1. This judgment will also govern Wealth-tax Reference No. 10 of 1973.
2. The wealth-tax reference arises out of the order of the Income-tax Appellate Tribunal which is also challenged by the petitioner in this petition, as a question relating to the validity of r. 1D of the W.T. Rules, 1957, (hereinafter referred to as 'the Rules'), was not referred by the Tribunal to this court for opinion.
3. The facts which have given rise to this petition are within a very narrow compass. The petitioner, who is an assessee for the purposes of the W.T. Act, is the owner of 1,232 shares of Surat Cotton Spinning & Weaving Mills Pvt. Ltd. (hereinafter referred to as the 'Surat Cotton Mills'). In the proceedings for assessment of the net wealth of the petitioner for the assessment year 1967-68, the shares of the Surat Cotton Mills were valued at the rate of Rs. 170 relying upon a valuation of similar shares held by another assessee which is described as trustees of Maithili Family Trust No. 2.
4. In the assessment proceedings for the assessment year 1968-69, the petitioner filed a statement showing investment in shares of companies located in India, in which the value of the shares of the Surat Cotton Mills was shown at Rs. 254 per share and the total value of 1,232 shares held by the petitioner was shown at Rs. 3,12,928. The WTO seems to have accepted this valuation. But when the matter was taken in appeal to the AAC, it appears from his order that the applicability of r. 1D of the Rules in respect of the shares of the Surat Cotton Mills was disputed. It may be stated that it is not in dispute that if the shares are valued in accordance with the manner prescribed in r. 1D, the value of each share would stand correctly determined at Rs. 254. The AAC took the view that the value of the shares was correctly determined under r. 1D of the Rules.
5. The matter was taken in appeal by the petitioner to the Income-tax Appellate Tribunal. By an interim order made by the Tribunal under S. 24(6) of the W.T. Act (hereinafter referred to as 'the Act'), the question of valuation was referred to two valuers.
6. When the valuers proceeded to determine the value of the 1,232 equity shares of the Surat Cotton Mills as on 31st March, 1968, which was the valuation date relevant to the assessment year 1968-69, it was contended before the valuers that r. 1D had no relationship to the market value referred to in S. 7(1) of the Act and that the said rule goes beyond the substantive provision in S. 7 for valuation of shares. This legal contention with regard to the validity of r. 1D was not and indeed could not have been gone into by the two valuers. They, however, proceeded to determine the value of the shares as required by the Tribunal and the value of each share was determined at Rs. 175 as on the valuation date 31st March, 1968.
7. When the appeal was taken up for hearing by the Appellate Tribunal, the validity of r. 1D of the Rules was again challenged before the Tribunal. The Tribunal found that r. 1D, which came into force with effect from 6th October, 1967, provided that the market value of an unquoted equity share of any company, other than an investment company or managing agency company, shall be determined according to the manner prescribed in that rule. The Tribunal found that the Surat Cotton Mills was a company to which r. 1D applied. The Tribunal took the view that r. 1D was mandatory in the sense that it was to be adopted whether the valuation is to be made by the revenue authorities or by the valuers in terms of S. 24(6) of the Act. In other words the Tribunal found that the valuers should have computed the value of the shares in accordance with the manner prescribed under r. 1D and that they had, therefore, gone wrong in holding that r. 1D should be ignored. It was pointed out to the Tribunal by the departmental representative that the valuation adopted by the WTO and the AAC was in accordance with r. 1D. The Tribunal, therefore, found that there was no point in setting aside the valuers' report and directing a fresh determination because the value had been properly determined in accordance with r. 1D by the revenue authorities. The Tribunal, therefore, declined to accept the valuation reported by the valuers and confirmed the determination of the value of the shares of the Surat Cotton Mills at the rate of Rs. 254 per share.
8. The assessee asked for a reference to be made in respect of three questions which were as follows :
'(1) Whether, on the facts and in the circumstances of the case, the valuers were bound to value the shares of Surat Cotton Spinning & Weaving Mills Pvt. Ltd. in accordance with rule 1D of the Wealth-tax Rules
(2) Whether the Tribunal should have accepted the value of the said shares as determined by the valuers
(3) Whether rule 1D in so far as it goes beyond the substantive provisions of valuation contained in section 7(1) is invalid and/or ultra vires the rule-making power of the Board under section 46(2) of the Wealth-tax act, 1957, and suffered from the vice of excessive legislation ?'
9. The Tribunal referred the first two questions. That reference is Wealth-tax Reference No. 10 of 1973 referred to earlier. So far as the third question was concerned, the Tribunal took the view that the question of ultra vires was foreign to the scope of the jurisdiction of the taxing authority and no such question could, therefore, be raised or could arise from the Tribunal's order. Reference under s. 27 having been declined by the Tribunal in respect of the third question, the petitioner filed this petition challenging the validity of r. 1D.
10. Since the questions which arise in this petition will be germane to the decision of the Wealth-tax Reference No. 10 of 1973, we have heard both these matters together and both the matters are, therefore, being disposed of by a common judgment.
11. Before we refer to the contentions raised by Mr. Kolah appearing on behalf of the assessee both in the petition and in the reference, it will be more convenient to set out the relevant provisions of the Act and the Rules which fall for consideration in this petition.
12. Under S. 3 of the W.T. Act it is provided that 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, 1957, a tax (hereinafter referred to as the 'wealth-tax') in respect of the net wealth on the corresponding valuation date of every individual, HUF and company at the rate or rates specified in the Schedule. The net wealth referred to in S. 3 is defined in S. 2(m) of the Act as meaning 'the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date' other than certain assets which are specified in sub-cls. (i) to (iii) of clause (m).
13. Section 4 refers to certain assets which are to be included in the net wealth of an individual. The assets specified therein are not relevant for our purpose. The definition of net wealth provides that the aggregate value is to be computed in accordance with the provisions of the Act. The relevant provision in the Act is to be found in S. 7. We are in this petition concerned with sub-s. (1) of S. 7, which reads as follows :
'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.'
