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Gift-tax Officer Vs. M. Ramanna/M.P.C. Somanna/Mr. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1983)3ITD300(Hyd.)
AppellantGift-tax Officer
RespondentM. Ramanna/M.P.C. Somanna/Mr.
Excerpt:
.....of shares, the value of the shares, if not ascer-tainable 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 on 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 than the price in the open market shall be disregarded.he held that it was possible to ascertain the value of the shares with reference to the value of the total assets and, therefore, he observed that the value of the total assets of the company would mean the market value of the assets and not the book value of the same. he accordingly made two adjustments in the assets.....
Judgment:
1. These are three appeals preferred by the revenue. The contentions involved in all the appeals are the same and hence we propose to dispose of all the three appeals by this common order.

2. We take up for consideration the facts in the case of M. Ramanna [IT Appeal No. 23 (Hyd.) of 1980]. The assessee made a gift of 325 shares of Stumpp, Scheule & Somappa (P.) Ltd., to his minor son K.R. Ramesh on 28-1-1974. Similarly, 300 shares of the same company were gifted on the same date to his son M.R. Ganganna. On 17-1-1974 the assessee gifted 350 shares in Nippon Electronics (India) (P.) Ltd., to M.R. Gangadhar.

The value of the shares for gift-tax purposes was computed by the assessee in terms of rule ID of the Wealth-tax Rules, 1957. The value arrived at was Rs. 213 per share for the shares in Stumpp, Scheule & Somappa (P.) Ltd. and Rs. 131 for the shares of Nippon Electronics (India) (P.) Ltd., against the face value of shares in each case of Rs. 100. In terms of rule ID, the relevant rule under the Wealth-tax Rules, 1957, the break-up value of the shares was determined according to the figures as appearing in the balance sheet and in the case of Stumpp, Scheule & Somappa (P.) Ltd., 85 per cent of the break-up value taken as arrived at on the above basis and in the case of the latter company, 75 per cent was adopted with reference to the figure arrived at on the same basis looking to the dividends which were declared by the two companies and the adjustment required by the rules.

3. The GTO stated that the shares were those of private limited companies and they were not quoted on the stock exchange. According to him breakup value method provided under the Wealth-tax Rules could not be followed for evaluating the value of shares under the Gift-tax Act ('the Act'). He set out the provisions of Rule 10(2) of the Gift-tax Rules as under : Where the articles of association of a private company contain restrictive provision as to the alienation of shares, the value of the shares, if not ascer-tainable 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 on 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 than the price in the open market shall be disregarded.

He held that it was possible to ascertain the value of the shares with reference to the value of the total assets and, therefore, he observed that the value of the total assets of the company would mean the market value of the assets and not the book value of the same. He accordingly made two adjustments in the assets namely an upward revision in respect of the value of land and building in each case and further an addition on account of goodwill taken at 3 years purchase in each case. In the case of land and building the upward revision was by Rs. 1.89 lakhs, in the case of Stumpp, Scheule & Somappa (P.) Ltd. and Rs. 3.89 lakhs in the case of Nippon Electronics (India) (P.) Ltd. The value taken for goodwill in the case of Stumpp, Scheule & Somappa (P.) Ltd., was Rs. 9.63 lakhs and in the case of Nippon Electronics (India) (P.) Ltd. Rs. 6.73 lakhs. After making adjustments in respect of these revisions to the figures as appearing in the balance sheets as on 31-12-1973 in the case of the former company and 30-6-1973 in the case of latter company, the GTO computed She total value of assets and thereafter the break-up value of the shares, thus each share in the case of Stumpp, Scheule & Somappa (P.) Ltd., was valued at Rs. 498 and in the case of Nippon Electronics (India) (P.) Ltd. at Rs. 246 per share. The complete working in this regard has been set out in the assessment order. In coming to this conclusion, the GTO rejected the arguments of the assessee that when the market value of the immovable properties was taken, it would cover goodwill also and a shareholder's right was limited to the yield and not to the value of the assets.

