COMMISSIONER OF GIFT TAX Vs. AMBALAL SARABHAI EXECUTORS AND TRUSTEES OF THE ESTATE OF LATE

JUDGEMENT

(1.) IN this reference at the instance of the Revenue the following two questions have been referred to us for our opinion :

(2.) THE Tribunal has also referred the following question to us at the instance of the assessee, namely :

(3.) THE relevant assessment year is 1965 66. The assessee was originally Ambalal Sarabhai and, after his death, the executors and trustees of his estate have been brought on the record of these proceedings. Late Ambalal Sarabhai held 480 shares in an English company called M/s Bakubhai & Ambalal Ltd., London. The share capital of the company consisted of 2,000 shares of # 10 each. This company was, what is known under the Indian Companies Act, as a private limited company, that is, the articles of association of this company contained restrictive provisions as to the alienation of shares, the alienation being permitted amongst existing shareholders. Thus, this company if incorporated in India would be known as a private limited company. At its extraordinary general meeting the company decided on October 4, 1961, to increase its share capital from # 20,000 to # 40,000 divided into 4,000 shares of # 10 each. The company also decided at the said meeting that the 2,000 new shares should be offered in the first instance to the holders of ordinary shares of the company whose names appeared in the register of members of the company on such date as might be fixed by the directors. The offer was to be one new ordinary share for one ordinary share held. The company further resolved on that day that if any new ordinary shares were not applied for by such date as might be fixed by the company, those shares could be offered to any person willing to purchase the same. The new shares were to be acquired by remitting # 10 per share applied for. In pursuance of this resolution of October 4, 1961, the company issued letters of offer to the existing shareholders regarding the issue of new shares. On the strength of 500 shares held by him, Ambalal Sarabhai decided to apply for 480 shares and he applied to the Reserve Bank of India for permission to remit # 4,800 to the company in England for the purpose of acquiring the new shares. The permission was not immediately given by the Reserve Bank of India and this permission, so far as the record of this case is concerned, does not appear to have been granted till the relevant date. Originally the company had fixed December 15, 1961, as the date up to which the offer for new shares was to be accepted by the shareholder but this date was extended from time to time and the last of such extended date was March 31, 1965. On May 11, 1964, Ambalal Sarabhai applied to the Reserve Bank of India for permission to gift 480 shares (ex right) and this permission was granted by the Reserve Bank of India by its letter dated July 18, 1964. 480 shares were gifted to different donees on October 17, 1964, and different gift deeds in identical terms were also executed by Ambalal Sarabhai, the donor, on October 17, 1964. After the gift deeds were executed, on October 26, 1964, the Reserve Bank of India appear to have granted permission to the Indian shareholders to remit # 10 per new share applied for by them and subsequently the amount was remitted to the company in London. We are not concerned in the present reference with that aspect of the case. On October 17, 1964, Ambalal Sarabhai executed eight separate gift deeds for different members of his family to whom he wanted to gift the shares. The gift deeds did not clarify whether they were gifted ex right in respect of the new shares. However, the value of the shares in the gift deeds was mentioned as Rs. 450 per share. Thereafter, in due course, the donor filed a return of gift before the GTO declaring the value of gift at Rs. 2,16,000 in respect of these 480 shares at the rate of Rs. 450 per share. These shares were not quoted on the stock exchange and the assessee had worked out the value of these shares according to the break up value method based on the balance sheet of the company as of March 31, 1963. In the course of the gift tax proceedings it was urged on behalf of the assessee that the value as on October 17, 1964, that is, the date of the gift, should be adopted at Rs. 420 per share which was the mean of value of Rs. 507 and Rs. 333 per share. It was contended that on the breakup value method the value of the share was Rs. 507 on the basis of the balance sheet as of March 31, 1964, and Rs. 333 per share on the basis of the balance sheet of the company as of March 31, 1965. There was no dispute that by following the break up value method the value per share was Rs. 450 per share on the basis of the balance sheet as of March 31, 1963, Rs. 507 per share on the basis of the balance sheet as of March 31, 1964, and Rs. 333 per share on the basis of the balance sheet as of March 31, 1965. The GTO proceeded on the footing that as the gifts were made on October 17, 1964, the value of the shares should be taken at Rs. 507 per share because the nearest balance sheet in point of time would be as of March 31, 1964. The assessee had also contended before the GTO that there should be further reduction in the value of the shares as the allotted shares were transferred ex right only, that is, the assessee did not transfer his right of getting new shares on payment of # 10 per share. The GTO rejected this contention and adopted the value of shares at Rs. 507 per share, that is, on the break up value as on March 31, 1964.