TMI Blog1979 (2) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... e valued at the rate of Rs. 170 relying upon a valuation of similar shares held by another assessee which is described as trustees of Maithili Family Trust No. 2. In the assessment proceedings for the assessment year 1968-69, the petitioner filed a statement showing investment in shares of companies located in India, in which the value of the shares of the Surat Cotton Mills was shown at Rs. 254 per share and the total value of 1,232 shares held by the petitioner was shown at Rs. 3,12,928. The WTO seems to have accepted this valuation. But when the matter was taken in appeal to the AAC, it appears from his order that the applicability of r. 1D of the Rules in respect of the shares of the Surat Cotton Mills was disputed. It may be stated that it is not in dispute that if the shares are valued in accordance with the manner prescribed in r. 1D, the value of each share would stand correctly determined at Rs. 254. The AAC took the view that the value of the shares was correctly determined under r. 1D of the Rules. The matter was taken in appeal by the petitioner to the Income-tax Appellate Tribunal. By an interim order made by the Tribunal under s. 24(6) of the W.T. Act (hereinaft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made in respect of three questions which were as follows : " (1) Whether, on the facts and in the circumstances of the case, the valuers were bound to value the shares of Surat Cotton Spinning Weaving Mills Pvt. Ltd. in accordance with rule 1D of the Wealth-tax Rules ? (2) Whether the Tribunal should have accepted the value of the said shares as determined by the valuers ? (3) Whether rule 1D in so far as it goes beyond the substantive provisions of valuation contained in section 7(1) is invalid and/or ultra vires the rule-making power of the Board under section 46(2) of the Wealth-tax Act, 1957, and suffered from the vice of excessive legislation ? " The Tribunal referred the first two questions. That reference is Wealth-tax Reference No. 10 of 1973 referred to earlier. So far as the third question was concerned, the Tribunal took the view that the question of ultra vires was foreign to the scope of the jurisdiction of the taxing authority and no such question could, therefore, be raised or could arise from the Tribunal's order. Reference under s. 27 having been declined by the Tribunal in respect of the third question, the petitioner filed this petition challengi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluation date. Section 7(1) opens with the words " Subject to any rules made in this behalf ". The rule-making power which has been given to the Central Board of Direct Taxes is to be found in s. 46. As is usually found, the provision is in two parts, that is, sub-s. (1) and sub-s. (2), apart from some additional provisions relating to the manner of framing the rules and the power to make rules retrospectively which is given in sub-ss. (3) and (4). As much turns on the scope of the power of the rule-making authority, it is necessary to reproduce s. 46 in full : " 46. (1) The Board may, by notification in the Official Gazette, make rules for carrying out the purposes of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, rules made under this section may provide for-- (a) the manner in which the market value of any asset may be determined ; (b) the form in which returns under this Act shall be made and the manner in which they shall be verified; (c) the form in which appeals and applications under this Act may be made, and the manner in which they shall be verified ; (cc) the circumstances in which, the conditions subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the value of all its assets shown in that balance-sheet. The net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such 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 :-- The Table ---------------------------------------------------------------------------------------------------------------------------------------------------- Number of accounting years ending on the valuation date or in a case where the accounting year does not end on the valuation date, the Market value number ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e may at this stage point out that the matter relating to the determination of the value of shares was originally dealt with by a circular issued by the then Central Board of Revenue on 28th September, 1957. This circular is to be found on page 859 of A. C. Sampath Iyenger's Three New Taxes, Vol. I, 4th Edn. Since we are in this case concerned with the valuation of unquoted shares of a private limited company, we reproduce only the relevant part of that circular dealing with the valuation of shares and securities. The shares and securities have been divided into three categories, namely, (a) shares in joint stock companies and securities issued by the Government or local authorities which are the subject of dealings in a recognised stock exchange, (b) shares in foreign companies and securities issued abroad which are not the subject-matter of dealings in a recognised stock exchange in India but which are dealt with in a recognised stock exchange in a foreign country, and (c) shares which are not quoted on stock exchange and for which the market value cannot be ascertained on the basis of stock exchange quotation. With regard to the shares referred to in category (c) above, the circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aws (Amendment) Act, 1972, with effect from 1st January, 1973, but a new provision has been enacted in s. 16A which enables the WTO to refer the question of valuation of any asset to a valuation officer. Section 16A(1) reads as follows : " (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 a Valuation Officer-- (a) in a case where the value of the asset as returned is in accordance with the estimate made by a registered valuer, if the Wealth-tax Officer is of opinion that the value so returned is less than its fair market value ; (b) in any other case, if the Wealth-tax Officer is of opinion-- (i) that the fair market value of the asset exceeds the value of the asset as returned by more than such percentage of the value of the asset as returned or by more than such amount as may be prescribed in this behalf ; or (ii) that having regard to the nature of the asset and other relevant circumstances, it is necessary so to do. " The percentage and the value referred to in cl. