Calcutta High Court
Batuk Nath Bhattacharjee vs Commissioner Of Gift-Tax And Ors. on 30 September, 1994
Equivalent citations: [1996]217ITR434(CAL)
ORDER--Valuation of unquoted shares under break-up method. Ratio : Valuation of unquoted equity shares of a company under break-up method by Gift Tax Officer is neither erroneous nor prejudicial to interests of revenue, revision of order not valid. Held : (i) Section 24(2) 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 are conditions precedent to the invocation of the provisions of section 24(2). None of these conditions is satisfied in this case. (ii) The Gift Tax Officer considered all the relevant aspects, discussed the whole case, examined the balance-sheet of the company as well as the valuation report of the chartered accountant in respect of the valuation of shares and found that the valuation of shares for gift-tax purposes was correctly determined in accordance with rule 1D of the Wealth Tax Rules, 1957. This cannot be said to be a cryptic order or an order passed without application of mind. No other enquiry was called for in this case. The Commissioner of Gift Tax, therefore, lacked jurisdiction to initiate proceedings under section 24(2) since none of the conditions precedent to the invocation of the said section were satisfied in this case. Application : Valuation for gift-tax purposes is governed by Schedule II to the Gift-Tax Act. A. Y. : 1976-77 Gift Tax Act 1958 s.24(2) Gift Tax Rules 1958 r.10 GIFT TAX Writ--ALTERNATIVE REMEDY--Objection raised at the time of final hearing. Ratio & Held : It is, well-settled that the objection as to alternative remedy cannot be taken at the time of final hearing of the writ petition after filing of an affidavit and after several years from the date of issue of the rule. Case Law Analysis : Mrs. Shardaben B. Mafatlal v. CIT (1989) 177 ITR 463 (Bom) applied. Application : Also to current assessment years. Constitution of India art 226 JUDGMENT Shyamal Kumar Sen, J.
1. The facts, inter alia, leading to this writ petition are that the petitioner is the son of Debendra Nath Bhattacharjee, since deceased, an eminent industrialist. The said Debendra Nath Bhattacharjee died intestate on January 18, 1978, leaving behind him amongst other heirs and legal representatives, the petitioner.
2. During the lifetime of the said Debendra Nath Bhattacharjee, since deceased, he gifted in or about October, 1975, 403 shares of British Electrical and Pumps Private Limited (hereinafter referred to as "the said company") to the petitioner during the previous year ending on March 31, 1976, relevant to the assessment year 1976-77, and further 1,750 shares in or about December, 1977, of the said company to the petitioner's wife, Smt. Sovona Bhattacharjee, during the previous year ending on March 31, 1978, relevant to the assessment year 1978-79.
3. 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 1976-77. 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.
4. 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, 1977, so far as the valuation of the shares for the assessment year 1978-79 is concerned. The said revised valuation of the said gifted shares of the said company was made under Rule 1D of the Wealth-tax Rules, 1957. Rule 1D of the Wealth-tax Rules provides as to how the market value of unquoted equity shares of companies other than investment companies and managing agency companies should be determined. While for the assessment year 1976-77, the revised valuation under Rule 1D was based on the audited balance-sheet of the company as on March 31, 1976, for the assessment year 1978-79, the revised valuation under Rule 1D based on the balance-sheet as at November 30, 1977, and was duly certified by a chartered accountant. A copy of the valuation made by the chartered accountant for the assessment year 1978-79, in respect of the said shares has been annexed to the writ petition.
5. The Gift-tax Officer considering the facts and circumstances of the case and after going through the provisions of Rule 1D of the said Wealth-tax Rules, 1957, and after being satisfied as to the valuation shown by and on behalf of the assessee accepted the said valuation and duly completed the gift-tax assessments for the assessment years 1976-77 and 1978-79. A copy of each of the said assessment orders has been annexed to the writ petition.
