Valuation of unquoted private company shares under gift-tax law ordinarily follows the profit earning or yield method, not break-up value.

Valuation of gifted unquoted shares of a private company under the Gift-tax Act turns on the open-market price principle under section 6, with the prescribed method in section 6(3) and rule 10 applying only where direct market valuation is not feasible. For a going concern not ripe for liquidation, the profit earning or yield method is ordinarily the recognised basis, while the break-up value method is reserved for exceptional cases. Rule 10(2) does not make break-up valuation mandatory for such shares, and the authorities cited by the Revenue did not displace the Supreme Court guidance favouring yield valuation on these facts.

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Issues: Whether the unquoted shares of a private limited company gifted by the assessee were to be valued under the profit earning or yield method, or under the break-up value method under rule 10(2) of the Gift-tax Rules.

Analysis: The valuation of gifted property under section 6 of the Gift-tax Act first requires estimation of the price the property would fetch in the open market. The prescribed manner under section 6(3) and rule 10 applies only when valuation under section 6(1) is not possible. For unquoted shares of a private company that is a going concern and not ripe for liquidation, the recognised method is ordinarily the profit earning or yield method, while the break-up method is attracted only in exceptional situations. The Tribunal held that rule 10(2) does not make the break-up method the exclusive or mandatory basis for valuing such shares, and that the authorities relied on by the Revenue did not displace the Supreme Court guidance favouring the yield method in the facts of the case.

Conclusion: The shares were correctly directed to be valued on the profit earning or yield method, and not on the break-up value method; the Revenue's contention failed.

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