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B.R. Duggal Vs. Wealth-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1982)2ITD55(Delhi)
AppellantB.R. Duggal
RespondentWealth-tax Officer
Excerpt:
.....of the unquoted shares, according to the method they found suitable, but after the framing of the rule, the method prescribed by rule id should be applied. in taking the above view, their lordships affirmed their earlier decision in cwt v. sripat singhania [1978] 112 itr 363. apart from the above decision, we find that the question whether rule id is directory or mandatory has been discussed at length by the special bench of the appellate tribunal, delhi bench, in the case of biju patnaik (supra). in their order, it has been clearly held that the said rule is mandatory. in view of the above authorities, we are of the opinion that the aac was not justified in taking the view that the breakup method as per rule id is not applicable in respect of the shares of atul glass industries (p.).....
Judgment:
1. These cross appeals arise out of the common order of the AAC and, hence, for the sake of convenience, they are disposed of by a common order.

2. The assessee, Shri B.R. Duggal, filed the original return of wealth-tax on 28-8-1976 declaring a net wealth at Rs. 8,20,538. In the original return, the assessee had shown the value of 3,360 shares in Atul Glass Industries (P.) Ltd., which he inherited from his late father, Shri F.C. Duggal, at Rs. 200 per share, i.e., the total value was shown at Rs. 6,72,000. Later on, along with a letter dated 14-9-1977, the assessee filed a revised return of net wealth. In this return, firstly the value of 780 shares of Atul Glass Industries (P.) Ltd. was excluded on the ground that these shares were given over to Smt. Shant Duggal by virtue of a probate issued in her favour.

Secondly, the value of the remaining 2,580 shares was taken at Rs. 226 per share. This valuation was adopted on the basis of the order of the Assistant Controller in the case of late Shri F.C. Duggal, wherein the value of each share of Atul Glass Industries as on 16-11-1975 was taken at Rs. 226 per share. The WTO was of the view that the exclusion of 780 shares of the company could not be permitted as the ownership over these shares by Smt. Shant Duggal was under dispute in account of law and the assessee in the original return had already included these shares in the return of net wealth. With regard to the valuation of the shares, the WTO did not accept the value of the shares adopted by the assessee on the basis of the estate duty assessment of late Shri F.C.Duggal. According to the WTO the only method of valuation of these shares was by the break-up method as laid down in rule ID of the Wealth-tax Rules, 1957. Accordingly, he worked out the market value of each share of Atul Glass Industries (P.) Ltd. at Rs. 330 and the total value of 3,360 shares was determined at Rs. 11,08,800. This amount was included in the net wealth of the assessee as against the value declared by the assessee in the revised return at Rs. 5,83,828 in respect of 2,580 shares.

3. Against the decision of the WTO, the assessee went in appeal and submitted that the WTO was not justified in valuing the shares of Atul Glass Industries (P.) Ltd. on the break-up method on the basis of the balance sheet of the company for the assessment year 1976-77 as on 31-10-1975. The assessee also objected to the inclusion of the 780 shares whose ownership was claimed by Smt. Shant Duggal. It was argued on behalf of the assessee that the break-up method was not applicable in the case of a running concern and the valuation should have been arrived at only on the yield method. In this connection, reliance was placed on the decision of the Bombay High Court in Smt. Kusumben D.Mahadevia v. CWT [1980] 124 ITR 799. On the question of valuation, the AAC while agreeing with the assessee that since the company is a growing concern and is not ripe for winding up, the break-up method would not be applicable, at the same time observed that the correct market value of the shares could not be arrived at by the yield method.

He was, therefore, of the opinion that the method adopted by the Assistant Controller in the case of late Shri F.C. Duggal, valuing the shares at Rs. 226.29 per share, was the correct method and the value of the shares should be determined on that basis. With regard to the exclusion of the 780 shares, the AAC observed that the mere issue of the probate in favour of Smt. Shant Duggal did not entitle her to the ownership in respect of these 780 shares and, therefore, the WTO was justified in including the value of these shares also towards the net wealth of the assessee.

4. Against the above findings of the AAC, the assessee as well as the department have come up in the present cross appeals. The contention of the assessee is that firstly, the shares of Atul Glass Industries (P.) Ltd. should have been valued on the yield basis and not either on the break-up method or the method adopted in the estate duty case of late Shri F.C. Duggal. Secondly, it has been contended that the inclusion of the 780 shares for which probate was obtained in favour of Smt. Shant Duggal should not have been made towards the net wealth of the assessee. The contention of the department in its appeal is that the AAC was not justified in directing that the value of the shares of Atul Glass Industries (P.) Ltd. may be taken at Rs. 226.29 per share as adopted by the Assistant Controller as against the break-up value of Rs. 330 per share adopted for wealth-tax purposes in rule ID.5. Before us, on the question of valuation of the shares, the learned counsel of the assessee submitted that the proper method of valuing the shares of Atul Glass Industries (P.) Ltd. was on the yield basis and rule ID could not be applied in the case of a running business. He also submitted that even the method adopted in the estate duty case of late Shri F.C. Duggal and valuing the shares at Rs. 226.29 per share was not correct. According to the learned counsel, the AAC, although clearly holding that the break-up method was not applicable, has not given a clear finding that the yield method is the only method which could be applied in this case and if the yield method is applied, the value of each share works out to Rs. 50.30 per share as against Rs. 226.29 per share adopted by the AAC. The learned counsel, further, submitted that even if the assessee had returned a higher value due to a certain misconception of the correct legal position, the appellate authority should have adopted the correct value. In pressing home his point of view, the learned counsel referred to the decision of the Bombay High Court in Smt. Kusumben D. Mahadevia (supra).

