As per case facts, the dispute arose concerning the valuation of unquoted shares transferred for the assessment year 1973-74. Both the tax department and the assessee agreed on the break-up ...
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PETITIONER:
S. VIJI
Vs.
RESPONDENT:
COMMISSIONER OF GIFT TAX
DATE OF JUDGMENT: 02/12/1997
BENCH:
SUHAS C. SEN, V.N. KHARE
ACT:
HEADNOTE:
JUDGMENT:
THE 2ND DAY OF DECEMBER, 1997
Present:
Hon'ble Mr. Justice Sushas C.Sen
Hon'ble Mr.Justice V.N. Khare
A.T.M.Sampath and S.Balaji, Advs. for the appellant
Ranbir Chandra, Hemant Sharma and B.K. Prasad, Advs. for the
Respondent
J U D G M E N T
The following Judgment of the Court was delivered:
SEN, J
The following question of law was referred by the
Tribunal to the High Court under Section 26(1) of the Gift
Tax Act, 1958.
"Whether, on the facts and in the
circumstances of the case, the
Balance sheet figures as on
31.3.1972 should be taken for
ascertaining the break-up value of
the shares gifted and not the
balance sheet figures as on
31.3.1973?"
The assessment year involved in 1973-74. The dispute
relates to valuation of quoted shares of a Company which
were transferred on 28.3.1973. Section 6 of the Gift Tax Act
lays down the method of valuation of gifts. Sub-section (3)
provides that where the value of the property cannot be
estimated because it is not saleable in the open market, the
value shall be determined in the prescribed manner. There
is no dispute that the shares are unquoted and are not
saleable in the market. There was a restriction on the sale
of shares in the market by the Articles of Association of
the Company. Both the department and the assessee agree
that the valuation should be made by following the break-up
method. The dispute, however, is as to the balance sheet on
the basis of which the break-up value will have to be
calculated.
The case of the assessee s that these shares must be
valued by referring to the balance sheet figures of the
Company as on 31.3.1972 which was the latest available
balance sheet on the date of the transfer of shares. There
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is no question of referring to a balance sheet which was not
even in existence on the date of making of the gift. The
department has taken the stand that the valuation must be
made with reference to the balance sheet figures as on
31.3.1973 which was the closest proximate date from the date
of making of the gift. There is no dispute that break-up
method of valuation must be followed. If that be so, the
only available balance sheet figure as on 28.3.1973 was the
latest published balance sheet for the year ended on
31.3.1972.
We are unable to uphold the assessee's contention. The
Gift Tax Officer has to find out the correct value of the
shares as on the date of the gift. The gift was made only
three days before the financial year ending on 31.3.1973.
The balance sheet as on 31.3.1973 will give a more realistic
picture of the value of the assets of the Company than the
balance sheet as on 31.3.1972. Therefore, for calculating
the break-up value of the shares, the balance sheet figures
as on 31.3.1973 would be more relevant. The contention made
on behalf of the assessee, if upheld, would lead to absurd
result. If the gift was made on 28.3.,1973 the value will
have to be computed in accordance with the balance sheet
figures as on 31.3.72. But if the gift was made three days
later on 31.3.73 the valuation made on the basis of balance
sheet as on 31.3.73 may be much higher even though there is
no change in the value of the assets of the Company between
28.3.73 and 31.3.73. there is no justification for coming
to this conclusion. The break-up value method is adopted to
find out the correct value of the shares on the date of the
gift. The figures of the balance sheet of the year ended on
31.3.1973 will give a more realistic picture of the value of
the assets of the Company than the figures as on 31.3.1972.
