Divan, C.J.

1. In this reference at the instance of the revenue the following two questions have been referred to us for our opinion :

'(1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal based on the ratio of the case decided by the House of Lords in Lynall v. Inland Revenue Commissioner and basing the valuation of the sale shares of Bakubhai and Ambalal Ltd. London, in its balance-sheet as at March 31, 1963, instead of March 31, 1964, is bad in law

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in accepting the valuation of the shares as returned by the assessee and deleting Rs. 27,360 added by the Gift-tax Officer under section 15 (3) of the Act ?'

2. The Tribunal has also referred the following question to us at the instance of the assessee, namely :

'Whether, on the facts and in the circumstances of the case, the learned Tribunal erred in holding that the valuation of shares in question should not be made of ex-right basis in respect of the right shares issued by the company ?'

3. We may mention at this stage that Mr. K. C. Patel, appearing on behalf of the assessee, has not pressed the question which has been referred to us at the instance of the assessee and, therefore, in the course of this judgment we will only deal with the question referred to us at the instance of the revenue.

4. The relevant assessment year is 1965-66. The assessee was originally Ambalal Sarabhai and, after his death, the executors and trustees of his estate have been brought on the record of these proceedings. Late Ambalal Sarabhai held 480 shares in an English company called Messrs. Bakubhai & Ambalal Ltd., London. The share capital of the company consisted of 2,000 shares of pounds 10 each. This company was, what is known under the Indian Companies Act, as a private limited company, that, is the articles of association of this company contained restrictive provisions as to the alienation of shares, the alienation being permitted amongst existing share-holders. Thus, this company if incorporated in India would be known as a private limited company. At its extraordinary general meeting the company decided on October 4, 1961, to increase its share capital from pounds 20,000 to pounds 40,000 divided into 4,000 shares of pounds 10 each. The company also decided at the said meeting that the 2,000 new shares should be offered in the first instances to the holders of ordinary shares of the company whose names appeared in the register of members of the company on such date as might be fixed by the directors. The offer was to be one new ordinary share for one ordinary share held. The company further resolved on that day that if any new ordinary shares were not applied for by such date as might be fixed by the company, those shares could be offered to any person willing to purchase the same. The new shares were to be acquired by remitting pounds 10 per share applied for. In pursuance of this resolution of October 4, 1961, the company issued letters of offer to the existing share-holders regarding the issue of new shares. On the strength of 500 shares held by him, Ambalal Sarabhai decided to apply for 480 shares and he applied to the Reserve Bank of India for permission to remit pounds 4,800 to the company in England for the purpose of acquiring the new shares. The permission was not immediately given by the Reserve Bank of India and this permission, so far as the record of this case is concerned, does not appear to have been granted till the relevant date. Originally the company had fixed December 15, 1961, as the date up to which the offer for new shares was to be accepted by the shareholder but this date was extended from time to time and the last of such extended date was March 31, 1965. On May 11, 1964, Ambalal Sarabhai applied to the Reserve Bank of India for permission to gift 480 shares (ex-right) and this permission was granted by the Reserve Bank of India by its letter, dated July 18, 1964. 480 shares were gifted to different donees on October 17, 1964, and different gift deeds in identical terms were also executed by Ambalal Sarabhai, the donor, on October 17, 1964. After the gift needs were executed, on October 26, 1964, the Reserve Bank of India appeal to have granted permission to the Indian shareholders to remit pounds 10 per new share applied for by them and subsequently the amount was remitted to the company in London. We are not concerned in the present reference with that aspect of the case. On October 17, 1964, Ambalal Sarabhai executed eight separate gift deeds for different members of his family to whom he wanted to gift the shares. The gift deeds did not clarify whether they were gifted ex-right in respect of the new shares. However, the value of the shares in the gift deeds was mentioned as Rs. 450 per share. Thereafter, in due course, the donor filed a return of gift before the Gift-tax Officer declaring the value of gift at Rs. 2,16,000 in respect of these 480 shares at the rate of Rs. 450 per share. These shares were not quoted on the stock exchange and the assessee had worked out the value of these shares according to the break-up value method based on the balance-sheet of the company as of March 31, 1963. In the course of the gift-tax proceedings it was urged on behalf of the assessee that the value as on October 17, 1964, that is, the date of the gift, should be adopted at Rs. 420 per share which was the mean of value of Rs. 507 and Rs. 333 per share. It was contended that on the bread-up value method the value of the share was Rs. 507 on the basis of the balance-sheet of the company as of March 31, 1964, and Rs. 333 per share on the basis of the balance-sheet of the Company as of March 31, 1965. There was no dispute that by following the break-up value method the value per share was Rs. 450 per share on the basis of the balance-sheet as of March 31, 1963, Rs. 507 per share on the basis of the balance-sheet as of March 31, 1965. The Gift-tax Officer proceeded on the footing that as the gift were made on October 17, 1964, the value of the shares should be taken at Rs. 507 per share because the nearest balance-sheet in point of time would be as of March 31, 1964. The assessee had also contended before the Gift-tax Officer that there should be further reduction in value of the shares as the allotted shares were transferred ex-right only, that is, the assessee do not transfer his right of getting new shares on payment of pounds 10 per share. The Gift-tax Officer rejected this contention and adopted the value of shares at Rs. 507 per share, that is, on the break-up value as on March 31, 1964.

