TMI Blog2003 (9) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment dated November 17, 1998, in O .P. No. 13793 of 1997. "1. Whether, on the facts and circumstances of the case, the Tribunal should have upheld that deemed gift theory was not applicable to the sale of the unquoted shares made on compelling circumstances, which are amply established by the petitioner? 2. Whether, on the facts and circumstances of the case, the Tribunal was wrong in upholding the application of wealth-tax valuation in the place of valuation as per the yield method, with regard to the sale of unquoted shares?" The brief facts necessary for adjudication of the above said questions of law are as follows: The applicant-assessee was holding 14,040 equity shares in Malayala Manorama Co. Ltd., Kottayam. The said shares had a face value of Rs. 10 each. In October, 1985, the assessee sold the said shares to Smt. Rachel Mammen and Shri Roy Mammen, Bangalore, at Rs. 5 per share. The Gift-tax Officer noted that the purchasers are the grand children of Sri K. M. Mathew, who is the uncle of the assessee. The officer was of the view that the shares had been sold at a price lower than the market value and so the provisions of the Act were attracted. The officer had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or taxes appearing for the respondent. Sri Dandapani submitted that the assessee had sold the shares in Malayala Manorama Co. Ltd., Kottayam, since he was badly in need of money for celebrating the marriage of his son, that there was nobody to purchase the said shares at a higher price at that time and therefore he was forced to sell the said shares to Smt. Rachel Mammen and Sri Roy Mammen, Bangalore, at Rs. 5 per share. Counsel submitted that the two persons mentioned above are not the grand children of Sri K. M. Mathew as alleged by the officer. He submitted that the said two persons are the grand children of Sri K. M. Jacob, the brother of Sri K. M. Mathew and that the assessee had married the daughter of Sri K. M. Oommen, another brother of Sri K M. Mathew. Counsel submitted that the purchasers are not the relations of the assessee as understood in the taxation laws. He also submitted that the Assessing Officer had valued the shares at the value fixed in the case of another assessee in the wealth tax assessment by applying rule 1D of the Wealth-tax Rules. Counsel submitted that rule 1D of the Wealth-tax Rules was omitted with effect from April 1, 1989, by the Wealth-tax (Second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his regard, it must be noted that both the Assessing Officer and the first appellate authority did not accept the contention of the assessee that the shares held by him were sold under pressing circumstances. The Tribunal had taken the view that this is a case of sale of shares to the relatives of the assessee and the consideration is less than the face value itself and is very much less than the market value of the shares computed in accordance with the Wealth-tax Rules. In view of the concurrent finding of fact entered by the two appellate authorities we do not find any reason to interfere with the said finding. In the above circumstances, the first question referred is answered in the negative, i.e., in favour of the Revenue and against the assessee. Coming to the second question it is a substantial question of law regarding the application of the provisions of rule 1D of the Wealth-tax Rules for valuation of unquoted shares of a company in the absence of a similar provision in the Gift-tax Rules. If the provisions of rule 1D of the Wealth-tax Rules are to be applied for valuation of unquoted shares of a company and since rule 1D of the Wealth-tax Rules is mandatory as held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Mathew's case [1986] 158 ITR 466 a Division Bench of this court was considering the question as to whether the provisions of rule 1D can be applied for valuation of shares for the purpose of gift-tax. In that case the assessee, who was a director of Malayala Manorama Company Ltd., gifted 1,940 shares of the face value of Rs. 10 each in that company to one Sri Jacob Mathew on February 1,1972. The assessee filed the gift-tax return showing the value of the gifted shares as Rs. 19,400. The assessee contended before the Gift-tax Officer that there were no willing buyers in the market for purchasing those shares since the Central Government had introduced a Bill for diffusion of ownership in newspaper industry which sought to limit the holdings of a director and his relations to 5 per cent, of the total share capital. The Gift-tax Officer observed that there was no valid basis for estimating the value of the shares at their face value and determined the value of the gifted shares as Rs. 73,089 at the rate of Rs. 40.25 per share, that being the value arrived at on the basis of the last balance-sheet. He completed the assessment accordingly. The assessee filed appeal before the Appellat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he absence of rules made under the Gift-tax Act for determining the value of gifts the procedure prescribed in the rules under the Wealth-tax Act for that purpose would and should be applied is accepted. The Division Bench also referred to the decision of the Mysore High Court in CED v. J. Krishna Murthy [1974] 96 ITR 87 which has taken the view that the adoption of rule ID of the Wealth-tax Rules, 1957, for valuation for the purpose of estate duty and the decision of the Madhya Pradesh High Court in Shyamsukh Garg v. CED (1984] 145 ITR 238 which has also taken a similar view. The Division Bench had also referred to the decision of the Supreme Court in CWT v. Mahadeo Jalan [1972] 86 ITR 621 and in Kusumben D. Mahadevia v. CGT [1980] 122 ITR 38 (SC). Regarding the determination of the value of unquoted shares, in the former decision rendered in the context of the Wealth-tax Act, the Supreme Court held that the Wealth-tax Officer can on an examination of the balance-sheet, ascertain the profit-earning capacity of the concern and, on the basis of the potential yield, fix the valuation and in the latter case