Private company share valuation must follow market-value and yield principles when break-up value is not commercially realistic.

Rule 10(2) of the Gift-tax Rules applies only where private company shares can be valued by reference to the company's total assets in a commercially realistic sense. Where transfer restrictions, non-marketability, and discounting mean that a balance-sheet based break-up computation does not reflect real value, the shares fall outside rule 10(2) and must be valued on market-value principles. For a going concern, the yield method is the governing approach recognised in Supreme Court valuation decisions. On the facts described, the break-up method was rejected, the yield or market-value basis was applied, and the appellate valuation was sustained while the departmental appeals failed.

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Issues: Whether, in valuing shares of a private company for gift-tax purposes, rule 10(2) of the Gift-tax Rules permitted adoption of the break-up method by reference to the total assets of the company, or whether the shares had to be valued on the basis of market value applying the yield principle.

Analysis: Rule 10(2) applies only where the value of the shares is ascertainable by reference to the value of the total assets of the company in a commercially realistic sense. A purely arithmetic computation from the balance-sheet does not satisfy that test where restrictions on transfer, non-marketability, and the need for discounting materially affect value. The wide divergence between the break-up value computed by the Gift-tax Officer and the value resulting even under the Wealth-tax Rules showed that the shares could not fairly be valued only by reference to total assets. In such a case, the matter falls outside rule 10(2), and the shares must be valued on market-value principles, for which the yield method laid down in the Supreme Court decisions governs the valuation of a going concern.

Conclusion: The break-up method was not applicable on the facts, and the shares had to be revalued on yield / market-value principles; the revenue's challenge failed.

Final Conclusion: The valuation adopted by the appellate authority was sustained, and the departmental appeals were rejected.

Ratio Decidendi: Rule 10(2) of the Gift-tax Rules applies only where valuation by reference to total assets yields a commercially realistic result; otherwise, private company shares must be valued on market-value principles, ordinarily by the yield method for a going concern.

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