6. It appears from the said assessment orders that the Gift-tax Officer determined the market value in accordance with the provisions of Section 6 of the Gift-tax Act, 1958. Section 6 of the said Act provides that the value of any property transferred by way of gift 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.
7. It is the contention of the petitioner that inasmuch as the Gift-tax Rules did not prescribe any particular method by which the shares of the private limited company should be valued, the petitioner, on the basis of the guidelines provided in Rule 1D of the Wealth-tax Rules, 1957, valued the said shares and the Gift-tax Officer, respondent No. 2, duly accepted the said guidelines and the assessments were completed accordingly. The said assessments were completed by respondent No. 2 on January 30, 1981.
8. In pursuance of the assessments, respondent No. 2 duly raised demands for a total sum of Rs. 75,075 under Section 31 of the Gift-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.
9. 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, in 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 show-cause issued under Section 24(2) of the said Act, respondent No. 1 held that the Gift-tax Officer should have valued the gifted shares for both the above assessment years in terms of Rule 10(2) of the Gift-tax Rules, 1958, and not under Rule 1D of the Wealth-tax Rules, 1957. It was mentioned by respondent No. 1 in the said show-cause notice that Rule 1D of the Wealth-tax Rules, 1957, had or has no application to the Gift-tax Act, or the gift-tax assessment and the language of Rule 10(2) of the Gift-tax-Rules is identical with Section 37 of the Estate Duty Act, 1953. By the said show-cause notice, respondent No. 1 fixed the hearing of the said case on January 17, 1983. A copy of the said show-cause notice has been annexed to the writ petition.
10. Rule 10(2) of the Gift-tax Rules, 1958, provides as follows :
"Rule 10(2). Valuation of property.--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, but the fact that a special buyer would for his own special reasons give a higher price than the price in the open market shall be disregarded."
11. Section 37 of the Estate Duty Act, 1953, provides as follows :
"Section 37. Valuation of shares in a private company where alienation is restricted.--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 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, but the fact that a special buyer would for his own special reasons give a higher price than the price in the open market shall be disregarded."
12. In reply to the said show-cause notice dated January 6, 1983, the petitioner duly preferred objections to the course of action to be adopted by respondent No. 1 in respect of the said assessments duly made by the Gift-tax Officer, respondent No. 2.
13. 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.
14. 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.
15. 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.
16. 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.
17. He has further submitted that both Rule 10(2) of the Gift-tax Rules, 1958, and Section 37 of the Estate Duty Act, 1953, are in pari materia with each other. Both these two provisions lay down the procedure for valuing the shares of a private limited company which contain restrictive provisions as to the alienation of shares. Both these two provisions give the taxing authority two options. The first option is to adopt the break-up method, viz., to value the shares with reference to the total assets of the company as appearing in its last available balance-sheet. If this method is not practicable, the alternative method given in both these two provisions is the determination of open market value by any other method. The profit-earning method or yield method is one such alternative method by which the value of shares of an unquoted company may be determined in the open market.
18. Mr. Poddar also referred to the Division Bench judgment of this court in CWT v. India Exchange Traders' Association [1992] 197 ITR 356 to which I was also a party. He has further contended referring to pages 376, 377 and 379 of the said report that the Division Bench clearly noted that, according to Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958, the value of unquoted equity shares of a private limited company was required to be ascertained by reference to the value of the total assets of the company as appearing in its last available balance-sheet and it was only if the value was not so ascertainable that it could be determined in any other manner.
19. He has further submitted that the Division Bench also noted that the alternative method was required to be adopted only in the case of impracticability of the break-up method in any particular case.
20. The learned advocate further referred to the judgment of the Supreme Court in Kusumben D. Mahadevia's case . The Division Bench also noted that the Supreme Court had not pronounced on that issue as the same was not referred by the Tribunal to the High Court and, therefore, that question did not fall for determination by the Supreme Court. Therefore, the Division Bench noted that despite the primacy given to the break-up method under the said Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958, the Supreme Court directed the application of the alternative method, viz., the profit-earning method or the yield method since the 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. Kasiur 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."
