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TMI Blog1982 (9) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... res between interested members. If the shares are not sold within three months, the intending seller may sell them to any person at any price. On 6th February, 1970, the petitioner made gifts of 1,325 equity shares of the first-named company and 1,468 shares of the second-named company. On 5th March, 1972, the petitioner made a gift of 134 shares of the first-named company. The petitioner filed returns of gifts under the G.T. Act for the assessment years 1971-72 and 1972-73 valuing the shares of the first-named company at Rs. 162 and Rs. 161 per share respectively and of the second-named company at Rs. 108 per share. In support of the valuation the petitioner filed a valuation report of M/s. C. C. Chokshi Co., Chartered Accountants. In the course of the assessment proceedings, the 1st respondent, the GTO, indicated that he intended to invoke the provisions of r. 10(2) of the G.T. Rules, 1958. By reason thereof, the value of the shares would increase multifold. The petitioner, therefore, filed this petition seeking to restrain the 1st respondent from applying the provisions of the said rule to the returns of the petitioner. For several years the petitioner and various members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old in the open market on the terms of the purchaser being entitled to be registered as holder. Section 7(1) of the W.T. Act may be noted. It provides that the value of any asset for the purposes of the W.T. Act shall be estimated to be the price which in the opinion of the WTO it would fetch if sold in the open market on the valuation date. It is similar to the provisions of s. 6(1) of the G.T. Act. It was contended by Mr. R. J. Kolah, learned counsel for the petitioner, that s. 6(1) of the G.T. Act contemplated a hypothetical open market, which presumed a willing purchaser and seller. He submitted that the value of the shares in question had to be estimated under s. 6(1) upon the valuation report submitted by the petitioner. The basis of this report had been accepted by the Tribunal and by the Supreme Court, both in respect of wealth-tax and gift-tax. This showed that the price of the shares in question could be determined on the basis of what they would fetch in the open market. The provisions of s. 6(1) could, therefore apply. Consequently, the provisions of s. 6(3) did not apply, and the provisions of r. 10(2) framed thereunder had no application. If the provisions of s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market " in s. 7(1) of the W.T. Act. The court took the view that the said words did not contemplate actual sale or the actual state of the market, but only enjoined that it should be assumed that there was an open market and that the property could be sold in such market. It was a hypothetical case which was contemplated and the tax officer had to so assume. The judgment of the Supreme Court in CWT v. Mahadeo Jalan [1972] 86 ITR 621, is of great importance in this matter. The question which had to be determined was what was the basis of valuation of shares in private limited companies for the purposes of s. 7 of the W.T. Act, 1957. Generally, the court observed, the price at which a reasonably willing purchaser would buy the shares postulated a hypothetical purchaser. Even in such a case, it was to be assumed that the vendor would only be willing to sell the share for its real value and the purchaser would be willing to pay the price. The price had to be determined notionally. Among the factors which governed the considerations of the buyer and the seller, where the one desired to purchase and the other wished to sell, the factor of break-up value of the shares as on liquidation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying the profit-earning method and the other by applying the break-up method. The assessee pleaded that only the profit-earning method should be applied since it was the only method that could be applied for the valuation of the shares of a going concern. The Tribunal accepted the assessee's contention, dismissed the appeals of the Revenue and allowed the cross-objections of the assessee. In doing so, the Tribunal followed the decision of the Supreme Court in Mahadeo Jalan's case [1972] 86 ITR 621. Aggrieved by the orders of the Tribunal the Revenue made applications for referring to the High Court the following question of law (p. 42 of 122 ITR) : " Whether the Tribunal is right in holding that the shares of an investment company have to be valued only on the basis of the yield without taking into account the assets owned and reflected in the balance-sheet ?" The applications for reference were rejected by the Tribunal on the ground that no referable question of law arose out of its orders. The Revenue thereupon made applications to this court for calling for a reference, but those applications also met with the same fate. The Revenue then preferred special leave petitions, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jalan's case [1972] 86 ITR 621 (SC), that, in the case of an investment company, the asset-backing was a relevant consideration and the break-up method could not, therefore, be considered totally irrelevant. This meant that in order to determine the capacity of the company to maintain its profits the asset-backing would be a relevant consideration. The observation ought not to be read to suggest that the valuation of the assets would be a relevant factor in determining the valuation of the shares. The Supreme Court held that the combination of the two methods advocated on behalf of the Revenue could not be accepted as a valid principle of valuation of shares. The court held (at p. 47 of 122 ITR): " Here, in the present case, Mafatlal Gagalbhai Pvt. Ltd. was a private limited company which was a going concern and it was neither ripe for liquidation nor were there any exceptional circumstances which should attract the applicability of the break-up method. The profit-earning method was, therefore, the only method which could properly be applied for arriving at the valuation of the shares in the company and the Tribunal was right in accepting the figures of valuation in the report of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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