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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Hon'ble Mr. Justice Batukumar Kantiprasad Mehta
  • Hon'ble Mr. Justice Bipinchandra Jivanlal Divan
Acts
  • section 44, sub-section (1), clause (3) of the Finance Act, 1965,
  • provisions of the Gift-tax Act and the Gift-tax Rules.
  • Wealth-tax Rules, 1957, under rule 1D provision
  • WEALTH TAX ACT
  • SECTION 46 A GIFT TAX ACT
  • Rules called the Gift-tax Rules, 1958,
  • section 7(5) of the Finance Act, 1894,
  • GIFT TAX ACT
  • provisions in the Wealth-tax Rules
  • provisions of the Wealth-tax Rules
  • SECTION 3 WEALTH TAX ACT
  • Indian Companies Act,
  • section 44(1)(3). Lord
  • Clause (2) of rule 10
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Hon'ble Mr. Justice Batukumar Kantiprasad Mehta
  • Hon'ble Mr. Justice Bipinchandra Jivanlal Divan
Acts
  • section 44, sub-section (1), clause (3) of the Finance Act, 1965,
  • provisions of the Gift-tax Act and the Gift-tax Rules.
  • Wealth-tax Rules, 1957, under rule 1D provision
  • WEALTH TAX ACT
  • SECTION 46 A GIFT TAX ACT
  • Rules called the Gift-tax Rules, 1958,
  • section 7(5) of the Finance Act, 1894,
  • GIFT TAX ACT
  • provisions in the Wealth-tax Rules
  • provisions of the Wealth-tax Rules
  • SECTION 3 WEALTH TAX ACT
  • Indian Companies Act,
  • section 44(1)(3). Lord
  • Clause (2) of rule 10
See more information ...
Smart Summary

Structured Summary of the Court's Opinion

Factual and Procedural Background

This reference arises from appeals in gift-tax proceedings relating to 480 shares in an English private company, Messrs. Bakubhai & Ambalal Ltd., London, formerly held by the late Ambalal Sarabhai. The revenue referred two questions to the court and the assessee referred a third question which the assessee subsequently did not press.

Key factual points (as stated in the opinion):

  • Bakubhai & Ambalal Ltd. was a private company with restrictive provisions in its articles as to alienation of shares. The company increased its share capital by issuing 2,000 new shares in October 1961 and offered them, on a one-for-one basis, first to existing shareholders.
  • Ambalal Sarabhai, holding 500 shares, applied for 480 new shares and applied to the Reserve Bank of India for permission to remit funds and, later, for permission to gift the 480 shares. Permission to gift was granted by the Reserve Bank on July 18, 1964.
  • Gift deeds for the 480 shares were executed on October 17, 1964; the gift deeds stated a value of Rs. 450 per share. The donor's return of gift declared the total value at Rs. 2,16,000 (480 shares at Rs. 450 each).
  • The assessee valued the shares using the break-up value method based on the company's balance-sheet as at March 31, 1963. Alternative break-up valuations mentioned in the proceedings were: Rs. 507 per share (based on balance-sheet as of March 31, 1964) and Rs. 333 per share (based on balance-sheet as of March 31, 1965); the assessee suggested an intermediate figure of Rs. 420 per share for valuation on the date of gift.
  • The Gift-tax Officer adopted Rs. 507 per share (using the March 31, 1964 balance-sheet) and rejected the assessee's contention that the shares should be valued on an ex-rights basis. The Appellate Assistant Commissioner affirmed that view. The Appellate Tribunal, however, accepted the assessee's break-up valuation based on the March 31, 1963 balance-sheet, distinguishing certain precedents and applying the ratio in Lynall v. Inland Revenue Commissioners.
  • At the instance of the revenue two specific questions were referred to the court for opinion; the assessee's referred question about ex-right valuation was not pressed before the court.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal's finding — based on the ratio of Lynall v. Inland Revenue Commissioners — that the valuation of the shares should be based on the balance-sheet as at March 31, 1963 (instead of March 31, 1964) was bad in law.
  2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in accepting the valuation of the shares as returned by the assessee and deleting Rs. 27,360 added by the Gift-tax Officer under section 15(3) of the Act.
  3. Whether the Tribunal erred in holding that the valuation should not be made on an ex-rights basis in respect of the right shares issued by the company (this question was referred at the instance of the assessee but was not pressed).

