TMI Blog1988 (7) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... 154 ITR 830. The question is accordingly answered. Thus, only the second question survives for consideration. The assessment years concerned in this case are 1981-82, 1982-83 and 1983-84. On the relevant valuation dates, the assessee was holding certain shares of Biological Evans Ltd. The said company is a closely held public limited company whose shares are not quoted on the Stock Exchange. The assessee valued the said shares on the basis of 'yield method', which was rejected by the Wealth-tax Officer, who valued the same on the 'break-up method'. On appeal, the Appellate Assistant Commissioner set aside the assessment so far as this aspect is concerned and directed the Wealth-tax Officer to redo the assessment after considering the assessee's objections. The Revenue appealed to the Income-tax Appellate Tribunal which upheld it holding that rule 1 D of the Wealth-tax Rules is mandatory and that, therefore, the valuation of the shares should be done according to the break-up method contained in the said rule. The Tribunal refused to follow the decision of the Bombay High Court in Kusumben D. Mahadevia v. N. C. Upadhya [1980] 124 ITR 799 holding that rule ID is directory. It prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the valuation date, for not less than three continuous accounting years ending on a date immediately before the valuation date the market value of such share shall be as indicated in the Table below ......." It would be evident from a reading of the rule that it incorporates what is broadly known as the "break-up method". It says that, for determining the value of equity shares of a company, whose shares are not quoted on the Stock Exchange, the method to be adopted is : the value of total liabilities as shown in the balance-sheet of the company shall be deducted from the total value of its assets as shown in the balance-sheet. The net amount so arrived at shall then be divided by the total amount of its paid-up equity share capital as shown in the balance-sheet. The amount so obtained shall be multiplied by the paid-up value of each equity share and the figure so obtained shall be the break-up value of each unquoted equity share. 85% of the break-up value so determined of each share shall represent the market value. The proviso deals with situations where dividend has not been declared by such company continuously for not less than three accounting years ending on the valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t rule 1 D has to be followed in the matter of valuation of unquoted equity shares of a company, and that no other method is permissible (vide CWT v. Laxmipat Singhania [1978] 111 ITR 272 (All) ; CWT v. Sripat Singhania [1978] 112 ITR 363 (All); Bharat Hari Singhania v. CWT [1979] 119 ITR 258 (All) and CWT v. Padampat Singhania [1979] 117 ITR 443 (All)). The same view has been taken by the Kerala High Court in CWT v. Mamman Varghese [1983] 139 ITR 351. As against this, the Bombay, Delhi and Madras High Courts have taken the view that since rule 1D does not achieve the purpose indicated in section 7 (1), i.e., ascertainment of the value which the asset would fetch if sold in the open market on the valuation date, it should be treated as directory. It is observed by the Delhi and Bombay High Courts that the break-up method incorporated in rule 1D does not lead to, nor is relevant for ascertaining the true market value as contemplated by section 7(1), and that the break-up method indicated in the said rule is relevant only in the case of valuing the shares of a company which is about to be wound up. For this reason, it is held that the method contained in the said rule need not be fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lead to that result. But rule ID, incorporating as it does the break-up method, is not the proper method to be adopted in the case of a going concern, as pointed out by the Supreme Court in Mahadeo Jalan's case [1972] 86 ITR 621. The breakup method incorporated in the rule is appropriate only in the case of companies which are ripe for winding up. Rule 1 D, therefore, does not carry out the purpose of section 7(1). Indeed, there is a certain inconsistency between the rule and section 7(1). Instead of declaring the rule to be invalid, the proper course would be to read it down, notwithstanding the use of the word "shall" in the rule. The word "shall" occurring in the rule should be read as "may", thereby making the rule directory. Moreover, section 46(2)(a), which empowers the rule-making authority to provide the manner in which the market value of any asset may be determined, uses the expression "may". It says, the rules made under section 46 may provide for "the manner in which the market value of any asset may be determined". Therefore, a rule under section 46(2)(a) can only be made in such manner as to give discretion to the Wealth-tax Officer to apply the rule, if necessary, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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