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Judgment
Per Shri Dongzathang, (Accountant Member) - This appeal of the assessee is directed against the order of the CIT (A). It is relevant for the assessment year 1971-72.
The facts giving rise to the present appeal are as follows. The assessee is a company. The previous year is the financial year 1970-71. During the relevant year, the company sold its entire holding of 1,06,276 shares of M/s. Godrej Soaps Ltd., a subsidiary company, to the members of the Godrej family at the rate of Rs. 200 per share. In the Income Tax return, the said sale of shares was declared by returning capital gains to the tune of Rs. 99,99,322 which was duly assessed by the ITO vide his order dated 15-2-1973.
On 4-12-1979, the GTO issued notice u/s 16(1) of the Gift-tax Act 1958 to the assessee on the reasoning that he had reasons to believe that the shares were transferred for inadequate consideration and the profit arising therefrom was to be treated as deemed gift u/s 4(1) (a) of the Gift-tax Act. Not accepting the explanation offered by the assessee, the IAC of Gift-tax worked out the value of the shares at Rs. 267 on net wealth basis + Rs. 81 for goodwill will making a total of Rs. 348 per share. In doing so, the IAC of Gift-tax applied the provisions of section 6 read with Rule 10(2) of the Gift-tax Rules. Accordingly, the taxable gift was determined at Rs. 1,57,27,850.
Aggrieved by the said order of assessment, the assessee took up the matter in appeal before CIT (A). As many as 22 grounds were raised which were grouped under 3 categories by the learned CIT (A). The first objection was against the validity of the proceedings u/s 16(1) (a) of the Act. The second objection was in regard to valuation of shares gifted. The 3rd objection raised was in regard to the estimate of the value of the goodwill at Rs. 81 per share. The learned CIT (A) dealt with each aspect of the grounds raised. He, however, upheld the order of the IAC of Gift-tax.
The assessee is still aggrieved and has come up in appeal before the Tribunal. As many as 32 grounds raised in the present appeal Shri S. E. Dastur, learned counsel appeared for the assessee and Shri A. A. Makhija learned departmental Representative appeared for the Revenue. Both the parties agreed to take up the issue on merit before going into the legality of the proceedings and other connected issues raised in the appeal. The question of merit is accordingly taken up as agreed to by the parties. Shri S. E. Dastur, learned counsel vehemently objected to the order of the learned CIT (A). Accordingly to him, the transaction entered into by the assessee during the present assessment and the assessing officer has accepted the sale consideration as declared in the Income Tax return. Besides that, these very shares are a subject matter of assessment under the Wealth-tax Act and the value has been accepted by the WTO in the case of the individual assessment of the members of the family. In such a case, there is no reasonable ground for holding that there was deemed a gift as contemplated u/s 4(1) (a) of the Gift-tax Act. According to him, the assessee in this case determined the value of the basis of Rule 1D of the Wealth-tax Rules. This method has since been approved by the Tribunal in the case of N. P. Godrej & Dastur B. P. Godrej in GRA Nos. 33 to 47 (Bom.) of 1979 dated 17-10-1980. The Tribunal relied upon its earlier decision as also on the decision of the Mysore High Court in the case of Controller of Estate Duty, Mysore Vs. J. Krishna Murthy, . Since the Bombay High Court itself has approved of this method in the under mentioned cases, it is submitted that there is no reasonable ground for holding that there was an element of gift in the sale of the shares by the assessee.
(i) Jehangir Mahomedali Chagla and another Vs. M.V. Subrahmanian, Additional First Assistant Controller of Estate Duty and others, , and
(ii) Madhusudan Dwarkadas Vora Vs. Superintendent of Stamps,
Shri S. E. Dastur further submitted that in the case of N. P. Godrej & Dastur B. P. Godrej (supra) the Honble Bombay High Court has already rejected the reference u/s 26(3) of the Gift-tax Act in G. T. Application No. 3/1983 of 2-2-1984. It is, therefore, submitted that there was an element of gift in the transaction entered into by the assessee.
