TMI Blog1982 (4) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... years as the assessee felt aggrieved with the valuation of shares as sustained by the AAC in respect of Mugneeram Bangur Co. Pvt. Ltd. The face value of the said shares of the five companies was Rs. 100 each. The WTO valued the shares of the five companies on the basis of break-up value method. We will not go into the details of the said valuation. When the matter went up in appeal before the AAC, he found that the valuation of shares of General Investment Co. Ltd., Indian Investment Co. Ltd., Oriental Co. Ltd. and Luxmi Salt Co. Ltd. had been discussed threadbare by the Income-tax Appellate Tribunal in its order pertaining to the appeals of various shareholders for the assessment year 1960-61 and earlier years. The AAC, therefore, agreed with the contentions of the assessee that the yield basis was a very fair and reasonable method for arriving at the market value of the shares of the said four companies. The AAC considered the increase in bank rates of interest from 1960 onwards, the issue of new shares carrying dividend yield of over 9% from 1960 onwards, the report of the bonus commission and various other factors put forth to him on behalf of the assessee. The AAC, according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of the shares held by the said Mugneeram Bangur Co. Private Ltd. Before us, the learned counsel appearing for the assessee has urged that there was no difference between Mugneeram Bangur Co. Private Ltd. and the other four companies. According to the learned counsel, therefore, the Appellate Assistant Commissioner was not justified in adopting the break-up value method in respect of shares of Mugneeram Bangur Co. Pvt. Ltd., whereas, while valuing the shares of the other four companies, the Appellate Assistant Commissioner followed the yield basis as suggested by the Tribunal in respect of earlier years. Our attention is drawn by the learned counsel for the assessee to the fact that the business of Mugneeram Bangur Co. Pvt. Ltd. was being carried on by partnership firm and that the said business was converted into a private limited company. But this fact was of no consequence, because the yield for earlier years when the business was done by a partnership firm could be treated as the profit of the limited company for purposes of arriving at the average yield. According to the learned counsel, therefore, the departmental authorities were not justified in adopting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue for the four years under consideration failed and were dismissed, whereas the four appeals of the assessee were partly allowed. As mentioned hereinbefore, for the previous years in respect of other companies apart from Mugneeram Bangur Co. Pvt. Ltd., the matter had been considered by the Tribunal. The question involved in the said matter came up for consideration in Matter No. 355 of 1969, in the case of CWT v. Sri Balbhadradas Bangur and by an order passed and judgment delivered by this court on April 13, 1978, it was, inter alia, held as follows : "The question in this reference under section 27(1) of the Wealth-tax Act, 1957, is covered by our judgment delivered in Matter No. 377 of 1969 on April, 6, 1978 : (Commr. of Wealth-tax, West Bengal III, Calcutta v. Bejoy Kumar Karnani[1979] 117 ITR 543). In Civil Wealth-tax Reference No. 22 of 1969, the High Court of Rajasthan has taken the same view as this court. By following the same, we answer the question referred in the affirmative and in favour of the assessee. There will be no order as to costs." The Tribunal thereafter has referred the following question under s. 27(1) of the W.T. Act: " Whether, on the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be done by assimilating and consolidating the balance-sheets of the subsidiary companies with the balance-sheet of the parent investment company. Care must be taken to ensure that in such assimilation and consolidation, the inter-company balances are correctly adjusted. (ii) 'maintainable profits' would have to be aggregated in respect of the parent investment company and its wholly-owned subsidiary or subsidiaries. The capitalised value should then be arrived at by applying a rate of yield of 9 per cent. to the aggregated 'maintainable profits'. The method of calculation of 'maintainable profits' in respect of the parent investment company and its wholly-owned subsidiary or subsidiaries should be in accordance with the Board's Circular No. 2 (WT) of 1967, i.e., they should be determined separately in accordance with the said circular and then aggregated. " Our attention was also drawn to another circular of October 31, 1967, No. 2 (WT), regarding valuation of unquoted equity shares of investment companies, holding companies and managing agency companies. The said circular, inter alia, is as follows: " 2. Unquoted equity shares of investment companies other than those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company "other than investment or managing agency company " should be determined. The said rule was relevant for the subsequent assessment years. It was submitted that in view of the said rules and the circulars, the method of valuation adopted by the Tribunal was not the correct one in the instant case. The question of valuing shares in companies was considered by the Supreme Court in the case of CWT v. Mahadeo Jalan [1972] 86 ITR 621. There the Supreme Court observed, for the purpose of wealth-tax, the shares held by the assessee in a company are to be valued under s. 7 of the W.T. Act, 1957, though ultimately the facts and circumstances of the case, the nature of the business of the company, the prospects of profitability and such other considerations would have to be taken into account. There the Supreme Court laid down what principles would normally be applicable. The Supreme Court, however, observed that those were not hard and fast rules. But, the market value, except in exceptional cases, could not be determined on the hypothesis that because in private company one holder could bring it into liquidation it should be valued as on liquidation by the break-up method. The yi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value is determined by reference to the dividends, if any, reflecting the profit-earning capacity on a reasonable commercial basis. But, where they do not, then the amount of yield on that basis will determine the value of the shares. In other words, the profits which the company has been making and should be making will ordinarily determine the value. The dividend and earning method or yield method are not mutually exclusive; both should help in ascertaining the profit-earning capacity as indicated above. