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Wealth-tax Officer Vs. Mrs. Madhu Kanta J. Shah. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberW. T. APPEAL NOS. 946 AND 947 (CAL.) OF 1982 [ASSESSMENT YEARS 1976-77 AND 1977-78]
Reported in[1986]17ITD947(Cal)
AppellantWealth-tax Officer
RespondentMrs. Madhu Kanta J. Shah.
Excerpt:
- .....with the provisions of rule 1d of the wealth-tax rules, 1957 (the rules).2. the assessee held shares of madhu jayanti (p.) ltd. and jay bharat cotton textiles (p). ltd. according to the assessee, the shares were to be valued on the basis of the principle laid down by the supreme court in the case of mahadeo jalan (supra) so also on the basis of the decision of the bombay high court in the case of smt. kusumben d. mahadevia v. cwt : [1980]124itr799(bom) . the wto rejected the assessees submission inasmuch as he was of the opinion that the valuation of unquoted shares was to be made keeping in view the provisions of rule 1d.3. on appeal to the aac, it was contended on behalf of the assessee that the method of break-up value was not the only method and the shares were to be valued.....
Judgment:
ORDER

Per Shri A. R. Haldar, Judicial member - These two appeals by the revenue are directed on the following common grounds :

1. That on the facts and in the circumstances of the case the AAC erred in law as well as in facts in interpreting the ration of the principle decided in the case of CWT v. Mahadeo Jalan : [1972]86ITR621(SC) .

2. That on the facts and in the circumstances of the case, the AAC erred in law in holding that valuation of the shares held by the assessee during the year should not be done in accordance with the provisions of rule 1D of the Wealth-tax Rules, 1957 (the Rules).

2. The assessee held shares of Madhu Jayanti (P.) Ltd. and Jay Bharat Cotton Textiles (P). Ltd. According to the assessee, the shares were to be valued on the basis of the principle laid down by the Supreme Court in the case of Mahadeo Jalan (supra) so also on the basis of the decision of the Bombay High Court in the case of Smt. Kusumben D. Mahadevia v. CWT : [1980]124ITR799(Bom) . The WTO rejected the assessees submission inasmuch as he was of the opinion that the valuation of unquoted shares was to be made keeping in view the provisions of rule 1D.

3. On appeal to the AAC, it was contended on behalf of the assessee that the method of break-up value was not the only method and the shares were to be valued only on yield method in view of the decisions cited before the WTO. It was also contended that the break-up value method was resorted to only when the company was ripe for liquidation or in exceptional circumstances. It was pointed out tht even though the company was not ripe for liquidation the WTO had not established that there existed exceptional circumstances warranting departure from the general procedure of determining the valuation on yield method. The assessee also furnished before the AAC the valuation report given by a registered valuer, A. C. Roy & Co. The AAC after considering the valuation report given by a registered valuer directed the WTO to value the shares of Jay Bharat Cotton Textiles (P.) Ltd. at Rs. 36.96 each and those of Madhu Jayanti (P.) Ltd. at Rs. 96 each.

4. Against the said order of the AAC, the revenue preferred the present appeals before us. It was contended by the learned departmental representative that the AAC was wrong in directing the WTO to determine the value of the shares held by the assessee on the basis of the report given by a registered valuer. He urged that the AAC failed to consider that unquoted shares should be valued in accordance with the provisions of rule 1D. He submitted that rule 1D is mandatory in the light of the order of the Tribunal, Special Bench, Delhi in the case of Biju Patnaik v. WTO [1982] 1 SOT 623 wherein was held that rule 1BB of the Rules is mandatory. The learned departmental representative urged that the Honble Supreme Court had no occasion to consider the provisions of rule 1BB while deciding the case of Mahadeo Jalan (supra). He, therefore, urged that the AAC was entirely wrong in applying the principle laid down by the Supreme Court in the case of Mahadeo Jalan (supra) while determining the value of the shares held by the assessee. The learned counsel for the assessee, on the other hand, strongly supported the order of the AAC. He relied on the decisions in Mahadeo Jalan; case (supra), CIT v. Swadeshi Mining & Mfg. Co. Ltd. : [1979]116ITR259(Cal) CWT v. Executors to the Estate of Sir E. C. Benthal : [1980]121ITR814(Cal) CGT v. Smt. Kusumben D. Mahadevia : [1980]122ITR38(SC) and Smt. Kusumben D. Mahadevia v. CWT : [1980]124ITR799(Bom) . The learned counsel for the assessee invited our attention to the comments of the learned author, Sampath Iyengar, in his Three New Taxes, 1979 Fifth edn., Vol. 1 wherein it has been observe, inter alia, as under :

