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HIGH COURT OF CALCUTTA
R. S. BACHAWAT, K. MUKHERJEE
GIFT TAX OFFICER k WARD - Appellant
Versus
KASTUR CHAND JAIN - Respondent
A. F. O. O. 161 Of 1961
Decided On : MARCH 16, 1964
GIFT TAX - Valuation of shares in private company - Value of shares not ascertainable by reference to value of total assets of company - Valuation to be made by reference to break up value of company's assets as shown in its latest balance sheet - Gift Tax Officer erred in taxing artificial wealth of company computed under Section 2 (m) of Wealth Tax Act 1957 as basis of valuation - Item of provision for taxation was genuine pre-estimate of tax liability and no part of it was concealed reserve or surplus of company concerned - Item of proposed dividend was not liability of company on date of gift - Assessment order and notice of demand quashed and set aside.
Fact of the Case:
Respondent made a gift of shares in two private companies to his daughter. The Gift Tax Officer valued the shares at their face value, but the respondent challenged this valuation, arguing that the shares should be valued by reference to the break up value of the companies' assets. The Gift Tax Officer rejected this argument and issued a notice of demand for the gift tax. The respondent filed a writ petition in the High Court, which quashed the assessment order and the notice of demand.
Finding of the Court:
The High Court held that the Gift Tax Officer erred in valuing the shares at their face value. The court held that the shares should be valued by reference to the break up value of the companies' assets as shown in their latest balance sheet. The court also held that the Gift Tax Officer erred in taxing the artificial wealth of the companies computed under Section 2 (m) of the Wealth Tax Act 1957 as the basis of the valuation. The court further held that the item of provision for taxation was a genuine pre-estimate of the tax liability and no part of it was a concealed reserve or surplus of the company concerned. However, the court held that the item of proposed dividend was not a liability of the company on the date of the gift.
Issues: 1. Whether the shares should be valued at their face value or by reference to the break up value of the companies' assets. 2. Whether the Gift Tax Officer erred in taxing the artificial wealth of the companies computed under Section 2 (m) of the Wealth Tax Act 1957 as the basis of the valuation. 3. Whether the item of provision for taxation was a genuine pre-estimate of the tax liability. 4. Whether the item of proposed dividend was a liability of the company on the date of the gift.
Ratio Decidendi: 1. The value of shares in a private company should be determined by reference to the break up value of the company's assets as shown in its latest balance sheet, if the value of the shares is not ascertainable by reference to the value of the total assets of the company. 2. The Gift Tax Officer erred in taxing the artificial wealth of the companies computed under Section 2 (m) of the Wealth Tax Act 1957 as the basis of the valuation. 3. The item of provision for taxation was a genuine pre-estimate of the tax liability and no part of it was a concealed reserve or surplus of the company concerned. 4. The item of proposed dividend was not a liability of the company on the date of the gift.
Final Decision: The assessment order and the notice of demand were quashed and set aside.
( 1 ) ON or about August 8, 1957 the respondent made a gift of 250 ordinary shares of the face value of Rs. 100/- each in R. Mcdill and Co. (Private) Ltd. (hereafter referred to as the K. M. Company) and 100 ordinary shares of the face value of Rs. 100/- each in Misrilal Dharamchand (Private) Ltd. (hereafter referred to as the M. D. Company) to his daughter. On or about July 28, 1959 he submitted a voluntary return of the gift to the Gift Tax Officer valuing the shares at their face value of Rs. 35,000/ -. By his order dated February 24, 1960, the Gift Tax Officer rejected their valuation and acting under Section 15 (3) of the Gift Tax Act 1958 determined the total value of the shares to be Rs. 2,68,503/- and the gift tax to be Rs. 21020. 36. On April 19, 1960, the respondent was served with the notice of demand under Section 31 of the Act, On May 19, 1960 he obtained a rule calling upon the Gift Tax Officer and the other appellants to show cause why the order of assessment and the notice of demand should not be quashed and set aside by a writ in the nature of certiorari, and, why a writ in the nature of mandamus should not be issued directing them not to give effect to the same. On March 16, 1961, D. N. Sinha, J. made the rule absolute. The appeal raises questions as to the proper mode of valuation of the shares. Section 6 of the Gift Tax Act 1958 provides for the manner in which the value of gifts may be determined and is as follows: --"section 6. Value of gifts, how determined: (i) The value of any property other than cash transferred by way of gift, shall, subject to the provisions of Sub-sections (2) and (3), be estimated to be the price which in the opinion of the Gift Tax Officer it would fetch if sold in the open market on the date on which gift was made. (2) Where a person makes a gift which is not revocable for a specified period, the value of the property gifted shall be the capitalised value of the income from the property gifted during the period for which the gift is not revocable. (3) Where the value of any property cannot be estimated under Sub-section (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner. "the basic principle of valuation is embodied in Section 6 (1) of the Gift Tax Act, 1958 and in the corresponding Section 36 of the Estate Duty Act 1953 and Section 7 (i) of the Wealth Tax Act, 1957. The valuer has to find "the price which. . . . . it would fetch if sold in the open market. " The measure of value of the property is the price which the hypothetical buyer in an open market would pay for it.
( 2 ) THE machinery of Section 6 (1) does not exactly fit in a case where the property is of such a nature that it cannot be sold in the open market. But the existence of an open market is not the precondition of the liability for the tax and in the absence of a supplementary provision like Section 6 (3), the machinery of Section 6 (1) would have to be applied and an estimation of the value of the property would have to be made on general business lines on the basis of a hypothetical sale to a buyer in the open market Accordingly, under Section 7 (5) of the English Finance Act 1894 and in the absence of supplementary provisions corresponding to Section 6 (3) of the Gift Tax Act and Rule 10 (2) of the Gift Tax Rules, it was held that where the articles of association of a company contained restrictive provisions as to the alienation and transfer of the shares, the value of the shares for the purpose of estate duty was to be estimated at the price which they would fetch if sold in the open markets on the terms that the purchaser should be entitled to be registered as the holder of the shares subject to the articles including those relating to the alienation and transfer of shares in the company but the special value of the shares to special buyers should be disregarded. See Inland Revenue Commrs. v. Crossman, 1937 A. C. 26, Halsbury Third Editi
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