14. Section 7(1) thus provides that the value of the asset is to be estimated by the WTO and the estimate is to be made of the price which, in the opinion of the WTO, it would fetch if sold in the open market on the valuation date.
15. Section 7(1) opens with the words 'Subject to any rules made in this behalf'. The rule-making power which has been given to the Central Board of Direct Taxes is to be found in S. 46. As is usually found, the provision is in two parts, that is, sub-s. (1) and sub-s. (2), apart from some additional provisions relating to the manner of framing the rules and the power to make rules retrospectively which is given in sub-ss. (3) and (4). As much turns on the scope of the power of the rule-making authority, it is necessary to reproduce S. 46 in full :
'46. (1) The Board may, by notification in the Official Gazette, make rules for carrying out the purposes of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, rules made under this section may provide for -
(a) the manner is which the market value of any asset may be determined;
(b) the form in which returns under this Act shall be made and the manner in which they shall be verified;
(c) the form in which appeals and applications under this Act may be made, and the manner in which they shall be verified;
(cc) the circumstances in which, the conditions subject to which and the manner in which, the Appellate Assistant Commissioner may permit an appellant to produce evidence which he did not produce or which he was not allowed to produce before the Wealth-tax Officer;
(d) the form of any notice of demand under this Act;
(dd) the procedure to be followed in calculating interest payable by assessees or interest payable by the Government to assessees under any provision of this Act, including the rounding off of the period for which such interest is to be calculated in cases where such period includes a fraction of a month, and specifying the circumstances in which and the extent to which petty amounts of interest payable by assessee may be ignored;
(e) the areas for which lists of valuers may be drawn up;
(f) any other matter which has to be, or may be, prescribed for the purposes of this Act.
(3) The power to make rules conferred by this section shall on the first occasion of the exercise thereof include the power to give retrospective effect to the rules or any of them from a date not earlier than the date of commencement of this Act.
(4) The Central Government shall cause every rule made under this Act to be laid as soon as may be after it is made before each House of Parliament while it is in session for a total period of thirty days which may be comprised in one session or in two successive sessions, and if before the expiry of the session in which it is so laid or the session immediately following, both Houses agree in making any modification in the rule or both Houses agree that the rule should not be made, the rule shall thereafter have effect only in such modified form or be of no effect, as the case may be, so however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule.'
16. Rule 1D of the Rules, on the validity of which there has been a long debate at the bar, became effective with effect from 8th October, 1967. Actually it was not one of the W.T. Rules which, it appears, were framed for the first time in October, 1967. Rule 1D reads as follows :
'The market value of an unquoted equity share of any company, other than an investment company or a managing agency company, shall be determined as follows :
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 :
Provided that where, in respect of an equity share, no dividend has been paid by such company continuously for not less than three accounting years ending on the valuation date or in a case where the accounting year of that company does not end on the valuation date, for not less three continuous accounting years ending on a date immediately before the valuation date the market value of such share shall be as indicated in the table below :-
The Table----------------------------------------------------------------------Number of accounting years ending on thevaluation date or in a case where theaccounting year does not end on thevaluation date, the number of accounting Market valueyears ending on a date immediatelypreceding the valuation date, for whichno dividend has been paid.----------------------------------------------------------------------Three years 82 1/2 per cent. of the breakup value of such share.Four years 80 do.Five years 77 1/2 do.Six years and above 75 do.---------------------------------------------------------------------- Explanation I. - For the purposes 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.
Explanation II. - For the purposes of this rule -
(i) the following amounts shown as assets in the balance-sheet shall not be treated as assets, namely :-
(a) any amount paid as advance tax under section 18A of the Indian Income-tax Act, 1922 (11 of 1922), or under section 210 of the Income-tax Act, 1961 (43 of 1961);
(b) any amount shown in the balance-sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset;
(ii) the following amounts shown as liabilities in the balance-sheet shall not be treated as liabilities, namely :-
(a) the paid-up capital in respect of equity shares;
(b) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the valuation date at a general body meeting of the company;
(c) reserves, by whatever name called, other than those set apart towards depreciation;
(d) credit balance of the profit and loss account;
(e) any amount representing provision for taxation (other than the amount referred to in clause (i)(a)) to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
(f) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.'
17. We may at this stage point out that the matter relating to the determination of the value of shares was originally dealt with by a circular issued by the then Central Board of Revenue on 28th September, 1957. This circular is to be found on page 859 of A. C. Sampath Iyenger's Three New Taxes, Vol. I, 4th Edn. Since we are in this case concerned with the valuation of unquoted shares of a private limited company, we reproduce only the relevant part of that circular dealing with the valuation of shares and securities. The shares and securities have been divided into three categories, namely, (a) shares in joint stock companies and securities issued by the Government or local authorities which are the subject of dealings in a recognised stock exchange, (b) shares in foreign companies and securities issued abroad which are not the subject-matter of dealings in a recognised stock exchange in Indian but which are dealt with in a recognised stock exchange in a foreign country, and (c) shares which are not quoted on stock exchange and for which the market value cannot be ascertained on the basis of stock exchange quotation. With regard to the shares referred to in category (c) above, the circular reads as follows :
'The total wealth of the company without excluding the values of any assets which would have been exempted in making the assessment on the company to wealth-tax should first be determined. This will be determined by adding to the paid-up capital the debentures, reserves and the balance as per profit and loss account. The provision for liabilities in the balance-sheet should particularly be scrutinised with a view to excluding therefrom items which should really form part of the reserves. From the total so arrived at, the paid-up value of the preference shares and the debentures should be subtracted. The resulting balance should be divided by the amount of the paid-up ordinary share capital in order to arrive at the value of each rupee of paid-up Capital. On multiplying this result by the paid-up value of the shares held by the assessee, their value is arrived at for the purpose of wealth-tax assessment.'
