Valuation of transferred shares failed the investment-company test, so no deemed gift arose on the Revenue's basis.

Shares transferred for alleged inadequate consideration were not liable to deemed gift treatment because the transferee company did not meet the statutory test of an investment company. The valuation method under the Gift Tax and Wealth Tax schedules applied only where the company's gross total income consisted mainly of income from house property, capital gains, or income from other sources, and that precondition was not satisfied. The authorities therefore erred in using the investment-company valuation rule. Once that rule was excluded, the shares had to be valued on book value, which exceeded the declared transfer price, so no inadequate consideration arose and no deemed gift liability was attracted on the Revenue's basis.

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Issues: Whether the shares transferred by the assessee could be treated as transferred for inadequate consideration so as to attract deemed gift liability under the Gift Tax Act, and whether the transferee company satisfied the definition of an investment company for applying the valuation rules under the Wealth Tax Act.

Analysis: The applicable scheme required property transferred otherwise than for adequate consideration to be valued in the manner prescribed in Schedule II, and Rule 11 of the Second Schedule to the Gift Tax Act carried the valuation exercise to Rule 2(6) of Schedule III to the Wealth Tax Act, 1957 only where the company was in fact an investment company. On the facts found, the company did not satisfy the statutory preconditions for that classification, since its gross total income did not consist mainly of income from house property, capital gains or income from other sources. The authorities below therefore erred in applying the investment-company valuation method. Once that method was held inapplicable, the proper basis was the book value of the shares, which was higher than the declared transfer price of Rs. 10 per share, so no inadequate consideration arose.

Conclusion: The transfer did not give rise to a deemed gift on the basis adopted by the Revenue, and the assessee succeeded on the legal issue.

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