Statutory valuation of private company shares under gift tax rules prevails over a yield-only method.

Gifted cumulative redeemable preference shares of a private company were required to be valued under the statutory scheme in the Gift-tax Act and Rules. Section 6(1) adopts open-market value, while Section 6(3) applies where that value cannot be estimated because the property is not saleable in the open market, in which case the prescribed method must be used. Rule 10 governs valuation of shares in a private company with restrictive transfer provisions and directs valuation by reference to company assets, with the rule-based method prevailing over a yield-only approach. The valuation therefore had to follow Rule 10, and the yield method alone was rejected.

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Issues: Whether the cumulative redeemable preference shares of a private company gifted by the assessee were required to be valued under Rule 10 read with Section 6(3) of the Gift-tax Act, 1958, or could be valued on the yield method.

Analysis: Section 6(1) of the Gift-tax Act, 1958 provides that gifted property is ordinarily to be valued at the price it would fetch in the open market. Section 6(3) applies where such value cannot be estimated under Section 6(1) because the property is not saleable in the open market, in which event the value must be determined in the prescribed manner. The prescribed manner is supplied by the Gift-tax Rules, 1958. Rule 10 specifically deals with valuation of shares in a private company where the articles of association contain restrictive provisions on alienation. The rule contemplates valuation by reference to the value of the total assets of the company, and where that is not ascertainable, valuation by the open market method on the terms stated in the rule. The rule therefore provides the governing valuation framework and does not leave room for treating the yield method as the only basis of valuation.

Conclusion: The shares had to be valued in accordance with Rule 10 of the Gift-tax Rules, 1958, and not solely on the yield method. The answer was against the assessee and in favour of Revenue.

Final Conclusion: The reference was answered by holding that the statutory valuation scheme for the gifted shares controlled the assessment, and the Tribunal's view accepting the yield method alone was not sustained.

Ratio Decidendi: Where the statute and rules prescribe a specific valuation mechanism for gifted property, that mechanism must be followed and an alternative method such as yield valuation cannot replace it unless the prescribed method itself is unavailable.

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