TMI Blog1974 (10) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts and in the circumstances of the case, the learned Tribunal erred in holding that the valuation of shares in question should not be made on ex-right basis in respect of the right shares issued by the company ? " We may mention at this stage that Mr. K. C. Patel, appearing on behalf of the assessee, has not pressed the question which has been referred to us at the instance of the assessee and, therefore, in the course of this judgment we will only deal with the questions referred to us at the instance of the revenue. The relevant assessment year is 1965-66. The assessee was originally Ambalal Sarabhai and, after his death, the executors and trustees of his estate have been brought on the record of these proceedings. Late Ambalal Sarabhai held 480 shares in an English company called Messrs. Bakubhai Ambalal Ltd., London. The share capital of the company consisted of 2,000 shares of pound 10 each. This company was, what is known under the Indian Companies Act, as a private limited company, that is, the articles of association of this company contained restrictive provisions as to the alienation of shares, the alienation being permitted amongst existing shareholders. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are not concerned in the present reference with that aspect of the case. On October 17, 1964, Ambalal Sarabhai executed eight separate gift deeds for different members of his family to whom he wanted to gift the shares. The gift deeds did not clarify whether they were gifted ex-right in respect of the new shares. However, the value of the shares in the gift deeds was mentioned as Rs. 450 per share. Thereafter, in due course, the donor filed a return of gift before the Gift-tax Officer declaring the value of gift at Rs. 2,16,000 in respect of these 480 shares at the rate of Rs. 450 per share. These shares were not quoted on the stock exchange and the assessee had worked out the value of these shares according to the break-up value method based on the balance-sheet of the company as of March 31, 1963. In the course of the gift-tax proceedings it was urged on behalf of the assessee that the value as on October 17, 1964, that is, the date of the gift, should be adopted at Rs. 420 per share which was the mean of value of Rs. 507 and Rs. 333 per share. It was contended that on the break-up value method the value of the share was Rs. 507 on the basis of the balance-sheet as of March 31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this judgment have been referred to us for our opinion. We have a1so indicated above that the question which was referred to us at the instance of the assessee had not been pressed by the learned advocate, Mr. K. C. Patel, appearing on behalf of the assessee. Under the Gift-tax Act, 1958, under section 3, subject to the other provisions contained in the Act, there shall be charged for every assessment year commencing on and from the 1st day of April, 1958, a tax referred to as gift-tax in respect of the gifts, if any, made by a person during the previous year (other than gifts made before the 1st day of April, 1957) at the rate or rates specified in the Schedule. Section 6 of the Act is material for our purposes. It is in these terms : " 6. (1) 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 the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res is not ascertainable by reference to the value of the total assets of the company. As a matter of fact it may be pointed out that before the Tribunal it was common ground that the value of the shares should be ascertained by following the break-up value method and the only difference was as to with reference to the balance-sheet of what date the total value of the assets has to be ascertained. In paragraph 8 of its order, the Tribunal has observed : " We may again state that there is no dispute that they have to be valued according to the break-up method based on the balance-sheet of the company. " Therefore, we will proceed in the course of this judgment on the footing that the shares, in the light of what has been stated in clause (2) of rule 10 and in the light of the common ground which was accepted before the Tribunal, the shares which formed the subject-matter of the gift, have to be valued according to the break-up method based on the balance-sheet of the company. The question then arises as to the date of the balance-sheet of the company, namely, whether the balance-sheet should be taken as of March 31, 1963, that being the latest balance-sheet which was availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of directors to answer reasonable questions put by the purchaser or his advisers. Plowman J. held that in arriving at the open market value under section 7(5) of the Finance Act, 1894, the court should only have regard to the published information and information which the directors would in fact have given in answer to reasonable questions ; accordingly, he held that since the directors would not in fact have disclosed the category B documents they were not admissible, and on that basis he assessed the value of the shares at pound 3 10s. a share. On appeal, the Court of Appeal reversed that decision and held that, in the circumstances, the category B documents were admissible, and, accordingly, increased the valuation to pound 4 10s. a share. On further appeal, the House of Lords allowed the appeal and held that section 7(5) of the Finance Act, 1894, was merely a machinery for estimating the value and that, accordingly, the value of the shares for the purpose of estate duty was to be estimated at the price which they would fetch in the open market on the terms that the purchaser should be entitled to be registered and to be regarded as the holder of the shares, and should take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders ...... No doubt sale in the open market may take many forms. But it appears to me that the idea behind this provision is the classical theory that the best way to determine the value in exchange of any property is to let the price be determined by economic forces--by throwing the sale open to competition when the highest price will be the highest that anyone offers. That implies that there has been adequate publicity or advertisement before the sale, and the nature of the property must determine what is adequate publicity. Goods may be exposed for sale in a market place or place to which buyers resort. Property may be put up to auction. Competitive tenders may be invited. On the Stock Exchange a sale to a jobber may seem to be a private sale but the price has been determined, at least within narrow limits, by the actions of the investing public. In a particular case it may not always be easy to say whether there has been a sale in the open market. But in my judgment the method on which the respondents rely cannot by any criterion be held to be selling in the open market. If the hypothetical sale on the open market requires us to suppose that competition has been invited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It must happen every day that directors of many companies have in their possession confidential information which very properly they do not make public but which if made public would lead to a substantial alteration of the quoted prices of their companies' shares. That could not possibly be a 'special circumstance' ......... " Thus, the test which was applied in Lynall's case 2 was also applied in Crabtree v. Hinchcliffe, viz., that the confidential information which the directors of a particular company may have in their possession which is not made available to all shareholders will not be taken into consideration while determining the question of valuation of the particular type of shares as of the material date. Both these decisions of the House of Lords emphasize that for determining the value of shares either when they are quoted on the market or when following the break-up value method, the total assets of the company are taken into consideration as of a particular date, the correct principle to be applied is that of the information which was available to all shareholders as of the date with reference to which the valuation has to be made. In the instant case, on the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id-up equity share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 85 per cent. of the break-up value so determined. " Explanation I to rule 1D provides : " For the purpose of this rule 'balance-sheet', in relation to any company, means the balance-sheet of such company as drawn up on the valuation date and where there is no such balance-sheet, the balance-sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balance-sheet drawn up on a date immediately after the valuation date. " Now these special provisions of the Wealth-tax Rules have not been made applicable to gift-tax nor is there any similar provision under the Gift-tax Rules. It may be pointed out that rule 1D was added even in the Wealth-tax Rules in 1967 and, even for wealth-tax purposes in 1964, the principles which we have mentioned in connection with the Gift-tax Act and the Gift-tax Rules were ordinarily applicable. What the rule-making authority has subsequently provided for the purposes of the Weal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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