1967 (12) TMI 5 - HC - Wealth-tax

Determining the value of the shares - s. 7 of the WT Act - Tribunal was not justified in law to follow the method involving the principle of break-up instead of the method involving the principle of yield value

Summary

Issues:
1. Interpretation of Section 7 of the Wealth-tax Act in determining the value of shares.
2. Application of the "break-up value" method vs. the "yield value" method in valuation.
3. Consideration of appropriate valuation method for shares in a company.

Analysis:
The judgment by the High Court of Assam and Nagaland involved the interpretation of Section 7 of the Wealth-tax Act concerning the determination of the value of assets, specifically shares. The court addressed the question of whether the Tribunal was justified in applying the "break-up value" method instead of the "yield value" method in valuing shares under the Act. The "break-up value" method is typically used for companies in liquidation, while the "yield value" method is applied to going concerns. The Tribunal had previously accepted the "yield value" method for valuation but switched to the "break-up value" method without substantial justification in the case at hand.

The court considered arguments presented by both parties regarding the appropriate valuation method. The petitioner contended that the "break-up value" method should only be used for companies in liquidation, citing legal precedents. On the other hand, the respondent argued that the "yield value" method should be applied, emphasizing the importance of considering the company's profitability and nature of business in determining share value. The court agreed with the respondent, stating that the "yield value" method is more suitable for valuing shares in a going concern, as opposed to the "break-up value" method, which is linked to companies in winding-up stages.

Furthermore, the court highlighted the lack of substantial evidence or material to support the Tribunal's shift from the "yield value" method to the "break-up value" method for valuation. The court emphasized that in cases involving shares of a going concern, the correct method for valuation under Section 7 of the Wealth-tax Act is the "yield value" method. The judgment concluded by answering the referred question in the negative, asserting that the "yield value" principle should be applied in similar cases. The court also noted that the decision in one wealth-tax reference also applied to another wealth-tax reference, ensuring consistency in valuation methodology.