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TMI Blog1996 (2) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... is a company, which sold certain shares in its sister companies during the years under consideration, i.e., during the assessment year 1973-74, the shares of India Motor Parts and Accessories Ltd. and Sundaram Private Ltd. were sold and during 1974-75, the shares of Sundaram Fasteners were sold. The Gift-tax Officer was of the opinion that the market value of the shares was higher and so he sought to bring the difference of Rs. 3,12,702 for the assessment year 1973-74 and Rs. 9,45,786 for the assessment year 1974-75 to tax. The mode of computation adopted by the Gift-tax Officer as well as the mode of computation adopted by the assessee were the same ; but the reason for the difference has been explained in detail in the order of the first appellate authority. The Gift-tax Officer and the assessee had followed the method of break-up value of the shares ; but the Gift-tax Officer proceeded from the balance-sheet nearer to the date of sale, which is subsequent to the date of sale ; but the assessee relied on the balance-sheet for the period prior to the date of sale, on the ground that it was the only balance-sheet available on date. The second difference was due to dispute as to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 462 (Mad), the balance-sheets drawn up after the dates of sale, which are nearer to the sale date alone should be taken into consideration and not the balance-sheets earlier to the date of sale. (2) Rule 1D of the Rules is mandatory in nature as per the decision of the Supreme Court in Bharat Hari Singhania v. CWT [1994] 207 ITR 1 and according to the said rule, discount can be given for sales of shares in the companies, which contained restrictive clauses in their articles of association, to the extent of 15 per cent. and in this case, the discount granted at 30 per cent. is against the said provision. According to learned counsel for the assessee, the balance-sheets drawn up after the date of sale, though nearer in point of time, were not available to ascertain the true market value of the shares on the date of sale, but the balance-sheets which were drawn prior to the date of sale alone were available, even though they are not nearer to the date of sale. According to him, in the cases where the date of the balance-sheet and the valuation date of the assessee do not coincide, Explanation I to rule 1D has to be invoked which says that where the date on which the balance-sheet is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... March 31, 1973, for the sale that took place on February 14, 1974, while the Gift-tax Officer worked it out at Rs. 11.66 per share on the fair market value basis adopting the balance-sheet as at March 31, 1974. In this case, the difference was Rs. 9,45,786 and it was added as deemed gift under section 4. In so far as the India Motor Parts and Accessories Ltd. is concerned, it was submitted that the balance-sheet as on March 31, 1972, has to be taken, as stated by the High Court in CGT v. Prema Srinivasan [1978] 114 ITR 78. The Gift-tax Officer has taken into account the profits earned during the ten months up to January 31, 1973, into consideration and the average profits for five years ending March 31, 1972, at Rs. 2,96,000. On this basis, the break-up value per share was worked out at Rs. 139. Since the Tribunal has allowed 30 per cent. discount in the case of T. V. Sundaram Iyengar and Sons Ltd., and there are similar restrictive clauses in this case also, a similar discount at 30 per cent. was granted, which would result in the value coming down to Rs. 97.03 per share. As the sale price was Rs. 109.50, there is no undervaluation in this case, according to the Tribunal. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Schedule II, this court, in CGT v. Gopal Srinivasan [1995] 214 ITR 637, held that rule 1D is mandatory and in the cases where the date of the balance-sheet and the valuation date of the assessee do not coincide, Explanation I to rule 1D has to be applied whereunder in the cases where the date on which the balance-sheet is drawn up does not coincide with the valuation date of the assessee, the balance-sheet drawn up on a date immediately preceding the valuation date shall be adopted as the basis for working the rule and in yet another situation where both the above situations are absent, the balance-sheet drawn up on a date immediately after the valuation date shall be adopted as the basis and that would be the most reasonable thing to do. This view was taken by this court following the decision of the Supreme Court in Bharat Hari Singhania v. CWT [1994] 207 ITR 1 (SC). As regards the applicability or otherwise of the rules (Wealth-tax Rules) to the proceedings arising under the Gift-tax Act, in CED v. J. Krishna Murthy [1974] 96 ITR 87, the Mysore High Court pointed out that the method of valuation of unquoted shares prescribed under rule 1D of the Rules (Wealth-tax Rules) by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending March 31, 1968 ; March 31, 1969 ; March 31, 1970 and March 31, 1971. Since this is a private limited company and having restrictive clauses relating to the transfer of shares, the assessee required 30 per cent. discount. According to the Tribunal even if the balance-sheet as at March 31, 1972, is taken into account and if the discount of 30 per cent. is given to the figure Rs. 189.81 arrived at by the Gift-tax Officer, the resultant figure would be Rs. 127 which is less than the sale price of Rs. 128. In the case of India Motor Parts and Accessories Ltd., 30 per cent. discount was allowed as there was also a restrictive clause in the articles of association and the Tribunal had allowed 30 per cent. discount in the case of T. V. Sundaram Iyengar and Sons Ltd., it was pointed out by the Tribunal that the resultant figure would be Rs. 97.03 per share, while the sale price was Rs. 109.50. In the case of Sundaram Fasteners Ltd., for the very same reasonings, the sale price was Rs. 6 while the figure arrived at was Rs. 5.82 per share. Considering the aforementioned depressing factors like restriction on sale of shares in the matter of private limited companies, non-declaration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Even in the case of private limited companies, it has to be assumed that the sale of the shares could take place in the open market and the market value as on the date of gift will have to be ascertained. Changes which might have happened after the shares were valued in the previous balance-sheets of the company will and can and should be taken note of by the Gift-tax Officer. There will be no error if the position as on the date of the gift is ascertained assuming that the real position is ascertainable. " In the matter of allowing discount as per the provisions of rule 1D of the Rules, it says that discount can be given at 15 per cent. There is also a Table provided under rule 1D and according to it, if the dividend has not been paid for three years, the market value of each unquoted equity share shall be 82 1/2 per cent. ; if the dividend was not declared for four years, the market value shall be 80 per cent., for five years--77 1/2 per cent. and for six years and above, it shall be 75 per cent. It means that discount can be given to the extent of 25 per cent. where the dividend was not paid for a period of six years or more. Considering the fact that the profit for each sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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