ORDER
Smt. Moksh Mahajan, A.M.
1. In an appeal filed by the Revenue, it is contended that the CGT(A) has erred in directing the AO to value the gifted shares on yield method and not on break-up value method. The facts in brief are that the assessee gifted 6,650 equity shares of Tech Invest (India) (P). Ltd. of the paid-up value of Rs. 10 each. The shares were not listed on stock exchange. The GTO valued the aforesaid shares at Rs. 41/14 on the basis of break-up method. This was contested by the assessee in the appeal before the CGT(A). The contention was whether shares are to be valued either at par or at Rs. 10/90 per share on yield basis. Various decisions were relied upon in this context. The learned CGT(A) after referring to the provisions of GT Act and the rules made thereon directed the GTO to value the shares in question in accordance with the profit-earning method in the light of the decision of the Honourable Supreme Court in the case of CGT vs. Kusumben D. Mahadevia (1980) 122 ITR 38 (SC) and that of the Gujarat High Court in CGT vs. Executors & Trustees of the Estate of Late Shri Ambalal Sarabhai (1988) 170 ITR 144 (SC). Against this decision, the Revenue has come in appeal.
2. The learned Departmental Representative S. K. Srivastava relying heavily on the decision of the Honourable Supreme Court in the case of Bharat Hari Singhania vs. CWT (1994) 207 ITR 1 (SC) submitted that as r. 1D has been held to be mandatory in its application unquoted equity shares have to be valued as per the aforesaid rule. On this decision alone, the order of the CGT needs to be set aside.
3. The learned authorised representative, B. B. Ahuja on the other hand argued that the assessee’s case has to be examined under the provisions of GT Act which are not pari materia with those of the WT Act. There are direct decision on the issue namely, CGT vs. Kusumben D. Mahadevia (supra) and that of the Gujarat High Court in the case of Chimanbhai Kasibhai Patel vs. CGT (1993) 203 ITR 57 (Guj), the issue has to be decided in the light of the same. On the other hand, in the case of Bharat Hari Singhania (supra), one of the question before their Lordships of Supreme Court was whether it is obligatory to follow r. 1D while valuing the unquoted equity shares of company other than investment company and managing agency company or is it merely optional ? While deciding the issue, their Lordships of Supreme Court have referred to the case of CGT vs. Executors & Trustees of the Estate of Late Shri Ambalal Sarabhai (supra) and have distinguished the aforesaid decision. This was for the reasons given on p. 21 of the order as reported in (1993) 207 ITR 1 (Guj) (supra). In support of his contention, that r. 1D is not mandatory in valuing unquoted equity shares in gift-tax proceedings, the observations of their Lordships on the various methods of valuation were referred to. It was argued that the application of a particular method for valuation of unquoted equity shares would be dependent on the facts of each case and that too under the provisions of GT Act.
4. We have carefully considered the rival submissions. We have also gone through the decisions as referred to, on both sides. Both under WT Act as well under GT Act, the value of any asset is to be the price which it would fetch if sold in the open market on the valuation date or on the date on which the gift is made. Rules have also been made in this respect under both the Acts. During the relevant period, s. 7(1) of the WT Act read as under :
“7(1). Subject to any rules made in this behalf, the value of any asset, other than cash, for the purpose of this Act, shall be estimated to be the price which in the opinion of the WTO it would fetch if sold in the open market on the valuation date.”
The working of market value of unquoted equity shares of companies other than investment companies and managing agency companies of WT Rules as they stood at the relevant period of time were provided in r. 1D of WT Rules.
5. On the other hand, corresponding to s. 7 of the WT Act, s. 6 of the GT Act read as under :
“6.(1) The value of any property other than cash transferred by way of gift, shall, subject to the provisions of sub-ss. (2) and (3), be estimated to be the price which in the opinion of the GTO it would fetch if sold in the open market on the date on which the gift was made.”
Rule 10(2) of GT Rules as it stood then, read as under :
“10(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.”