With regard to the method of valuation, it is submitted that the IAC of Gift-tax himself rejected the yield method of valuation as the value on that basis works out to less than Rs. 200 as per the computation given in the Paper Book. With regard to the method of valuation as prescribed under Rule 1D of the Wealth-tax Rules, it is submitted that the same has since been approved by the Honble Bombay High Court and, therefore, no objection can be raised in this regard. Coming to the valuation on the basis of break up value method, it is submitted that the break up value of the shares of Godrej Soaps Ltd. as on the date of gift was Rs. 267. However, the value for the purpose of Gift-tax Act is to be determined on the basis of the market value and for that purpose, the market value is to be determined following the circular issued by the CBDT. Therefore, the assessee was entitled to deduction of 25% as the company had not declared dividend for a period of more than last six years. Since any willing purchaser will have to consider these aspects of the matter, the deduction on this basis for arriving at the market value of the shares cannot be denied. Even in any case, the Revenue cannot be aggrieved as the said computation has been done on the basis of the circular issued by the CBDT which is binding on the Revenue authorities. Deducting 25% from the break up value of each equity share, the market value taken at 75% of such value equals to Rs. 200. In any view of the matter, it is submitted that there can be no deemed gift as contemplated u/s 4(1) (a) of the Gift-tax Act. It is, therefore, urged that the assessee is to succeed on merit itself without going into the legalities or otherwise of the case.
Learned counsel further submitted that if the assessee is not to succeed on merit, full opportunity should be given to argue its case on the legal and other aspects on which the assessee raises various objections. However, since the transfer was made for adequate consideration on the basis of the Income Tax record as also the wealth-tax record where such consideration and value have been accepted, there is no element of gift and, therefore, the order of the Commissioner (Appeals) and the IAC of Gift-tax have to be cancelled.
With regard to the application of Rule 10(2) of Gift-tax Rules, learned counsel Shri S. E. Dastur submitted that this issue came up before the Tribunal in the cases of GTO v. Ambalal Sarabai (HUF) [1984] 9 ITD 227 and Sunil Kumar Das vs. Assistant Controller of Estate Dut, (1984) 10 ITD 31 (Tri.) and it has been held that while valuing unquoted equity shares under Rule 10(2) of the Gift-tax Rules or u/s 37 of the Estate Duty Act, 1953, the value of goodwill of the company cannot be added. For the reasons fully discussed in these decisions it is submitted that the IAC of Gift-tax cannot add the value of goodwill for working out the break up value of the equity shares transferred by the assessee. It is therefore, submitted that there was no reasonable ground for initiating gift-tax proceedings by the IAC of Gift-tax.
On the other hand, Shri A. A. Makhija, learned Departmental Representative vehemently supported the order of the learned Commissioner of Income Tax (Appeals). According to him, the shares transferred by the assessee are the shares of a closely held company which cannot be freely sold and transferred in the open market. In such a case, the application of Rule 1D is definitely ruled out. Even in any case, it is submitted that the assessee itself purchased 1602 shares at the rate of Rs. 201 per share immediately before the sale of these shares. Since the sale of the entire shares means the transfer of controlling power, the purchaser would definitely agreed to pay a much higher price than at the rate at which the assessee immediately before the sale of these entire shares, it is evident that the sale consideration declared by the assessee was not the fair market value as contemplated under the Gift-tax Act.
With regard to the valuation adopted by the Inspecting Asstt. Commissioner of Gift-tax, it is submitted that is the possible way and in view of the goodwill which is inherent in a company like Godrej Soaps Ltd., such value of goodwill has been correctly determined and, therefore, the Inspecting Asstt. Commissioner of Gift-tax was fully justified in adding the said value. Shri A. A. Makhija, learned Departmental Representative fully supported the order of the learned CIT (A) upholding the order of the IAC of Gift-tax which applied the provisions of Rule 10(2) and stated that the learned CIT (A) correctly held that there was no necessity of going to the market value for valuation of the shares as the condition prescribed in Rule 10(2) for doing that was not fulfilled in the case of the assessee.
