TMI Blog1985 (8) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... ith. The petitioner held 9,800 equity shares of the said company and the total value of the shares so disclosed in their return was Rs. 22,78,304. Before the wealth-tax assessment was made, the petitioner filed revised return. In the said revised return, the petitioner valued the shares of the aforesaid company at Rs. 120 per share. The total value of 9,800 shares of the company which was now disclosed thus came to Rs. 11,76,000. This revised valuation was supported by the valuation done by the registered valuers, M/s B.L. Khandelwal and Co., Chartered Accountants. In their report, the registered valuers stated that the Supreme Court had held in the case of CGT v. Kusumben D. Mahadevia [1980] 122 ITR 38, 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 its shares. According to the registered valuers, the proper course to be adopted, therefore, was to value the shares on the basis of the yield method and not by applying rule ID which prescribe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no option but to adopt the value of the unquoted shares according to the method prescribed by rule ID. In view of the fact that the Wealth-tax Officer had not done so, respondent No. 1 came to the conclusion that the assessment order was erroneous and prejudicial to the interest of the Revenue and, therefore, the assessment order was cancelled and the Wealth-tax Officer was directed to reframe fresh assessment order in accordance with law and the prescribed rules. The aforesaid order of respondent No, 1, setting aside the assessment order, has been challenged in the present petitions. According to the petitioner, the proper method of valuing the unquoted shares is to adopt the yield method. The contention of the petitioners is that rule ID of the Wealth-tax Rules, 1957, is directory and not mandatory. It is further alleged that if it is held that rule ID is mandatory, then the same is ultra vires the Act and should be struck down. In this connection, the contention raised in the petition is that the said rule does not carry out the provisions of the Act and imposes a liability which is not warranted by the statute. The respondents, on the other hand, in their return contended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taken to be the price which, in the opinion of the Wealth-tax Officer, it would fetch if sold in the open market on the valuation date next following the date on which he became the owner of the house, or on the valuation date relevant to the assessment year commencing on the first day of April, 1971, whichever valuation date is later: Provided that where more than one house belonging to the assessee is exclusively used by him for residential purposes, the provisions of this sub-section shall apply only in respect of one of such houses which the assessee may, at his option, specify in this behalf in the return of net wealth." Section 16A was incorporated in the Act with effect from January 1, 1973, by virtue of the Taxation Laws (Amendment) Act, 1972. The said section provides for reference to be made to the Valuation Officer. The relevant portion of the said section is as follows: " 16A. Reference to Valuation Officer.-(1) For the purpose of making an assessment (including an assessment in respect of any assessment year commencing before the date of coming into force of this section), under this Act, the Wealth-tax Officer may refer the valuation of any asset to Valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch share shall be 85 per cent. of the break-up value so determined: Provided that where, in respect of an equity share, no dividend has been paid by such company continuously for not less than three accounting years ending on the valuation date or in a case where the accounting year of that company does not end 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 : ... Explanation 1-For the purposes of this rule, 'balance sheet' in relation to any company, means the balance-sheet of such company as drawn up on the valuation date and where there is no such balance-sheet, the balance-sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balance-sheet drawn up on date immediately after the valuation date." The main question which arises for consideration is whether rule ID is mandatory or not. As already noted, the contention on behalf of the respondents is that the only method by which the unquoted shares, like those held by the petitioner, can be valued is by invoking rule ID. The peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no such balance-sheet, then the balance-sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balancesheet drawn up on a date immediately after the valuation date. At first glance, therefore, the language of section 7(1) of the Act would indicate that the Wealth-tax Officer cannot ignore the rules which are framed for the purpose of valuation of any asset. It would appear that it is mandatory for him to follow and apply any rules which have been laid down for the purposes of valuing any asset and that the Wealthtax Officer would have no option but to invoke the provisions of rule ID while seeking to value the unquoted shares. A question which immediately arises is whether rule 1-D can be applied in all cases of unquoted shares. According to rule 1-D, the break-up value has to be determined on the valuation date of the company concerned. It is not necessary that the valuation date of the company and the valuation date of the shareholder, who is being assessed to wealth-tax, must always coincide. In the instant case itself, the valuation date for the purpose of wealth-tax of the assessee is 31st March of each year, whereas the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. Where, however, the two dates do not coincide, then the applicability of rule ID would be directory and not mandatory. In the latter case, it will be open to the assessee to show to the Wealth-tax Officer that on his valuation date the value of the unquoted shares was different from the value as arrived at by applying rule ID. In the former case, where the dates of valuation are identical, the Wealth-tax Officer will have to compute the value of the unquoted shares by applying rule 1D. Where, however, like the present, the valuation dates are not the same, even the Wealth-tax Officer may not be bound to take recourse to the provisions of rule 1D. It was then contended by the petitioner's counsel that even if we hold that the Wealth-tax Officer is bound to compute the value of the unquoted shares by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground of its being arbitrary and thereby being violative of article 14 of the Constitution. The word may " in section 16A(1) has to be read not only with section 16A(1)(a) but also with section 16A(1)(b)(i) and (ii). The present case falls under section 16A(1)(b)(i). If the value as computed according to rule ID is in excess of what is returned by the assessee, then, at the instance of the assessee, a reference has to be made to the Valuation Officer. It is only in cases under section 16A(1)(b)(ii) that the Wealth-tax Officer has the discretion to refer or not to refer the question of the value of an asset to the Valuation Officer. It is now well-settled that in certain circumstances the word " may " can mean " shall ". In the context in which the word " may " is used in section 16A, we have no doubt that where there is question of conflict of opinion with regard to the value of a particular asset, then the word " may " has to mean " shall " and, on being called to do so, the Wealth-tax Officer has to refer the question of valuation of the asset to the Valuation Officer. In any case, it is not open to the respondents to contend that the provisions of section 16A are not man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluation date. In case the asset is a house, then the determination is to be of its market value on the valuation date as specified in sub-section (4). Sub-section (3) opens with the words " notwithstanding anything contained in sub-section (1) ". This will mean that notwithstanding there being anything contrary in sub-section (1), the Valuation Officer is to estimate the value of an asset in the manner specified in sub-section (3). In other words, the powers of the Valuation Officer are not subject to any rules which may be made in determining the value of an asset. The Valuation Officer, therefore, is not bound to value the unquoted shares by adopting the method prescribed by rule ID. The Valuation Officer is to value the unquoted shares by estimating what it would fetch if sold in the open market on the valuation date. How such shares are to be valued has been specified by the Supreme Court in CWT v. Mahadeo Jalan [1972] 86 ITR 621 (SC) and CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38. To summarise: the position, therefore, is that when a question arises as to the value of unquoted shares, the Wealth-tax Officer has to act according to the provisions of section 7(1) rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any rules made under the Act. A taxing statute has to be construed strictly. When section 7(1) refers only to the opinion of the Wealth-tax Officer, the said section cannot be construed so as to include the opinion of the appellate authorities as well. The powers of the appellate authorities are governed by the provisions other than section 7(1). For example, the power of the Appellate Tribunal contained in section 24 of the Act is of the widest amplitude. The said power cannot be restricted by the provisions of rule ID. It is obvious that a rule cannot be so construed as to override, restrict or amend the provisions of the substantive statute under which the said rule is framed. Even though the appeal to the Appellate Assistant Commissioner and a further appeal to the Tribunal may be parts of an integrated process, nevertheless the jurisdiction of the appellate authorities, as we have already observed, is to be governed by the provisions of sections 23 and 24 of the Act. Although, as already noticed, it was also contended that rule ID is ultra vires the Act, we do not think it is necessary to consider that contention because section 7(1) and rule ID have been so construed by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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