18. One other provision to which a reference is necessary is to be found in sub-ss. (5) and (6) of S. 24. An appeal against the orders of the AAC is provided to the Appellate Tribunal under S. 24. The course which the Tribunal is to adopt when the appellate before it objects to the valuation of any property is prescribed in S. 24(6), the relevant part of which reads as follows :
'(a) Where the appellant objects to the valuation of any property, the Appellate Tribunal may, and if the appellant so requires, shall, refer the question of the disputed value to the arbitration of two valuers, one of whom shall be nominated by the appellant and the other by the respondent, and the Tribunal shall, so far as that question is concerned, pass its orders under sub-section (5) conformably to the decision of the valuers.'
19. There is a proviso to clause (a) of sub-s. (6) dealing with situations which might arise from the failure of either party to nominate a valuer or in case there is a difference of opinion between the valuers. Those procedural provisions are not relevant for our purpose. Sub-sections (7), (8) and (8A) are also procedural provisions dealing with the enquiry to be made by the valuers and by sub-s. (8B) it is expressly provided that nothing in the Arbitration Act, 1940, shall apply to arbitrations under this section.
20. At this stage it is also necessary to point out that Ss. 24(6) to 24(8B) have been repealed by the Taxation Laws (Amendment) Act, 1972, with effect from 1st January, 1973, but a new provision has been enacted in S. 16A which enables the WTO to refer the question of valuation of any asset to a valuation officer. Section 16A(1) reads as follows :
'(1) For the purpose of making an assessment (including an assessment in respect of any assessment year commencing before the date of coming into force of this section) under this Act, the Wealth-tax Officer may refer the valuation of any asset to a Valuation Officer -
(a) in a case where the value of the asset as returned is in accordance with the estimate made by a registered valuer, if the Wealth-tax Officer is of opinion that the value so returned is less than its fair market value;
(b) in any other case, if the Wealth-tax Officer is of opinion -
(i) that the fair market value of the asset exceeds the value of the asset as returned by more than such percentage of the value of the asset as returned or by more than such amount as may be prescribed in this behalf; or
(ii) that having regard to the nature of the asset and other relevant circumstances, it is necessary so to do.'
21. The percentage and the value referred to in clause (b) above are respectively 33 1/2% and Rs. 50,000 having been so prescribed by r. 3B of the Rules. The 'Valuation Officer' is defined in S. 2(r) as meaning a person appointed as a Valuation Officer, under S. 12A, and includes a Regional Valuation Officer, a District Valuation Officer and an Assistant Valuation Officer. Section 12A empowers the Central Govt. to appoint as many Valuation Officers as it thinks fit. The newly inserted S. 16A is not directly relevant for the purposes of the decision of the questions raised in this petition, but it has been referred to merely point out that in spite of rules being made dealing with the valuation of assets, provision has still been retained enabling the WTO to make a reference to a Valuation Officer.
22. Having reproduced the relevant provisions of the Act, it is now necessary to refer to the contentions raised by Mr. Kolah appearing on behalf of the petitioner. It is contended that r. 1D of the Rules, if read as being a mandatory rule, defeats the very purpose of S. 7 which is to arrive at the true market value of the shares. It is urged that r. 1D, which prescribes a break-up value method of determining the valuation of shares, requires even a company, which is having a prosperous business, to be treated on the same footing as a company, which is ripe for winding-up or is facing imminent liquidation. Reliance has been placed on the decision of the Supreme Court in CWT v. Mahadeo Jalan : 86ITR621(SC) and on the basis of certain observations made by the Supreme Court in that decision, it is urged that the break-up value method could properly be utilised only where the shares of a company, which is ripe for winding up, have to be valued and, therefore, r. 1D, which is made applicable to all companies, must be treated as being in excess of the rule-making power of the Board. Another limb of the same argument is that S. 46(2)(a) empowered the Board to frame a rule which would be directory in nature and if the rule is construed as a mandatory rule, as held by the Tribunal, then it would also be clearly in excess of the rule-making power. It is argued that unless the rule is read as being of a directory nature, it would have the effect of taking away the right which is given to an assessee under S. 7(1) to have the market value of an asset determined for the purposes of the W.T. Act and it would, therefore, be in conflict with S. 7. Relying on the well-established principle that where there is a conflict between a provision of a statute and the rule, the rule must give way to the statute, it is urged that the rule will become bad and will, therefore, have to be ignored.
23. On the other hand, it is contended by Mr. Joshi appearing on behalf of the revenue that the power to make rules for working out the provisions of S. 7 is contemplated by the provisions of S. 7 itself, and, according to the learned counsel for the revenue, when S. 7(1) opens with the words 'subject to any rules made in this behalf', it is clearly contemplated that the power exercised by the WTO under S. 7(1) of the W.T. Act has to be in accordance with the rules that may be framed under S. 46. It was seriously disputed by Mr. Joshi on behalf of the revenue that the power given by clause (a) of S. 46(2) could be exercised to make only a directory rule and, according to the learned counsel, even if r. 1D did not squarely fall within the power contemplated by clause (a) of sub-s. (2) of S. 46, as long as the rule prescribed a method of valuation which was a well-known method of valuation, it could still be supported as having been made in the exercise of the general power of making rules under the main provisions in S. 46(1) of the Act, the provisions in sub-s. (2) being merely of an illustrative character.
24. Before we go to these rival contentions, it is necessary to refer briefly at the outset to the recognised methods of valuation where the value of unquoted shares of a private limited company is to be ascertained. We shall later refer to the decision of the Supreme Court in Mahadeo Jalan's case : 86ITR621(SC) , which has come after the rules were framed because the decision was given in September, 1972, and the rules were framed in October, 1967. It will, therefore, be profitable to find out what were the recognised principles of accountancy at that time relating to the valuation of the unquoted shares. Generally two methods of valuation have been well recognised which have been broadly described as the 'yield method' and the 'break-up value method'. Both these methods have been described by different names by different authors. The yield method has been described as the earning capacity valuation method by Yorston and Smyth in their book Advanced Accounting, Vol. 2, 6th Edn., p. 507. Dealing with this method, the learned authors have observed as follows :
'This method of valuing unlisted shares is known as the 'Profit Valuation' or 'Earning Capacity' method and is the one to be used in all but exceptional cases. This method of valuation depends upon the comparison of the company's earning capacity and the normal rate of interest or dividend that is current on outside investments. An investor is primarily concerned with the possible return on the capital he invests, and in most cases in which the provisions of a statute do not require consideration, this method is preferred to the asset backing method.'
