Gift-tax share valuation must use the profit-earning method for a going private company; break-up valuation is inapplicable.

Shares in a private limited company that is a going concern and subject to transfer restrictions are to be valued for gift-tax purposes on the open-market basis under section 6(1), using the profit-earning method. The break-up method is not appropriate where the company is neither ripe for liquidation nor affected by exceptional circumstances. In that setting, section 6(3) and rule 10(2) do not justify substituting break-up valuation for the profit-earning basis. The stated principle is that valuation must reflect a hypothetical willing buyer and seller in an open market.

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Issues: Whether the shares of a private limited company which is a going concern and subject to transfer restrictions are to be valued for gift-tax purposes under the profit-earning method under section 6(1) of the Gift-tax Act, or whether section 6(3) and rule 10(2) of the Gift-tax Rules, 1958, permit valuation by the break-up method.

Analysis: The valuation of shares for gift-tax follows the open-market price under section 6(1), and the expression contemplates a hypothetical market and a willing buyer and seller. The Supreme Court authority applied in the judgment had already held that, for shares in a private limited company which is a going concern and is neither ripe for liquidation nor affected by exceptional circumstances, the break-up method is not appropriate and the proper basis is the profit-earning method. The earlier decision also bound the revenue authorities on the method of valuation and ruled out any other method for such shares. In that setting, section 6(3) and rule 10(2) had no application to substitute the break-up method for the profit-earning basis.

Conclusion: The shares had to be valued under section 6(1) by the profit-earning method, and the revenue authorities could not apply section 6(3) or rule 10(2) to adopt the break-up method.

Ratio Decidendi: Shares of a private limited company which is a going concern and not ripe for liquidation must be valued for gift-tax purposes on the profit-earning basis under the open-market standard, and the break-up method is inapplicable absent exceptional circumstances.

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