Delhi H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the conversion of equity shares into preference shares by M/s Hari Bros. (P) Ltd. and the consequent allotment of preference shares to the assessees in place of equity shares held by them, would not amount to a transaction entered into within the meaning of s. 2(xxiv)(d) of the GT Act ?

High Court Of Delhi

Commissioner Of Gift Tax vs. Raghu Hari Dalmia & Ors.

Sections GT 2(xii), 2(xxii), 2(xxiv), 4, 6(3), GT RULE 10(2)

Asst. Year 1971-72

Arijit Pasayat, C.J. & D.K. Jain, J.

GT Ref. Nos. 1 to 16 of 1982

15th October, 2001

Counsel Appeared

R.C. Pandey with Sanjiv Khanna, Ajay Jha & Ms. Prem Lata Bansal, for the Applicant : R.K. Maheshwari with Harihar Lal, for the Respondents

JUDGMENT

ARIJIT PASAYAT, C.J. :

These references involve identical issue, therefore, are disposed of by this judgment. Following questions have been referred under s. 26(1) of the GT Act, 1958 (in short, the ‘Act’), by the Income-tax Appellate Tribunal, Delhi Bench ‘A’, New Delhi (in short, the ‘Tribunal’), for opinion of this Court : “Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the conversion of equity shares into preference shares by M/s Hari Bros. (P) Ltd. and the consequent allotment of preference shares to the assessees in place of equity shares held by them, would not amount to a transaction entered into within the meaning of s. 2(xxiv)(d) of the GT Act ?” “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that no gift arose as a result of the conversion of equity shares into preference shares, at par ?” “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that, as per r. 10(2) of the GT Rules, the value of the equity shares as well as the preference shares, would be the same ?” “Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the value of the assets of the assessee had not decreased ‘in globo’?” The dispute relates to the asst. yr. 1971-72.

2. Factual position, in a nutshell, is as follows : Assessees, respondents in the references, were holders of equity shares of a face value of Rs. 100 per share in M/s Hari Brothers (P) Ltd. (hereinafter referred to as the ‘company’). They held different number of shares totalling 2,000. The original number of equity shares held by each of these persons was only 250 and the increase to 2,000 shares had taken place, as a result of the issue of 1,750 bonus shares. The company was incorporated on 2nd March,1995, (sic) and its paid-up capital was Rs. 2 lakhs consisting of 2,000 shares of Rs. 100. As indicated above, 250 equity shares were allotted in cash and subsequently 1,750 bonus shares were issued. Assessees are family members and trust belonging to Dalmia Group and the company was a closely-held private limited company. On 19th Sept., 1970, the Board of directors of the company decided to increase the equity capital from Rs. 2 lakhs to Rs. 3 lakhs by issuing 10,000 new equity shares of Rs. 10 each. On 1st Oct., 1970, 5,000 new equity shares were allotted to M/s Dalmia Agencies (P) Ltd. and the remaining 5,000 equity shares to M/s Govan Brothers (Rampur) Ltd. Allottees were companies belonging to J. Dalmia Group. The existing shareholders were not allotted any shares. With the allotment of 10,000 new equity shares, paid-up capital increased from Rs. 2 lakhs to Rs. 3 lakhs. As the company was a private limited one, new share could not have been allotted to the allottee companies except with approval and consent of existing shareholders. On 23rd Nov., 1970, special resolution was adopted in General Body Meeting of the shareholders to convert 2,000 fully paid equity shares of the face value of Rs. 100 each held by the assessees-respondents into 2,000 fully paid- up cumulative preference shares of the face value of Rs. 100 each. On 10th Dec., 1970, 2,000 equity shares of Rs. 100 each ceased to exist and in return assessees were issued, cumulative preference shares of the face value of Rs. 100 each in the company.

