1. The facts found and/or admitted in this reference are shortly as follows :
2. The assessee, one Swadeshi Mining & ., sold in the accounting year ended 31st December, 1957, a lot of 7,500 ordinary shares of Jaipuria Kajora Collieries Ltd. to one Swadeshi Cotton Mills Ltd. at the rate of Rs. 9.50 per share, the face value thereof being Rs. 10 per share. In the assessment year 1958-59, the ITO proceeded to compute capital gains arising out of the said transaction under the first prov. to Section 12B(2) of the I.T. Act, 1922, with the approval of the IAC. The ITO was of the view that the said shares had been sold at an unusually low price to a great advantage to the vendee and, therefore, he proceeded to ascertain the break-up value of the said shares which worked out to Rs. 23.85 per share. The surplus was sought to be taxed as capital gains.
3. In the relevant assessment year the assessee had also claimed development rebate in respect of certain capital items like coal tubs, cast iron pipes, winding and guiding ropes, etc. Under the relevant rules, the assessee was entitled to allowance of the entire cost of replacement of such items as and when old stock was worn out. The ITO refused to allow the development rebate on these items on the ground that depreciation was not allowable in respect of the same.
4. Being aggrieved by the order of assessment, the assessee went up on appeal before the AAC, who held that neither the break-up value nor the maintainable profits method can be adopted as the sole guide for determining the price of the said shares. Taking the mean of the break-up value of the said shares computed on the basis of the balance-sheet of the company as on the 31st December, 1956, and the market price of the shares, he determined the value of the said shares at Rs. 15 per share. On the ques-tion of development rebate, the AAC agreed with the ITO and held that the assessee was not entitled to such rebate on the items concerned as depreciation was not allowable thereon.
5. From the order of the AAC, a further appeal was preferred by the assessee before the Tribunal. It was contended in the appeal that the break-up value could never indicate the correct market price of shares of a running company as a buyer would be always influenced by the prospect of return to his capital outlay, i.e., expected dividend from year to year. The company in question had declared only 2'5% dividend on its equity shares in the calendar years 1952 and 1956 and during the intervening years no dividend whatsoever was declared. Only after the sale of the shares in question the company had declared dividend of 5% out of profits of the calendar year 1957. This would, however, not be known to the buyers.
6. It was contended on behalf of the revenue, on the other hand, that in the case of unquoted shares, the break-up value was the most reliable basis for determining the market price. Further, the seller and buyer in this case being intimately connected, it would not be safe to proceed only on the basis of profit arid loss account or on the basis of the declared dividend because the same could be manipulated in a manner advantageous to the persons concerned. In the year in question, the company concerned had created a capital reserve of over Rs. 10 lakhs on revaluation of its fixed assets and, therefore, the dividend declared would not show the actual value of the shares.
7. On the question of development rebate it was contended by the assessee that the items concerned fell within the category of plant and machinery and, therefore, was entitled to such rebate. As defined in Section 10(5)of the I.T. Act, 1922, the word 'plant' included all kinds of things including books and scientific apparatus.
8. The Tribunal held that the break-up value of the said shares did not indicate their market value on the date of sale on account of the low return on the basis of average maintainable commercial profits. The Tribunal held further that the value at which the said shares had been sold, that is, at little less than the par value, was very reasonable. The assessee did not make any capital gain but suffered a loss. The Tribunal also held that the assessee was entitled to development rebate in respect of the items claimed subject to its complying with the provisions as to reserve.
9. From this order of the Tribunal, the revenue has initiated the present reference and under Section 66(2) of the I.T. Act, 1922, this court has directed the Tribunal to draw up a statement of case and refer the following questions:
'1. Whether, on the facts and in the circumstances of the case, and according to the proper method of valuation, the Tribunal was right in holding that no capital gain arose on the sale by the assessee of the shares of J.K. Collieries Ltd.
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to development rebate in respect of capital items like coal tubs, C.I. pipes, winding and guiding ropes, etc., subject to the assessee's compliance with the requirements of law in respect of appropriate reserve ?'
10. At the hearing, Mr. B. L. Pal, learned counsel for the revenue, drew our attention to a decision of the Supreme Court in CWT v. Mahadeo Jalan : 86ITR621(SC) , which laid down the law as follows (page 633):
'An examination of the various aspects of valuation of shares in a limiqted company would lead us to the following conclusion :
(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 computedby adjustment of unreasonable expenses and adopting a reasonable proportion of pronts.
(3) In the case of a private limited company also where the expenses are incurred out of all proportion to the commercial venture, they will be added back to the pronts 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 whereas 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.
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 prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each care. But, one thing is clear, that 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.'
11. Mr. B. L. Pal drew our attention to the observations of the Supreme Court in the said judgment at page 628. These observations are as follows :
'Leaving aside any distress sales, the factors which in our view are likely to determine the fixation of a share on any particular day or at any particular time is, firstly, the profit-earning capacity of the company on a reasonable commercial basis ; secondly, its capacity to maintain those profits or a reasonable return for the capital invested, and in special cases such as investment companies, the asset-backings, the prospects of capitalisation of its earning in the shape of declaration of bonus shares or where the company is financially and commercially sound, the prospects of issue of further capital where the existing shareholders have a right to apply for and obtain them at a certain price which is generally less than the market value, offering an increased yield on his investment, on the assumption that the company will be able to maintain the same rate or at least increase the aggregate payment of dividends on the increased capital.'
