Valuation of unquoted shares under Gift-Tax Act must follow gift-tax rules, not the Wealth-Tax Act method

Unquoted shares gifted under the Gift-Tax Act must be valued under the statutory gift-tax method, by reference to open market value or the prescribed rule for private company shares, and not by importing the Wealth-Tax Act concept of net wealth. An assessment based on the wealth-tax approach, including exclusion of items such as proposed dividend and tax provision on the footing that they are not deductible debts, is inconsistent with the gift-tax scheme and cannot be sustained. Where the assessment rests on a wrong legal standard and the valuation method is not clearly disclosed, writ jurisdiction may be invoked to quash the assessment and demand notice, with reassessment required in accordance with law.

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Issues: (i) Whether the value of unquoted shares gifted under the Gift-Tax Act could be determined by adopting the method used under the Wealth-Tax Act; (ii) Whether the assessment, made on that basis, could be quashed in writ jurisdiction.

Issue (i): Whether the value of unquoted shares gifted under the Gift-Tax Act could be determined by adopting the method used under the Wealth-Tax Act.

Analysis: The valuation provisions under the Gift-Tax Act required the shares to be valued at the price they would fetch in the open market, or in the prescribed manner where market valuation was not possible. The relevant rule for private company shares directed valuation by reference to the total assets of the company. The method followed by the assessing authority, however, treated the shares as if they were being valued under the Wealth-Tax Act and excluded items such as proposed dividend and provision for taxation on the footing that they were not deductible debts. That approach was inconsistent with the Gift-Tax Act because the gift-tax scheme turned on liabilities relevant to market valuation, whereas the wealth-tax scheme computed net wealth by deducting only debts owed. The two methods were not interchangeable.

Conclusion: The valuation was erroneous and could not be sustained.

Issue (ii): Whether the assessment, made on that basis, could be quashed in writ jurisdiction.

Analysis: An assessment made on a basis wholly unsupported by law offended the constitutional requirement that no tax be levied or collected except by authority of law. The assessment order did not disclose the method of valuation with sufficient clarity, and the later affidavit showed that the wrong legal standard had in fact been applied. In those circumstances, the petitioner was not confined to an appellate remedy and interference under writ jurisdiction was justified.

Conclusion: The assessment and demand notice were liable to be quashed, and the matter had to be reassessed according to law.

Final Conclusion: The gift-tax assessment was set aside and a fresh assessment was directed to be made after notice to the petitioner and in accordance with law.

Ratio Decidendi: Unquoted shares under the Gift-Tax Act must be valued under the statutory gift-tax method, and an assessment based on the different wealth-tax concept of net wealth is illegal and liable to be quashed.

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