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TMI Blog1994 (7) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... flict with the substantive provisions of the Act including the charging section 3 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that tax deduction on enhanced compensation not provided for in the balance-sheet of the company should be allowed as a deduction on equitable basis for the purpose of determination of the value of the shares on the basis of break-up value ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that while determining the market value of unquoted shares of a company, no deduction can be allowed under rule 1D of the Wealth-tax Rules, 1957, in respect of liability for tax relating to an amount appearing as liability in the balance-sheet which is claimed to be exempt but is held liable to tax in the hands of the company ? Wealth-tax References Nos. 101 to 106 of 1982 : (Assessment years 1967-68 to 1969-70) : (i) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally justified in treating the enhanced compensation of ₹ 4,91,723 as part of the assets of the company in computing the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Nos. 142 to 147 of 1983) also held certain shares in Delhi Land and Finance P. Ltd. The shares of the said companies were not quoted at any of the stock exchanges in the country. The said companies were doing colonisation business on an extensive scale by purchasing land, developing it, parcelling it out into plots and selling them. Thus the companies were doing business in real estate and the lands held by them were part of their capital assets. Some of the lands held by the companies were acquired by the Government under the Land Acquisition Act, 1894. The companies deducted the cost of acquired land from the compensation granted by the Collector and the excess of compensation over the cost price was shown in the profit and loss account of the companies and income-tax was paid thereon. However, the companies did not accept the adequacy of the compensation awarded by the Collector and so they got references made to the District Judge under sections 18 and 23 of the Land Acquisition Act, claiming more compensation for the acquired land. The latter enhanced the compensation. The Government, however, did not accept the decision of the District Judge and filed appeals in the High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enhanced compensation was to be taxed only when the order of the High Court was received. In the alternative, it was contended by the assessees that the estimated tax liability on the enhanced compensation should in any case be deducted before including the amount of enhanced compensation in the net wealth of the company, while determining the break-up value of the equity shares. The Wealth-tax Officers concerned did not accept the contentions of the assessees. According to them as soon as the order was passed by the District Judge, awarding enhanced compensation, the companies became entitled to it. The Wealth-tax Officers, acting under rule 1D of the said Rules, for computing the value of the said shares, took into account the value of the enhanced compensation. In the cases of Mrs. Indra K. P. Singh and Mrs. Prem Shamsher Singh, on the alternative plea also, they took the view that only those liabilities would be taken into account which were shown in the balance-sheet and mentioned in Explanation II of the said rule. However, in the case of Raghvendra Singh, the Wealth-tax Officer did reduce the value of the enhanced compensation by the amount of income-tax payable thereon. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o any amount representing the asset. Applying these broad propositions on the facts of the instant cases, learned counsel for the assessees has strenuously urged that a person has no vested right in the enhanced compensation which he may claim in appeal or which he may be granted in appeal but challenged by the Government and it cannot belong to him till such time there is a final judicial determination of the issue. In the present cases, he submits, the enhanced compensation awarded by the District Judge to the companies being under challenge as on the relevant valuation dates, its value is not an asset belonging to the company and cannot, therefore, be included as such under rule 1D for valuing the unquoted equity shares. In support reliance is placed on CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524 (SC) ; Topandas Kundanmal v. CIT [1978] 114 ITR 237 (Guj) and CIT v. Jai Parkash Om Parkash Co. Ltd. [1961] 41 ITR 718 (Punj). In the alternative, it is urged that the tax payable by the companies on the enhanced compensation has to be allowed as a liability for working out the net asset value under rule 1D even though such a liability has not been provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... break-up value so determined : Provided that where, in respect of an equity share, no dividend has been paid by such company continuously for not less than three accounting years ending on the valuation date, or in a case where the accounting year of that company does not end on the valuation date, for not less than three continuous accounting years ending on a date immediately before the valuation date, the market value of such share shall be as indicated in the Table below : THE TABLE -------------------------------------------------------------------------------------------------------------------------------------------------- Number of accounting years ending on the valuation date or in a case where the accounting year does not end on the valuation date, the number of accounting Market value years ending on a date immediately preceding the valuation date, for which no dividend has been paid -------------------------------------------------------------------------------------------------------------------------------------------------- (1) (2) ------------------------------------------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the liabilities as shown in the balance-sheet of the company from the value of all its assets shown therein and the net amount so arrived at is to be divided by the total amount of its paid-up equity share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 85 per cent. of the break-up value so determined. Explanation II to the said rules which contain two clauses, however, provides that for the purpose of rule 1D, two types of assets shown in the balance-sheet shall not be treated as assets and similarly six types of liabilities shown as such in the balance-sheet shall not be treated as liabilities. As noted above, after the authoritative pronouncement of the Supreme Court in Bharat Hari Singhania's case [1994] 207 ITR 1, the controversy with regard to the question as to whether rule 1D is mandatory or not, which raged for quite some time on account of divergence of opinion between various High Courts on the issue, has been laid to rest and it has been held that the said rule is mandatory in character and an un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets. It is equally well to remember that rule 1D does not treat the break-up value as the market value. A deduction of 15 per cent. is made in the break-up value to arrive at the market value. It is equally relevant to notice that rule 1D uses the expression 'shall', which prima facie indicates its mandatory character. But the question which requires consideration in the first instance is whether at the time of working out the market value of an unquoted equity share in accordance with the formula devised in the said rule, any further adjustments or alterations or modifications in the relevant balance-sheet of the company other than those prescribed in Explanation II to the said rules could be made. In other words, are the amounts/figures reflected in the balance-sheet of the company sacrosanct in so far as the said rule is concerned. The objective of the valuation process, which by itself is a tough liability is to make a best reasonable judgment of the value of an asset--in the present case an unquoted equity share. There may be several methods of valuing an unquoted equity share. Each of the methods will have its own merits and demerits. It may be advanta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein, dealing with the principles laid down in its earlier decision in CWT v. Mahadeo Jalan [1972] 86 ITR 621, it observed that as compared to other methods, viz., dividend yield method, earning method or the combination of the two, the break-up method incorporated in rule 1D is far simpler and less time-consuming. The court observed that the said rule prescribes a simple uniform method to be followed in a case. What the Wealth-tax Officer has to do is to take the balance-sheet delete some items front the columns relating to assets and liabilities as directed by Explanation II and then apply the formula contained in the rule (emphasis supplied by us). He need not look into the profitability, the earning capacity and the various other factors mentioned in propositions (2), (3) and (4) of the decision in Mahadeo Jalan's case [1972] 86 ITR 621 (SC). In the said judgment, the court again held that no other amounts like provision for taxation, provident fund and gratuity, etc. can be deducted while applying rule 1D. The rule has to be construed according to its plain language and neither should anything be added thereto nor subtracted therefrom. The meaning and the extent to whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the balance-sheet. Having held that the said rule as a whole is comprehensive and any adjustments/modifications, if called for, have to be within the ambit of Explanation II. We are afraid, we cannot accept the alternative contention of the assessees that the value of the additional compensation taken as an asset may at least be reduced by the company's liability towards the payment of income-tax on this compensation. The liability has neither been provided for in the relevant balance-sheet nor is there any provision in Explanation II for such an adjustment. We are, therefore, unable to agree with the Tribunal that the tax liability in respect of the enhanced compensation, though not shown in the balance-sheet of the company should be allowed as deduction while computing the value of an unquoted share of the company in accordance with rule 1D. In view of the foregoing discussion, our answers to the questions referred in each of the references are as under : Wealth-tax References Nos. 87 to 96 of 1978 : Questions Nos. 1 and 2 are answered in the negative, that is, in favour of the Revenue and against the assessee and question No. 3 is answered in the affirmative, in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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