1990 (12) TMI 168 - AT - Income Tax

Summary

Issues Involved:
1. Valuation of equity shares of Amalgamations Ltd.
2. Exclusion of dividends declared by subsidiary companies in computing average maintainable profits.
3. Addition of a 10% premium to the capitalized value of aggregate average maintainable profits.
4. Appropriate rate of capitalization.
5. Discount for non-declaration of dividends and bulk holding of shares.

Detailed Analysis:

1. Valuation of Equity Shares of Amalgamations Ltd.:
The primary issue revolves around the valuation of unquoted equity shares of Amalgamations Ltd., an investment company with 28 subsidiaries, five of which are wholly owned. The shares were initially valued by Frazer & Ross, Chartered Accountants, at nil. However, the assessees filed a statement valuing the shares at Rs. 61.53 each based on CBDT Circular No. 118 dated 15-9-1973. The Assessing Officer, rejecting both valuations, valued the shares at Rs. 451.25 each using CBDT Circular No. 332-A dated 31-3-1982, which replaced Circular No. 118.

2. Exclusion of Dividends Declared by Subsidiary Companies:
The assessees argued that dividends declared by the subsidiaries and received by the holding company should be excluded from the average maintainable profits of the holding company to avoid double addition. The Assessing Officer and CIT(A) did not accept this exclusion, as Circular No. 332-A did not specifically mention such an adjustment. However, the Tribunal found merit in the argument, noting that the book profits of the parent company include dividends from subsidiaries, which should be excluded to reflect the true value of the shares. The Tribunal directed the lower authorities to make suitable adjustments in this regard.

3. Addition of a 10% Premium:
The Assessing Officer added a 10% premium to the capitalized value of the aggregate average maintainable profits, which the assessees contested. They cited Circular No. 118 of 15-9-1973, which stated that no premium should be added for parent companies with wholly owned subsidiaries. The Tribunal noted that Circular No. 332-A of 31-3-1982 did not amend this position. However, since Amalgamations Ltd. had only five wholly owned subsidiaries out of 28, the Tribunal held that the 10% premium was applicable and rejected the assessee's claim.

4. Appropriate Rate of Capitalization:
The assessees contended that a 15% capitalization rate should be applied, referencing the MRTP Act. The Tribunal rejected this, stating that the MRTP Act is not in pari materia with the Wealth-tax Act. It emphasized that Rule 48-I of the Income-tax Rules prescribes an 8% discounting rate, and there was no reason to deviate from the 10% rate prescribed in Circular No. 332-A.

5. Discount for Non-Declaration of Dividends and Bulk Holding of Shares:
The assessees argued for a discount due to non-declaration of dividends by the holding company and the depressing effect of bulk holding on share prices. The Tribunal rejected these claims, noting that dividend policies in closely held companies are controlled by those with a controlling interest, and bulk holding does not necessarily depress share value. It highlighted instances where bulk holdings resulted in higher prices through private treaties.

Conclusion:
The Tribunal allowed the appeals in part, directing adjustments for dividends received from subsidiaries while upholding the 10% premium and 10% capitalization rate as per Circular No. 332-A. Claims for a higher capitalization rate and discounts for non-declaration of dividends and bulk holding were rejected.