Per Shri S. Rajaratnam, Accountant Member - These eleven departmental appeals arise out of the orders of the AAC, in the case of the above assessees in respect of the gift-tax assessments for the assessment year 1978-79. Since common facts are involved and the assessees belong to the same family group, these appeals are conveniently dealt with together.
2. The assessees are shareholders of India Fruits (P.) Ltd. of Kadium and they have sold the shares therein to Godavari Electrical Conductors, a firm of four partners. It is not disputed that the partners of the said firm are related to the assessees. The face value of the share was Rs. 500 per share. However, it has been sold at Rs. 3,450 per share which, according to the assessees, represented the market value as on that date. The sale price was sought to be justified with reference to a working purportedly by a method even as prescribed under rule 1D of the Wealth-tax Rules, 1957 (the 1957 Rules) for wealth-tax purposes. The method followed by the assessee was to work out the intrinsic (break-up) value of the share as per the balance sheet as on 31-3-1977 which was the last balance sheet available as the sale was on 27-2-1978 and then adjustment was made towards sale value for accretion to the assets till the date of sale. After the said addition, 15 per cent deduction as prescribed under rule 1D for the reason that there is restriction on transfer of shares was worked out.
The net amount was Rs. 3,450 at which the transfer took place. The GTO was, however, of the view that rule 1D was not mandatory. In this view, he came to the conclusion that 15 per cent discount for restriction on transfer of shares was not admissible. If it was not admissible, the share value should be Rs. 4,042 per share. It is the difference that has been sought to be taxed as gift in the hands of the assessees and the amount in dispute before the first appellate authority in the hands of the assessees covered by this present order is as under : The first appellate authority found that the method prescribed for wealth-tax purposes need not be considered as inapplicable for the purposes of valuation under allied Acts. The decision of the Mysore High Court in the case of CED v. J. Krishna Murthy (1974) 96 ITR 87 was relied upon for the proposition that the method for wealth-tax purposes could well be adopted for estate duty purposes. Another decision of the Madras Bench of this Tribunal following the said decision and considering a discount for restriction purposes was also cited by the first appellate authority. He further found nothing unreasonable in the working adopted by the assessee and that there was no case for presuming any gift in the transaction. He, therefore, cancelled the gift-tax assessments. In the departmental appeal, his decision is questioned. The only reason discernible in the grounds of appeal is that the revenue has assumed that the AAC adopted the method laid down in rule 1D and that he was wrong in doing so. The learned departmental representative reiterated this stand. He contended that the company not being one under liquidation, the shares there cannot be valued by break-up value of the shares, even as held by the Supreme Court in the case of CWT v. Mahadeo Jalan (1972) 86 ITR 621 and the Bombay High Court in Smt. Kusumben D. Mahadevia v. CWT (1980) 124 ITR 799. Since the assessee was a going concern, he contended that the method followed by the first appellate authority for holding that there is no element of gift was incorrect. Apparently it was his case that if any other method had been followed, the value would be much higher and that the gift element even more pronounced. He claimed that he was entitled to support the gift-tax assessment with reference to this argument as well. The learned counsel for the assessee, on the other hand, claimed that disputed difference between the value adopted by the GTO and the consideration for the sale as between the parties was only 15 per cent.
This is also explained with reference to the stipulation regarding transfer of shares in the private limited company with reference to the articles of association of the company. He pointed out that such discount has always been given. Besides, he claimed that the method prescribed for wealth-tax purposes is a well-known method and that there is no bar to such method to be considered as a reasonable one for other tax purposes even as noticed by the Mysore High Court in the case of J. Krishna Murthy (supra) referred to by the first appellate authority. He also referred to a recent decision of the Madras High Court in the case of CWT v. S. Ram (1983) 15 Taxman 149 wherein valuation of unquoted shares in private companies for purposes of wealth-tax and gift-tax was discussed. This decision, inter alia, found that the break-up value method could well be followed for gift-tax purposes as well. The Madras High Court in this case pointed out that the Gift-tax Act, 1958 (the Act) or the rules thereunder do not contain any detailed method of valuation of unquoted shares. Rule 10(2) of the Gift-tax Rules, 1958 would, in the opinion of the High Court, prefer the break-up value method. He further pointed out that the assessee has chosen to consider the accretion till date of transfer though there are decisions in his support that it is not necessary to include such accretion as the only balance sheet available to the intending purchaser is the last one. As for the discount of 15 per cent, he claimed that such discount has always been considered admissible, even where yield method has been followed because the restrictions on transfer of shares is an inhibiting factor in respect of shares in private companies. He also claimed that some of the parties are trustees who are not expected to make a gift when they sell the shares entrusted to them for custody on behalf of the minors and other beneficiaries. He claimed that there is neither presumption nor facts to justify the inference of gift.
