1979 (12) TMI 61 - SC - Wealth-tax

Break Up Method, Investment Company, Private Company, Question Of Law, Supreme Court, Tribunal s Order, Wealth Tax

Issues Involved:
1. Whether a reference should have been called for by the High Court in each of these cases.
2. The correct method for valuing the shares of a private limited investment company.
3. Whether the Tribunal's decision to apply only the profit-earning method was justified.
4. Applicability of principles of valuation from the Mahadeo Jalan case.
5. Whether Rule 10, Sub-rule (2) of the Gift-tax Rules necessitates the break-up method for valuation.

Issue-wise Detailed Analysis:

1. Whether a reference should have been called for by the High Court in each of these cases:
The Supreme Court examined whether the Tribunal was justified in refusing to refer the question of law to the High Court. The court noted that not every question of law must be referred; only those where the answer is not self-evident or concluded by a prior decision of the court. The court cited precedents like CIT v. Chander Bhan and Mathura Prasad v. CIT to support this view.

2. The correct method for valuing the shares of a private limited investment company:
The central controversy was whether the valuation should follow the profit-earning method or a combination of the profit-earning and break-up methods. The Tribunal had accepted the profit-earning method as the sole method, as advocated by the assessees, and rejected the revenue's contention for a combined approach.

3. Whether the Tribunal's decision to apply only the profit-earning method was justified:
The Tribunal's decision was based on the Supreme Court's earlier ruling in CWT v. Mahadeo Jalan, which laid down principles for valuing shares, emphasizing the profit-earning method for a going concern. The Supreme Court reaffirmed that the profit-earning method is generally applicable for a private limited company that is a going concern, and the break-up method is reserved for exceptional circumstances or when the company is ripe for liquidation.

4. Applicability of principles of valuation from the Mahadeo Jalan case:
The Supreme Court reviewed the principles from Mahadeo Jalan's case, which included:
- For public limited companies with quoted shares, the market price on the valuation date is used.
- For private limited companies or unquoted shares, the profit-earning capacity, reflected through dividends or profits, is the basis.
- The break-up method is applicable only in cases of companies ripe for winding up or where profit estimation is unreasonable due to fluctuating profits.
The court found that these principles were directly applicable to the present case, thereby justifying the Tribunal's reliance on the profit-earning method alone.

5. Whether Rule 10, Sub-rule (2) of the Gift-tax Rules necessitates the break-up method for valuation:
The revenue argued that Rule 10, Sub-rule (2) mandated the break-up method for private limited companies with restrictive share transfer provisions. However, the Supreme Court held that this argument was not raised before the Tribunal and thus could not be considered. Moreover, the court emphasized that a question must arise out of the Tribunal's order to be referred to the High Court, which was not the case here.

Conclusion:
The Supreme Court dismissed the appeals, upholding the Tribunal's decision to value the shares using the profit-earning method as per the Mahadeo Jalan case principles. The court found no merit in the revenue's contentions and affirmed that the High Court was justified in refusing to call for a reference. The appeals were dismissed with costs.

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