Freely transferable shares are valued on yield basis, not break-up value, when no transfer restriction exists under gift-tax rules.

Shares were treated as freely transferable where the articles of association imposed no restriction on transfer, though they limited membership to 50 and restricted public issue. For gift-tax valuation, the normal fair market value method in such a case was the yield method, and rule 10(2) of the Gift-tax Rules, 1958 did not support use of the break-up value method because the relevant transfer restriction was absent. The article's position is that, on these facts, valuation of shares for gift-tax purposes should follow yield basis rather than break-up value basis.

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Issues: Whether the shares of the company were freely transferable so that their value had to be determined on yield basis and not by the break-up value method under the applicable gift-tax rules.

Analysis: The reference concerned valuation of shares for gift-tax purposes for the assessment year 1979-80. The articles of association did not impose any restriction on transfer of shares; they only limited membership to 50 and restricted public issue of shares. In such a situation, the shares remained freely transferable. The normal method for determining fair market value was therefore the yield method, and rule 10(2) of the Gift-tax Rules, 1958, did not justify adoption of the break-up value method because the restriction contemplated by that rule was absent.

Conclusion: The shares were freely transferable and their value was correctly determined on yield basis. The questions were answered in favour of the assessee.

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