Statutory valuation of gifted shares must follow the break-up method; revocable gifts remain valid if expressly permitted by law.

Unquoted equity shares gifted by the assessee had to be valued under the statutory break-up method in rule 10(2) of the Gift-tax Rules, 1958, because that rule governed restrictive shares in a private company and there was no material showing that value could not be ascertained from the company's assets. The Tribunal was therefore wrong to apply the yield method, and the issue was decided for the Revenue. A gift structured with a right of revocation after a specified period was also held valid, because the Gift-tax Act expressly contemplated that arrangement and the fact that it was tax-effective did not make it void. That issue was decided for the assessee.

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Issues: (i) Whether the valuation of unquoted equity shares gifted by the assessee was required to be made on the break-up method under rule 10(2) of the Gift-tax Rules, 1958, or on the yield method. (ii) Whether a gift made with a right of revocation after a specified period was a valid gift under the Gift-tax Act, 1958.

Issue (i): Whether the valuation of unquoted equity shares gifted by the assessee was required to be made on the break-up method under rule 10(2) of the Gift-tax Rules, 1958, or on the yield method.

Analysis: The governing law for the relevant assessment year required the value of gifted property to be estimated at the price it would fetch in the open market on the date of gift. Rule 10(2) specifically directed that, in the case of restrictive shares in a private company, the value should primarily be determined with reference to the value of the total assets of the company. Only where value could not be so ascertained could another method be resorted to. The Court held that the statutory rule controlled the valuation exercise and that, on the facts, there was no material to show that the value of the shares could not be ascertained from the balance-sheet and assets of the company. The Tribunal had ignored the statutory mandate and the binding effect of the valuation rule.

Conclusion: The valuation had to be made on the break-up method under rule 10(2), not on the yield method. This issue was decided in favour of the Revenue.

Issue (ii): Whether a gift made with a right of revocation after a specified period was a valid gift under the Gift-tax Act, 1958.

Analysis: The Gift-tax Act contained a special provision for a gift that was not revocable for a specified period, and the corresponding rule provided for valuation on a capitalised basis. That special statutory scheme displaced the general law argument that a revocable gift is void. The Court further held that the mere fact that the gift structure was tax-effective did not make it invalid, so long as the arrangement remained within the letter of the law.

Conclusion: The revocable gift was valid and not void. This issue was decided in favour of the assessee.

Final Conclusion: The reference was answered by upholding the statutory break-up method for valuation while recognising the validity of the revocable gift, resulting in a mixed outcome.

Ratio Decidendi: Where a valuation rule prescribes a primary statutory method for determining the value of gifted shares, authorities must apply that method unless the valuation cannot be ascertained on that basis; a gift revocable after a specified period is not void merely because it is tax-advantageous if the statute expressly contemplates such a gift.

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