1973 (5) TMI 8 - HC - Wealth-tax

Assessee owned 500 equity shares and 277 preference shares in Best & Co. (Private) Ltd., Madras, of the face value of Rs. 100 each - articles of association of a private company restricts both transferability as well as the price - whether the value of shares get depreciated and whether break-up method of valuation can be adopted in such a case - questions referred to us are answered technically in favour of the assessee. The Tribunal will have to, therefore, consider the question of allowing depreciation on the value ascertained in this case by the Wealth-tax Officer for the various restrictions contained in the articles of association. However, in view of our rejection of the stand taken by the assessee that the shares are to be valued only at their face value, we direct the assessee to pay the costs of the revenue

Issues Involved:
1. Valuation of shares for wealth-tax purposes.
2. Impact of restrictions on transfer of shares on their valuation.
3. Applicability of break-up value method for valuation.
4. Depreciation of share value due to restrictions in articles of association.

Issue-wise Detailed Analysis:

1. Valuation of Shares for Wealth-Tax Purposes:
The primary issue was the method of valuing shares held by the assessee for wealth-tax purposes. The assessee valued his shares at their face value, while the Wealth-tax Officer computed the market value based on the balance-sheet of Best & Co. The Tribunal upheld the Wealth-tax Officer's valuation, leading to the referral of the case to the High Court. The relevant questions were whether the valuation of shares at Rs. 1,66,278 and Rs. 1,99,200 for the assessment years 1961-62 and 1962-63, respectively, was proper under section 7(1) of the Wealth-tax Act.

2. Impact of Restrictions on Transfer of Shares on Their Valuation:
The articles of association of Best & Co. imposed restrictions on the transfer of shares, including a pre-emption right for directors, managers, or assistants to purchase shares at their face value. The Tribunal and the High Court had to determine whether these restrictions should affect the valuation. The High Court noted that while the restrictions were recognized, they were not absolute. If the pre-emption right was not exercised, the shares could be sold at market value, subject to the directors' approval.

3. Applicability of Break-Up Value Method for Valuation:
The High Court considered the appropriateness of using the break-up value method, which involves valuing shares based on the company's balance-sheet. The court referred to the Supreme Court's decision in Commissioner of Wealth-tax v. Mahadeo Jalan, which suggested that the break-up value method is an alternative basis for valuation, particularly when other methods are not suitable. The court concluded that the break-up value method was appropriate in this case, given the lack of other suitable valuation methods.

4. Depreciation of Share Value Due to Restrictions in Articles of Association:
The High Court agreed with the assessee's contention that the value determined using the break-up method should be depreciated to account for the restrictions on transfer and price contained in the articles of association. The court cited Abraham v. Federal Commissioner of Taxation, which suggested allowing depreciation for such restrictions. The court directed the Tribunal to consider depreciation on the value ascertained by the Wealth-tax Officer, as the restrictions would likely reduce the market price of the shares.

Conclusion:
The High Court concluded that the Tribunal must consider depreciation on the value determined by the Wealth-tax Officer due to the restrictions in the articles of association. However, the court rejected the assessee's argument that the shares should be valued only at their face value. The questions were answered technically in favor of the assessee, but the assessee was directed to pay the costs of the revenue.

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