Bachawat, J. - (1.) On or about August 8, 1957 the respondent made a gift of 250 ordinary shares of the face value of Rs. 100/- each in R. McDill and Co. (Private) Ltd. (hereafter referred to as the K. M. Company) and 100 ordinary shares of the face value of Rs. 100/- each in Misrilal Dharamchand (Private) Ltd. (hereafter referred to as the M. D. Company) to his daughter. On or about July 28, 1959 he submitted a voluntary return of the gift to the Gift Tax Officer valuing the shares at their face value of Rs. 35,000/-. By his order dated February 24, 1960, the Gift Tax Officer rejected their valuation and acting under Section 15(3) of the Gift Tax Act 1958 determined the total value of the shares to be Rs. 2,68,503/- and the gift tax to be Rs. 21020.36. On April 19, 1960, the respondent was served with the notice of demand under Section 31 of the Act, On May 19, 1960 he obtained a rule calling upon the Gift Tax Officer and the other appellants to show cause why the order of assessment and the notice of demand should not be quashed and set aside by a writ in the nature of certiorari, and, why a writ in the nature of mandamus should not be issued directing them not to give effect to the same. On March 16, 1961, D.N. Sinha, J. made the rule absolute. The appeal raises questions as to the proper mode of valuation of the shares. Section 6 of the Gift Tax Act 1958 provides for the manner in which the value of gifts may be determined and is as follows: -- "Section 6. Value of gifts, how determined: (i) The value of any property other than cash transferred by way of gift, 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 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." The basic principle of valuation is embodied in Section 6 (1) of the Gift Tax Act, 1958 and in the corresponding Section 36 of the Estate Duty Act 1953 and Section 7 (i) of the Wealth Tax Act, 1957. The valuer has to find "the price which ..... it would fetch if sold in the open market." The measure of value of the property is the price which the hypothetical buyer in an open market would pay for it.
(2.) The machinery of Section 6 (1) does not exactly fit in a case where the property is of such a nature that it cannot be sold in the open market. But the existence of an open market is not the precondition of the liability for the tax and in the absence of a supplementary provision like Section 6 (3), the machinery of Section 6 (1) would have to be applied and an estimation of the value of the property would have to be made on general business lines on the basis of a hypothetical sale to a buyer in the open market Accordingly, under Section 7 (5) of the English Finance Act 1894 and in the absence of supplementary provisions corresponding to Section 6 (3) of the Gift Tax Act and Rule 10(2) of the Gift Tax Rules, it was held that where the articles of association of a company contained restrictive provisions as to the alienation and transfer of the shares, the value of the shares for the purpose of estate duty was to be estimated at the price which they would fetch if sold in the open markets on the terms that the purchaser should be entitled to be registered as the holder of the shares subject to the articles including those relating to the alienation and transfer of shares in the company but the special value of the shares to special buyers should be disregarded. See Inland Revenue Commrs. v. Crossman, 1937 A. C. 26, Halsbury Third Edition, Volume 15, Article 151. The value is found on the assumption that the share can be offered freely in the market, that the highest bidder buying freely in the market would be registered as a share-holder and would then be subject to the same restrictions in the articles and that the hypothetical bid for a share subject to those restrictions would naturally be lower than a bid for a share free from the restrictions.
(3.) Considering that it is difficult and sometimes almost impossible to fit the machinery of Section 6 (1) in a case where the property is not saleable in the open market, Section 6 (3) provides that where the value of the property cannot be estimated under Section 6 (1), because it is not saleable in the open market, the value shall be determined in the prescribed manner. By Section 2 (XIX) "prescribed" means prescribed by rules made under the Act. Rule 10 of the Gift Tax Rules, 1958 prescribes the mode of valuation of properties not saleable in the open market and is as follows: "10. Valuation of Property--(1) The value of a policy of insurance shall be its cash surrender value on the date on which the gift was made. (2) Where the articles of association of a private company contain restrictive provisions 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 fold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the article 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 regarded. (3) The value of an interest in a firm or association of persons shall be determined in accordance with the following provisions, namely:--(a) The excess of the market value of the assets or the firm or association over its liabilities (excluding reserves) shall be determined as on the date of gift, (b) The excess aforesaid shall be allocated among the partners of the firm or members of the association in accordance with the agreement of partnership of association for the distribution of assets in the event of dissolution of the firm or association or in the absence of any such agreement, in the proportion in which the partners or members are entitled to share profits. (c) The total of the amount allocated under Clause (b) to each partner or member together with the capital contributed by him shall be treated as the value of his interest. (4) The value of any other property not saleable in the open market shall be determined by the Board".;