Share valuation must reflect transfer restrictions and marketability; break-up value may be discounted rather than applied mechanically.

Under the gift-tax share valuation principles discussed, restrictive transfer clauses in a private company justify a discount from break-up value because marketability is reduced and break-up value should not be applied mechanically. For a public company, a genuine free-market sale price may be relevant, but valuation still must reflect market factors and may also require a discount from break-up value rather than treating it as conclusive without adjustment. The note states that a 25% discount was sustained for the private company shares, while a 15% reduction from break-up value was applied for the public company shares, leading to recomputation of the share values.

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Issues: (i) Whether, for valuation of shares in a private company with restrictive transfer clauses, the break-up value could be reduced by a discount for lack of free transferability; and (ii) whether, for valuation of shares of a public company, the prior free-market sale price or the break-up value with an appropriate discount should govern.

Issue (i): Whether, for valuation of shares in a private company with restrictive transfer clauses, the break-up value could be reduced by a discount for lack of free transferability.

Analysis: The shares of the private company were subject to restrictive provisions in the articles, affecting transferability and marketability. In such a case, the open market value is not to be equated mechanically with the arithmetical break-up value. A buyer would take the restrictions into account, and the value derived from the break-up method must be appropriately depressed to reflect that feature.

Conclusion: Yes. A discount of 25 per cent on the break-up value was justified and sustained.

Issue (ii): Whether, for valuation of shares of a public company, the prior free-market sale price or the break-up value with an appropriate discount should govern.

Analysis: The company was not private, so the restrictive-transfer rule did not apply. A genuine free-market sale price existed and could be used as a relevant indicator of market value, but the absence of contemporaneous sales and the use of break-up value did not warrant refusing any discount at all. In the circumstances, a moderate discount from the break-up value was appropriate, while the contention that no discount should be allowed was rejected.

Conclusion: The valuation was to be taken at the break-up value reduced by 15 per cent, yielding the revised per-share figure directed by the Tribunal.

Final Conclusion: The Revenue's challenge to the assessee-friendly valuation was not accepted, and the share values were to be recomputed on the basis indicated by the Tribunal.

Ratio Decidendi: For share valuation under the gift-tax regime, restrictive transfer clauses justify discounting break-up value to reflect reduced marketability, and where a free-market sale price exists, valuation must still account for relevant market factors rather than applying break-up value mechanically without discount.

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