TMI Blog1979 (12) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... tment in the profits of the company. It is not necessary for the purpose of these appeals to set out the different figures of valuation given in the report of M/s. C. C. Choksy Co. and claimed by the assessee as representing the correct value of the shares on the material dates, because the question with which we are concerned is one of principle and the actual figures of valuation are not relevant. The Gift-tax and the Wealth-tax Officers did not accept the figures of valuation given by the assessees on the basis of the profit earning method and valued the shares at much higher figures by applying the break-up method. This naturally involved the assessees in higher tax liability and hence they preferred appeals to the AAC. The AAC applied what has been described in the record as " rule of three " and reduced the valuation of the shares but the figures determined by the AAC were still higher than those claimed by the assessees. Since the valuation of the shares made by the Gift-tax and Wealth-tax Officers was reduced by the AAC, the revenue was dissatisfied and it, therefore, preferred appeals against the orders of the AAC to the Tribunal. The assessees were also unhappy with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e preferred petitions for special leave to appeal in the case of all the assessees and special leave having been granted in some of the petitions, the present appeals have come up for hearing before us. The sole question that arises for determination in these appeals is whether any question of law arises out of the orders of the Tribunal which needs to be referred to the High Court. It is true that there must be a question of law arising out of the order of the Tribunal before a reference can be made, but it is not every question of law that is required to be referred by the Tribunal to the High Court. Where the answer to the question of law is self-evident or is concluded by a decision of this court, it would be futile to make a reference and in such a case the Tribunal would be justified in refusing to refer the question to the High Court, vide CIT v. Chander Bhan [1966] 60 ITR 188 (SC), Mathura Prasad v. CIT [1966] 60 ITR 428 (SC) and CIT v. Indian Mica Supply Co. P. Ltd. [1970] 77 ITR 20 (SC). Now, there can be no doubt that in the present case the question as to which method should be adopted for valuation of the shares of Mafatlal Gagalbhai Private Ltd., a private limited c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e method and not the break-up method. The revenue carried the matter in appeal to this court and in a judgment delivered by Jaganmohan Reddy J. this court examined the question of valuation of shares in depth and after referring to various decisions of the English, Irish and Australian courts, laid down the following principles for valuation of shares in a limited company (p. 633): " (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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly reflect the profit earning capacity because only a small proportion of the profits is distributed by way of dividends and a large amount of profits is systematically accumulated in the form of reserves, the dividend method of valuation may be rejected and the valuation may be made by reference to the profits. The profit- earning method takes into account the profits which the company has been making and should be capable of making and the valuation, according to this method is based on the average maintainable profits. Of course for the purpose of such valuation, the taxing authority is not bound by the figure of profits shown in the profit and loss account because it is possible that the amount of profits may have suffered diminution on account of unreasonable expenditure or the directors having chosen to take away a part of the profits in the form of remuneration rather than dividends. The figure of profits in such a case would have to be adjusted in order to arrive at the real profit earning capacity of the company. It would, thus, be seen 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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of the shares, what the court meant 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 which would determine the valuation of the shares would naturally have to take into account not only the profits which the company is actually making, but also the profits which the company should be capable of making and in order to arrive at a proper estimation of the latter, the asset-backing would be, a relevant factor in the case of an investment company. It would not be right to read the observation of the court as suggesting that valuation of the assets would be a relevant factor in determining the valuation of the shares. The revenue, of course, did not plead for exclusive adoption of the break-up method and wanted the mean of the values arrived at by applying the break-up method and the profit-earning method to be taken as representing the valuation of the shares, but we do not see on what principle can a combination of the two methods be justified. There is no authority either in any judicial decision or in any standard text book on valuation of shares whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ened to make it clear, as if in answer to a possible argument which might be advanced on behalf of the revenue on the basis of that observation that " 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. " Here, in the present case, Mafatlal Gagalbhai Pvt. Ltd. was a private limited company which was a going concern and it was neither ripe for liquidation nor were there any exceptional circumstances which should attract the applicability of the break-up method. The profit earning method was, therefore, the only method which could properly be applied for arriving at the valuation of the shares in the company and the Tribunal was right in accepting the figures of valuation in the report of M/s. C.C. Choksy Co. based on the application of the profit earning method. The answer to the question of law relating to the method to be adopted for valuation of shares in the company was clearly concluded by the decision in Mahadeo Jalan's case [1972] 86 ITR 621 (SC) and the High Court was therefore, justified in refusing to call for a reference on this question. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing method, at least so far as the valuation under the G.T. Act was concerned. Now, it is difficult to see how the question whether the valuation of the shares should have been made on the basis of the break-up method by reason of r. 10, sub-r. (2), of the G.T. Rules, can be required to be referred by the Tribunal to the High Court. It is well settled that no question can be referred to the High Court unless it arises out of the order of the Tribunal and, as pointed out by this court in CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 689, a question of law can be said to arise out of the order of the Tribunal only if it is dealt with by the Tribunal or is raised before though not decided by the Tribunal and a question of law not raised before the Tribunal and not dealt with by it in its order cannot be said to arise out of its order, even if on the facts of the case stated in the order the question fairly arises. It is obvious that this question sought to be raised on behalf of the revenue was neither raised before the Tribunal nor decided by it and the only argument advanced before the Tribunal was that the mean of the values arrived at on an application of the profit ear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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