5. The matter was taken in appeal by the assessee but the Appellate Assistant Commissioner agreed with the reasoning of the Gift-tax Officer and dismissed the appeal. In further appeal before the Appellate Tribunal the Tribunal held that in view of the special terms of the officer, there was no question of the assessee or the donor having any right to renounce the shares in favour of anyone else and the company had made it clear in its resolution and in the offer made to the shareholders that if any particular shareholders did not take up the shares offered to him, the shares would be offered to any person willing to purchase the same. The Tribunal distinguished the case of Miss Dhun Dadabhoy Kapadia v. Commissioner of Income-tax and, following the decision of the House of Lord in Lynall v. Inland Revenue Commissioner, held that since the only balance-sheet which was available at the date of the gift, namely, October 17, 1964, was the balance-sheet as of March 31, 1963, and since the auditors of the company had signed the balance-sheet as of March 31, 1964, only on December 27, 1964, the break-up value method could be applied only in the light of the balance-sheet as of March 31, 1963. Thereafter, at the instance of the revenue the two questions which we have set out at the commencement of the judgment have been referred to us for our opinion. We have also indicated above that the question which was referred to us at the instance of the assessee had not been pressed by the learned advocate, Mr. K. C. Patel, appearing on behalf of the assessee.

6. Under the Gift-tax Act, 1958, under section 3, subject to the other provisions contained in the Act, there shall be charged for every assessment year commencing on and from the 1st day of April, 1958, a tax referred to as gift-tax in respect of the gift, if any, made by a person during the previous year (other than gifts made before the 1st day of April, 1957) at the rate or rates specified in the schedule. Section 6 of the Act, is material for our purpose. It is in these terms :

'6. (1) The value of any property other than cash transferred by way of gift shall, subject to the provisions of sub-section (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.

(2) Where a person makes a gift which is not revocable for a specified period, the value of the property gifted shall be the capitalised value of the income from the property gifted during the period for which the gift is not revocable.

(3) 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.'

7. The Central Board of Revenue has made Rules called the Gift-tax Rules, 1958, in exercise of the powers conferred upon it by section 46 of the GIft-tax Act. Rule 10 is material for our purpose and it deals with valuation of property. Clause (2) of rule 10 which deals with the question before us sets out :

'(2) Where the articles of association of a private company contain restrictive provisions as to the alienation of shares, the value of 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 of 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 then the price in the open market shall be disregarded.'