21. 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.
22. It has been contended by the learned advocate for the petitioner that the method prescribed under Rule 1D of the Wealth-tax Rules, 1957, being the break-up method for valuing unquoted equity shares of a company (other than an investment company or a managing agency company) based upon the balance-sheet of the company is a more simple method than the other methods prescribed.
23. It has also been submitted by the learned advocate for the petitioner that there may be several methods of valuing an asset or for that matter unquoted equity shares, namely, the yield method and profit-earning method also.
24. It has been suggested that compared to them, the break-up method incorporated in Rule 1D is far simpler and less time consuming. All that the Wealth-tax Officer has to do is to take the balance-sheet of a company, delete some items from the columns relating to the assets and liabilities as directed by Explanation II of Rule 1D and then apply the formula contained in the said rule. These were the observations made by the Supreme Court recently in Bharat Hari Singhania v. CWT . This decision is also .
25. The Supreme Court in its decision in Bharat Hari Singhania's case approved the break-up method embodied in Rule 1D, and the principles laid down by the Division Bench of this court in CWT v. India Exchange Traders' Association [1992] 197 ITR 356.
26. In support of his contention, the petitioner also relied upon the following decisions :
1. CGT v. Mammen Mathew [1986] 158 ITR 466 (Ker) ;
2. CED v. J. Krishna Murthy [1974] 96 ITR 87 (Mys) ;
3. Shyamsukh Garg v. CED ;
4. CED v. S.M. Zaki ;
5. Bal Krishna Binani v. CWT .
27. Different High Courts in this country including the Division Bench of this court have consistently taken the view that under all direct taxes Acts, viz., the Wealth-tax Act, 1957, the Gift-tax Act, 1958, and the Estate Duty Act, 1953, the only proper method of valuing the shares of an unquoted private limited company is the break-up method as prescribed in Rule 1D of the Wealth-tax Rules, 1957. The said principle has now been approved by the Supreme Court in Bharat Hari Singhania's case .
28. It has also been submitted by the learned advocate for the petitioner that Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958, which has been referred to by respondent No. 1 in 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.
29. 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(1)(e) of the Estate Duty Act, 1953. These rules are special rules which are applicable to controlled companies alone. There is a separate chapter dealing with controlled companies under the Estate Duty Act ; Sections 17, 18, 19 and 20 deal with "controlled companies". These Sections lay down anti-avoidance measures. These sections were enacted with a view to control the avoidance of estate duty by the deceased, who could make a transfer of his substantial assets to a controlled company during his lifetime and thereafter continue to derive all benefits from the controlled companies concerned. A controlled company is defined in Sub-section (4) of Section 17 of the Estate Duty Act, 1953, to mean a company which is under the control of not more than five persons. Sections 17, 18 and 19 of the Estate Duty Act, 1953, make it quite clear that these sections are applicable only where it is found that the deceased transferred his property to a controlled company before his death and benefits accrued to the deceased from such controlled company in the three years immediately preceding his death. In such a case, Sub-section (1) of Section 17 lays down that the assets of the controlled companies shall be deemed to be chargeable to estate duty as deemed to pass on the death in the manner and to the extent laid down therein. It was for this purpose that the rule-making authority was authorised to make rules and the Estate Duty (Controlled Companies) Rules, 1953, were accordingly enacted in the exercise of the powers conferred on the rule-making authority by Section 20 of the said Act. As already stated earlier, the provisions of Sections 17, 18 , 19 and 20 of the Estate Duty Act, 1953, as well as the Estate Duty (Controlled Companies) Rules, 1953, have no application to a normal private limited company, whose shares, even under the Estate Duty Act, 1953, are required to be valued in accordance with the break-up method as laid down in Section 37 read with Section 36 of the Estate Duty Act, 1953. It has been submitted that Section 37 on the one hand and the Estate Duty (Controlled Companies) Rules, 1953, on the other are two independent provisions. Section 37 of the Estate Duty Act, 1953, applies to valuation of shares of a private limited company which is not a controlled company. The shares of a controlled company on the other hand are required to be valued in accordance with Rule 15 of the Estate Duty (Controlled Companies) Rules, 1953.