25. William Pickles in his book on Accountancy, 4th Edn., at p. 2619, has referred to this method as 'Income Basis' method and has observed as follows :
'It is clear that the normal purpose of the contemplated purchase is to provide for the buyer an annuity; for his outlay he will expect a yearly income return, great or small, stable or fluctuating, but nevertheless some sort of return commensurate with the price paid therefor. In other words, the investment is made, primarily at all events, with a view to providing a recurring income. Apart from the fact that he may cherish a hope that when the time arrives for selling he will be able to secure a profit, the purchaser's object in making the purchase is to secure, as already stated, a recurring income; he is prepared to risk fluctuation and even the possibility that in any one year (or even years) no income at all will be forthcoming; but all the same, he expects income, again hoping that it will, as time goes on, tend to increase rather than decrease.....
The value of a share is arrived at by taking the rate of annual return divided by the return expected and multiplied by the paper or paid-up amount of the share upon which the dividend is based, without taking into account any accruing dividend.'
26. Adamson and Goorey in their book The Valuation of Company Shares and Businesses while summarising the principles which have emerged as a result of judicial decisions have put the matter thus :
'Judicial approval has been given to those accounting authorities who regard goodwill as included automatically in a total valuation ascertained by capitalization instead of it being valued by a separate formula.
The assessment of value must be based mainly upon the income yield, but with some regard to the asset backing in special cases.
Asset backing is of more importance in the case of investment companies than in the case of trading companies.
Earning capacity or maintainable profits are not synonymous with the yield or return, which is the balance remaining therefrom after providing a reasonable reserve.
In the use of average yields and average profits - or indeed any average - the greatest care is necessary to ensure that the factors averaged are truly comparable and are relevant to the result being sought.'
27. These authors also deal with the break-up value method.
28. Yorston and Smyth have described this method as 'asset backing method' and have clearly classified companies into two parts, namely, (1) company as a continuing concern, and (2) where company is being liquidated. The learned authors have put the matter thus at p. 501 :
'(a) Company as a continuing concern :
In valuing shares by the Asset Backing method based on the view that the company is a continuing concern, two methods of approach are available, viz. :
(i) to value the shares on the net tangible asset basis (excluding goodwill); and
(ii) to value the shares on the basis of the net tangible assets plus an amount for goodwill.
Net Tangible Asset Backing (excluding goodwill) : By this method the total of the net tangible assets (assets less liabilities) is divided by the number of issued shares - the result gives the asset backing for each issued share. For instance, if the assets total $ 50,000, and the liabilities $ 10,000, the net assets ($ 40,000) divided by the number of shares, which we will assume to be 20,000, will make the asset value of each share $ 2. That is, if all the assets were disposed of at their present amounts in the books and all the liabilities were discharged there would be available for each shareholder an amount of $ 2 for each share held....
(b) Asset backing where company is being liquidated :
The Asset Backing method is sound if liquidation is contemplated, though in this case the realizable value of the assets should be taken into account.'
29. Pickles described this method as 'equity' or 'net assets' Basis and has described it as follows (p. 2625) :
'The procedure of arriving at the value of a share employed in the equity method is simply to estimate what the assets, less liabilities, are worth, i.e., the 'net' assets - allowing for a probable loss or possible profit on book values - the balance being available for shareholders. Included in the liabilities may be debentures, debenture interest, expenses outstanding, and possibly preference dividends if the articles of association stipulate for payment of 'arrears' in a winding up.'
30. Particularly important are the observations of the learned author at p. 2627, where he states :
'It need hardly be stressed that when a company is : (a) known to be at the end of its life, or (b) likely to be taken over on an asset basis by another company, the valuation will be on the above-mentioned basis, even if quoted on the Stock Exchange, because the market value will naturally be based on the break-up basis.'
31. The established principles of accountancy, therefore, appear to contemplate that the break-up value method is not resorted to in the case of a company which is a going concern and is generally resorted to in the case of a company which is about to be liquidated. This concept has also received judicial and statutory recognition and we may merely refer to the two decisions of the High Court of Australia, the first one being in McCathie v. Federal Commissioner of Taxation  69 CLR 1. The High Court in that case was concerned with the valuation of the shares of a deceased person for the purposes of estate duty. What had to be ascertained was the market value of the shares on the stock exchange, on the date of death of the deceased. While dealing with this question and setting out the true approach to the problem of valuation, it was pointed out by Williams J. that a purchaser of shares in a company which is a going concern does not usually purchase them with a view to attempting to wind up the company and a prudent purchaser, therefore, while taking care to see that his purchase money is well secured by tangible assets, would look mainly to the dividends which he could reasonably expect to receive on his shares, and such a purchaser would no doubt expect to receive such dividends as were appropriate to the nature of the business in which the company was engaged. He then pointed out (p. 11) :
'It follows, therefore, that the real value of shares which a deceased person holds in a company at the date of his death will depend more on the profits which the company has been making and should be capable of making, having regard to the nature of its business, than upon the amounts which the shares would be likely to realize upon a liquidation.'
32. The statutory recognition of this principle seems to have been given in S. 16A of the Estate Duty Assessment Act of 1914-1942 in Australia as will appear from the decision in Federal Commissioner of Taxation v. Sagar  71 CLR 421. Section 16A, which had three paragraphs, read as follows :
'(1) Where the Commissioner is of the opinion that it is necessary that the following provisions should apply for the purpose of assessing the value for duty of an estate for the purpose of this Act, the following provisions shall apply :
(a) the value of shares or stock in any company, whether incorporated in Australia or elsewhere, shall be determined upon the assumption that the memorandum and articles of association or rules of the company, at the date of death, satisfied the requirements of the committee or governing authority of the Stock Exchange at the place where the share or stock register is situate for the purpose of enabling that company to be placed on the current official list of that Stock Exchange;
(b) no regard shall, in determining the value of any such shares or stock, be had to any provision in the memorandum or articles of association or rules of the company whereby or whereunder the value of the shares or stock of a deceased or other member is to be determined;
(c) where the estate includes any shares or stock in any company the shares or stock of which are not or is not quoted in the official list of any Stock Exchange, the Commissioner may, in his discretion, notwithstanding anything contained in the last two preceding paragraphs, adopt as the value of any such shares or stock such sum as the holder thereof would receive in the event of the company being voluntarily wound up on the date of death.'
