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TMI Blog1998 (3) TMI 538X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany is held by the family except that a few shares are held by some of the relatives and friends of the parties. The family consist of four brothers and their mother. While the appellant No. 4 and members of his family are on one side, the other three brothers namely, Mohinder Nath, Virender Nath and Rajendra Nath and their mother were on the other side. The mother of the parties had died during the pendency of the proceedings. The appellant group is herein referred to as the 'NN' group and the other group is referred to as the 'MN' group. 3. The authorised capital of the company comprised of 20,000 equity shares of Rs. 100 each. Issued and paid up capital as on 30-6-1988 was Rs. 16,45,700 i.e., 18,457 equity shares of Rs. 100 each. The MN group jointly held 5,364 equity shares in the company while the remaining issued and subscribed capital of the company belong to the MN group. 4. Till about 30-6-1988 the main income of the company was the commis-sion from the agency business of Thyssen Sthal Union of Germany ('TSU'). It appears that there arose certain disputes between the brothers, and the appellant No. 4, therefore, with his efforts got the TSU agency exclusively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinue to occupy the portion of the property of the company in which he is at present residing as deemed owner/owner, and the value of such portion will be taken into account for evaluating the assets of the company. The value of such part of the property as is occupied by Shri Narender Nath Nanda will be adjusted in the value of his share. 16. That for the purpose of valuation of share of Shri Narender Nath Nanda Group, the property No. K-72, Udyog Nagar, Rohtak Road, Delhi will be treated as the property of the company. 19. This agreement will be filed in the Suit No. 1310 of 1988, and C.P. No. 28 of 1988, and appropriate orders will be passed in the suit." 6. In terms of the settlement, Justice P.N. Khanna, after evaluating the assets of the property held that the MN group was entitled to get assets worth Rs. 1.10 crores and on that basis he allotted Golf Links property to the said group even though its value, according to Justice Khanna, was Rs. 1,82 crores. However, the report was not agreeable to the parties and, accordingly, the matter was again taken up in the Court and on 9-8-1990 the parties agreed that valuation of the shares of Kidarsons Industries (P.) Ltd. and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Chartered Accountants, the NN group filed their objections. These objections were dismissed by Hon'ble the Single Judge by his judgment dated 5-2-1993. Being aggrieved by the judgment of Hon'ble the Single Judge, the appellants have preferred this appeal. 9. The challenge to the impugned judgment as well as to the report of the valuers by the appellants is mainly on the following grounds: ( 1 )The valuers did not take into account the value of the goodwill and tenancy rights while assessing the value of the assets of the company; ( 2 )Value of Udyog Nagar Plot has been taken at a very low figure; ( 3 )As there was no transfer of properties by the company, the valuers could not have deducted the hypothetical capital gains allegedly payable to the Income-tax Department from the value of the assets of the company; ( 4 )Once the value of shares have been arrived at, the same could not have been reduced by 20 per cent on the ground that the company being a private company, its shares were not marketable; and ( 5 )As per clause 14 of the settlement, Narender Nath Nanda was to continue to occupy the Golf Links property and he could not be thrown out of the same. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact of the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition.' Applying the above principles, in our opinion, the valuation of goodwill in the above facts and circumstances would not arise." 13. In our view, sufficient reasons have been given by the valuer as to why the company did not have any goodwill and we do not see any reason to differ either with the opinion of the valuer or with the judgment of the learned Single Judge. In the present case, the main business of the company having been taken away by the appellants themselves, in our view, the company will not have any goodwill on account of its past performance. The company may have to start afresh to create a goodwill in respect of the business which it carries on after the agency was terminated by TSU. In our view, therefore, there was no value of the goodwill and no error has been committed by the valuer in not assessing the value thereof. 14. Insofar as the value of the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket value of a particular property. It is for the parties to place sufficient material on record to enable the Court to come to a finding as to what would have been the value of a property. In the absence of any such material before us, we are unable to say as to what would be the market value of the property and in our opinion there was nothing wrong in valuing the said property at the price shown in the books of account. We, therefore, do not see any reason to differ with the report of the valuer insofar as the same relate to the valuation of the Udyog Nagar property. 16. The objection of the appellants to the reduction of the value of the assets of the company by the capital gains allegedly payable to the Income- tax Department on the hypothetical transfer of the property at the time of its sale is that as the capital gains has not been paid nor is payable to the Income-tax Department, the valuer could not have deducted the same from the value of the assets of the company. 17. Under section 45 of the Income-tax Act any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54( b ) , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of section 48 and, consequently, the capital gains could not have been deducted from the market value of the property before arriving at the value of shares. In support of his contention he has referred to the judgments in CIT v. MohanbhaiPamabhai [1973] 91 ITR 393 (Guj.) and Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 1400 (SC). 