30. 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.
31. 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.
32. 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 Rule 15(1) of the Estate Duty (Controlled Companies) Rules, 1953, in his said impugned order passed under Section 24(2) of the said Act since the Controlled Companies Rules including Rule 15(1) thereof can have no application whatsoever to the valuation of shares of a private limited company covered by Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958.
33. The said order was also challenged on the ground that it was not mentioned in the said order that the shares of B.E. Pumps P. Ltd. should be valued in accordance with the profit earning or yield method. Respondent No. 1 was of the view that those shares should have been valued in accordance with Rule 15(1) of the Estate Duty (Controlled Companies) Rules, 1953.
34. It has further been submitted by the learned advocate for the petitioner that the market value of shares for the purposes of charging to gift-tax should also be determined in accordance with the break-up value would be further clear if one looks at the provisions of Schedule II to the Gift-tax Act, 1958. This Schedule II which corresponds to Schedule III to the Wealth-tax Act, 1957, and Rule 1D of the Wealth-tax Rules, 1957, was brought on the statute book by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989. Schedule II to the Gift-tax Act, 1958, lays down the manner of determining the market value of shares of an unquoted company. Rule 5 of Schedule II clearly provides that the value of an unquoted equity share in any company, other than an investment company, shall be determined in accordance with the break-up method based upon the last available balance-sheet of such company.
35. It has also been submitted by the learned advocate for the petitioner that the earlier rules for valuation of shares of an unquoted private limited company were laid down in Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958. This rule clearly stated that the valuation of shares of a private limited company should ordinarily be determined on the break-up value method, that is to say with reference to the value of the assets of the company as appearing in its balance-sheet. If this was not practicable then only the other alternative method was to be adopted. Schedule II inserted in the Gift-tax Act, 1958, by the Amendment Act of 1989, as aforesaid clearly confirms and reconfirms this very position that the proper method of valuing shares of an unquoted 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.
36. 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 the Wealth-tax Rules, 1957, which was framed in 1957 provided for the break-up method of valuing shares of unquoted private limited companies. This very method was envisaged even in Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958. This clearly shows the legislative intention that it never wanted the provisions of Rule 15 of the Controlled Companies Rules to be applied for valuing the shares of unquoted private limited companies either for the purposes of the Wealth-tax Act and/or for the purposes of the Gift-tax Act and/or even for the purposes of the Estate Duty Act, in those cases, where it was not a controlled company.
37. Shri S.K. Mitra, the learned advocate for the Revenue, while opposing the instant writ application submitted as follows :
(a) 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, where an alternative remedy exists under the relevant statute, viz., the Gift-tax Act, 1958, as in this case.
(b) The Commissioner of Gift-tax, respondent No. 1, found that the gift-tax assessments in this case in respect of the assessment years 1976-77 and 1978-79 were completed by the Assessing Officer without making proper enquiries and without applying his mind. The assessment orders passed by the Gift-tax Officer in this case were cryptic in nature.
This by itself was sufficient to invoke the provisions of Section 24(2) of the Gift-tax Act, 1958. In this respect, learned counsel for the Revenue referred to the following two decisions :
