GIFT TAX OFFICER K WARD Vs. KASTUR CHAND JAIN

JUDGEMENT

(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: --

(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: