GOPALAN NAMBIYAR C.J. - At the instance of the Revenue, the I.T. Appellate Tribunal, Cochin Bench, has referred the following question of law for our determination, viz. :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that rule 1D of the Wealth-tax Rules, 1957, for determination of the market value of unquoted equity shares is not always mandatory ?'
The assessee in these four income-tax references are different individuals holding certain shares in a private limited company, viz., the Malayala Manorama Co. Ltd. They have filed returns showing their total wealth for the assessment year 1972-73. The valuation date under the W.T. Act, 1957, was March 31, 1972. The shares of the company had a face value of Rs. 10. In the return, the shares were valued at Rs. 4,025. This was arrived at by following the break-up value method on the basis of the balance-sheet of the company for the relevant year. This was accepted by the WTO who accepted the return under s. 16 (1). The assessment was completed on November 30, 1972. The assessee appealed to the AAC. It was argued on their behalf that they had made applications on July 11, 1972, requesting the WTO to adopt a revised valuation for the shares and allow a further opportunity to the assessee to prove their contentions. This application was not allowed. The request was repeated in appeal. The AAC did not accept the request for additional opportunity being afforded. He confirmed the WTOs orders of assessment and dismissed the appeals, the assessee preferred further appeals to the I.T. Appellate Tribunal. The Tribunal took note of the fact that legislation was proposed for nationalising the press and that this was likely to bring about a depreciation in the value of the shares of such a company, as was involved in these cases. The Tribunal, therefore, allowed the discount by fixing the value of the shares at Rs. 30 per share. In taking this view and depressing the value of the share, the Tribunal was followings its judgment rendered at the same time in certain appeals relating to gift-tax. It was pointed out to the Tribunal that undr the G.T. Act, no rules had been framed for valuing equity shares of a company which are not quoted in the stock market; but that there are different rules under the W.T. Act dealing with the mode of valuation of the shares. Therefore, it was argued on the side of the Revenue that the position with respect to the G.T. Act, cannot apply ad idem in the sphere of wealth-tax. The Tribunal, following the decision of the Madras High Court in Writ Petition No. 4221 of 1974, decided on January 8, 1975, [K. M. Mammen v. WTO-since reported in : 139ITR357(Mad) (Appendix) (infra)] held that the rule in question is not mandatory. The Tribunal, accordingly, allowed the assessees appeals in part by fixing the value of the shares at Rs. 30 per share.
We may notice the relevant section as well as the rule under the W.T. Act :- Section 7 and r. 1D read as follows :
'7. Value of assets how to be determined. - (1) 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.
(2) Notwithstanding anything contained in sub-section (1), -
(a) where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth-tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business on the valuation date and making such adjustments therein as may be prescribed;
(b) where the assessee carrying on the business is a company not resident in India and a computation in accordance with clause (a) cannot be made by reason of such business in India, the Wealth-tax Officer may take the net value of the assets of the business in India to be that proportion of the net value of the assets of the business as a whole wherever carried on determined as aforesaid as the income arising from the business in India during the year ending with the valuation date bears to the aggregate income from the business wherever arising during that year.
(3) Notwithstanding anything contained in sub-section (1), where the valuation of any asset is referred by the Wealth-tax Officer to the Valuation Officer under section 16A, the value of such asset shall be estimated to be the price which, in the opinion of the Valuation Officer, it would fetch if sold in the open market on the valuation date, or, in the case of an asset being a house referred to in sub-section (4), the valuation date referred to in that sub-section.
(4) Notwithstanding anything contained in sub-section (1), the value of a house belonging to the assessee and exclusively used by him for residential purposes throughout the period of twelve months immediately preceding the valuation date may, at the option of the assessee, be taken 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 next following the date on which he became the owner of the house, or on the valuation date relevant to the assessment year commencing on the April 1, 1972, whichever valuation date is later :
Provided that where more than one house belonging to the assessee is exclusively used by him for residential purposes, the provisions of this sub-section shall apply only in respect of one of such houses which the assessee may, at his option, specify in this behalf in the return of the net wealth.
Explanation. - For the purpose of this sub-section -
(i) where the house has been constructed by the assessee, he shall be deemed to have become the owner thereof on the date on which the construction of such house was completed;
(ii) house includes a part of a house, being an independent residential unit.'
Rule 1D of the Rules reads thus :
1D. Market value of unquoted equity shares of companies other than investment companies and managing agency companies. - 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 than 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.'
(Rest of the rule omitted as unnecessary).
The rule has been framed under the powers conferred by s. 46 of the Act which is the rule-framing section. We may quote sub-s. (1) and sub-s. (2)(a) of s. 46, which are as follows :
'46. Power to make rules. - (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 fore-going power, rules made under this section may provide for -
(a) the manner in which the market value of any asset may be determined,.....'
The section itself opens with the words 'subject to any rules made in this behalf', thereby bringing out the paramountcy of the rules. The section then proceeds to use imperative language by providing that the value of any asset 'shall' be estimated to be the price which, in the opinion of the WTO, it would fetch if sold in the open market on the valuation date. Turning to the rule again, we notice the imperativeness of the provision in the direction that the value of an unquoted equity share 'shall' be determined.