Arguments of the Parties

Assessee's Arguments

  • The assessee relied on the decision of the House of Lords in Lynall v. Inland Revenue Commissioners to argue that the correct date for the balance-sheet to be used for break-up valuation is the latest balance-sheet available to all shareholders on the date of the gift (October 17, 1964), namely the balance-sheet as at March 31, 1963.
  • The assessee also argued (before earlier authorities) that the allotted shares had been gifted ex-rights and thus some reduction in value should be made; that contention was advanced but ultimately was not pressed before this court.
  • As stated in the return of gift, the assessee valued the shares at Rs. 450 per share using break-up value based on the March 31, 1963 balance-sheet.

Revenue's Arguments

  • The revenue contended that the appropriate balance-sheet was that as of March 31, 1964 (the last balance-sheet for the completed year of account before the gift), and that the Tribunal erred in using the March 31, 1963 balance-sheet.
  • The revenue relied on provisions in the Wealth-tax Rules (including rule 1D added later) to support a contention about hypothetical market value and valuation methodology, and urged that market-value rules in the wealth-tax context supported its approach.
  • The Appellate Assistant Commissioner had inferred that because only members of the Sarabhai family were shareholders, they must have known the correct state of affairs of the company; thus, the revenue argued that relevant information (for valuation) was available to the shareholders and should be reflected in valuation.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Lynall v. Inland Revenue Commissioners [1972] 85 ITR 563 HL (House of Lords) Principle that hypothetical open-market purchaser is to be assumed to have the information ordinarily available to an ordinary shareholder; confidential director-only information is not to be treated as available for valuation. The court applied Lynall's test to hold that only information available to all shareholders on the date of the gift is to be used for break-up valuation; because the company's March 31, 1964 balance-sheet was not available to ordinary shareholders on October 17, 1964, the Tribunal was correct to use the March 31, 1963 balance-sheet.
Miss Dhun Dadabhoy Kapadia v. Commissioner of Income-tax The case was referenced by the Tribunal and comparison was drawn, but the Tribunal distinguished it (the opinion records the Tribunal's distinguishing of the case). The court records that the Tribunal distinguished this authority; the opinion does not elaborate on the distinguishing beyond noting the Tribunal's action.
Crabtree v. Hinchcliffe (House of Lords) Confirmed that confidential takeover negotiations (not publicly available) do not amount to 'special circumstances' that should alter market valuation for quoted securities; supports principle that confidential information need not be taken into account. The court relied on Crabtree as reinforcing the Lynall principle that confidential information unavailable to ordinary shareholders is not to be considered when determining hypothetical market value or break-up valuation.

Court's Reasoning and Analysis

The court's analysis proceeded in a stepwise manner and invoked the legislative and rule framework that governs gift valuation together with the House of Lords authorities relied upon:

  1. Statutory and regulatory framework: The court identified section 6 of the Gift-tax Act, 1958, which directs that the value of property transferred by way of gift (other than cash) is to be estimated as the price it would fetch in the open market on the date of gift, subject to specified exceptions. The Gift-tax Rules, 1958, and specifically rule 10(2), were identified as governing valuation of shares in private companies with restrictive articles.
  2. Application of rule 10(2): It was common ground before the Tribunal that the shares should be valued by the break-up (total-assets) method. Rule 10(2) requires that, for private company shares where value cannot be ascertained by reference to total assets, a hypothetical open-market price subject to articles should be estimated. In this case the court accepted the parties' common ground that break-up valuation was appropriate.
  3. Key factual/temporal question: The critical issue became which balance-sheet date to use for break-up valuation — the balance-sheet as of March 31, 1963 (the latest balance-sheet actually available to all shareholders on Oct 17, 1964), or the balance-sheet as of March 31, 1964 (the last completed year-end). The revenue argued for March 31, 1964; the assessee argued for March 31, 1963.
  4. Precedential test from Lynall and Crabtree: The court accepted the House of Lords' approach in Lynall (and the supporting reasoning in Crabtree) that the hypothetical purchaser in open market valuation must be assumed to have only the information ordinarily available to an ordinary shareholder at the valuation date. Confidential documents or information not available to ordinary shareholders are not to be presumed available for valuation purposes.
  5. Application to facts: On the facts, the court found that the only balance-sheet information actually available to ordinary shareholders on October 17, 1964 was the March 31, 1963 balance-sheet. The March 31, 1964 balance-sheet had been signed by the auditors only in December 1964 and thus was not available to the ordinary shareholder at the gift date. The court rejected the Appellate Assistant Commissioner's inference (based on family shareholders' membership) that the shareholders must have known the company's correct state of affairs; valuation must be based on what information was readily and ordinarily available to all shareholders as such.
  6. Wealth-tax rules not applicable: The court noted that subsequent Wealth-tax Rules (rule 1D) provide a different procedural provision for valuation but observed that those provisions were not made applicable to the Gift-tax Act and rules. The court declined to import the later Wealth-tax rulemaking into construction of the Gift-tax statutory and regulatory provisions relevant to this 1964 gift.
  7. Conclusion of analysis: Given the statutory framework and the precedential test, the Tribunal's application of the break-up method using the March 31, 1963 balance-sheet was legally correct.

