JUDGMENT
Thanikkachalam, J.
1. At the instance of the Department, the Tribunal referred the following two questions for the assessment years 1973-74 and 1974-75 for our opinion under section 26(1) of the Gift-tax Act, 1958 :
“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that there was no undervaluation of shares sold by the assessee and hence, there was no scope for assessment of any deemed gift ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding the Commissioner of Income-tax (Appeals) order allowing a discount of 30 per cent. while arriving at the break-up value of the shares of the company having regard to the factors like non-declaration of dividends in the past and the restrictive clauses in the articles of association ?”
2. The assessee is a company, which sold certain shares in its sister companies during the years under consideration, i.e., during the assessment year 1973-74, the shares of India Motor Parts and Accessories Ltd. and Sundaram Private Ltd. were sold and during 1974-75, the shares of Sundaram Fasteners were sold. The Gift-tax Officer was of the opinion that the market value of the shares was higher and so he sought to bring the difference of Rs. 3,12,702 for the assessment year 1973-74 and Rs. 9,45,786 for the assessment year 1974-75 to tax. The mode of computation adopted by the Gift-tax Officer as well as the mode of computation adopted by the assessee were the same; but the reason for the difference has been explained in detail in the order of the first appellate authority. The Gift-tax Officer and the assessee had followed the method of break-up value of the shares; but the Gift-tax Officer proceeded from the balance-sheet nearer to the date of sale, which is subsequent to the date of sale; but the assessee relied on the balance-sheet for the period prior to the date of sale, on the ground that it was the only balance-sheet available on date. The second difference was due to dispute as to the extent of discount that has to be allowed in ascertaining the market value with reference to the break-up value of the shares.
3. On Appeal, the Commissioner of Income-tax (Appeals), followed the guidelines laid down by this court in CGT v. Prema Srinivasan [1978] 114 ITR 78 and some of the decisions of the Tribunal on the point in respect of the same group of companies. He adopted the guidelines laid down and taking the last available balance-sheets and considered the further estimated profits till the date of sale, subject to adjustment for declaration of bonus shares and dividends and allowing discount, after reckoning the period of non-declaration of dividends in the past and the nature of the restrictive clauses contained in the articles of association of the respective companies and found that it was nearly the same or less than the value adopted for transfer in the account. In fact, he found that there was no ground for presuming undervaluation in respect of all the three companies. He, therefore, deleted the additions. The aggrieved Department filed second appeal before the Tribunal.
4. Before the Tribunal, the Department raised two contentions. According to the Department, the Commissioner of Income-tax (Appeals) had followed the provisions of rule 1D of the Wealth-tax Rules, 1957 (hereinafter referred to as “the Rules”, for short), which have no application to gift-tax proceedings. It was submitted that section 6(1) of the Gift-tax Act prescribes as to the valuation and it is not the same, as the one under the Wealth-tax Act. Secondly, it was contended that the discount allowed by the Gift-tax Officer is reasonable and that there is no case for any further allowance. However, the Tribunal upheld the view expressed by the Commissioner of Income-tax (Appeals). It pointed out that discount was provided under rule 1D of the Rules and that this rule merely adopts the well-known method of valuation of shares. If this method, which is well-known and is also prescribed for wealth-tax purposes, is followed, there is no basis for presumption of understatement of the consideration. Therefore, the Tribunal took the view that there is no scope for presuming any deemed gift for the purpose of the Gift-tax Act.
5. Before us, learned standing counsel appearing for the Department, made two submission. (1) in view of the decision in CGT v. K. Ramesh [1983] 141 ITR 462 (Mad), the balance-sheets drawn up after the dates of sale, which are nearer to the sale date alone should be taken into consideration and not the balance-sheets earlier to the date of sale. (2) Rule 1D of the Rules is mandatory is nature as per the decision of the Supreme Court in Bharat Hari Singhania v. CWT and according to the said rule, discount can be given for sales of shares in the companies, which contained restrictive clauses in their articles of association, to the extent of 15 per cent. and in this case, the discount granted at 30 per cent. is against the said provision.
6. According to learned counsel for the assessee, the balance-sheets drawn up after the date of sale, though nearer in point of time, were not available to ascertain the true market value of the shares on the date of sale, but the balance-sheets which were drawn prior to the date of sale alone were available, even though they are not nearer to the date of sale. According to him, in the cases where the date of the balance-sheet and the valuation date of the assessee do not coincide, Explanation I to rule 1D has to be invoked which says that where the date on which the balance-sheet is drawn up does not coincide with the valuation date of the assessee, the balance-sheet drawn up on a date immediately preceding the valuation date shall be adopted, as the basis for working the rule, and yet another situation contemplated by that Explanation is where both the above situations are absent, the balance-sheet drawn up on a date immediately after the valuation date shall be adopted as the basis. According to hi,, the Tribunal is, therefore, justified in taking into consideration the balance-sheet drawn up immediately preceding the valuation date adopted by the assessee. As regards the discount allowed, learned counsel pointed out that 30 per cent. discount is reasonable in view of the provisions contained in rule 1D and the Table provided thereunder. Learned counsel also submitted that while determining the valuation of the shares, the Tribunal has taken into consideration the profits to be made from the date of drawing of the balance-sheet immediately preceding the date of sale. According to him, the discount allowed at 30 per cent. cannot be considered to be unreasonable or against the statute.
7. We have heard learned standing counsel for the Department as well as learned counsel for the assessee. During the assessment year 1973-74, the shares in India Motor Parts and Accessories Ltd. and Sundaram Private Ltd. were sold and in 1974-75, the shares of Sundaram Fasteners were sold. The assessee showed the sale price of one share of India Motor Parts and Accessories Ltd. at Rs. 109.50 on the basis of the balance-sheet as at March 31, 1972 ; but the Gift-tax Officer worked it out at Rs. 131.15 per share of the fair market value on the basis of the balance-sheet as at March 31, 1973. The actual sale took place on February 7, 1973. In the case of Sundaram Private Ltd., the sale took place on February 27, 1972, and the assessee showed the sale price at Rs. 128 per share, on the basis of the balance-sheet as at March 31, 1971; while the Gift-tax Officer worked it out at Rs. 161.45 per share as per the fair market value on the basis of the balance-sheet as at March 31, 1972. The difference between the two in the above two cases was Rs. 3,12,702 and it was added back by the Gift-tax Officer as deemed gift under section 4. In relation to Sundaram Fasteners Ltd., the price was Rs. 6 per share adopted by the assessee on the basis of the balance-sheet as at March 31, 1973, for the sale that took place on February 14, 1974, while the Gift-tax Officer worked it out at Rs. 11.66 per share on the fair market value basis adopting the balance-sheet as at March 31, 1974. In this case, the difference was Rs. 9,45,786 and it was added as deemed gift under section 4.
8. In so far as the India Motor Parts and Accessories Ltd. is concerned, it was submitted that the balance-sheet as on March 31, 1972, has to be taken, as stated by the High Court in CGT v. Prema Srinivasan [1978] 114 ITR 78. The Gift-tax Officer has taken into account the profits earned during the ten months up to January 31, 1973, into consideration and the average profits for five years ending March 31, 1972, at Rs. 2,96,000. On this basis, the break-up value per share was worked out at Rs. 139. Since the Tribunal has allowed 30 per cent. discount in the case of T. V. Sundaram Iyengar and Sons Ltd., and there are similar restrictive clauses in this case also, a similar discount at 30 per cent. was granted, which would result in the value coming down to Rs. 97.03 per share. As the sale price was Rs. 109.50, there is no undervaluation in this case, according to the Tribunal.
9. In the case of Sundaram Private Ltd., though the sale was after the end of accounting year March 31, 1972, the balance-sheet as at March 31, 1972, had not been published on the date of sale, the balance-sheet as at March 31, 1971, was taken into consideration. The company did not declare any dividend during the four years ending March 31, 1968, to March 31, 1971. Since this was a private limited company and there were restrictive clauses as respects the transfer of shares, 30 per cent. discount should be allowed by the Tribunal. Even if the balance-sheet as at March 31, 1972, is taken into account and the discount at 30 per cent. is given to the figure of Rs. 189.81 arrived at by the Gift-tax Officer, the resultant figure would be Rs. 127, which was lower than the sale price at Rs. 128.
