GOVINDAN NAIR C.J. - We deal with these two cases under a common judgment because the questions that have been referred to us by the Tribunal in these cases raise similar if not identical questions for decision. We shall extract the questions in the two cases :
T.C.No. 588 of 1975
'Whether it has been rightly held that shares of M/s T. V. Sundaram Iyengar & Sons (P.) Ltd. should be value for gift-tax assessment at Rs. 107.34 per share and not as at Rs. 134.82 per share ?'
T.C.No. 595 of 1975
'Whether, it has been rightly held that shares of M/s. T. V. Sundaram Iyengar & Sons (P.) Ltd. Should be valued for gift-tax assessment at Rs. 107.58 per share and not as at Rs. 133.63 per share ?'
The year of assessment in T.C.No. 588 of 1975 is 1971-72 and that in T.C. No. 595 of 1975 is 1973-74. Two gift deeds are the subject-matter which gave rise to these references, one dated March 22, 1971, in the earlier case and the other dated March 28, 1973, in T.C.No. 595 of 1975. These gifts dealt with shares in M/s. T. V. Sundaram Iyengar & Sons (P.) Ltd. It will be noticed that the gift deeds were executed almost at the end of the years 1970-71 and 1972-73. The assessees seem to have proceeded on the basis that the value shown in the balance-sheet as the value of the share for the year ending 1970-71, for T.C.No. 588 of 1975 and that shown in the balance-sheet for the year 1972-73, for T.C.No. 595 of 1975 minus 15 per cent. would be the value the shares would fetch if sold in the open market. On that basis, the returns were filed. So, in T.C.No. 588 of 1975, the value of the share was shown as Rs. 113.29 and in T.C.No. 595 of 1975 as Rs. 117.78 by the assessees. On second thoughts as it were, the assessees wanted to have the value reduced further on the basis of issue of dividend by the company after the previous balance-sheet and claimed that the value of the share for the assessment year 1971-72, in T.C.No. 588 of 1975 must be fixed at Rs. 107.34 and that with which we are concerned in T.C.No. 595 of 1975 at Rs. 107.58. We may mention here that the value of the share as shown in the balance-sheet for the year 1971-72, as on March 31, 1972, for T.C.No. 588 of 1975 is Rs. 134.82 and the corresponding figure for the year 1973-74, for T.C.No. 595 of 1975 is Rs. 133.63. The Tribunal considered the question whether the shares should be valued at Rs. 107.34 or Rs. 134.82 in the order under appeal which gave rise to T.C.No. 588 of 1975 and considered the similar question in the order which gave rise to T.C.No. 595 of 1975 as to whether the value should be Rs. 107.58 or Rs, 133.63 per share and came to the conclusion that the shares should be valued at the lower figures that we have mentioned earlier. A reference has been made at the instance of the revenue and it was contended before us that the Tribunal has erred in applying the lower figures and the value of the shares should have been fixed at the figures. We shall now turn to the statutory provisions in the Gift-tax Act and the Rules. Section 6 dealing with the method of determination of value of gifts is in these terms :
'(1) The value of any property other than cash transferred by way of gifts shall, subject to the provisions of sub-sections (2) and (3), be estimated to be the price which in the opinion of the Gift-tax Officer it would fetch if sold in the open market on the date on which the gift was made.
(2) Where a person makes a gift which is not revocable for a specified period, the value of the property gifted shall be the capitalised value of the income from the property gifted during the period for which the gift is not revocable.
(3) Where the value of any property cannot be estimated under sub-section (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner.'
Rule 10(2) of the Gift-tax Rules, 1958, gives an indication as to how the value of the shares should be determined. We shall extract that sub-rule :
'(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.'
What the section speaks of is that the value should be estimated to be the price which, in the opinion of the Gift-tax Officer, the shares would fetch if sold in the open market on the date on which the gift was made.
