1. The assessee is the same in both the cases. He owned 500 equity shares and 277 preference shares in Best & Co. (Private) Ltd., Madras, of the face value of Rs. 100 each.
2. In his wealth-tax return for the assessment year 1961-62, he valued these shares at Rs. 77,700, as per their face value. The Wealth-tax Officer did not accept the said valuation of the shares, but computed the market value of those shares on the basis of the balance-sheet of Messrs. Best and Co. for that year and determined the value at Rs. 1,66,278.
3. For the assessment year 1962-63, the assessee again valued these shares at Rs. 77,700 on the basis of their face value. The Wealth-tax Officer again did not accept this valuation but computed the market value of the shares on the basis of the balance-sheet of Messrs. Best and Company for that year and determined their value at Rs. 1,99,200.
4. The assessee preferred appeals to the Appellate Assistant Commissioner against the orders of the Wealth-tax Officer computing the value of the shares on the basis of the balance-sheets of the company. He contended that, under the articles of association of Messrs. Best and Co., there was restriction on transfer of shares, that the shares could, if at all, be transferred only at their face value and that, therefore, there was no justification on the part of the Wealth-tax Officer to value the shares at a higher value. The Appellate Assistant Commissions did not accept these contentions and held that under the Wealth-tax Act the value of the shares has to be computed on the basis that there was no restriction on the transfer of the shares and that the shares could be sold in the open market. In that view he affirmed the valuation adopted by the Wealth-tax Officer.
5. There were further appeals to the Appellate Tribunal. Before the Tribunal the assessee filed a copy of the memorandum and articles of association of Best and Company and also a letter dated January 17, 1958, from Messrs. Best and Company in which the company had agreed to arrange for the transfer of 200 shares at the rate of Rs. 100 per share and contended that as there is a restriction on the transfer of the shares and also on the value for which the shares could be sold, the shares held by him should be valued only at their face value.
6. The Appellate Tribunal accepted the assessee's statement that the shares held by the assessee were transferable only subject to the restrictions mentioned in the articles of association and that the shares, if at all, could be transferred only at their face value. The Tribunal, however, held that under Section 7(1) of the Wealth-tax Act, the shares have to be valued on the basis that there were no restrictions on their sales and that the assessee could sell the shares in open market at any price wanted by him and which the purchaser was willing to pay. According to the Tribunal the shares in question have to be valued like any other unquoted shares and that the valuation adopted by the Wealth-tax Officer on the basis of the break-up value given in the balance-sheet was proper and reasonable. At the instance of the assessee the following questions have been referred to this court for its opinion in respect of the two years 1961-62 and 1962-63 :
'Whether, on the facts and in the circumstances of the case and also in view of the provisions of Section 7(1) of the Wealth-tax Act, the valuation of the shares of Best and Co. (Private) Ltd., Madras, held by the assessee at Rs. 1,66,278, was proper
Whether, on the facts and in the circumstances of the case, and also in view of the provisions of Section 7(1) of the Wealth-tax Act the valuation of the shares of Best & Co. (Private) Ltd., Madras, held by the assessee at Rs. 1,99,200, was proper ?'
7. As already stated, the Tribunal has found that there are restrictions on the transfer of shares and that the price for which they could be transferred has also been pegged down to its face value in the articles of association of Messrs. Best and Company. Articles 30, 31, 32, 33 and 34 of the articles of association of Best and Company are as follows :
Article 30 :
No ordinary shares shall be transferred to any person not being a director, manager or assistant in the company's service so long as any director, manager or assistant approved by the directors shall be willing to purchase the same.
In order to ascertain whether any director, manager or assistant is willing to purchase any ordinary shares the proposing transferor shall give notice in writing (hereinafter called the 'transfer notice') to the company that he desires to transfer the same. Such transfer notice shall specify the purchase price as hereinafter provided for and shall constitute the company his agent for the sale of the shares. The transfer notice shall not be revocable except with the sanction of the directors.
All the shares comprised in a transfer notice shall be offered to the directors, managers or assistants in such order as the directors think fit.
Article 33 :
The sum fixed by the transfer notice as the price of an ordinary shareshall be Rs. 100 per share.
If the company shall within the space, of sixty clear days after being served with such transfer notice, find a purchaser for the shares comprised in a transfer notice (hereinafter called 'the purchaser') and shall give notice thereof to the intending transferor, he. shall be bound on the payment of the purchase money to transfer such shares; to the purchaser.'
