TMI Blog1991 (3) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... he share as per rule ID of the Wealth-tax Rules, 1957, should be taken?" So far as the question for the assessment years 1979-80 and 1980-81 is concerned, the same deals with the issue whether an association of persons can be subjected to wealth-tax under the 1957 Act. This issue is covered by the assessee's own case for the assessment years 1972-73 to 1974-75 by a judgment delivered on December 22, 1989, in Matter No. 48 of 1982 (CWT v. India Exchange Traders Association). Following the said decision, this question is answered in the affirmative and in favour of the assessee. The facts relating to the question pertaining to the assessment years 1981-82 to 1983-84 are that the assessee was holding certain shares. The shares were not quoted on the stock exchange. The assessee adopted the value of such shares on the basis of the valuation report of the registered valuer. The Wealth-tax Officer did not accept the valuation shown and he applied rule ID of the Wealth-tax Rules, 1957. As the assessments were cancelled by the Commissioner of Wealth-tax (Appeals), he did not give any finding on this issue. However, the contention of the assessee was accepted by the Tribunal. The Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 Commissioner of Taxation (69 Commonwealth Law Reports 1) : '. . . the real ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable in specific fact-situations and, whenever a question of valuation of shares arises, the taxing authority is in an uncharted sea and it has to innovate new methods of valuation according to the facts and circumstances of each case. The principles of valuation as formulated by the court are clear and well-defined and it is only in deciding which particular principle must be applied in a given situation that the facts and circumstances of the case become material. It is significant to note that, immediately after making the above observation, the court hastened to make it clear, as if in answer to a possible argument which might be advanced on behalf of the Revenue on the basis of that observation that the yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation. " At page 48 of the Reports, it was laid down as under: "It is true that, in the present appeals, the question of valuation arises not only under the Wealth-tax Act 1957, but also under the Gift-tax Act'. 1958, but since the provision for determining the value of an asset is the same in section 6, sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation under the Gift-tax Act, 1958, was concerned." At pages 48 and 49 of the Reports, it was laid down as under : "Now, it is difficult to see how the question whether the valuation of the shares should have been made on the basis of the break-up method by reason of rule 10(2) of the Gift-tax Rules, 1958, can be required to be referred by the Tribunal to the High Court . . . . There was no argument addressed to the Tribunal that the break-up method should be adopted because that was the primary method prescribed by rule 10, sub-rule (2), and the Tribunal had, therefore, no occasion to deal with such an argument. This question obviously, therefore, does not arise out of the orders of the Tribunal and it cannot be required to be referred to the High Court." (emphasis supplied). In CGT v. Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai [1988] 170 ITR 144, the Supreme Court laid down that the yield method was the only correct method for valuing the shares of a going concern. The said case came up, on appeal by the Revenue against judgment of the Gujarat High Court in CGT v. Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai [1975] 100 ITR 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for. This contention of the assessee was rejected by the Supreme Court at pages 147 and 148 of 170 ITR as under : " We are afraid, the basis adopted by the High Court is clearly unsustainable in the light of the pronouncements of this court referred to earlier. In Kusumben's case [1980] 122 ITR 38 (SC), referring to the principles of valuation relevant to the matter, this court said (at page 45) : .... The view of the High Court cannot, therefore, be said to reflect the position in law correctly. The correct principle of valuation applicable to a given case is question of law. The parties can agree upon a principle permissible under and recognised by law. If two or more alternative principles are equally valid and available, it might be permissible for the parties to agree upon one of the alternative modes of valuation in preference to another. In this case, the Revenue cannot be said to be precluded from urging the correct legal position. In the ultimate analysis, it requires to be held that the view of the High Court as to the principle of valuation in determining the value of the kind of shares concerned in this case cannot be held to be correct. The first question of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that is, companies which are ripe for liquidation or going concerns which are having exceptional circumstances which make the yield method inapplicable. In support of his contention that rule ID is directory, he refers to section 7(1) and section 46(2)(a). Sub-section (1) of section 7 