3. Action under s. 16(1)(a) of the Act was initiated by the AO primarily on the ground that as a result of the conversion, there was transfer of wealth by the member of Dalmia family held by them in the form of equity shares and this amounted to a gift. In response to the notices issued, assessees submitted their respective returns. The AO issued notices under s. 15(3) of the Act requiring the assessees to explain as to why the difference between the fair market value of the equity shares and preference shares should not be treated as gift. Assessees stand was that the conversion was a bona fide transaction for adequate consideration keeping in view the rights attached to the preference shares. Rights under the preference shares were very valuable rights from a long-term point of view, as a company having good reserve could run into losses in future and the value of the equity shares may be affected thereby. But in the case of preference shareholders, they will have a preferential right both as to the dividends as well as to the payment of capital. It was also pointed out that after managing agency system came to an end in December, 1969, the company had only one immovable property in occupation of the shareholders as their residence and the company may have to surrender a substantial part of the property to the Government under the Urban Land Ceiling Law. This would considerably lower the value of the equity shares. The act of conversion was a unilateral action by the company and the shareholders did not part with their equity shares, for preference shares, in favour of any third part. In essence, it was contended that the conversion cannot be held to be a transaction resulting in a gift. The AO rejected contentions. It was his stand that valuable rights were attached to the equity shareholders such as right to vote and the right to a higher rate of dividend, which was not available to the preference shareholders. It was held that a transaction entered into with the intent to diminish the value not of some property which is transferred to another person, but of the donor’s owner property in globo and to increase the value of property in globo of another person would constitute a gift. Having held that the conversion resulted in a gift, AO proceeded to compute value of the equity shares on the basis of the value of the net assets of the company. In doing so, he valued immovable property owned by the company on the ‘Land and Building’ method and arrived at the net value of Rs. 1,773 per equity shares. As these were converted into preference shares of Rs. 100 each, he held that there was a gift to the extent of Rs. 1,673 per share parted with by the assessees. Matter was carried in appeals by the assessees before the Appellate Assistant Commissioner (in short the ‘AAC’), who upheld the views of the AO. Assessees preferred appeals before Tribunal. Assessee’s stand was accepted by the Tribunal, which observed that conversion of equity shares into preference shares did not result in any gift liable to gift-tax. Referring to the decisions of the apex Court in Goli Eswariah vs. CGT (1970) 76 ITR 675 (SC) : TC 35R.247 and CGT vs. N.S. Getti Chettiar 1972 CTR (SC) 349 : (1971) 82 ITR 599 (SC) : TC 35R.730, the Tribunal held that a gift under the Act is not brought about by the unilateral action of any person. In order to constitute transfer of property, two persons per force have to be involved, i.e., a donor and a donee. Assessees had nothing to do with the allotment of 10,000 equity shares of Rs. 10 each to M/s Dalmia Agencies (P) Ltd. and M/s Govan Brothers (Rampur) Ltd. because such shares were created by the company in the process of increasing its equity capital and these shares were allotted by the company to the two companies much before the date of conversion of equity shares into preference shares. As the equity shares had the same value as that of the preference shares and since the allotment of preference share in exchange of equity shares does not involve bilateral transactions, there was no transaction attracting gift-tax.

It was further held that the value of the assets of the assessees in globo has neither decreased nor of the other two companies, to whom equity shares were allotted, increase because the three private companies were closely held companies belonging to the same group of assessees and any decrease or increase in the value of the assets of these companies would ultimately be reflected in the value of interest of each of these assessees in such companies, the conclusions of the Revenue authorities that the intent was to diminish the value of the property was not established; this could also be not inferred from the mere fact that a transaction had the ultimate result of diminishing the value in such property. So far as conversion of the equity shares into preference shares was concerned, the Tribunal held that it was merely of an academic interest, as it had already been held by it that the conversion of the shares did not give rise to any gift. Even otherwise in working out the break-up value, the only property owned by the company had not been properly valued as the overriding charge in favour of Smt. Krishna Devi Dalmia and the share of unearned increase in the value of the land payable to the President of India had not been taken into account; the AO had totally ignored the fact that preference shares are cumulative preference shares with a right to participate in the surplus of assets in the event of liquidation of the company and further the AO had not taken note of r. 10(2) of the GT Rules, 1958 (in short, the ‘Rules’), under which the equity shares as well as the preference shares had to be valued. It was observed that the said rule did not make any distinction between the valuation of an equity share or of a preference share of a private company. Thus, the value of the equity shares worked out by the GTO at Rs. 1,773 per share was held to be patently incorrect. Accordingly, it was held that no gift-tax was payable on the conversion of equity shares, held by the assessees into preference shares. On being moved for reference, as noted supra, the questions as set out above, have been referred for opinion of this Court.