8. In the instant case it is common ground that this particular company is, what is referred to in clause (2) of rule 10, a private company, that is, the articles of association of this particular company in London contain restrictive provision as to the alienation of shares. Hence, the question that has to be considered is whether the value of the shares of his company cannot be ascertained by reference to the value of the total assets of the company. If it can be so ascertained, then it has to be ascertained only in that manner. If, however, it cannot be ascertained by reference to the value of the total assets of the company, then estimate has to be made of what the shares 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 factor of a special buyer giving a higher price for his own special reasons has to be disregarded while valuing these shares. In the instant case it has not been shown to us as to why in the case of this particular company which is a private company, the articles of association of which contained restrictive provision 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. As a matter of fact it may be pointed out that before the Tribunal it was common ground that the value of the shares should be ascertained by following the break-up value method and the only difference was as to with reference to the balance-sheet of what date the total value of the assets has to be ascertained. In Paragraph 8 of its order, the Tribunal has observed :

'We may again state that there is no dispute that they have to be valued according to the break-up method based on the balance-sheet of the company.'

9. Therefore, we will proceed in the course of this judgment on the footing that these shares, in the light of what has been stated in clause (2) of rule 10 and in the light of the common ground which was accepted before the Tribunal, the shares which formed the subject-matter of the gift, have to be valued according to the break-up method based on the balance-sheet of the company.

10. The question then arises as to the date of the balance-sheet of the company, namely, whether the balance-sheet should be taken as of March, 31, 1963, that being the latest balance-sheet which was valuable to all concerned on October 17, 1964, when the gift was made, or, whether it should be the balance-sheet as of March 31, 1964, which was the last balance-sheet for the completed year of account of the company before the gift was made. The revenue insists that it should be the balance-sheet as of March 31, 1964, whereas the assessee insists that it should be the balance-sheets as of March 31, 1963.

11. On behalf of the assessee, Mr. Patel has relied on the decision of the House of Lords in Lynall v. Inland Revenue Commissioner. The question before the House of Lords was under section 7(5) of the Finance Act, 1894, pertaining to estate duty and the wording of the relevant section was :

'The principle value of any property shall be estimated to be the price which, in the opinion of the Commissioners, such property would fetch if sold in the open market at the time of the death of the deceased.'

12. The case before the House of Lords arose in connection with the estate duty payable on the estate of Mrs. Lynall who died on May 21, 1962. Estate duty became payable on 67,980 ordinary shares in a private company. The shares were a minority holding. The company had a successful profit record, a strong liquid position, a high dividend cover and a very satisfactory cash flow. The value of the shares would have been increased if a public issue was likely. The accounts for the year up to July 31, 1962, when drawn up, showed a substantial increase in profits. The accounts for the previous year had been drawn up and audited prior to Mrs. Lynall's death but were not passed until the meeting on June 7, 1962. The chairman's speech was not circulated prior to the meeting and there was no evidence that it was in existence at the date of death, namely, May 21, 1962. Private documents of the directors (category B documents) were in existence at the date of death indicating that a flotation of part of the capital was under consideration. One of the directors, however, if questioned at the date of death by a prospective purchaser as to the likelihood of a public issue, would have said that it was doubtful and remote. It was common ground that the accounts up to July 31, 1961, were to be taken into account. On behalf of the Crown expert evidence was given that where substantial block of shares in private companies were in the market, it was the invariable practice among boards of directors to answer reasonable questions put by the purchaser or his advisers. Plowman J. held that in arriving at the open market value under section 7(5) of the Finance Act, 1894, the court should only have regard to the published information and information which the directors would in fact have given in answer to reasonable questions; accordingly, he held that since the directors would not in fact have disclosed the category B documents they were not admissible, an on that basis he assessed the value of the shares at pounds 3 10s. a share. On appeal, the Court of Appeal reversed that decision and held that, in the circumstances, the category B documents were admissible, and, accordingly, increased the valuation of pounds 4 10s. a share. On further appeal, the House of Lords allowed the appeal and held that section 7(5) of the Finance Act 1894, was merely a machinery for estimating the value and that, accordingly, the value of the shares for the purpose of estate duty was to be estimated at the price which they would fetch in the open market on the terms that the purchaser should be entitled to be registered and to be regarded as the holder of the shares, and should take and hold them subject to the provision of the articles of association, including those relating to the alienation and transfer of shares in the company. It was further held by the House of Lords that, in the circumstances, confidential information of the nature contained in the category B documents ought not to be regarded as available to a hypothetical purchaser under section 7(5) of the Act of 1894, and that, accordingly, the value of the shares was to be assessed at pounds 3 10s. a share. At page 567, Lord Reid in his speech pointed out :