Clause (c) reproduced above dealt with unquoted shares and it is left to the discretion of the Commissioner to adopt as value of any such shares or stock such as the holder thereof would receive in the event of the company being voluntarily wound up on the date of death. Dealing with the scheme of S. 16A, Williams J. of the High Court of Australia observed (p. 427) :
'Section 16A(1) contains three paragraphs, Paragraph (b) would appear to be unnecessary. Paragraph (a) is adopted because a memorandum and articles of association which satisfied the requirements of the Stock Exchange would not contain the provisions excluded by paragraph (b). Thus the presence of paragraph (b) as a separate paragraph points to a separate discretion to exclude these provisions from the memorandum and articles of association of a company without at the same time excluding the other provisions which would infringe paragraph (a). Paragraphs (a) and (b) apply to the valuation of shares in a company as a going concern, whereas paragraph (c) applies to their valuation on the basis that the company is placed in voluntary liquidation at the date of death.'
33. Dealing with the circumstances in which it would be proper to decide whether to apply para. (a) or (c) it was observed (p. 427) :
'There was a great deal of argument before the Board as to the circumstances in which it would be proper for the valuer to form an opinion that it was necessary to apply the provisions of the section, and in that event as to the circumstances in which it would be proper to decide whether to apply paras. (a) or (c). The only fetter placed by the Act upon a decision to apply the section is that the Commissioner or Board or Court must be of opinion that it is necessary to apply it.... But the discretion must be exercised honestly and for the purpose for which it was given, that is to say, the method should be chosen which in the opinion of the Commissioner or Board or Court is most calculated to place a fair value on the shares as at the date of death. And where a company is a going concern the instances would appear to be rare in which it would be proper to use para. (c). One instance might be where the deceased held or controlled sufficient shares to enable him to pass a special resolution that the company be wound up voluntarily, but even then it would appear to be preferable, where practicable, to use paras. (a) or (b).'
34. It appears to us, therefore, that in a company which is a running concern, the market value of a share is determined mainly on the basis of the yield method because, as already pointed out earlier, the person who holds the shares or who wants to purchase the shares, does it, not with a view to bring the company into liquidation, but he does it in the hope of getting adequate return for his investment. As pointed out by Pickles (Accountancy) it is only when the company is known to be at the end of its life that the market value will be based on the break-up basis.
35. The methods of valuation of equity shares were considered by the Supreme Court in Mahadeo Jalan's case : 86ITR621(SC) and the conclusions reached by the Supreme Court with regard to the various aspects of valuation of shares were set down by the court as follows (p. 633) :
'(1) Where the shares in a public limited company are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares.
(2) Where the shares are of a public limited company which are not quoted on a stock exchange or of a private limited company the value is determined by reference to the dividends, if any, reflecting the profit earning capacity on a reasonable commercial basis. But, where they do not, then the amount of yield on that basis will determine the value of the shares. In other words, the profits which the company has been making and should be making will ordinarily determine the value. The dividend and earning method or yield method are not mutually exclusive; both should help in ascertaining the profit-earning capacity as indicated above. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of profits.
(3) In the case of private limited company also where the expenses are incurred out of all proportion to the commercial venture, they will be added back to the profits of the company in computing the yield. In such companies the restriction on share transfers will also be taken into consideration as earlier indicated in arriving at a valuation.
(4) Where the dividend yield and earning method break down by reason of the company's inability to earn profits and declare dividends, if the set-back is temporary then it is perhaps possible to take the estimate of the value of the shares before set-back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses.
(5) Where the company is ripe for winding up then the break-up value method determines what would be realised by that process.
(6) As in Attorney-General of Ceylon v. Mackie  2 All ER 775 , a valuation by reference to the assets would be justified where as in that case the fluctuations of profits and uncertainty of the conditions at the date of the valuation prevented any reasonable estimation of prospective profits and dividends.'
36. After setting out these conclusions certain observations have been made by the Supreme Court on which the learned counsel for both sides have relied. These observations are as follows (p. 634) :
'In setting out the above principles, we have not tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospect of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case. But, one thing is clear, the market value, unless in exceptional circumstances to which we have referred, cannot be determined on the hypothesis that because in a private limited company one holder can bring it into liquidation, it should be valued as on liquidation by the break-up method. The yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation but none the less is one of the methods.'
37. Relying on these observations, Mr. Joshi for the revenue has contended that the decision of the Supreme Court recognises the fact that the break-up value method is a permissible method of valuation, while Mr. Kolah has contended that the Supreme Court itself has pointed out that normally the market value of an unquoted share of a private limited company should not be valued as it is done on liquidation by the break-up value method.
38. As we read the above quoted observations, the ratio of the decision of the Supreme Court appears to be contained in the last sentence of the above-quoted paragraph the effect of which is that a break-up method may be resorted to only in exceptional circumstances even though a company is not ripe for liquidation. What those exceptional circumstances are is not pointed out, but it is apparent from these observations, apart from r. 1D, that where the break-up method is sought to be used for ascertaining the valuation of shares of a company which is a running concern, exceptional circumstances will have to be established when the break-up value method is sought to be relied upon. It is also clear from even this decision of the Supreme Court that the normal method in the case of a company which is a running concern is not the break-up value method but is the yield method. This aspect, in our view, has great relevance when we come to determine the nature of r. 1D of the Rules.
