1986 (6) TMI 103 - AT - Wealth-tax

Summary

Issues Involved:
1. Valuation of unquoted shares in Abhirami Cotton Mills (P.) Ltd.
2. Applicability of face value vs. market value.
3. Relevance of restrictive conditions in articles of association.
4. Application of section 7(1) of the Wealth-tax Act, 1957.
5. Appropriate discount for restrictions in share transferability.

Detailed Analysis:

1. Valuation of Unquoted Shares in Abhirami Cotton Mills (P.) Ltd.:
The appeals concern the valuation of unquoted shares held by the assessees in Abhirami Cotton Mills (P.) Ltd. The assessees claimed that their shares should be valued at the face value of Rs. 100 per share, as stipulated in the memorandum and articles of association. The Wealth Tax Officer (WTO) did not accept this claim, but the Appellate Assistant Commissioner (AAC) did, relying on a previous Tribunal decision in the case of V. S. Sivalingam Chettiar.

2. Applicability of Face Value vs. Market Value:
The learned departmental representative argued that section 7(1) of the Wealth-tax Act, 1957 requires the market value of every asset to be determined, regardless of whether the asset is saleable or not. The Tribunal had previously accepted the face value as per the articles of association, but the departmental representative contended that the face value should not be taken solely due to restrictive conditions in the articles.

3. Relevance of Restrictive Conditions in Articles of Association:
The articles of association included clauses that restricted the transferability of shares, requiring the company to act as an agent for sale and to find a purchaser within 45 days. If no purchaser was found, the transferor could sell the shares at any price. The Tribunal had to consider whether these restrictive conditions justified valuing the shares at face value.

4. Application of Section 7(1) of the Wealth-tax Act, 1957:
The Tribunal examined the decision of the Madras High Court in R. Rathinasabapathy Chettiar's case, which emphasized that market value must be determined even for assets with restrictive conditions. The Madras High Court had held that some discount should be given for restrictions, but the market value should still be computed, typically using the break-up value method as per rule 1D of the Wealth-tax Rules, 1957.

5. Appropriate Discount for Restrictions in Share Transferability:
The learned departmental representative suggested that a 15% discount from the break-up value was sufficient, while the learned counsel for the assessee argued for a larger discount due to the restrictive conditions. The Tribunal noted that rule 1D allows for lower percentages in special cases and concluded that a larger discount was warranted due to the specific restrictions in the articles of association.

Conclusion:
The Tribunal directed that the value of each share in Abhirami Cotton Mills (P.) Ltd. should be computed using the break-up value method prescribed under rule 1D, with a normal discount of 15% and an additional discount of 25% for the restrictive conditions. This combined discount would reflect the market value of the shares on the respective valuation dates.

Result:
All the appeals were treated as allowed in part, with the WTO instructed to recompute the value of the shares in accordance with the Tribunal's directions.