8. Article 36, however, provides that if the company is unable to find a purchaser for the shares offered for sale, then the intending transferor shall, after a period of three months, be at liberty to sell the shares to any person and at any time provided that such price be not, without the consent of the directors, lower than the price such shares were offered to the company. Thus, the restrictions oil transfer of shares consist of (1) that the shares cannot be transferred to a non-member so as to make the number of members exceed the limit prescribed by Article 10 or to a person whom the directors may object and (2) that at the first instance the shares are to be offered to a director, manager or assistant of the company at the face value of the shares and that only in case they decline or fail to purchase the shares, they can be sold to such person and at such price as the shareholder may think fit, subject of course to the right of the directors to refuse to recognise the transfer under Article 29. On a proper interpretation of the articles of association of the company we are of the view that the prohibition or restriction on transfer of shares is not absolute and that a right of pre-emption to purchase the shares at their face value is recognised in favour of the director, manager or assistant and if the right of pre-emption is not exercised by them, the shareholder will be at liberty to sell the shares At the best possible price to whomsoever he likes, subject, however, to the right of the directors to register or refuse to register the shares. It is in the light of this situation that the assessee's shares have to be valued.
9. According to the assessee, in view of the restrictions contained in the articles of association of the company on the transfer as well as on the price for which they could be sold, the shares could be valued only at their face value and that the shares are not at all saleable in the market. But, according to the revenue, the restrictions on the transfer of shares and on the price for which they could be sold are all to be ignored and that it should be assumed that the shares are freely available for sale in the open market without any such restrictions in view of the wording of Section 7(1) of the Wealth-tax Act.
10. Section 7(1) of the Wealth-tax Act is as follows:
'7. Value of assets how to be determined.--(1) Subject to any rates 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.'
11. While construing Section 7(1) of the Wealth-tax Act, 1957, theSupreme Court in Ahmed G.H. Ariff v. Commissioner of Wealth-tax, : 76ITR471(SC) saidthat when the statute uses the words 'if sold in the open market', it doesnot contemplate actual sale or the actual state of the market, but onlyenjoins that it should be assumed that there is an open market and theproperty can be sold in such a market and, on that basis, the value has tobe found out, and that it is a hypothetical case which is contemplated andthe tax officer must assume that there is an open market in which theasset can be sold. The above view was also affirmed by the SupremeCourt in a later decision in Purushottam N. Amarsey v. Commissioner ofWealth-tax,
12. The question of valuation of shares whose transfers are. restricted by the articles of association under which they have been issued had come up for consideration before the courts. The earliest case is the one decided in Attorney-General v. Jameson,  2 I.R. 218 a case relating to the valuation of shares left by a deceased for the purpose of estate duty. The articles of association of the company contained practically the same restrictions as in this case. The question arose as to how the value of the shares could be determined. The Court of Appeal held that the principal value of the shares ought to be estimated at the price which they would fetch if sold in the open market on the terms that the purchaser should be entitled to be registered and to be regarded as the holder of the shares, and should take and hold them subject to the articles of association, including the articles relating to the alienation and transfer of the shares of the company. Section 7(5) of the Finance Act of 1894, with which the Court of Appeal was concerned, is practically the same as Section 7(1) of the Wealth-tax Act of 1957. It was contended by the assessee that the shares cannot be sold in the open market. It was contended by the revenue that the various clauses restricting the transfer and the price for which it could be transferred have to be ignored for the purpose of valuing the shares and that it should be assumed that the shares are for unfettered sale in the open market to the highest bidder. The court took the view that each side had put forwardextreme contentions and that the solution should lie between the two, that the assessee's contention ignores the words of the Act while the contention of the revenue ignores the articles of association. It, therefore, held that the principal value should be estimated at the price which would be fetched if sold in the open market on the terms that the purchaser should take and hold the same subject to the articles of association. In Trustees of John Thomas Salvesen v. Commissioners of Inland Revenue,  Scottish Law Reports 387 practically the same restrictions were contained in the relevant articles of association of the company. Dealing with the method of valuation of the shares for the purpose of estate duty the court expressed that the estimation of the value of shares in a company, whose shares cannot be bought and sold in the open market and in regard to which there have not been any sales on ordinary terms, is obviously one of difficulty, that the problem could only be dealt with by considering all the relevant facts, so far as known at the date of the testator's death and by determining what a prudent investor, who knew these facts, might be expected to be willing to pay for the shares, and that one of the modes of valuing such shares is on a break-up basis on the figures contained in the last balance-sheet issued by the company prior to the testator's death. In Commissioners of Inland Revenue v. Crossman,  A.C. 26 ; 2 E.D.C. 537 the House of Lords had to decide what was the proper basis of valuation for purposes of estate duty of shares in a limited company where the right of sale of shares was restricted by the articles of association. There the articles of association contained a provision that if any shareholder wants to sell his shares it should be offered first to the other shareholders at a price to be certified by the auditor. After considering Jameson's case and Salvesen Trustee's case, the court expressed the view that the value of the shares for the purpose of estate duty was to be estimated at the price which they would fetch if sold in the open market on the terms that the purchaser should be entitled to be registered and to be regarded as the holder of the shares, and should take and hold them subject to the provisions of the articles of association, including those relating to the alienation and transfer of shares in the company.