'We must decided what the highest bidder would have offered in the hypothetical sale in the open market, which the Act requires us to imagine took place at the time of Mrs. Lynall's death. The sum which any bidder will offer must depend on what he knows (or thinks he knows) about the property for which he bids. The decision of this case turns on the question what knowledge the hypothetical bidders must be supposed to have had about the affairs of Linread : (private limited company concerned). One solution would be that they must be supposed to have been omniscient. But we have to consider what would in fact have happened if this imaginary sale had taken place, or at least - if we are looking for a general rule - what would happen in the event of a sale of this kind taking place. One thing which would not happen would be that the bidders would be omniscient. They would derive their knowledge from facts made available them by the shareholder exposing the shares for sale. We must suppose that, being a willing seller and an honest man, he would give as much information as which he was entitled to give. If he was not as directors he would give the information which he could get as a shareholder. If he was a director and had confidential information, he could not disclose that information without the consent of the board of directors.

In the present case if we are to suppose that the bidder only had information which he could obtain himself or which could be given without the consent of the board then admittedly pounds 3 10s. is the correct estimate of what the highest bid would have been. But the revenue maintains and the Court of Appeal would seem to have held that it must be supposed that the board would have authorised the hypothetical seller to communicate highly confidential information to all who might come forward as bidders......

No doubt sale in the open market may take many forms. But it appears to me that the idea behind this provision is the classical theory that the best way to determine the value in exchange of any property is to let the price be determined by economic forces - by throwing the sale open to competition when the highest price will be the highest that anyone offers. That implies that there has been adequate publicity or advertisement before the sale, and the nature of the property must determine what is adequate publicity. Goods may be exposed for sale in market place or place to which buyers resort. Property may be put up to auction. Competitive tenders may be invited. On the Stock Exchange a sale to a jobber may seem to be a private sale but the price has been determined, at least within narrow limits, by the actions of the investing public. In a particular case it may not always be easy to say whether there has been a sale in the open market. But in my judgment the method on which the respondents rely cannot by any criterion be held to be selling in the open market.

If the hypothetical sale on the open market requires us to suppose that competition has been invited then we would have to suppose that steps had been taken before the sale to enable a variety of persons, institutions or financial groups to consider what offers they would be prepared to make. It would not be a true sale in the open market if the seller were to discriminate between genuine potential buyers and give to some of them information which he with held from others, because one from whom he with held information might be the one who, if he had had the information, would have made the highest offer.'

13. The same conclusion was reached by the other law Lords who also delivered speeches in this particular case before the House of Lords and, therefore, the test which was applied was the information which would be ordinarily available to any ordinary shareholder as of the date with reference to which the value has to be made. That test, for the purpose of deciding the hypothetical market value, seems to have appealed to the House of Lords in Lynall's case.

14. In Crabtree v. Hinchcliffe the House of Lords was concerned with the question of capital gains tax. Shares and securities were being quoted on the stock exchange and again the test of the price which shares might reasonably be expected to fetch in open market was before the House of Lords. As of the relevant date confidential negotiations were going on for taking over of the entire shareholding of the company. These take-over negotiations were not published or communicated to the stock exchange. Under section 44, sub-section (1), clause (3) of the Finance Act, 1965, except where in consequence of special circumstances price so quoted were by themselves not a proper measure of market value, the market value was to be accepted in the case of shares quoted for sale in the open market and the only question before the House of Lords was whether the fact theatre private negotiations or negotiations which were highly confidential were going on for taking over the entire competent, could be said to be special circumstances within the meaning of section 44 (1) (3). Lord Reid in his speech referred to the earlier decision in Lynall v. Inland Revenue Commissioners. Ultimately, it was held by the House of Lords in that case that this confidential information could not be said to be special circumstances which would have affected the price quoted on the stock exchange. At the end of his speech Lord Reid observed :

'It must happen every day that directors of many companies have in their possession confidential information which very properly they do not make public but which if made public would lead to a substantial alteration of the quoted prices of their companies' shares. That could not possibly be a 'special circumstances'.....'

