ORDER
K.C. Srivastava, Accountant Member
1. These are cross-appeals, one by the assessee and one by the Department against the order of the Commissioner of Gift-tax (Appeals) for the assessment year 1979-80. Though the Gift-tax assessment was made in the hands of Dr. Surender Singh Majithia, he later on expired and his legal heirs have been brought on record. In fact the appeal has been filed before us by the legal heir and executors of the estate.
2. The main issue in the present appeals relates to the valuation of certain shares of M/s. Saraya Sugar Mills, which had been gifted by the assessee on 21-5-1978. The assessee had disclosed the value of 70,000 shares at Rs. 2,62,500 but at the time of assessment it had been contended by the representative of the assessee that while valuing these shares the liability in respect of the provision for gratuity should be deducted. It was also contended that as the shares are not readily saleable in the market as a deduction of 30 % should be allowed. The Gift-tax Officer, however, determined the value under Rule 1D of the Wealth-tax Rules and took the value at 75% of that value as no dividends had been declared by the company. He did not accept the plea of the assessee regarding the deduction for the actuarial valuation of the provision for gratuity.
3. When the matter came before the Commissioner of Gift-tax (Appeals), two main contentions were considered by him. The first was that while valuing the shares, it should be the yield method, which, should be applied and not the break up method as provided under Rule 1D of the Wealth-tax Rules. The second point raised before him was about the deduction of actuarial value of the liability for gratuity. The Life Insurance Corporation had certified that the value of this gratuity was Rs. 47,98,807. Reliance was placed on the decision of the Supreme Court in the case of CGT v. Smt. Kusumben D. Mahddevia [1980] 122 ITR 38 and also the decision in the case of CWT v. Mahadeo Jalan [1972] 86 ITR 621. Strong reliance was placed on the decision of the Madras High Court in the case of CWT v. S. Ram [1984] 147 ITR 278, wherein it was held that gratuity should be allowed as a deduction while valuing the shares.
4. The CGT (Appeals) accepted the plea of the assessee and he proceeded to work out the value on the basis of the average profit of the earlier three years. He also held that the actuarial value of the gratuity liability was also to be deducted for the purpose of valuing the shares. On this basis he determined the value of the shares at Rs. 5.96 per share as against the value of Rs. 15.42 per share taken by the Gift-tax Officer.
5. Now both the parties are in appeal. The case of the Department is that while valuing the shares the Commissioner of Gift-tax was not justified in not applying yield method and not Rule 1D of the Wealth-tax Rules. The counsel for the assessee, on the other hand, submitted that the Commissioner of Gift-tax (Appeals) did not consider the plea of the assessee that in the case of Gift-tax the value of the shares could be determined on the basis of the preceding and succeeding balance-sheets and not merely one of them. It was also submitted by him that the CGT (Appeals) did not take into consideration the fact that the position of the sugar industry was precarious at the relevant time when the gift was made. He contended that without considering the financial results of the relevant year the Commissioner has arrived at an unreal value. It was pointed out by him that in the balance-sheet of the company ending on 30th September, 1978 there was a huge loss of Rs. 44,86,057. It was further contended that even if the losses are divided on time basis the proportionate loss would come to Rs. 29,34,357, which was enough to wipe out the profits of the earlier two years. He contended that the decision of the Madras High Court in the case of S. Ram {supra) should have been taken into consideration by the CGT (Appeals). It was also pointed out that as on 30th September the value of the shares had considerably gone down and this reflected in the assessment of the assessee for the subsequent year where the value was taken at NIL. A reference was also made to the balance-sheet of the company in support of the assessee’s contention.
6. We have carefully considered the rival submissions. In view of the decision of the Supreme Court in the case of Smt. Kusumben D. Mahadevia (supra) and the further decision of the Bombay High Court in the case of Seth Hemant Bhagubhai Mafatlal v. N. Rama Iyer, GTO [1983] 144 ITR 737, it has to be held that the break-up method of valuation as prescribed in Rule 1D could not be applied for the purpose of gift-tax unless it was a case of a company which was ready for being wound up. The Supreme Court had further held that even the average of the two methods was not the correct method unless it was not possible to follow the yield method due to strong reason. It had also been indicated that where dividends are not the current indicator of the value the profits should be taken into consideration.
