1968 (3) TMI 2 - HC - Income Tax

Gift Tax Act 1958 - assessee who is an individual and not the company made gifts of the shares of this company which he was holding in favour of his son - in determining the market value of the shares of the EGC (Pvt.) Ltd. gifted by the assessee the amount of the taxation liability of the company is not liable to be deducted

Issues Involved
1. Valuation of gifted shares for gift-tax purposes.
2. Deduction of company's tax liabilities not provided for in the balance-sheet.
3. Tribunal's acceptance of tax liability quantum and its rectification application.
4. Legal principles regarding balance-sheet omissions and their impact on share valuation.

Detailed Analysis

1. Valuation of Gifted Shares for Gift-Tax Purposes
The primary issue revolves around the method used to value 312 shares of East Ganhodi Colliery (Pvt.) Ltd. gifted by the assessee to his son. The Gift-tax Officer valued the shares at Rs. 443 per share based on the break-up value method, while the assessee argued for a value of Rs. 337 per share, considering the company's tax liabilities.

2. Deduction of Company's Tax Liabilities Not Provided for in the Balance-Sheet
The assessee contended that the Gift-tax Officer failed to deduct the company's tax liabilities amounting to Rs. 5,28,005, which was not provided for in the balance-sheet. The Appellate Assistant Commissioner rejected this contention, stating that the liability was neither paid nor charged as a liability by creating a taxation reserve in the balance-sheet. However, the Tribunal accepted the assessee's contention, stating, "Liability to income-tax is very much a real liability and whether it is provided for in the accounts or not, any prospective buyer in the open market must take it into consideration in appraising the value of the shares."

3. Tribunal's Acceptance of Tax Liability Quantum and Its Rectification Application
The Tribunal directed the Gift-tax Officer to value the shares at Rs. 337 each. The Commissioner of Gift-tax, dissatisfied with this decision, applied for a reference to the High Court and filed an application under section 34 of the Act for rectification, arguing that the Tribunal erred in recording that the departmental representative did not dispute the quantum of the tax liability. The Tribunal dismissed this application, stating, "It is not possible at this stage to remember with any degree of precision as to what was the submission made by the parties at the time of hearing of the appeal."

4. Legal Principles Regarding Balance-Sheet Omissions and Their Impact on Share Valuation
The High Court examined whether the tax liability, though not provided for in the balance-sheet, should be deducted in determining the market value of the shares. The court referenced the case of Kastur Chand Jain v. Gift-tax Officer, where it was held that a buyer would consider the tax liability in appraising the value of shares. The court also referred to the Supreme Court decision in Kesoram Industries & Cotton Mills Ltd. v. Commissioner of Wealth-tax, which stated, "A liability to pay income-tax is a present liability though it becomes payable after it is quantified in accordance with ascertainable data."

However, the court noted the absence of evidence quantifying the company's tax liability and stated, "In the absence of any finding that the claim made by the assessee as to the income-tax liabilities of the company was reasonable, any answer that we might give to the question referred would be purely academic."

Conclusion
The High Court declined to answer the question referred, stating, "The High Court may decline to answer a question arising out of the order of the Tribunal, if it is unnecessary or irrelevant or is not calculated to dispose of the real issue between the taxpayer and the department." The Tribunal was directed to dispose of the appeal in accordance with the views expressed in the judgment.

Separate Judgment
P. B. Mukharji J. agreed with the conclusion, emphasizing the lack of legal proof to support the Tribunal's order allowing the deduction for the tax liability and the valuation of shares at Rs. 337 each. He stated, "Unless the tax liability for a particular amount is proved by legal evidence or legal material, the question whether there should be a deduction or not on that ground even if such claim was not made in the balance-sheet, becomes entirely hypothetical."

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