Deputy Commissioner of Gift-tax Vs. Vasantrao S. Dempo - Court Judgment

Excerpt:

.....that even in the case of cwt v. mahadeo jalan [1972] 86 itr 621 the supreme court has observed that there was no single formula or hard and fast rule or method that can be applied mechanically to each and every case, falling in a category of taxable assets. in other words, the supreme court has not laid down any hard and fast rule which is applicable to all cases. therefore, he resorted to the valuation of shares as per rule 1d of the wealth-tax rules (break-up method) in order to determine the market value of the shares transferred. however, he was aware of the judgment of the bombay high court in the case of cwt v. pratap bhogilcd [1987] 167 itr 501 wherein it has been held that the provision for tax made by the company should not be reduced by advance tax paid and, therefore, he has withheld the proportionate tax attributable to advance tax paid. accordingly, he determined the gift as detailed in the gift-tax assessments.5. on appeal, the cgt(a) cancelled the gift-tax assessments by following the decision of the tribunal in chowgule group of cases wherein yield method was adopted for valuation of shares vis-a-vis rule 1d of the wealth-tax rules.6. at the time of hearing,.....

Judgment:

1. These appeals by the revenue are consolidated and disposed of by a common order for the sake of convenience as they involve a common issue.

2. These appeals pertain to the assessment year 1984-85 and are directed against the orders of the CGT (A), Belgaum, wherein he cancelled the Gift-tax assessments made by the Assessing Officer by holding that the yield method of valuation is proper method of valuation and not Rule 1D of the Wealth-tax Rules, as adopted by the Assessing Officer. The CGT (A) followed the decision of the Tribunal, Pune Bench, in the case of Chowgule group of cases for wealth-tax purposes. The CGT(A) held the same method of valuation is to be made for transfer of shares also and if it is so adopted, there would be no gift liable to tax. Therefore, he cancelled the Gift-tax assessments made by the Assessing Officer.

3. Revenue has taken common grounds to urge that the CGT (A) erred in cancelling the Gift-tax assessments by holding yield method as proper method of valuation and he ought to have considered that there are no sections and Rules in Gift-tax Act and Rules corresponding to Section 7 of the Wealth-tax Act and Rule 1D of the Wealth-tax Rules respectively and in any case, the decision of the Tribunal in Chowgule group of cases has not become final and reference application is pending.

Therefore, it was urged that the orders passed by the CGT(A) should be cancelled and that of the Assessing Officer be restored.

4. The assessees are individuals and they sold away the shares in V.S.Dempo & Co. P. Ltd., at the rate of Rs. 2,100 per share as mentioned below : As the market value of the shares was higher than the rate at which they are sold, the Assessing Officer initiated Gift-tax proceedings to tax the difference in valuation as deemed gift. The assessee, contended before the Assessing Officer that valuation as per Rule 1D should not be applied and for this proposition relied on the judgment of the Supreme Court in the case of CGT v. Smt. Kuswnben D. Mahadevia [1980] 122 ITR 38 was relied upon. This contention was rejected by the GTO as, according to him, Section 4 of the Gift-tax Act was applicable and, therefore, the difference in valuation was to be assessed as deemed gift. The GTO also observed that even in the case of CWT v. Mahadeo Jalan [1972] 86 ITR 621 the Supreme Court has observed that there was no single formula or hard and fast rule or method that can be applied mechanically to each and every case, falling in a category of taxable assets. In other words, the Supreme Court has not laid down any hard and fast rule which is applicable to all cases. Therefore, he resorted to the valuation of shares as per Rule 1D of the Wealth-tax Rules (break-up method) in order to determine the market value of the shares transferred. However, he was aware of the judgment of the Bombay High Court in the case of CWT v. Pratap Bhogilcd [1987] 167 ITR 501 wherein it has been held that the provision for tax made by the company should not be reduced by advance tax paid and, therefore, he has withheld the proportionate tax attributable to advance tax paid. Accordingly, he determined the gift as detailed in the Gift-tax assessments.

5. On appeal, the CGT(A) cancelled the Gift-tax assessments by following the decision of the Tribunal in Chowgule group of cases wherein yield method was adopted for valuation of shares vis-a-vis Rule 1D of the Wealth-tax Rules.

6. At the time of hearing, it is common ground that the issue involved in these appeals stands covered by the orders of the Tribunal in Chowgule group of cases.

7. In this connection, it is relevant to refer to the decision of the Bombay High Court in the case of Smt. KusumbenD. Mahadevia v. N.C.Upadhya [1980] 124 ITR 799 wherein it has been held that Rule 1D of the Wealth-tax Rules, 1957 prescribing break-up method for valuing unquoted equity shares is directory and not mandatory. The Bombay High Court has pointed out that the normally permissible method of determining the market value in the case of unquoted shares is the yield method, though, under exceptional circumstances, the break-up method could also be utilised. The Supreme Court had occasion to consider the question of valuation of shares of private limited company which are not quoted in the stock exchange in the case of Mahadeo Jalan (supra). After discussing the various decisions, the Supreme Court laid down the criteria for valuation of shares of public as well as private limited companies. It is pertinent to observe that one of the criteria laid down is that where a company is ripe for winding up, then the break-up value method determines what would be realised by that process. At page 634 of the judgment, their Lordships have observed that 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 is one of the methods. The Supreme Court has again considered the proper method of valuation of shares of a private company in the case of Smt. Kusumben D. Mahadevia (supra). The Supreme Court observed that in the case of the company which is a going concern and whose shares are not quoted in the stock exchange, the profit which the company has been making and 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.

8. Applying the aforesaid principles to the cases of the assessees, we hold that the Assessing Officer was not justified in adopting break-up method and, therefore, the CGT(A) was justified in adopting yield method. Consequently, we uphold the orders of the CGT(A) and reject the common grounds taken by the revenue.