4. The assessee appealed and relied on the decision of the Supreme Court in the case of CWT v. Mahadeo Jaian [1972] 86 ITR 621 as also the decision in the case of CGT v. Smt. Knsumben D. Mahadevia [1980] 122 ITR 38. His submission was that in the case of a going concern, the value of the shares had to be determined only by the yield method. The Commissioner (Appeals) had considered the effect of the ratio of the said judgments in detail and eventually stated that the general principle in the case of a going concern was that it was the yield method which had to be adopted and the value by break-up method had to be ascertained only in exceptional circumstances, or when the company was ripe for liquidation or wide fluctuations of profits and uncertainty of conditions obtained at the date of valuation which would prevent any reasonable estimation of the profit-earning capacity of the company. The Commissioner then stated that though it may be true that in the case of Kusumben (supra), the contention of the revenue that under Rule 10(2) of the Gift-tax Rules the break-up method was the primary method to be adopted was not pronounced upon by the Supreme Court, still the plea of the revenue that the break-up value alone should be taken was not acceptable. The Commissioner finally directed that the shares should be revalued according to the principle enunciated by the Supreme Court in the case of Kusumben (supra) and such value should be taken as the value of the gift as against the break-up value as determined by the GTO as mentioned.

5. The revenue is aggrieved with the decision of the Commissioner (Appeals) and heavy reliance was placed on the phraseology of Rule 10(2). As considerable stress has also been placed on these provisions, we repeat the said provisions as under : (2) Where the articles of association of a private company contain restrictive provision as to the alienation of shares, the value of the 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 on 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 than the price in the open market shall be disregarded.

The submission of the learned departmental representative was that this is a case where the value of the shares was ascertainable with reference to the value of the total assets of the company and, therefore, the computation as made by the GTO should be upheld. The learned counsel for the assessee, on the other hand, emphasised that in the present case there were admittedly several restrictions in the matter of transfer of shares and referring to Article 1 of the articles of association of Stumpp, Scheule & Somappa (P.) Ltd., he pointed out that the shares in the first event had to be offered for sale to other members of the company. Transfers had also to be at a fair value in certain cases which has to be fixed. He, therefore, submitted that this is a case where the value of shares could not be ascertained with reference to the total value of the assets. The learned counsel also submitted that it was well known that where there were restrictive provisions in the matter of transfer of shares of companies and large discount had to be given and this principle received judicial recognition in the decision of the Madras High Court in the case of CGT v. S. Venu Srinivasan [1978] 112 ITR 771. He, therefore, submitted that the finding of the Commissioner (Appeals) was unexceptionable when the provisions of Rule 10(2) were not applicable.

6. We have considered the rival submissions. We have given anxious consideration to the provisions of Rule 10(2) as extracted above particularly to the expression 'if not ascertainable by reference to the value of the total assets of the company'. We have to come to the conclusion that theoretically in every case where there is a balance sheet it would be possible mathematically to ascertain the value of the shares with reference to the value of the total assets of the company because it would be a matter of mere arithmetic. The term therefore has to be interpreted to mean that the ascertainment of the value of shares with reference to the total assets of the company would be held to be possible only where commercially realistic value would result if such method was to be adopted. We have already set out the computation of the break-up value as made under the Wealth-tax Rules which was only one-half of the value arrived at by the GTO. The Gift-tax Rules ex facie are in conflict with the rules under the Wealth-tax Act. Having due regard to commercial considerations, this is a case therefore where there is a very wide difference between the computations of the GTO of the break-up value and the computation even according to the Wealth-tax Rules. It is amply clear therefore that this is not a case where the value of the shares could be determined with reference only to the value of the total assets of the company. We are fortified in this conclusion because a discount for non-marketability has to be given even according to the accepted judicial principle from the break-up value and no such discount has been given by the GTO and even the value as computed under the Wealth-tax Rules does not provide for such discount. Therefore, the case goes outside the purview of Rule 10(2) and the market value of the shares would have to be determined. When we come to the aspect that it would be the market value of the shares that will have to be determined, then the ratio of the Supreme Court in the case of Mahadeo Jalan (supra) as reiterated in the case of Kusumben (supra) becomes applicable. The Commissioner (Appeals) has only directed that the value of the shares should be computed in accordance with such principles. The decision of the Commissioner (Appeals) is, therefore, unexceptionable and accordingly the appeal of the revenue would stand dismissed.

7. The same decision would hold good in respect of GT Appeal Nos. 18 and 19 (Hyd.) of 1981.


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