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting reasonable proportion of profits. (3) In the case of a private limited company also where the expenses are incurred out of all proportion to the commercial venture, they will be added back to the profits of the company in computing the yield. In such companies the restriction on share transfers will also be taken into consideration as earlier indicated in arriving at a valuation. (4) Where the dividend yield and earning method break down by reason of the company's inability to earn profits and declare dividends, if the set-back is tem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent decision of the Supreme Court where the Supreme Court reiterated this view in the case of CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38. There the Supreme Court noted that the question as to which method should be adopted for the valuation of shares of a private company which was an investment company and at all material times a going concern-whether the profit-earning method or combination of the break-up method and the profit-earning method-was question of law. The Supreme Court observed that in the case of a company which was a going concern and whose shares were not quoted on the stock exchange, the profits which the company had 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. The break-up value would not be appropriate for the valuation of shares of such a company because among the factors which governed the consideration of the buyer and the seller where the one desired to purchase and the other wished to sell, the factor of break-up value as on liquidation hardly entered into consideration where the shares were of a going concern. It was only where a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits in the form of remuneration rather than dividends. We are not concerned with this aspect of the controversy either. What the Supreme Court meant when it said in the case of Mahadeo Jalan [1972] 86 ITR 621, as referred to hereinabove, that in the case of an investment company, the asset-backing was a relevant factor in determining the value of its shares was that in order to determine the capacity of the company to maintain its profits the asset-backing would be a relevant consideration. The profit-earning capacity of the company would naturally have to take into account not only the profits which the company was actually making but also the profits which the company would be capable of making, and in order to arrive at a proper estimate of the latter, the asset-backing would be a relevant factor in the case of an investment company. It is not correct to read the observation as suggesting that valuation of the assets would be a relevant factor in determining the value of the shares. The Supreme Court (at p. 46 of 122 ITR) approved of its observations in the previous decision in Mahadeo Jalan's case [1972] 86 ITR 621. In this connection, we may profitably refer to the observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the two methods as unscientific in his book on The Valuation of Company Shares and Business (Fourth edition), at page 55, where he has said : 'The mere averaging of two results obtained by quite different bases of approach can hardly be said to represent any logical approach, whatever its merit as a compromise. Despite its evident popularity in any quarters, it has not been given judicial recognition in decisions involving the fixation of a value by the court.' The combination of the two methods advocated on behalf of the Revenue has, thus, no sanction of any judicial or other authority and cannot be accepted as a valid principle of valuation of shares. " Therefore, the combination of two methods which was advocated by the Revenue has been characterised by the Supreme Court as having no sanction of any judicial or other authority and cannot be accepted as valid principle of valuation of shares. Therefore, it appears to us that, apart from the fact that the circulars were issued subsequently and apart from the fact that the circulars could not bind the Revenue (sic) or did not bind the Tribunals, it appears to us that in view of the Supreme Court decision, the method s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficers are bound to follow the instructions issued by the Board. " The CBDT thereafter instructed the ITOs that while completing the assessments they should keep in mind the assurance given by the Finance Minister and the provisions of s. 52(2) of the I.T. Act might not be invoked in cases of bona fide transactions. The Supreme Court noted that these circulars were binding on the Revenue in administering or executing the provision enacted in sub-s. (2), but, quite apart from their binding character, the Supreme Court was clearly of the opinion that the circulars were in the nature of contemporanea expositio furnishing legitimate aid in the construction of sub-s. (2) of s. 52. The Supreme Court noted at pages 612-613 of the report that the principle of contemporanea expositio is a relevant consideration in construing certain provisions. Where doubt arises as to the construction of a provision of law, in such a case if there are contemporary expositions by the relevant authorities, they may be utilised in aid in coming to a construction, but that is not the position here in this case. It appears to us that in view of the language and clear enunciation of the principle, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules must be regarded as rules of evidence or procedure and not as rules of substantive law. Therefore, rr. IC and ID, inserted in the W.T. Rules by the W.T. (Amendment) Rules, 1967, on October 6, 1967, were applicable to pending assessments of the assessee even though such assessments related to assessment years prior to the date of coming into force of those rules and the relevant valuation dates were also prior to that date. It appears from the judgment that the attention of the Allahabad High Court was not drawn to the decision of the Supreme Court in the case of Mahadeo Jalan [1972] 86 ITR 621, which dealt with the question of valuation of unquoted shares. In so far as the Allahabad High Court, however, held that r. ID affected the valuation of the shares, with great respect we cannot agree with this aspect of the matter. In any event, this is academic because the Supreme Court in the case of Mahadeo Jalan [1972] 86 ITR 621, has laid down the principles which would be applicable in resolving this controversy. Furthermore, it appears to us that r. ID would not be applicable because the facts of the instant case were different from the facts of the Allahabad High Court case as i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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