7. In the case of S. Ram (supra), the Madras High Court has held that for the purpose of valuing the shares under the wealth-tax, gift-tax and estate duty the provisions for gratuity based on actuarial valuation should be held as a deduction. The Madras High Court has referred to the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 while deciding the above point.
8. One other question decided by the Madras High Court in the above case was the choice of balance-sheet which has got to be taken as the basis for purpose of computation of company’s net wealth for valuing the unquoted shares. The Court held that where a gift takes place in between the dates of the two balance-sheets, both the balance-sheets may be taken into consideration while determining the value of the unquoted shares. For this their Lordships referred to their decision in the case of CGT v. K. Ramesh [1983] 141 ITR 462 (Mad.). In that case a balance-sheet of two or three days after the date of gift was taken into consideration for determining the value. Their Lordships said that the case of K. Ramesh (supra) was on its own facts. It was further stated that in the absence of facility of drawing up a balance-sheet pre- V D cisely on the date of the gift, it was proper to evaluate the shares having regard to the position in the balance-sheets preceding and succeeding the date of gift. Their Lordships did not approve of the view of the Tribunal that only the preceding balance-sheet should be taken into consideration. In spite of the fact that this decision has been referred to before the Commissioner, he did not discuss this aspect of the matter.
9. Our attention was drawn to the balance-sheet and profit and loss account of the company whose shares have to be valued as on the date of gift. In the year ending 31st October, 1978 the position of sugar mills was not very happy. It appears from the Directors’ report that the sugar industry had passed through one of its worst crises as a result of the directions of the Government to make higher payments for sugarcane. It is also stated that the sugar mills were made to crush all available cane in uneconomical recovery resulting in huge built up stocks and production far outstripped the consumption. On 16th April, 1978 sugar was decontrolled after holding back the release of free-sale sugar. The companies had to sell the stock of sugar to meet their liability for sugarcane. This resulted in crash in sugarcane prices. However, it is noted by the Directors that on account of direction carried out prior “to the start of crushing season in spite of cane inferior to the previous year the company had normal working season up to 7th April and they had highest recovery, the highest daily crushed and higher percentage of better cane sugar as compared to previous five years. It was after this that the working deteriorated in the extended period of crushing.
10. Having regard to the circumstances as discussed above, we are of the view that the Commissioner of Gift-tax (Appeals) erred in not taking into consideration the position of the company on the date of gift. The exact position is not before us but it does appear that some time after the middle of April the company was facing unfavourable circumstances resulting in crash in prioes and meeting of excessive liabilities. It is not known whether the loss suffered by the company at the end of its accounting period was substantially effective on the date of gift. It cannot, however, be denied that on the date of gift the fact that sugar industry was facing a difficult situation was known to all persons concerned with that industry and intending buyers could also know the situation and, therefore, it would not be correct to completely ignore the financial condition as on the date of gift. As the learned CGT (Appeals) has not taken this factor into consideration and has determined the value independent of the financial year as on the date of gift, we deem it fit to restore the matter to the Commissioner of Gift-tax (Appeals) for ascertaining all the relevant facts for the purpose of determining the value of the shares as on that date. While doing so, we uphold the approach of the Commissioner in applying the yield method as well as the allowance of actuarial value of liability for gratuity. At the same time, one has to keep in view the fact that there was a substantial reserve in the balance-sheet, which has ultimately been adjusted by the company towards the loss suffered in this year. The Commissioner of Gift-tax (Appeals) is directed to take into consideration as far as possible the position of the company on the relevant date of gift and then to ascertain the possible value of the shares on that date. We have not accepted the plea of the learned counsel for the assessee to take the figure of loss on the relevant date of gift on time basis. In view of the fact that as per Directors’ report the position of the company was normal till April, 1978 and it deteriorated rather sharply after that. As the gift had taken place in the third week of May, 1978, the position as on that date has to be ascertained and the trend of the market has also to be taken into consideration. If it is possible to have the market value of other sugar companies on the nearabout dates, it will give an indication about the extent of fall which was suffered by the sugar companies. With these directions, the appeal is restored to the file of the CGT (Appeals).
11. In the result, the Departmental appeal is dismissed and the appeal by the assessee is allowed for statistical purposes.