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TMI Blog2004 (4) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... f the shares for the assessment year 1991-92 was to be made under section 6 of the Gift-tax Act in accordance with Schedule III to the Wealth-tax Act?" The brief facts are as follows: The assessee, an individual, held shares in Malayala Manorama Co. Ltd. During the previous year relevant to the assessment year 1991-92, the valuation date March 31, 1991, the assessee sold 9,640 shares of the said company to his close relatives at a value of Rs. 37 per share. The Assessing Officer noticed that during the previous year relevant to the assessment year 1991-92, the assessee had gifted away 280 shares in the same company to his minor daughter and for the purpose of gift-tax he valued the shares at Rs. 77.85 per share. Since the assessee had sold the other shares in the same previous year, the Assessing Officer took the fair market value of the shares at Rs. 77.85 per share and on that basis he came to the conclusion that there was a gift involved in the sale to the extent of Rs. 3,93,794 and the same was assessed to tax under the Act as deemed gift. The Commissioner of Income-tax (Appeals) confirmed the assessment holding that the market value of the shares was to be taken at 77.85 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the decision of this court in Wg. Commander A.G. Mathews v. CGT [2004] 269 ITR 149 on the merits. Learned senior counsel for the Revenue submitted that the question is one of valuation of unquoted equity shares under the Act. Senior counsel referred to the provisions of section 6(1) of the Act as amended with effect from April 1, 1989, and Schedule II to the Act as also Schedule III to the Wealth-tax Act inserted by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989, particularly rule 11 thereof. Senior counsel took us to Schedule II to the Act introduced with effect from April 1, 1993, and rule 5 thereof. Senior counsel submitted that rule 1D of the Wealth-tax Rules, 1957, is similar to rule 11 of Schedule III to the Wealth-tax Act and rule 5 of Schedule II to the Act. Senior counsel with reference to the observations of the Tribunal and the decision of the Supreme Court in Bharat Hari Singhania v. CWT [1994] 207 ITR 1 submitted that the method of valuation of a particular asset is a matter of procedure and not a matter of substantive law and therefore such a rule is applicable to assessments pending on the day such rule comes into force even though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined in the manner laid down in Schedule II to the Act which in turn provides that the value shall be determined in accordance with the provisions of Schedule III to the Wealth-tax Act. Rule 11 was inserted in Schedule III to the Wealth-tax Act by the Finance Act, 1993, with effect from April 1, 1993, which provides that the value of unquoted equity shares in companies other than investment companies shall be determined in the manner set out in sub-rule (2). There was no provision in Schedule III to the Wealth-tax Act for valuation of unquoted shares of a private company other than an investment company. Schedule II to the Act introduced with effect from April 1, 1993, by the Finance Act, 1993, rule 1 thereof provides that subject to the provisions of rules 2 to 7, the value of any property, other than cash, transferred by way of gift shall, for the purposes of the Act, be determined in accordance with the provisions of Schedule III to the Wealth-tax Act, 1957, which shall apply subject to modifications contained in the rule. Rule 5 of Schedule II to the Act provides that the value of unquoted shares in companies other than investment companies shall be determined in the mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 993, i.e., on February 21, 1994, and, therefore, the valuation of the shares has to be determined in accordance with the provisions of Schedule III to the Wealth-tax Act. A Division Bench of this court in P. J. George v. CIT [1998] 231 ITR 19 has held that Schedule III to the Wealth-tax Act inserted with effect from April 1,1989, has no retrospective operation. The question whether Schedule III to the Act is procedural in nature or not was not considered in the said decision. However, the question, whether rule 1BB of the Wealth-tax Rules is a provision of substantive law, not expressly rendered applicable to valuation for the earlier years and therefore only prospective or whether it is merely procedural and attracted to a pending case was considered by the Supreme Court in CWT v. Sharvan Kumar Swarup and Sons [1994] 210 ITR 886 wherein it was held that rule 1BB is essentially a rule of evidence as to the choice of one of the well-accepted methods of valuation in respect of certain kinds of properties with a view to achieve uniformity in valuation and avoiding disparate valuation resulting from application of different methods of valuation respecting properties of a similar natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 6 of the Act. Can it be done? It is doubtful. Section 4(1)(a) of the Act only says that the difference between the market value of the property at the date of transfer and the value of the consideration shall be deemed to be a gift made by the transferor. This would show that there is no question of valuation of the gift as such by the application of section 6 of the Act in the case of a deemed gift. Thus even after the amendment made to section 6 of the Act by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989, prescribing the manner in which the value of gifts has to be determined (Schedule II), for the purpose of determining the difference between the market value of the property on the date of transfer and the value of the consideration, Schedule II has no application. It is by virtue of the amendment to section 4(1)(a) of the Act made by the Finance (No. 2) Act, 1991, with effect from April 1, 1992, the value of the property as on the date of the transfer, for the purposes of section 4(1)(a), can be determined in the manner laid down in Schedule II to the Act. The amendment in paragraph 82 of the said Act says "in section 4 of the Gift-tax Act, 1958 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act as provided under section 6 of the Act. This is made explicit by the amendment to section 4(1)(a) of the Act with effect from April 1,1992, and the Department Circular explaining the scope and effect of the amendment made to section 4(1)(a) of the Act. In short, the position is that so far as the gift simpliciter is concerned, the value has to be ascertained as provided under section 6 of the Act which states that the value as on the date on which the gift was made shall be determined in the manner laid down in Schedule II to the Act. Schedule II to the Act in turn says that the value has to be determined in the manner provided in Schedule III to the Wealth-tax Act. So, in respect of the gifts simpliciter, the value of the gift has to be determined on the basis of the provisions of rule 1D of the Wealth-tax Rules. However, this method of valuation of shares will not be available to valuation for the purposes of arriving at the deemed gift. In other words, notwithstanding the amendment to section 6 of the Act made by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989, providing for valuation of the gift in the manner provided in Schedule II to the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April 1, 1992, has to be determined in the manner provided in Schedule II to the Act. Since the deemed gift and the manner of determination of the deemed gift are integrally connected and are integrated in one section, it cannot be said that the former limb of section 4(1)(a) of the Act is substantive and the latter limb regarding the determination of value of the deemed gift is a procedural provision. According to us, the manner of determination of the consideration for transfer for the purpose of deemed gift provided in section 4(1)(a) of the Act in an integrated whole and which cannot be separated to say that it is procedural in character. Here it must be noted that this was specifically made applicable only with effect from April 1,1992, i.e., in relation to the assessment year 1992-93 and subsequent assessment years. Thus looked at from any angle, the position is clear that the application of Schedule II to the Act inserted by the Direct Tax Laws (Amendment) Act and applied for valuation of gifts by amending section 6 also so far as deemed gifts under section 4(1)(a) of the Act are concerned is only from April 1, 1992, in relation to the assessment year 1992-93 and subsequent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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