3. We have carefully considered the records as well as the arguments.
Section 4(1) (a) of the Act enables the GTO to deem a gift where the consideration is inadequate in the following words : "(a) where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor".
In this particular case, the transfer is purportedly by way of sale of unquoted shares in private limited company. Rule 10(2) prescribes the method of valuation 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 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 gives a higher price than the price in the open market shall be disregarded." The Madras High Court in S. Rams case (supra) held that the words if not ascertainable by reference to the value of the total assets of the company certainly expresses itself in favour of the break-up value of the shares in the following words : "As we earlier mentioned the value of unquoted shares figures in connection with the gift-tax references also. The tax under this Act is chargeable on the value of the gifts, which value has got to be ascertained on the basis of market value. Unlike as in the Wealth-tax Act and the Rules made there under, there is no detailed provision in the Gift-tax Act or the Gift-tax Rules as to how the market value of unquoted shares has to be ascertained. Mention, however, should be made of rule 10(2) of the Gift-tax Rules. According to this rule, the value of unquoted shares must be ascertained on the break-up value method.
But where the break-up value method cannot be applied, then the rule lays down that the market value of the unquoted shares may be ascertained on the footing that a purchaser of the unquoted shares would be entitled to get registered as a transferee in the companys registry. This rule, therefore, shows that the preferred method of market valuation of unquoted shares is the break-up value method. But unlike as in the Wealth-tax Rules, the Gift-tax Rules do not contain any conditions or restrictions in the matter of deduction of contingent liabilities ...." (p. 157) It is, therefore, clear that the question of following any method for purposes of valuation for gift-tax would arise only where the value cannot be ascertainable by reference to the value of the total assets of the company. This is not a case where it cannot be so ascertained.
In facts, the assessee as well as the GTO have worked out the break-up value of the shares. It is, therefore, pointed out that it is neither open to the learned departmental representative, nor is it otherwise justifiable with reference to the law and the rules on the subject to seek any other method of valuation so as to justify the assessment already made. We would also add that there is absolutely no material before us to show that any other method could be more favourable to the revenue even if adoption of such other method was possible. We would hasten to add that there is actually no dispute between the GTO and the assessee as to the precise method to be adopted. Both agreed that the break-up value of the shares should be adopted. The only dispute is whether there should be any discount to be allowed. We may also add that there is not even any dispute as to what balance sheet should be adopted. The assessee has taken into consideration the last balance sheet available and has even made an upward adjustment for accretion to the assets till date of transfer. In order that the position may be clear, we reproduce the working as given by the assessee and reproduced by the GTO in his order : Add : Accretion to net wealth for arriving at its value as on : February 1978 on the basis of the the previous years accretion to reserve Total net wealth as on February 1978 Less : 15 per cent deduction to compensate for the restriction on transfer of shares applicable for private companies and on their free sale This method of considering action till date of transfer with reference to a later balance sheet, though favorable to the revenue in this case, has been adopted by the assesses. It incidentally has the support of the Madras High Court decisions in S. Rams case (supra).
There is a contrary decisions which requires that the value should be reckoned with reference to the balance sheet last available. The Kerala High Court in CGT v. H. H. Sethu Parvathi Bai  145 ITR 124 had taken this view that the valuation should be with reference to the last available balance sheet quoting with approval a decision of the Gujarat High Court in CGT v. Executors & Trustees of the Estate of Late Shri Ambalal Sarabhai  100 ITR 447, following the decision of the House of Lords in Lynall v. IRC  83 ITR 563. These decisions have taken the view that the nearness to the date of gift is irrelevant and is of no consequence at all" and the last available balance sheet is relevant as it is the only balance sheet which is available to an intending buyer. No doubt, the Madras High Court has taken a contrary view, Though the assessee has taken the view which is favorable to the revenue, we are mentioning this fact merely to suggest that the assessee had added Rs. 19,89,702 (nearly 10 per cent) as an accretion on which there could be reasonable dispute.
4. Now, coming to the issue whether any discount is called in view of the restriction in respect of shares, we may consider the relevant provisions in the articles of association. Articles 22 to 30 deal with such restrictions. Article 22 stipulates that the shares cannot be transferred to a person who is not a member as long as the directors are not convinced that the transfer is a desirable person in the interest of the company and that the purchase is "at it fair valued. If a person want to sell shares, he has to give notice of such proposed sale to the company with the price fixed by him. The company within 28 days of such notice can make the purchase by itself at that price or arrange a sale to any other member or any other person appointed by it as a desirable person in the interest of the company. The fair value is also fixed annuals at ordinary general meeting. Only where the company could not find a purchaser the shareholder is at liberty to sell his own shares at his own price. Even bequeanthal of these shares has to be to the relatives specified in article 29. Over and above thee restrictions, article 30 empowers the directors to refuse registration of any transfer of a share without assigning any reason therefor where it is not proved to their satisfaction than the proposed transferee is not a responsible person or a desirable person. These clauses are wide enough and the restrictions are even more than ordinary restrictions which are usually found in such private companies The depressing effect of such restrictions cannot be denied. However, the only question that is posed is whether a discount for this factor can be given when the break-up value method is followed. Rule ID provides for such discount.