Our attention was drawn to a decision of the Madras
High Court in the case of Commissioner of Gift Tax v. K
Ramesh, 141 ITR 462. In that case, a gift was made on
28.3.1972. The Tribunal held that as the gift had taken
place before the balance sheet as on 31.3.1972, the break-up
value should be calculated with reference to the last
balance sheet of the Company before the date of the gift
which was of the year ending on 31.3.1971. The High Court
held that though the balance sheet as on 31.3.1972 was
subsequent to the date of the gift, it could not be
disregarded because it was not so far removed from the date
of the gift and there may have been several developments
affecting the net-worth of the Company and thereby affecting
the value of the individual shares between the two balance
sheets as on 31.3.1971 and 31.3.1972. The Tribunal was, not
therefore, justified in ignoring or disregarding the balance
sheet as on 31.3.1972. The High Court held that if anything
had happened to the assets and liabilities of the Company
between 28.3.1972 and 31.3.1972, that could also taken into
consideration by the Tribunal. The Tribunal was directed to
re-examine the question in that light again.
We are in agreement with his approach of the Madras
High Court., In the instant case, the balance sheet figures
as on 31.3.1972 give the picture of the value of the various
assets of the Company upto that date. The Company may have
increased. It is also possible that during that period the
fortune of the Company languished and the value of its
assets had decreased. In either event, when a valuation of
shares is to be made as on 28.3.1973, it will be unrealistic
to ignore the balance sheet for the year ended on 31.3.1973.
The assessee, of curse, is entitled to point out that
between 28.3.1973 and 31.3.1973, the value of the assets of
the Company has increased. If so, such variation in the
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value of the assets will have to be ignored. But the basis
of the valuation will have to be the balance sheet as on
31.3.1973.
We were also referred to another judgment of the Madras
High Court in the case of Commissioner of Wealth Tax and
Others v. S.Ram and Others, 147 ITR 278 where it was held:
"In cases where gift of unquoted
shares has been made during the
accounting year of the company, the
true principle of valuation of such
unquoted shares is that if it were
possible to draw a precise balance-
sheet as on the date of the gift,
that would afford quite an accurate
basis and an ideal solution. But
in the absence of the facility of
drawing up a balance sheet
precisely on the date of the gift,
the next best thing would be to
take two of the balance sheets
falling both before and after the
date of the gift and arrive, as
near as may be, at the break-up
value of the assets and liabilities
of the company as on the date of
the gift, either on a time basis or
on some other basis".
But in this case, the balance sheet as on 31.3.1973 was
available to the Gift Tax Officer when he made the valuation
of unquoted shares. It was not difficult to get a precise
picture of the value of the shares as on 28.3.1973 from this
balance sheet.
We were referred to a large number of decisions, but it
is not necessary to specifically deal with all of them.
We are of the view having regard to the fact that the
gift was made on the verge of the close of the accounting
year ending on 31.3.73 the balance sheet as on 31.3.1973
should be taken as the basis for ascertaining the break-up
value of the shares as on 28.3.1973. However, suitable
adjustments will have to be made if there has been any
variation in the value of the assets of the Company between
28.3.1973 and 31.3.1973. That, however, is not the case of
the assessee. Under these circumstances, the judgment under
appeal is upheld. The appeal is dismissed. There will be
no order as to costs.
The landmark Supreme Court judgment in **S. Viji vs. Commissioner of Gift Tax**, dated December 2, 1997, sets a crucial precedent for **Gift Tax Valuation** and **Unquoted Share Valuation**. This significant ruling, available on CaseOn, delves into the intricacies of determining the fair market value of shares for gift tax purposes, particularly when such shares are not traded in the open market.
The core legal question presented to the Supreme Court by the Tribunal, under Section 26(1) of the Gift Tax Act, 1958, was:
"Whether, on the facts and in the circumstances of the case, the Balance sheet figures as on 31.3.1972 should be taken for ascertaining the break-up value of the shares gifted and not the balance sheet figures as on 31.3.1973?"
The case pertained to the assessment year 1973-74, involving the valuation of unquoted shares of a company that were transferred on March 28, 1973. Both the assessee and the department agreed that the 'break-up value method' was the appropriate approach for valuation, as the shares were unquoted and not saleable in the open market due to restrictions in the company's Articles of Association.
Section 6 of the Gift Tax Act, 1958, governs the method of valuing gifts. Specifically, Sub-section (3) states that if the value of the property cannot be estimated because it is not saleable in the open market, its value shall be determined "in the prescribed manner." In cases of unquoted shares, the break-up value method is commonly adopted.