On comparison of rules made under the WT Act and GT Act, it is seen that WT Rules are more comprehensive. Separate modes of computation have been provided for in respect of most of the assets. While r. 1B lays down the mode of valuation of life interest, r. 1BB specifies the mode for valuation of house. Similarly r. 1C provides for computation of value of preference shares. The computation of other assets have also been provided for in r. 2 onwards. The manner in which the market value of a particular asset is to be worked out is given in detail in each rule. This is not so under the GT Rules. Rule 10 of the GT Rules provide for the valuation of property. While r. 10(1) speaks of the value of policy of insurance. r. 10(3) that of the value of the interest in a firm. Rule 10(4) on the other hand, is in respect of value of any other property which is not saleable in the open market. Rule 10(2) as detailed earlier provides for the valuation of shares of a private company. Reading of r. 10(2) would show that the mode provided is in respect of private companies where the Articles of Association contain restricted provision to the transfer of shares. In addition, there are other conditions specified therein. As per the rule, the value of shares is required to be ascertained by reference to the value of the total assets of the company. It is only when it is not ascertained in the manner that it can be decided by any other mode. Rule 11, on the other hand, provides for fixation of capitalised value in respect of the gifts which are not revocable. In short, the valuation of assets for the purpose of gift-tax have been contained in r. 2 only.
6. On the differences as noted above, could it be said that r. 1D is to be applied even in cases where working of the valuation of unquoted equity shares is to be done under the GT Act. For this, we would refer to the reasons given by their Lordships of Supreme Court while holding r. 1D as mandatory in case of Bharat Hari Singhania & Ors. (supra) as stated above. One of the reasons given is that under the WT Act, the expression “the price which in the opinion of the WTO, it would fetch if sold in the open market on the valuation date” has been made expressly made subject to the rules made in this behalf. Then the break-up method, as chosen is found to be one of the recognised methods of valuing unquoted equity shares and the method so chosen cannot be faulted on the ground that there are other appropriate methods available. The break-up method based upon the balance sheet of the company incorporated in r. 1D has also been considered to be a simple one. According to their Lordships leaving the matter to the WTO, would mean vesting of uncalled for wide discretion in the hands of the WTO/valuing authorities. “It would lead to uncertainty and may be arbitrariness in practice. Where there is a rule prescribing manner in which a particular property has to be valued, the authorities under the Act have to follow it”. On the other hand, the decision in the case of CWT vs. Mahadeo Jalan (1972) 86 ITR 621 (SC) was distinguished on the ground that for the relevant period of time, the opening words “subject to any rules made in this behalf” were not there. As regards the decision in Kusumben D. Mahadevia (supra) their Lordship found that in that case the Honourable Court was concerned with the valuation of shares in an investment company which was a going concern. Reference was also made to the decision of the Supreme Court in CGT vs. Executors & Trustees of the Estate of Late Shri Ambalal Sarabhai (supra). It was held that in the aforesaid case, the question related to valuation of certain shares which were subject-matter of a gift.
7. From the above, it is clear that no hard and fast rule can be laid down for valuation of unquoted equity shares. It would depend on the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other consideration which may be found to be applicable to the facts of each case. This however would not mean that it could be done at the cost of uniformity and consistency in following a particular method as may be found suitable at the end of the AO. As noted in the earlier paragraph, this may lead to uncertainty and arbitrariness in practice. In striking, a balance between the two, one has to keep in mind that the method chosen cannot be faulted so long it is one of the recognised method, though may be less popular as held by their Lordship in the case of Bharat Hari Singhania (supra).
8. Keeping the above in view, we find that the issue in regard to valuation of unquoted equity shares under the GT Act has been decided by their Lordships of Supreme Court in case of CGT vs. Executors & Trustees of the Estate of Late Shri Ambalal Sarabhai (supra). In the aforesaid case, their Lordship after considering the decision of Supreme Court in CWT vs. Mahadeo Jalan (supra) and particularly in CGT vs. Kusumben D. Mahadevia (supra) have held that the shares had to be valued on the basis of the dividend or profit method of valuation as given recognition to in case of Mahadeo Jalan (supra).
