1. This writ petitioner concerned the method to be adopted for the valuation of share of private limited companies for the purposes of gifts-tax.
2. The share are of Mafatlal Gagalbhai & Co. Pvt Ltd,. and SUrat Cotton Spinning & Weaving Mills Pvt. Ltd. Under the articles of association of these companies the shares thereof are not transferable unless the rights of pre-emption conferred thereby have been exhausted. Thus, every member thereof who intends to transfer his shares is required to give notice in writing to the company board to his intention, specifying the details of th shares and the proposed sale price. In the even of the sale price not being agreed upon, the auditors of the company must fix fair sealing value thereof. The board must then given noticed to the members of the number and price of the share to be sold and invite them to state the share between interested members,. If the shares are not sold within there months, e intending seller may what shares they are ready to buy. The board must thereafter allocate the share between interest members. If the shares are not sold within there months, intending seller may sell en to any persons at any price.
3. On 6th, February, 1970, he petitioner, made gifts of 1,325 equity share of e first-named company and 1,468 share of the second-named company. On 5th March, 1972, the petitioner made a gifts of 134 shares of e first-named company. The petitioner filed returned of gifts under the G. T. Act for the assessment year 1971-72 and 1972-73 valuing the shares of the first-need company at Rs. 162 and Rs. 161 per share respectively and of the second-named company at Rs. 108 per share. In support of the valuation the petitioner filed a valuation report of M/s. C. C. Chokshji & Co. Chartered Accountant. In e courts of the assessment proceedings, the 1st respondent, the GTO, indicated that be intended to invoke the provision of r. 10(2) of the G. t. Rules, 1958. By reasons thereof, the value of the shares would increase multifold. The petitioner, therefore, filed their petitioner seeking to restrain the 1st respondent from applying the provision of the said rule to the returns of the petitioner.
4. For several years the petitioner and various members of the Magatlal family have be assessed to gift-tax and wealth-tax in respect of the shares of e two companies. In all such cases e assessment have proceeded upon valuation reports made by the approved value's, M/s. C. C. Chokshji & Co. Their report filed in the present proceedings proceeds upon the basis adopted earlier, The G. t. authorities had sought a reference to this court, in. respect of the gift-tax assessed livable, by the Tribunal on e share of e first-named company, which reference was rejected. The matter want to the Supreme Court and the Supreme Court delivered a judgment, to what I shall have occasion to refer, refusing the reference.
5. To appreciate to contention of the rival parties, some provisos of the G. t. ACt need to be loved at. Gift-tax is livable by reasons of s. 3 in respect of gifts made by a person during the previous year,. The provision of s. 6 set out how the value of gifts is to be determined. They read thus :
'6. (1) The value of any property other than cash transferred by way of gifts shall, subjection to the provision of sub-section (2) and (3), be estimated to be the prince which in th opinion of the Gift-tax Officer it would fetch if sound in the open market on the dated on which the fists was made.
(2) Where a persons makes a gifts which is not revocable for the specified period, the value of the property gifted shall be the capitalized value of the income from the property gifted during the period for which the gifts is not revocable.
(3) where the value of any property cannot be estimated under sub-section (1) because it is not salable in the open market, the value shall be determined in th prescribed manner.'
6. The word 'prescribed' is defied in s. 2(xix) as meaning prescribed by rules under the G. T. Act. Section 46(1) empowers the CBDT to make rule4s for carrying out the purpose of the G. T. Act. In particular and without prejudicial toe the generality of that power, the rules made may provide for the manner in which the value of any property may be determined. Under r. 10(2) of the G. t. Rules. 1958, where three articles of association of a private company contain restrictive provision as to the alienation of share, the us of the share, 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 gifts they could be sold in the open market on the terms of the purchases being entitled to the registrar as holder.
7. Section 7(1) o the W. t. Act may be noticed. It provides that the value of any assets for the purpose of the W. T. Act shall be 4estimated to be the price which in opinion of the WTO it would fetch if sold in the open market on e valuation date. It is similar to the provision of s. 6(1) of the G. T. Act.
8. It was contended by Mr. R. J. Kolah, learned counsel for the petitioner, that s. 6(1) of he G. t. ACt contemplated a hypothetical open market, which presumed a willing purchaser and seller. He submitted that the value of the shares in question had to be estimated under s. 6(1) upon the valuation report submitted by the petitioner. The basis of this report had been accepted by the Tribunal and by the Supreme C Court, both the respect of wealth-tax and gift-tax. This showed that the price of the share in question could be determined on e basis of what they would fetch in the open market. The provision of s. 6(1) could therefore, apply. Consequently, the provision of s. 6(3) did not apply, and e provisos of r. 10(2) framed thereunder had no application.
9. If the provision of s, 6(3) and r. 10(2) were applicable, Mr. Kolah went on to urge in the alternative, the value on had to be made on the basis of what the she would fetch on the dated of the gift and not by reference to the value of the total assets of the company, for the break-up method had bene ruled out buy e Supreme Court, except in the case of companies r alternative, Mr. Kolah submitted if the break-up method was to be adopted, the balance-sheet value of the company assets and not the market value thereof had to be taken into account. Mr. Kolah also submitted that he provision of s. 6(3) and r. 10(2) were ultra vires the Constitution. For the reasons that i shall indicate, it is unnecessary to go into the alternative submission.
10. Mr. R. J. Joshi, learned counsel for the respondent, s submitted that s. 6(1) had been made subject to s. 6(3). Section 6(1) has no application in the present case because the she in questions were not salable in the open market by reasons of the restriction attached to their transfer. In his submission, the appropriate provision for there valuation was s. 6(3) and the manner prescribed thereunder, viz., r. 10(2).
11. Mr. Joshi relied upon the judgment of the Calcutta High Court i GTO v. Kastur Chand Jain : 53ITR411(Cal) . The Court was there concerned with a case where there was a gift of shares of two private companies. The articles of association of both contained provisions restarting the right to transfer shares. The shares were not quoted on the stock exchange and could not be brought in the open market. the court held that, considering that it was difficulty and sometimes almost impossible to fit that machinery of s. 6(1) in a case where the property was not salable in the open market, s. 6(3) provided that, in cases where e value of the property could not be estimated under s. 6(1) because it was not salable in. he open makes, its value shows b determined in. he prescribed manner, namely, under r. 10 Rule,. 10(2) implied that if the value of the shears was ascertainable by reference to the value of the total assets of the company, the value must be so ascertaied. An open market means a market open to a seller and purchaser.
12. In Ahmed G. H. Ariff v. CWT : 76ITR471(SC) , e Supreme Court was concerned with interpreting the words, 'if self in. he open market' in s. 7(1) of the W. T. Act. The court took the view that the said words did not contemplate actual sale or the actual state of the market, but only an jointed that it should be assumed that there was an op[en market and that the property could be sold in such market. It was a hypothetical case which was contemplated and the tax officer had to so assume.
13. The judgment of the Supreme Court in CWT v. Mahadeo Jalan : 86ITR621(SC) , is of great importance in this matter. The question which had to be determined was what was the basis if valuation of shares in private limited companies for the purpose of s. 7 of the W. t. ACt, 1957. Generally, the court observed, the process at which a reasonably willing Even in such a case,. it was to be assumed that the vendor would only be willing to seal the share of its real value and the purchaser notional. Among the factors which governed the consideration of the buyer and the seller, where the one desired to purchaser and e other wished to sell, the factor of breaks-up value of the shares as on liquidation hardly entered ito consideration where the shares were of a going in a limited company led the court to come to the conclusion (at p 633 of 86 ITR) that :
'Where e shares are of a public limited company which are not quoted on a stock exchange or of private limited company, the value is determined by reference to the dividends, if any, reflecting the profits earning capacity on a reasonable commercial basis. But, where they do not, then the amount of yield on that basis will determined the value of the shares. In other words, e profits which the company has been making and shout be marketing will ordinarily determined the us. The dividend and earning method or yield method are not mutually exclusive; both should help in ascertain the profits earning capacity as indicated above. If the results of the two methods, differs, and intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of profits>'
14. I have earlier referred to case concerning the valuation for the purpose of gift-tax of the share of the first-named company which went before the Supreme Court. this was th cease of CGT v. Smt. Kusumbey D. Mahadevia : 122ITR38(SC) . Reference to this case in detail will be of assistance. The assessee claimed in the course of his assessments to gift-tax and wealth-tax that the value of the shares should be taken to be the figures arrived at by M/s C. C. Chokshji & Co. Chartered Accountants, by applying the profits-earning method of valuation of shares, without making any adjustment. The G. T. and WTO did not accepted the figures of valuation on the basis of profits-earning method and valued the shares at much higher figures by applying the break-up and valued the share at much higher figures by applying the break-up method. The assessee preferred appeal, the AAC. The AAc applied what was described as the 'rule of three' and reduced the valuation. Both the revenue authorities and th assessee were aggrieved by the decision and applies therefore, by the Revenue and cross-objections by e assessee were heard by the Tribunal. The only controversy before the Tribunal was as to which method should be followed for valuing the shares. The Revenue contended that in. he case of an investment company the proper method of valuation would be to taken the mean of two values, one arrived at by the applying the profit-earning method and over by applying the break-up method. The assessee pleaded that only the profit-earning method shout be applied since it was the only method that could be applied for th valuation of th shares of a going concern. The Tribunal accepted the assessee contention, dismissed the appeals of the Revenue and allowed e cross-objection of the assessee. In doing sos, the Tribunal followed the decision of th Supreme court in Mahadeo jalan' s case  86 ITR 621. Aggrieved by the orders of the Tribunal the Revenue made applications for referring to the High Court the following questions of law (p 42 of t122 ITR) :
'Whether, the Tribunal is right in holding that the she of than in investment company have to be valued only on the basis of the yield without taking into account the assets owned and reflect in the balance-sheet ?'
