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TMI Blog1984 (3) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... 1957 Rules') for wealth-tax purposes. The method followed by the assessee was to work out the intrinsic (break-up) value of the share as per the balance sheet as on 31-3-1977 which was the last balance sheet available as the sale was on 27-2-1978 and then adjustment was made towards sale value for accretion to the assets till the date of sale. After the said addition, 15 per cent deduction as prescribed under rule 1D for the reason that there is restriction on transfer of shares was worked out. The net amount was Rs. 3,450 at which the transfer took place. The GTO was, however, of the view that rule 1D was not mandatory. In this view, he came to the conclusion that 15 per cent discount for restriction on transfer of shares was not admissible. If it was not admissible, the share value should be Rs. 4,042 per share. It is the difference that has been sought to be taxed as gift in the hands of the assessees and the amount in dispute before the first appellate authority in the hands of the assessees covered by this present order is as under : Sl. No. Name of assessee Amount in dispute Rs. 1. A.V. Reddy Trust for A.V. Seshakumar Reddy 1,72,700 2. A.V. Reddy Trust for Mrs. Lalitha A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent. This is also explained with reference to the stipulation regarding transfer of shares in the private limited company with reference to the articles of association of the company. He pointed out that such discount has always been given. Besides, he claimed that the method prescribed for wealth-tax purposes is a well-known method and that there is no bar to such method to be considered as a reasonable one for other tax purposes even as noticed by the Mysore High Court in the case of J. Krishna Murthy referred to by the first appellate authority. He also referred to a recent decision of the Madras High Court in the case of CWT v. S. Ram [1983] 15 Taxman 149 wherein valuation of unquoted shares in private companies for purposes of wealth-tax and gift-tax was discussed. This decision, inter alia, found that the break-up value method could well be followed for gift-tax purposes as well. The Madras High Court in this case pointed out that the Gift-tax Act, 1958 ('the Act') or the rules thereunder do not contain any detailed method of valuation of unquoted shares. Rule 10(2) of the Gift-tax Rules, 1958 would, in the opinion of the High Court, prefer the break-up value method. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le on the value of the gifts, which value has got to be ascertained on the basis of market value. Unlike as in the Wealth-tax Act and the Rules made thereunder, there is no detailed provision in the Gift-tax Act or the Gift-tax Rules as to how the market value of unquoted shares has to be ascertained. Mention, however, should be made of rule 10(2) of the Gift-tax Rules. According to this rule, the value of unquoted shares must be ascertained on the break-up value method. But where the break-up value method cannot be applied, then the rule lays down that the market value of the unquoted shares may be ascertained on the footing that a purchaser of the unquoted shares would be entitled to get registered as a transferee in the company's registry. This rule, therefore, shows that the preferred method of market valuation of unquoted shares is the break-up value method. But unlike as in the Wealth-tax Rules, the Gift-tax Rules do not contain any conditions or restrictions in the matter of deduction of contingent liabilities . . . ." It is, therefore, clear that the question of following any method for purposes of valuation for gift-tax would arise only where the value cannot be 'ascertai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation : ------------------------ No. of shares on date 5,450 Value per share : Rs. 1,87,22,642/5,450 = Rs. 3,435.35 or Rs. 3,450." This method of considering accretion till date of transfer with reference to a later balance sheet, though favourable to the revenue in this case, has been adopted by the assessees. It incidentally has the support of the Madras High Court decision in S. Ram's case. There is a contrary decision which requires that the value should be reckoned with reference to the balance sheet last available. The Kerala High Court in CGT v. H.H. Sethu Parvathi Bai [1984] 145 ITR 124 had taken this view that the valuation should be with reference to the last available balance sheet quoting with approval a decision of the Gujarat High Court in CGT v. Executors & Trustees of the Estate of Late Shri Ambalal Sarabhai [1975] 100 ITR 447, following the decision of the House of Lords in Lynall v. IRC [1972] 83 ITR 563. These decisions have taken the view that the nearness to the date of gift is 'irrelevant and is of no consequence at all' and the last available balance sheet is relevant as it is the only balance sheet which is available to an intending buyer. No doubt, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p value of shares for various reasons. The break-up value is the value that can be realised if the company is taken to liquidation as on the date of such sale of share and the assets are realised and liabilities discharged on that date. But a single shareholder not having controlling interest, cannot bring a company to liquidation at his will. Again, it takes time, to observe the formalities under the Companies Act, 1956. Realisation of assets cannot also happen on the same day. There is further the cost of realisation and the administrative expenses during the period of realisation. Over and above these factors, there is the depressing effect of the intending purchaser not being accepted as a 'responsible' or 'desirable' person in the opinion of the directors. Hence, the market for such shares is limited. It is for these reasons that a discount has been given. When the first appellate authority accepted the assessee's case for discount, he was not following the mandatory rule 1D for wealth-tax purposes blindly as though these were acceptable for gift-tax purposes as well in the same mandatory sense. All that he did was to adopt a recognised valuation which has the approval of rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it should at least be 25 per cent. If the variation between break-up value and market price even in respect of blue scrips of public companies is 15 per cent or above, the allowance of 15 per cent for shares in private companies can hardly be considered unreasonable. We are mentioning these facts to show that though there is an element of approximation and estimation in fixing 15 per cent as discount for restriction on the shares, it will not be correct to say that it is an allowance without any scientific basis. Under the circumstances, the only dispute of the GTO being that there is no warrant for discount at 15 per cent, we should hold that his order cannot stand. Even as pointed out earlier, it was possible for the assessee to ignore the subsequent balance sheet and if it had not done so, the margin of difference would be more than halved. Again, it must be pointed out that the best evidence of market value of unquoted shares is the price at which the sales are transacted. There had been as many as 22 transactions, there being 22 different sellers though belonging to the same family group to the same buyer. Some of the sellers are trustees on behalf of minor children and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 4(1)(a). In the case cited, the Supreme Court has further clarified that the object of qualifying the word 'consideration' by the word 'adequate' is to 'make it sufficient and valuable having regard to the facts, circumstances and necessities'. Such a conclusion as regards the initial jurisdiction for attracting section 4(1)(a) has the support of some decisions under the Act itself. While it is undisputed that in the case of transfer without adequate consideration, the extent of inadequacy could be treated as gift, it is also equally clear that inadequacy should be such as to warrant the inference that the consideration itself is not adequate. The Bombay High Court in CGT v. Cawasji Jehangir Co. (P.) Ltd. [1977] 106 ITR 390 found that though the consideration as on date of transfer as ordered by the Court was inadequate, it was not a transfer for inadequate consideration because the difference was explainable with reference to the date on which the transaction was approved by a resolution of the company. The High Court observed "the expression, 'adequate consideration' cannot be construed with precision, but as already stated above, it must be construed in relation to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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