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PETITIONER: COMMlSSlONER OF GIFT TAX, GUJARAT

       Vs.

RESPONDENT: EXECUTORS & TRUSTEES OF THE ESTATE OFLATE SH. AMBALAL SARABH

DATE OF JUDGMENT11/12/1987

BENCH: VENKATACHALLIAH, M.N. (J) BENCH: VENKATACHALLIAH, M.N. (J) NATRAJAN, S. (J)

CITATION:  1988 AIR  522            1988 SCR  (2) 341  1988 SCC  Supl.  115

ACT:      Gift Tax  Act,  1958:  Section  15(3)-Gift  of  shares- Correct-Principles of  valuation-Whether a  question of law- Shares not  quoted on  stock exchange-What  is the method of valuation applicable to.

HEADNOTE: %      The assessee  contended  in  the  gift  tax  assessment proceedings that  the 480  shares  in  the  English  Company acquired as gift were not quoted in the stock exchange, that their value  be determined  on the  average  break-up  value indicated by  the  balance  sheets  of  the  Company  as  on 31.3.1964 and 31.3.1965, and that in view of the decision of the General  Body of the Company dated 4.10.1961 to increase its share capital by issue of additional shares the value of the shares  constituting the  subject matter  of  the  gifts which were transferred "ex-right" would stand depreciated.      The Gift  Tax officer valued the shares on the basis of the breakup  value yielded by and deducible from the balance sheet as  on 31.3.1964. The Appellate Assistant Commissioner dismissed the assessee’s appeal.      In the  further appeal  before the Income-tax Appellate Tribunal, the  Tribunal, relying  on the  ratio laid down in the English  Case, Lynall  and another,  v.  Inland  Revenue Commissioner, 83  I.T.R. 563  valued the  shares  at  Rs.450 each, said  to represent  the break-up value on the basis of the balance  sheet of  31.3.1963, holding  that it could not take  into  consideration  any  other  document  except  the published  information,  which  was  the  aforesaid  balance sheet.      The Tribunal  stated a  case and referred the matter to the High  Court, for  its opinion.  The High Court held that since the  only information  which was available on the date of the  gifts was  in the  form of  the balance  sheet as of March 31,  1963, the  Tribunal was  right in taking the same into consideration, for the purpose of arriving at the value of the shares by the ’break-up’ method. 342      In the  appeal to this Court it was contended on behalf of the  Revenue that  the principle of valuation relied upon by the  High Court  was erroneous,  and that  the  case  was

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covered by  the decisions  of this  Court in Commissioner of Wealth Tax,  Assam v.  Mahadeo Jalan  & Ors.,86  ITR 621 and Commissioner  of   Gift-Tax,  Bombay   v.  Smt.  Kusumben  . Mahadevia, 122 ITR 38.      On behalf  of the assessee it was urged that in view of the consensus  between  the  parties  as  to  the  basis  of valuation, it  was not  now open  to the Revenue to urge the application of an altogether different principle.      Disposing of the appeal, ^      HELD:1. The  correct principle  of valuation applicable to a  given case is a question of law. The parties can agree upon a  principle permissible  and recognised by law. If two or  more   alternative  principles  arc  equally  valid  and available it  might be  permissible for the parties to agree upon one of the alternative modes of valuation in preference to another. [346G-H]      In the  instant case,  the Revenue  cannot be precluded from urging the correct legal position. [347A]      2. When  the shares in a public limited company are not quoted on  the stock  exchange. Or  are in a private limited company the  proper method  of valuation to be adopted would be the profit earning method.[346B-C]      Commissioner of  Gift- Tax,  Bombay v. Smt. Kusumben D. Mahadevia, 122 ITR 38, relied upon.      Commissioner of  Wealth Tax,  Assam v. Mahadeo Jalan .& Ors., 86,  ITR 621  and, Williams J in Mc. Cathie v. Federal Commissioner of Taxation, 69 C.L.R. 1, referred to.      In the  instant case,  the view of the High Court as to the principle  of valuation  in determining the value of the kinds of shares concerned cannot be held to be correct. As a logical consequence,  the Tribunal would have to go through, over again,  the exercise  of determination  of the value of the shares  adopting  the  correct  principle.  But,  having regard to the fact that the matter is already two and a half decades old, and that the magnitude of the mechanism for the re-fixation of  the value  of  the  gifts  by  adopting  the somewhat intricate process inherent in the 343 "profit method"  of valuation,  and the  difference  in  the quantum  of  tax  that  might  result  in,  do  not  bear  a reasonable or  senible proportion,  the  valuation  is  left undisturbed.[347A-D]

