1. These appeals are under the Gift-tax Act. The two appeals by the department relate to the assessment years 1973-74 and 1974-75. The appeal by the assessee relates to the assessment years 1973-74 and 1974-75 and is in the nature of cross-appeals.
2. During the two previous years, the assessee made a gift of 1,000 shares each of Calama Industries (P.) Ltd. Before the GTO, the assessee claimed that the shares for the purpose of gift-tax should be valued by adopting the break-up value method prescribed by Rule 1D of the Wealth-tax Rules, 1957. This rule provides for the valuation of the shares, which are not regularly quoted at any recognised stock exchange. The contention was rejected by the GTO who held that Rule 1D of the Wealth-tax Rules cannot be applied, as Rule 10 of the Gift-tax Rules provides for the valuation of the shares. He valued the shares on the basis of the balance sheet and the average net profit for five years and added to the same the value of the goodwill calculated as equal to three years' net profit. The break-up value thus calculated by him came to Rs. 366.22 per share for the assessment year 1973-74 and Rs. 369.35 per share for the assessment year 1974-75. He levied gift-tax on this basis.
3. In the appeal filed by the assessee, the Commissioner (Appeals) accepted the contention of the assessee that the shares should be valued under Rule 1D of the Wealth-tax Rules. For doing so, he relied upon the ruling of the Karnataka High Court in CED v. J. Krishna Murthy  96 ITR 87. He also accepted the calculation of the value at Rs. 292 per share by the assessee, subject to further verification by the GTO. Although he stated in the order that there should be reduction from this value on account of the fact that the company had not declared dividend in the earlier years, in the operative portion of the order it was directed that no reduction should be made on this account.
He rejected the contention of the department that the value of the goodwill should also be added in arriving at the break-up value.
4. The ground taken by the department in its appeals is that the Commissioner (Appeals) erred in directing the GTO to exclude the value of goodwill from the total assets of the company in determining the value of unquoted shares.
5. The ground taken by the assessee in her appeals is that the GTO erred in not allowing a deduction of 25 per cent of the break-up value on account of the facts that the company had not declared dividend for the past six years.
6. The ruling of the Karnataka High Court in CED v. J. Krishna Murthy (supra) relied upon by the Commissioner (Appeals) is a clear authority for the proposition that in the absence of detailed rules under the Estate Duty Act for the valuation of the shares for the purposes of the Act, the valuation has to be made in accordance with the well recognised methods of valuation and that the method of valuation prescribed by Rule 1D of the Wealth-tax Rules being the only statutorily recognised method of valuation of unquoted shares, it would not be wrong to adopt that method for valuation of the shares for the purpose of estate duty also. It is further held by the Karnataka High Court that in so calculating the value, the goodwill value of the company should not be included. The position is same with regard to the Gift-tax Act. No rulings taking a different view of the matter were brought to our notice. The ruling of the Supreme Court in CGT v. Smt.
Kusumben D. Mahadevia  122 ITR 38 also confirms the practice of employing Rule 1D of the Wealth-tax Rules for valuing the shares for the purpose of the gift-tax also. It is true that in this case, the revenue made an attempt to question the correctness of the practice, but the point was not allowed to be raised as it did not arise out of the order of the Tribunal. But the fact remains that the practice has not so far been held to be wrong. The learned departmental representative was not able to furnish any rule or authority which permitted the addition of the value of the goodwill to the break-up value calculated on the basis of the balance sheet. It was claimed by him that this has been the practice and in the face of the ruling in J.Krishna Murthy (supra), it is not possible to accept the contention of the department. In this connection, Rule 2C of the Wealth-tax Rules is also relevant. Under Clause (b) of the same, where goodwill has been purchased by the assessee for a price, its market value or the price actually paid by him is to be added as the value of an asset not disclosed in the balance sheet. This is a clear indication that when the goodwill has not been purchased by the company for a price, the market value of the same cannot be added to the value of the assets as found in the balance sheet. It has not been shown that in the present case the company had purchased the goodwill for a price. We, therefore, find no reason to interfere with the findings of the Commissioner (Appeals) with regards to the method of valuation of the shares.
7. During the course of the hearing of the appeals, references were also made to the decision of the Supreme Court in Smt. Kusumben D.Mahadevia (supra) that the proper method of valuing the shares of a running concern is by employing the profit yielding method and not the break-up value method. It is not necessary to go into this aspect of the case, because it is found from the calculations furnished by the assessee at the time of the hearing that the value as per the profit yielding method will be far less than the value calculated on the basis of the break-up value method, which has been accepted by the assessee.
8. In view of what is stated above, the appeals by the department have to fail.
9. In her appeals, the contention of the assessee is that the value arrived at the break-up value method prescribed by Rule 1D of the Wealth-tax Rules should be reduced as per the proviso to the rule under which a reduction in the break-up value has been allowed where the company has not been paying a dividend. According to the table under the proviso, the market value will be only 75 per cent of the break-up value if the company had not declared dividend for 6 years and above.
According to the assessee, in the present case, the reduction will be 25 per cent. In accepting the method of valuation prescribed under Rule 1D, the Commissioner (Appeals) observed in para 5 of his order that a further reduction should be allowed in cases where no dividend has been paid by the company in the earlier years, in view of the proviso.
However, in the next sentence, while directing that the shares should be valued under the break-up value method, the Commissioner (Appeals) directed that no further reduction should be allowed. It was intended to give a direction that no reduction under the proviso to Rule 1D should be given in the present case. No reasons have been stated for the same. We are inclined to wonder whether the direction that no reduction should be given appears as a result of an error by the introduction of the word "no". It is clear that once Rule 1D of the Wealth-tax Rules is adopted for the purposes of the valuation, there is no justification for not applying the rule into and to ignore the benefits conferred on the assessee by the proviso. The claims of the assessee for reduction of the value has, therefore, to be allowed, subject to verification by the GTO.10. In the result, the appeals by the department are dismissed. The appeals by the assessee are allowed and the GTO is directed to allow the reduction in the value as prescribed by the proviso to Rule 1D while working out the value of the shares.