1972 (9) TMI 7 - SC - Wealth-tax

Shares - valuation - yield method or on break-up method - power of SC to reframe the question - Whether to bring out the real issue the Supreme Court is certainly empowered to re-frame a question referred by the Tribunal, when the question does not correctly indicate the scope of the answer - Appeal of revenue is dismissed

Summary

Issues Involved:
1. Valuation Method of Shares: Whether the "break-up value" or "yield value" method should be used for the valuation of shares in private limited companies under Section 7 of the Wealth-tax Act, 1957.
2. Tribunal's Adoption of Valuation Method: Whether the Tribunal was justified in adopting the "break-up value" method for the valuation of shares.
3. High Court's Decision on Valuation Method: The High Court's decision that the "yield value" method was the proper method for valuation.

Detailed Analysis:

1. Valuation Method of Shares
The central issue revolves around the appropriate method for valuing shares in private limited companies under Section 7 of the Wealth-tax Act, 1957. Sub-section (1) of Section 7 states that "the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date." The valuation date is December 31st of the calendar year. The Wealth-tax Officer must ascertain the price the shares would fetch if sold in the open market, which would be the price a willing seller would accept and a willing buyer would pay.

2. Tribunal's Adoption of Valuation Method
The Tribunal initially adopted the "break-up value" method based on the balance sheets of the companies, assuming a liquidation scenario. This method was confirmed by the Appellate Assistant Commissioner. However, the Tribunal later adopted the "yield value" method, considering it a more reasonable method given the particular circumstances of the respective cases. The Tribunal stated that the maintainable profits rather than the dividends declared would afford a reasonable basis for valuation, especially for private limited companies where dividends could be manipulated by the directors.

3. High Court's Decision on Valuation Method
The High Court did not agree with the Tribunal's adoption of the "break-up value" method. It recognized that while the break-up value is one method of calculation, it should only be applied to a company that has reached the stage of liquidation and winding up. The High Court observed, "so far as the application of section 7 of the Wealth-tax Act in determining the value of the shares of a deceased person on the date of his death is concerned, where those shares pertain to a going concern, the only proper method to adopt was the 'yield value' method." The High Court noted that the Tribunal was not justified in assuming that in the case of a private company, the dividend would be controlled by the persons controlling the company to suit their own purposes, and that the maintainable profits should be accepted as the basis rather than the dividends.

Conclusion
The Supreme Court concluded that the yield method is generally the applicable method for valuing shares, while the break-up method is reserved for exceptional circumstances or when the company is ripe for liquidation. The Court reframed the question to address whether the break-up value method adopted by the Tribunal was sustainable in law and concluded that it was not. The appeals were dismissed with costs, affirming the High Court's decision that the yield method was the proper method for valuation.