Vs. Commissioner of Gift Tax  INSC 891 (2 December 1997)
C. SEN, V.N. KHARE
2ND DAY OF DECEMBER, 1997 Present:
Mr. Justice Sushas C.Sen Hon'ble Mr.Justice V.N. Khare A.T.M.Sampath and S.Balaji,
Advs. for the appellant Ranbir Chandra, Hemant Sharma and B.K. Prasad, Advs.
for the Respondent
following Judgment of the Court was delivered:
The following question of law was referred by the Tribunal to the High Court
under Section 26(1) of the Gift Tax Act, 1958.
on the facts and in the circumstances of the case, the Balance sheet figures as
on 31.3.1972 should be taken for ascertaining the break-up value of the shares
gifted and not the balance sheet figures as on 31.3.1973?" The assessment
year involved in 1973-74. The dispute relates to valuation of quoted shares of
a Company which were transferred on 28.3.1973. Section 6 of the Gift Tax Act
lays down the method of valuation of gifts. Sub-section (3) provides that where
the value of the property cannot be estimated because it is not saleable in the
open market, the value shall be determined in the prescribed manner. There is
no dispute that the shares are unquoted and are not saleable in the market.
There was a restriction on the sale of shares in the market by the Articles of
Association of the Company. Both the department and the assessee agree that the
valuation should be made by following the break-up method. The dispute,
however, is as to the balance sheet on the basis of which the break-up value
will have to be calculated.
case of the assessee s that these shares must be valued by referring to the
balance sheet figures of the Company as on 31.3.1972 which was the latest
available balance sheet on the date of the transfer of shares. There is no
question of referring to a balance sheet which was not even in existence on the
date of making of the gift. The department has taken the stand that the
valuation must be made with reference to the balance sheet figures as on
31.3.1973 which was the closest proximate date from the date of making of the
gift. There is no dispute that break-up method of valuation must be followed.
If that be so, the only available balance sheet figure as on 28.3.1973 was the
latest published balance sheet for the year ended on 31.3.1972.
unable to uphold the assessee's contention. The Gift Tax Officer has to find
out the correct value of the shares as on the date of the gift. The gift was
made only three days before the financial year ending on 31.3.1973.
balance sheet as on 31.3.1973 will give a more realistic picture of the value
of the assets of the Company than the balance sheet as on 31.3.1972. Therefore,
for calculating the break-up value of the shares, the balance sheet figures as
on 31.3.1973 would be more relevant. The contention made on behalf of the assessee,
if upheld, would lead to absurd result. If the gift was made on 28.3.,1973 the
value will have to be computed in accordance with the balance sheet figures as
on 31.3.72. But if the gift was made three days later on 31.3.73 the valuation
made on the basis of balance sheet as on 31.3.73 may be much higher even though
there is no change in the value of the assets of the Company between 28.3.73
and 31.3.73. there is no justification for coming to this conclusion. The
break-up value method is adopted to find out the correct value of the shares on
the date of the gift. The figures of the balance sheet of the year ended on
31.3.1973 will give a more realistic picture of the value of the assets of the
Company than the figures as on 31.3.1972.
attention was drawn to a decision of the Madras High Court in the case of
Commissioner of Gift Tax v. K Ramesh, 141 ITR 462. In that case, a gift was
made on 28.3.1972. The Tribunal held that as the gift had taken place before
the balance sheet as on 31.3.1972, the break-up value should be calculated with
reference to the last balance sheet of the Company before the date of the gift
which was of the year ending on 31.3.1971. The High Court held that though the
balance sheet as on 31.3.1972 was subsequent to the date of the gift, it could
not be disregarded because it was not so far removed from the date of the gift
and there may have been several developments affecting the net-worth of the
Company and thereby affecting the value of the individual shares between the
two balance sheets as on 31.3.1971 and 31.3.1972. The Tribunal was, not
therefore, justified in ignoring or disregarding the balance sheet as on
31.3.1972. The High Court held that if anything had happened to the assets and
liabilities of the Company between 28.3.1972 and 31.3.1972, that could also taken
into consideration by the Tribunal. The Tribunal was directed to re-examine the
question in that light again.
in agreement with his approach of the Madras High Court., In the instant case,
the balance sheet figures as on 31.3.1972 give the picture of the value of the
various assets of the Company upto that date. The Company may have increased.
It is also possible that during that period the fortune of the Company
languished and the value of its assets had decreased. In either event, when a
valuation of shares is to be made as on 28.3.1973, it will be unrealistic to
ignore the balance sheet for the year ended on 31.3.1973.
of curse, is entitled to point out that between 28.3.1973 and 31.3.1973, the
value of the assets of the Company has increased. If so, such variation in the
value of the assets will have to be ignored. But the basis of the valuation
will have to be the balance sheet as on 31.3.1973.
were also referred to another judgment of the Madras High Court in the case of
Commissioner of Wealth Tax and Others v. S.Ram and Others, 147 ITR 278 where it
cases where gift of unquoted shares has been made during the accounting year of
the company, the true principle of valuation of such unquoted shares is that if
it were possible to draw a precise balance- sheet as on the date of the gift,
that would afford quite an accurate basis and an ideal solution. But in the
absence of the facility of drawing up a balance sheet precisely on the date of
the gift, the next best thing would be to take two of the balance sheets
falling both before and after the date of the gift and arrive, as near as may
be, at the break-up value of the assets and liabilities of the company as on
the date of the gift, either on a time basis or on some other basis".
this case, the balance sheet as on 31.3.1973 was available to the Gift Tax
Officer when he made the valuation of unquoted shares. It was not difficult to
get a precise picture of the value of the shares as on 28.3.1973 from this
were referred to a large number of decisions, but it is not necessary to
specifically deal with all of them.
of the view having regard to the fact that the gift was made on the verge of
the close of the accounting year ending on 31.3.73 the balance sheet as on
31.3.1973 should be taken as the basis for ascertaining the break-up value of
the shares as on 28.3.1973. However, suitable adjustments will have to be made
if there has been any variation in the value of the assets of the Company
between 28.3.1973 and 31.3.1973. That, however, is not the case of the assessee.
Under these circumstances, the judgment under appeal is upheld. The appeal is
dismissed. There will be no order as to costs.