Delhi High Court
Assistant Commissioner Of Gift Tax vs K.K Gosain on 13 January, 1998
Equivalent citations: (1998)61TTJ(DEL)786
ORDER
Moksh Mahajan, A.M. In an appeal filed by the revenue, it is contended that the Commissioner of Gift Tax (Appeals) has erred in directing the assessing officer to value the gifted shares on yield method and not on break-up value method. The facts in brief are that the assessee gifted 6650 equity shares of Tech Invest (India) Pvt. Ltd. of the paid up value of Rs. 10 each. The shares were not listed on stock exchange. Gift Tax Officer valued the aforesaid shares at Rs.41.14 on the basis of break-up method. This was contested by the assessee in the appeal before the Commissioner of Gift Tax (Appeals). The contention was whether shares are to be valued either at par or or at Rs. 10.90 per share on yield basis. Various decisions were relied upon in this context. The learned Commissioner of Gift Tax after referring to the provisions of Gift Tax Act and the rules made thereon directed the Gift Tax Officer to value the shares in question in accordance with the profit-earning method in the light of the decision of the Supreme Court in the Case of CGT v. Smt. Kusumben D. Mahadevia (1980) 122 ITR 38 (SC) and that of the Gujarat High Court in CGT v. Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai (1998) 170 ITR 144 (SC). Against the decision the revenue has come in appeal.
2. The learned Departmental Representative Shri S.K Srivastava relying heavily on the decision of the Hon'ble Supreme Court in the case of Bharat Hari Singhania v. CWT (1994) 207 ITR submitted that as rule 1D has been held to be mandatory in its application unquoted equity shares have to be valued as per the aforesaid Rule. On this decision alone, the order of Commissioner of Gift Tax needs to be set aside.
3. The learned Authorised Representative, Shri B.B. Ahuja on the other hand argued that the assessee's case has to be examined under the provisions of Gift Tax Act which are not pari materia with those of the Wealth Tax Act. There are direct decision on the issue namely, Smt. Kusumben D. Mahadevia's case (supra)and that of the Gujarat High Court in the case of Chimabhai Kashibhai Patel v. GCT (1993) 203 ITR 57(Guj). The issue has to be decided in the light of the same. On the other hand, in the case of Bharat Hari Singhania (supra), one of the questions before their Lordships of Supreme Court was whether it is obligatory to follow rule 1D while valuing the unquoted equity shares of company other than investment company and managing agency company or is it merely optional ? While deciding the issue, their Lordships of Supreme Court have referred to the case of Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai (supra) and have distinguished the aforesaid decision. This was for the reasons given on page 21 of the order as reported in Bharat Hari Singhania's case (supra). In support of his contention, that rule 1D is not mandatory in valuing unquoted equity shares in Gift-tax proceedings, the observations of their Lordships on the various methods of valuation were referred to. It was argued that the application of a particular method for valuation of unquoted equity share would be dependent on the facts of each case and that too under the provisions of Gift Tax Act.
4. We have carefully considered the rival submissions. We have also gone through the decisions as referred to, on both sides, both under Wealth Tax Act as well under Gift Tax Act, the value of any asset is to be the price which it would fetch if sold in the open market on the valuation date or on the date on which the gift is made. Rules have also been made in this respect under both the Acts. During the relevant period, section 7(1) of the Wealth Tax Act read as under:-
"7.(1) Subject to any rules made in this behalf, the value or any asset, other than cash, for the purpose of this Act shall be estimated to be the price which in the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date."
The working of market value of unquoted equity shares of companies other than investment companies and managing agency companies of Wealth Tax Rules as they stood at the relevant period of time were provided in rule 1D of Wealth Tax Rules.
5. On the other hand, corresponding to section 7 of the Wealth Tax Act, section 6 of the Gift Tax Act reads as under:-
"6(1) The value of any property other than cash transferred by way of gift, shall, subject to the provisions of sub-sections (2) and (3) 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."
