1998 (1) TMI 110 - AT - Income Tax

Summary

Issues Involved:
1. Valuation method for gifted shares.
2. Applicability of Rule 1D of the Wealth-tax Rules.
3. Comparison between Wealth-tax Act and Gift-tax Act provisions.
4. Determination of appropriate valuation method under the Gift-tax Act.

Detailed Analysis:

1. Valuation Method for Gifted Shares:
The primary issue is whether the gifted shares should be valued using the yield method or the break-up value method. The Commissioner of Gift-tax (Appeals) directed the Assessing Officer to value the shares based on the yield method, following precedents set by the Supreme Court and the Gujarat High Court. The revenue contested this direction, arguing for the break-up value method as applied by the Gift-tax Officer.

2. Applicability of Rule 1D of the Wealth-tax Rules:
The revenue relied on the Supreme Court decision in Bharat Hari Singhania v. CWT, which held Rule 1D of the Wealth-tax Rules as mandatory for valuing unquoted equity shares. The revenue argued that this rule should apply to the Gift-tax Act as well, necessitating a break-up value method. However, the assessee countered that the Gift-tax Act provisions are distinct and should follow the yield method as established in earlier cases like Smt. Kusumben D. Mahadevia and Chimanbhai Kashibhai Patel.

3. Comparison Between Wealth-tax Act and Gift-tax Act Provisions:
The judgment compared the provisions of the Wealth-tax Act and the Gift-tax Act. Section 7(1) of the Wealth-tax Act and Section 6(1) of the Gift-tax Act both estimate the value of assets based on the price they would fetch in the open market. However, the rules under each act differ significantly. The Wealth-tax Rules provide detailed methods for various assets, while the Gift-tax Rules are less comprehensive, particularly Rule 10(2) which deals with the valuation of shares in private companies with restrictive transfer provisions.

4. Determination of Appropriate Valuation Method Under the Gift-tax Act:
The Tribunal noted that the Supreme Court's decision in Bharat Hari Singhania emphasized the mandatory nature of Rule 1D under the Wealth-tax Act due to the specific language of the Act. However, for the Gift-tax Act, the Supreme Court in Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai and other cases like Smt. Kusumben D. Mahadevia, endorsed the yield method for valuing unquoted equity shares. The Tribunal highlighted that no hard and fast rule exists for valuation; it depends on the facts and circumstances of each case, the nature of the business, and its profit-earning capacity. The yield method is generally preferred unless exceptional circumstances justify the break-up method.

Conclusion:
The Tribunal upheld the decision of the Commissioner of Gift-tax (Appeals), affirming that under the Gift-tax Act, the valuation of unquoted equity shares should be based on the yield method, not the break-up method as argued by the revenue. The appeal of the revenue was dismissed.