15. The application for reference were rejected by e Tribunal, o the ground that no referable questions of law arose out of theirs order. The Revenue thereupon made application to this court for calling for a refer, but those application also met with the same fate. The Revenue then preferred special leave petitioner, which were granted. The sole question that arose for the determination of the Supreme Court was whether any question of law arose out of the order of the Tribunal which needed to be referred to this court. The Supreme court observed that where the answer to the question of law was sell-evident or was concluded by a decision of the Supreme Court it would be futile to make a reference. In the case before it the question was as to which method should be adopted for valuation of the shares of a private limited company which wa an investment company and at all material time a going concern. The controversy between the parties centred around the question as to what was decided in Mahadeo janlan's case : 86ITR621(SC) , and whether it laid down what method should be applied for valuation of shares of private limited company which was an investment company carrying on business as a going concern. The court, therefore referred toe e decision in Mahadeo Jalns's case. Since the company involved the Mahadeo Jalna's case was a private limited company, which was going concern, the court, following the above principles, had negatived the applicability of the break-up method of valuation of shares and had upheld the view taken by the High Court that e yield method was the proper method. From the decision in mahadeo Jalna's case it was clear tot he Supreme Court that where the shares were of a private limited coming, e proper method of valuation to the adopted was the profits-earning method. The break-up method would not be appropriate for valuation of shares of the accompany which was a going concern because, as was pointed out in Mahadeo Jalans case : 86ITR621(SC) . :
'... among the factor which govern the consideration of the buyer and the seller where e one desired to purchase and the other wishes to sell, the factors or (sic) break-up value of a shares as on liquidation hardly enters into consideration where the shares are of a going concern.'
The Supreme Court observe (at p. 46 of 122 ITR) that : '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 th profits earning-capacity of the company, that the valuation by the break-up method would be justified>'
16.The Supreme Court had observed in Mahadeo jalans case : 86ITR621(SC) , that, in the case of an investment company, the asset-backing was a relevant consideration and the break-up method court not, therefore, be considered totally irrelevant. This meant that in order to determine the capacity of e company to maintain its profits the asset-backing would be a relevant consideration. The observation ought not to be read to suggest that the valuation of the assets would be a relevant factor in determining the valuation of the shares. The Supreme Court held that the combination of the two method s advocate on behalf of the Revenue could not be accepted as a valid principals of valuation of shares. The court held (at p 47 of 122 ITR) :
'Here, in th represent case, Magatlal Gagalbhai Pvt. Ltd. was a private limited company which was a going concerns and it was neither ripe of liquidation nor were there any exceptional circumstance which should attract the applicability of the break-up method. the profits-earning method was, therefore, e the only method which could properly be applied of arriving art e valuation of the share in. the company and he Tribunal was right in accepting the figures of valuation in the report of M/s. C. C. Chokshji, &B; Co,. based on application of the profit-earning method. The answer to the question of law relating to the method to be adopted for valuation of shares in the company was clearly conclude by the decision in Mahadeo jalan's case : 86ITR621(SC) , and the High Court was, therefor, justified in refusing to call for a race on this questions.'
17. It was then argued on behalf of the Revenue that, for the proposes of determining the valuation of e shares for gift-tax. s. 6(3) and r. 10(2) should be applied for, according to the rule, the break-up method was the primary method to be applied. There was no argument, t Supreme Court observed, addressed to the Tribunal that the break-up method should be adopted because that was e primary method, and it had no occasion to consider such an argument. The question sought to be raised on behalf of the Revenue did not arise out of th order of the Tribunal and could not be referred to the High Court.
18. It was contended by Mr. R. J. Joshi that the Supreme Court in Kusumbey D. Mahadevia's case : 122ITR38(SC) . had left open the question as to whether or not the primary method of valuation of the shares of a private limited company was the break-up method upon the basis of s. 6(2) and re. 10(2). He submitted that the first respondent had rightly intended to apply the provision of s. 6(3) and r. 10(2) and to arrive at an assessment upon the basis of the break-up method of valuation of the share of the purposes of gift-tax.
19. I cannot agreed. The Supreme Court, has in Kusumbey D. Mahadevia's case : 122ITR38(SC) , laid down that in the case of a private limited company such as Mafatlal Gagalbhai Pvt Ltd, which is a going concern, which is not ripe for liquidation and regarding which there is no exceptional circumstances, the break-up method cannot be applied ; the profits-earning method is the only method which can properly be applied for the valuation of its shares. The Supreme Court affirmed that the valuation of the shares o the company such as this can be validly done under the provisions of s. 6(1). it ruled out the applicability of any other method, including the break-up method. What the Supreme Court said in regard to s. 6(3) and r. 10(2) was that it had not been argued before the Tribunal that the break-up method was the primary method to be applied. No questions based upon this argument could, therefor, be refereed.
20. It is crystal clear that the valuation of the shares of the two companies concerned here can only be arrived at under the provision of s. 6(1) upon the profits-earning method. This finding of the Supreme Court is binding on the first respondent. It was not open to him to seek to adopt for the purpose of the gift-tax assessment of the petitioner any method of valuation other than that method.
21. Having regard to this conclusion, it is unnecessary to go into the alternative submission of mr. Kolahj.
22. The petitioner is made absolute in terms of prayers (a) and (b), with costs.