39. Having thus referred to the permissible methods of valuation in the case of a company which is a going concern, we now come to the arguments relating to the validity of r. 1D. There cannot be any quarrel with the general proposition that rules made under any Act are never intended to override any specific provision of the Act itself. If the rules do so they will be clearly in excess of the rule-making power. The rule of interpretation of subordinate legislation is that if the subordinate legislation is directly repugnant to the general purpose of the Act, which authorises such legislation, it is either ultra vires altogether or, if possible, it must be so interpreted that it does not create any anomaly. At the same time, if the rules framed under a statute are in excess of the provisions of the statute or are in contravention of or inconsistent with such provisions, then those provisions must be regarded as ultra vires and cannot be given effect to. It is also a well-established rule of interpretation that when a literal construction of a statutory rule would render it ultra vires of the rule making authority, then the rule must be so construed as to be ultra vires and held valid rather than construed as ultra vires and initially void.
40. We shall bear in mind these principles when considering the contention of Mr. Kolah that primarily the rule must be declared as ultra vires as exceeding the permissible scope laid down by S. 7 of the Act.
41. The purpose of the rule made under S. 46, it cannot be disputed, is to work out the provisions of S. 7. We have reproduced S. 7(1) earlier. Obviously, it is not a charging provision. On the face of it, it is a provision intended to work out the concept of net wealth in respect of which wealth-tax is to be charged. It is primarily a provision for the computation of net wealth. The definition of net wealth contemplates computation of aggregate value of the net wealth 'in accordance with the provisions of this Act'. Those provisions are to be found in S. 7(1) and S. 7(2). Section 7(1) has been considered by this court in CWT v. Purshottam N. Amersey : 71ITR180(Bom) , where it was pointed out that S. 7 merely deals with the mode in which the value of the assets has to be determined and the purpose of S. 7 was to indicate how an asset is to be valued. This court has also pointed out in that decision that the words 'if sold in open market' in S. 7(1) do not contemplate any actual sale or the actual state of the market but only enjoin that it should be assumed that there is an open market and the property can be sold in such a market and, on that basis, the value should be found out. It was held that the tax officer must assume that there is an open market in which the asset can be sold and proceed to value it on that basis and the words 'if sold' create a fictional position which the tax officer has to assume.
42. Section 7(1) is thus a machinery provision which requires the WTO to hypothetically assume that there is an open market and the property can be sold in such market and it is on that basis that the value of the asset has to be determined for the purposes of computation of the net wealth of the assessee.
43. The decision of this court in CWT v. Purshottam N. Amersey : 71ITR180(Bom) was approved by the Supreme Court in Ahmed G. H. Arif v. CWT : 76ITR471(SC) . While referring to the observations of this court in that case, the Supreme Court observed as follows (p. 477) :
'It has been rightly observed by the High Court that when the statute uses the words 'if sold in the open market' it does not contemplate actual sale or the actual state of the market, but only enjoins that it should be assumed that there is an open market and the property can be sold in such a market and, on that basis, the value has to be found out. It is a hypothetical case which is contemplated and the tax officer must assume that there is an open market in which the asset can be sold.'
44. Section 7(1) thus being a machinery provision, the scope of the power to be exercised under the provision must be ultimately to determine the price of an asset if it is sold in the open market on the valuation date. Now, when S. 7(1) opens with the words 'Subject to any rules made in this behalf', the rules contemplated were rules which would enable the WTO to determine the price. In other words, any rules made must be for the purpose of carrying out the object of S. 7, the object being to determine the market value as contemplated by S. 7(1). As already pointed out, the normally permissible method of determining the market value in the case of unquoted shares was the yield method though, under exceptional circumstances, as contemplated by the Supreme Court's decision in Jalan's case : 86ITR621(SC) , the break-up method could also be utilised.
45. The question which then arises is what would be the content of the power under S. 46(2)(a). It will not be possible to construe or determine the validity of r. 1D merely on the terms of r. 1D itself. The scope of the power under which it has been made is also relevant to decide the scope of r. 1D.
46. It was vehemently contended by Mr. Joshi that r. 1D contemplates that the 'market value of an unquoted equity share of any company..... shall be determined as follows' and according to the learned counsel for the revenue, the imperative word 'shall' having been used, that was sufficient indication that the rule was intended to be mandatory in nature.
47. There are two reasons why in this case it will not be possible to determine the true nature of r. 1D merely relying on the use of the word 'shall'. It is well known that the use of the word 'shall' is never conclusive of the nature of the provision, that is, whether it is mandatory or directory. The question whether a particular provision using the word 'shall' is mandatory or directory cannot be resolved by laying down any general rule and depends on the facts of each case. One has to look to the object of the provision; one has also to look to the object of the statute making the provision. The purpose for which the provision has been made, its nature, and the intention of either the legislature if the provision is the section of a statute or the intention of the rule-making authority in the case of subordinate legislation will also have to be ascertained.
48. A provision which uses the word 'shall' can always be considered as directory if the content of the provision or the intention of the rule-making authority so demands. We need only refer to the decision of the Supreme Court in Govind Lal v. Agriculture Produce Market Committee, : 1SCR451 , where the law on the subject has been stated as follows on the basis of Maxwell's Interpretation of Statutes, Crawford's Statutory Construction and Craies on Statute Law (p. 267) :
'Maxwell, Crawford and Craies abound in illustrations where the words 'shall' and 'may' are treated as interchangeable. 'Shall be liable to pay interest' does not mean 'must be made liable to pay interest' and 'may not drive on the wrong side of the road', must mean 'shall not drive on the wrong side of the road'. But the problem which the use of the language of command poses is : Does the legislature intend that its command shall at all events be performed Or is it enough to comply with the command in substance In other words, the question is : is the provision mandatory or directory
Plainly 'shall' must normally be construed to mean 'shall' and not 'may' for the distinction between the two is fundamental. Granting the application of mind there is little or no chance that one who intends to leave a leeway will use the language of command in the performance of an act. But since, even lesser directions are occasionally clothed in words of authority, it becomes necessary to delve deeper and ascertain the true meaning lying behind mere words.
