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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 ..... s. 165 per share. 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 Industr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from 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 (2) Towards interest cost of 23 mont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 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 1,00,711 each 1000 × 283 281 Long-Term Capital Gains 3,97,73,581 Sale of value of 4,32,000 shares @ Rs. 175 7,56,00,000 Less: Book value as on 28-12-1995 4,00,55,040 Short-Term Capital Gains 3,55,44,960 The total capital gains thus adds up to Rs. 7,53,18,541, as against Rs. 7,10,99,252 earlier assessed. The difference of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 'fair market value' are cognate expressions. The definition of FMV in the Income-tax Act is in pari materia with the general definition of 'value of assets', which existed in section 7 of the Wealth-tax Act until 31-3-1989. Both have their basis as the concept of 'hypothetical sale' in the open market between a hypothetical seller and buyer. But the general definition under the Wealth-tax Act was subject to Rule for valuation of assets. Once any Wealth-tax Rule prescribes fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssurance 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 with the provisions which draw upon other enactments not only for definition of terms used in the Income-tax Act but even for computation of income. Thus, in section 2(29) the term 'legal representative' has the meaning assigned to it in the CPC, 1908. Similarly, the term 'public servant' has the same meaning as in section 21 of IPC. Section 115JA(2) prescribed preparation of profit and loss account in accordance with the Companies Act. Section 55A, on reference to Valuation Officer, draws upon the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn 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 estimation of prospective profits and dividends.' In setting out the above principles, the assessee did not try to lay down any hard and fast rule because, ultimately, the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case. But, one thing is clear, the market value, unless in exceptional circumstances to which cannot be determined on the hypothesis that because i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily 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 court meant was that in order to determine the capacity of the company to maintain its profits the asset-backing would be a relevant consideration. The profit-earning capacity of the company would determine the valuation of the shares would naturally have to take into account not only the profits which the company is actually making, but also the profits which the company should be capable of making and in order to arrive at a proper estimation of the latter, the asset-backing would be, a relevant factor in the case of an investment comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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-term capital gains will increase and the short-term capital gains on actual sale of shares to the public for Rs. 175 will be converted into loss. The direct effect would be to reduce the overall tax liability of the assessee. Thus, adoption of the higher value of Rs. 187 per share will result in an unintended advantage for the assessee at the cost of the Revenue. Such advantage, though otherwise allowable, if claimed, cannot be granted in the instant case as no such claim had been made by the assessee at any stage. Not even at the appellate sta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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