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TMI Blog2006 (1) TMI 466X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. On the facts and circumstances of the case and in law, the CIT(A) erred in deleting the short-term capital gain in the assessment year 1996-97 with a direction to tax the same in the assessment year 1997-98. 4. On the facts and circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer, that if any higher authority decides that short-term capital gain should be assessed in assessment year 1996-97, then the same should be computed by adopting the sale consideration at Rs. 175 per share and the cost of each share at Rs. 165." 3. The first issue is regarding methodology employed for determining the market value of unquoted shares. The facts of the case are that the assessee is a Private Trust. It was holding shares of Harsh Archana Trading and Investments Ltd. (in short Harsh Archana ). These shares had been subscribed to by the assessee in the previous year relevant to the assessment year 1993-94. Harsh Archana went into a voluntary liquidation pursuant to a settlement arbitrated amongst the members of the Mariwala family by the Ex-CJI of India, Justice V.D. Tulzapurkar. Harsh Archana was holding certain shares of Marico Industries Ltd. (in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filing a revised return under section 139(5). To regularize the return filed on 31-12-1996, the Assessing Officer completed the (original) assessment under section 143(3) of the Income-tax Act, 1961, accepting the returned income of Rs. 7,42,57,800. As regards the market value of shares of Marico on the date of distribution of assets of Harsh Archana, i.e., 28-12-1995, wherein the Assessing Officer held as "The liquidators distributed the above shares of Marico Industries Ltd. to the company on 28-12-1995. On this date Marico Industries Ltd. was not a listed company. The book value of Marico shares as on 30-9-1995 as per the prospectus was Rs. 30.94 per share. The market value of Rs. 165 per share for 4,32,000 shares of Marico Industries Ltd. has been arrived at on the basis of subsequent price of Rs. 175 per share at which the shares were offered to the public on 21-3-1996 and allotted on 17-4-1996. The share price of Rs. 165 has been determined as under : Price at which the shares are allotted to theRs. 175.00 Public Less : (1) Estimated expenditure in connection with Public (actual exp. Per share comes to Rs. 5.42) Rs. 5.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled return of income (without prejudice) in compliance with the above notice declaring a total income of Rs. 7,42,57,795, which included the long-term capital gains of Rs. 7,10,99,252. The reassessment, which is the subject-matter of this appeal, was completed on 20-3-2002 determining the total income of Rs. 7,84,77,084. While in the original assessment, the long-term capital gains had been assessed at Rs. 7,10,99,252, in the reassessment it was assessed at Rs. 3,97,73,581. The Assessing Officer further held that since the public issue of Marico closed on 26-3-1996 and the money was received in March, 1996, the short-term capital gains on sale of the said block of 4,32,000 Marico shares by the assessee to the public also arose during the previous year to the assessment year 1996-97. The capital gains long-term and short-term had been computed in the assessment order as under : Rs. Being not listed Co. book value Rs. 92.77 per share (value of 4,32,000 shares of Marico Industries Ltd.) Being break-up value 4,00,55,040 ( i )Deemed value as per adoption 1,80,711 ( ii )Indexed cost of 1,000 shares of Rs. 100 1,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of market value of the shares. Likewise, no reasons have been given by the Assessing Officer for adopting the break-up value method for computing the market value of the shares. Even the computation of the value adopted had not been given. The Assessing Officer did not even refer to the decisions cited by the assessee, which decisions are directly on the point. No reasons were given as to why these decisions were not applicable. 4.3 Though it remains unstated in the assessment order, the record suggests that in valuing the shares of Marico by the break-up method, the Assessing Officer could have been guided by Rule 11 of Schedule III of the Wealth-tax Act. The question is whether this action of the Assessing Officer was sustainable. Under the provisions of section 46(2), the market value of the assets received on liquidation of a company had to be taken for computing capital gains. The term market value has not been defined in the Income-tax Act. However, the term fair market value has been defined in section 2(22B) of the Income-tax Act as the price which the capital asset would ordinarily fetch in the open market on the relevant date. The terms market value and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered by the Hon ble Calcutta High Court in the case of CIT v. General Assurance Society Ltd. [1980] 121 ITR 727 , wherein it was that for the purposes of section 12B of the Income-tax Act, 1922, the FMV of the suit properties as on 1-1-1954 may not be determined on the same basis or formula as adopted for computing the compensation in accordance with the First Schedule to the LIC Act, 1956. Also the decisions rendered by the Hon ble Bombay High Court in the case of CIT v. New India Assurance Co. Ltd. [1980] 122 ITR 633 and CIT v. Oriental Govern- ment Security Life Assurance Co. Ltd. [1983] 141 ITR 215 , wherein it was held that in determining the market value of the assets as on 1-1-1954, for the purpose of computing capital gains of an insurance company from the compensation received on the acquisition of its life insurance business under the Life Insurance Act, 1956, the Tribunal is not bound by the formula adopted in that Act for determining compensation. 4.5 Thus, there is no authority for importing the valuation under the Wealth-tax Act for the purpose of the Income-tax Act, particularly when the context does not so warrant. The Income-tax Act is replete wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able expenses and adopting a reasonable proportion of profits. (3) In the case of a private limited company also where the expenses are incurred out of all proportion to the commercial venture, they will be added back to the profits of the company in computing the yield. In such companies the restriction on share transfers will also be taken into consideration as earlier indicated in arriving at a valuation. (4) Where the dividend yield and earning method break down by reason of the company s inability to earn profits and declare dividends, if the set-back is temporary then it is perhaps possible to take the estimate of the value of the shares before set-back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses. (5) Where the company is ripe for winding-up the break-up value method determines what would be realized by that process. (6) As in Attorney-General of Ceylon v. Mackie a valuation by reference to the assets would be justified where as in that case the fluctuations of profits and uncertainty of the conditions at the date of the valuation prevented any reasonable es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the seller where the one desires to purchase and the other wishes to sell, the factor or break-up value of a share as on liquidation hardly enters into consideration where the shares are of a going-concern . It is only where a company is ripe for winding-up or the situation is such that the fluctuations of profits and uncertainty of conditions at the date of valuation prevent any reasonable estimation of the profit-earning capacity of the company, that the valuation by the break-up method would be justified. The revenue leaned heavily on the observation in Mahadeo Jalan s case that the factors likely to determine the valuation of a share include, in special cases such as investment companies, the asset-backing and urged on the strength of this observation that in the case of an investment company, the asset-backing was a relevant consideration and the break-up method could not, therefore, be considered as totally irrelevant. This contention, we are afraid, is based on a wrong reading of the observation of the court. When the court said that in the case of an investment company, the asset-backing is a relevant factor in the determination of the value of the shares, what the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, during the course of appellate proceedings the assessee was required to furnish valuation on this basis. The assessee had furnished the report of N.A. Shah Associates, Chartered Accountants, according to which on applicable of the yield or price earning method, the market value of Marico shares as on 28-12-1995 had been worked out at Rs. 187 per share. It was submitted by the assessee that this value more or less corresponds to that indicated in the prospectus of Marico or, for that matter, even to the issue price of Marico shares to the public. It is also noteworthy that Marico shares when listed on the stock exchange opened with a quotation of Rs. 260.50 on 2nd March, 1996 on the Bombay Stock Exchange and maintained an average price of more than Rs. 275 in the first three months. Thus, whether computed as per the profit-earning method or estimated with reference to the price quoted on the stock exchange, the market value of Marico shares as on 28-12-1995 works out to be more than Rs. 165 adopted by the assessee for computing long-term capital gains under section 46(2) of the Income-tax Act, 1961. If this higher value is adopted, the result will be that the returned long ..... X X X X Extracts X X X X X X X X Extracts X X X X
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