1987 (2) TMI 131 - AT - Income Tax

Valuation of Unquoted Shares: Yield Method Over Break-up Value for Gift Tax

The ITAT held that unquoted shares of companies should be valued on the yield method for gift-tax purposes, as they were going concerns not ripe for ... Valuation Of Gift, Unquoted Shares Issues: Valuation of unquoted shares for gift-tax purposes - Whether shares should be valued on yield basis or break-up value method.Analysis:1. The case involved the valuation of unquoted shares of two companies for gift-tax purposes. The assessee had gifted shares of these companies, which were not quoted on the stock exchange, to different persons during the relevant accounting year.2. The Gift-tax Officer had initially valued the shares on a yield basis, which was challenged by the assessee before the Commissioner (Appeals). The Commissioner directed the GTO to recompute the value of the gifted shares on the break-up value method.3. The Revenue appealed contending that the shares should be valued on a yield basis, citing the decision of the Supreme Court in CGT v. Smt. Kusumben D. Mahadevia and the Bombay High Court decision in Seth Hemant Bhagubhai Mafatlal v. N. Rama Iyer, GTO.4. The assessee argued that under the provisions of the Gift-tax Act, valuation of assets should be made under section 6, and Rule 10(2) of the GT Rules prescribed that the break-up method should be adopted for valuation in the case of a private limited company.5. After considering the submissions, the ITAT held that the Commissioner (Appeals) was not correct in directing the GTO to recompute the value of shares on the break-up value method. The ITAT referred to various judgments including CWT v. Mahadeo Jalan and Smt. Kusumben D. Mahadevia, emphasizing that the profit-earning capacity of a company should determine the value of its shares, especially for a going concern not ripe for liquidation.6. The ITAT concluded that the unquoted shares of the companies in question should be valued only on the yield method, as they were going concerns not ripe for liquidation, and there were no exceptional circumstances warranting the use of the break-up method. The ITAT reversed the Commissioner's decision and restored the GTO's orders, with a direction to verify the correctness of the valuation of shares of one of the companies.7. The ITAT highlighted that the decisions cited by the assessee did not support the application of the break-up method in this case, as they did not deal with the specific issue of valuing shares of a going concern not ripe for liquidation. The ITAT allowed the appeals subject to the above directions.This detailed analysis provides a comprehensive overview of the judgment, including the arguments presented by both parties, the legal principles applied by the ITAT, and the final decision reached regarding the valuation of unquoted shares for gift-tax purposes.