Gift-tax valuation of unquoted shares must follow a recognised open-market method, not an arbitrary reduction.

For gift-tax valuation of unquoted shares, the open market value on the date of gift must be determined by a recognised method. In the absence of a specific Gift-tax Act rule, the valuation approach in rule 1D of the Wealth-tax Rules, 1957 was treated as the proper guide. The Kerala HC held that the Tribunal could not depart from that settled method and substitute an arbitrary figure based on proposed legislation or assumed market impact. The reduction of the gifted shares to Rs. 30 per share was therefore unjustified, and the valuation based on Rs. 40.25 per share was upheld.

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Issues: Whether the Tribunal was justified in reducing the value of the gifted unquoted shares to Rs. 30 per share instead of adopting the valuation of Rs. 40.25 per share arrived at in accordance with rule 1D of the Wealth-tax Rules, 1957.

Analysis: The value of gifted property under section 6 of the Gift-tax Act, 1958 has to be estimated on the basis of the price it would fetch in the open market on the date of the gift. In the absence of a specific rule under the Gift-tax Act for valuing unquoted shares, the valuation principle embodied in rule 1D of the Wealth-tax Rules, 1957 was treated as the proper guide. The Tribunal was not entitled to depart from that recognised method and fix the value on an arbitrary basis by relying on the proposed legislation and its assumed impact on share value. The Court applied the accepted valuation approach for unquoted shares and held that the Tribunal had no discretion to substitute an unsupported figure.

Conclusion: The reduction to Rs. 30 per share was unjustified. The answer to question No. 6 was in the negative, in favour of the Revenue and against the assessee.

Ratio Decidendi: In valuing unquoted shares for gift-tax purposes, the open market value must be determined by a recognised valuation method, and the authority cannot fix an arbitrary figure when a settled statutory valuation principle is available.

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