Holding and Implications

The court answered the referred questions as follows (stated in the opinion):

Question (1): Answered in the negative and in favour of the assessee.

Question (2): Answered in the affirmative and in favour of the assessee.

Question (3): Not pressed.

Direct consequences and implications (as recorded in the opinion):

  • The Tribunal was correct to value the gifted shares by the break-up method based on the company's balance-sheet as at March 31, 1963 rather than the balance-sheet as at March 31, 1964, because the March 31, 1964 balance-sheet was not available to ordinary shareholders on the gift date (October 17, 1964).
  • By answering Question (2) in the assessee's favour, the court effectively sustained the Tribunal's acceptance of the assessee's declared valuation and the deletion of the Rs. 27,360 added by the Gift-tax Officer under section 15(3) of the Act.
  • No broader new precedent was announced beyond applying and following the principles in Lynall and Crabtree to the facts of this case; the decision clarifies application of those principles in the Gift-tax valuation context.
  • The Commissioner was ordered to pay the costs of the reference to the assessee (costs awarded in favour of the assessee).

This summary is confined to and derived exclusively from the content of the provided court opinion.

Show full summary ...

    Commissioner Of Gift-Tax, Gujarat v. Executors And Trustees Of The Estate Of Late Shri Ambalal Sarabhai.

    Divan, C.J:— In this reference at the instance of the revenue the following two questions have been referred to us for our opinion:

    “(1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal based on the ratio of the case decided by the House of Lords in Lynall v. Inland Revenue Commissioners [1972] 85 ITR 563 HL. and basing the valuation of the shares of Bakubhai and Ambalal Ltd., London, in its balance-sheet as at March 31, 1963, instead of March 31, 1964, is bad in law

    (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in accepting the valuation of the shares as returned by the assessee and deleting Rs. 27,360 added by the Gift-tax Officer under section 15(3) of the Act”

    2. The Tribunal has also referred the following question to us at the instance of the assessee, namely:

    “Whether, on the 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”

    3. 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.