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lict with s. 7. Relying on the well established principle that where there is a conflict between a provision of a statute and the rule, the rule must give way to the statute, it is urged that the rule will become bad and will, therefore, have to be ignored. On the other hand, it is contended by Mr. Joshi appearing on behalf of the revenue that the power to make rules for working out the provisions of s. 7 is contemplated by the provisions of s. 7 itself, and, according to the learned counsel for the revenue, when s. 7(1) opens with the words " subject to any rules made in this behalf ", it is clearly contemplated that the power exercised by the WTO under s. 7(1) of the W.T. Act has to be in accordance with the rules that may be framed under s. 46. It was seriously disputed by Mr. Joshi on behalf of the revenne that the power given by cl. (a) of s. 46(2) could be exercised to make only a directory rule and, according to the learned counsel, even if r. 1D did not squarely fall within the power contemplated by cl. (a) of sub-s. (2) of s. 46, as long as the rule prescribed a method of valuation which was a well-known method of valuation, it could still be supported as having been mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herish a hope that when the time arrives for selling he will be able to secure a profit, the purchaser's object in making the purchase is to secure, as already stated, a recurring income; he is prepared to risk fluctuation and even the possibility that in any one year (or even years) no income at all will be forthcoming; but all the same, he expects income, again hoping that it will, as time goes on, tend to increase rather than decrease ....... The value of a share is arrived at by taking the rate of annual return divided by the return expected and multiplied by the par or paid-up amount of the share upon which the dividend is based, without taking into account any accruing dividend. " Adamson and Goorey in their book The Valuation of Company Shares and Businesses while summarising the principles which have emerged as a result of judicial decisions have put the matter thus : " Judicial approval has been given to those accounting authorities who regard goodwill as included automatically in a total valuation ascertained by capitalization instead of it being valued by a separate formula. The assessment of value must be based mainly upon the income yield, but with some reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets--allowing for a probable loss or possible profit on book values--the balance being available for shareholders. Included in the liabilities may be debentures, debenture interest, expenses outstanding, and possibly preference dividends if the articles of association stipulate for payment of 'arrears' in a winding up. " Particularly important are the observations of the learned author at p. 2627, where he states : " It need hardly be stressed that when a company is : (a) known to be at the end of its life, or (b) likely to be taken over on an asset basis by another company, the valuation will be on the above-mentioned basis, even if quoted on the Stock Exchange, because the market value will naturally be based on the break-up basis. " The established principles of accountancy, therefore, appear to contemplate that the break-up value method is not resorted to in the case of a company which is a going concern and is generally resorted to in the case of a company which is about to be liquidated. This concept has also received judicial and statutory recognition and we may merely refer to the two decisions of the High Court of Australia, the first one being in McCathie v. Fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of any such shares or stock, be had to any provision in the memorandum or articles of association or rules of the company whereby or whereunder the value of the shares or stock of a deceased or other member is to be determined; (c) where the estate includes any shares or stock in any company the shares or stock of which are not or is not quoted in the official list of any Stock Exchange, the Commissioner may, in his discretion, notwithstanding anything contained in the last two preceding paragraphs, adopt as the value of any such shares or stock such sum as the holder thereof would receive in the event of the company being voluntarily wound up on the date of death. " Clause (c) reproduced above dealt with unquoted shares and it is left to the discretion of the Commissioner to adopt as value of any such shares or stock such as the holder thereof would receive in the event of the company being voluntarily wound up on the date of death. Dealing with the scheme of s. 16A, Williams J. of the High Court of Australia observed : " Section 16A(1) contains three paragraphs. Paragraph (b) would appear to be unnecessary. Paragraph (a) is adopted because a memorandum and articles of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its life that the market value will be based on the break-up basis. The methods of valuation of equity shares were considered by the Supreme Court in Mahadeo Jalan's case [1972] 86 ITR 621 and the conclusions reached by the Supreme Court with regard to the various aspects of valuation of shares were set down by the court as follows : " (1) Where the shares in a public limited company are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares. (2) Where the shares are of a public limited company which are not quoted on a stock exchange or of a private limited company 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these observations, Mr. Joshi for the revenue has contended that the decision of the Supreme Court recognises the fact that the break-up value method is a permissible