Break-up value method governs valuation of unquoted shares where transfer restrictions make the statutory rule mandatory.

Where unquoted shares are transferred in a company with restrictive articles of association, the statutory valuation rule requiring break-up value applies as the mandatory method under the Gift-tax Act and Rules. The Court treated the prescribed rule as part of the operative valuation scheme, supported by the rule-making power and parliamentary sanction, and held that the yield method could not displace it where no impracticability in applying the asset-based approach was shown. Later legislative incorporation of the same valuation method was treated as confirming that approach. The valuation therefore had to be made on break-up value basis, and the Tribunal was not justified in rejecting the Commissioner's view.

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Issues: Whether the market value of unquoted shares gifted in a company with restrictive articles of association was required to be determined on the break-up value basis under the valuation rules, or whether the yield method could be adopted instead.

Analysis: The valuation scheme under the Gift-tax Act and the Gift-tax Rules was held to make the prescribed method under rule 10(2) operative where the company's articles restricted transfer of shares. The rule was treated as a mandatory part of the statutory scheme, supported by the rule-making power under section 46 and by parliamentary sanction. The Court held that the yield method could not be preferred when the break-up value method was practicable and the case did not show any impracticability in applying the asset-based approach. The later legislative incorporation of the valuation method through the schedules was relied upon as confirming the intended statutory approach to unquoted shares.

Conclusion: The valuation had to be made on the break-up value basis under the applicable rule, and the Tribunal was not justified in rejecting the Commissioner's view. The answer to the reference was against the assessee and in favour of the Revenue.

Ratio Decidendi: Where the valuation rules prescribe break-up value for unquoted shares and no impracticability in applying that method is shown, the prescribed statutory method prevails over the yield method, especially where transfer restrictions in the articles of association attract the mandatory rule.

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