Gift-tax valuation of unquoted shares must follow market value principles; goodwill cannot be added to inflate the deemed gift figure.

Transfer of shares at Rs. 200 per share was examined for deemed gift treatment under the Gift-tax Act. The Tribunal treated the valuation provisions across the income-tax, wealth-tax, gift-tax and estate duty statutes as part of an integrated scheme based on market value, and held that the open market value already accepted in the wealth-tax context could not be disregarded for gift-tax valuation. It also held that unquoted equity shares were to be valued by the profit-earning method and that goodwill could not be added under the relevant gift-tax rule. On those facts, no deemed gift arose and the higher valuation adopted by the Gift-tax authorities was unsustainable.

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Issues: Whether the transfer of shares for Rs. 200 per share gave rise to a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958, and whether the value adopted by the Gift-tax authorities by applying section 6(3) of the Gift-tax Act, 1958 read with Rule 10(2) of the Gift-tax Rules, 1958, including goodwill, could be sustained.

Analysis: The transfer was of shares that had already been accepted at the same value in the income-tax assessment and in the wealth-tax assessments of the transferees. The relevant valuation provisions under the Income-tax Act, the Wealth-tax Act, the Gift-tax Act and the Estate Duty Act were treated as part of an integrated scheme requiring valuation on market value basis. The open market value of the shares, as accepted under the wealth-tax valuation method, could not be ignored for gift-tax purposes so as to adopt a different and higher figure. The Tribunal also noted that the correct method for valuing such shares was the profit-earning method and that goodwill could not be added while valuing unquoted equity shares under the relevant gift-tax rule.

Conclusion: No deemed gift arose on the facts, and the higher valuation adopted by the Gift-tax authorities was unsustainable; the assessee succeeded.

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