Valuation of unquoted shares: profit-earning method applies for a going concern, not the break-up method.

Unquoted equity shares of a going concern are to be valued on recognised valuation principles, and the break-up method is not appropriate where there is no indication of winding up. The Court relied on Supreme Court authorities to hold that the profit-earning method was the proper basis in such circumstances, and that the mere existence of rule 1D in the Wealth-tax Rules did not displace that approach for Gift-tax valuation. On the facts, rule 1D was not the correct guide and the shares had to be valued by the profit-earning method.

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Issues: Whether, in the absence of any specific rule under the Gift-tax Act for valuing unquoted equity shares, rule 1D of the Wealth-tax Rules, 1957, could be used as a guide for determining the market value of the gifted shares.

Analysis: The valuation of unquoted shares has to be made on recognised principles. Where the company is a going concern and there is no indication that it is likely to be wound up, the break-up method is not the proper basis for valuation. The Supreme Court authorities relied upon by the Court support application of the profit-earning method in such a case, and the mere presence of rule 1D in the Wealth-tax Rules does not displace that principle for a going concern.

Conclusion: Rule 1D was not the appropriate guide on the facts, and the shares were required to be valued by the profit-earning method. The question was answered in the affirmative and in favour of the assessee.

Ratio Decidendi: Unquoted shares of a company that is a going concern are to be valued on the profit-earning method rather than the break-up method, and rule 1D of the Wealth-tax Rules does not govern such valuation where that method is inapplicable on settled principles.

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