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Lalit N. Bhagwati Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1986)15ITD427(Ahd.)
AppellantLalit N. Bhagwati
Respondentincome-tax Officer
Excerpt:
.....of profit-earning method might work out to be in excess of the value arrived at on the break-up value method, a notice was issued to comply with the provisions of sub-section (5) of section 23 of the act regarding an opportunity of hearing to be given to the assessee in case there is an enhancement in the amount of gift-tax determined. it was finally heard on 8-7-1983 when the learned chartered accountant, shri anil r. shah, attended and submitted that he had nothing further to add.6.2 we, therefore, set aside the order of the aac and direct the gto to make an assessment on the basis of maintainable profits since the dividends do not reflect the profit-earning capacity of the company on the basis of decision of the bombay high court in the case of smt.kusumben d. mahadevia {supra) and.....
Judgment:
1.The ground taken against the order passed by the AAC in his Appeal No. IV-D/3 of 1980-81 is as under: The AAC has erred in adopting Rs. 233 as the market value of the share as on the date of the gift and thereby rejected the claim of the appellant to value the share at Rs. 15 based on yield value.

2. The assessee is an individual. During the accounting year ended on 31-3-1975 she made a gift of 62 shares of Bhagwati Foundries Ltd. The date of gift is 30-3-1975 as per the order of the AAC. In the return of gift the said shares were valued at Rs. 100 per share. According to the GTO since the shares are not quoted on any recognised stock exchange the value had to be arrived at on the basis of break-up value and for this purpose after giving necessary discount, etc., on the basis of balance sheet after certain adjustments the value was arrived at Rs. 233 and, accordingly, the assessment was completed under Section 15(3) of the Gift-tax Act, 1958 ('the Act').

2.1 In appeal before the AAC, a ground as per the statement of grounds, taken was that the value of the shares should be taken as nil as the same was required to be arrived at on the basis of yield as per the decision of the Supreme Court in the case of CGT v. Smt. Kusumben D.Mahadevia [1980] 122 ITR 38. The relevant paragraph in the order of the AAC reads as under : Shri Anil R. Shah, chartered accountant, attended and was heard. He has contended that break-up method as per Rule 1D under the Wealth-tax Rules, 1957. So far the Gift-tax Act, 1958 is concerned, there is no such specific rule framed under that law and, therefore, normal principles of valuation from commercial angle and accountancy principles have to be adopted. The company is not on threshold or a point of liquidation and, therefore, break-up method cannot be applied. The correct method that should be applied is the yield method or the dividend declared method. In support of this contention, he has relied upon the decision of the Supreme Court in the case of CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38. He also pointed out that the company did not declare any dividends in the years 1971 to 1973. It was only in the year 1974 that the company declared the dividend of 12 per cent. He, therefore, contended that the average yield per year would work out to 3 per cent and, accordingly, the value per share should be taken at Rs. 15 per share.

It has also been contended that if the value of the gifted shares is really less than that declared by the appellant in the return, the same should be adopted despite the same being lower than the declared value.

The AAC held that (i) in the case before the Supreme Court the question of valuation of shares was in respect of a private limited company being an investment company and not the public limited company, (ii) at the relevant time there was no provision in the Wealth-tax Act, 1957 ('the 1957 Act') specifically describing the method of valuation of unquoted shares, (iii) in the present case dividends were not declared in the initial years of the company engaged in the manufacturing activity and, therefore, the yield method was not the proper method or the only method of arriving at the value of the shares, (iv) the profitability of the investment in the shares of the company is clearly indicated from the accounts of 1975 when dividend of 1(16.8 per cent was declared as against that of 12 per cent in the year 1974, (v) though under the Act there is no specific provision regarding valuation of unquoted shares the GTO could apply the rules framed under the Wealth-tax Act, and (vi) if for the purpose of gift-tax yield method was required to be adopted in this case, then value under the 1957 Act as on 31-3-1974 based on break-up method would be around Rs. 200 per share and for the purpose of gift-tax assessment during the year ended 31-3-1975 the value per share would be Rs. 15 only on yield basis while on the same day it would be Rs. 232 under the 1957 Act and this would lead to ridiculous results. He, therefore, confirmed the value on the basis of break-up method, 3. At the time of hearing the learned counsel for the assessee submitted that the case was directly covered by the decision of the Supreme Court in the case of Smt. Kusumben D. Mahadevia (supra).