6. The learned representative of the department, on the other hand, submitted that after the introduction of rule ID the only method of valuing the shares of a private limited company which are not quoted in a recognised stock exchange is the break-up method as per the balance sheet of the company. It was pleaded by him that rule ID is mandatory and has to be applied. In this connection, he relied on the decision of the Allahabad High Court in CWT v. Padampat Singhania [1979] 117 ITR 443 and the decision of the Special Bench of the Appellate Tribunal, Delhi Bench, in the case of Biju Patnaik v. WTO [1981] 6 Taxman 56.

7. After hearing the learned representatives of the parties, we are unable to uphold the findings of the AAC, with regard to the valuation of the shares. After the introduction of rule ID, the value of the shares of a private limited company had to be determined in accordance with the said rule ID. It has been clearly held by the Allahabad High Court in Padampt Singhania (supra) that after the framing of the Wealth-tax Rules, unquoted shares have to be valued in accordance with rule ID, not only by the WTO but also by the appellate authorities.

Their Lordships further held that so long as that rule was not framed, it was open to the authorities under the Act to estimate the market value of the unquoted shares, according to the method they found suitable, but after the framing of the rule, the method prescribed by rule ID should be applied. In taking the above view, their Lordships affirmed their earlier decision in CWT v. Sripat Singhania [1978] 112 ITR 363. Apart from the above decision, we find that the question whether rule ID is directory or mandatory has been discussed at length by the Special Bench of the Appellate Tribunal, Delhi Bench, in the case of Biju Patnaik (supra). In their order, it has been clearly held that the said rule is mandatory. In view of the above authorities, we are of the opinion that the AAC was not justified in taking the view that the breakup method as per rule ID is not applicable in respect of the shares of Atul Glass Industries (P.) Ltd., since it was a case of a running business.

8. Coming now to the authorities cited by the learned counsel of the assessee, we find that in the case of CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 (SC) their Lordships of the Supreme Court were dealing with a case under the Gift-tax Act but in that case also, the question of valuation of shares under Section 7(1) was involved. Their Lordships took the view that where the shares in a public limited company are not quoted on the stock exchange or the shares are in a private limited company, the proper method of valuation to be adopted would be the profit-earning method. In taking the above view, the Hon'ble Court followed the ratio of their earlier decision in the case of CWT v. Mahadeo Jalan [1972] 86 ITR 621. In Mahadev Jalan (supra) the assessment years involved were 1957-58 and 1958-59. Rule ID was not in existence at the relevant time, but it was introduced only during the year 1966. In these circumstances, their Lordships had no occasion to consider the applicability of rule ID. In the case of Smt. Kusumben D.Mahadevia (supra) also, their Lordships of the Supreme Court had no occasion to consider the applicability of rule ID. In these circumstances, the decision of the Supreme Court in the case of Kusumben D. Mahadevia (supra) would not be of any assistance to the assessee.

9. This leaves us with the decision of the Bombay High Court in Smt.

Kusumben D. Mahadevia (supra). In the said decision, the Bombay High Court has no doubt held that rule ID prescribing the break-up method for valuing unquoted equity shares is directory and not mandatory. This view is contrary to the view taken by the Allahabad High Court in Padampat Singhanla (supra). We would, however, prefer to follow the view taken by the Allahabad High Court since the said view is in conformity with the decision of the Special Bench of the Appellate Tribunal, Delhi, in the case of Biju Patnaik (supra). We are, therefore, of the opinion that the WTO was justified in valuing the shares of Atul Glass Industries (P.) Ltd. held by the assessee on the basis of the break-up method as per rule ID. In this view of the matter, we allow the appeal filed by the department and reject the appeal filed by the assessee on this point. The order of the AAC to this extent is reversed and the order of the WTO is restored.

10. Coming now to the next ground taken by the assessee in its appeal regarding the inclusion of the value of the 780 shares whose ownership vested with Smt. Shant Duggal by virtue of the probate, we find that the matter is covered by the decision of the Distt. Judge, Delhi, dated 20-5-1980, a copy of which has been filed before us. From the above order, it is clear that Smt. Shant Duggal obtained the shares by virtue of a will executed by late Shri F.C. Duggal and, hence, the lady was entitled to the grant of probate. In these circumstances, the WTO was not justified in including the value of the 780 shares held by Smt.

Shant Duggal towards the net wealth of the assessee. It has been held by the Calcutta High Court in Gopichand Gupta v. CWT [1981] 132 ITR 308 that: ...the judgment of the probate court must be presumed to have been obtained in accordance with the procedure prescribed by law and it is a judgment in rem, and so long as the order remains in force, it is conclusive as to the execution and validity of the will, not only upon all the parties who might be before the Court but also before all other persons whatever, in connection with all proceedings arising out of the will or claim under or enacted therewith. The tax authorities arc not entitled to go into the question and consider the genuineness of a will in regard to which the Court has granted probate or letters of administration.(p.) In view of the above authority, we direct that the value of the 780 shares held by Smt. Shant Duggal should be excluded from the net wealth of the assessee.

11. In the result, the appeal filed by the assessee is partly allowed, while the appeal filed by the department is allowed.


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