rendered in the context of the provisions of the Gift-tax Act itself the Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tified in accepting the valuation of shares as returned by the assessee by adopting the balance-sheet as on March 31,1963, instead of March 31,1964. In that case there was no dispute with regard to the method of valuation adopted for the reason that both the assessee and the Department had adopted the break up method for the purpose of value of unquoted shares and the only dispute was with regard to the adoption of the balance-sheet as on March 31,1963. However, when the matter came up before the Supreme Court senior counsel appearing for the Revenue submitted that the case was squarely covered by the pronouncements of the Supreme Court in Mahadeo Jalan's case [1972] 86 ITR 621 and Kusumben D. Mahadevia's case [1980] 122 ITR 38 (SC) and that the erroneous view of the High Court as to the principles of valuation should, therefore, not remain uncorrected. The Supreme Court also noted that senior counsel for the assessee in the light of the aforesaid two pronouncements of the Supreme Court found it difficult to support the principles on which the determination of the value of the shares proceeded before the authorities as well as before the Tribunal and the High Court. The Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of profits. The Supreme Court also observed that the yield method is 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 nonetheless is one of the methods. The Supreme Court in CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 again considered the question as to which method should be adopted for the valuation of shares of a private limited company which is an investment company and at all material times a going concern-whether the profit-earning method or a combination of the break-up method and the profit-earning method. It was observed that a combination of the two methods, viz., the profit-earning method and the break-up method, though it may sound acceptable as a compromise formula, cannot be accepted as a valid principle of valuation of shares. The question, it must be noted, arose in the context of valuation of shares of a private company for the purpose of gift-tax. The question considered was as to whether the shares of an investment company have to be valued only on the basis of the yield without taking into account the assets owned and reflected in the balance- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company has been making and should be capable of making and the valuation, according to this method is based on the average maintainable profits. Of course, for the purpose of such valuation, the taxing authority is not bound by the figure of profits shown in the profit and loss account because it is possible that the amount of profits may have suffered diminution on account of unreasonable expenditure or the directors having chosen to take away a part of the profits in the form of remuneration rather than dividends. The figure of profits in such a case would have to be adjusted in order to arrive at the real profit-earning capacity of the company. It would, thus, be seen that in the case of a company which is a going concern and whose shares are not quoted on the stock exchange, the profits which the company has been making and should be capable of making or, in other words, the profit-earning capacity of the company would ordinarily determine the value of the shares. That is why in Mahadeo Jalan's case [1972] 86 ITR 621, 630, 632 (SC), the court quoted with approval the following observations of Williams J. in McCathie v. Federal Commissioners of Taxation (69 Commonwealth Law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a private limited company where the articles of association contain restrictive provision as to the alienation of shares, by providing that in such a case, the value of the shares "if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch if on the date of gift they could be sold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the articles, but the fact that a special buyer would for his own special reasons give a higher price than the price in the open market shall be disregarded". The Supreme Court noted that the argument of the Revenue was that Mafatlal Gagalbhai Pvt. Ltd. was a private limited company and its articles of association admittedly contained restrictive provision as to the lienation of shares and, therefore, rule 10(2) was applicable and according to that sub-rule, the value of the shares was required to be ascertained by reference to the value of the total assets of the company and it was only if the value was not so ascertainable that it could be determined in any other manner. The break-up method was thus, according to this sub-rule, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment had referred to the two decisions of the Supreme Court in Mahadeo Jalan's case [1972] 86 ITR 621 and Kusumben's case [1980] 122 ITR 38 the Division Bench did not apply the principles laid down by the Supreme Court in those cases. It is not clear as to why the Division Bench did not apply the principles laid down by the Supreme Court in Kusumben D. Mahadevia's case [1980] 122 ITR 38 which arose under the Gift-tax Act itself. The Supreme Court in Kusumben D. Mahadevia's case [1980] 122 ITR 38 has clearly stated that the proper method for valuation of unquoted shares of a private company is the yield method and not the break up value method. This position has been reiterated by the Supreme Court in Ambalal Sarabhai's case [1988] 170 ITR 144 which was rendered in the context of the provisions of the Gift-tax Act itself. Of course this decision is subsequent to the decision of this court in Mammen Mathew's case [1986] 158 ITR 466. Thus the position is settled that in the absence of any rules similar to rule 1D of the Wealth-tax Rules regarding the valuation of unquoted shares of a private company the proper method of valuation of unquoted shares is the yield method. We find that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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