20. In CIT v. Mohanbhai Pamabhai's case ( supra ) , a division Bench of the Gujarat High Court was considering the question as to whether the receipt of an amount in respect of a share in the partnership by an assessee on retirement is assessable to capital gains tax under section 45 of the Income-tax Act and it was held by the Court that there is no transfer of interest in the partnership assets involved when a partner retires from a partnership and consequently he is not liable to be assessed to the capital gains tax under the Act. It was held by the Court as under: "The charging provision in section 45 is not confined to those cases where the capital asset has cost something to the assessee in terms of money in acquiring it. There is nothing in any of the sections relating to capital gains which indicates tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he retiring partner to the continuing partners. The transfer of a capital asset in order to attract capital gains tax must be one as a result of which consideration is received by the assessee or accrues to the assessee. When a partner retires from a partnership what he receives is his share in the partnership which is worked out and realised and does not represent consideration received by him as a result of the extinguishment of his interest in the partnership assets Hence, when an assessee retires from a firm and receives an amount in respect of his share in the partnership there is no transfer of interest of the assessee in the goodwill of the firm and no part of the amount received by him would be assessable to capital gains tax under section 45." (p. 393) 21. The Commissioner not being satisfied with the judgment of the Gujarat High Court filed an appeal in the Supreme Court of India However, the Supreme Court by judgment in Addl CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 dismissed the appeal and confirmed the judgment of the Gujarat High Court. 22. In Sunil Siddharthbhai's case ( supra ) , the Supreme Court held that where a partner of a firm transfers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital cannot fall within the terms of section 48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether." 23. It is, therefore, the contention of Mr. Dholakia that payment of the value of the shares to the appellants in specie, viz ., in the shape of the property, was neither sale nor transfer of immovable property from the company to the appellant and as such the capital gains tax could not have been deducted from the value of the shares. 24. In our view, reliance by Mr. Dholakia upon the judgments referred to above is of no assistance to him. The judgments referred to by Mr. Dholakia relate to the transfer of assets by the partnership firm and not by a company. It has been held by the Supreme Court that the interest of a partner in a partnership is not interest in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. We, in the present case, are concerned only with the first step as there is no dispute about the liabilities and as there are only one type of equity shares, therefore, third step is not necessary. While dealing with valuation of assets it says that two problems which present themselves in valuing the assets of the company are: whether they should be taken from the book value or realisable value. In these times of changing price levels, it is unrealistic to take book values of different assets of a company - particularly fixed assets, if the values have changed materially since the date of their acquisition. In such cases, therefore, realisable value of the assets should be ascertained, if necessary with the help of expert valuers. Normally such value of assets would be taken after taking into account the cost of realisation, as well as the capital gains and other taxes which the company may have to pay on such realisation. An important departure from this principle is found in the Wealth-tax Rules, 1957 for valuation of unquoted equity shares, which specifically require the assets to be taken at their book value. Generally, the value of the assets will have to be taken on a goi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir right to deduct the capital gains from the value of the assets of the company but every deduction made by the valuers like the cost of realisation, etc., has also been rightly deducted and we find nothing wrong in the same. We, therefore, see no reason to differ with the judgment of the learned Single Judge on this aspect of the matter. 30. Assailing the report, it has lastly been argued by Mr. Dholakia that the valuers ought not to have reduced the value of the share by 20 per cent on the ground that the shares belong to a private limited company which were not easily marketable and the shares were subject to restrictions on their transfer in accordance with the memorandum and articles of association of the company. 31. The company is admittedly a private limited company and as per its articles of association, there is a restriction on the transfer of its shares and its shares are not sold in the open market nor are they quoted in the stock exchange. 32. The usual rule in valuation of shares is that the market value of shares as on the date of transfer is taken as the value. There may not be any difficulty in arriving at market value of shares which are quoted in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... others of Mr. Narender Nath Nanda. Sub-division of the property on the basis of its occupation was not legally possible. The Golf Links property being the leasehold property, sub-division of the property was not permitted. The property, therefore, could not be divided between different co-owners. Moreover, there was so much acrimony between the parties that it was practically impossible for them to live in the same house. There had been various instances of violence and the matter, we have been informed, had even been reported to the police. In our view, therefore, to give effect to the settlement, it was not possible to allow both the parties to live in the same house. Under the settlement, the payment of the equity shares held by the appellants was to be paid to Mr. Narender Nath Nanda or his nominee in specie by the company by transferring to him 30.14 per cent of the assets of the company. Marginal amount not exceeding Rs. 5 lakhs could have been paid by the company in cash if the same was found necessary. Similarly, Mr. Narender Nath Nanda could make similar compensatory acqualisation payment to the company. In case, the entire Golf Link property was to be transferred to Mr. N ..... X X X X Extracts X X X X X X X X Extracts X X X X
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