Income Tax Appellate Tribunal - Madras
Gift-Tax Officer vs M.A. Murugappan on 27 February, 1987
Equivalent citations: [1987]21ITD450(MAD)
ORDER
R. Rangayya, Accountant Member
1. As common points are involved in both the appeals, they are disposed of by a common consolidated order for the sake of convenience. The assessees in these cases have gifted during the accounting year relevant to the assessment year 1980-81 certain number of shares of Ambadi Enterprises Pvt. Ltd./T.I. & M. Sales Ltd. and Tube Investments to different persons. These shares were not quoted in the stock exchange. For the purpose of estimating their fair market value as on the date of gift, the Gift-tax Officer valued them on yield basis. Aggrieved by the above orders of the GTO, the assessee filed appeals before the Commissioner (Appeals) who held that only in cases where no dividend is declared or where there was no other method possible, yield method is taken in preference to other methods. In the absence of any reason to show, by the break-up value does not represent the real worth of the shares, he directed the GTO to recomputed the value of the gifted shares on the basis of break-up value method.
2. The Revenue is now in appeal before us contending that the Commissioner (Appeals) was not correct in holding that the shares in question should be valued only on break-up value method and not on yield basis. Shri B.C. Mohanty, the learned departmental Representative contends that the decision of the Supreme Court in the case of CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 clearly applies to the facts of the case, as the company, the shares of which were gifted was a going concern. Accordingly, it was contended that the GTO was correct in valuing the gift on yield basis. He also brings to our attention the decision of the Bombay High Court in the case of Seth Hemant Bhagubhai Mafatlal v. N. Rama Iyer, GTO [1983] 144 ITR 737 in which it was held that in valuing the shares for the purpose of gift-tax, in the case of a private limited company which is a going concern not ripe for liquidation and regarding which there are no exceptional circumstances, the break-up method cannot be applied, the profit earning method is the only method which can be applied for the valuation of shares. He also relies on the decision of Smt. Kusumben D. Mahadevia v. N.C. Upadhya [1980] 124 ITR 799 (Bom.) in which it was held that Rule ID of the WT Rules is only directory and not mandatory and the appropriate method of valuation of shares of a private limited company which is not quoted in the stock-exchange is not break-up method but yield method. The learned counsel, Shri K. Srinivasan, on the other hand, vehemently contends that under the provisions of GT Act, the valuation of assets has to be made under Section 6. As per Section 6(1) the value of any property shall 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 on which the gift was made. This is subject to the provisions of Sub-section (3) of the same section wherein it is enacted that where the value of the property cannot be estimated under Sub-section (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner. It is claimed that Rule 10(2) of the GT Rules lays down that where the articles of association of a private company contain restrictive provisions as to the alienation of shares, the value of the shares, if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch if on the date of gift they could be sold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the articles . On the basis of the above provisions, it is contended that break-up method of valuation should be adopted in the case of a private limited company and it is only in cases such method is not available, recourse can be had to other methods of valuation. Shri Srinivasan also relies on the decision of the Madras High Court in the cases of CWT v. S. Ram [1984] 147 ITR 278 ; CGT v. K. Ramesh [1983] 141 ITR 462 and the decision of the Kerala High Court in the case of CIT v. Mammen Mathew 1985 Tax LB 1177. Shri Srinivasan also contends that even on yield basis the GTO has not correctly computed the value of the shares in respect of Ambadi Enterprises Private Limited as there is an arithmetical mistake. According to him, value per share should be Rs. 13.30 and not Rs. 133.30 as calculated by the GTO.
3. Having heard the rival submissions, we are of the opinion that the Commissioner (Appeals) was not correct in directing the GTO to recomputed the value of the shares on the break-up value method. The Supreme Court in the case of CWT v. Mahadeo Jalan [1972] 86 ITR 621 held that the market value except in exceptional cases, cannot be determined on the hypothesis, because in a private company one holder can bring it into liquidation, it should be valued as on liquidation by the break-up method. The yield method is generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation. Again in the case of Smt. Kusumben D. Mahadevia (supra), the Supreme Court held that in the case of a company which is a going concern and whose shares are not quoted on the stock exchange, the profits which the company has been making or should be capable of making or, in other words, the profit-earning capacity of the company would ordinarily determine the value of its shares. The break-up value would not be appropriate for valuation of shares of such a company because among the factors which govern the consideration of the buyer and the seller, where the one desires to purchase and the other wishes to sell, the factor of break-up value as on liquidation hardly enters into consideration where the shares are of a going concern. It is only where a company is ripe for winding up or the situation is such that the fluctuations of profits and uncertainty of conditions at the date of valuation prevent any reasonable estimation of the profit-earning capacity of the company, that the valuation by the break-up method would be justified. It is not the case of the assessee that the company's shares of which are gifted, are ripe for winding up, there are fluctuations in profits or uncertainty of conditions at the date of valuation preventing any reasonable estimation of the profit-earning capacity of the company. In the circumstances, in our opinion, the only method for valuation of the shares will be the yield method. However, Shri Srinivasan contends that the Supreme Court in the latter case did not decide the question whether the valuation of the shares should have been made on the basis of break-up method by reason of Rule 10 of the Gift-tax Rules. As the abovementioned rule prescribes that the break-up value method should be followed in preference to other methods, he points out that the GTO ought to have valued the shares on break-up method only. This point is clearly answered by the Bombay High Court in the case of Seth Hemant Bhagubhai Mafatlal (supra) in which similar argument was advanced before the Bombay High Court wherein it was held that for valuing the shares for gift-tax purposes in the case of a private limited company, which is a going concern which is not ripe for liquidation, and regarding which there are no exceptional circumstances, the break-up method cannot be applied ; the profit-earning method is the jonty method which can be adopted for valuation of its shares. The Supreme Court affirmed that the valuation of the shares of the company such as this can be validly done under the provisions of Section 6(1) of the GT Act. It ruled out the applicability of any other method including the break-up method. The decisions sought to be relied upon by the learned counsel for the assessee, in our opinion, do not advance his case any further. In the case of Mammen Mathew (supra), the Court held that the Gift-tax authorities have no authority to value the shares without following any principle or procedure. In the absence of any rules, it held that Rule ID of WT Rules may be followed. Similarly, in the case of S. Ram (supra) the issue before the Court was whether gratuity and other contingent liability will have to be allowed as a deduction from the value of the companies assets in valuing the unquoted shares of the company on the break-up value method. No question was either argued or decided by the High Court in that case, as to whether the shares of a company, which is a going concern and which is not ripe for liquidation are to be valued on yield basis or on break-up value method. The other decision in K. Ramesh's case (supra) also does not deal with the issue presently under consideration. In view of the above discussion and in view of the decisions of the Supreme Court and Bombay High Court, we are of the opinion that the unquoted shares of the above companies Ambadi Enterprises Pvt. Ltd. and T.I. & M. Sales Ltd. have to be valued only on the yield method and not on the break-up value method as these two companies are going concerns, which are not ripe for liquidation and there are no exceptional circumstances by reason of which resort should be had to break-up method. In view of the above, the orders of the Commissioner (Appeals) are reversed and the GTO's orders are restored. However, the GTO is directed to verify the correctness of the assessee's claim regarding the wrong calculation of the valuation of shares of Ambadi Enterprises Pvt. Ltd. The face value of these shares is said to be only Rs. 10 and not Rs. 100 as estimated by the GTO. Subject to the above, the appeals are treated as allowed.