1991 (7) TMI 12 - HC - Wealth-tax

Issues Involved:
1. Vires of Rule 1D of the Wealth-tax Rules, 1957.
2. Appropriate method for valuation of unquoted shares.
3. Consistency of Rule 1D with Section 7(1) of the Wealth-tax Act, 1957.
4. Legislative intent and rule-making authority under Section 46(2)(a).
5. Judicial precedents on valuation methods.
6. Constitutional validity of Rule 1D.

Issue-wise Analysis:

1. Vires of Rule 1D of the Wealth-tax Rules, 1957:
The petitioner challenged the vires of Rule 1D, arguing that it overrides Section 7(1) of the Wealth-tax Act and Entry 86 of List I of the Seventh Schedule to the Constitution of India. The court examined whether Rule 1D, which prescribes the break-up value method for determining the market value of unquoted shares, is consistent with the legislative intent and the fundamental legislative policy of valuing assets based on their market value.

2. Appropriate Method for Valuation of Unquoted Shares:
The petitioner contended that the yield method, as accepted by the Central Board of Direct Taxes and upheld by the Supreme Court in cases such as CGT v. Smt. Kusumben D. Mahadevia and CWT v. Mahadeo Jalan, should be applied for valuing unquoted shares. The court noted that the Supreme Court has generally favored the yield method for going concerns but has not entirely discarded the break-up method, which is applicable in exceptional circumstances or when a company is ripe for liquidation.

3. Consistency of Rule 1D with Section 7(1) of the Wealth-tax Act, 1957:
The court analyzed whether Rule 1D, by mandating the break-up value method, is harmonious with Section 7(1) of the Wealth-tax Act, which requires the market value of assets to be estimated as the price they would fetch in an open market. The court observed that the amendment to Section 7(1) in 1964, which added "subject to any rules made in this behalf," gives paramountcy to the rules framed under the Act, thereby validating Rule 1D.

4. Legislative Intent and Rule-making Authority under Section 46(2)(a):
The court discussed the rule-making authority under Section 46(2)(a), which empowers the Board to prescribe the manner of determining the market value of assets. It was noted that Rule 1D was framed under this authority and had been in force since 1967. The court emphasized that the rule had been laid before Parliament and not disapproved, indicating legislative approval.

5. Judicial Precedents on Valuation Methods:
The court referred to several Supreme Court decisions, including CWT v. Mahadeo Jalan, CGT v. Smt. Kusumben D. Mahadevia, and CGT v. Executors and Trustees of the Estate of Late Sh. Ambalal Sarabhai, which generally preferred the yield method but did not completely rule out the break-up method. The court concluded that the break-up method is one of the methods and can be adopted under certain circumstances.

6. Constitutional Validity of Rule 1D:
The court examined whether Rule 1D violates the Constitution by being inconsistent with the Wealth-tax Act or Entry 86 of List I of the Seventh Schedule. It was argued that Rule 1D does not result in unreasonable discrimination and is consistent with the legislative intent. The court also noted that the subsequent legislative development, incorporating the break-up method into the main legislation, further supports the validity of Rule 1D.

Conclusion:
The court held that Rule 1D is not ultra vires the Wealth-tax Act or the Constitution. The application challenging the vires of Rule 1D was dismissed, and the rule was discharged without any order as to costs. The court emphasized that Rule 1D, by adopting the break-up value method, does not suffer from any infirmity and is consistent with the legislative intent and the provisions of the Wealth-tax Act.

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