1988 (2) TMI 107 - AT - Wealth-tax

Summary

Issues Involved:
1. Whether the provision of Rule 1D of the Wealth-tax Rules, 1957, is directive or mandatory.
2. Whether the valuation of unquoted shares of non-investment companies should be determined by the yield method or by adopting the break-up value method as prescribed under Rule 1D.

Detailed Analysis:

Issue 1: Nature of Rule 1D (Directive or Mandatory)

Arguments by the Department:
- The department contended that the language of Section 7(1) of the Wealth-tax Act, 1957, clearly indicated that the Wealth-tax Officer (WTO) has no option but to follow the rules made in this behalf.
- Emphasis was laid on the fact that Section 7(1) opened with the words "subject to any rules made in this behalf," making the application of Rule 1D mandatory.
- Reliance was placed on various High Court decisions, including CWT v. Sripat Singhania, CWT v. Padampat Singhania, Bharat Hari Singhania v. CWT, and CWT v. Mamman Varghese, which supported the view that Rule 1D is mandatory.

Arguments by the Assessees:
- The assessees argued that Rule 1D should be considered directory and not mandatory.
- It was contended that the valuation date of the assessee and the companies were different, and thus Rule 1D should be directory.
- Reliance was placed on the decision of the Delhi High Court in Sharbati Devi Jhalani v. CWT and the Bombay High Court in Smt. Kusumben D. Mahadevia, which held that Rule 1D is directory.
- The assessees also cited various Tribunal decisions supporting the view that Rule 1D is directory.

Tribunal's Analysis:
- The Tribunal examined Section 7(1) and Section 46 of the Wealth-tax Act.
- It was noted that Section 7(1) requires the WTO to estimate the market value of an asset, which should be the price it would fetch if sold in the open market on the valuation date.
- The Tribunal held that the words "subject to any rules made in this behalf" indicate that the WTO should keep the rules in view but are not bound to follow them mandatorily.
- The Tribunal emphasized that the use of the word "shall" in Rule 1D is not decisive in determining whether the rule is mandatory or directory.
- The Tribunal concluded that Rule 1D is directory and not mandatory, allowing the WTO discretion in determining the market value of unquoted shares.

Issue 2: Method of Valuation (Yield Method vs. Break-up Value Method)

Arguments by the Department:
- The department argued that the WTO is bound to determine the value of unquoted shares by adopting the break-up value method as prescribed under Rule 1D.
- Various decisions were cited to support the contention that Rule 1D is mandatory.

Arguments by the Assessees:
- The assessees contended that the yield method should be used for valuation, as supported by the Supreme Court decision in CWT v. Mahadeo Jalan.
- It was argued that the companies in question were going concerns and not ripe for liquidation, making the yield method more appropriate.

Tribunal's Analysis:
- The Tribunal referred to the Supreme Court's decision in Mahadeo Jalan, which laid down principles for determining the valuation of unquoted shares.
- The Tribunal noted that the yield method is generally applicable, while the break-up value method is used in exceptional circumstances, such as when the company is ripe for liquidation.
- The Tribunal directed the WTO to redetermine the valuation of unquoted shares in accordance with the principles laid down by the Supreme Court in Mahadeo Jalan.

Conclusion:
The Tribunal concluded that Rule 1D of the Wealth-tax Rules, 1957, is directory and not mandatory. The WTO should use discretion in determining the market value of unquoted shares, considering the yield method as generally applicable and the break-up value method in exceptional circumstances. The orders of the Commissioner of Wealth-tax (Appeals) were set aside, and the WTO was directed to redetermine the valuation of unquoted shares in accordance with the principles laid down by the Supreme Court in Mahadeo Jalan.