CHIMANBHAI KASHIBHAI PATEL Vs. COMMISSIONER OF GIFT TAX

JUDGEMENT

(1.) BOTH these references are in respect of the same assessee and the same assessment year. Both of them are, therefore, disposed of by this common judgment.

(2.) THE assessee gifted 8,000 shares of Gaskets and Radiators Private Limited to three family members on 28th April, 1976. The shares were transferred in the names of the trustees on 28th Dec., 1976. The assessee filed the gift tax return and valued the shares at the rate of Rs. 243 per share following the break up value method. For that purpose, the assessee had adopted the balance sheet of the company as at 31st Dec., 1974, that being the last audited balance sheet of the company on the day on which gifts were made. The GTO was of the view that the break up value was required to be ascertained on the basis of the balance sheet as at 31st Dec., 1975 as the shares were transferred in the names of the trustees in the name of the trust on 28th Dec., 1976 and by that time, balance sheet as at 31st Dec., 1975 was available. He was also of the view that the goodwill was required to be taken into consideration while calculating the total assets. Taking this view, he worked out the value of the shares at Rs. 402.22 and assessed the gift tax accordingly. The assessee appealed to the CGT(A). The Commissioner was of the view that gift of the shares can be said to have been made on 28th April, 1976 and not on 28th Dec., 1976 as held by the GTO and, therefore, balance sheet as at 31st Dec., 1974 was required to be adopted as the basis for valuing the shares. As regards the correct method for valuation of shares, the Commissioner held that shares should be valued by taking the average of value arrived at on the break up value method as well as on yield method and that the value should be discounted by 10% in view of the impediment in transfer of shares. He confirmed the view of the GTO that goodwill was required to be added to the total value of the assets of the company. On this basis, the Commissioner worked out the breakup value of shares at Rs. 351 and after discounting the same at 10% arrived at the figure of Rs. 325 per share. He worked out the value of shares on yield method at Rs. 261 per share and after giving discount of 10%, arrived at the figure of Rs. 235. Thereafter, he took the average of these two valuations and held that the shares gifted should be valued at Rs. 280 per share. The Revenue feeling aggrieved by the said order of the Commissioner, preferred an appeal to Tribunal. The assessee filed cross objections. Before the Tribunal, it was contended by the Revenue that valuation of shares should have been made on the basis of break up value method and for that purpose, reliance was also placed on r. 10 of the GT Rules. The Revenue also contended that there was no justification for giving deduction of 10%. As against that, it was contended by the assessee that the value of shares should have been worked out by adopting the yield or profit earning method as the company was a running concern. It was also urged that goodwill could not have been added to the assets of the company as the same was not shown as an asset in the balance sheet. The Tribunal confirmed the finding of the Commissioner that the gifts of shares were made on 28th April, 1976 and not on 28th Dec., 1976. The Tribunal rejected the contention of the assessee that the correct method of valuation to be applied was yield or profit earning method and held that shares were required to be valued according to the break up method. As regards inclusion of goodwill in the total assets of the company, the Tribunal held that as the goodwill was not indicated as an asset in the balance sheet, it cannot be considered while determining the total assets of the company as that would mean revaluation of the assets of the company. The Tribunal also held that there was no justification to depress the value of shares on the ground of transferability firstly because while valuing the shares of the company, the same was irrelevant and also because there was no evidence to show that effect of restriction on transfer was to depreciate the value of shares. In the result, the Tribunal partly allowed the appeal of the Revenue and also partly allowed the cross objections filed by the assessee.

(3.) QUESTIONS which are referred to this Court in GTR No. 1/81 are at the instance of the assessee and the questions in GTR No. 2/81 are referred at the instance of the Revenue. What is contended by the learned counsel for the assessee is that as held by the Supreme Court, break up value method is not the correct method to be applied in such cases and the correct method of valuation is yield method or profit earning method. He drew our attention to a decision of this Court in CGT vs. Trustees of Estate of Ambalal Sarabhai 1975 CTR (Guj) 1 : (1975) 100 ITR 447 (Guj). In that case, shares of an English company equivalent to a private limited company under the Indian Companies Act were given as gift by the assessee to his family members. In the return filed by the assessee, value of shares was declared following the break up method. The GTO accepted that method of valuation as the correct method and this was accepted even by the AAC in appeal and by the Tribunal. There was almost a concensus between the assessee and the Department that shares were required to be valued according to the break up method. The dispute between the assessee and the Revenue was as to which was the nearest balance sheet in point of time that was required to be considered for ascertaining the total assets of the company. Before the High Court also, there was no dispute as regards the correct method of valuation. This Court, after referring to S. 6 of the Act and r. 10(2) of the GT Rules, 1958, held that value of shares was required to be ascertained by reference to value of total assets of the company. If that could be so ascertained, then it was to be ascertained only in that manner. If it could not be ascertained by valuation of total assets of the company, then, estimate had to be made as to what the shares would have been valued if on the date of the gift, they could be sold in open market. This Court further observed that it was not shown as to why in the case of that particular company which was a private company, Articles of Association of which contained restrictive provisions as to the alienation of shares, the value of shares is not ascertainable by reference to the value of the total assets of the company. Taking this as the correct legal position, this Court observed that it was common ground that value of shares was required to be ascertained by following break up value method. The learned counsel then submitted that the decision of this Court in that case has been held to be bad and correct position of law is not what has been pointed out by this Court. While dealing with an appeal against that decision, the Supreme Court in CGT vs. Estate of Late Ambalal Sarabhai (1988) 67 CTR (SC) 247 : (1988) 170 ITR 144 (SC) held that the correct method of valuation in determining the value of kind of shares concerned is the profit method and not the break up value method. The learned counsel, therefore, submitted that in view of the said decision of the Supreme Court, it should be held that the authorities and the Tribunal were wrong in applying the principle of break up value while determining the value of shares and it should be held that in this case also, the correct method applicable is the yield method or profit earning method. The learned counsel for the Revenue, however, drew our attention to S. 6 of the Act and r. 10(2) of the GT Rules. Sec. 6 as it stood then read as under :