of the Act provides "subject to any rules made in this behalf ". There could be some controversy as to the exact scope of these words, but Mr. Bajoria contends that the matter is beyond doubt in view of the provisions of section 46(2)(a) of the Act relating to rule-making powers. Section 7 lays down " subject to any rules " which would mean such rules as it is lawful and competent for the Board to make in, terms of section 46. Under the provisions of section 46(2), such rules are to provide the manner in which the market value of any asset can be determined. In other words, the rule made must aim at determining the market value of the asset in a well-recognised or accepted manner. If any rule is made which would not lead to determination of the market value, then it would be beyond the rule-making power and would be invalid. It is well-settled that an interpretation which would uphold the validit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve dealt with several aspects of this question. It will be our endeavour to discuss these cases with reference to the different aspects dealt with by these decisions. The first question is whether the yield method is the only proper method of valuing the shares of a going concern and consequently the break-up method is not applicable to such cases. In Laxmipat Singhania [1978] 111 ITR 272, the Allahabad High Court, at page 276, observed: "A well-accepted method of valuing an unquoted equity share is on the basis of its break-up value". (emphasis supplied). According to Mr. Bajoria, this observation of the Allahabad High Court is directly contrary to the aforesaid three decisions of the Supreme Court. It is his contention that the attention of the Allahabad High Court was not drawn in the said case to the decision of the Supreme Court in Mahadeo Jalan [1972] 86 ITR 621, which had been reported by them. This was pointed out by this court in CWT v. Balbhadradas Bangur [1984] 148 ITR 149, at pages 163-164. The Allahabad High Court merely followed its view in Laxmipat Singhania [1978] 111 ITR 272 (All) in the subsequent decisions in Sripat Singhania [1978] 112 ITR 363 (All) and Padamp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with the principles laid down in the said three decisions of the Supreme Court referred to above, held that the only method for valuing the shares of a going concern was the yield method and not the break-up method. This view, according to Mr. Bajoria, was also shared by this court in the said case of Balbhadradas Bangur [1984] 148 ITR 149 at pages 163-164 and the said view of the Allahabad High Court that the break-up method was also the proper method for valuing the shares of a going concern was dissented from, being contrary to the Supreme Court decision in Mahadeo Jalan [1972] 86 ITR 621. The second aspect is whether the provisions of rule 1D are to be construed as directory and are applicable only to cases where the company is ripe for liquidation or in exceptional circumstances where the value cannot be obtained by the yield method, in short, whether rule 1D can be applied to a going concern. Section 7 read with section 46(2)(a) empowers making of only such rule as would enable determination of the market value of shares in a given set of circumstances. Hence, the words "subject to any rules made in this behalf", learned counsel contends, do not contemplate that a rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate that it shall be followed only by the Wealth-tax Officer and that, after the framing of the rules, the valuation of the unquoted shares had to be determined under section 7(1) read with rule ID. It further held at pages 366 and 367 of the Reports that the powers exercisable by the Tribunal under section 24 are not different from those exercisable by the Wealth-tax Officer under section 7(1) and that an appellate court or authority exercises the same power as the trial court or assessing authority and that the use of the words "as it thinks fit" in section 24(5) does not take away or whittle down the binding effect of rule ID. Mr. Bajoria points out that no submissions were made and considered by the Allahabad High Court with reference to section 7(3) read with section 16A and to hearing the Valuation Officer in appellate proceedings and that section 7(3) Was not subject to any rules and was made notwithstanding the provisions of section 7(1). The Bombay High Court in Smt. Kusumben D. Mahadevia's case [1980] 124 ITR 799, at pages 808 and 809, noted these provisions and, at pages 822 and 823, held that the provisions of valuation under section 16A and the appellate provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alth-tax Officer, it would fetch if sold in the open market on the valuation date. Turning to the rule again, we notice the imperativeness of the provision in the direction that the value of an unquoted equity share 'shall' be determined. In the context and from the purport of the section and the rule, we do not see any warrant or justification for construing the expression ' shall' in the section and the rule as 'may' or in understanding this provision as directory and not mandatory. On the other hand, we think, that effect should be given to the plain and simple provision of the rule. Counsel for the Revenue cited