JUDGMENT:      CIVIL. APPELLATE  JURISDICTION: Civil  Appeal  No.  982 (NT) of 1975.      From the  Judgment and  order dated  10.10.1974 of  the Gujarat High Court in Gift Tax Reference No. 1 of 1973.      Dr. V. Gauri Shanker, K.C. Dua, C.V. Subha Rao and Miss A. Subhashini for the Appellant.      T.A. Ramachandran,  Sonet P.  Mehta. D.N. Misra and Ms. Sunita Narhari for the Respondent.      The Judgment of the Court was delivered by      VENKATACHALIAH, J.  This appeal, by certificate, by the Commissioner of  Income-Tax, Gujarat,  directed against  the order dated,  10.10.1974 of  the Gujarat  High Court in Gift Tax Ref.  No. 1  of 1973  raises  a  question  touching  the correct  principles   of   valuation   of   certain   shares constituting the subject-matter of a gift, held in a company incorporated in  the United  Kingdom analogous  to a private limited company in India.      2. Shri  Ambalal Sarabhai,  since  deceased,  held  480

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shares in  an English  Company M/s. Bakubhai & Ambalal Ltd., London, the  share-capital of which consisted of 2000 shares of   10 each. On 17.10.1964, under eight deeds of gift, the said Ambalal  Sarabhai made  gifts of the said 480 shares to certain members  of his  family. In  the proceedings  of the assessment to gift-tax respecting said gifts the question of the proper basis for determination of the value of the gifts having arisen,  the assessee  contended that,  as the shares were not  quoted  in  the  stock-exchange,  their  value  be determined on the average of break-up value indicated by the balance-sheets of the Company as on 31.3.1964 and 31.3.1965. The former  figure was  Rs.507 and  the  latter  Rs.333  per share; the average of the two being Rs.420 per share.      The  assessee  also  contended  that  in  view  of  the decision  of   the  General  Body  of  the  company,  dated, 4.10.1961  to   increase  its   share-capital  by  issue  of additional 2000 shares at  10 each, the value of the shares constituting the  subject-matter of  the  gifts  which  were transferred "ex-right" would stand depreciated. 344      The Gift  Tax Officer did not accept the contentions of the asses  see. He  proceeded to  value the shares at Rs.507 per share  on the basis of the break-up value yielded by and deducible  from  the  balance-sheet  as  on  31.3.1964.  The Appellate Assistant  Commissioner dismissed  the  assessee’s appeal.  In   the  further  appeal  before  the  Income  Tax Appellate late  Tribunal, the  Tribunal, placing reliance on what  it  considered  to  be  the  principles  of  valuation appropriate to  such cases  said to  be contained in Lynal & Anr. v.  I.R. C.  (H.L.), (83 ITR 563), valued the shares at Rs.450 each  said to  represent the  break-up value  on  the basis of  the balance-sheet  of 31.3.1963. The Tribunal held that it could not take into consideration any other document except the  published in  formation which, in this case, was the balance-sheet as on 31.3.1963.       3.  The Tribunal,  at the instance of both the revenue and the  assessee stated a case and referred three questions of law  for the  opinion of  the High Court-the first two at the instance of the revenue and the third at the instance of the assessee.  The assessee,  it must  be observed  did  not press the  question referred  at his  instance and  the High Court, accordingly,  did not  express any opinion on it. The two questions  referred for the opinion of the High Court at the instance of the Revenue were:           "(1) Whether  on the facts and in circumstances of                the case.  the finding  of the Tribunal based                on the ratio of the case decided by the House                of Lords  in Lynall  and  Another  v.  Inland                Revenue Commissioner,  (83  l.T.R.  563)  and                basing  the   valuation  of   the  shares  of                Bakubhai and  Ambalal Ltd.,  London,  on  its                balance  sheet   as  at  31.3.63  instead  of                31.3.64 is bad in law?           (2)  Whether on the facts and in the circumstances                of the case, the Tribunal was right in law in                accepting the  valuation  of  the  shares  as                returned  by   the  assessee   and   deleting                Rs.27,360 added by the Gift-Tax officer under                Section 15(3) of the Act?"      The High Court by its order, now under appeal, answered the questions against the revenue. It held:           "The only  information which  was available  as on           October, 17,  1964 was in the form of the balance-           sheet as  of March 31, 1963 and hence the Tribunal           was right  when it took into consideration for the