10. As regards Sundaram Fasteners Ltd., there are also restrictive clauses as in the case of the other companies. Since the sale took place on February 14, 1974, the balance-sheet as at March 31, 1973, has to be taken. The value of 7 lakh shares on the basis of the balance-sheet as at March 31, 1973, as worked out by the assessee, at the time of sale was Rs. 55,84,000 and the average profit during the five years ending March 31, 1969, to March 31, 1973, was Rs. 2.30 lakhs. On this basis, the value per share was worked out at Rs. 8.32. This company had not declared dividends for six years. Therefore, the Tribunal held that at the time of sale, there was no case for any addition on account of deemed gift.
11. Learned counsel for the Department would submit that the balance-sheets drawn up after the date of sale, were the ones nearer to the dates of sale and, therefore, on the basis of those balance-sheets, the fair market value of the shares should be ascertained. However, learned counsel for the assessee would contend that only the balance-sheets drawn up immediately preceding the date of sale should be taken into consideration, even though they are not as near as that of the balance-sheets drawn up after the date of the respective sales.
12. In Bharat Hari Singhania v. CWT , the Supreme Court held that rule 1D is mandatory in nature and Explanation I thereto is provided to meet the situation where the date of the balance-sheet and the valuation date of the assessee do not coincide.
13. While considering rule 1D of the Rules to a case arising out of the Gift-tax Act, 1958, Schedule II, this court, in CGT v. Gopal Srinivasan [1995] 214 ITR 637, held that rule 1D is mandatory and in the cases where the date of the balance-sheet and the valuation date of the assessee do not coincide, Explanation I to rule 1D has to be applied whereunder in the cases where the date on which the balance-sheet is drawn up does not coincide with the valuation date of the assessee, the balance-sheet drawn up on a date immediately preceding the valuation date shall be adopted as the basis for working the rule and in yet another situation where both the above situations are absent, the balance-sheet drawn up on a date immediately after the valuation date shall be adopted as the basis and that immediately after the valuation date shall be adopted as the basis and that would be the most reasonable thing to do. This view was taken by this court following the decision of the Supreme Court in Bharat Hari Singhania v. CWT .
14. As regards the applicability or otherwise of the rules (Wealth-tax Rules) to the proceedings arising under the Gift-tax Act, in CED v. J. Krishna Murthy [1974] 96 ITR 87, the Mysore High Court pointed out that the method of valuation of unquoted shares prescribed under rule 1D of the Rules (Wealth-tax Rules) by the Wealth-tax (Amendment) Rules, 1967, dated October 6, 1967, merely replaced the then existing circular of the Central Board of Direct Taxes issued under Circular 3/W. T. of 1957, dated September 28, 1957. The Board’s circular again emphasised the well-known method of valuation of the shares. It was further found in that case that the principle of method of valuation of property, under section 36 of the Estate Duty Act on under section 7 of the Wealth-tax Act, 1957, or section 6 of the Gift-tax Act, 1958, is the same. Therefore, the Mysore High Court pointed out that the adoption of the method of valuation prescribed under the Wealth-tax Act for the case arising under the Estate Duty Act, could not be characterised as arbitrary. Therefore, in our opinion, what is applicable to the method of valuation adopted under the Wealth-tax Act can equally be made applicable to the gift-tax purposes. Rule 1D prescribes a well-known method of ascertaining the value, which a property would fetch, if sold in the open market in respect of shares. In the present case, both the assessee and the Department followed the break-up method in ascertaining the value of unquoted equity shares. Even though the balance-sheets, which was drawn up immediately preceding the date of sale of shares was taken by the Tribunal, the Tribunal took into consideration profit earned from the date of drawing up of the balance-sheet till the date of sale. Therefore, the value was ascertained as on the date of sale by taking into account what the shares would have fetched if sold in the open market on the date of sale. In view of the provisions contained in the Explanation I to rule 1D of the Rules and in the face of the decision of the supreme Court and of this court, referred to supra, we hold that there is no infirmity in the order passed by the Tribunal in valuing the unquoted equity shares by adopting the balance-sheets, which were prepared prior to the date of sale.
15. Now, what remains to be considered is whether the Tribunal was correct in allowing the discount at 30 per cent. while arriving at the break-up value of the shares of the companies in question having regard to the restrictive clauses found in the articles of association of the companies, whose shares were disposed of.