1. Gee Vee Enterprises v. Addl. CIT ;
2. CWT v. Ramnarayan Bhojnagarwala .
(c) The break-up value method was not the only proper method of valuing shares of an unquoted private limited company. Since the value of unquoted shares for the purposes of the charge to gift-tax is to be determined, under Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958, the Gift-tax Officer should have followed the yield method and/or profit-earning method as applied in the following cases :
1. CGT v. Kusumben D. Mahadevia ;
2. CGT v. Executors and Trustees of the Estate of Late Sh. Ambalal Sarabhai ;
3. Mrs. Shardaben B. Mafatlal v. CIT [1989] 177 ITR 463 (Bom) ;
4. CGT v. S. Venu Srinivasan [1978] 112 ITR 771 (Mad) ;
5. Chimanbhai Kashibhai Patel v. CGT [1993] 203 ITR 57 (Guj).
38. 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 ;
2. Shivram Poddar v. ITO ;
3. Gita Devi Aggarwal v. CIT ;
4. CIT v. R. Hanumanthappa and Son ;
5. CIT v. Sri Ram Gopal ;
6. Gee Vee Enterprises v. Addl. CIT ;
7. Samnuggar Jute Factory Co. Ltd. v. CIT ;
8. Deoki Nandan Singhania (AOP) v. CIT .
39. Accordingly it has been submitted that there is no jurisdictional error as to call for interference by this court.
40. It has further been submitted by the learned advocate for the respondent that the Commissioner of Gift-tax in this case has exercised his jurisdiction in accordance with Section 24 of the Gift-tax Act which should not be interfered with by this court. The learned advocate submitted that in view of the several decisions of the different courts in India, the Commissioner can exercise revisional jurisdiction under Section 24 of the Gift-tax Act (or Section 263 of the Income-tax Act) if he finds that the Assessing Officer has not made any enquiry or has not given any reason in coming to his finding that the two assessment orders in this case, passed by the Gift-tax Officer are non-speaking orders.
41. It has been submitted that while valuing gifted shares under Rule 10(2) of the Gift-tax Rules, he has not followed the said specific rule nor Section 6 of the Gift-tax Act but has simply applied Rule 1D of the Wealth-tax Rules, which is only one of the modes of valuation of shares of a company under certain circumstances under the Wealth-tax Act. In this connection, the learned advocate relied upon the following cases :
Gee Vee Enterprises v. Addl. CIT ;
Addl. CIT v. Mukur Corporation [1978] 111 ITR 312 (Guj) ;
CWT v. Ramnarayan Bhojnagarwala .
42. Mr. Mitra, the learned advocate for the respondent, further submitted that the decisions cited by the learned advocate for the assessee in the case of CWT v. India Exchange Traders' Association and in the case of CIT v. Godavari Sugar Mitts (sic) reported in 198 ITR 624 have no application in this case inasmuch as they are not cases under the Gift-tax Act and they deal specifically with the valuation of shares for wealth-tax purpose under certain circumstances in accordance with Rule 1D of the Wealth-tax Rules.
43. It has been further submitted that the decision of CIT v. Godavari Sugar Mills (sic) reported in 198 ITR 624 is a case under the Estate Duty Act.
44. 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 as well as Kusumben D. Mahadevia 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.
45. 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 gifted on the date of gift. In this connection, he referred to the decision in the case of CGT v. Prema Srinivasan [1978] 114 ITR 78 (Mad).
46. It has further been submitted by the learned advocate for the respondent that the question whether the break-up method under Rule 1D of the Wealth-tax Rules is the only method in valuing gifts for gift-tax purposes was not argued or decided in the case of CGT v. Smt. Kusumben D. Mahadevia .
47. Mr. Mitra, the learned advocate for the respondent, further submitted that Rule 10(2) of the Gift-tax Rules corresponds with Section 37 of the Estate Duty Act. The Estate Duty Act does not contain any specific Rule as to how the value of shares is to be determined except that Rule 15 of the Estate Duty (Controlled Companies) Rules, 1953, contains the provisions for valuation of shares. The value of shares giving an interest in a company may on general principles be estimated by reference to the value of the company's business as a going concern.
48. It is the further contention of the learned advocate for the respondent that even in case the break-up method is adopted, necessary direction should be made for provision of taxation and gratuity. The balance-sheet to be followed is that which is available on the date of gift.