method of valuation, while Mr. Kolah has contended that the Supreme Court itself has pointed out that normally the market value of an unquoted share of a private limited company should not be valued as it is done on liquidation by the break-up value method. As we read the above quoted observations, the ratio of the decision of the Supreme Court appears to be contained in the last sentence of the above-quoted paragraph the effect of which is that a break-up method may be resorted to only in exceptional circumstances even though a company is not ripe for liquidation. What those exceptional circumstances are is not pointed out, but it is apparent from these observations, apart from r. 1D, that where the break-up method is sought to be used for ascertaining the valuation of shares of a company which is a running concern, exceptional circumstances will have to be established when the break-up value method is sought to be relied upon. It is also clear from even this decision of the Supreme Court that the normal method in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deals with the mode in which the value of the assets has to be determined and the purpose of s. 7 was to indicate how an asset is to be valued. This court has also pointed out in that decision that the words " if sold in open market " in s. 7(1) do not contemplate any actual sale or the actual state of the market but only enjoin that it should be assumed that there is an open market and the property can be sold in such a market and, on that basis, the value should be found out. It was held that the tax officer must assume that there is an open market in which the asset can be sold and proceed to value it on that basis and the words " if sold " create a fictional position which the tax officer has to assume. Section 7(1) is thus a machinery provision which requires the WTO to hypothetically assume that there is an open market and the property can be sold in such market and it is on that basis that the value of the asset has to be determined for the purposes of computation of the net wealth of the assessee. The decision of this court in CWT v. Purshottam N. Amersey [1969] 71 ITR 180 was approved by the Supreme Court in Ahmed G. H. Arif v. CWT [1970] 76 ITR 471. While referring to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atory or directory. The question whether a particular provision using the word " shall " is mandatory or directory cannot be resolved by laying down any general rule and depends on the facts of each case. One has to look to the object of the provision ; one has also to look to the object of the statute making the provision. The purpose for which the provision has been made, its nature, and the intention of either the legislature if the provision is the section of a statute or the intention of the rule-making authority in the case of subordinate legislation will also have to be ascertained. A provision which uses the word " shall " can always be considered as directory if the content of the provision or the intention of the rule-making authority so demands. We need only refer to the decision of the Supreme Court in Govind Lal v. Agriculture Produce Market Committee, AIR 1976 SC 263, where the law on the subject has been stated as follows on the basis of Maxwell's Interpretation of Statutes, Crawford's Statutory Construction and Craies on Statute Law : " Maxwell, Crawford and Craies abound in illustrations where the words ' shall ' and ' may ' are treated as interchangeable. ' Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o account by the rule-making authority when it framed the rule relating to computation of market value of unquoted equity shares. The rule provides that the market value of the shares shall be 85% of the break-up value determined. On what basis the percentage was fixed at 85% is not possible to be ascertained. We are, therefore, faced with a situation where a rule which is normally applicable in the case of a company, winding up of which is imminent is sought to be used for computing the value of shares of a company which is a running concern. Such a rule, it is now being argued, is of a mandatory nature. Thus, we are being asked to hold primarily on the ground that the word " shall " has been used by the rule-making authority. If the use of the word " shall " is not in any way conclusive and does not foreclose any discussion as to the mandatory or directory nature of the provision in the rule, then the only guidance that we can have is from the provision which confers the rule-making power. The rule-making power is not conferred by s. 7(1). The power to determine the market value conferred thereby is merely made subject to the rules. The rule-making power is to be found in s. 46. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure uses " may " and " shall " in the same section, it will be reasonable to assume that they were not used in the same sense of making a provision either directory or mandatory. Obviously, when " may " and " shall " are used in different parts of the same provision, we must attribute intention to the Legislature to make that part in which the word " may " is used as being of a permissive character and that part in which the word " shall " is used as of a mandatory character. Therefore, when cl. (c) of sub-s. (2) refers to forms in which appeals and applications may be made, that part was clearly directory in nature, but the rule with regard to the manner of verification had to be of a mandatory nature. Again in cl. (cc) reference is made to the circumstances in which, the conditions subject to which and the manner in which the AAC may permit an appellant to produce evidence which he did not produce or which he was not allowed to produce before the WTO. There can be no doubt that rules were contemplated to enable the AAC to exercise his discretion in the matter of permitting additional evidence to be produced. When the words used were " may permit ", they were obviously intended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the use of the word " shall " must have the effect of making the rule mandatory, then it will be