16. In so far as Sundaram Private Limited is concerned, the company has not declared any dividend during the four years ending March 31, 1968; March 31, 1969; March 31, 1970 and March 31, 1971. Since this is a private limited company and having restrictive clauses relating to the transfer of shares, the assessee required 30 per cent. discount. According to the Tribunal even if the balance-sheet as at March 31, 1972, is taken into account and if the discount of 30 per cent. is given to the figure Rs. 189.81 arrived at by the Gift-tax Officer, the resultant figure would be Rs. 127 which is less than the sale price of Rs. 128. In the case of India Motor Parts and Accessories Ltd., 30 per cent. discount was allowed as there was also a restrictive clause in the articles of association and the Tribunal had allowed 30 per cent. discount in the case of T. V. Sundaram Iyengar and Sons Ltd., it was pointed out by the Tribunal that the resultant figure would be Rs. 97.03 per share, while the sale price was Rs. 109.50. In the case of Sundaram Fasteners Ltd., for the very some reasonings, the sale price was Rs. 6 while the figure arrived at was Rs. 5.82 per share. Considering the aforementioned depressing factors like restriction on sale of shares in the matter of private limited companies, non-declaration of dividends for 4 to 6 years, etc., the allowance of 30 per cent. towards discount was accepted by the Tribunal.
17. However, learned standing counsel for the Department submitted that in any event, the discount could not be more than 15 per cent. as per the provisions of rule 1D of the Rules, which is mandatory in nature. According to learned counsel for the assessee, in view of the depressing factors, referred to above, the granting of 30 per cent. discount, cannot be said to be unreasonable. In the matter of ascertaining the value of unquoted equity shares, it will be necessary to ascertain what the share of a private limited company would fetch, if sold in a hypothetical market, which may not really exist.
18. In CGT v. S. Venu Srinivasan [1978] 112 ITR 771, this court has held that “the fact that a company is a private limited company and 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. Even in such cases under rule 10 (2) of the Gift-tax Rules, 1958, it should be assumed that the shares were capable of being sold freely in the open market and that there would be purchasers for the same. Therefore, it will be necessary to ascertain what the shares of a private limited company would fetch if sold in a hypothetical market which may not really exist. However, the value the shares of a private limited company would fetch in the open market as ascertained disregarding the restrictions as to sale will have to be reduced because in reality the shares would not fetch that much of money when transferred because the shares in a private limited company are not easily transferable and hence cannot be treated to be on a par more or less with money that can be handed over quickly from one person to another or other commodities which are readily saleable.”
19. In CGT v. Prema Srinivasan [1978] 114 ITR 78 (Mad), it has been held that “for valuing a property for purposes of gift-tax, the question always is what the property would have fetched if sold in the open market on the date on which the gift was made. The search must always be to find out the market value of the property gifted on the date of the gift. Since the date of the gift is important, the state of affairs as on that date will have to be ascertained. Even in the case of private limited companies, it has to be assumed that the sale of the shares could take place in the open market and the market value as on the date of gift will have to be ascertained. Changes which might have happened after the shares were valued in the previous balance-sheets of the company will and can and should be taken note of by the Gift-tax Officer. There will be no error if the position as on the date of the gift is ascertained assuming that the real position is ascertainable.”
20. In the matter of allowing discount as per the provisions of rule 1D of the Rules, it says that discount can be given at 15 per cent. There is also a Table provided under rule 1D and according to it, if the dividend has not been paid for three years, the market value of each unquoted equity share shall be 82 1/2 per cent.’ if the dividend was not declared for four years, the market value shall be 80 per cent., for five years – 77 1/2 per cent. and for six years and above, it shall be 75 per cent. It means that discount can be given to the extent of 25 per cent. where the dividend was not paid for a period of six years or more.
21. Considering the fact that the profit for each share was worked out up to the date of sale and the restrictive clauses contained in the articles of association of the companies in question, the Tribunal thought it fit to grant a discount at 30 per cent. which cannot at all be said to be unreasonable. Since this aspect had been considered on the basis of the facts available on record, we do not want to got deep into this matter. In that view of the matte, we answer both the questions referred to us in the affirmative and against the Department. No costs.