49. The main contention of the learned advocate for the respondent that the Gift-tax Officer in the instant case in his cryptic orders passed for the assessment years 1976-77 and 1978-79 simply followed Rule 1D of the Wealth-tax Rules in valuing gifted shares of a going concern, namely, British Electrical Pump (P.) Ltd., without making any enquiry, whatsoever about such value under Section 6 of the Gift-tax Act read with Rule 10(2) of the Gift-tax Rules, as pointed out by the Commissioner of Gift-tax in his revision order.
50. According to the learned advocate for the respondent, the Gift-tax Officer should have enquired into the following particulars :
(1) Why in view of specific Section 6 of the Gift-tax Act read with Rule 10(2) of the Gift-tax Rules, the Gift-tax Officer has not referred to it or followed it in the determination of value of the gifts and instead applied Rule 1D of another Act (Wealth-tax Act) ?
(2) The Gift-tax Officer has not taken into consideration nor given any particulars of the value of the assets and liabilities of the company even when applying Rule 1D of the Wealth-tax Rules (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 November 30, 1977 was mainly drawn up for the valuation of shares as on the date of gift; and that for the purposes of valuation of the gift, the relevant date was the date of gift; and therefore, the valuation of the balance-sheet as to November 30, 1977 was fair and should be accepted.
4. Section 37 of the Estate Duty Act is similar to Rule 10(2) of the Gift-tax Rules. The Estate Duty Act contains no rule for valuation of shares. The Controlled Companies Rules framed under the Estate Duty Act provides for a method of valuation of shares (Rule 15) which provides that shares in a controlled company should be valued by reference to the total assets of the company and otherwise by market value method. Section 36 of the Estate Duty Act has no application in this case. The Gift-tax Officer has not ascertained either the market value of the gifts on the date of gift as provided in Section 6 of the Gift-tax Act or given any particulars as to how the total assets of the company was determined. In fact, he made no enquiry whatsoever, but simply adopted Rule 1D of the Wealth-tax Rules. The decision in CED v. J. Krishna Murthy [1974] 96 ITR 87 (Mys) relied on by the assessee has not dealt with the Controlled Companies Rules and is distinguishable from the facts of this case.
51. It has further been submitted by the learned advocate for the respondent that there is no lack of jurisdiction of the Commissioner of Gift-tax in passing the said order under Section 24 of the Gift-tax Act, since it is open to the petitioner to make necessary submission before the Gift-tax Officer when the Gift-tax Officer will pass fresh assessment order.
52. The learned advocate in this connection relied upon the judgment and the decision in the case of Chimanbhai Kashibhai Patel v. CGT [1993] 203 ITR 57 (Guj).
53. The learned advocate for the respondent argued that the shares of the private limited company which has been gifted would have to be valued by adopting the profit-earning method. The learned advocate has further referred to the decisions in the cases of CWT v. Mahadeo Jalan ; CGT v. Smt. Kusumben D. Mahadevia and CGT v. Executors and Trustees of the Estate of Late Sh. Ambalal Sarabhai .
54. It is the contention of the learned advocate for the respondent that the Gift-tax Officer has passed the assessment orders without considering 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.
55. 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.
56. I have considered the respective submissions of the learned advocates for the parties and decisions cited.
57. 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.
58. 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 the Supreme Court in L. Hirday Narain v. ITO , may be taken note of in this connection. In the aforesaid decision it was held by the Supreme Court in paragraph 12 of the said judgment at page 36 of the said report as follows (at page 31 of 78 ITR) :
"It is true that a petition to revise the order could be moved before the Commissioner of Income-tax. But Hirday Narain moved a petition in the High Court of Allahabad and the High Court entertained that petition. If the High Court had not entertained his petition, Hirday Narain could have moved the Commissioner in revision, because at the date on which the petition was moved the period prescribed by Section 33A of the Act had not expired. We are unable to hold that because a revision application could have been moved for an order correcting the order of the Income-tax Officer under Section 35, but was not moved, the High Court would be justified in dismissing as not maintainable the petition, which was entertained and was heard on the merits."