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         purpose of arriving at the value of the 345           shares by  the break-up  method, the balance sheet           as at  March 31,  1963 and  not as the revenue was           contending for  the balance  sheet as of March 31.           1964."      4. Dr.  Gauri Shanker,  Learned Senior Counsel urged in support of the appeal, that the entire exercise of valuation before the  High  Court  rested  on  a  case  which  had  no application to  the  matter;  that  the  case  was  governed squarely by the pronouncements of this Court in Commissioner of Wealth  Tax, Assam  v. Mahadeo  Jalan & Ors.,(86 ITR 621) and, more  particularly, in Commissioner of Gift-tax, Bombay v. Smt.  Kusumben D.  Mahadevia, (  122 ITR 38) and that the erroneous view  of the  High Court  as to  the principles of valuation should, therefore, not remain uncorrected.      5. Shri  Ramchandran, learned  senior counsel  for  the assessee, in  the. light  of the aforesaid pronouncements to this court,  found it difficult to support the principles on which the determination of the value of the shares proceeded before the  authorities as  well as  before the Tribunal and the igh  Court. He,  however, invited  our attention  to the following observations of the High Court:           " ..  As a  matter of  fact it  may be pointed out           that before the Tribunal it was common ground that           the value  of the  shares should be ascertained by           following the  break-up value  method and the only           difference was  as to  with reference  to  balance           sheet of  what date  the total value of the assets           has to be ascertained ...... and urged  that in view of the consensus between the parties as to  the basis  of valuation  it was  not now  open to the Revenue to  turn around  and  urge  the  application  of  an altogether different principle.      6. We  are afraid,  the basis adopted by the High Court is clearly  unsustainable in the light of the pronouncements of this  court referred  to earlier.  The reference  to  and reliance upon  the Lynall principle was somewhat in-apposite and  misplaced.   That  case   principally  dealt  with  the impermissibility  of   reliance  on  classified  information considered  confidential  and  privileged  from  disclosure. Pointing out  the inadequacy  of the "break-up-value" method this court in Mahadeo Jalan’s case referred with approval to the following  observations of  Williams J  in Mc. Cathie v. Federal Commissioner’s of Taxation (69 C.L.R. 1):           " .. the real value of the shares .. will depend 346           more on  the profits  which the  company has  been           making and  should be  capable of  making,  having           regard to the nature of its business than upon the           amounts  which  the  shares  would  be  likely  to           realise upon liquidation ..... In Kusumben’s  case referring to the principles of valuation relevant to the matter, this court said:           "..... But  where the  shares in  a public limited           company are  not quoted  on the  stock exchange or           the shares  are in  a private-limited  company the           proper method  of valuation to be adopted would be           the profit  earning method.  This  method  may  he           applied by  taking the dividends as reflecting the           profit earning capacity of the company on a reason           able commercial  basis but if it is found that the           dividends do  not  correctly  reflect  the  profit           earning capacity  because only  a small proportion           of the  profits is distributed by way of dividends

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         and a  large amount  of profits  is systematically           accumulated in  the form of reserves, the dividend           method  of  valuation  may  be  rejected  and  the           valuation may be made by reference to the profits.           The profit-earning  method takes  into account the           profits which  the company  has  been  making  and           should be  capable of  making and  the  valuation,           according to  this method  is based on the average           maintainable profits.  Of course,  for the purpose           of such  valuation, the  taxing authority  is  not           bound by the figure of profits shown in the profit           and loss  account because  it is possible that the           amount of  profits may have suffered diminution on           account  of   unreasonable  expenditure   or   the           directors having chosen to take away a part of the           profits in  the form  of remuneration  rather than           dividends. The  figure of  profits in  such a case           would have  to be  adjusted in  order to arrive at           the real profit earning capacity of the company           ....."      The view  of the  High Court cannot, therefore, be said to reflect the position in law correctly.       7.  The correct principle of valuation applicable to a given case  Is a question of law. The parties can agree upon a principle  permissible under and recognised by law. If two or  more   alternative  principles   ar  equally  valid  and available, it  might be permissible for the parties to agree upon one of the alternative modes of valuation in preference to 347 another. In  this case,  the revenue  cannot be  said to  be precluded from  urging the  correct legal  position. In  the ultimate analysis,  it requires  to be held that the view of the  High   Court  as  to  the  principle  of  valuation  in determining the  value of  the kind  of shares  concerned in this case  cannot be  held to be correct. The first question of law  referred for its opinion would otherwise, require to be answered  in  the  affirmative  and  the  second  in  the negative;  both   against  the   assessee.  As   a   logical consequence, the  Tribunal would  have to  go through,  over again, the  exercise of  determination of  the value  of the shares adopting the correct principle.      8. But  the matter  is already  two and  a half decades old. The  gift was  in the  year 1964. The total Gift-Tax as now assessed  is Rs.5661.  Upon a fresh determination of the value  of   the  shares   adopting  the  somewhat  intricate processes inherent  in the  ’profit-method’ of valuation the difference in  the quantum of the tax might, perhaps, not be substantial. The  magnitude of  the mechanism for refixation of the  value of the gifts and the difference in the quantum of the  tax it  might result-in, do not bear a reasonable or sensible  proportion.   Having  regard   to  the   pecuniary involvement in the case which is obviously small we think we should  not   expose  the   parties  to  a  fresh  round  of litigation.      In this  view of  the matter, we think appellant should be content  with the  declaration of  the law on the matter, without disturbing  the valuation  made by  the Tribunal and approved by  the High Court. though the principle adopted is not supportable in law. We therefore decline to interfere in the matter. The valuation is therefore left undisturbed .      9. The  appeal  is  disposed  of  accordingly.  In  the circumstances of  the case,  there will  be no  order as  to costs. N.P.V.                                   Appeal disposed of.

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