Rule 10(2) of Gift Tax Act as it stood then, reads as under:-
"10.(2) Where the articles of association of a Private Company contain restrictive provision 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."
On comparison of Rules made under the Wealth Tax Act and Gift Tax Act, it is seen that Wealth Tax Rules are more comprehensive. Separate modes of computation have been provided for in respect of most of the assets. While rule 1 B lays down the mode of valuation of life interest, rule 1BB specifies the mode for valuation of house. Similarly rule 1C provides for computation of value of preference shares. The computation of other assets have also been provided for in rule 2 onwards. The manner in which the market value of a particular asset is to be worked out is given in detail in each Rule. This is not so under the Gift Tax Rules. Rule 10 of the Gift Tax Rules provides for the valuation of property. While rule 10(1) speaks of the value of policy of insurance, rule 10(3) that of the value of the interest in a firm. Rule 10(4), on the other hand, is in respect of value of any other property which is not saleable in the open market. Rule 10(2) as detailed earlier provides for the valuation of shares of a private company. Reading of rule 10(2) would show that the mode provided is in respect of private companies where the Articles of Association contain restricted provision to the transfer of shares. In addition, there are other conditions specified therein. As per the rule, the value of shares is required to be ascertained by reference to the value of the total assets of the company. It is only when it is not ascertained in the manner that it can be decided by any other mode. Rule 11 on the other hand provides for fixation of capitalised value in respect of the gifts which are not revocable. In short, the valuation of assets for the purpose of gift-tax have been contained in 2 Rules only.
6. On the differences as noted above, could it be said that rule 1D is to be applied even in cases where working of the valuation of unquoted equity shares is to be done under the Gift Tax Act. For this, we would refer to the reasons given by their Lordships of Supreme Court while holding Rule 1D as mandatory in the case of Bharat Hari Singhania (supra) and others as stated above. One of the reasons given is that under the Wealth Tax Act, the expression "the price which in the opinion of the Wealth Tax Officer, it would fetch if sold in the open market on the valuation date" has been made expressly made subject to the rules made in this behalf. Then the break-up method, as chosen is found to be one of the recognised methods of valuing unquoted equity shares and the method so chosen cannot be faulted on the ground that there are other appropriate methods available. The break-up method based upon the balance sheet of the company incorporated in rule 1D has also been considered to be a simple one. According to their Lordships leaving the matter to the Wealth Tax Officer, would mean vesting of uncalled for wide discretion in the hands of the Wealth Tax Officer/valuing authorities. "It would lead to uncertainty and may be arbitrariness in practice. Where there is a Rule prescribing manner in which a particular property has to be valued, the authorities under the Act have to follow it." On the other hand, the decision in the case of CWT v. Mahadeo Jalan (1972) 86 ITR 621 (SC) was distinguished on the ground that for the relevant period of time, the opening words "subject to any rules made in this behalf" were not there. As regards the decision in Smt. Kusum D. Mahadevia's case (supra), their Lordships found that in that case the court was concerned with the valuation of shares in an investment company which was a going concern. Reference was also made to the decision of the Supreme Court in Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai's case (supra). It was held that in the aforesaid case, the question related to valuation of certain shares which were subject matter of a gift.
7. From the above, it is clear that no hard and fast rule can be laid down for valuation of unquoted equity shares. It would depend on the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other consideration which may be found to be applicable to the facts of each case. This, however, would not mean that it could be done at the cost of uniformity and consistency in following a particular method as may be found suitable at the end of the assessing officer. As noted in the earlier paragraph, this may lead to uncertainty and arbitrariness in practice. In striking, a balance between the two, one has to keep in mind that the method chosen cannot be faulted so long it is one of the recognised method, though may be less popular as held by their Lordships in the case of Bharat Hari Singhania (supra).
