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2005 (9) TMI 229 - AT - Income TaxComputation of capital Gains - Determine the fair market value of the unquoted shares - Method of calculation of the cost of acquisition - original shares - HELD THAT - The method of determination of market value of unquoted shares was examined by the Lordships of the Apex Court have examined this issue in the light of earlier judgments of the Apex Court in the cases of Mahadeo Jalan 1972 (9) TMI 7 - SUPREME COURT and Smt. Kusumben D. Mahadevia 1979 (12) TMI 61 - SUPREME COURT CGT v. Executors Trustees of the Estate late Shri Ambalal Sarabhai 1987 (12) TMI 31 - SUPREME COURT . Their Lordships have categorically held that rule 1D has necessarily to be followed and WTO has no option either to follow or not to follow the same and the question whether the Rule is mandatory or directory does not arise. While dealing with the other methods of valuation of unquoted shares their Lordships have out rightly discarded the arguments of the assessee that the break up method adopted by rule 1D does not lead to proper determination of the market value of the unquoted shares. They further held that the argument to this effect advanced by the learned counsel for the assessee is based upon the assumption and premises that the value determined by applying the yield method is the correct market value. Their Lordship have further held that once rule 1D is brought on the statute it is to be followed in each and every case as the rule is found to be good and valid. It is not a matter of choice or option. The Rule making authority has prescribed only one method for valuing the unquoted equity shares. If these methods were not to be followed there is no other method prescribed by the Rules. Their Lordships have further held that if the contention of the assessee are accepted then it would be open to the WTO to adopt such other method of valuation as he thinks appropriate in the circumstances. This is bound to lead to vesting of uncalled for the wide discretion in the hands of the WTO/valuing authorities. It would lead to uncertainty and may be arbitrariness in practice. Where there is a Rule prescribing the manner in which a particular property has to be valued the authorities under the Act have to follow it. They cannot devise their own ways and means for valuing the assets. Their Lordships further explained that rule 1D does not treat the break up value as the market value. A deduction of 15 per cent is to be made in the break up value to arrive the market value. Their Lordships further examined the various principles enunciated in the judgments of Mahadeo Jalan s case and Smt. Kusumben D. Mahadevia s case by the Apex Court. While dealing with the issues their Lordships of the Apex Court in the case of Bharat Hari Singhania 1994 (2) TMI 55 - SUPREME COURT have categorically examined the dividend yield method the earning method and the break up method and finally concluded that the earning method and dividend yield method is a cumbersome process and the best method is the break up method as laid down in rule 1D. We are also not convinced with the argument of the assessee that the ratio laid down in the case of Bharat Hari Singhania is not applicable to the present case as it was rendered in wealth tax matter because whatever cases are referred before us they all were rendered in different Acts. We therefore have to follow the latest judgment which is more rational in order to adjudicate the impugned issue. We therefore of the view in the light of the categorical finding of the Apex Court that the unquoted shares in the instant case should have been valued as per break up method as done by the Assessing Officer. We therefore do not agree with the finding of the CIT(A). Accordingly we set aside the order of CIT(A) and restore that of the Assessing Officer. In the result appeal of the revenue is allowed.
Issues Involved:
1. Determination of fair market value of unquoted shares as on 1-4-1981. 2. Applicability of yield method versus break-up method under rule 1D of the Wealth-tax Rules. 3. Relevance of previous Supreme Court judgments in determining the method of valuation. 4. Applicability of Wealth-tax Rules to Income-tax proceedings. Issue-wise Detailed Analysis: 1. Determination of Fair Market Value of Unquoted Shares as on 1-4-1981: The primary issue in this case was the determination of the fair market value of unquoted equity shares as on 1-4-1981. The assessee sold 89 unquoted equity shares and 89 bonus shares of Duke & Sons Ltd. and computed the long-term capital gain based on the fair market value as on 1-4-1981. The assessee used the yield method for valuation, supported by a valuation report, while the Assessing Officer used the break-up method under rule 1D of the Wealth-tax Rules. 2. Applicability of Yield Method versus Break-up Method under Rule 1D of the Wealth-tax Rules: The CIT(A) directed the Assessing Officer to adopt the yield method, relying on the Supreme Court judgments in CWT v. Mahadeo Jalan and CGT v. Smt. Kusumben D. Mahadevia, which supported the yield method for valuing unquoted shares. However, the revenue argued that the Supreme Court in Bharat Hari Singhania v. CWT upheld the validity of rule 1D, which prescribes the break-up method as mandatory for valuing unquoted shares. The Tribunal agreed with the revenue, stating that the break-up method under rule 1D is simpler and less time-consuming compared to the yield method. 3. Relevance of Previous Supreme Court Judgments in Determining the Method of Valuation: The Tribunal examined the judgments in Mahadeo Jalan, Smt. Kusumben D. Mahadevia, and Bharat Hari Singhania. The earlier judgments supported the yield method, but Bharat Hari Singhania upheld the mandatory application of the break-up method under rule 1D. The Tribunal noted that the Supreme Court in Bharat Hari Singhania found the break-up method to be the best method for determining the fair market value of unquoted shares, despite the earlier judgments suggesting otherwise. 4. Applicability of Wealth-tax Rules to Income-tax Proceedings: The revenue argued that in the absence of specific guidelines under the Income-tax Act for valuing unquoted shares, the provisions of the Wealth-tax Act, including rule 1D, should be applied. The Tribunal agreed, stating that the Wealth-tax Rules provide a clear method for valuation, which should be followed in the absence of specific provisions under the Income-tax Act. The Tribunal found that the break-up method prescribed by rule 1D, although omitted from the statute, remains relevant and should be applied for determining the fair market value of unquoted shares. Conclusion: The Tribunal concluded that the unquoted shares should be valued using the break-up method under rule 1D of the Wealth-tax Rules, as upheld by the Supreme Court in Bharat Hari Singhania. The order of the CIT(A) was set aside, and the Assessing Officer's valuation using the break-up method was restored. The appeal of the revenue was allowed.
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