Goodwill valuation in estate duty share pricing must follow super-profits method, and proposed dividends are not deductible.

In valuing unquoted shares on a break-up basis for estate duty, goodwill must be treated as a company asset and valued by the capitalisation of super-profits method, not reduced merely because the deceased held only a minority interest. The valuation concerns the goodwill of the company itself, and the Appellate Controller's approach was upheld while the Tribunal's reduction was rejected. A proposed dividend shown in the balance-sheet is not deductible in computing the break-up value of the shares, because it does not reduce the company's assets for valuation purposes. The reference was answered against the accountable person and in favour of the Revenue.

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Issues: (i) Whether, in valuing unquoted shares for estate duty purposes, the goodwill of the company had to be valued by the super-profits method at four years' purchase or at a lower figure. (ii) Whether the proposed dividend shown in the balance-sheet was deductible in computing the break-up value of the shares.

Issue (i): Whether, in valuing unquoted shares for estate duty purposes, the goodwill of the company had to be valued by the super-profits method at four years' purchase or at a lower figure.

Analysis: Goodwill is an asset of the company and, for valuation of shares on break-up basis, its value has to be taken into account. The accepted method for valuing goodwill in such a case is the capitalisation of super-profits method. The reduction made by the Tribunal on the ground that the deceased held only a minority interest was erroneous, because the valuation concerned the goodwill of the company itself and not the personal value of that goodwill to the deceased shareholder. On the facts, the Assistant Controller adopted the correct principle in valuing goodwill by reference to super-profits and the Appellate Controller was justified in granting limited relief.

Conclusion: The Tribunal was not justified in reducing the goodwill to Rs. 50,000; the valuation adopted by the Appellate Controller was correct and was in favour of the Revenue.

Issue (ii): Whether the proposed dividend shown in the balance-sheet was deductible in computing the break-up value of the shares.

Analysis: A proposed dividend is not an allowable deduction in arriving at the break-up value of shares for estate duty purposes. The issue was covered by the binding view that such a provision does not reduce the assets for valuation of the shares.

Conclusion: The proposed dividend of Rs. 74,740 was not deductible and the Tribunal was not justified in allowing it as a deduction; this issue was also in favour of the Revenue.

Final Conclusion: The reference failed and the Tribunal's valuation was set aside to the extent it had reduced the goodwill and allowed the proposed dividend deduction, with the answer returned against the accountable person.

Ratio Decidendi: In valuing unquoted shares on a break-up basis for estate duty, goodwill of the company must be valued as a company asset by the super-profits method, and a proposed dividend shown in the balance-sheet is not deductible from assets.

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