835/CBDT. - Income Tax - 835/CBDT

INSTRUCTION NO. 835/CBDT Dated : May 24, 1975 Section(s) Referred: 37 Statute: Estate Duty Act Section 37 of the Estate Duty Act deals with valuation of shares in a private company where alienation of shares is restricted. The section reads as under:- "Where the articles of association of a private company contain restrictive provisions as to the alienation of shares, the value of the shares, if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch if they could be sold in the open market on the terms of the purchaser being entitled to the registered as holder subject to the articles, but the fact that a special buyer would for this own special reasons give a higher price than the price in the open market shall be disregarded." The Board in their letters dated 3rd May, 1965 and 5th July, 1965 issued from F.No. 25A/3/65-ED clarified the scope of this Section. Briefly, the clarification runs as follows:- Section 37 of the Estate Duty Act which governs the mode of valuation of shares in a private limited company whose Articles of Association contain restrictive provisions as to the alienation of its shares, contemplates:- (a) firstly, it should be seen whether the value of shares is ascertainable by reference to the value of the total assets of the company and (b) if it is not so ascertainable, then it shall be estimated to be what it would fetch if sold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the articles, disregarding any special price that might be paid by a special buyer. If clause (a) applies, the value of shares should be determined by break-up method taking the market value of the assets of the company and not the book value, if that does not happen to be their market value. If clause (b) applies then the Assessing Officer need not necessarily adopt the break-up method but may also adopt some other method of valuation based on the yield or profits, etc. 2, These instructions appeared to have been impliedly modified by Circular No 1-D/ED of 1968 which extended the method of valuation prescribed by Wealth-tax Rules to valuation of shares for purposes of Estate Duty Act. On a reference from the Revenue Audit the Board, after consultation with Ministry of Law on the scope of Section 37 of the Estate Duty Act issued instruction No 771, dated 29th October 1974 directing that contents of circular No. 1-D/Ed of 1968 dated the 26th March, 1968 will not apply to valuation of shares covered by Section 37 of the Estate Duty Act but that the valuation of such shares will be governed by Board's earlier letters dated 3rd May, 1965 and 5th July, 1965 issued from File No. 25A/3/65-ED. Thus, the expression "value of the total assets of the company" in section 37 of the Estate Duty Act would mean market value of the assets and not the book value of the assets; further, the expression 'total assets of the company' would include goodwill also, whether or not shown as such in the balance sheet. 3. An allied issued is valuation of shares in a case where two or more private companies hold shares of each other and valuation of such shares to be made by the break-up method. The Board are of the view that in such cases the value of the shares can be determined by framing and solving simple algebraic equations.