Break-up value valuation of gifted shares follows the nearest balance-sheet date, while gratuity provision is deductible as an ascertained liability.

For valuing gifted shares under the break-up value method, the balance-sheet nearest to the date of gift governs the computation, so the later balance-sheet as on 31 March 1974 was preferred over the earlier one as on 31 March 1973. Provision for gratuity was treated as an ascertained liability and therefore deductible while arriving at total assets for break-up value; it could not be ignored as a contingent item. The valuation rule thus depends on the nearest relevant balance-sheet date, with gratuity provision allowed as a liability in the asset computation.

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Issues: (i) Whether, for valuing gifted shares under the break-up value method, the balance-sheet nearest to the date of gift or the earlier balance-sheet should be adopted. (ii) Whether provision for gratuity should be added back while arriving at the total assets for determining break-up value.

Issue (i): Whether, for valuing gifted shares under the break-up value method, the balance-sheet nearest to the date of gift or the earlier balance-sheet should be adopted.

Analysis: The applicable valuation principle is that the balance-sheet nearest to the date of gift is to be taken for computing the break-up value of shares. On the facts, the relevant balance-sheet was the one as on 31 March 1974, being nearer to the date of gift on 14 March 1974. The earlier balance-sheet as on 31 March 1973 could not be adopted for this purpose.

Conclusion: The issue is answered against the assessee and in favour of the Revenue.

Issue (ii): Whether provision for gratuity should be added back while arriving at the total assets for determining break-up value.

Analysis: Provision for gratuity was treated as an ascertained liability and, therefore, had to be reckoned in the computation of break-up value. It could not be ignored as a mere contingent item for valuation purposes.

Conclusion: The issue is answered in favour of the assessee and against the Revenue.

Final Conclusion: The valuation of the gifted shares must be worked out on the basis of the balance-sheet nearest to the date of gift, while provision for gratuity is deductible as an ascertained liability; the remaining questions were left unanswered as consequential to the first issue.

Ratio Decidendi: For valuation of gifted shares under the break-up value method, the balance-sheet nearest to the date of gift governs, and provision for gratuity constitutes an ascertained liability deductible in computing break-up value.

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