In support of the reference petitions, learned counsel for the Revenue submitted that shares are goods and immovable property, which are transferable. The Tribunal was not justified in holding that the conversion of equity shares into preference shares was a unilateral act. Transfer of property under the Act means any disposition, conveyance, assignment, settlement, delivery, payment or other alienations and includes inter alia, any transaction entered into by a person with intent thereby to directly or indirectly diminish the value of his own property and to increase the value of the property of another person. On conjoint reading of the provisions of the Companies Act, 1956 (in short, the ‘Companies Act’), and the Act, share or even interest of shareholder can be subject-matter of transfer and charge under the Act. A company and a shareholder are two distinct persons and legal entities. They are competent to enter into contract and transfer property between them. Redemption of preference shares by a company has been held to be a transfer for the purpose of capital gain under the IT Act, 1961 (in short, the ‘IT Act’). Further, when a face value of a share is reduced, on payment of money by the company to a shareholder, the rights of the said shareholder diminished and get reduced. There is reduction in right to get dividend and distribution of net assets on liquidation proportionately to the reduction of capital. The voting right of the shareholder also gets reduced with a reduction in the value of the vote of the assessee in the event of there being a poll. Conversion can be effective only through a process of reduction of capital as provided under ss. 100, 104 and some other provisions of the Companies Act. Equity shares held by the assessees were transferred to the company and the assessee in exchange or as consideration of this transfer received cumulative preference shares. This cannot be treated as a unilateral transaction. Two parties were involved. The rights of preference shareholders are not the same as those of equity shareholders, therefore, assessees had given up several rights, which were available as the equity shareholders. Though the Tribunal held that r. 10(2) of the Rules could have been made applicable and even if it was held that the valuation made by the AO was at a higher figure that per se was not a ground to accept assessee’s contention regarding non-increase in the value. Rule 10(2) is not mandatory and the manner of calculation of market value is not stated in r. 10(2). Rules of valuation are procedural in nature and have to be given retrospective effect. Schedule II of the Act was inserted by Direct Tax Laws (Amendment) Act, 1989. The said Schedule incorporated as procedural rule and partakes character of a rule of evidence, therefore, Sch. II is applicable to all pending proceedings and could have been applied.

6. Stand of the assessees, on the other hand, is that the conversion cannot be treated to be a transaction resulting in a gift. It was a bona fide transaction for adequate consideration keeping in view the rights attached to the preference shares, which are very valuable rights from a long-term point of view, as there was likelihood of considerable reduction in the value of equity shares and keeping in view the future prospects the conversion was accepted. Such act of conversion was a unilateral action by the company and there is no question of any gift being involved. The conversion can be only in terms of s. 106 of the Companies Act and there was no variation of the rights, in fact, there was no transfer of any right to the company and there was no reduction or redemption of share capital. There were other private limited companies, which held equity shares and merely because there was denial of voting rights in certain circumstances, it cannot be considered to be a bilateral act and in fact there was so transaction between the assessees and the company.