59. The principles laid down in the said decision has been followed by. . .
It is, therefore, well-settled that the objection as to alternative remedy cannot be taken at the time of final hearing of the writ petition after filing of an affidavit and after several years from the date of issue of the rule. The same principle has also been reiterated in the judgment and the decision in the case of Mrs. Shardaben E. Mafatlal v. CIT [1989] 177 ITR 463 (Bom).
60. In considering the aforesaid position in law as laid down by the Supreme Court, in my view it cannot be said that in the instant case the alternative remedy provided in the statute does not disentitle the petitioner to the relief claimed in the writ petition.
61. Mr. Mitra, the learned advocate, contended that the Supreme Court in the case of CGT v. Smt. Kusumben D. Mahadevia approved pf the profit-earning method to be the proper method for valuation of the shares of a private limited company under the Gift-tax Act.
1958. It may, however, be noted that the Supreme Court in the aforesaid decision declined to consider the provisions of Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958, for the reasons, as noted at pages 48 and 49 of the reports. The Supreme Court noted that no argument based on Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958, was advanced by the Revenue either before the Tribunal 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.
62. 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 , at pages 376, 377 and 379 of the report.
63. In my view the learned advocate for the Revenue did not correctly appreciate the decision of the Supreme Court in Smt. Kusumben D. Mahadevia's case , in its proper perspective. The learned advocate for the Revenue also relied upon the judgment and the decision of the Supreme Court in CGT v. Executors of Trustees of the Estate of Late Sh. Ambalal Sarabhai . In the aforesaid decisions both the assessee as well as the Department proceeded to value the shares for the purpose of the gift-tax on the basis of their break-up value. The Revenue for the first time before the Supreme Court contended that the correct principle of valuation was the profit-earning method in the light of the decision of the Supreme Court in Mahadeo Jalaris case and more particularly in Smt. Kusumben D. Mahadevia's case . The Supreme Court accepted the contentions of the Department that the shares should have been valued on the basis of dividend or profit-earning method of valuation but held and observed that it would not be desirable to disturb ,the method of valuation adopted by the Tribunal and approved by the High Court particularly when both parties proceeded on the break-up method. A reading of this case again shows that the Supreme Court did not examine the specific provisions of Rule 10(2) of the Gift-tax Rules, 1958, since no argument based on the said rule was advanced by either of the parties. The principles laid down by the aforesaid decisions cannot have any application to the facts and circumstances of the present case because here both the petitioner as well as the Revenue agree that for the purpose of the gift-tax, Rule 10(2) should be applied. Rule 10(2) of the Gift-tax Rules, 1958, clearly postulates the break-up method as the primary method of valuation of unquoted equity shares of a private limited company for the purposes of gift-tax.
64. The third decision of the Bombay High Court in Mrs. Shardaben B. Mafatlal v. CIT [1989] 177 ITR 463 as cited by the Revenue has again no application in that case too. In the aforesaid decision also the provisions of Rule 10(2) of the Gift-tax Rules, 1958, were not considered by the Bombay High Court.
65. The learned advocate for the Revenue also relied on the judgment of the Gujarat High Court in Chimanbhai Kashibhai 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.
66. 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 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.
67. 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 the learned advocate for the Revenue. It may be noted that the Gift-tax Officer considered all the relevant aspects, discussed the whole case as is apparent from the reading of the two assessment orders enclosed with the writ petition, examined the balance-sheet of the company as well as the valuation report of the chartered accountant in respect of the valuation of shares and found that the valuation of shares of B.E. Pump P. Ltd. for gift-tax purposes was correctly determined in accordance with Rule 1D of the Wealth-tax Rules, 1957. This cannot be said to be a cryptic order or an order passed without application of mind. No other enquiry was called for in this case. In fact, learned counsel for the Revenue also could not suggest what further enquiry could have been made by the Gift-tax Officer.