Reference was made to the decision of the Supreme Court in CWT vs. Mahadeo Jalan (supra) would show that their Lordship have laid down the principle of valuation of shares in detail as under (Head Note 🙂 –
“1. Where the shares are of a public company and are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares.
2. Where the shares are of a public company which are not quoted on a stock exchange or of a private company, their value is determined by reference to the dividends, if any, reflecting the profit-earning capacity on a reasonable commercial basis. But if the profits are not reflected in the dividends which are declared and a low earning yield is shown by the company, which is unrealistic on a consideration of the financial affairs disclosed for the relevant year, the WTO can, on an examination of the balance sheet, ascertain the profit-earning capacity of the concern and, on the basis of the potential yield, fix the valuation. In other words, the profits which the company has been making and should be making will ordinarily determine the value. The dividend and earning method or yield method are not mutually exclusive; both should help in ascertaining the profit-earning capacity. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of the profits.
3. In the case of a private company also where the expenses are incurred out of all proportion to the commercial venture, they will be added back to the profits of the company in computing the yield.
4. Where the dividend yield and earning method break-down by reason of the company’s inability to earn profits and declare dividends, if the setback is temporary then it is perhaps possible to take the estimate of the value of the shares before setback and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses.
5. Where the company is ripe for winding up then the break-up value determines what would be realised by that process.
6. Valuation by reference to the assets would be justified where the fluctuations of profits and uncertainty of conditions at the date of the valuation prevent any reasonable estimation of prospective profits and dividends.
These are not, however, hard and fast rules. But, the market value, except in exceptional cases, cannot be determined on the hypothesis that, because in a private company one holder can bring it into liquidation, it should be valued as on liquidation by the break-up method. The yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation, but none the less it is one of the methods.
The factors which are likely to determine the value of a share on any particular day or at any particular time are : (i) the profit-earning capacity of the company on a reasonable commercial basis; (ii) its capacity to maintain these profits or a reasonable return for the capital invested; and in special cases such as investment companies, the asset backing; (iii) the prospects of capitalisation of its earning in the shape of declaration of bonus shares or where the company is financially and commercially sound, the prospects of issue of further capital where the existing shareholders have a right to apply for and obtain them at a certain price which is generally less than the market value, offering an increased yield on their investment, on the assumption that the company will be able to maintain the same rate or at least increase the aggregate payment of dividends on the increased capital.
Where under the articles of the company the right to transfer shares is restricted, the value of the shares should be determined without ignoring the restrictions as to transfer because they are an inherent element in the property which has to be valued. This restriction may not necessarily be depreciatory because the chance of acquiring the shares of other members in the company on advantageous terms is itself a benefit. In cases where shares have to be valued by reference to the assets of the company restrictions on alienation are irrelevant.”
The above would show that the Lordships also considered the case where the articles of the company restrict the transfer of shares as is laid down in r. 10(2) of the GT Rules. In this context, we find that their Lordship of Andhra Pradesh High Court in the case of CGT vs. Smt. K. V. Rajyalakshmi (1997) 223 ITR 25 (AP) after taking note of that there has been no subsequent decision after that of in Ambalal Sarabhai case (supra) have held that the yield method has to be followed while valuing the unquoted equity shares under the GT Act. It may be mentioned that while holding so, the decision of the Hon’ble Supreme Court in the case of Bharat Hari Singhania vs. CWT (supra) was also referred to. In the result, we would hold that under the GT Act, the valuation of unquoted equity shares has to be arrived at on the basis of the yield method and not that of break-up method as held in the case of Bharat Hari Singhania (supra). In the circumstances, the decision of the learned CIT(A) on the issue is upheld.
9. In the result, the appeal of the Revenue is dismissed.