Gift-tax valuation of running company shares follows profit-earning method, and gift date is the effective transfer date.

For gift-tax valuation of shares in a running private company, the profit-earning method was applied instead of the break-up value method, and the Revenue's attempt to displace the governing Supreme Court approach was rejected. The gift date was taken as the date on which the assessee effected the transfer, not the later date when the transfer was entered in the company's books. Both points were decided in favour of the assessee, and the references were disposed of accordingly, with the remaining referred questions left unanswered.

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Issues: (i) Whether the value of shares of a running private company gifted by the assessee was to be determined by the break-up value method or the profit-earning method. (ii) Whether the gift of shares was to be treated as made on the earlier date of transfer by the assessee or on the later date when the transfer was recorded in the company's books.

Issue (i): Whether the value of shares of a running private company gifted by the assessee was to be determined by the break-up value method or the profit-earning method.

Analysis: The valuation question was examined with reference to section 6 of the Gift-tax Act and rule 10(2) of the Gift-tax Rules, 1958. The Court held that the Supreme Court decision governing such shares had rejected the break-up value approach for a running concern and had accepted the profit-earning method as the proper basis. The Revenue's attempt to treat that decision as per incuriam was rejected.

Conclusion: The valuation was required to be made by the profit-earning method, and the Tribunal was wrong in insisting on the break-up value method. This issue was decided in favour of the assessee.

Issue (ii): Whether the gift of shares was to be treated as made on the earlier date of transfer by the assessee or on the later date when the transfer was recorded in the company's books.

Analysis: The date of gift was accepted as the date on which the assessee effected the transfer, and not the later bookkeeping entry date. The Tribunal's finding on that factual and legal aspect was upheld.

Conclusion: The gift was treated as having been made on April 28, 1976, and not on December 28, 1976. This issue was decided in favour of the assessee.

Final Conclusion: The references were disposed of by answering the substantive valuation question and the transfer-date question in favour of the assessee, while leaving the remaining referred questions unanswered.

Ratio Decidendi: For gift-tax valuation of shares in a running private company, the profit-earning method prevails over the break-up value method, and the operative date of gift is the date when the transfer is effectuated, not the later date of recording in the books.

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