9911796707
TMI Blog1994 (9) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... 78-79. The returns of gift-tax under section 13(1) of the Gift-tax Act, 1958 (hereinafter referred to as " the said Act "), were filed for both the said assessment years, that is to say, the assessment years 1976-77 and 1978-79, within the due date. In the said returns, the donor (hereinafter referred to as " the said assessee ") had valued the shares on the basis of the balance-sheet of the company as at March 31, 1975, in respect of 403 shares of the said company being the subject-matter of the assessment year 197677. So far as the valuation of 1,750 shares which is the subject-matter of assessment for the assessment year 1978-79 is concerned, the valuation was based on the basis of the balance-sheet as at March 31, 1977. The Gift-tax Officer, " D " Ward, Cinema Circle, Calcutta, issued notices under section 15(2) of the said Act in connection with the said returns of gift filed by and/or on behalf of the said assessee. In compliance with the said notices, the petitioner submitted revised valuation of the said shares being based on the balance-sheet as at March 31, 1976, so far as the valuation of the shares for the assessment year 1976-77 is concerned, and as at November 30, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t-tax Act, 1958, whereupon the petitioner made an application under section 32(3) of the said Gift-tax Act, inter alia, for instalment and has paid a total sum of Rs. 20,000 thereof against the original demand for the assessment year 1978-79. By order dated February 9, 1983, respondent No. 2 has given effect to the order dated January 22, 1983, passed by respondent No. 1 vacating all the original demands. As such, there being no demand the petitioner is entitled to the refund of Rs. 20,000 as stated above. By a consolidated show-cause notice under section 24(2) of the said Gift-tax Act, 1958, for the assessment years 1976-77 and 1978-79, the Commissioner of Gift-tax, West Bengal IV, respondent No. 1, intimated the petitioner that it appears to him that the gift-tax assessment for the assessment years 1976-77 and 1978-79 made by respondent No. 2 under section 15(3) of the Gift-tax Act, 1958, determining the taxable gifts are erroneous in so far as they are prejudicial to the interests of the Revenue. He, therefore, proposed to pass orders under section 24(2) of the said Act by setting aside the assessment orders duly made by the Gift-tax Officer. In the said consolidated notice of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It has been submitted on behalf of the petitioner that the said show-cause notice is wholly illegal and without any basis and the conclusions arrived at therein are perverse inasmuch as the conclusions are based on a misconstruction of statutory language and arrived at by ignoring the relevant materials. It has been submitted by Mr. N. K. Poddar, the learned advocate for the petitioner, that the Commissioner of Gift-tax, being respondent No. 1, acted illegally and without jurisdiction in setting aside the two assessments orders completed by respondent No. 2 under section 15(3) of the said Act after making all the necessary and proper enquiries as was required. It has further been submitted that section 24(2) of the said Act can be invoked only in a case where the assessment order passed by the Gift-tax Officer is erroneous in law and prejudicial to the interests of the Revenue. Both the two are conditions precedent to the invocation of the provisions of section 24(2) of the said Act. None of these conditions is satisfied in this case. The learned advocate for the petitioner referred to sub-rule (2) of rule 10 of the Gift-tax Rules, 1958, as it stood at the relevant time. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument based on rule 10(2) of the Gift-tax Rules, 1958, was made by the Revenue for the first time before the Supreme Court and no such argument was made by the Revenue either before the Tribunal or before the High Court. The Supreme Court in that case declined to consider rule 10(2) of the Gift-tax Rules, 1958, since that was a new issue raised for the first time before it. The learned advocate also relied upon the judgment and decision in the case of GTO v. Kastur Chand Jain [1964] 53 ITR 411, wherein the Division Bench of this court, while dealing with rule 10(2) of the Gift-tax Rules, at page 414 of the said report, observed as follows : " Under rule 10(2) of the Gift-tax Rules, valuation of the shares of a private company giving no controlling interest in the company may properly be made by reference to the break-up value of the company's assets as shown in its latest balance-sheet. " It has been submitted that the Division Bench also referred to rule 15 of the Estate Duty (Controlled Companies) Rules, 1953, and held that the said rule will apply only in relation to a controlled company for estate duty purposes. It has been contended by the learned advocate for the petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n his said impugned order passed under section 24(2) of the said Act also refers to the break-up method as the primary method of valuing the shares of a private limited company whose articles contain restrictive provisions as to alienation of shares. This rule clearly lays down that if the value of the shares of a private limited company can be ascertained with reference to the value of total assets of the company, that is to say, by the break-up method, it should be so ascertained. If, however, the value of the shares of a private limited company is not ascertainable by the break-up method, then and then only the other alternative method should be adopted. As already stated earlier, this view was reiterated by the Division Bench of this court in GTO v. Kastur