'In reality, as an instance the method prescribed by the Board by rule 1D as a mandatory one is only one of the several methods for the valuation of shares - the other important methods are to capitalise the actual yield of dividend, or to take the market quotations of similar shares which are quoted on the stock-exchange, etc. Besides, many other considerations based on the variable factors of economic life may have to be taken into account by the fact-finding authorities for determining the real or true taxable value of this category of assets.

In view of the foregoing reasons, the Rules sought to be framed by the Board quo-section 7(1) read with section 46(2) (a) of the act are ultra vires the Boards power and are legally ineffective : the taxpayers are, therefore, not barred from claiming, and the WTOs from entertaining the claim, that the value of shares in question should be determined in accordance with the substantive provisions of section 7(1), the method prescribed by the Board being only one of the several methods which can be legally and technically adopted for the purpose...' (p. 481)

5. Having heard the submissions of both the parties and after going through the facts of the case we are of the opinion that the order of the AAC needs no interference. The Supreme Court in the case of Mahadeo Jalan (supra) held :

'The factors which are likely to determine the value of a share on any particular day or at any particular time are : (i) the profit-earning capacity of the company on a reasonable commercial basis; (ii) its capacity to maintain these profits or a reasonable return for the capital invested; and in special cases such as investment companies, the asset backing; and (iii) 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 their 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.' (p. 622)

Then again, the Calcutta High Court in the case of Swadeshi Mining & Mfg. Co. Ltd. (supra) held that it is only in very exceptional cases that the shares of a company would be valued by the break-up method and the fact that the purchaser and vendor are associated with each other in business is not a fact which would bring the transaction within such special circumstances. In the case of Executors to the Estate of Sir E. C. Benthal (supra) the Calcutta High Court reiterated the view that was taken by the Supreme Court in the case of Mahadeo Jalan (supra). Reliance may be placed on the decision of the Supreme Court in the case of Smt. Kusumben D. Mahadevia (supra) wherein it has been held that the profit-earning method was the only method which could properly be applied for for arriving at the valuation of the shares in this case. Bearing in mind the principle laid down in the aforesaid cases we have no hesitation in holding that the AAC was justified in directing the WTO to determine the value of the shares held by the assessee keeping in view the principle laid down by the Supreme Court in the case of Mahadeo Jalan (supra).

6. Much reliance was placed by the learned departmental representative on the provisions of rule 1D. In this connection, reference may be made to the decision of the Bombay High Court in the case of Smt. Kusumben D. Mahadevia (supra) wherein it is has been held that rule 1D prescribing the break-up method for valuing unquoted equity shares is directly and not mandatory. The observation of the learned author, Sampath Iyengar, as reproduced hereinbefore, cannot be lost sight of. As has been observed by him, in reality, as in instance the method prescribed by the Board of rule 1D as a mandatory one is only one of the several methods for the valuation of shares; the other important methods are to capitalise the actual yield of dividend, or to take the market quotations of similar shares which are quoted on the stock exchange. That being the position, we are of the opinion that the order of the AAC does not require any interference. We, accordingly, upheld the order of the AAC on this score.

7. Both the appeals by the revenue, thus, fail and are hereby dismissed. hereby dismissed.


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