Prospective valuation rule for deemed gifts of unquoted shares: later Schedule II methodology did not apply to earlier years.

For deemed gifts arising from transfer of unquoted shares in assessment year 1991-92, valuation under section 4(1)(a) of the Gift-tax Act remained governed by the pre-amendment market value approach, and the later linkage to Schedule II of the Gift-tax Act applied only prospectively from assessment year 1992-93. The valuation rules introduced for gifts simpliciter did not control earlier deemed gifts, so the authorities were not justified in applying Schedule II and Schedule III to the 1991-92 transfer. Unquoted shares in that period were to be valued by the yield method.

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Issues: Whether, for assessment year 1991-92, the valuation of a deemed gift arising from transfer of unquoted shares was required to be made under section 6 of the Gift-tax Act, 1958 read with Schedule III to the Wealth-tax Act, 1957, or whether Schedule II to the Gift-tax Act, 1958 became applicable only from assessment year 1992-93 onwards.

Analysis: The relevant scheme distinguished between a gift simpliciter and a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958. Before the amendment effective from 1 April 1992, deemed gift was computed by reference to the excess of market value over consideration, and the later incorporation of Schedule II did not govern such transfers for earlier years. The valuation rules introduced for gifts simpliciter were treated as applicable to pending matters in their own field, but the statutory change linking deemed gifts to Schedule II operated only prospectively from assessment year 1992-93. On that basis, the authorities below were not justified in applying Schedule II and Schedule III to the assessee's 1991-92 deemed gift. The proper method for valuing unquoted shares in the circumstances remained the yield method.

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

Ratio Decidendi: The valuation mechanism introduced for deemed gifts under section 4(1)(a) of the Gift-tax Act, 1958 by the amendment effective from 1 April 1992 is prospective and cannot be applied to transfers relating to earlier assessment years; for such earlier deemed gifts, unquoted shares are to be valued on the basis of the market value principles then applicable, namely the yield method.

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