Validity of gift of shares to minor upheld, minor represented by guardian, share transfer complete. GTO to use yield method for valuation.

The Tribunal upheld the validity of the gift of shares to a minor, ruling that the transaction was complete and valid as the minor was represented by his natural guardian. The Tribunal rejected the assessee's argument that the transaction was void ab initio due to the minor signing the share transfer form. Additionally, the Tribunal directed the GTO to value the shares using the yield method for gift-tax purposes, setting aside the AAC's direction to average the values obtained by different valuation methods.

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Issues Involved:
1. Validity of the gift of shares to a minor.
2. Method of valuation of shares for gift-tax purposes.

Issue-wise Detailed Analysis:

1. Validity of the Gift of Shares to a Minor:

The primary issue was whether the gift of 495 equity shares by the assessee to his minor son was valid. The assessee contended that the transaction was void ab initio because the minor son had signed the share transfer application form, which he is not legally permitted to do under Section 11 of the Indian Contract Act, 1872. The assessee argued that the transaction was invalid and no gift was involved, relying on the Andhra Pradesh High Court's decision in Smt. Valluri Janakamma v. CGT [1967] 66 ITR 255. The AAC rejected this contention, stating that the minor had received the gift of shares and that the transaction was valid as the minor was represented by his mother and natural guardian. The AAC also held that the transaction was not a contract but a gift, and there is no legal prohibition against a minor acquiring or holding shares in a joint stock company.

Upon appeal, the Tribunal upheld the AAC's decision, stating that the gift was complete and valid. The Tribunal noted that the donor, being the father and natural guardian, was competent to make the gift on behalf of the minor. The Tribunal also referenced the Rajasthan High Court's decision in Malu Khan Lalu Khan v. CIT [1986] 157 ITR 457, which dealt with the invalidity of a contract signed by a minor. However, the Tribunal distinguished this case, noting that the shares in question did not belong to a joint family and the donor was an individual. The Tribunal concluded that the gift was complete when the father delivered the share certificates and took possession as the natural guardian of the minor.

2. Method of Valuation of Shares for Gift-tax Purposes:

The second issue concerned the method of valuation of the shares for gift-tax purposes. The GTO had valued the shares based on the break-up value method according to Rule 10(2) of the Gift-tax Rules, 1958, resulting in a total gift value of Rs. 1,58,895. The assessee argued that the shares should be valued using the yield method, as per the Supreme Court's decision in CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38. The AAC partially accepted this contention and directed the GTO to take the average of the values obtained by both the break-up value method and the yield method.

The Tribunal found merit in the department's objection to the AAC's direction to average the values. It cited the Supreme Court's decision in Smt. Kusumben D. Mahadevia's case, which did not sanction combining the two methods. The Tribunal noted that Rule 10(2) should be applied only if the value of the shares is not ascertainable by reference to the value of the company's total assets. The Tribunal held that the yield method should be used for valuing the shares, as it is the proper method for unquoted equity shares. The Tribunal set aside the AAC's direction to average the values and remanded the case to the GTO to adopt the yield basis for valuing the shares after giving the assessee a reasonable opportunity to present his submissions.

Conclusion:

The Tribunal dismissed the assessee's appeal, upholding the validity of the gift of shares to the minor. The departmental appeal was allowed for statistical purposes, with the Tribunal directing the GTO to use the yield method for valuing the shares for gift-tax purposes.

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