    4. 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 £ 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. Thus, this company if incorporated in India would be known as a private limited company. At its extraordinary general meeting the company decided on October 4, 1961, to increase its share capital from £ 20,000 to £ 40,000 divided into 4,000 shares of £ 10 each. The company also decided at the said meeting that the 2,000 new shares should be offered in the first instance to the holders of ordinary shares of the company whose names appeared in the register of members of the company on such date as might be fixed by the directors. The offer was to be one new ordinary share for one ordinary share held. The company further resolved on that day that if any new ordinary shares were not applied for by such date as might be fixed by the company, those shares could be offered to any person willing to purchase the same. The new shares were to be acquired by remitting £ 10 per share applied for. In pursuance of this resolution of October 4, 1961, the company issued letters of offer to the existing shareholders regarding the issue of new shares. On the strength of 500 shares held by him, Ambalal Sarabhai decided to apply for 480 shares and he applied to the Reserve Bank of India for permission to remit £ 4,800 to the company in England for the purpose of acquiring the new shares. The permission was not immediately given by the Reserve Bank of India and this permission, so far as the record of this case is concerned, does not appear to have been granted till the relevant date. Originally the company had fixed December 15, 1961, as the date up to which the offer for new shares was to be accepted by the shareholder but this date was extended from time to time and the last of such extended date was March 31, 1965. On May 11, 1964, Ambalal Sarabhai applied to the Reserve Bank of India for permission to gift 480 shares (ex-right) and this permission was granted by the Reserve Bank of India by its letter, dated July 18, 1964. 480 shares were gifted to different donees on October 17, 1964, and different gift deeds in identical terms were also executed by Ambalal Sarabhai, the donor, on October 17, 1964. After the gift deeds were executed, on October 26, 1964, the Reserve Bank of India appear to have granted permission to the Indian shareholders to remit £ 10 per new share applied for by them and subsequently the amount was remitted to the company in London. We 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 breakup value method the value of the share was Rs. 507 on the basis of the balance-sheet as of March 31, 1964, and Rs. 333 per share on the basis of the balance-sheet of the company as of March 31, 1965. There was no dispute that by following the break-up value method the value per share was Rs. 450 per share on the basis of the balance-sheet as of March 31, Rs. 507 per share on the basis of the balance-sheet as of March 31, and Rs. 333 per share on the basis of the balance-sheet as of March 31, 1965, The Gift-tax Officer proceeded on the footing that as the gifts were made on October 17, 1964, the value of the shares should be taken at Rs. 507 per share because the nearest balance-sheet in point of time would be as of March 31, 1964. The assessee had also contended before the Gift-tax Officer that there should be further reduction in the value of the shares as the allotted shares were transferred ex-right only, that is, the assessee did not transfer his right of getting new shares on payment pi£ 10 per share. The Gift-tax Officer rejected this contention and adopted the value of shares at Rs. 507 per share, that is, on the break-up value as on March 31, 1964.

    5. The matter was taken in appeal by the assessee but the Appellate Assistant Commissioner agreed with the reasoning of the Gift-tax Officer and dismissed the appeal. In further appeal before the Appellate Tribunal the Tribunal held that in view of the special terms of the offer, there was no question of the assessee or the donor having any right to renounce the shares in favour of anyone else and the company had made it clear in its resolution and in the offer made to the shareholders that if any particular shareholder did not take up the shares offered to him, the shares would be offered to any person willing to purchase the same. The. Tribunal distinguished the case of Miss Dhun Dadabhoy Kapadia v. Commissioner of Income-tax and, following the decision of the House of Lords in Lynall v. Inland Revenue Commissioners [1972] 83 ITR 563 HL., held that since the only balance-sheet which was available at the date of the gift, namely, October 17, 1964, was the balance-sheet as of March 31, 1963, and since the auditors of the company had signed the balance-sheet as of March 31, 1964, only on December 27, 1964, the break-up value method could be applied only in the light of the balance-sheet as of March 31, 1963. Thereafter, at the instance of the revenue the two questions which we have set out at the commencement of this judgment have been referred to us for our opinion. We have also 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.

    6. 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 the income from the property gifted during the period for which the gift is not revocable.

    (3) Where the value of the property cannot be estimated under subsection (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner.”

    7. The Central Board of Revenue has made Rules called the Gift-tax Rules, 1958, in exercise of the powers conferred upon it by section 46 of the Gift-tax Act. Rule 10 is material for our purposes and it deals with valuation of property. Clause (2) of rule 10 which deals with the question before us sets out:

    “(2) Where the articles of association of a private company contain restrictive provisions as to the alienation of shares, the value of 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.”

    8. In the instant case it is common ground that this particular company is, what is referred to in Clause (2) of rule 10, a private company, that is, the articles of association of this particular company in London contain restrictive provision as to the alienation of shares. Hence, the question that has to be considered is whether the value of the shares of this company cannot be ascertained by reference to the value of the total assets of the company. If it can be so ascertained, then it has to be ascertained only in that manner. If, however, it cannot be ascertained by reference to the value of the total assets of the company, then estimate has to be made of what the shares 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 factor of a special buyer giving a higher price for his own special reasons has to be disregarded while valuing these shares. In the instant case it has not been shown to us as to why in the case of this particular company which is a private company, the articles of association of which contained restrictive provision as to the alienation of shares, the value of shares 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.”

