Deemed gift and valuation of unquoted shares: yield method preferred over break-up method under gift-tax principles.

Unquoted shares sold to relatives below market value may attract deemed gift-tax consequences where the factual finding shows consideration far below market value and the claimed financial necessity is not accepted. For valuation of unquoted shares under the Gift-tax Act, absent a specific contrary rule, the yield method is ordinarily the proper basis for a going concern; the break-up method is not the normal governing approach, and reliance on Wealth-tax valuation rules was displaced by gift-tax valuation principles.

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Issues: (i) Whether the sale of unquoted shares to relatives at a price below market value gave rise to a deemed gift despite the assessee's claim of compelling financial circumstances. (ii) Whether unquoted shares under the Gift-tax Act were to be valued by the yield method or by applying the break-up method under the Wealth-tax Rules.

Issue (i): Whether the sale of unquoted shares to relatives at a price below market value gave rise to a deemed gift despite the assessee's claim of compelling financial circumstances.

Analysis: The finding that the transfer was to relatives at a consideration far below the market value was supported by concurrent factual determinations of the lower authorities. The asserted financial necessity was not accepted on facts, and no basis was shown to disturb the conclusion that the difference between the consideration received and the market value attracted gift-tax consequences.

Conclusion: The issue was answered in the negative, against the assessee and in favour of the Revenue.

Issue (ii): Whether unquoted shares under the Gift-tax Act were to be valued by the yield method or by applying the break-up method under the Wealth-tax Rules.

Analysis: In the absence of a specific valuation rule under the Gift-tax Rules, the Court preferred the valuation principles applied by the Supreme Court in gift-tax cases holding that, for a going concern, the proper method for valuation of unquoted shares is ordinarily the yield method. The break-up method was treated as inappropriate on the facts, and the earlier reliance on the Wealth-tax Rules was displaced by the governing gift-tax valuation principles.

Conclusion: The issue was answered in the affirmative, in favour of the assessee and against the Revenue.

Final Conclusion: The reference was answered partly for each side: the deemed gift finding was upheld, but the valuation method applied by the first appellate authority was accepted as the correct method for unquoted shares under the Gift-tax Act.

Ratio Decidendi: For valuation of unquoted shares under the Gift-tax Act, where no specific contrary rule applies, the yield method is the proper method for a going concern and the break-up method is not ordinarily the governing basis.

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