Continuing the argument further, the learned Departmental Representative submitted that the assessee cannot value the shares on the basis of Rule 1D as the date of transfer in this case has not conceded with the valuation date of the assessee. For this proposition, reliance was placed on the decisions of the Delhi High Court in the case of Sharbati Devi Jhalani Vs. Commissioner of Wealth Tax, Delhi-VII, and others, . Shri A. A. Makhija learned Departmental Representative submitted that the proper method in the case of the assessee would be the profit-earning capacity method in the light of the decision of the Supreme Court in the case of Commissioner of Gift Tax, Bombay Vs. Smt. Kusumben D. Mahadevia, . If the yield profit-earning method is adopted and proper multiple commensurate with the profitability of the company is applied, then the value of the shares also would be the same as determined by the Inspecting Asstt. Commissioner of Gift-tax. It is, therefore, submitted that the present valuation made by the Inspecting Asstt. Commissioner of Gift-tax following Rule 10(2) of the Gift-tax Rules and adding the goodwill is fully justified and, therefore, the order is liable to be sustained.
We have carefully considered the rival submissions. The crucial point that falls for our consideration is in a narrow compass and involves a determination of the market value of the shares which were transferred so as to find out whether the consideration was adequate. To focus the issue in sharper relief and for better appreciation, it would be worthwhile to recount the facts briefly. The assessee is a company. During the assessment year, the company sold its entire holding of 1,06,276 shares of M/s Godrej Soaps Ltd. to the members of the Godrej family at the rate of Rs. 200 per share. The sale of shares was declared in the Income Tax return and the capital gains was subjected to assessment on the basis of the declared value. There was no attempt on the part of the ITO to invoke the provisions of section 52(2) of the Income Tax Act. Similarly, the shares were assessed in the Wealth-tax assessment of the members of the family at the same value as declared in the Income Tax return. On these facts, the question to be considered is whether the above transfer involves a deemed gift as contemplated u/s 4(1) (a) of the Gift-tax Act and for this purpose it is necessary to see whether the consideration is adequate vis-a-vis the market value of the shares transferred. Before doing that, it will be useful to examine the relevant provisions as contained in the Income Tax, Wealth-tax, Gift-tax and Estate Duty Act which run as follow :
Section 52(2) of the Income Tax Act :
"Without prejudice to the provisions of sub-section (1), if in the opinion of the Income Tax Officer the fair market value of capital asset transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by an amount not less than fifteen per cent of the value so declared, the full value of the consideration for such capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its transfer."
Section 7(1) of the Wealth-tax Ac :
"Subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date."
Section 6(1) (3) of the Gift-tax Act :
"6. (1) The value of any property other than cash transferred by way of gift shall, subject to the provisions of sub-section (2) and (3), be estimated to be the price which in the opinion of the Assessing Officer it would fetch if sold in the open market on the date on which the gift was made.
(2) ... ...
(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."
Rule 10(2) of the Gift-tax Rules, 1958 :
"10(1) ... ...
(2) Where the articles of association of a private company contain restrictive provision as to the alienation of shares, the value of the shares, if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch if on the date of gift they could be sold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the articles, but the fact that a special buyer would for his own special reasons give a higher price than the price in the open market shall be disregarded."
Section 4(1) (a) of the Gift-tax Act :
"4(1) for the purposes of this Act -
(a) where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor."
Section 37 of the Estate Duty Act :
"37. Valuation of shares in a private company where alienation is restricted. -
Where the articles of association of a private company contain restrictive provisions as to the alienation of shares, the value of the shares, if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch if they could be sold in the open market, on the terms of the purchaser being entitled to be registered as holder subject to the articles, but the fact that a special buyer would for his own special reasons give a higher price than the price in the open market shall be disregarded."