7. In order to appreciate the rival submissions, a few provisions, which throw light on the controversy need to be noted. The expression ‘transfer of property’ has been defined in s. 2(xxiv) of the Act, which reads as follows : “2.(xxiv) “transfer of property’ means any disposition, conveyance, assigment, settlement, delivery, payment or other alienation of property and, without limiting the generality of the foregoing, includes : (a) …. …. …. …. …. …. …. …. (b) …. …. …. …. …. …. …. …. (c) …. …. …. …. …. …. …. ….; and (d) any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person.” The term ‘property’ is defined under s. 2(xxii) of the Act and reads as follows : “2(xxii) ‘property’ includes any interest in property, movable or immovable.” Sec. 4 of the Act on the basis of which the Revenue authorities proceeded, reads as follows : “4. (1) For the purposes of this Act : (a) where property is transferred otherwise than for adequate consideration, the amount by which the value of the property as on the date of the transfer and determined in the manner laid down in Sch. II, exceeds the value of the consideration shall be deemed to be a gift made by the transferor : Provided that nothing contained in this clause shall apply in any case where the property is transferred to the Government or where the value of theconsideration for the transfer is determined or approved by the Central Government or the Reserve Bank of India. (b) where property is transferred for a consideration which, having regard to the circumstances of the case, has not passed or is not intended to pass either in full or in part from the transferee to the transferor, the amount of the consideration which has not passed or is not intended to pass shall be deemed to be a gift made by the transferor; (c) where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim of any interest in property by any person, the value of the release, discharge, surrender, forfeiture or abandonment to the extent to which it has not been found to the satisfaction of the AO to have been bona fide, shall be deemed to be a gift made by the person responsible for the release, discharge, surrender, forfeiture or abandonment; (d) where a person absolutely entitled to property causes or has caused the same to be vested in whatever manner in himself and any other person jointly without adequate consideration and such other person makes an appropriation from or out of the said property, the amount of the appropriation used for the benefit of the person making the appropriation or for the benefit of any other person shall be deemed to be a gift in his favour by the person who causes or has caused the property to be so vested; (e) where a person who has an interest in property as a tenant for a term or for life or a remainderman surrenders or relinquishes his interest in the property or otherwise allows his interest to be terminated without consideration or for a consideration which is not adequate, the value of the interest so surrendered, relinquished or allowed to be terminated or, as the case may be, the amount by which such value exceeds the consideration received, shall be deemed to be a gift made by such person. (2) Where, in the case of an individual being a member of an HUF, any property having the separate property of the individual has been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family (such property), then, notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, for the purpose of computation of the taxable gifts made by the individual, the individual shall be deemed to have made a gift of so much of the converted property as the members of the HUF other than such individual would be entitled to, if a partition of the converted property had taken place immediately after such conversion.”

Gift is defined in s. 2(xii) of the Act and reads as follows : “2 (xii) ‘gift’ means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth, and includes the transfer of conversion of any property referred to in s. 4, deemed to be a gift under that section”. Rule 10(2) of the Rules to which also reference has been made by the learned counsel for the authorities though for different purposes reads as follows : “10(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 asset of the company, shall be estimated to be what they would fetch if on the date of gift they could be fetch 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 reasons give a higher price than the price in the open market shall be disregarded.”