clearly in excess of the rule-making power and the rule would become bad. The other alternative is to find out whether the word " shall " should be read as " may " in the light of the fact that the power to make the rule itself was restricted and assume that the rule-making authority would not deliberately exceed the power given under the parent Act. As already pointed out above, when dealing with the question of validity of a rule, attempt must be made as far as possible to see if the rule can be sustained having regard to the construction to be placed on the power of the rule-making authority. In our view, it is not possible to attribute intention to the Board to rule out in the case of valuation of shares of a company all methods of computation of the value of the shares and restrict the scope of the enquiry under s. 7(1) only to the value based on the break-up value method. The proper view to take in this case, therefore, appears to be that the rule-making authority intended to make a rule of a directory nature. There is another reason which makes us to take this view. We have ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the courts to say whether it is a fair method or not and in view of the general provisions in s. 46(1), the rule could still be supported as being valid. The foundation of this argument is the decision of the Privy Council in the case of King Emperor v. Sibnath Banerji, AIR 1945 PC 156. Strictly speaking in the view which we have taken that the rule falls squarely under s. 46(2)(a) as construed by us, we need not consider the argument in any great detail, but since the learned counsel has vehemently argued the question in all fairness to him, we will refer to the authorities which were cited by him. In King Emperor v. Sibnath Banerji, AIR 1945 PC 156, the question raised was whether r. 26 of the Defence of India Rules, 1940, was in excess of the rule-making power given under s. 2 sub-s. (2)(x), of the Defence of India Act, 1939. It is well known that the Federal Court in Keshav Talpade v. Emperor, AIR 1943 FC 1, had taken the view that r. 26 of the Defence of India Rules went beyond the rule-making powers which the Legislature had thought fit to confer upon the Central Govt. and was, therefore, invalid. Section 2(1) of the Defence of India Act provided that the Central Govt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a moment that rule 1D is outside the powers conferred by s. 46(2)(a), the revenue was entitled to call in aid the main provisions in s. 46(1) and that having regard to the generality of the powers, as long as the rule has the effect of carrying out the purposes of the Act, the rule will still be valid. Our attention was invited to certain decisions in which the observations of the Privy Council have been referred to with approval. The first decision was in State of Kerala v. M. Appukutty [1963] 14 STC 242; AIR 1963 SC 796. The question which arose for decision in that case was whether r. 17 made in exercise of the power under s. 19 of the Madras General Sales Tax Act, 1939, was valid. Section 19(1) of that Act was that " the State Government may make rules to carry out the purposes of this Act ". Among the items in respect of which the rule-making power could be exercised under sub-s. (2) of s. 19 was one for making a provision for " the assessment to tax under this Act of any turnover which has escaped assessment and the period within which such assessment may be made, not exceeding three years ". Rules 17(1),17(1A) and 17(3A) were framed by the State Govt. under s. 19. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Om Parkash v Union of India, AIR 1971 SC 771, reiterates the same principle that where specific power is conferred without prejudice to the generality of the general power already specified, the specific power is only illustrative and does not restrict the general power in any way. The third decision relied upon is in Afzal Ullah v. State of Uttar Pradesh, AIR 1964 SC 264, where also the same proposition has been reiterated with regard to the two parts of the provision providing for the rule-making power and it was observed that any case not falling within the power specified may well be protected by the general power. In the matter of construing the extent of the rule-making power, as we have already said, there is no dispute regarding the proposition laid down in the decisions referred to above and there is, therefore, no doubt that s. 46(1) is really the repository of the rule-making power. That power has to be exercised for the purposes of carrying out the purposes of the Act. Some specified subjects are mentioned in s. 46(2) in respect of which the rule-making power could also be exercised. The subject in s. 46(2) will, therefore, be clearly illustrative of the extent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rule, if necessary, is vested in Parliament at the initial stage. But the fact that Parliament has not chosen to modify it does not prevent the court from placing a construction upon it, which, according to the court, is the proper construction in the light of the purpose and scheme of the Act. Section 46(4) does not, therefore, in any way come into the picture and cannot prevent any challenge being made on the ground that the rule, if it is to be treated as a mandatory rule, is either ultra vires or in excess of the rule-making power. Mr. Kolah had relied upon certain decisions in support of the proposition that the rule went far beyond the provisions of s. 7 and should, therefore, be held to be invalid. As already stated, it was contended by him that the rule cannot take away something which is given by the section. The two decisions on which Mr. Kolah has relied dealt with the validity of r.19A(3) of the I.T. Rules. In Century Enka Ltd. v. ITO [1977] 107 ITR 909 the Calcutta High Court took the view that in so far as r.19A(3) of the I.T. Rules places restrictions on the computation of capital for the purposes of s. 80J of the I.T. Act, 1961, it could not be construed as o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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