S. VIJIversusCOMMISSIONER OF GIFT TAX

A                                       S. VIJI
                                           \'.

                        COMMISSIONER OF GIFf TAX

                                DECEMBER 2, 1997

B                   [SUHAS C. SEN AND V.N. KHARE, .JJ.)


          Gift Tax Act, 1958: Section 6(3).

          Unquoted share:i~Transfer of-Valuation--Balance Sheer-Preceding
C or following the date of tramfe1~Retevancy of - AY 1973-74---Unquoted
    shares transferred on 28-3-1973-Held : Though the balance sheet of
    31.3.1973 was the latest one available on the date of tramfer it bei11g more
    proximate, was more realistic to asce1tai11 the break-up value of the shares as
    011 28-3- 1973--Howevei; the assessee is e11titled to poi11t out any valiation of
    assets of company betwee11 28.3. 1973 and 31.3.1973.
D
           Unquoted shares of a company were transferred on 28- 3.1973 to the
    appellant-assessee during the assessment year 1973-74. The dispute was in
    relation to the valuation of these unquoted shares. Both the revenue and
    the assessee agreed that the valuation should be made following the
E   break-up method as provided in Section 6(3) of the Gift Tax Act, 1958.

          The assessee contended that these shares must be valued by refer-
    ring to the balance sheet figures of the company as on 31.3.1972 which was
    the latest available balance sheet as on the date of transfer of the shares.
    The revenue contended that the valuation must be made with reference to
F   the balance sheet figures as on 313.1973 which was the closest proximate
    date from the date of making of the gift. The High Court rejected the
    contention of the assessee. Hence this appeal.

           Dismissing the appeal, this Court

G         HELD : 1. The balance sheet figures as on 313.1972 give the picture
    of the value of the various assets of the company up to that date. The
    company may have flourished thereafter and the value of the assets may
    have increased. ft is also possible that during that period the fortune of
    the company languished and the value of its assets had decreased. In either
H   event, when a valuation of shares is to be made as on 283.1973, it will be
                                         62
                        S.VIJI v. COMMR.OFGIFfTAX[SEN,J.]                        63

       unrealistic to ignore the balance sheet for the year ended on 31.3.1973. The A
.I..
       figures of the balance sheet of the year ended on 31.3.1973 will give a n:iore
       realistic picture of the value of the assets of the company than the figures
       as on 31.3.1973. The assessee, of course, 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 value of the assets will have to be B
       ignored. But the basis of the valuation will have to be the balance sheet as
       on 31.3.1973. [65-D-F]

               CGT v. K Ramesh, 141 ITR 462 (Mad.), approved.

               CWT v. S. Ram, 147 ITR 278 (Mad.), referred to.                         c
               CIVIL APPELLATE JURISDICTION: Civil Appeal No. 6239 of
       1990.

            From the Judgment and Order dated 18.12.81 of the Madras High
       Court in T.C. No. 1182 of 1977.                                    D
               A.T.M. Sampath and S. Balaji for the Appellant.

               Ranbir Chandra, Hemant Sharma and B.K. Prasad for the Respon-
       dent.
                                                                                       E
               The Judgment of the Court was delivered by

             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      F
                 Balance Sheet figures as on 31.3.1972 should be taken for ascer-
                 taining the break-up value of the shares gifted and not the balance
                 sheet figures as on 31.3.1973?"

              The assessment year involved is 1973-74. The dispute relates to G
       valuation of unquoted 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 H
    64                     SUPREME COURT REPORTS [1997] SUPP. 6 S.C.R.

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.

B            The case of the assessee is 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 is no question of referring to a balance sheet which was not even in
 , . c:rxistence on the date of making of the gift. The department has taken the
C ·.~land 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
D 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 ~he financial year ending on
  31.3.1973. The balance sheet as on 31.3.1973 will give a more realistic
E 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.
F 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
G 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
H    case, a gift was made on 28.3.1972. The Tribunal held that as the gift had
                S.VIJI v. COMMR.OFGIFTTAX[SEN,J.J                         65
taken place before the balance sheet as on 31.3.1972, the break-up value A
should be calculated with reference to the last balance sheet of the Com-
pany 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 B
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 has happened to the assets and liabilities of the
Company between 28.3.1972 and 31.3.1972, that could also be taken into C ·
consideration by the Tribunal. The Tribunal was directed to re-examine
the question in that light again.

       We are in agreement with this approach of the Madras High Court.
In the instant case, the balance sheet figures as on 31.3.1972 give the picture D
of the value of the various assets of the Company upto that date. The
Company may have flourished thereafter and the value of the assets 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 28.3.1.973, it will be
unrealistic lo ignore the balance sheet for the year ended on 31.3.1973. The E
assessce, of course, is entitled to point out that between 28.3.1973 and
31.3.1.973, the value of the assets of the Company has increased. If so, such
variation in the 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.
                                                                               F
      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 !TR 278 where it was held :

        "In cases where gift of unquoted shares has been made during the G
        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 H
    66                    SUPREME COURT REPORTS [1997) SUPP. 6 S.C.R.

A            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
B   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 ts not
    necessary to specifically deal with all of them.
c
          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 adjust-
D   ments 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 assessc;e. Under these circumstances, the judgment
    under appeal is upheld. The appeal is dismissed. There will be no order
    as to costs.

E   v.s.s.                                                      Appeal dismissed.