15. Thus, the test which was applied in Lynall's case was also applied in Crabtree v. Hinchcliffe, viz., that the confidential information which the directors of a particular company may have in their possession which is not made available to all shareholders will not be taken into consideration while determining the question of valuation of the particular type of shares as of the material date.

16. Both these decision of the House of Lords emphasize that for determining the value of shares either when they re quoted on the market or when following the break-up value method, the total assets of the company are taken into consideration as of a particular date, the correct principle to be applied is that of the information which was available to all shareholders as of the date with reference to which the valuation has to be made. In the instant case, on the facts before us, which we have set out hereinabove, it is obvious that as of October 17, 1964, when the gifts were made and the gift deeds were executed, the only information available to all shareholders was in the form of the balance-sheet as of March 31, 1963. The balance-sheet of the company as of March 31, 1964, annexure 'I' to the statement of case clearly shown that the auditors of the company had signed their report and the balance-sheet on December 23, 1964. Therefore, the information contained in the balance-sheet as of March 31, 1964, was not available to ordinary shareholders on October 17, 1964. The Appellate Assistant Commissioner has by adopting an inferential process of reasoning come to the conclusion that since only the members of the Sarabhai family were shareholders of this company, they must have known about the correct state of affairs of the company but it must not be forgotten that what we are concerned with is the value which a hypothetical purchaser would have offered in a hypothetical market on the basis of the information readily and ordinarily available to all shareholders as such. The only information which was available as on October 17, 1964, was in the form of the balance-sheet as of March 31, 1963, and hence the Tribunal was right when it took into consideration for the purpose of arriving at the value of the shares by the break-up method, the balance-sheet as of March 31, 1963, and not, as the revenue was contending for, the balance-sheet as of March 31, 1964.

17. Mr. Kaji for the revenue relied upon certain provisions in the Wealth-tax Rue in support of his argument. He contended that under section 3 of the Wealth-tax Act the hypothetical market value as of the relevant valuation date has to be reached and under the Wealth-tax Rules, 1957, under rule 1D provision has been made for market value of unquoted equity shares of companies, other than investment companies, and managing agency companies. Rule 1D provides that the market value of an unquoted equity share of any company, other than an investment company or a managing agency company, has to be determined in the following manner :

'The value of all the liabilities shown in the balance-sheet of such company shall be deducted from the value of all its assets shown in that balance-sheet. The net amount so arrived at shall be divided by the total amounts of its paid-up equity share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up value each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 85 per cent. of the break-up value so determined.'

Explanation I to rule 1D provides :

Or the purpose of this rule 'balance-sheet', in relation to any company, means the balance-sheet of such company as drawn up on the valuation date and where there is no such balance-sheet the balance-sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balance-sheet drawn up on a date immediately after the valuation date.'

18. Now these special provision of the Wealth-tax Rules have not been made applicable to gift-tax nor is there any similar provision under the Gift-tax Rules. It may be pointed out that rule 1D was added even in the Wealth-tax Rules in 1967 and, even for wealth-tax purpose in 1964, the principle which we have mentioned in connection with the Gift-tax Act and the Gift-tax Rules were ordinarily applicable. What the rule-making authority has subsequently provided for the purposed of the Wealth-tax Act and the Wealth-tax Rules can hardly be of any assistance to us in construing the provisions of the Gift-tax Act and the Gift-tax Rules. Under these circumstance we have not considered the question before us from the point of view of what has been prescribed with effect from 1967 in the context of the Wealth-tax Act.

19. Our conclusion, therefore, is that the Tribunal was right in holding that the shares have to be valued with reference to the break-up value method applied in the balance-sheet as of March 31, 1963. We, therefore, answer the questions referred to us as follows :

Question (1) :

In the negative and in favour of the assessee.

Question (2) :

In the affirmative and in favour of the assessee.

Question (3) :

Not pressed.

20. The Commissioner will pay the costs of this reference to the assessee.