Profit-earning method governs valuation of unquoted shares; break-up value is not the proper test.

Unquoted shares in a private company are ordinarily to be valued for gift-tax purposes by the profit-earning method, because their real worth depends on earning capacity rather than liquidation value. The break-up value method is not the correct rule for such shares, and balance-sheet figures alone do not state the proper legal standard. Parties cannot agree to a valuation basis that departs from the governing principle. The High Court's adoption of the break-up value approach was therefore incorrect in law, although the valuation already made was left undisturbed and the assessed value was not altered.

---

---

Issues: The correct principle for valuing unquoted shares of a company not listed on a stock exchange for gift-tax purposes, and whether the valuation made on the break-up value method could be sustained.

Analysis: The applicable principle for valuing shares of a private or unquoted company is the profit-earning method, since the real value depends on the company's capacity to earn profits rather than on liquidation value alone. The break-up value method is not the proper rule where the shares are not quoted, and reliance on balance-sheet values alone does not reflect the correct legal standard. The parties cannot, by agreement, displace the correct legal principle where the law requires valuation on a different basis. The valuation of the shares had therefore been made on an unsound legal foundation.

Conclusion: The valuation principle adopted by the High Court was incorrect in law, and the correct basis was the profit-earning method; however, the valuation already made was left undisturbed, so the appeal did not result in alteration of the assessed value.

Ratio Decidendi: Unquoted shares in a private or similar company must ordinarily be valued by the profit-earning method based on average maintainable profits, and not by the break-up value method.

---