GIFT TAX OFFICER Vs. M RAMANNA/M P C SOMANNA/MR NARASAPPA
INCOME TAX APPELLATE TRIBUNAL
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George Cheriyan, Accountant Member -
(1.) THESE are three appeals preferred by the revenue. The contentions involved in all the appeals are the same and hence we propose to dispose of all the three appeals by this common order.
(2.) We take up for consideration the facts in the case of M. Ramanna [IT Appeal No. 23 (Hyd.) of 1980]. The assessee made a gift of 325 shares of Stumpp, Scheule & Somappa (P.) Ltd., to his minor son K.R. Ramesh on 28-1-1974. Similarly, 300 shares of the same company were gifted on the same date to his son M.R. Ganganna. On 17-1-1974 the assessee gifted 350 shares in Nippon Electronics (India) (P.) Ltd., to M.R. Gangadhar. The value of the shares for gift-tax purposes was computed by the assessee in terms of rule ID of the Wealth-tax Rules, 1957. The value arrived at was Rs. 213 per share for the shares in Stumpp, Scheule & Somappa (P.) Ltd. and Rs. 131 for the shares of Nippon Electronics (India) (P.) Ltd., against the face value of shares in each case of Rs. 100. In terms of rule ID, the relevant rule under the Wealth-tax Rules, 1957, the break-up value of the shares was determined according to the figures as appearing in the balance sheet and in the case of Stumpp, Scheule & Somappa (P.) Ltd., 85 per cent of the break-up value taken as arrived at on the above basis and in the case of the latter company, 75 per cent was adopted with reference to the figure arrived at on the same basis looking to the dividends which were declared by the two companies and the adjustment required by the rules.
The GTO stated that the shares were those of private limited companies and they were not quoted on the stock exchange. According to him breakup value method provided under the Wealth-tax Rules could not be followed for evaluating the value of shares under the Gift-tax Act ('the Act'). He set out the provisions of Rule 10(2) of the Gift-tax Rules as under :
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 ascer-tainable 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.
He held that it was possible to ascertain the value of the shares with reference to the value of the total assets and, therefore, he observed that the value of the total assets of the company would mean the market value of the assets and not the book value of the same. He accordingly made two adjustments in the assets namely an upward revision in respect of the value of land and building in each case and further an addition on account of goodwill taken at 3 years purchase in each case. In the case of land and building the upward revision was by Rs. 1.89 lakhs, in the case of Stumpp, Scheule & Somappa (P.) Ltd. and Rs. 3.89 lakhs in the case of Nippon Electronics (India) (P.) Ltd. The value taken for goodwill in the case of Stumpp, Scheule & Somappa (P.) Ltd., was Rs. 9.63 lakhs and in the case of Nippon Electronics (India) (P.) Ltd. Rs. 6.73 lakhs. After making adjustments in respect of these revisions to the figures as appearing in the balance sheets as on 31-12-1973 in the case of the former company and 30-6-1973 in the case of latter company, the GTO computed She total value of assets and thereafter the break-up value of the shares, thus each share in the case of Stumpp, Scheule & Somappa (P.) Ltd., was valued at Rs. 498 and in the case of Nippon Electronics (India) (P.) Ltd. at Rs. 246 per share. The complete working in this regard has been set out in the assessment order. In coming to this conclusion, the GTO rejected the arguments of the assessee that when the market value of the immovable properties was taken, it would cover goodwill also and a shareholder's right was limited to the yield and not to the value of the assets.
(3.) THE assessee appealed and relied on the decision of the Supreme Court in the case of CWT v. Mahadeo Jaian  86 ITR 621 as also the decision in the case of CGT v. Smt. Knsumben D. Mahadevia  122 ITR 38. His submission was that in the case of a going concern, the value of the shares had to be determined only by the yield method. THE Commissioner (Appeals) had considered the effect of the ratio of the said judgments in detail and eventually stated that the general principle in the case of a going concern was that it was the yield method which had to be adopted and the value by break-up method had to be ascertained only in exceptional circumstances, or when the company was ripe for liquidation or wide fluctuations of profits and uncertainty of conditions obtained at the date of valuation which would prevent any reasonable estimation of the profit-earning capacity of the company. THE Commissioner then stated that though it may be true that in the case of Kusumben (supra), the contention of the revenue that under Rule 10(2) of the Gift-tax Rules the break-up method was the primary method to be adopted was not pronounced upon by the Supreme Court, still the plea of the revenue that the break-up value alone should be taken was not acceptable. THE Commissioner finally directed that the shares should be revalued according to the principle enunciated by the Supreme Court in the case of Kusumben (supra) and such value should be taken as the value of the gift as against the break-up value as determined by the GTO as mentioned.;
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