We have no doubt that rule ID is mandatory, if at all, only for wealth-tax purposes. But rule ID incorporates a recognised method for valuation of unquoted shares. The discount under this rule is not a concession or an artificial allowance It recognises the fact that the market value of unquoted shares in private company is less than the break-up value of shares for various reasons. The break-up value is the value that can be realised if the company is are realised and liabilities discharged on that date. But a single shareholder not having controlling interest, cannot bring a company to liquidation as his will. Again, it takes time, to observe the formalities under the Companies Act, 1956. Realisation of assets cannot also happen on the same day. There is further the cost of realisation and the administrative expenses during the period of realisation. Over and above these factors, there is the depressing effect of the intending purchaser not being accepted as a responsible or desirable person in the opinion these reason that a discount has been given. When the first appellate authority accepted the assessees case for discount, he was not following the mandatory rule 1D for wealth-tax purposes blindly as though these were acceptable for gift-tax purposes as well in the same mandatory sense. All that he did was to adopt a recognise d valuation which has the approval of rule 1D as well. Any standard text book on valuation would indicate that some discount has to be allowed for the depressing effect of restrictions on transfer of shares. Study on share Valuation published the Research Committee of chartered Account ants of India cites the decisions in Salvesens Trustees v. CLR  TLR 387 where a deduction of 25 per cent was allowed in view of an unusual and stringent clause that any holder of less than 10 equity share could be compelled to transfer them at any time. There are other decisions to the same effect. Such discount has been found to be allowable whatever might be the method adopted, whether it be by break-up value method or yield method. 15 per cent has been fixed by rule ID not in any arbitrary manner as is evident from the following extract from Verma on Wealth-tax Second edition.
"85 per cent discount - Basis of - As stated earlier as per rule ID the market value of an equity share is taken at 85 per cent of the break-up value of the share. The basis of the discount of 15 per cent is not given in the Rules. During a Taxation Seminar in Delhi in November 1970 arranged by the Indian Chamber of Commerce a question was raised regarding the arbitrary basis of taking the market value of the equity share at 85 per cent of the break-up value. According to the participants in the discussion the quoted market value in respect of some of the established blue scrips companies was much less than 85 per cent of the break-up value. In answer to that above question one of the senior officials of the Board who was connected with the framing of rule replied thus : A question has been raised here why we allow a discount of only 15 per cent from the break-up value. Here I must say that we had studied the balance sheet of a very large number of public companies whose shares are quoted be the Stock Exchange. We tried to compare the break-up value of the shares of such companies with the market value to only on the date of balance sheet, but also three months later and six months later, and ultimately we found that 15 per cent discount was quite reasonable. So that is how 15 per cent discount from the break-up value come to be taken." (p. II/237) Shri Verma, after the above extract, proceeds to say that in view of the shyness of the capital market and other factors prevalent in India, the allowance of 15 per cent is inadequate and that it should at least be 25 per cent. If the variation between break-up value and market price even in respect of blue scrips of public companies is 15 per cent or above, the allowance of 15 per cent for shares in private companies can hardly be considered unreasonable. We are mentioning these facts to show that though there is an element of approximation and estimation in fixing 15 per cent as discount for restriction on the shares, it will not be correct to say that it is an allowance without any scientific basis. Under the circumstances, the only dispute of the GTO being that there is no warrant for discount at 15 per cent, we should hold that his order cannot stand. Even as pointed out earlier, it was possible for the assessee to ignore the subsequent balance sheet and if it had not done so, the margin of difference would be more than halved. Again, it must be pointed out that the best evidence of market value of unquoted shares is the price at which the sales are transacted. There had been as many as 22 transactions, there being 22 different sellers though belonging to the same family group to the same buyer. Some of the sellers are trustees on behalf of minor children and others. If stands to reason that they would not have accepted a lesser amount than what is fairly due as trustees on behalf of the beneficiaries. When there are numerous transaction at the same price between different parties, it is not possible to reject the sale price out of hands as had been sought to be done by the learned GTO. In other words, there is no material whatsoever for questioning the fairness of the sale price.
In other words, inadequacy of the consideration has not been established.
