TMI Blog1991 (6) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ted equity shares after 1967 ignoring the provisions of rule 1 D ? (4) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in adopting the market value of the unquoted shares of Jindal Aluminium Ltd. at Rs. 100 per share as against the value determined by the Wealth-tax Officer ?" The first question is covered by the decision of this court in CWT v. N. Krishnan [1986] 162 ITR 309. Following the said decision, the question is answered in the negative and against the assessee. The next three questions are essentially the same and the answer lies in the answer to the second question. The basic question involved is whether rule 1D is mandatory and is exhaustive of the method of valuation. The assessment year in question is 1981-82. The assessee is a shareholder of the company called M/s. Jindal Aluminium Ltd., a private limited company. He declared the value of its shares at Rs. 100 per share. The Wealth-tax Officer did not accept the contention of the assessee that the break-up value could be adopted only when the company is about to be wound up ; the assessee contended that, in the case of a going concern, the yield method is the proper mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have a better investment in view which will give on it higher yield or ensure for his capital better prospects. It may be that he may not expect a higher dividend to be maintained or that these dividends are likely to be reduced or there is a likelihood of the security of capital being in jeopardy, and therefore he wishes to make a prudent sale. From what we have stated, among the factors which govern the consideration of the buyer and the seller where the one desires to purchase and the other wishes to sell, the factor or break-up value of a share as on liquidation hardly enters into consideration where the shares are of a going concern. The basic yield method in cases where shares are quoted and transactions take place on the share market may not be different but where shares are not quoted, it is in these latter cases the yield must be determined after taking into account various factors to which a reference has been made earlier." The court noted the possibility of dividends not reflecting the real profits of the company in certain cases. In the case of a non-profit making company which is really in financial difficulty, break-up method was found to be a correct mode of valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case. But, one thing is clear, the market value, unless in exceptional circumstances to which we have referred, cannot be determined on the hypothesis that because in a private limited company one holder can bring it into liquidation, it should be valued as on liquidation by the break-up method. 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 but none the less is one of the methods." This was the law declared by the Supreme Court with reference to the assessment years 1957-58 and 1958-59. On October 6, 1967, rule 1D was inserted in the relevant Schedule to the Act providing for valuation of unquoted equity shares of companies referred to therein. Section 7 provides for estimating the value and the scope of this has to be understood in the light of the observations of the Supreme Court while valuing the shares ; the tests indicated by the Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the particular provision to effectuate the said statutory object. The object of rule 1D is to aid the valuation of shares. The principles applicable while valuing shares vary, depending upon the financial and commercial standing of the company (as pointed out by the Supreme Court) and, therefore, rule 1D should not be read so as to exclude the application of those relevant principles ; the object of the Wealth-tax Act is to charge the net wealth of an individual to tax and the net-wealth being the aggregate of the value of assets, that value should, as far as possible, be estimated to arrive at a correct valuation. By reading rule 1D as mandatory, all the salutary principles of interpretation will be violated ; it will be most appropriate to read it as a directory provision. We read it accordingly. In CGT v. Smt. Kusumben D. Mahadevia, [1980] 122 ITR 38 ; AIR 1980 SC 769, the Supreme Court applied the same principle of valuation and once again pointed out that, in the case of a company which is a going concern and whose shares are not quoted on the stock exchange, the yield method is the most appropriate mode of valuing shares. Though the decision is in the context of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue's contention. It was held therein that section 7 opens with the words "subject to any rules made in this behalf" thereby bringing out the paramountcy of the rules. The section then proceeds to use imperative language by providing that the value of any asset shall be determined. Rule ID also uses imperative language and directs that the value of an unquoted equity share shall be determined in accordance with its provisions. In the context and from the purport of the section and the rule, there is no warrant or justification for construing the expression "shall" in the section and rule as "may" ; rule 1D is, therefore, mandatory and its provisions have to be followed in determining the value of unquoted equity shares of a company for wealth-tax purposes. The Kerala High Court did not consider the effect of such an interpretation, on the validity of rule 1D and the hardship that may flow out of such an insistence by abiding by rule 1D in all cases ; with utmost respect to the learned judges, we prefer to follow the reasoning of the Bombay High Court which accords with our views. Mrs. Grace Collis v C WT [1988] 172 ITR 597, is again the decision of the Kerala High Court whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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