Crawford on Statutory Construction (1940 Edn., art. 261, p. 516) sets out the following passage from an American case approvingly : 'The question as to whether a statute is mandatory or directory depends upon the intent of the legislature and not upon the language in which the intent is clothed. The meaning and intention of the legislature must govern, and these are to be ascertained, not only from the phraseology of the provision, but also by considering its nature, its design, and the consequences which would follow from construing it the one way or the other.' Thus, the governing factor is the meaning and intent of the legislature, which should be gathered not merely from the words used by the legislature but from a variety of other circumstances and considerations. In other words, the use of the word 'shall' or 'may' is not conclusive on the question whether the particular requirement of law is mandatory or directory. But the circumstance that the legislature has used a language of compulsive force is always of great relevance and in the absence of anything contrary in the context indicating that a permissive interpretation is permissible, the statute ought to be construed as peremptory.'
49. Now, so far as r. 1D is concerned, it prescribes a certain procedure for computing the market value. Unfortunately, we do not have the advantage of any material which could have been produced by the Union of India to indicate what circumstances were taken into account by the rule-making authority when it framed the rule relating to computation of market value of unquoted equity shares. The rule provides that the market value of the shares shall be 85% of the break-up value determined. On what basis the percentage was fixed at 85% is not possible to be ascertained. We are, therefore, faced with a situation where a rule which is normally applicable in the case of a company, winding up of which is imminent is sought to be used for computing the value of shares of a company which is a running concern. Such a rule, it is now being argued, is of a mandatory nature. Thus, we are being asked to hold primarily on the ground that the word 'shall' has been used by the rule-making authority. If the use of the word 'shall' is not in any way conclusive and does not foreclose any discussion as to the mandatory or directory nature of the provision in the rule, then the only guidance that we can have is from the provision which confers the rule-making power. The rule-making power is not conferred by S. 7(1). The power to determine the market value conferred thereby is merely made subject to the rules. The rule-making power is to be found in S. 46. We mush, therefor, construe the extent of the rule-making power. We are not at the moment considering the argument advanced on behalf of the revenue that the rule could be supported as having been made in exercise of the general rule-making power under S. 46(1). That argument we shall consider later. We are immediately considering the question as to what is the scope of clause (a) of sub-s. (2) of S. 46. Clause (a) of sub-s. (2) refers to the manner in which the market value of any asset may be determined. Sub-s. (2) enables the rule-making power to be so exercised that 'rules made under this section may provide for' things specified in cls. (a) to (f). There can be little doubt that the word 'may' used in the main part of sub-section (2) clearly indicated that it was in the nature of an enabling provision, enabling the rule-making authority to make rules in respect of topics specified in cls. (a) to (f). There was no compulsion on the rule-making authority to make any rules. Indeed, as will be clear from the facts earlier stated, for almost 10 years from 1957 to 1967, there were no rules. There can be, therefore, no dispute that the word 'may' used in the main part of sub-s. (2) was of a permissive nature.
50. When we come to clause (a), there are two circumstances which will enter our consideration. Firstly, there were two well known methods of valuation of shares out of which one was invariably used in the case of companies which were running concerns, and the other was used in the case of companies of which winding up was imminent and the Board must be presumed to be aware of these facts. The second consideration is that if we carefully analyse the contents of the remaining cls. (b) to (f) in sub-s. (2), we find that the Legislature has used the words 'may' and 'shall' on different occasions. For example, clause (b) refers to making of returns and the rules contemplate provision for 'the form in which returns under this Act shall be made and the manner in which they shall be verified'. When we go to clause (c) which deals with the form in which appeals and applications under the Act have to be made, we find that 'may' is used in juxtaposition with 'shall' in another part of the same provision. Clause (c) reads : 'the form in which appeals and applications under this Act may be made, and the manner in which they shall be verified'. When the Legislature uses 'may' and 'shall' in the same section, it will be reasonable to assume that they were not used in the same sense of making a provision either directory or mandatory. Obviously, when 'may' and 'shall' are used in different parts of the same provision, we must attribute intention to the Legislature to make that part in which the word 'may' is used as being of a permissive character and that part in which the word 'shall' is used as of a mandatory character. Therefore, when clause (c) of sub-s. (2) refers to forms in which appeals and applications may be made, that part was clearly directory in nature, but the rule with regard to the manner of verification had to be of a mandatory nature. Again in clause (cc) reference is made to the circumstances in which, the conditions subject to which and the manner in which the AAC may permit an appellant to produce evidence which he did not produce or which he was not allowed to produce before the WTO. There can be no doubt that rules were contemplated to enable the AAC to exercise his discretion in the matter if permitting additional evidence to be produced. When the words used were 'may permit', they were obviously intended to indicate a discretion which had been vested in the AAC.'May' there could not by any stretch of imagination be read as 'shall'. In clause (c) again reference is made to the areas for which lists of valuers may be drawn up. Now, here again, 'may' is obviously used to make a provision of permissive nature. Thus, if the scheme of sub-s. (2) is properly understood, in our view, there is little difficulty in holding that where the Legislature wanted the rule-making authority to make rules of a mandatory character, the Legislature has clearly used the word 'shall' and where the rules of a directory nature were permitted to be framed, the Legislature had used the word 'may'.
51. So far as the use of the word 'may' is concerned, its use normally is of a permissive nature though sometimes it is used interchangeably with 'shall'. I Societe de Traction et D'Electricite Societe Anonyme v. Kamani Engineering Co. Ltd.  33 Com Cas 869 (SC), the Supreme Court has pointed out that in come contexts 'may' is purely permissive and in others it may confer a power and make it obligatory upon a person invested with power to exercise it as laid down. In Smt. Sahodara Devi v. Government of India, : AIR1971SC1599 , it was pointed out by the Supreme Court that normally the word 'may' is used to grant a discretion and not to indicate a mandatory direction.
52. Normally, therefore, the word 'may' operates to confer a discretion. Considering the scheme of S. 46(2), firstly, in the light of the fact that on principles of accountancy, the proper method for valuing a share of a private company when the share is not quoted on the stock exchange was not the break-up value method but the yield method and, secondly, in the context of the fact that the Legislature has used in S. 46(2) 'may' and 'shall' in the same section, it clearly appears to us that the use of the word 'may' in clause (a) was intended to make a rule to vest a discretion in the WTO in the matter of valuation of unquoted shares of a private limited company. In other words, the scope of the rule-making power was restricted so as to provide by a rule a mode in which the market value of an asset may or would be determined.
