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TMI Blog1973 (5) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... es in Best Co. (Private) Ltd., Madras, of the face value of Rs. 100 each. In his wealth-tax return for the assessment year 1961-62, he valued these shares at Rs.77,700, as per their face value. The Wealth-tax Officer did not accept the said valuation of the shares, but computed the market value of those shares on the basis of the balance-sheet of Messrs. Best and Co. for that year and determined the value at Rs.1,66,278. For the assessment year 1962-63, the assessee again valued these shares at Rs.77,700 on the basis of their face value. The Wealth-tax Officer again did not accept this valuation but computed the market value of the shares on the basis of the balance-sheet of Messrs. Best and Company for that year and determined their value at Rs. 1,99,200. The assessee preferred appeals to the Appellate Assistant Commissioner against the orders of the Wealth-tax Officer computing the value of the shares on the basis of the balance-sheets of the company. He contended that, under the articles of association of Messrs. Best and Co., there was restriction on transfer of shares, that the shares could, if at all, be transferred only at their face value and that, therefore, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., Madras, held by the assessee at Rs. 1,99,200, was proper ? " As already stated, the Tribunal has found that there are restrictions on the transfer of shares and that the price for which they could be transferred has also been pegged down to its face value in the articles of association of Messrs. Best and Company. Articles 30, 31, 32, 33 and 34 of the articles of association of Best and Company are as follows : Article 30 : No ordinary shares shall be transferred to any person not being a director, manager or assistant in the company's service so long as any director, manager or assistant approved by the directors shall be willing to purchase the same. Article 31 : In order to ascertain whether any director, manager or assistant is willing to purchase any ordinary shares the proposing transferor shall give notice in writing (hereinafter called the " transfer notice ") to the company that he desires to transfer the same. Such transfer notice shall specify the purchase price as hereinafter provided for and shall constitute the company his agent for the sale of the shares. The transfer notice shall not be revocable except with the sanction of the directors. Article 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociation of the company on the transfer as well as on the price for which they could be sold, the shares could be valued only at their face value and that the shares are not at all saleable in the market. But, according to the revenue, the restrictions on the transfer of shares and on the price for which they could be sold are all to be ignored and that it should be assumed that the shares are freely available for sale in the open market without any such restrictions in view of the wording of section 7(1) of the Wealth-tax Act. Section 7(1) of the Wealth-tax Act is as follows : " 7. Value of assets how to be determined.-(1) Subject to any rules made in this behalf, 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." While construing section 7(1) of the Wealth-tax Act, 1957, the Supreme Court in Ahmed G. H. Ariff v. Commissioner of Wealth-tax said that when the statute uses the words " if sold in the open market ", it does not contemplate actual sale or the actual state of the market, but only enjoins that it sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, held that the principal value should be estimated at the price which would be fetched if sold in the open market on the terms that the purchaser should take and hold the same subject to the articles of association. In Trustees of John Thomas Salvesen v. Commissioners of Inland Revenue practically the same restrictions were contained in the relevant articles of association of the company. Dealing with the method of valuation of the shares for the purpose of estate duty the court expressed that the estimation of the value of shares in a company, whose shares cannot be bought and sold in the open market and in regard to which there have not been any sales on ordinary terms, is obviously one of difficulty, that the problem could only be dealt with by considering all the relevant facts, so far as known at the date of the testator's death and by determining what a prudent investor, who knew these facts, might be expected to be willing to pay for the shares, and that one of the modes of valuing such shares is on a break-up basis on the figures contained in the last balance-sheet issued by the company prior to the testator's death. In Commissioners of Inland Revenue v. Crossman the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e effect of the restrictions on transfer of shares and the right of pre-emption given to the governing directors to purchase the shares must all be taken note of and depreciation on that account had to be allowed for in the primary valuation. The above case laid down the principle that the restrictions contained in the articles of association on the transfer and also on the price for which the shares could be transferred has to be ignored and the transferability in the open market must be assumed, for the purpose of valuation, but that the market value of the shares has to be depreciated to a certain extent having regard to the said restrictions contained in the articles of association, and that if the market value of such shares could not be ascertained otherwise, it is possible to value the shares on a break-up basis with reference to the balance-sheet of the company for the relevant year. The learned counsel for the assessee would, however, contend that the break-up method based on the balance-sheet can be adopted only in the case of a company which is ripe for liquidation and that such a method cannot be adopted for valuation of shares in a company which is a going concern. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we see no objection to the adoption of the break-up value method. Even before us, the assessee is not able to say that there is any other suitable method available for ascertaining the value of the shares. The learned counsel for the assessee would then contend that even accepting the break-up method of valuation as the proper one, the Wealth-tax Officer has to find out the depreciated value of the shares in view of the various restrictions contained in the articles of association which the buyer should be taken to be aware of. We are of the view that this contention is correct. The break-up method of valuation is adopted to find out the real worth of the shares. But section 7(1) of the Act enjoins the Wealth-tax Officer to find out the price the shares would fetch if sold in the open market on the valuation date. If the shares are sold in open market, the purchaser will certainly take note of the various restrictions contained in the articles of association of the company and offer only a lesser price. It is for this reason Abraham v. Federal Commissioner of Taxation suggested the adoption of depreciated value wherever there are restrictions on the transfer of shares as also on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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