The company with which we are concerned in this case is a private limited company and naturally has incorporated restrictions in its articles of association regarding the transfer of shares. The fact that the company is a private limited company and that there is not the freedom to deal with the shares held in such a company will not affect the question as to the possible value the shares would fetch had they been sold in the open market on the date of the gift, for the principle has been laid down that even in such cases, it should be assumed that the shares were capable of being sold freely in open market and that there would be purchasers for the same. Therefore, it is necessary to ascertain what the shares, even of of a private limited company, would fetch, if sold in a hypothetical market which may not really exist. This has been laid down by the Supreme Court in the decision in Ahmed G. H. Ariff v. Commissioner of Wealth-tax : 76ITR471(SC) . It may often be difficult to find out the value which a share would fetch if sole in open market, which cant be termed to be the market value of the share. In such cases, it is not as though the Gift-tax Officer is helpless. In such circumstances, he can take the value of the shares as shown in the balance-sheet which is based on the break up figures and such value shown in the balance-sheet which was in existence at the time of the gift can very well be taken to be the market value of the shares. The further question would then arise whether any adjustment by way of depreciation will have to be made from the value of the shares shown in the balance-sheet which was in existence at the time of the gift. It seems now to be well-established that when there are restrictions in the articles of association of a company, the value of the shares that would fetch in the open market as ascertained disregarding those restrictions will have to be reduced because in reality the shares would not fetch that much of money when transferred. This is understandable in view of the fact that the shares in a private limited company are not easily transferable and, therefore, cannot be treated to be on a par more or less with money which can be handed over quickly from one person to another, or other commodities which are readily saleable. Only certain persons may be interested in acquiring shares in a private limited company. Others who are desirous of dealing with shares as frequently as fancy taken them or those who want to deal with shares with a view to make profits as occasion demands will certainly fight shy in investing in shares in private limited company. In other words, the effortlessness with which the shares held in a good concern which is not a private limited company can be transferred will not be available in the case of shares held in a private limited company; such shares cannot so easily be transferred. If we do not take this fact into consideration, we will be making an unrealistic approach and courts have not been guilty of such an approach for there is a wealth of case law on the subject that this factor must be borne in mind and necessary adjustment towards depreciation in view of this factor of restriction must be taken into account. This court itself dealt with the matter in the decision in R. Rathinasabapathy Chettiar v. Commissioner of Wealth-tax : 93ITR555(Mad) and our attention has not been invited to any other decision of this court which taken a view different from what has been laid down in that decision. The principle of the decision has to be applied after considering, (a) whether it is possible to ascertain the market value on the date of the gift; and (b) if such market value could not be ascertained, by taking the value of the shares in the balance-sheet that existed at the time of the gift. After having so fixed the market value the further question will have to be considered -adjustments towards depreciation. These aspects have not been dealt with by the Tribunal. The Tribunal apparently did not go into it for the assessee herself had started by giving what we may call the depreciated value of the shares, depreciating the value shown in the balance-sheet. It is admitted before us that Rs. 113.29 in T.C. No. 588 of 1975 and Rs. 117.78 in T.C.No. 595 of 1975 had been provided in the returns originally filed on the basis of 15 per cent. deduction on the value of the shares as shown in the existing balance-sheet on the date on which the gifts were executed. She was not satisfied with 15 per cent. depreciation and, therefore, claimed further depreciation and that is how the figures Rs. 107.34 and Rs. 107.58 had been reached. The Tribunal has accepted these figures apparently without noticing the double depreciation adjustment that has been claimed.
The question whether whether the value given in the balance-sheet as existed at the time of the gift deeds should be taken as the market value and if so, what depreciation, if any, should be made on those figures are matters which have to be decided by the Tribunal after taking into consideration all the relevant factors. We are, therefore, unable to answer the questions that have been referred to us and in view of the fact that the Tribunal has not considered these matters before passing the orders in the cases, we consider that we should adopt the principle that was adopted by the Supreme Court, in dealing with references under the Income-tax Act, in the decisions of the Supreme Court in Commissioner of Income-tax v. Greaves Cotton and Co. Ltd. : 68ITR200(SC) and Commissioner of Income-tax v. Indian Molasses Co. P. Ltd. : 78ITR474(SC) . Accordingly we direct the Tribunal to take back G.T.A. No.83 (MDS) /73-74 and G.T.A.No. 25/74-75 on its file and deal with them afresh after issuing notice to the parties concerned and dispose of those appeals in the light of what is the stated in this judgment. We order these two references in the above terms. We direct the parties to bear their respective costs. The costs hereafter incurred will be provided for by the Tribunal.