Satish Chandra, C.J.
1. Ralli International Limited is a non-resident foreign company. During the accounting period 1972-73 (relevant to the assessment year 1973-74), this company sold 10,000 shares in Oriental Carpet ., Amritsar. The sale was effected with the sanction of the Reserve Bank of India at the price fixed by the Reserve Bank at Rs. 245 per share. The sale of these 10,000 shares was in favour of Shri J. L. Mehra and his relations. These shares had been acquired by the assessee company prior to 1954. The question for the assessment year 1973-74 related to the quantum of capital gains that this transaction of sale entailed. In relation to this problem, the Income-tax Appellate Tribunal has referred the following question of law for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the method of valuation adopted by the Tribunal in valuing the shares in question under Section 55(2) of the Income-tax Act, 1961, is sustainable in law If not, what would be the correct basis ?'
2. Section 55(2) relates to capital gains. It provides for determining 'the cost of acquisition' of a capital asset. It says :
'(2) For the purposes of sections 48 and 49, 'cost of acquisition', in relation to a capital asset-
(i) where the capital asset became the property of the assessee before the 1st day of January, 1954, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee,'
3. In the present case, the shares in question were admittedly acquired by the assessee prior to 1954. They were sold in 1972-73. The assessee opted for the fair market value of the shares as on 1st day of January, 1954,as their cost of acquisition. There is hence no dispute between the parties so far as Section 55(2) of the Income-tax Act, 1961, is concerned.
4. The dispute was as to the method of computation of the fair market value of the shares as on 1st day of January, 1954. The Income-tax Officer accepted the assessee's case that on the basis of the balance-sheet of the company, the break-up value of the 10,000 shares in question was Rs. 237 per share. He applied Rule 1D of the Wealth-tax Rules and computed the fair market value as on 1st January, 1954, by deducting 15% from the break-up value. Thus, by deducting 15% from Rs. 237, he computed the fair market value at Rs. 202 per share. Accordingly, he computed the cost of acquisition of 10,000 shares at Rs. 30,30,000.
5. Aggrieved, the assessee went up in appeal.
6. The Appellate Assistant Commissioner held that Rule 1D framed under the Wealth-tax Act, 1957, was not in existence on 1st January, 1954. The deduction of 15% under that rule was not warranted. He directed that the fair market value of the shares as on 1st January, 1954, be taken to be the break-up value, i.e., Rs. 237.
7. The Department took the matter in appeal to the Tribunal. The Tribunal reversed the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. Accordingly, the value of the shares was directed to be computed at Rs. 202 per share. The Tribunal, however, adopted a different line of reasoning. It held that in CWT v. Mahadeo Jalan : 86ITR621(SC) , the Supreme Court held that in a private company the yield method is generally adopted to determine the fair market value of its shares. The break-up method is resorted to in exceptional circumstances or where the company is ripe for liquidation. On yield basis, the value of the shares as on 1st January, 1954, was Rs. 113 per share. Even on the basis of the average of the break-up value and yield basis, the value of the shares as on 1st January, 1954, comes to Rs. 171.43 per share. Both these figures are much lower than the value of Rs. 202 per share adopted by the Income-tax Officer. On this basis, the result would be more disadvantageous to the assessee. The Tribunal held that in this situation, the fair market value of the shares as their cost of acquisition, adopted by the Income-tax Officer at Rs. 202 for determining the capital gains, did not call for any interference.
8. The question whether Rule 1D of the Wealth-tax Rules will apply for determination of fair market value of shares for purposes of capital gains is not relevant. The Income-tax Officer no doubt applied Rule 1D, but the Tribunal has upheld his order on equitable grounds, viz., that applying the correct method of valuation, i.e., the yield basis, the assessee would be in a more disadvantageous position. Similarly, the question whether Rule 1D being a procedural provision was retrospective in operation so as to apply to pending assessments as held by the Allahabad High Court in CWT v. Laxmipat Singhania : 111ITR272(All) , CWT v. Sripat Singhania : 112ITR363(All) and Bharat Hari Singhania v. CWT : 119ITR258(All) is also not material and need not be considered.
9. Suffice it to say that the view expressed by the Supreme Court in Mahadeo Jalan's case : 86ITR621(SC) , has been reiterated by that court in CGT v. Smt. Kmumben D. Mahadevia : 122ITR38(SC) . It was held that in the case of a company which is a going concern and whose shares are not quoted on the stock exchange, the profits which the company has been making and should be capable of making or, in other words, the profit-earning capacity of the company would ordinarily determine the value of its shares. The break-up value will not be appropriate for valuation of shares of such a company, because among the factors which govern the consideration of the buyer and the seller, the factor of break-up value as on liquidation hardly enters into consideration where the shares are of a going concern. It is only where a company is ripe for winding-up or the situation is such that the fluctuations of profits and uncertainty of conditions at the date of valuation prevent any reasonable estimation of the profit-earning capacity of the company, that the valuation by the breakup method would be justified. It was also observed by the Supreme Court that a combination of the two methods, viz., the profit-earning method and the break-up method, though it may sound acceptable as a compromise formula, cannot be accepted as a valid principle of valuation of shares.
10. In the present case, the shares in question were the shares of a going concern whose shares were not quoted on the stock exchange. It was not a case of sale of shares of a company which was ripe for winding-up. There is no suggestion that the situation was such that the fluctuations of profit and uncertainty of conditions at the date of valuation, viz., 1st January, 1954, prevented any reasonable estimation of the profit-earning capacity of the company. Hence, the valuation by the break-up method could not be justified.
11. In the present case, the Tribunal held that the figure arrived by at the Income-tax Officer was favourable to the assessee in comparison with the figure on the basis of the profit-earning method and so no interference was called for in an appeal by the assessee. In the circumstances, we agree with this view.
12. Learned counsel for the assessee was at pains to repeatedly emphasise that the Income-tax Officer applied double standards. While computing the fair market value of the shares on the date of sale during 1972-73, he adopted the break-up value without any deduction. But while determining the market value as on January 1, 1954, he applied Rule 1D. Under this rule, the fair market value is the break-up valueless 15%. We are constrained to observe that this submission need not have been made. The Income-tax Officer's adoption of the fair market value at Rs. 202 per share was set aside by the Appellate Assistant Commissioner. The figure of Rs. 245 per share fixed by the Reserve Bank of India was taken as the fair market value. This view was affirmed by the Tribunal.
13. The first part of the question of law referred to us is answered in the affirmative, in favour of the Department and against the assessee. In this view, the second part of the question does not arise and need not be answered.
Suhas Chandra Sen, J.
14. I agree.