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Issues Involved:
1. Whether the latest published balance-sheet or the balance-sheet drawn up immediately preceding the valuation date should be considered for valuing unquoted equity shares. 2. Whether the provisions of Rule 1D of the Wealth-tax Rules are mandatory or directory. 3. Whether liabilities not shown in the balance-sheet but mentioned in annexures and directors' reports should be considered. 4. Whether advance tax paid should be deducted from the provision for taxation while valuing shares. Issue-wise Detailed Analysis: 1. Latest Published Balance-Sheet vs. Balance-Sheet Drawn Up Immediately Preceding the Valuation Date: The court examined multiple tax cases involving the valuation of unquoted equity shares under the Wealth-tax Act. The primary contention was whether the latest published balance-sheet, signed by auditors and passed in the annual general meeting, should be used for valuation or if balance-sheets drawn up immediately preceding the valuation dates but published later should be considered. The Tribunal held that only the latest published balance-sheet available on the valuation date should be taken into account. The court affirmed this view, emphasizing that the balance-sheet must be approved by the annual general meeting to be considered valid for valuation purposes. The court noted, "the balance-sheet available on the valuation date March 31, 1977, was the balance-sheet as on December 31, 1975." 2. Mandatory vs. Directory Nature of Rule 1D of the Wealth-tax Rules: The Tribunal had held that Rule 1D of the Wealth-tax Rules was directory and not mandatory, thus allowing flexibility in its application. However, the court disagreed, referencing the Supreme Court's decision in Bharat Hari Singhania v. CWT [1994] 207 ITR 1, which held that Rule 1D is mandatory. The court stated, "the provisions of rule 1D of the Wealth-tax Rules are valid and effective and the provisions of rule 1D of the Rules are mandatory in nature." Consequently, the Tribunal's view that Rule 1D is directory was deemed erroneous. 3. Consideration of Liabilities Not Shown in the Balance-Sheet: The Tribunal had allowed the deduction of liabilities mentioned in the directors' report and notes forming part of the accounts. However, the court clarified that only liabilities explicitly mentioned in the balance-sheet should be considered. The court cited its previous decision in Late C. S. Ramachary v. CWT [1991] 189 ITR 8, stating, "a note attached to the balance-sheet cannot be regarded as forming part of the balance-sheet for the purpose of valuation of the shares under rule 1D of the Wealth-tax Rules." Thus, the Tribunal's decision to consider such liabilities was overturned. 4. Deduction of Advance Tax Paid from Provision for Taxation: The court addressed whether advance tax paid should be deducted from the provision for taxation while valuing shares. The Tribunal had allowed the entire provision for taxation to be deducted, but the court found this approach incorrect. The court referred to Explanation II(ii)(e) to Rule 1D, which specifies that only the excess of the tax payable over the book profits should be deducted. The court concluded, "the entire provision for taxation cannot be regarded as liability," thus rejecting the Tribunal's approach. Judgment Summary: The court answered the questions of law as follows: - First Question: Affirmative and against the Revenue. - Second Question: Negative and in favor of the Revenue. The Tribunal was directed to reconsider the cases in light of the court's observations. The court emphasized that Rule 1D of the Wealth-tax Rules is mandatory and should be applied strictly, with only the latest published balance-sheet being considered for valuation purposes. Liabilities not shown in the balance-sheet but mentioned in annexures or directors' reports should not be considered, and the entire provision for taxation cannot be deducted. The court's decision provides clarity on the application of Rule 1D and the treatment of various liabilities in the valuation of unquoted equity shares.
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