In the context and from the purport of the section and the rule, we do not see any warrant or justification for construing the expression 'shall' in the section and the rule as 'may' or in understanding this provision as directory and not mandatory. On the other hand, we think, that effect should be given to the plain and simple provision of the rule. Counsel for the Revenue cited the decisions in CWT v.Sripat Singhania : 112ITR363(All) and CWT v.Padampat Singhania : 117ITR443(All) . In the earlier of these cases, a Division Bench of the Allahabad High Court explained the position thus (at p. 366) :
'Rule 1D lays down the method of determination of the value of an unquoted equity share of any company other than an investment company or a managing agency company. There is nothing in this rule to indicate that it shall be followed only by the Wealth-tax Officer. The Act provided that so long as the rules are not framed, the Wealth-tax Officer shall estimate the price which it would fetch if sold in the open market on the valuation date. After the framing of the rules in 1967, the valuation of unquoted equity shares has to be determined under section 7(1) read with rule 1D.
Relying on the observation in Commissioner of Income-tax v. McMillan & Co. : 33ITR182(SC) , counsel for the Revenue has urged that the Tribunal exercises the same powers as are exercised by the Wealth-tax Officer under section 7(1) while valuing an asset. He has urged that the mere use of the word in the opinion does not in any manner indicate that the rule is not binding on the Tribunal.
In McMillan & Co.s case : 33ITR182(SC) , the Supreme Court while construing section 31 of the Indian Income-tax Act, 1923, explained the powers of the Appellate Assistant Commissioner, at page 192, thus :
Our attention has been drawn to the difference in language in which the two conditions for the application of the proviso have been expressed; the first condition is fulfilled if no method of accounting is regularly employed; the second condition, however, requires an opinion, viz., the opinion of the Income-tax Officer that the income, profits and gains cannot be properly deduced from the method of accounting regularly employed. It is pointed out that the first condition involves an objective determination-not by any named authority but by any and every authority which may have to consider whether the condition as to the regularity of the method employed has been fulfilled or not; whereas the second condition involves a determination by a named authority. The argument is that by reason of the aforesaid difference in language, the legislature clearly intended that the opinion of no other officer can be substituted for the opinion of the named authority, viz., the Income-tax Officer, with regard to the fulfilment of the second condition. Therefore, once the income-tax Officer accepts the method of accounting as proper, the Appellate Assistant Commissioner has no jurisdiction to go behind that opinion. We are unable to accept this argument as correct. It is to be remembered that with regard to both conditions, the first and initial duty is that of the Income-tax Officer to determine whether the conditions or any of them are fulfilled, secondly, if the opinion of the Income-tax officer with regard to the second condition is to be inviolate by reason of the difference in language, then it should be inviolate in all cases. Why should it be inviolate in one case and not so when the assessee appeals against determination made adverse to him We feel that the second condition is expressed in the terms in which it has been expressed, because it involves an inferential process and the expression in the opinion of the Income-tax Officer is aptly used as that officer must in the first instance make the determination. It does not necessarily follow that the Appellate Assistant Commissioner cannot revise the determination and exercise the power which the Income-tax Officer could exercise.'
The Allahabad High Court agreed with the principles stated in McMillans cast : 33ITR182(SC) . It was of the opinion that the expression 'as it thinks fit' in s. 24(5) of the Act does not in any way take away or whittle down the binding effect of r. 1D. We are in agreement with the above reasoning and principle of the Allahabad High Court.
Our attention was called to an unreported judgment of the Madras High Court in K. M. Mammen v. WTO [WP No. 4221 of 1974-8-1-1975 - since reported in : 139ITR357(Mad) (Appendix) (infra)] (annex. D of the statement of the case). In dismissing the writ petition in admission it was observed by the Division Bench of the Madras High Court that the rule was merely enabling, the governing purpose thereof being to determine the market value. The court was further of the view that the word 'shall' in the latter part of the rule is not always mandatory, and, in the context, it can be read as having the effect of 'may'. Our attention was also called to pages 480-481 of Sampath Iyengars Treatise on the 'Three New Taxes', 5th Edn., Vol. I, where the learned author also expressed the view that r. 1D must be understood as being directory and not mandatory. With respect, we are unable to give our asset to this view. We rather agree with the principle in the decision of the Allahabad High Court noticed earlier.
The result is that the Tribunal in these cases was wrong in having interfered with the valuation made by the WTO and confirmed by the AAC, following the principle indicated by r. 1D of the Rules. We answer the question referred in the negative, i.e., in favour of the Revenue and against the assessee. The appeals preferred by the Revenue will go back to the Tribunal for disposal in accordance with law and in the light of the opinion referred in these references. There will be no order as to costs.
A copy of this judgment under the seal of the court and the signature of the Registrar will be communicated to the Tribunal as required by law.