In each of the sections of the above enactments which are part of the integrated scheme of taxation, the crucial or decisive factor is the market value on the basis of which the capital gains, the net wealth, the value of gift or the principal value of estate have to be determined. In the case of section 52(2), the cause of action arises when there is difference between market value and consideration declared due to the understatement by the assessee and that full value of the consideration in respect of the transfer shown is lesser than actually received by the assessee. In this particular case, there is no such allegation of violation of the provisions of section 52(2) of the Income Tax Act in the Income Tax assessment of the assessee company and, therefore, it is to be presumed that the assessee declared the actual consideration received for the transfer of the shares which was accepted by the assessing officer.
It is the case of Revenue that though the sale consideration declared by the assessee for the purpose of Income Tax may be treated as corrector, even then the provisions of section 4(1) (a) of the Gift-tax Act can still be invoked if the market value of the shares is more than the sale consideration. This view is also supported by the decision of the Supreme Court in the case of K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, . That may be so and is possible in so far as Income Tax provisions are concerned. Now in the case of Gift-tax and Wealth-tax Acts, the scheme is almost identical. From the extract of the relevant provisions of the Gift-tax Act and Wealth-tax Act, it is seen that the provisions are analogous, in that, in each of the case the material issue is to estimate the price of the asset which, in the opinion of the assessing officer, would fetch if sold in the open market on the relevant date. It is undisputed fact that in the case of the assessee, the shares which are now transferred are the subject matter of assessment in the case of the members of the Godrej Family and the value has been accepted at the rate of Rs. 200 per share on the basis of Rule 1D of the Wealth-tax Rules. If the value of these shares has been accepted for Wealth-tax purpose then how it can be ignored for the purpose of the Gift-tax assessment under the Gift-tax Act. The answer to the question is, in our view, supplied by the decision of the Bombay High Court in the case of Madusudan Dwarkadas Vora (supra). In that case, the Bombay High Court approved and followed the decision of the Mysore High Court in the case of J. Krishna Murthy (supra) wherein the court observed that there was no rule under the Estate Duty Act providing for such valuation. In the absence of Rules, valuation for the purpose of the Estate Duty Act had to be made in accordance with the sole recognized valuation method followed in India. The method of valuation prescribed by Rule 1D of the Wealth-tax Rules being the only statutorily recognized method of valuation of unquoted shares, it would not be wrong to adopt that method of valuation for the purpose of Estate Duty also.
Since Rule 10(2) of the Gift-tax Rules and section 37 of the Estate Duty Act are in pari material, these decisions are fully applicable to the facts of the case, and therefore, the Gift-tax Officer was bound to follow the same procedure as laid down in the Wealth-tax Rules which is the only statutorily recognized method of valuation. In fact, the correct valuation, as held by the Bombay High Court, would have been on the basis of profit-earning method as held by the Bombay High Court in the case of Seth Memant Bhagubhai Magatlal Vs. N. Rama Iyer, Gift-tax Officer and another, . However, the Inspecting Asstt. Commissioner of Gift-tax ignored this method of valuation on the finding that the value on this basis would be much less than computed under Rule 1D of the Wealth-tax Rules. He, therefore, applied the provisions of section 6(3) of the Gift-tax Act read with Rule 10(2) of the Gift-tax Rules and determined the value of the shares at Rs. 348 per share. This view taken by the inspecting Asstt. Commissioner of Gift-tax is directly opposed to the decisions cited above. Even if the Inspecting Asstt. Commissioner of Gift-tax refused to follow this correct method of valuation as laid down by the Supreme Court and the jurisdictional High Court, the value arrived at by him cannot be sustained in view of the decisions of the Mysore High Court in the case of J. Krishna Murthy (supra) and that of the Bombay High Court in the case of Madhusudan Dwarkadas Vora (supra). The Ahmedabad Bench of the Tribunal in the case of Ambalal Sarabhai (HUF) (supra) considered the question of valuation of gift and held that u/s 6 of the Gift-tax Act, 1958 read with Rule 10(2) of the Gift-tax Rules, 1958, the value of goodwill of company should not be considered while valuing unquoted equity shares. Similar view has been taken by the Calcutta Bench of the Tribunal in the case of Sunil Kumar Das (supra).