12. Mr. Pal also relied on the text book 'The Valuation of Company Shares and Business' by A. V. Adamson, 5th edn., and drew our attention to the following passage :
'However, the assets backing of an investment company may be a more useful guide than is the assets-backing of a trading company, when used as a check on the value determined by capitalization of earning capacity subject of course, to allowances for disabilities attaching to the shareholding being valued.'
13. On disallowance of development rebate Mr. Pal sought to argue that items in question for which the rebate was claimed were neither plants nor machinery. In support of this proposition, he cited a decision of the Supreme Court in CIT v. Mir Mohammad Ali : 53ITR165(SC) , where in a majority judgment, the Supreme Court approved the definition of the word 'machinery' adopted by the Privy Council in Corporation of Calcutta v. Chairman of the Cossipore & Chitpore Municipality  ILR 49 Cal 190; AIR 1922 PC 27 as follows :
'.....machinery means some mechanical contrivances which by themselves or in combination with one or more contrivances by the joint movement and interdependent operation of their respective parts generate power or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite and specific a result.'
14. Mr. Pal also drew our attention to another decision of the Supreme Court in CIT v. Raju and Mannar : 60ITR246(SC) relied on by the AAC and fairly admitted that this decision had little relevance in the facts andcircumstances of the instant case.
15. Mr. R. Murarka, learned counsel for the assessee, contended on theother hand that the question No. 1 was clearly covered by the decision of the Supreme Court in Mahadeo Jalan : 86ITR621(SC) . He submitted, that even assuming the two methods of valuation were applicable in the facts of this case, the fact that the Tribunal has chosen one method resulting in a lower tax cannot be the reason why it should be erroneous. In this context, he cited a decision of the Supreme Court in CIT v. Simon Carves Ltd. : 105ITR212(SC) where it was laid down that if the ITO adopted a permissible method of computation resulting in a lower tax liability compared with other permissible methods, the same would not be a case whereincome could be said to have escaped assessment. The Supreme Court disapproved the view that unless the revenue exercised the power in a manner most beneficial to the revenue and consequently most adverse to the assessee they should be deemed to have not exercised power in a proper and judicious manner. Mr. Murarka contended further that even if the disputed items were not machinery within the meaning of the Supreme Court decision in the case of Mir Mohammad Ali : 53ITR165(SC) the same certainly came within the category of plant. As an authority Mr. Murarka cited a decision of the Supreme Court in CIT v. Taj Mahal Hotel : 82ITR44(SC) , where it was held that even sanitary and pipeline fittings in a hotel fell within the definition of 'plant 'in Section 10(5) of the Indian I.T. Act, 1922, and the assessee was entitled to development rebate in relation thereto. The Supreme Court in its judgment observed as follows (page 47):
'Now it is well settled that where the definition of a word has not been given, it must be construed in its popular sense if it is a word of every day use. Popular sense means 'that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it'. In the present case, Section 10(5) enlarges the definition of the word 'plant' by including in it the words which have already been mentioned before. The very fact that even books have been included shows that the meaning intended to be given to 'plant' is wide. The word 'includes' is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used, these words and phrases must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include.'
16. On a careful consideration of the facts and circumstances we cannotsay that the Tribunal fell into any error when it upheld the valuation ofthe said shares on the basis of average maintainable profit computed on thebasis of past dividends declared. This is definitely one of the methodsaccepted and approved by the Supreme Court in the case of Mahadeo Jalan : 86ITR621(SC) . We are of the opinion that it is only in very exceptional cases that the shares of a company would be valued by the break-upmethod and the fact that the purchaser and vendor are associated with eachother in business is not a fact which would bring the transaction withinsuch special circumstances. Mr. Pal could not cite any authority for theproposition that wherever shares are held for investment purposes and theyare bought and sold between persons associated in business or belonging tothe same group then the correct or the only method of valuation would bethe break-up value method and no other. The very text book cited byMr. Pal contains the following passage at page 62 :
'In some instances, however, there has been a tendency with Australian revenue officers--both Federal and in some States--to assess value on an assets basis where it was felt that actual past earnings did not provide a yield which, when capitalized at an appropriate rate, would result in an adequate value. Typical examples were family pastoral companies where the actual earnings were so small that, if used for capitalization purposes, a reasonable value for the shares could only be obtained by using a rate so low as to be far removed from reality. Whilst admitting that the mere capitalization of actual past earnings would not produce a reasonable result in such cases, the author considers that the assets basis should not be used in the case of a continuing business except as a last resort when all attempts to measure prospective earning capacity have failed. The emphasis is on prospective earning capacity rather than actual past earnings, although naturally the latter must be used as a starting point to calculate the former.'
17. For the reasons above we answer question No. 1 in the affirmative and in favour of the assessee.
18. Question No. 2 must also be answered in favour of the assessee. The decision of the Supreme Court in the case of Taj Mahal Hotel : 82ITR44(SC) has clearly laid down the ambit of the expression 'plant' and the items in dispute in the present case, in our opinion, certainly come within the ambit of the said expression as construed by the Supreme Court. We answer question No. 2 in the affirmative. In the facts and circumstances there will be no order as to costs.
19. I agree.