8. It is to be noted that shares are goods and movable property as provided in s. 2(7) of the Sale of Goods Act, 1930 (in short, the ‘Sale Act’). Sec. 2(46) of the Companies Act defines shares as share capital of the company and that the shares or any other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of association of the company in terms of s. 82 of the Companies Act. In CIT vs. Standard Vacuum Oil AIR 1966 SC 1393, it was observed by the apex Court that share is not a sum of money alone but represents interest of the shareholder, measured in sum of money and made of diverse rights contained in the contract evidenced by the article of association of a company. A share in a company regulated by the Companies Act is a chose in action. [See Re V.G.M. Holdings (1942) Ch. 235]. A share in a company does not denote rights only, it denotes obligations also, and when a member transfers his share, he transfers all his rights and obligations as a shareholder as from the date of transfer. He does not transfer rights to dividends or bonuses already declared nor does he transfer liabilities in respect of calls already made, but he transfers his rights to future payments and his liabilities to future calls (per Lindley L.J., In re National Bank of Wales 66 L.J. Ch. 225). In that case, it was held that a transfer with the sanction of the liquidator makes the transferee a ‘present’ member and the transferor a ‘past’ member of a liquidating company. As defined in s. 85 of the Companies Act, equity shares and preference shares are conceptually different. In Anarkali Sarabhai vs. CIT (1997) 138 CTR (SC) 253 : (1997) 224 ITR 422 (SC) : TC S20.2241, the apex Court held that in general sense transfer of property means transfer of rights from one person to another. They may be passing of entire bundle of rights from the transferor to the transferee, in another case, there may be transfer of one estate out of several assets, and in a third case, there may be reduction of exclusive interest in the totality of rights of the original owner. In all the three categories of cases, transfer of property takes place. In the said case redemption of preference shares was held to be a transfer by way of sale and the amount paid by the company for redemption was held to be the purchase price or consideration, as in substance the company purchases preference shares. In Kartikeya Sarabhai vs. CIT (1997) 142 CTR (SC) 150 : (1997) 228 ITR 163 (SC) : TC S 20.2242, it was held that reduction of face value of a share and payment received from the company in this regard amounts to transfer of property. As noted above, s. 2(xii) of the Act defines the expression ‘gift’ in an expressive manner.

It is provided that the expression includes any transfer by one person to another without consideration of money or money’s worth and also includes transfers deemed to be gift under s. 4 of the Act. Under cl. (a) of s. 4(1) of the Act, which also includes any interest in a property, in view of s. 2(xxiv) if any property is transferred otherwise than for adequate consideration, it will amount to gift. Under cl. (c) release, discharge, surrender, forfeiture or abandonment of any interest in the property, which is not bona fide is also deemed to be gift. In Khoday Eswarsa & Sons vs. CGT (1990) 86 CTR (Kar) 250 :(1990) 186 ITR 388 (Kar) : TC 35R.741, it was observed that the term ‘gift’ under the Act is much wider than under s. 112 of the Transfer of Property Act, 1882 (in short, ‘T.P. Act’). Under s. 6 of the Act, value of any property or price is, which in the opinion of the AO, it would fetch, if sold in the open market. As observed by the apex Court in Jagatram Ahuja vs. CGT (2000) 164 CTR (SC) 1 : (2000) 246 ITR 609 (SC), the word ‘transaction’ in cl. (d) of s. 2(xxiv) of the Act takes its colour from the main clause, i.e., it must be a transfer of property, in some way. The words disposition, conveyance, assignment, settlement, delivery and payment are all used to indicate some kind of transfer of property. The definition of ‘transfer’ in s. 2(47) of the IT Act is not an exhaustive definition. Clause (i) speaks of sale, exchange or relinquishment. In Kartikeya’s case (supra), it was observed that when a face value of a share is reduced, on payment of money by the company to a shareholder, the rights of the said shareholder diminish and get reduced. There is reduction in right to get dividend and distribution of net assets on liquidation proportionately to the reduction of capital. The voting right of the shareholder also gets reduced with a reduction in the value of the vote of the assessee in the event of there being a poll. What each shareholder gets on liquidation is in lieu of the shareholding and represents worth and price of the shares. If the share was held as stock-in-trade, the amount received will be revenue receipt in the hands of the shareholder and if the share was held by way of investment, the amount receipt represents the capital receipt. [See CIT vs. Ram Kumar Aggarwal & Bros. (1994) 116 CTR (SC) 98 : (1994) 205 IT 251 (SC) : TC