5. Before closing the matter, we would like also to base out decision on a question of jurisdiction. Section 4(1) (a) deems a transfer of an assets as a gift when any portion is transferred otherwise than for adequate consideration. It is only when there is such a transfer for inadequate consideration that the question of taxing the difference as gift would d arise. In other words, the question of reckoning of the market value itself would not arise unless there is a prima facie transfer for inadequate consideration. The Supreme Court in the case of Kum. Sonia Bhatia v. State of UP AIR 1981 SC 1274 dealing with a gift hit by the UP Imposition of Ceiling on Land Holdings Act, 1961, had dealt with the meaning assigned to the words consideration, adequate consideration. etc., under the Transfer of Property Act, 1882, and the Indian Contract Act, 1872. The Supreme Court quoted with approval the following definition of the word adequate consideration in "Words and Phrases (Permanent Edition, vol. 2) : "Fair consideration in money or moneys worth is consideration which under all circumstances is honest reasonable, and free from suspicion, whether or not strictly adequate or full". (p. 1280) The Supreme Court emphasised the word adequate and full in the above definition. In other words, the consideration should be honest, reasonable and free from suspicion whether or not strictly adequate or full Hence, in a transfer of sale simpliciter, the question of treating a transaction as one for inadequate consideration cannot arise merely because the GTO may attack the valuation which would show that the consideration agreed between the parties could be higher or lower. If such a kind of approach has to be adopted, it is possible to inter a gift either by a seller or a purchaser in every transaction of sale.
Obviously, such is not the intention of section 4(1) (a). In the case cited, the Supreme Court has further clarified that the object of qualifying the word consideration by the word adequate is to make it sufficient and valuable having regard to the facts, circumstances and necessities. Such a conclusion as regards the until jurisdiction for attracting section 4(1) (a) has the support of some decisions under the Act itself. While it is undisputed that in the case of transfer without adequate consideration, the extent of indequancy could be treat as gift, it is also equally clear that inadequacy should be as to warrant the inference that the consideration itself is not adequate. The Bombay High Court in CGT v. Cawasji Jehangir Co. (P.) Ltd.  106 ITR 390 found the though the consideration as on date of transfer as ordered by the Court was inadequate, it was not a transfer for inadequate consideration because the difference was explainable with reference to the date on which the transaction was approved by a resolution of the company. The High Court observed "the expression, adequate consideration cannot be construed with precision, but as already stated above, it must be construed in relation to the facts and figures of each particular case." This decision was approved by the Madras High Court in the case of CGT v. Indo Traders & Agencies (Madras (P.) Ltd.  131 ITR 313 in the following words : "... If the Legislature had contemplated as a universal rule that the market value should alone be criterion for testing the adequacy of consideration, the provision would have been differently worded. The wording would then have been, where the property is transferred for less than its market value, then the difference between the market value and the consideration stipulated, shall be deemed to be the gift made by the transferor. Parliament not having made any such provision, it would not be for us to take the market value of the property for determining the adequacy of consideration in all events." (p. 322) The above observation was made in the context of the very words under section 4(1) (a) now before us. The Madras High Court further observed that the consideration should be such as to shock the conscience of the Court in order to be characterised as inadequate in the following words in the same judgment : "The considerations which weighed with the Courts in examining the adequacy of the consideration in respect of the sale by a minor or in respect of a relief for specific performance would also apply in the examination of a transaction under section 4(1) (a). Unless the price was such as to shock the conscience of the Court that it cannot be the reason able consideration at all, it would not be possible to hold that the transaction is otherwise than for adequate consideration. In fact, in the full Bench judgment of the Patna High Court, it is mentioned by Chief Justice Harries, that the adequacy of consideration is a matter for the parties (see (1941) 9 ITR 137. 148). The judgment of the Patna High Court has been approved by the Supreme Court in a later decision-Tulsidas Kilachand v. CIT (1961) 42 ITR 1 (sic). Of course it is not enough if a transfer is for good consideration. It should also be for adequate consideration. Adequate consideration is not necessarily what it ultimately determined by someone else as market value." (p. 320) In the case before us, the assessee has sought to give a basis for the price at which different persons agreed to sell to the same buyer different numbers of shares at that price. The basis itself was found to be justifiable with reference to a recognised method of valuation which had the approval under rule 1D though for wealth-tax purposes.
There may be other methods giving other results. But as long as the method given by the assessees as the basis for the consideration shown is a recognised method and there is no material to discredit the taxpayers basis either as to the bona fides of the transaction or with reference to some other facts, we do not think that it was really open to the GTO to treat the transaction as one without adequate consideration. It has not been shown to us that the consideration here was shocking or is even otherwise different than what it should have been.
6. Hence, in any view of the matter we find that the orders of the first appellate authority have to be upheld and the appeals dismissed.