8. Keeping the above in view, we find that the issue in regard to valuation of unquoted equity shares under the Gift Tax Act has been decided by their Lordships of Supreme Court in the case of Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai (supra). In the aforesaid case, their Lordship after considering the decision of Supreme Court in Mahadeo Jalan's case (supra) and particularly in Smt. Kusumben D. Mahadevia's case (supra) have held that the shares had to be valued on the basis of the dividend or profit method of valuation as given recognition to in the case of Mahadeo Jalan (supra). Reference was made to the decision of the Supreme Court in Mahadeo Jalan's case (supra) would show that their Lordships have laid down the principle of valuation of shares in detail as under (Head Note):-
"1. Where the shares are of a public company and are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares.
Where the shares are of a public company which are not quoted on a sock exchange or of a private company, their value is determined by reference to the dividends, if any, reflecting the profit earning capacity on a reasonable commercial basis. But if the profits are not reflected in the dividends which are declared and a low earning yield is shown by the company, which is unrealistic on a consideration of the financial affairs disclosed for the relevant year, the Wealth Tax Officer can, on an examination of the balance sheet, ascertain the profit earning capacity of the concern and on the basis of the potential yield, fix the valuation. In other words, the profits which company has been making and should be making will ordinarily determine the value. The dividend and earning method or yield method are not mutually exclusive; both should help in ascertaining the profit-earning capacity. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of the profits.
In the case of a private company also where the expenses are incurred out of all proportion to the commercial venture, they will be added back to the profits of the company and computing the yield.
Where the dividend yield and earning method break down by reason of the company's inability to earn profits and declare dividends, if the set back is temporary then it is perhaps possible to take the estimate of the value of the shares before set back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses.
Where the company is ripe for winding up then the break-up value determines what would be realised by that process.
Valuation by reference to the assets would be justified where the fluctuations of profits and uncertainty of conditions at the date of the valuation prevent any reasonable estimation of prospective profits and dividends.
These are not, however, hard and fast rules. But, the market value except in exceptional cases, cannot be determined on the hypothesis that, because in 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 the generally applicable method while the break up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation; but nonetheless it is one of the methods.
The factors which are likely to determine the value of a share on any particular day or at any particular time are: (i) the profit- earning capacity of the company on a reasonable commercial basis; (ii) its capacity to maintain these profits or a reasonable return for the capital invested; and in special cases such as investment companies the asset backing; (iii) the prospects of capitalisation of its earning in the shape of declaration of bonus shares or where the company is financially and commercially sound, the prospects of issue of further capital where the existing shareholders have a right to apply for and obtain them at a certain price which is generally less than the market value, offering an increased yield on their investment, on the assumption that the company will be able to maintain the same rate or at least increase the aggregate payment of dividends on the increased capital.
Where under the articles of the company the right to transfer shares is restritced, the value of the shares should be determined without ignoring the restrictions as to transfer because they are an inherent element in the property which has to be valued. This restriction may not necessarily be depreciatory because the chance of acquiring the shares of other members in the company on advantageous terms is itself a benefit. In cases where whereas have to be valued by reference to the assets of the company restrictions on alienation are irrelevant."
The above would show that the Lordships also considered the case where the articles of the company restrict the transfers of shares as is laid down in rule 10(2) of the Gift Tax Rules. In this context, we find that their Lordships of Andhra Pradesh High Court in the case of CGT v. Smt. K.V. Rajyalakshmi (1997) 223 ITR 25 (AP) after taking note of that there has been no subsequent decision after that of in Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai's case (supra) have held that the yield method has to be followed while valuing the unquoted equity shares under the Gift Tax Act. It may be mentioned that while holding so, the decision of the Supreme Court in the case of Bharat Hari Singhania (supra) was also referred to. In the result, we would hold that under the Gift Tax Act, the valuation of unquoted equity shares has to be arrived at on the basis of the yield method and not that of break up method as held in the case of Bharat Hari Singhania (supra). In the circumstances, the decision of the learned Commissioner of Wealth Tax (Appeals) on the issue is upheld.
9. In the result, the appeal of the revenue is dismissed.