38R.1242]. Share or interest of any member in a company is a movable property, which is transferable in accordance with the articles of association of the company. It is to be noted that the articles of association is in the nature of a contract between the shareholders and the company and defines and gives diverse rights of the shareholders. In addition, shareholders also have rights conferred under the Companies Act. Share is a right of specified amount in the share capital of a company carrying with it rights and obligations. It represents interest of a shareholder in a company and a bundle of rights, which a shareholder has in a company in proportion to his shareholding. The face value of the shares is relevant for the purpose of determining the liability of the shareholder and the payment of dividend and the right to receive payments. However, the value of share and the market price depends upon the rights conferred and given to the shareholder, his control over management and proportionate share in the benefits and, profits earned by the company. As noted in LIC vs. Escorts Ltd. (1986) 59 Comp. Cas. 548, the equityshareholders have the following rights : (a) Right to elect directors of the company and through them participate in the management of the company; (b) Right to vote on resolutions at meetings of the company; (c) Enjoy benefits earned by the company in the shape of dividend; (d) Right to apply to Court and get relief in the case of oppression and mismanagement. (e) Right to move to the Court for winding up; (f) Share surplus on winding up of the company.

The value or market price of equity shares and preference shares of a same company will be different as preference shareholder does not have same rights in a company as an equity shareholder. An equity shareholder has the right to elect the directors and through them participate in management. A preference shareholder does not have right to elect directors and essentially there is no participation in the management. Equity shareholder has the right to vote on each resolution in a General Body Meeting of the shareholders and in case of poll his voting right is in proportion to the shares of the paid-up equity capital of the company. A preference shareholder does not have right to vote in respect of all resolutions, he has right to vote only on resolution, which directly affect rights attached to the preference shareholders. It is only if the dividend due on cumulative preference shares remains unpaid for an aggregate period of not less than two years preceding the date of commencement of meeting that a cumulative preference shareholder gets right to vote on all resolutions. Sec. 87 of the Companies Act is relevant for this purpose. The preference shareholders have no voting rights. Under s. 87(2), the rights conferred are restricted. The inevitable conclusion is that transaction constituted transfer of property.

9. Learned counsel for the assessee submitted with emphasis that the, resolution of the company was of 1st Oct.,

1970, for conversion and in fact after the resolution dt. 23rd Nov., 1970, the conversion took place on 10th Dec., 1970, and therefore, there was no link between the resolution of the company with the actual conversion. It is to be noted that the main players in the whole arrangement were persons belonging to a closely held group. It is also not correct as contended by learned counsel for the assessee that there was no transfer of property involved. As soon as there is a change of rights attached to a class of shares, it amounts to a ‘transaction’ and the moment the rights are diminished, it amounts to a ‘transaction involving gift’. As was observed in M.A. Ismail vs. CGT (1999) 157 CTR (Ker) 557 : (1999) 240 ITR 539 (Ker), on application of cl. (d) of s. 2(xxiv) of the Act, three conditions have to be satisfied : (a) value of the property of the assessee should be diminished; (b) value of the property of any other person should increase; (c) the transaction must be with the intent to diminish directly or indirectly value of its own property and increase in value of any other person’s property. Any transaction done with the intent to directly or indirectly reduce value of ones property and to increase value of property of any other person is also deemed to be transfer. Thus, the beneficiary can be any person and need not be the person to whom property is transferred. A third person can also be gainer and transaction may be for his benefit. It is to be noted that assessee’s case was that for tax purposes and for reduction in the value for the shares held by the assessee, it was decided to convert equity shares into preference shares. As noted above, the right of preference shareholders are not the same as equity shareholders. In Escort Farm (Ramgarh) Ltd. vs. CIT (1996) 136 CTR (SC) 434 : (1996) 222 ITR 509 (SC) : TC S22.2367, the apex Court had occasion to examine the question of valuation of shares and the impact of issue of bonus shares. It was held that issue of bonus shares results in the reduction of the market value of the shares. Though number of shares held by the assessee increases but the total market value remains the same. This is because of the rights of the shareholders, even after the issue of bonus shares, remain same.

