicion, thus not warranting the inference of a gift.

Conclusion:
The Tribunal upheld the first appellate authority's orders, dismissing the departmental appeals. The Tribunal found that the method used by the assessees for valuing the shares was reasonable, the 15% discount for transfer restrictions was justified, and the consideration for the shares was adequate, thus negating the presumption of a gift.