68. In any event, the decision cited by Mr. Mitra, the learned advocate for the Revenue, praying for adopting the yield method, goes to show that the procedure followed under the yield method admittedly provides for lower valuation and thus the same cannot in any event be for the benefit of the Revenue. Nowhere in the impugned order passed under Section 24(2) of the said Act, respondent No. 1 has referred to the yield method. The Department, therefore, should not be allowed to make out a new case or change its stand in the course of arguments before this court at this stage when no such case was pleaded by the Revenue.
69. It appears from the affidavit filed on behalf of the Revenue before this court that such a contention was not raised by the Revenue. The Division Bench of this court, therefore, felt that it could not be said that the profit-earning method was the only proper method. In fact, subsequently, the Supreme Court in Bharat Hari Singhania's case itself held and observed that the profit-earning method was a complicated method and the break-up value method was a more simple and proper method.
70. The Madras High Court in CGT v. S. Venn Srinivasan [1978] 112 ITR 771, dealing with the valuation of shares for gift-tax purposes, vis-a-vis, Rule 10(2) of the Gift-tax Rules, 1958, held and observed at page 774 that in such circumstances, the Gift-tax Officer can take the value of the shares as shown in the balance-sheet which is based on the break-up figures and such value shown in the balance-sheet which was in existence at the time of the gift can very 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 should be computed on the break-up figures. The matter was remanded to the Tribunal only for that purpose.
71. The other decision cited by learned counsel for the Revenue is that of the Delhi High Court in Gee Vee Enterprises' case , which cannot have any application to the facts and circumstances of the instant case. In that case, the Delhi High Court found that the Assessing Officer granted registration to a partnership firm without making proper enquiries as to the genuineness of the firm. It was in this view of the matter that the Delhi High Court held that granting registration to the partnership firm without making proper enquiries as to its genuineness was clearly erroneous and/or prejudicial to the interests of the Revenue.
72. Learned counsel relied on the judgment of this court in Ram Narayau Bhojnagarwala's case [1992] 194 ITR 489. In the aforesaid decision, it appears that the assessee showed a lower value of Rs. 35,000 in respect of his landed property in his wealth-tax returns for the assessment years 1975-76 and 1976-77. These two assessments were completed in January, 1981, accepting the lower value as returned by the assessee. The value of the relevant immovable property was declared by the assessee at a very high figure of Rs. 3,63,000 in the subsequent return filed in 1981. The Commissioner of Wealth-tax noted that the Wealth-tax Officer did not make proper enquiry as to the value of land in Jaipur at the relevant time and accepted the value declared by the assessee, even when there was wide divergence between the value shown in the earlier year and that declared by the assessee herself subsequently in 1981. It was in the circumstances that this court felt that the Commissioner of Wealth-tax was fully justified in invoking the provisions of Section 25(2) of the Wealth-tax Act, 1957, since the earlier assessments in question were completed by the Wealth-tax Officer without making proper enquiry as to the value of land prevailing at Jaipur at the relevant time particularly when the subsequent return was, filed in 1981, where the value of land was declared by the assessee himself at Rs. 3,63,000 in 1981 as against the earlier value of Rs. 35,000 for the very property. This case is again distinguishable on the facts.
73. Considering the facts and circumstances of the case, in my view respondent No. 1, the Commissioner of Gift-tax, patently lacked jurisdiction to initiate the proceedings under Section 24(2) of the Gift-tax Act, 1958, since none of the conditions precedent to the invocation of the said section were satisfied in this case. The petitioner, accordingly, succeeds in this writ petition.
74. Accordingly, the said proceedings, decisions and order passed by the Commissioner of Gift-tax under Section 24(2) of the Gift-tax Act stand quashed and set aside.
75. There will be no order as to costs.