Break-up value for unquoted gifted shares must use the latest balance-sheet available on the gift date.

For valuation of unquoted restricted shares gifted under the Gift-tax Act, the break-up value method must be based on the information ordinarily available to a hypothetical purchaser on the date of gift. Because the balance-sheet as on 31 March 1964 had not been available to ordinary shareholders on 17 October 1964, the earlier balance-sheet as on 31 March 1963 was the correct basis. Once that valuation was accepted, the Gift-tax Officer's addition under section 15(3) had no surviving foundation and was correctly deleted. The valuation issue and the resulting addition were thus resolved in favour of the assessee.

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Issues: (i) Whether, for valuing unquoted shares gifted on 17 October 1964, the break-up value method had to be worked out with reference to the balance-sheet as on 31 March 1963 or 31 March 1964. (ii) Whether the addition made by the Gift-tax Officer under section 15(3) of the Gift-tax Act, 1958, was rightly deleted on the assessee's valuation being accepted.

Issue (i): Whether, for valuing unquoted shares gifted on 17 October 1964, the break-up value method had to be worked out with reference to the balance-sheet as on 31 March 1963 or 31 March 1964.

Analysis: Under section 6 of the Gift-tax Act, 1958, the property gifted is 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, requires valuation of restricted private-company shares by reference to the value of the company's total assets. The governing principle is the information ordinarily available to a hypothetical purchaser on the valuation date. The later balance-sheet as on 31 March 1964 had not been made available to ordinary shareholders on 17 October 1964, whereas the balance-sheet as on 31 March 1963 was the latest available material.

Conclusion: The balance-sheet as on 31 March 1963 was the correct basis for valuation, and this issue is decided in favour of the assessee.

Issue (ii): Whether the addition made by the Gift-tax Officer under section 15(3) of the Gift-tax Act, 1958, was rightly deleted on the assessee's valuation being accepted.

Analysis: Once the correct valuation basis was held to be the 31 March 1963 balance-sheet and the assessee's returned valuation was accepted on that footing, the basis for the addition made by the Gift-tax Officer did not survive.

Conclusion: The deletion of the addition was correct and this issue is decided in favour of the assessee.

Final Conclusion: The reference was answered entirely in favour of the assessee, and the valuation of the gifted shares was required to be made on the break-up value basis with reference to the latest available balance-sheet on the gift date.

Ratio Decidendi: For valuation under the Gift-tax Act, unquoted restricted shares are to be priced on the basis of the information ordinarily available to a hypothetical purchaser on the date of gift, and a later balance-sheet not yet available on that date cannot be used.

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