Bona fide share valuation cannot be replaced by a higher departmental method to infer a deemed gift

Where an assessee adopts a recognised and bona fide method of valuing shares, the tax authority cannot reject that method merely because an alternative valuation yields a higher figure. The Madras High Court noted that the declared share value had been computed under a prescribed method and that the mere availability of another approach did not justify substitution by the Gift-tax Officer. On those facts, the difference between the declared value and the higher departmental valuation could not be treated as a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958, and the reassessment was held unsustainable.

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Issues: Whether the reassessment could be sustained and the difference between the declared value of shares and an alternative higher valuation could be treated as a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958.

Analysis: The assessees had valued the shares by adopting a recognised method of valuation prescribed by the Central Board of Direct Taxes. The mere possibility of another method yielding a higher figure did not justify the Gift-tax Officer in substituting that method for the one lawfully adopted by the assessees. On those facts, the transaction remained bona fide and there was no basis to infer a deemed gift merely because the officer preferred a different valuation approach.

Conclusion: The reassessment was not sustainable and section 4(1)(a) of the Gift-tax Act, 1958 was not attracted. The finding was in favour of the assessees and against the Revenue.

Final Conclusion: The reference was answered by upholding the Tribunal's view that no deemed gift arose on the facts found and that the declared valuation could not be displaced by a different method chosen by the department.

Ratio Decidendi: Where an assessee adopts a recognised and bona fide method of valuation, the taxing authority cannot substitute another method merely because it produces a higher value and thereby treat the difference as a deemed gift.

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