Profit-earning method governs valuation of unquoted going-concern shares; unargued rule-based contention was not referable.

For unquoted shares of a private limited company that remains a going concern, the ordinary valuation basis is the profit-earning or yield method; the break-up method applies only in exceptional situations such as winding up or inability to estimate profits. Asset backing in an investment company may inform estimation of earning capacity, but it does not justify a blended yield and break-up approach, which was said to have no judicial or scientific sanction. A further contention based on rule 10(2) of the Gift-tax Rules, 1958 was not referable because it had neither been raised before nor decided by the Tribunal.

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Issues: (i) Whether the shares of a private limited investment company which is a going concern were to be valued by the profit-earning method or by the break-up method, and whether the question was already concluded by the earlier valuation principles; (ii) Whether the alternative contention based on rule 10(2) of the Gift-tax Rules, 1958 could be required to be referred when it had not been raised before the Tribunal.

Issue (i): Whether the shares of a private limited investment company which is a going concern were to be valued by the profit-earning method or by the break-up method, and whether the question was already concluded by the earlier valuation principles.

Analysis: The valuation principles earlier laid down for shares of unquoted private companies treat the profit-earning or yield method as the general rule for a going concern. The break-up method is confined to exceptional situations, such as where the company is ripe for winding up or where profits cannot be reasonably estimated. In the case before the Court, the company was an investment company but remained a going concern, and no exceptional circumstance justified departure from the profit-earning method. The observation that asset-backing may be relevant in special cases of investment companies was understood as relevant only to estimating profit-earning capacity, not as authorising valuation of shares by a combination of the yield and break-up methods. A blended mean of the two methods was held to have no judicial or scientific sanction.

Conclusion: The proper method was the profit-earning method, and the Tribunal was right in adopting that method and in refusing reference on that point. The assessee succeeded on this issue.

Issue (ii): Whether the alternative contention based on rule 10(2) of the Gift-tax Rules, 1958 could be required to be referred when it had not been raised before the Tribunal.

Analysis: A question of law can arise out of the Tribunal's order only if it was dealt with by the Tribunal or was raised before it though not decided. The contention founded on rule 10(2) was neither urged before the Tribunal nor considered by it, and the Tribunal had no occasion to decide whether that rule displaced the profit-earning method. Such a new question could not be forced into reference proceedings merely because it might arguably arise on the facts.

Conclusion: The contention was not referable to the High Court. The assessee succeeded on this issue as well.

Final Conclusion: The appeals failed because the valuation dispute was concluded in favour of the profit-earning method for these shares, and no additional referable question arose on the unargued rule-based contention.

Ratio Decidendi: For unquoted shares of a private limited company that is a going concern, the valuation is ordinarily determined by the profit-earning or yield method, while the break-up method applies only in exceptional cases such as liquidation or inability to estimate profits; a question not raised before and not decided by the Tribunal does not arise out of its order for reference.

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