Chand Jain [1964] 53 ITR 411, at page 414, and in India Exchange Traders' Association's case [1992] 197 ITR 356, at pages 376, 377 and 379. It has further been submitted by the learned advocate for the petitioner that rule 15(1) of the Estate Duty (Controlled Companies) Rules, 1953, has no application in this case. These rules were framed by the rule-making authority in exercise of the powers conferred on it under section 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce with rule 15 of the Estate Duty (Controlled Companies) Rules, 1953. It has further been submitted that the provisions of the Estate Duty (Controlled Companies) Rules, 1953, as well as section 37 of the Estate Duty Act, 1953, vis-a-vis rule 10(2) of the Gift-tax Rules, 1958, were examined by a Division Bench of this court in Kastur Chand Jain's case [1964] 53 ITR 411. The Division Bench clearly held and observed at page 414 of the reports that unless a company is a controlled company, the shares thereof for the purpose of both estate duty as well as the Gift-tax Act have to be valued in accordance with the break-up method. It has been submitted by the learned advocate for the petitioner that no case has been made out to the effect that British Electrical Pumps Private Limited now known as B. E. Pumps Private Limited is a controlled company. Respondent No. 1 in his order passed on January 22, 1983, under section 24(2) of the Gift-tax Act, 1958, has clearly held and observed that the said company is an industrial company. It is the contention of the learned advocate for the petitioner that the Commissioner of Gift-tax, being respondent No. 1, was wholly wrong in referring to ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed private limited company for the purposes of charge to gift-tax too is the " break-up method ". The other alternative method should be adopted only if the break-up method fails. In other words, the profit-earning method and/or yield method and/or dividend method should be followed only when it is not practicable to compute the value of the shares by the break-up method. It has further been contended on behalf of the petitioner that the Estate Duty Act was enacted in 1953. Even the Estate Duty (Controlled Companies) Rules were also framed in 1953. Both the Wealth-tax Act as well as the Gift-tax Act are subsequent legislations of 1957 and 1958, respectively. If Parliament and/or the rule-making authority wanted to adopt rule 15 of the Controlled Companies Rules for valuation of shares, for wealth-tax and/or gift-tax purposes, it would have been very easy for the Legislature as well as for the rule-making authority to just enact the provisions similar to rule 15 of the Estate Duty (Controlled Companies) Rules even in the Wealth-tax Rules as well as in the Gift-tax Rules for valuation of shares of unquoted private limited companies. This was not done. On the other hand, rule 1D of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vasan [1978] 112 ITR 771 (Mad) ; 5. Chimanbhai Kashibhai Patel v. CGT [1993] 203 ITR 57 (Guj). It has been submitted by the learned advocate for the respondent that the writ petitioner had an alternative remedy by way of appeal against the order passed by respondent No. 1 under section 24(2) of the Gift-tax Act, 1958, therefore, the writ court should not interfere when an alternative remedy exists under the relevant statute, namely, the Gift-tax Act, 1958. In fact, the learned advocate for the respondent raised a preliminary objection as to the maintainability of the writ petition on the ground that the Gift-tax Act provides for alternative remedy by way of appeal to the Tribunal under section 25 of the Gift-tax Act against an order passed by the Commissioner under section 24 of the Gift-tax Act. The assessee has not given any explanation whatsoever as to why he has not preferred any appeal before the Tribunal under section 25 of the Gift-tax Act. In support of his contention, the learned advocate for the respondent relied upon the following decisions : 1. C. A. Abraham v. ITO [1961] 41 ITR 425 (SC) ; 2. Shivram Poddar v. ITO [1964] 51 ITR 823 (SC) ; 3. Gita Devi Aggarwal v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported in 198 ITR 624 is a case under the Estate Duty Act. The learned advocate for the respondent has also referred to section 6 of the Gift-tax Act which provides that the value of any property transferred by gift 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 the gift is made. In this connection, he referred to the judgment and the decision of the Supreme Court in CWT v. Mahadeo Jalan [1972] 86 ITR 621 as well as Kusumben D. Mahadevia [1980] 122 ITR 38 (SC) which held that the profit-earning capacity of the company is a relevant fact to be taken into consideration in valuing shares of a company. In the aforesaid decisions, it has further been held that the break-up method will not be appropriate for valuation of shares of a company which is a going concern and it is only when the company is ripe for winding up or when its profit earning capacity cannot be estimated, then the break-up method is justified. It is the contention of the learned advocate for the respondent that for valuing shares under rule 10(2) of the Gift-tax Rules, there should be an effort to find out the value of the profits gift ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (which it is submitted is not applicable in gift-tax assessment) in valuation of shares of an industrial company, viz., British Electrical Pump (P.) Ltd., which is very much a going concern not ripe for liquidation. (3) The assessee filed two returns showing different valuation of gifts based on two balance-sheets for each of the assessment years. No explanation was sought for by the Gift-tax Officer from the assessee. The anomaly has not been