the decisions in CWT v. Sripat Singhania [1978] 112 ITR 363 (All) and CWT v. Padampat Singhania [1979] 117 ITR 443 (All). In the earlier of these cases, a Division Bench of the Allahabad High Court explained the position thus (at page 366). " At page 356 of the Reports, the view of the Allahabad High Court that the appellate authorities are also bound by the provisions of the said rule while exercising their appellate powers under section 24(5) of the Act was followed. Mr. Bajoria points out that there is no discussion in this case on any of the aspects relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et was drawn up, the company may have been prosperous but, on the valuation date of the assessee, it might have become commercially insolvent and the actual value of the shares may be nil. If rule 1D provides such an outcome, then it may have to be held that it is contrary to section 3 of the Act. In order to uphold the validity of rule 1D and, at the same time, not to do violence to the language of the relevant provisions, we are of the opinion that where the valuation date of the company and of the assessee is the same, then the application of rule ID is mandatory. " It is the contention of Mr. Bajoria that the Delhi High Court has also accepted the principles laid down by the Bombay High Court, Andhra Pradesh High Court and Madras High Court that the provisions of rule ID should be so construed so as to make it intra vires. The Delhi High Court felt that rule ID would be violative of the provisions of the Act if it was made applicable even to a case where the valuation date of the assessee and the accounting year of the company were not the same. The last aspect of the question is whether rule ID prescribes a rule of procedure. It is the contention of Mr. Bajoria that all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case [1980] 124 ITR 799. Mr. Bajoria also contends, as we have already noted, that the fact that the rules framed for valuation of assets are procedural was also accepted with reference to rule 1BB, which was framed for determining the value of residential immovable property by rental method. The decision of the Gujarat High Court in CWT v. Shri Kasturbhai Mayabhai [1987] 164 ITR 107, holding that rule IBB was procedural and hence retrospective in operation was followed by this court in Smt. Manjushree Biswas v. CWT [1988] 171 ITR 348. According to learned counsel, the procedural laws are handmaids of justice and, in case of any conflict, such procedural laws should yield to ensure justice (Kalipada Das v. Bimal Krishna Sen Gupta [1983] 1 SCC 14 ; AIR 1983 SC 876). He contends that the provisions of rule ID cannot be applied to the cases of a going concern in which no exceptional circumstances exist, as it would not lead to determination of the market value of the shares. Accordingly, the procedural law of rule ID should be held directory in nature and applicable only to cases where exceptional circumstances exist or the company is ripe for liquidation. According to him, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the asset is to be found out. The other sub-sections (2), (3) and (4) of section 7 are notwithstanding the provisions of sub-section (1) and are, therefore, in the nature of special provisions. The power to make the rules is conferred by section 46 of the Act. Clause (a) of subsection (2) lays down that such rules may provide the manner in which the market value of any asset may be determined. The words "market value" are not defined in the Act. Rule ID was inserted by the Wealth-tax (Amendment) Rules, 1967. It lays down the mode of computation of the market value of unquoted equity shares of companies other than investment companies and managing agency companies. The said rule would be relevant for determining the value of equity shares of all companies other than investment companies and managing agency companies. Such other companies are hereinafter referred to as non-investment companies. The said rule would be applicable in respect of non-investment companies, irrespective of whether they are ripe for liquidation or are going concerns or whether there are special circumstances which make the yield method unworkable. The method laid down by rule 1D is what is known as the break ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case [1972] 86 ITR 621 (SC) being the proper method should be applied, at least so far as the valuation under the Gift-tax Act, 1958, is concerned. It is true that the Revenue urged before the Supreme Court that the primary method prescribed by sub-rule (2) of rule 10 of the Gift-tax Rules, 1958, was the break-up method. The alternative method was required to be adopted only in case of impracticability of the break-up method in any particular case. But the Supreme Court did not pronounce on that issue as the same was not referred by the Tribunal to the High Court and, therefore, that question did not fall for determination by the Supreme Court. The Supreme Court, therefore, did not decide that issue. Thus, the question of preference for break-up method in sub-rule (2) of rule 10 of the Gift-tax Rules, 1958, was not considered in Kusumben D. Mahadevia's case [1980] 122 ITR 38 (SC). Mr. Bajoria, learned counsel for the assessee, has fairly conceded