Gift-tax valuation of private company shares must reflect open market value, with separate scrutiny of depreciation for transfer restrictions.

Gift-tax valuation of shares in a private limited company must start with the open market value on the date of the gift. Where that value cannot be directly ascertained, balance-sheet value may be used as a basis under Rule 10(2), but any depreciation for transfer restrictions must be separately examined on relevant materials. The Tribunal had not considered those factors and had accepted the figures without a reasoned inquiry, so the valuation question was remitted for fresh consideration in accordance with law.

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Issues: Whether the valuation of shares gifted in a private limited company had to be determined on the basis of the open market value on the date of gift, and whether depreciation could be applied to the balance-sheet value when the Tribunal had not examined all relevant factors.

Analysis: Section 6 of the Gift-tax Act requires the value of gifted property, other than cash, to be estimated at the price it would fetch in the open market on the date of the gift, and Rule 10(2) of the Gift-tax Rules, 1958 indicates the mode of valuing shares in a private company with restrictive transfer provisions. The proper approach is to first ascertain the market value, and if that cannot be done directly, to use the balance-sheet value as a basis, while separately considering whether depreciation is warranted because of restrictions on transferability. The Tribunal had not examined these questions on the relevant materials and had accepted the figures without addressing the claimed depreciation adjustments.

Conclusion: The referred questions were not answered on merits and the valuation issue was sent back to the Tribunal for fresh consideration in accordance with law.

Final Conclusion: The matter was remitted to the Tribunal for de novo disposal after notice to the parties, with costs left to be dealt with by the Tribunal.

Ratio Decidendi: Gift-tax valuation of shares must begin with the open market price on the date of gift, and where direct ascertainment is not possible, balance-sheet value may be used subject to a separate and reasoned consideration of any depreciation arising from transfer restrictions.

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