The inevitable conclusion is, therefore, that on conversion of equity shares, held by the assessee, to preference shares, there was transfer of property amounting to gift within the meaning of s. 2(xii) of the Act. The residual and the more important question is whether the valuation aspect has been properly dealt with by the Tribunal. It is to be noted that r. 10(2) comes into picture 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 reasons give a higher price than the price in the open market shall be disregarded. Though learned counsel for the Revenue submitted that there being no guidelines, Sch. II of the Act can be adopted. This is clearly fallacious. The said rule was introduced by Direct Tax Laws (Amendment) Act, 1989, whereas in the present case, the order is dt. 23rd Aug., 1980. It was argued with some amount of emphasis by learned counsel for the Revenue that the said Schedule incorporates a procedural rule and partakes character of a rule of evidence, and therefore, it can be given retrospective effect. We do not find any substance in that plea. We find that the Tribunal, while dealing with the issue of valuation, noted that the valuation as fixed by the AO was high because overriding charge in favour of Smt. Krishna Devi Dahmia and the share of unearned increase in the value of the land payable to the President of India have not been taken into account. Further, the right of preference shareholders to participate in the surplus assets in the event of liquidation has not been considered. But at the same time, it was held that r. 10(2) of the Rules does not make any distinction between the value of the preference shares and the equity shares. Even if we accept the stand of the learned counsel for the Revenue in this regard, it cannot be held that r. 10(2) has no application. It is the mode statutorily prescribed. In Bharat Hari Singhania & Ors. vs. CWT & Ors. (1994) 118 CTR (SC) 125 : (1994) 207 ITR 1 (SC) : TC 66R.328, it was held with reference to s. 7(1) of the WT Act, 1957 in the background of r. 1D of the WT Rules, 1957 that s. 7(1) defines the expression ‘value of an asset’. It is ‘the price, which in the opinion of the WTO, it would fetch if sold in the open market on the valuation date”, but this is made expressly subject to the rules made in that behalf. No guidelines are furnished by the Act to the rule-making authority except to say that the rule made must lead to ascertainment of the value of the asset (unquoted equity shares) as defined in s. 7. It is thus left to the rule-making authority to prescribe an appropriate method for the purpose. There may be several methods of valuing an asset or for that matter an unquoted equity share. The rule-making authority cannot prescribe all of them together, it has to choose one of them, which according to it is more appropriate. The rule-making authority in the concerned rule, i.e., r. 1D, has prescribed the break-up method, which is undoubtedly one of the recognized methods of valuing unquoted equity shares. It was further held that even if it is assumed that there was another method available, which was more appropriate, still the method chosen cannot be faulted so long as the method chosen is one of the recognized methods, though less popular. It is to be noted that prior to the amendment by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1st April, 1989, s. 6 of the Act had a sub-s. (3) which read as follows : “Sec. 6(3) : Where the value of any property cannot be estimated under sub-s. (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner.” Undisputed the shares in question were not saleable in the open market. Sub-s. (3) of s. 6 of the Act is in pari materia with sub-s. (3) of s. 7 of the WT Act, which was under consideration in Baharat Hari Singhania’s case (supra). Applying the principles laid down in the said case, it has to be held that r. 10(2) had application to the facts of the case.

12. It is to be noted that the AO, while computing the valuation, fixed the value of the land and building at Rs. 25 lakhs as against Rs. 7,83,230 as reflected in the balance sheet. There is no indication as to how this figure was arrived at. In other words, valuation as done was without any basis. The Tribunal no doubt had held that valuation aspect was of academic interest only, as there was no gift involved. On the contrary, we have, as noted above, held that there was a gift involved. In these circumstances, we hold that the Tribunal’s conclusions both on the questions— whether there was any gift involved and on the valuation—are erroneous. Thus, we direct theTribunal to redetermine the value keeping in view the aspects which it itself noted. The reference petitions are accordingly disposed of.

[Citation : 255 ITR 300]

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