Having regard to the above decisions and also keeping in view the integrated scheme of the above enactments, the value arrived at for the purpose of wealth-tax assessment has to be adopted for determining the value of gift under the Gift-tax Act. In this regard, the following observation of the Bombay High Court in the case of Jehangir Mohomedali Chagla (supra) is apt and appropriate :
"Sections 22 and 23 of the IT Act and rule 1BB of the W. T. Rules recognise the same method, and, in my judgment, a harmonious construction demands that an identical method should be employed while determining the value u/s 36(1) of the E. D. Act, even in case where death has occurred prior to March 1, 1981. To accept the claim of the Revenue that the only method of valuation is land and Building would lead to very anomalous results, like a flat would be valued for the purpose of wealth-tax under rule 1BB and in case the assessee dies on the day next to the valuation, then the accountable person would be required to pay duty based on a different method and by which the valuation of flat would be far in excess than that determined for the purpose of wealth-tax."
It would, therefore, be absurd to say that the value of the shares of Godrej Soaps Ltd. was Rs. 200 per share for the purpose of Income Tax and wealth-tax and Rs. 348 per share for the purpose of the Gift-tax Act. Since the provisions of these Acts which are in the nature of integrated scheme of taxation are more or less that same, the same value has to be adopted while valuing the same shares in the same assessment year for the purpose of Gift-tax Act. We hold accordingly.
With regard to the method of valuation, it is to be admitted that the correct method of valuation in the case of shares of this nature is the profit-earning method as held by the Supreme Court in the case of Commissioner of Gift Tax, Bombay Vs. Smt. Kusumben D. Mahadevia, and fully explained by the Bombay High Court in the case of Seth Hemant Bhagubhai Mafatlal (supra). The learned Departmental Representative had, at one state, faintly tried to raise this point by contending that with appropriate capitalisation, the value of the shares would work out to the same amount as adopted by the Inspecting Asstt. Commissioner of Gift-tax. However, the Inspecting Assistant Commissioner of Gift-tax has consciously and deliberately rejected this method as the value on this basis comes to a much lower figure than determined by him in the order of assessment. It is now a fait accompli and, therefore, futile to proceed further in this regard. We, accordingly, reject this contention at the threshold itself as the Inspecting Assistant Commissioner of Gift-tax himself has deliberately rejected this method.
With regard to the maintainability of the method adopted by the Inspecting Asstt. Commissioner of Gift-tax on the basis of section 6(3) of the Gift-tax Act read with Rule 10(2) of the Gift-tax Rules, it is pointed out earlier that the various Benches of the Tribunal have already considered these provisions and held that while valuing unquoted equity shares under these provisions, the value of goodwill cannot be added. Further, the provisions of section 37 of the Estate Duty Act are held to be analogous to the provisions of Rule 10(2) of the Gift-tax Rules and in that view of the matter, the only possible method of valuation is on the basis of the procedure laid down in the Wealth-tax Rules as held by the Bombay High Court in the case of Madhusudan Dwarkadas Vora (supra) and that of Jehangir Mahomedali Chagla (supra). In view of the above reasons, we hold that there was no scope of invoking the provisions of section 4(1) (a) of the Gift-tax Act in the case of the assessee for the sale of 1,06,276 shares of M/s. Godrej Soaps Ltd. to the members of the Godrej family. We, accordingly, cancel the orders of the authorities below.
In the result, the appeal is allowed.
Since the appeal of the assessee is allowed on merit, we do not consider it necessary to go into legal and other aspects of the matter raised in the grounds of appeal.
The appeal is allowed.