53. If this was the extent of the rule-making power, then there are two alternatives which are possible while construing the rule itself. If the contention of the revenue is accepted that the use of the word 'shall' must have the effect of making the rule mandatory, then it will be clearly in excess of the rule-making power and the rule would become bad. The other alternative is to find out whether the word 'shall' should be read as 'may' in the light of the fact that the power to make the rule itself was restricted and assume that the rule-making authority would not deliberately exceed the power given under the parent Act. As already pointed out above, when dealing with the question of validity of a rule, attempt must be made as far as possible to see if the rule can be sustained having regard to the construction to be placed on the power of the rule-making authority. In our view, it is not possible to attribute intention to the Board to rule out in the case of valuation of shares of a company all methods of computation of the value of the shares and restrict the scope of the enquiry under S. 7(1) only to the value based on the break-up value method. The proper view to take in this case, therefore, appears to be that the rule-making authority intended to make a rule of a directory nature.
54. There is another reason which makes us to take this view. We have referred earlier to the provisions in S. 24(6) of the W.T. Act. Section 24(6) has been on the statute book right from 1957 till it was deleted later on long after the rules were made. That deletion does not have much effect because the disputes with regard to valuation are even now made determinable by the valuer under S. 16A. Now, if the object of the rule was that only one method had to be applied, there could hardly be any dispute of any substantial nature which could be taken by the assessee under S. 24(6) to the valuers as contemplated by S. 24(6) when the appeal is filed before the Tribunal. It is important to remember that S. 24(6) of the Act and S. 46(2)(a) of the Act have been there since the commencement of the Act. If it was intended by Parliament that any rule exhaustive of the manner of computation of market value of assets for the purposes of S. 7(1) could be made under S. 46(2)(a), the elaborate provisions relating to the reference to the valuers and the procedural provisions made in S. 24 would really not have been of much use or assistance. Clause (a) of sub-s. (2) of S. 46 does not refer to any particular kind of asset. The power contained in clause (a) can be invoked for making rules in respect of any asset. If it was intended to give a power to make a mandatory rule, then the final word regarding the working out of the rule would normally not have been left to the valuers whose valuation was made binding on the Tribunal under S. 24(6) of the Act. The letter part of clause (a) of S. 24(6) clearly makes valuation made by the two valuers binding on the Tribunal because sub-s. (6) specifically provides that so far as the question referred to the arbitration of two valuers is concerned, the Tribunal shall pass its orders conformably to the decision of the valuers. We are, therefore, inclined to take the view that the rule-making power under S. 46(2)(a) could be exercised only for the purpose of making a rule giving discretion to the WTO to apply the rule if, necessary, and compute the value according to the manner prescribed in that rule.
55. That brings us to the argument of Mr. Joshi that, in any case, r. 1D must be held to be valid as it can be referred to the generality of the rule-making power provided for in S. 46(1). Mr. Joshi contended that valuation with reference to the break-up value method was a permissible method. It was, therefore, not open to the courts to say whether it is a fair method or not and in view of the general provisions in S. 46(1), the rule could still be supported as being valid. The foundation of this argument is the decision of the Privy Council in the case of King Emperor v. Sibnath Banerji . Strictly speaking in the view which we have taken that the rule falls squarely under S. 46(2)(a) as construed by us, we need not consider the argument in any great detail, but since the learned counsel has vehemently argued the question in all fairness to him, we will refer to the authorities which were cited by him.
56. In King Emperor v. Sibnath Banerji , the question raised was whether r. 26 of the Defence of India Rules 1940, was in excess of the rule-making power given under S. 2, sub-s. (2)(x), of the Defence of India Act, 1939. It is well known that the Federal Court in Keshav Talpade v. Emperor, , had taken the view that r. 26 of the Defence of India Rules went beyond the rule-making powers which the Legislature had thought fit to confer upon the Central Govt. and was, therefore, invalid. Section 2(1) of the Defence of India Act provided that the Central Govt. may, by notification in the Official Gazette, make such rules as appear to it to be necessary or expedient for securing the defence of British India, the public safety, the maintenance of public order or the efficient prosecution of war, or for maintaining supplies and services essential to the life of the community. Sub-s. (2) of S. 2 read as follows :
'Without prejudice to the generality of the powers conferred by sub-s. (1), the rules may provide for, or may empower any authority to make orders providing for, all or any of the following matters.'
57. and then there were 35 paragraphs each of which set out the matter or matters for which rules under the Act may be made. Construing item (x), the Federal Court had held that r. 26 went beyond the rule-making power. The correctness of this decision was debated in the Privy Council in Sibnath Banerji's case . The Privy Council did not go into the question as to whether r. 26 fell or did not fall within the rule-making power in S. 2(2)(x) but took the view that the rule was perfectly valid having regard to the general power given in S. 2(1). While so holding, the Privy Council observed as follows (p. 160) :
'Their Lordships are unable to agree with the learned Chief Justice of the Federal Court on his statement of the relative positions of sub-ss. (1) and (2) of the Defence of India Act, and counsel for the respondents in the present appeal was unable to support that statement, or to maintain that r. 26 was invalid. In the opinion of their Lordships, the function of sub-s. (2) is merely an illustrative one; the rule-making power is conferred by sub-s. (1), and 'the rules' which are referred to in the opening sentence of sub-s. (2) are the rules which are authorised by, and made under sub-s. (1); the provisions of sub-s. (2) are not restrictive of sub-s. (1), as indeed is expressly stated by the words 'without prejudice to the generality of the powers conferred by sub-s. (1)'. There can be no doubt - as the learned judge himself appears to have thought - that the general language of sub-s. (1) amply justifies the terms of r. 26, and avoids any of the criticisms which the learned judge expressed in relation to sub-s. (2).'