TMI Blog1972 (9) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... es on the basis of the break-up value and included them in their total wealth. In Appeals Nos. 1765, 1766 and 1767 of 1969 the respondents are Mahabir Prasad Jalan, Mahadev Jalan and Madan Mohan Jalan respectively. All these appeals pertain to assessment years 1957-58 and 1958-59. In respect of these years the value of the shares in private limited companies were included in the total wealth of the respective assessees on the basis of their yield though some of the companies were not paying dividends while others were declaring dividends throughout. The first two appeals which related to a later year seem to have been heard by the High Court and disposed of on December 12, 1967, while the last three appeals were disposed of later on February 4, 1969, mainly o the basis of the judgment of the High Court in the first two appeals. For the years 1957-58 and 1958-59 relating to the three persons referred to above, the Wealth-tax Officer had, as in the case of assessment for the year 1959-60, adopted the break-up value of the shares as disclosed on the balance-sheets of the company in computing their value as if each of the companies was brought to liquidation. This assessment was confir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as to whether the "break-up value" method is the correct method to be adopted in the facts and circumstances of the case or it is the "yield value" method to be adopted, that question was reframed and a further statement of the case called for from the Tribunal. The question as re-framed is as follows: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law to follow the method involving the principle of 'break-up value' instead of the method involving the principle of 'yield value' in determining the value of the shares in question under section 7 of the Wealth-tax Act?" In compliance with this direction the Tribunal drew up a supplementary statement of the case and submitted it to the High Court. In that statement the Tribunal stated: "Before the Appellate Assistant Commissioner no alternative basis of valuation appear to have been claimed. For the first time before the Tribunal, the assessee filed a statement of the dividends declared by the aforesaid private companies during the years 1953 to 1957 and claimed that the market value of the shares should be worked out with reference to the average percentage of the dividends decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion, is not justified in doing so. We are constrained to note that, although the Tribunal had adopted the 'yield value' method in its decisions in regard to the previous years, the Tribunal had taken a new path and adopted the 'break-up value' method as the basis of the assessment. We feel that there is no material placed on the record to justify this change in the method to be adopted in calculation." When the application for reference under section 66(2) in respect of the last three appeals came before the High Court after an application under section 66(1) had been rejected by the Tribunal, it observed: "This is undoubtedly a question of law but the answer will be covered by the decision of this court dated June 9, 1967. . . . " and so it thought it unnecessary to ask the Tribunal to refer the same point again and accordingly rejected the petitions. The special leave in respect of the first two appeals is against the judgment of the High Court holding that the "yield method" was the proper method and in respect of the latter three appeals against the order refusing to direct the Tribunal to state a case. As a common question of law has to be determined these appeals are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer, the fixation of the value of the share will have to be determined without ignoring the restriction as to transfer because they are an inherent element in the property which has to be valued. This restriction may not necessarily be depreciatory, because the chance of acquiring the shares of other members in the company on advantageous terms is itself a benefit. In cases where shares have to be valued by reference to the assets of the company restrictions on alienation are irrelevant. The shares the transfer of which is not restricted may be sold on the stock exchanges for which there is official market quotation. There may also be shares in public limited companies for which there are no quotations on the stock exchange. Generally, the price at which a reasonably willing purchaser would buy the shares postulates a hypothetical purchaser but even in such a case it is to be assumed that the vendor would only be willing to sell the share for its real value and the purchaser would be willing to pay the price. This has to be always determined notionally. Where shares in a company are bought and sold on the stock exchange and there are no abnormalities affecting the market p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern in which he intends to invest is financially and commercially sound, what is the yield that it will give on the capital which he invests, whether that yield will be maintained, whether the shares will appreciate in value and are easily marketable whenever he desires to dispose of them. In certain cases a person may want to take risks by investing in shares which having regard to various trends in the commercial world and in any particular industry has prospects of improvement and the value of the shares going up with the corresponding prospect of the return or yield obtainable on the capital invested being much higher than what he would get in other sounder concerns. There may yet be investors who notwithstanding that the company is not in a solvent condition or is unable to pay dividends for a number of years are willing to purchase the controlling interest for the purpose of manipulation or bringing it to liquidation for obtaining some benefit. Ignoring such cases, where a purchaser or seller is considering the various factors for purchase or sale of shares in a company, the dominant factor determining the price he will pay or receive, as the case may be, is the yield. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent only a small proportion of the company's profits and large sums are systematically accumulated in the form of reserves. It is important to remember in this connection that the interests of shareholders in unquoted companies often differ from those of investors in quoted shares, especially as respects dividend policy. Where the shares are held by a few individuals (particularly members of a single family), it will not necessarily be to their advantage to have the greatest possible amount paid out to them as dividends. Retention of the profits by the company may suit them better than the receipt of taxable dividends. A purchase of shares in a company which distributes only a small fraction of its profits is unlikely to prove attractive to an investor in search of current income, but the open market is by no means confined to such investors. It includes, for instance, the existing members of the company, to whom the shares may be more valuable than to others and who may wish to exclude outsiders, and surtax payers whose goal is capital appreciation rather than current income." Again, at page 409, it is observed: " A valuation by reference to earnings is apposite as resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reak-up value and it was necessary to find the value of the business as a going concern, observed, at page 779: " It is true that a purchaser of the shares held by the deceased could have obtained a controlling interest in the company as a going concern, and in their Lordships' judgment it is right to value these shares by reference to the value of the company's business as a going concern. No doubt, the value of an established business as a going concern generally exceeds and often greatly exceeds the total value of its tangible assets. But, that cannot be assumed to be universally true. If it is proved in a particular case that at the relevant date the business could not have been sold for more than the value of its tangible assets, then that must be taken to be its value as a going concern. In their Lordships' judgment it has been proved in this case that the deceased's holding could not have been sold in September, 1940, at a price based on any higher figure than the value of the tangible assets of the company." In the Irish case of Smith v. Revenue Commissioners, on which on behalf of the revenue reliance was placed, the deceased and his son held all the shares in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was determined on the profit earning capacity of the company. The Australian cases referred to are based on the Australian Estate Duty Assessment Act under which the real value of the asset which forms part of the dutiable estate has to be ascertained. Even then, it was held in McCathie v. Federal Commissioner of Taxation that the real value of shares held by a deceased on his death depends more upon the profits which the company has been making and should be capable of making having regard to the nature of its business than upon the amounts which the shares would be likely to realise upon liquidation, and that moneys paid as fees to directors in excess of a reasonable amount should be treated as profits when determining the reasonable earning capacity of a proprietary company which bears the character of a partnership trading with limited liabilities. Williams J., at page 11, observed: " . . . the real value of shares which a deceased person holds in a company at the date of his death will depend more on the profits which the company has been making and should be capable of making, having regard to the nature of its business, than upon the amounts which the shares would be li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of all proportion to the commercial venture, they will be added back to the profits 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 a valuation by reference to the assets would be justified where as 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 becaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime filed before it in respect of each of the companies. The Wealth-tax Officer and the Appellate Assistant Commissioner, as well as the Tribunal, had the balance sheets of each of the companies before them because the shares were valued on the break-up method in those cases on the basis of those balance sheets. If the balance sheets were filed they would also disclose the dividends as indeed the statement of the case shows that all the companies had declared dividends for the year 1959-60. Even otherwise, the Tribunal, as a fact-finding authority, could have considered the list or sent them to the Wealth-tax Officer for any further enquiry it required. In the last three appeals, the Tribunal had adopted the yield method. In the result our answer to the first part of the question is in the negative and to the second part our answer is in terms of the principles already set out. In Appeals Nos. 1765 to 1767 of 1969, the method adopted by the Tribunal being the proper method the refusal of the High Court to direct a case to be stated does not call for interference. For these reasons, all the appeals are dismissed with costs. One hearing fee. Appeals dismissed. - - TaxTMI - TMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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