    9. Therefore, we will proceed in the course of this judgment on the footing that these 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.

    10. 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 available to all concerned on October 17, 1964, when the gift was made, or, whether it should be the balance-sheet as of March 31, 1964, which was the last balance-sheet for the completed year of account of the company before the gift was made. The revenue insists that it should be the balance-sheet as of March 31, 1964, whereas the assessee insists that it should be the balance-sheet as of March 31, 1963.

    11. On behalf of the assessee, Mr. Patel has relied on the decision of the House of Lords in Lynall v. Inland Revenue Commissioners . The question before the House of Lords was under section 7(5) of the Finance Act, 1894, pertaining to estate duty and the wording of the relevant section was:

    “The principal value of any property shall be estimated to be the price which, in the opinion of the Commissioners, such property would fetch if sold in the open market at the time of the death of the deceased.”

    12. The case before the House of Lords arose in connection, with the estate duty payable on the estate of Mrs. Lynall who died on May 21, 1962. Estate duty became payable on 67,980 ordinary shares in a private company. The shares were a minority holding. The company had a successful profit record, a strong liquid position, a high dividend cover and a very satisfactory cash flow. The value of the shares would have been increased if a public issue was likely. The accounts for the year up to July 31, 1962, when drawn up, showed a substantial increase in profits. The accounts for the previous year had been drawn up and audited prior to Mrs. Lynall's death but were not passed until the meeting on June 7, 1962. The chairman's speech was not circulated prior to the meeting and there was no evidence that it was in existence at the date of death, namely, May 21, 1962. Private documents of the directors (category B documents) were in existence at the date of death indicating that a flotation of part of the capital was under consideration. One of the directors, however, if questioned at the date of death by a prospective purchaser as to the likelihood of a public issue, would have said that it was doubtful and remote. It was common ground that the accounts up to July 31, 1961, were to be taken into account. On behalf of the Crown expert evidence was given that where substantial blocks of shares in private companies were in the market, it was the invariable practice among boards 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 £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 £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 and hold them subject to the provisions of the articles of association, including those relating to the alienation and transfer of shares in the company. It was further held by the House of Lords that, in the circumstances, confidential information of the nature contained in the category B documents ought not to be regarded as available to a hypothetical purchaser under section 7(5) of the Act of 1894, and that, accordingly, the value of the shares was to be assessed at £3 10s. a share. At page 567, Lord Reid in his speech pointed out:

    “We must decide what the highest bidder would have offered in the hypothetical sale in the open market, which the Act requires us to imagine took place at the time of Mrs. Lynall's death. The sum which any bidder will offer must depend on what he knows (or thinks he knows) about the property for which he bids. The decision of this case turns on the question what knowledge the hypothetical bidders must be supposed to have had about the affairs of Linread: (private limited company concerned). One solution would be that they must be supposed to have been omniscient. But we have to consider what would in fact have happened if this imaginary sale had taken place., or at least—if we are looking for a general rule—what would happen in the event of a sale of this kind taking place. One thing which would not happen would be that the bidders would be omniscient. They would derive their knowledge from facts made available to them by the shareholder exposing the shares for sale. We must suppose that, being a willing seller and an honest man, he would give as much information as he was entitled to give. If he was not a director he would give the information which he could get as a shareholder. If he was a director and had confidential information, he could not disclose that information without the consent of the board of directors.

    In the present case if we are to suppose that the bidder only had information which he could obtain himself or which could be given without the consent of the board then admittedly £3 10s. is the correct estimate of what the highest bid would have been. But the revenue maintains and the Court of Appeal would seem to have held that it must be supposed that the board would have authorised the hypothetical seller to communicate highly confidential information to all who might come forward as bidders………….

    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 then we would have to suppose that steps had been taken before the sale to enable a variety of persons, institutions or financial groups to consider what offers they would be prepared to make. It would not be a true sale in the open market if the seller were to discriminate between genuine potential buyers and give to some of them information which he withheld from others, because one from whom he withheld information might be the one who, if he had had the information, would have made the highest offer.”

