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TMI Blog1969 (9) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... en shown in the balance-sheets and, therefore, it would be unrealistic to take the book value of the assets. The Tribunal came to the conclusion that the prospective buyers of the shares would take into consideration the fact that the assets of the companies concerned had depreciated year after year due to use, although no depreciation had been shown in the balance-sheets. The Tribunal, therefore, directed that the written down values of such depreciable assets should be taken instead of the values shown in the respective balance-sheets. Another contention was put forward by the assessee that the dividends proposed but not declared by Messrs. Hind Agents Private Ltd. and Shri Hanuman Sugar Mills Ltd. as on the relevant valuation date should be deducted from the gross value of the assets of the companies. The Tribunal was of the opinion that they should be so deducted and directed the Wealth-tax Officer to recompute the break-up value of the shares after allowing the dividends proposed by the companies but not declared on or before the relevant valuation date. The third contention of the assessee before the Tribunal was that in computing the break-up value of the shares of Sri Han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, it was submitted, that in computing the market value of the assets, there is no warrant for treating the written down value in the income-tax assessment of a particular asset as the basis. Before this contention is considered, it has to be borne in mind that the assets are depreciable assets. Therefore, the position seems to be admitted that these are assets which, with the passage of time, depreciate. It also appears from the order of the Tribunal that in the balance-sheets depreciation of these assets have not been provided for. The Tribunal in its order in this connection relied upon the judgment of the Tribunal in the case of another shareholder of the said company, i.e., Sri Narayan Prasad Nopany, relating to the assessment year 1959-60. The said order of the Tribunal in the case of Sri Narayan Prasad Nopany has been annexed with the statement of the case and sent to this court. At page 8 of the paper book it has been observed that : "It is stated that the two companies did not provide for either any depreciation or full depreciation due to paucity of profit." It does not appear that before the Tribunal this statement of fact was challenged. The position, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance-sheet that the depreciation had not been shown due to paucity of profit and in view of the fact that there was no evidence before the Tribunal to come to the conclusion that the written down value did not represent the market value, this court came to the conclusion that the Tribunal was justified in proceeding to take into consideration that the prospective buyer would be guided by the written down value. Mr. Pal, appearing for the revenue, drew our attention to two judgments of the Supreme Court in Commissioner of Wealth-tax v. Tungabhadra Industries Ltd. and Commissioner of Wealth-tax v. Aluminium Corporation of India Ltd. (Civil Appeal No. 1596 of 1968), for the argument that the values put in the balance-sheets should be taken as the basis of valuation. It has to be borne in mind that both the cases were concerned with the question of valuing the assets of the companies who themselves were the assessees and whose assets were being valued under section 7(2)(a) of the Wealth-tax Act, 1957. The company is, undoubtedly, bound by the balance-sheets as held by the Supreme Court unless the company adduces evidence to the effect that the balance-sheets do not represent the corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i , question No. 2 must be answered in the negative and in favour of the revenue. Indeed, on this question no argument was advanced by the parties before us. The third question canvassed before us is of a controversial nature. It appears from the order of the Wealth-tax Officer that the assessee claimed deduction of Rs. 3,50,771 for agricultural income-tax as "claimed but not provided." The Wealth-tax Officer in his order observed that the foot-note to the balance-sheet as on September 30, 1958, showed as follows : "The company has been assessed to agricultural income-tax for the accounting years 1951-52 and 1952-53, amounting to Rs. 5,14,156 towards which Rs. 1,63,385 have been advanced by the company under protest and the references have been decided in favour of the company. However, the department has preferred appeals against the same." According to the Wealth-tax Officer, as on September 30, 1958, there was not only no liability of the company, but the company was also entitled to a refund of Rs. 1,63,385, which it had earlier advanced under protest. The Wealth-tax Officer, therefore, disallowed the claim for Rs. 3,50,771 and further added back the refund of Rs. 1,63,385 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment. The Tribunal also observed that on the liabilities side no provision existed in respect of the demand of Rs. 5,14,156 made by the said agricultural income-tax department. The Tribunal dealing with the contention of the assessee on this point in the case of Sri Narayan Prasad Nopany observed as follows : "We agree with the learned counsel's submission that, in these circumstances, the contingencies of the department succeeding in appeal cannot be left out of the amount while valuing the assets. We would presume that the assessee has more than 50 : 50 chance of the issue being decided in his favour. As against the liability of Rs. 5,14,156 we would estimate the value of the liability at Rs. 1,63,385, being the sum already paid to the Government and not yet refunded to the assessee. Whether the liability amounts to a debt or not, it is certainly a factor to be taken into account by the prospective buyer of the undertaking while estimating its market value. Having regard to these aspects we direct the sum of Rs. 1,63,385 be left out of the assets while computing the break-up value of the shares of Shree Hanuman Sugar Mills Ltd." It was contended by Mr. Pal on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the