Reference was also made in Seth Hemant Bhagubhai Mafatlal v. N. Rama Iyer, GTO [1983] 144 ITR 737 (Bom.) regarding yield method and Rule 1D of the Wealth-tax Rules, 1957 to be applied only at the option of the assessee. There is no restriction on transfer of shares but it is a closely-held public limited company. On the aspect of profitability it was submitted that average yield be taken on the basis of normal profits or may take even one year for this purpose and left the matter to the Tribunal to apply rule of thumb (sic). Reference was also made in GTO v. M. Ramanna [1983] 3 ITD 300 (Hyd.).

4. The learned departmental representative relied upon the case of Shyamsukh Garg v. CED [1984] 145 ITR 238 (MP) under the Estate Duty Act, 1953 ('the 1953 Act') where CED v. J. Krishna Murthy [1974] 96 ITR 87 (Mys.) was followed. If Rule 1D of the 1957 Rules is followed in the 1953 Act it was submitted why should it not be followed under the 1958 Act. Relying upon the case of CWT v. S. Ram [1984] 147 ITR 278 (Mad.) break-up value on the basis of two balance sheets was accepted. The law should be interpreted in workable manner. Reference was also made to the book by the learned author Sampat Iyengar's Law of Income-tax, Seventh edn., Vol. 2, at p. 1112 regarding decision of the Bombay High Court in the case of Seth Hemant Bhagubhai Mafatlal (supra).

5. In reply, the learned counsel for the assessee submitted that in the decision of the Bombay High Court in the case of Smt. Kusumben D.Mahadevia v. CWT [1980] 124 ITR 779 it was held that Rule 1D is directory and not mandatory but, however, since the Supreme Court decision is applicable we were not concerned with that decision. Again, the Mysore High Court in the case of J. Krishna Murthy (supra) the same was not relevant because in that case the assessee contended for Rule 1D.6. We have considered the submissions and materials to which out attention was drawn. During the course of hearing, relevant balance sheets of Bhagwati Foundries Ltd. were asked for but the same were not readily available and, therefore, were supplied afterwards. We accept the plea of the assessee's counsel that the case would be governed by the decision of the Supreme Court in the case of Smt. Kusumben D.Mahadevia (supra) It is an admitted fact that though it is a public limited company it is a closely-held company and shares are not quoted on the stock exchange and, therefore, price quoted is not available.

The Supreme Court in the above case has held that where the shares in a public limited company are not quoted on the stock exchange or the shares are in a private limited company the proper method of valuation to be adopted would be the profit-earning method. It further adds that this method be applied by taking the dividends as reflecting the profit-earning capacity of the company on reasonable commercial basis but if it is found that the dividends do not correctly reflect the profit-earning capacity because of the factors mentioned the dividend method of valuation may be rejected and the valuation may be made by reference to the profits. The profit-earning method takes into account the profits which the company have been making and should be capable of making and the valuation according to this method, is based on average maintainable profits. It then further goes on regarding certain adjustments required to be made. Therefore, the plea of the assessee regarding applying the decision of the Supreme Court in the case of Smt. Kusumben D. Mahadevia (supra) is upheld.6.1 But looking to the balance sheets, very first look gave an impression that the company made sizeable profits in the year 1974 and subsequent years. Because of the gestation period, since the company is engaged in the manufacturing activities of high duty cast iron castings including alloy iron castings, etc., and for various other reasons the dividend declared for the year 1974 was the maiden dividend. The profits earned before and after tax are also sizeable exceeding Rs. 10 lakhs as against the capital of Rs. 6,25,000. In 1975 also there are sizeable profits with no increase in the capital. Applying certain financial and performance ratios the accounts show healthy signs with inbuilt prosperity. Therefore, it appeared that valuation on the basis of profit-earning method might work out to be in excess of the value arrived at on the break-up value method, a notice was issued to comply with the provisions of Sub-section (5) of Section 23 of the Act regarding an opportunity of hearing to be given to the assessee in case there is an enhancement in the amount of gift-tax determined. It was finally heard on 8-7-1983 when the learned chartered accountant, Shri Anil R. Shah, attended and submitted that he had nothing further to add.

6.2 We, therefore, set aside the order of the AAC and direct the GTO to make an assessment on the basis of maintainable profits since the dividends do not reflect the profit-earning capacity of the company on the basis of decision of the Bombay High Court in the case of Smt.

Kusumben D. Mahadevia {supra) and adopt the value, lower or higher, as the case may be, and frame the Assessment after giving proper opportunity to the assessee in accordance with law.

7. In the result, for statistical purposes, the appeal is allowed in parts.


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