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TMI Blog1973 (5) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee preferred appeals to the Appellate Assistant Commissioner against the orders of the Wealth-tax Officer computing the value of the shares on the basis of the balance-sheets of the company. He contended that, under the articles of association of Messrs. Best and Co., there was restriction on transfer of shares, that the shares could, if at all, be transferred only at their face value and that, therefore, there was no justification on the part of the Wealth-tax Officer to value the shares at a higher value. The Appellate Assistant Commissioner did not accept these contentions and held that under the Wealth-tax Act the value of the shares has to be computed on the basis that there was no restriction on the transfer of the shares and that the shares could be sold in the open market. In that view he affirmed the valuation adopted by the Wealth-tax Officer. There were further appeals to the Appellate Tribunal. Before the Tribunal the assessee filed a copy of the memorandum and articles of association of Best and Company and also a letter dated January 17, 1958, from Messrs. Best and Company in which the company had agreed to arrange for the transfer of 200 shares at the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inary shares the proposing transferor shall give notice in writing (hereinafter called the " transfer notice ") to the company that he desires to transfer the same. Such transfer notice shall specify the purchase price as hereinafter provided for and shall constitute the company his agent for the sale of the shares. The transfer notice shall not be revocable except with the sanction of the directors. Article 32 : All the shares comprised in a transfer notice shall be offered to the directors, managers or assistants in such order as the directors think fit. Article 33 : The sum fixed by the transfer notice as the price of an ordinary share shall be Rs. 100 per share. Article 34 : If the company shall within the space of sixty clear days after being served with such transfer notice, find a purchaser for the shares comprised in a transfer notice (hereinafter called " the purchaser ") and shall give notice thereof to the intending transferor, he, shall be bound on the payment of the purchase money to transfer such shares to the purchaser. " Article 36, however, provides that if the company is unable to find a purchaser for the shares offered for sale, then the intending transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date." While construing section 7(1) of the Wealth-tax Act, 1957, the Supreme Court in Ahmed G. H. Ariff v. Commissioner of Wealth-tax said that when the statute uses the words " if sold in the open market ", it does not contemplate actual sale or the actual state of the market, but only enjoins that it should be assumed that there is an open market and the property can be sold in such a market and, on that basis, the value has to be found out, and that it is a hypothetical case which is contemplated and the tax officer must assume that there is an open market in which the asset can be sold. The above view was also affirmed by the Supreme Court in a later decision in Purushottam N. Amarsey v. Commissioner of Wealth-tax. The above decisions lay down the principle that even if the property in question is incapable of being sold in the open market, it should be assumed that it has got a market and that there are buyers for such property. The question of valuation of shares whose transfers are restricted by the articles of association under which they have been issued had come up for consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, so far as known at the date of the testator's death and by determining what a prudent investor, who knew these facts, might be expected to be willing to pay for the shares, and that one of the modes of valuing such shares is on a break-up basis on the figures contained in the last balance-sheet issued by the company prior to the testator's death. In Commissioners of Inland Revenue v. Crossman the House of Lords had to decide what was the proper basis of valuation for purposes of estate duty of shares in a limited company where the right of sale of shares was restricted by the articles of association. There the articles of association contained a provision that if any shareholder wants to sell his shares it should be offered first to the other shareholders at a price to be certified by the auditor. After considering Jameson's case and Salvesen Trustee's case, the court expressed the view that the value of the shares for the purpose of estate duty was to be estimated at the price which they would fetch if sold in the open market on the terms that the purchaser should be entitled to be registered and to be regarded as the holder of the shares, and should take and hold them subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the shares on a break-up basis with reference to the balance-sheet of the company for the relevant year. The learned counsel for the assessee would, however, contend that the break-up method based on the balance-sheet can be adopted only in the case of a company which is ripe for liquidation and that such a method cannot be adopted for valuation of shares in a company which is a going concern. But the decision of the Supreme Court in Commissioner of Wealth-tax v. Mahadeo Jalan suggests that the break-up value method is an alternative basis for finding out the market value of the shares. In that case it was held that the following broad principles of valuation should normally be adopted in valuing the shares in a company as per section 7 of the Wealth-tax Act : (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) The shares of a public limited company which are not quoted on a stock-exchange or of a private company, are to be determined by reference to the dividends, if any, reflecting the profit-earning capacity on a reasonable commercial basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the valuation date. If the shares are sold in open market, the purchaser will certainly take note of the various restrictions contained in the articles of association of the company and offer only a lesser price. It is for this reason Abraham v. Federal Commissioner of Taxation suggested the adoption of depreciated value wherever there are restrictions on the transfer of shares as also on the price. Therefore, the value ascertained on the basis of a break-up method has to be depreciated to some extent having regard to the restrictions contained in the articles of association, which have a tendecy to bring down the price in an open market sale. The result is that the questions referred to us are answered technically in favour of the assessee. The Tribunal will have to, therefore, consider the question of allowing depreciation on the value ascertained in this case by the Wealth-tax Officer for the various restrictions contained in the articles of association. However, in view of our rejection of the stand taken by the assessee that the shares are to be valued only at their face value, we direct the assessee to pay the costs of the revenue in both the cases. Counsel's fee, Rs.250 i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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