Profit-earning valuation of unquoted shares prevails over break-up value where market quotations are unavailable and profits are substantial.

Unquoted shares in a closely held company were to be valued for gift-tax purposes on the profit-earning basis, not on break-up value, where market quotations were unavailable and dividends did not reflect true earning capacity. The Tribunal applied the Supreme Court's approach that maintainable profits provide the proper valuation method in such cases. On the facts, the company's financial statements showed substantial profits, so the lower authority's break-up valuation could not stand. The matter was remitted for fresh valuation on maintainable profits, with a proper opportunity of hearing to the assessee before any reassessment that could increase the valuation.

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Issues: Whether the value of unquoted shares gifted in a closely-held public limited company was to be determined on the break-up value method or on the profit-earning method for gift-tax purposes.

Analysis: The shares were unquoted and the company, though public limited, was closely held. The Tribunal held that the governing principle was the Supreme Court's approach that where market quotation is unavailable, valuation should ordinarily be made on the profit-earning basis, taking maintainable profits and, where dividends do not reflect true earning capacity, rejecting the dividend method in favour of a profits-based valuation. On the facts, the financial statements indicated substantial profits and the earlier valuation on break-up basis could not be sustained. Since a reassessment on maintainable profits could result in enhancement, an opportunity of hearing was required before completing the fresh assessment.

Conclusion: The break-up value adopted by the lower authority was set aside and the matter was remitted to the Gift-tax Officer to value the shares on the basis of maintainable profits after granting proper opportunity to the assessee.

Ratio Decidendi: Unquoted shares in a closely-held company are to be valued on the profit-earning basis where market quotations are unavailable and dividends do not correctly reflect earning capacity.

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