this position. In the third case, i.e., Executors and Trustees of the Estate of Late Ambalal Sarabhai [1988] 170 ITR 144, the Supreme Court, however, preferred the yield method to the break-up method holding that the High Court was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to the Wealth-tax Officer to apply the rule, if necessary, and compute the value according to the manner prescribed in that rule. Hence, the provisions of rule ID are not mandatory. It was, therefore, urged by learned counsel that the adoption of the break-up value method of rule ID for a company as a going concern cannot be mandatory in view of the said decisions Of the Supreme Court. As we have indicated, learned counsel also placed heavy reliance on the decision of the Delhi High Court in Sharbati Devi Jhalani's case [1984] 159 ITR 549, wherein the Delhi High Court has held that rule ID cannot be mandatory because such a view conflicts with sections 7(3) and 16A of the Wealth-tax Act, 1957, and rule 3B of the Wealth-tax Rules, 1957. Where the value so determined under rule ID is more than the value returned attracting the provisions of rule 3B, the question of the valuation of said shares has to be referred to the Valuation Officer under section 16A. The Valuation Officer, again, in the event of such reference, has to determine the value of the unquoted shares in accordance with the provisions of section 7(3) of the Act, i.e., he has to determine the price which those sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court decisions which inspired the assessee and on which heavy reliance was placed are distinguishable. The first decision, viz., CWT v. Mahadeo Jalan [1972] 86 ITR 621, was delivered by the Supreme Court in the context of the position prevailing prior to the framing of rule ID. Therefore, the Supreme Court did not have any occasion to go into the question of the imperative nature or otherwise of the provisions of rule ID. It is true that, in the second decision of the Supreme Court in Smt. Kusumben D. Mahadevia's case [1980] 122 ITR 38, a similar view was taken by the Supreme Court even after taking note of the provisions of sub-rule (2) of rule 10 of the Gift-tax Rules. The said provisions, however, gave the taxing authority two options, either to adopt the break-up method or, in the case of the impracticability of the break-up method, any other appropriate method. The Supreme Court, however, despite the primacy given to the break-up method by the said sub-rule (2) of rule 10, applied the profit-earning method. As indicated earlier, the question of primacy of the break-up method in rule 10(2) of the Gift-tax Rules was left out of consideration in the said judgment as the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf" bring out the paramountcy of the rules and the section also uses imperative language by providing that the valuation of any asset shall be determined subject to the rules. Rule ID also uses imperative language and the break-up method is a categorical imperative under the rule. Learned counsel's argument that rule ID is ultra vires the various provisions of the Act may be a plea for striking down the rule altogether but the question of vires of the rule does not fall within the reference jurisdiction of the High Court as held by the Supreme Court in Beharilal Shyamsunder v. STO [1966] 60 ITR 260 ; [1966] 17 STC 508 and K. S. Venkataraman and Co. Pvt. Ltd. v. State of Madras [1966] 60 ITR 112 ; 17 STC 418 (SC). It is not the case of the assessee that the rules should be struck down ; what the assessee contended is that it should be disregarded. But such ouster of the rule on the ground that it is ultra vires could be supported if there were an alternative method of the rule. It is, however, not the case that the rule contained two methods, one ultra vires and the other intra vires to choose between. Rule 1 D leaves no alternative. What learned counsel to the assessee wants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unquoted shares of companies other than investment companies,. It may be mentioned that the Direct Tax Laws (Amendment) Act, 1989, has recast, with effect from April 1, 1989, i.e., for and from the assessment year 1989-90, the existing provisions of section 7 which deals with the determination of value of assets for the purposes of the Wealth-tax Act. The main change which has been effected as a result of such recasting is that the rules for valuation of assets have been made a part of the Wealth-tax Act itself by inserting Schedule III to the Act instead of such rules having been made by the Central Board of Direct Taxes in exercise of its rule-making power. It clearly manifests the legislative intent. It gives an indication of the legislative recognition of the principles embodied in the erstwhile rule 1D. It is, in essence, declaratory of the validity of rule 1D. Parliament must be presumed to be aware of the conflicting decisions of the High Courts, but even then, by incorporating rule 1D in the Schedule to the Act, it has given recognition to the views of the High Courts that rule 1D is mandatory in its application to the valuation of unquoted shares of non-investment compan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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