13. In Abraham v. Federal Commissioner of Taxation, 70 C.L.R. 23 at the time of his death a deceased owned shares in five companies, four of which carried on investment business, and the fifth a pastoral business. The brother of the deceased who held equal interest in the whole of the issued capital of the companies was appointed the sole executor. The memorandum and articles of association of the four companies contained a restriction on transfer of shares whereby the board of directors may, refuseto register any transfer of shares to a transferee who was in their opinion an undesirable person to be admitted as a member of the company. In the fifth company the articles of association provided that the governing directors should have a right at any time of purchasing the shares of all the members of the company, the purchase .price to be the amount paid up thereon or, at the option of the governing directors, the amount which bore the same proportion to the excess value of the assets over the liabilities of the company as the total amount paid up on the shares bore to the total paid up capital of the company. The question arose as to how the shares left by the deceased are to be valued for the purpose of estate duty. The court held that the assessment of value of the shares held by the deceased in the five companies must normally be made principally on the basis of the income yield including the strong probability of distribution of accumulated profits and that the effect of the restrictions on transfer of shares and the right of pre-emption given to the governing directors to purchase the shares must all be taken note of and depreciation on that account had to be allowed for in the primary valuation. The above case laid down the principle that the restrictions contained in the articles of association on the transfer and also on the price for which the shares could be transferred has to be ignored and the transferability in the open market must be assumed, for the purpose of valuation, but that the market value of the shares has to be depreciated to a certain extent having regard to the said restrictions contained in the articles of association, and that if the market value of such shares could not be ascertained otherwise, it is possible to value the shares on a break-up basis with reference to the balance-sheet of the company for the relevant year.
14. The learned counsel for the assessee would, however, contend that the break-up method based on the balance-sheet can be adopted only in the case of a company which is ripe for liquidation and that such a method cannot be adopted for valuation of shares in a company which is a going concern. But the decision of the Supreme Court in Commissioner of Wealth-tax v. Mahadeo Jalan, : 86ITR621(SC) suggests that the break-up value method is an alternative basis for finding out the market value of the shares. In that case it was held that the following broad principles of valuation should normally be adopted in valuing the shares in a company as per Section 7 of the Wealth-tax Act:
(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) The shares of a public limited company which are not quoted on a stock-exchange or of a private company, are to be determined by referenceto the dividends, If any, reflecting the profit-earning capacity on a reasonable commercial basis, but if the profits are not truly reflected in the dividends which are declared, the Wealth-tax Officer can, on an examination of the balance-sheet, ascertain the profit-earning capacity of the concern and the potential yield of the shares.
(3) 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.
(4) Where the company is ripe for winding up then the break-up value determines what would be realised by that process.
(5) Valuation by reference to the assets would be justified where the fluctuation of profits and uncertainty of conditions at the date of the valuation prevent any reasonable estimation of prospective profits and dividends.
15. The Supreme Court, however, stated that the above principles are not hard and fast rules and that 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. In view of this decision, the assessee's contention that the break-up method can be adopted only when the company is ripe for liquidation cannot be accepted. If the circumstances of the case justify the adoption of a break-up method, the Wealth-tax Officer is justified in adopting that method. On the facts of this case we see no objection to the adoption of the break-up value method. Even before us, the assessee is not able to say that there is any other suitable method available for ascertaining the value of the shares.
16. The learned counsel for the assessee would then contend that even accepting the break-up method of valuation as the proper one, the Wealth-tax Officer has to find out the depreciated value of the shares in view of the various restrictions contained in the articles of association which the buyer should be taken to be aware of. We are of the view that this contention is correct. The break-up method of valuation is adopted to find out the real worth of the shares. But Section 7(1) of the Act enjoins the Wealth-tax Officer to find out the price the snares would fetch if sold in the open market on the valuation date. If the shares are sold in open market, the purchaser will certainly take note of the various restrictions contained in the articles of association of the company and offer only a lesser price. It is for this reason Abraham v. Federal Commissioner of Taxation suggested the adoption of depreciated value wherever there are restrictions on the transfer of shares as also on the price. Therefore, the value ascertained on the basis of a break-up method has to be depreciated to some extent having regard to the restrictions contained in the articles of association, which have a tendency to bring down the price in an open market sale.
17. The result is that the questions referred to us are answered technically in favour of the assessee. The Tribunal will have to, therefore, consider the question of allowing depreciation on the value ascertained in this case by the Wealth-tax Officer for the various restrictions contained in the articles of association. However, in view of our rejection of the stand taken by the assessee that the shares are to be valued only at their face value, we direct the assessee to pay the costs of the revenue in both the cases. Counsel's fee, Rs. 250 in each.