    13. The same conclusion was reached by the other law Lords who also delivered speeches in this particular case before the House of Lords and, therefore, the test which was applied was the information which would be ordinarily available to any ordinary shareholder as of the date with reference to which the value has to be made. That test, for the purpose of deciding the hypothetical market value, seems to have appealed to the House of Lords in Lynall's case .

    14. In Crabtree v. Hinchcliffe the House of Lords was concerned with the question of capital gains tax. Shares and securities were being quoted on the stock exchange and again the test of the price which shares might reasonably be expected to fetch in open market was before the House of Lords. As of the relevant date confidential negotiations were going on for taking over of the entire shareholding of the company. These take-over negotiations were not published or communicated to the stock exchange. Under section 44, sub-section (1), clause (3) of the Finance Act, 1965, except where in consequence of special circumstances prices so quoted were by themselves not a proper measure of market value, the market value was to be accepted in the case of shares quoted for sale in the open market and the only question before the House of Lords was whether the fact that private negotiations or negotiations which were highly confidential were going on for taking over the entire company, could be said to be special circumstances within the meaning of section 44(1)(3). Lord Reid in his speech referred to the earlier decision in Lynall v. Inland Revenue Commissioners . Ultimately, it was held by the House of Lords in that case that this confidential information could not be said to be special circumstances which would have affected the prices quoted on the stock exchange. At the end of his speech Lord Reid observed:

    “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’ ……………..”

    15. Thus, the test which was applied in Lynall's case 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.

    16. 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 facts before us, which we have set out hereinabove, it is obvious that as of October 17, 1964, when the gifts were made and the gift deeds were executed, the only information available to all shareholders was in the form of the balance-sheet as of March 31, 1963. The balance-sheet of the company as of March 31, 1964, annexure “I” to the statement of case, clearly shows that the auditors of the company had signed their report and the balance-sheet on December 23, 1964. Therefore, the information contained in the balance-sheet as of March 31, 1964, was not available to ordinary shareholders on October 17, 1964. The Appellate Assistant Commissioner has by adopting an inferential process of reasoning come to the conclusion that since only the members of the Sarabhai family were shareholders of this company, they must have known about the correct state of affairs of the company but it must not be forgotten that what we are concerned with is the value which a hypothetical purchaser would have offered in a hypothetical market on the basis of the information readily and ordinarily available to all shareholders as such. The only information which was available as on October 17, 1964, was in the form of the balance-sheet as of March 31, 1963, and hence the Tribunal was right when it took into consideration for the purpose of arriving at the value of the shares by the break-up method, the balance-sheet as of March 31, 1963, and not, as the revenue was contending for, the balance-sheet as of March 31, 1964.

    17. Mr. Kaji for the revenue relied upon certain provisions in the Wealth-tax Rules in support of his argument. He contended that under section 3 of the Wealth-tax Act the hypothetical market value as of the relevant valuation date has to be reached and under the Wealth-tax Rules, 1957, under rule 1D provision has been made for market value of unquoted equity shares of companies, other than investment companies, and managing agency companies. Rule 1D provides that the market value of an unquoted equity share of any company, other than an investment company or a managing agency company, has to be determined in the following manner:

    “The value of all the liabilities as shown in the balance-sheet of such company shall be deducted from the value of all its assets shown in that balance-sheet. The net amount so arrived at shall be divided by the total amount of its paid-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.”

    18. 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.”

    19. 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 rulemaking authority has subsequently provided for the purposes of the Wealth-tax Act and the Wealth-tax Rules can hardly be of any assistance to us in construing the provisions of the Gift-tax Act and the Gift-tax Rules. Under these circumstances we have not considered the question before us from the point of view of what has been prescribed with effect from 1967 in the context of the Wealth-tax Act.

    20. Our conclusion, therefore, is that the Tribunal was right in holding that the shares have to be valued with reference to the break-up value method applied in the balance-sheet as of March 31, 1963. We, therefore, answer the questions referred to us as follows:

    Question (1):

    In the negative and in favour of the assessee.

    Question (2):

    In the affirmative and in favour of the assessee.

    Question (3):

    Not pressed.

    21. The Commissioner will pay the costs of this reference to the assessee.

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