explained. The following observation of the Commissioner of Gift-tax at page 48 of the petition is relevant : " In reply to a query as to how the value of the shares was shown higher in the original returns and were later shown and revised to lower values, it was explained by Shri Bhattacharjee that for the first gift, the balance-sheet for the year ended March 31, 1976, which was later substituted for the balance-sheet as at November 30, 1977 ; and that for the period ended November 30, 1977, although there was no accounting year ending on that date, as the company drew up monthly balance-sheets, this balance-sheet was drawn up and the values were based thereon. In reply to other query it was explained that the balance-sheet as at Novembe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the decisions of the Supreme Court and the High Courts and without ascertaining the market value of the shares as required under section 6 of the Gift-tax Act and he did not make enquiry which he should have made as to the price the gifted shares would have fetched in the open market. It has been contended by the learned advocate for the respondent that the Gift-tax Officer erred in not valuing the shares by adopting the profit-earning method. Accordingly, it has been submitted that the petitioner should be directed to make his submission before the Gift-tax Officer to whom the case has been remanded by the Commissioner of Gift-tax and the petitioner may make such representation as, he may be advised. I have considered the respective submissions of the learned advocates for the parties and decisions cited. The respondent has raised the question of maintainability of the writ petition on the ground that alternative remedy under the statute is available to the writ petitioner and as such the court should not interfere. It may be noted that the writ petition was filed in January, 1983, when the rule was issued. More than 18 years have already passed since then. The decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or before the High Court. In that view of the matter, the said question has really not been considered at all by the Supreme Court. The Supreme Court in this connection analysing sub-rule (2) of rule 10 of the Gift-tax Rules, 1958, clearly noted at page 48 of the report that under that sub-rule the value of the unquoted equity shares was required to be ascertained by reference to the value of the total assets of the company and it was only if the value of the shares was not so ascertainable, then only the alternative method was to be followed. The break-up method, the Supreme Court observed was thus according to this sub-rule, the primary method to be applied for arriving at the valuation of the shares at least so far as the valuation under the Gift-tax Act was concerned. But the Supreme Court did not examine this question further and upheld the profit-earning method even for gift-tax purposes merely for the reasons that sub-rule (2) of rule 10 of the Gift-tax Rules, 1958, was never examined either by the Tribunal or by the High Court in that case. The said fact was noted in the judgment and the decision by the Division Bench in India Exchange Traders' Association's case [1992] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ashibhai Patel's case [1993] 203 ITR 57 which has again no application since that decision was also based upon the earlier decision of the Supreme Court, which did not consider the provisions of rule 10(2) of the Gift-tax Rules, 1958. The Gujarat High Court in the aforesaid decision also declined to go into the application of rule 10(2) of the Gift-tax Rules, 1958, on the ground that the Supreme Court itself did not go into that question and upheld the profit-earning method. We made a categorical finding after examining the decision of the Supreme Court as well as other decisions of the Bombay High Court and the Gujarat High Court in India Exchange Traders' Association's case [1992] 197 ITR 356 (Cal) to the effect that the provisions of rule 10(2) of the Gift-tax Rules, 1958, were not gone into by the Supreme Court since that question of considering the assessee's claim for further reduction on account of depreciation, which issue is not involved in this case. The other contention of the learned advocate for the Revenue is that no proper enquiry was made and the Income-tax Officer passed a cryptic order does not appear to be correct and I am unable to accept such contention of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well be taken to be the market value of the shares. The decision in the aforesaid case cited by the Revenue clearly supports the assessee's plea in the instant case. It is not understood as to how this decision cited by learned counsel Mr. Mitra, on behalf of the Revenue, can at all help the Revenue. In this case, the Madras High Court further noted at page 775 of the report that the assessee was not satisfied with the break-up value. He wanted the break-up value to be reduced by 15 per cent. twice over on account of the fact that the shares of a private limited company were not easily transferable. Dealing with this aspect of the matter, the Madras High Court sent the matter back to the Tribunal to decide this issue of depreciation after taking into consideration the relevant factors. In the present case no question of depreciation has been raised by the assessee. In this case, the value of the gifted shares was determined following rule 1D, namely, the break-up method. Therefore, the principles laid down by the Madras High Court clearly support the case of the assessee inasmuch as in that case, the Madras High Court also held that the value of the shares for gift-tax purposes sh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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