amount of tax liability was uncertain on the date of the gift it was necessary to make a just and fair allowance for the liability. The provision of taxation made by the company was a fair estimate of the tax liability and the amount so set apart was liable to be deducted. It was further held that in computing the value of shares by reference to the value of the company's assets no deduction or allowance could be made for dividends not declared on the date of the gift. The amount set apart as proposed dividend could not therefore be deducted. It has to be borne in mind that here under section 7(1) of the Wealth-tax Act, when the wealth-tax authorities are considering the market value of the shares by following the break-up method of the assets of the company it is not possible to lay down the precise factors which would operate in the minds of prospective buyers in that imaginary market. All that one can do is to consider what are the factors which reasonably a prospective buyer might consider and then consider how these factors affect the value of the shares. It has been urged that doubtful debts have often been considered to be factors which would diminish the value of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. In order to influence the mind of a prospective buyer the facts must be as on the valuation date. Here, in the balance-sheet which is mainly brought to the notice of the prospective buyer there is no indication of anything doubtful about recovering this sum of Rs. 1,63,385 from the Government. Counsel for the assessee also drew our attention to a decision of the Supreme Court in the case of Commissioner of Wealth-tax v. Standard Vacuum Oil Co. Ltd., where it was held that where a notice under section 18A of the Indian Income-tax Act, 1922, was concerned, the amounts mentioned in the said notices were debts owed within the meaning of section 2(m) of the Wealth-tax Act on the valuation dates and had to be deducted in computing the net wealth of the respondent. Here, the company was claiming deduction from its assets. But the service of the notice under section 18A of the Income-tax Act on the company was held to be fastening of the liability upon the company, because the company had to discharge it. Here, the position is, as mentioned before, on the relevant valuation date, there was no existing liability and as such the mere possibility of a liability being fastened on a futu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edly quoted on the stock exchange and there is no open market as such for such shares. While the market does not remain open, law opens the field of imagination. The answer is said to be to imagine a hypothetical market, a hypothetical seller and a hypothetical purchaser and then fix what must necessarily be the hypothetical price. But in the process, the law still says that one has to look for reality in the illusory market with illusory buyer and illusory purchaser trying to buy shares which have no market. The situation is ideal where the normally pent up legal romance gets its chance to operate. Many theories have been advanced in law for valuation of such shares. First, there is the book value or the balance-sheet value. Then there is the written down depreciation value in income-tax proceedings. The two recent, as yet unreported, decisions of the Supreme Court in the Commissioner of Wealth-tax v. Tungabhadra Industries Ltd., where the judgment was delivered in Civil Appeals Nos. 1629-1631 of 1969 on the 8th August, 1969, and Commissioner of Wealth-tax v. Aluminium Corporation of India Ltd., in Civil Appeal No. 1596 of 1968, dated the 7th August, 1969, have re-examined these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is to find the value in the open market. Balance-sheet value and the written down value are not the only two methods of valuing the asset. I do not read section 7 of the Wealth-tax Act to mean that the valuation is confined always and invariably to these two methods of valuation. It is open to the Wealth-tax Officer in search of value in the open market, even in hypothetical cases, to consider any relevant economic factor. Many factors determine the value of an asset like the share in a company. The value of shares fluctuates in the market due to many reasons--political and economic. If in any particular case the Wealth-tax Officer finds that the valuation of the shares on the basis of the balance-sheet will not be justified for reasons which can be tested in court or in the other case where the Wealth-tax Officer for reasons which again can be tested in court finds that the written down value in income-tax proceedings is not a proper guide for the valuation, then he would be right in rejecting it. What exactly is the bone of contention here? The contention plainly is that it is stated that the two companies did not provide for any depreciation or full depreciation due to paucit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation should not be allowed in the balance-sheet under any circumstances. It was not shown on the express ground of paucity of profits. That was the point which we emphasized in our recent decision in Commissioner of Wealth-tax v. Smt. Radha Debi M. Nopany (unreported). The other question in this reference is about the payment of agricultural income-tax and whether the Tribunal was right in holding that in determining the break-up value of the shares of Sree Hanuman Sugar Mills Ltd., agricultural income-tax paid by the said company amounting to Rs. 1,63,385 was liable to be deducted from the gross value of the assets. Here, at the foot of the balance-sheet of Sree Hanuman Sugar Mills Ltd. it is shown that "the company has been assessed to agricultural income-tax for the accounting years 1951-52 and 1952-53, amounting to Rs. 5,14,156, towards which Rs. 1,63,385 have been advanced by the company under protest and the references have been decided in favour of the company. However, the department has again preferred appeals against the same". This question merely raises the effect in substance of an agricultural income-tax paid out of the till of the company but legally refundab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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