The break-up value method involves assessing the net worth of a company by valuing its assets and liabilities, and then dividing this net worth by the number of outstanding shares to determine the value per share. The dispute here wasn't about the method itself, but about which balance sheet date should form the basis for this calculation.
The assessee argued that the valuation should be based on the balance sheet figures as of March 31, 1972. Their reasoning was that this was the latest available balance sheet on the date the shares were transferred (March 28, 1973). They contended that a balance sheet not yet in existence on the date of the gift should not be considered.
The department, supported by the Supreme Court, took the position that the valuation must refer to the balance sheet figures as of March 31, 1973. The Court emphasized that the goal is to ascertain the *correct value of the shares on the date of the gift*. Since the gift was made only three days before the financial year ending on March 31, 1973, the balance sheet from that date would offer a "more realistic picture" of the company's asset value than the one from March 31, 1972.
The Court highlighted the absurdity of the assessee's contention, stating that if the gift was made on March 28, 1973, using the 1972 balance sheet, but if made three days later on March 31, 1973, using the 1973 balance sheet, there could be a significant and unjustified difference in valuation despite no substantial change in assets during those few days. The Court clarified that the break-up value method aims to find the *correct* value on the gift date, and the 1973 figures, being so proximate, were more appropriate.
The Supreme Court referred to two Madras High Court judgments:
The Supreme Court concurred with the approach of the Madras High Court, stressing that ignoring the balance sheet for the year ending March 31, 1973, when valuing shares as of March 28, 1973, would be "unrealistic." It acknowledged that adjustments for variations in asset values between March 28, 1973, and March 31, 1973, could be made, though the assessee had not made such a case here.
Legal professionals often find themselves needing to quickly grasp the nuances of such rulings. CaseOn.in's 2-minute audio briefs provide an invaluable resource, allowing them to rapidly analyze the core arguments and implications of judgments like S. Viji vs. Commissioner of Gift Tax, even amidst busy schedules.
The Supreme Court ultimately upheld the judgment under appeal. It ruled that:
"We are of the view having regard to the fact that the gift was made on the verge of the close of the accounting year ending on 31.3.73 the balance sheet as on 31.3.1973 should be taken as the basis for ascertaining the break-up value of the shares as on 28.3.1973. However, suitable adjustments will have to be made if there has been any variation in the value of the assets of the Company between 28.3.1973 and 31.3.1973. That, however, is not the case of the assessee."
The appeal was dismissed, with no order as to costs.
The Supreme Court, in S. Viji vs. Commissioner of Gift Tax, addressed a dispute concerning the valuation date for unquoted shares gifted on March 28, 1973, for the purpose of Gift Tax. The central issue was whether to use the company's balance sheet from March 31, 1972 (the last available at the time of gift) or March 31, 1973 (the financial year-end closest to the gift date). Adopting the 'break-up value method,' the Court sided with the department, ruling that the March 31, 1973, balance sheet provides a more realistic picture of the company's assets due to its proximity to the gift date. The Court also allowed for adjustments for any variations in asset value between the gift date and the balance sheet date, should such a case be made.
This judgment is a cornerstone for anyone dealing with **Gift Tax Valuation** and **Unquoted Share Valuation**. For lawyers, it clarifies the principle of valuation for non-marketable assets, emphasizing the importance of using the most proximate and realistic financial data. It underscores that while traditional accounting periods are relevant, the ultimate goal is to determine the fair value at the specific transaction date. For students, it provides a practical example of how legal interpretation balances statutory requirements (like Section 6 of the Gift Tax Act) with practical considerations of financial accuracy and economic reality in tax matters. It also illustrates the judicial approach to valuing assets that lack a readily ascertainable market price, highlighting the flexibility for adjustments based on specific factual circumstances.
All information provided in this article is for informational purposes only and does not constitute legal advice. While efforts have been made to ensure accuracy, readers are advised to consult with a qualified legal professional for specific legal guidance on their individual circumstances.
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