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TMI Blog1964 (3) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... served with the notice of demand under section 31 of the Act. On May 19, 1960, he obtained a rule calling upon the Gift-tax Officer and the other appellants to show cause why the order of assessment and the notice of demand should not be quashed and set aside by a writ in the nature of certiorari, and why a writ in the nature of mandamus should not be issued directing them not to give effect to the same. On March 16, 1961, D.N. Sinha J. made the Rule absolute. The appeal raises questions as to the proper mode of valuation of the shares. Section 6 of the Gift-tax Act, 1958, provides for the manner in which the value of gifts may be determined and is as follows: 6. Value of gifts, how determined.--(1) The value of any property, other than cash transferred by way of gift, shall, subject to the provisions of sub-sections (2) and (3), be estimated to be the price which in the opinion of the Gift-tax Officer it would fetch if sold in the open market on the date on which the gift was made. (2) Where a person makes a gift which is not revocable for a specified period, the value of the property gifted shall be the capitalised value of the income from the property gifted dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be lower than a bid for a share free from the restrictions. Considering that it is difficult and sometimes almost impossible to fit the machinery of section 6(1) in a case where the property is not saleable in the open market, section 6(3) provides that where the value of the property cannot be estimated under section 6(1), because it is not saleable in the open market, the value shall be determined in the prescribed manner. By section 2(xix), prescribed means prescribed by rules made under the Act. Rule 10 of the Gift-tax Rules, 1958, prescribes the mode of valuation of properties not saleable in the open market and is as follows: 10. Valuation of property.--(1) The value of a policy of insurance shall be its cash surrender value on the date on which the gift was made. (2) 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 on the date of gift they could be sold in the open market on the terms of the purchaser being entitled to be regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference to the company's assets both in this country and in England: see rule 15 of the Estate Duty (Controlled Companies) Rules, 1953, and Halsbury, 3rd edition, volume 15, articles 152 to 162, pages 74 to 78. Independently of a statutory provision of this type the value of shares giving the controlling interest in a company may, on general principles, be estimated by reference to the value of the company's business as a going concern: see Attorney- General of Ceylon v. Mackie [1952] 2 All E.R. 775 and Dean v. Prince [1953] Ch. 590. Under rule 10(2) of the Gift-tax Rules, the shares of a private company giving no controlling interest in the company may properly be made by reference to the breakup value of the company's assets as shown in its latest balance-sheet. In the instant case, the assessee as also the Gift-tax Officer admit that the shares should be valued by adopting this method of valuation. Both the companies are private companies and their articles of association contain provisions restricting the right to transfer shares as required by section 27(3) read with section 3(1)(iii)(a) of the Companies Act, 1956. The Gift-tax Officer found that the shares were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal under section 23, and on reference to arbitration under section 23(6). The Gift-tax Officer should state in his assessment order the reasons for his opinion so that the appellate authorities and, in case of reference to arbitration, the valuers may be in a position to judge its reasonableness. In the assessment order, in the instant case, the Gift-tax Officer did not give full reasons for his opinion. But the learned judge allowed him to file affidavits to explain as to how he came to make the valuation. Looking at those affidavits it would appear that he valued the shares by reference to the balance-sheet value of the assets of the company, but in making the valuation he adopted the net wealth of the company computed for the purposes of the assessment of the company to wealth-tax as the value of the net assets of the company. Thus in the case of the M.D. Company he took as the starting point the sum of ₹ 14,49,954 shown as the total value of the assets on the assets side of the balance-sheet. From this figure he excluded the sum of ₹ 1,48,104 shown on the assets side as advance payment of income-tax, as this item did not represent any real asset of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The gift was made on August 8, 1957. The last accounting year of both the companies ended on July 31, 1957. The income of this year would be an income of the previous year for the income-tax year 1958-59. The annual Finance Act levying income-tax for the year 1958-59 had not been passed on the date of the gift. Nevertheless, independently of the passing of the relevant Finance Act, the income of both the companies for the year ended July 31, 1957, were at the close of the year chargeable to income-tax, and both the companies were then liable to pay the tax. On the date of the gift, the amount of the liability was uncertain, for the actual levy, the determination of the rate of the tax and the assessment of the tax liability was made much later. Still in estimating the net value of the assets of the company on that date, it is necessary and proper to make a just and fair allowance for this uncertain liability. The R.M. Company made a provision of ₹ 13,85,000 and the M.D. Company made a provision of ₹ 4,90,000 for their respective tax liabilities on their income up to the year ended on July 31, 1957. Mr. Meyer admitted that those provisions were fair estimates of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see within the meaning of section 2(m) of the Wealth-tax Act, 1957, and was not deductible in computing the net wealth of the assessee under that Act. This decision is an authority for the proposition that the liabilities of an assessee not amounting to debts owed by him cannot be deducted in computing his net wealth under section 2(m) of the Wealth-tax Act. But if an item of wealth of an assessee consists of a share in a company, and this item is to be valued by reference to the company's assets, the valuation must be based on the real wealth of the company and not its artificial wealth computed under section 2(m) of the Wealth-tax Act. In making this valuation of the share the Gift-tax Officer was therefore bound to take into account the company's liability for income-tax. Looking at the balance-sheet on which the order of assessment is based and the affidavits of the Gift-tax Officer, it is apparent that he did not take into account this liability and proceeded to make the valuation on an entirely wrong basis. We agree with D.N. Sinha J. that in doing so the Gift-tax Officer was in error in not taking into account this item of liability. At the close of his argument Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eclared on the date of the gift. It is true that the relevant standard form of the balance-sheet set out in Part I of Schedule VI read with section 211 of the Companies Act, 1956, showed the item of proposed dividend under the sub-heading current liabilities and provisions on the liabilities side. But the fact that a particular item appears on the liabilities side of the balance-sheet does not necessarily show that the item is a true liability of the company. Thus the items share capital and reserves and surplus on the liabilities side are not in any real sense its liabilities. Similarly some of the items under the heading provisions may not be in any real sense its liabilities. In the instant case the amount shown as proposed dividend was not a liability on the date of the gift. The Gift-tax Officer therefore rightly refused to deduct this item in computing the value of the company's assets. The result is that the finding of the learned judge with regard to the item of proposed dividend is set aside, and his decision with regard to the item of provision for taxation is affirmed. As the Gift-tax Officer refused to take into account the item of provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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