1982 (4) TMI 5 - HC - Wealth-tax

Summary

Issues Involved:
1. Valuation Method for Unquoted Shares
2. Consistency in Valuation Methods
3. Applicability of Circulars and Rules
4. Judicial Precedents and Principles for Share Valuation

Issue-wise Detailed Analysis:

1. Valuation Method for Unquoted Shares:
The primary issue revolves around the appropriate method for valuing unquoted shares held by the assessee in five companies: General Investment Co. Ltd., Indian Investment Co. Ltd., Oriental Co. Ltd., Luxmi Salt Co. Ltd., and Mugneeram Bangur & Co. Pvt. Ltd. The Wealth Tax Officer (WTO) initially valued these shares using the break-up value method. However, the Appellate Assistant Commissioner (AAC) found the yield basis method more appropriate for the first four companies, considering factors like bank interest rates, dividend yield, and the report of the bonus commission. For Mugneeram Bangur & Co. Pvt. Ltd., the AAC upheld the break-up method due to its recent conversion from a partnership firm to a private limited company.

2. Consistency in Valuation Methods:
The Tribunal, after hearing the rival contentions, upheld the AAC's decision for the first four companies, agreeing that the yield basis was a well-founded and scientific method. The Tribunal noted no substantial reason to interfere with the AAC's method. However, for Mugneeram Bangur & Co. Pvt. Ltd., the Tribunal initially agreed with the break-up method but later directed that the yield method should also be applied, given the assessee's concession to treat the partnership firm's profits as those of the limited company for valuation purposes.

3. Applicability of Circulars and Rules:
The Revenue argued that the valuation should consider Circular No. 118 and Circular No. 2 (WT) by the Central Board of Direct Taxes (CBDT), which provided guidelines for valuing unquoted equity shares of investment companies. These circulars suggested methods involving asset backing and maintainable profits. However, the Tribunal and the High Court found that these circulars, issued after the relevant assessment years, did not bind the Tribunal or the assessee. Moreover, Rule 1D of the Wealth-tax Rules, which prescribes the break-up method, was deemed inapplicable as it was introduced later and did not apply to investment companies.

4. Judicial Precedents and Principles for Share Valuation:
The High Court referred to several Supreme Court decisions, particularly CWT v. Mahadeo Jalan [1972] 86 ITR 621 and CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38. These cases established that the yield method is generally preferable for valuing shares of a going concern, while the break-up method is reserved for exceptional circumstances, such as when a company is ripe for liquidation. The Court emphasized that the profit-earning capacity should be the primary consideration, and asset backing should only be relevant in determining this capacity, not as a standalone valuation method. The Court also rejected the combination of the yield and break-up methods as unscientific and unsupported by judicial authority.

Conclusion:
The High Court affirmed the Tribunal's decision to use the yield method for valuing the shares of the five companies, including Mugneeram Bangur & Co. Pvt. Ltd., for the relevant assessment years. The appeals of the Revenue were dismissed, and the assessee's appeals were partly allowed. The Court reiterated that the yield method is the most appropriate for valuing shares of a going concern, aligning with established judicial principles. The Tribunal's approach was consistent with the Supreme Court's guidelines, and the circulars and rules cited by the Revenue were not applicable to the case at hand.