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TMI Blog1991 (7) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... tioner family filed its return declaring a net wealth of the Rs. 7,86,700. The petitioner valued the unquoted shares on the basis of the yield method. In the course of the assessment proceedings for the said assessment year, the petitioner-family made statements in regard to the valuation and audited accounts of the companies in which the petitioner held unquoted shares. The contention of the petitioner before the Assessing Officer was that the market value of the said unquoted shares should be determined on the basis of the yield method as accepted by the Central Board of Direct Taxes in its Circular dated March 31, 1982, and the principles laid down by the Supreme Court in the case of CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 and another decision of the Supreme Court in the case of CWT v. Mahadeojalan[1972] 86 ITR 621. The petitioner-family filed a revised valuation on the basis of the yield method before the Assessing Officer. By an order of assessment dated February 21, 1985, made under section 16(3) of the said Act, the Wealth-tax Officer computed the value of the unquoted shares on the basis of the break-up method under rule ID of the Rules. The Wealth-tax Officer w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment company, such rule has to be applied by the Wealth-tax Officer. In assailing the provisions of rule ID as ultra vires, learned counsel for the assessee has first emphasised the fact that the competence of Parliament to levy wealth-tax emanates from entry 86 of List I of the Seventh Schedule to the Constitution of India. The entry empowers the levy of " taxes on the capital value of the assets, exclusive of agricultural land of individuals and companies, tax on the capital of companies. " On the basis of numerous decisions cited before us, he has argued that this point is beyond dispute. His next argument is that the expression " capital value of assets in entry 86 inherently refers to the market value of an asset and the definition of net wealth in section 2(m) which is the subject-matter of charge under section 3 of the Wealth-tax Act, 1957, is defined as the aggregate value computed in accordance with the provisions of this Act of all the assets. This provision, according to him, brings in section 7 of the said Act which says that the value of any asset, other than cash, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant only where the company is ripe for winding up. In support of his contention, he relied on three decisions of the Supreme Court, namely, CWT v. Mahadeo Jalan [1972] 86 ITR 621 ; CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 and CGT v. Executors and Trustees of the Estate of Late Sh. Ambalal Sarabhai [1988] 170 ITR 144. In all these three decisions, the Supreme Court has held that the yield method is the proper method for estimating the market value of an unquoted equity share since the maintainable profit of the company is the factor that enters into the consideration of a willing purchaser. The same view has been reiterated in the later two decisions. In all these decisions, the break-up value has been treated as relevant only for company in liquidation or ripe for liquidation. Therefore, according to him, rule ID, by adopting the break-up value method as the only method for valuing unquoted equity shares of all companies irrespective of the facts and circumstances of individual companies, is not in harmony with the basic theme of sub-section (1) of section 7 and thus suffers from the vice of transgressing the said provision and, consequently, the totality of the sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wealth-tax. The argument advanced on behalf of the Revenue that the issue raised in the writ petition impugning the vires of rule ID should be considered as concluded against the petitioner because of the decision of this court holding rule ID as mandatory, is not tenable. The decision on the matter in the said reference was absolutely guided by the inherent presumption of validity of the rule because the question of vires is not justiciable in a reference proceeding. Therefore, this part of the argument on behalf of the Revenue does not hold good. The crucial question arising from the writ petition is whether the break-up value method adopted by rule ID as an invariable method for valuing unquoted equity shares of all companies is contrary to the legislative intent underlying the provisions of sub-section (1) of section 7. If the method of valuation prescribed by rule ID does not harmonise with such legislative intent, rule ID has to be declared as ultra vires. That is the moot question in the writ petition falling for determination before us. The sheet-anchor of the arguments of learned counsel of the petitioner in our view is the decision of the Supreme Court in CWT v. Mahad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the said decision (at page 633): " Where the shares are of a public limited company which are not quoted on a stock exchange or of a private limited company the value is determined by reference to the dividends, if any, reflecting the profit earning capacity on a reasonable commercial basis. But, where they do not, then the amount of yield on that basis will determine the value of the shares. In other words, the profits which the company has been making and should be making will ordinarily determine the value. The dividend and earning method or yield method are not mutually exclusive ; both should help in ascertaining the profit earning capacity as indicated above. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of profits. 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 valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 621 has laid down a hard and fast rule that the break-up method cannot be adopted as the manner of valuing unquoted shares where the company is a going one. What the Supreme Court decided was only a broad guideline. However, the fact remains that the Supreme Court has approved profit-backing method for valuing the unquoted shares of a going company. The other two decisions of the Supreme Court, namely, Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 and Executors and Trustees of the Estate of Late Sh. Ambalal Sarabhai [1988] 170 ITR 144 under the Gift-tax Act are not of much assistance to us because sub-rule (2) of rule 10 of the Gift-tax Rules provides for alternative methods of valuing such shares. The Gift-tax Rules give primacy to the break-up value method. But it was not decided by the Supreme Court as to whether such primacy in the rule framed under the Gift-tax Act should prevail or not because that question did not arise from the order of the Tribunal, the same not being at all canvassed before it. However, in CGT v. Executors and Trustees of the Estate of Late Sh. Ambalal Sarabhai [1988] 170 ITR 144, the Supreme Court has clearly indicated its preference for the profit-ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. Thus, the market value which, according to learned counsel for the petitioner, is the central theme of sub-section (1) of section 7, has been tempered by the requirement of the taxing officer to follow the rules framed to implement the provision. In this connection, we have once again to refer to the decision in CWT v. Mahadeo Jalan [1972] 86 ITR 621. There, the Supreme Court at pages 627 has observed : " It may also be noted that where under the articles of the company the right to transfer shares is restricted without being first offered to other members at a price which is either fixed in advance or in prescribed manner, or where the directors have a power to veto a transfer, the fixation of the value of the share will have to be determined without ignoring the restriction as to transfer because they are an inherent element in the property which has to be valued. This restriction may not necessarily be depreciatory, because the chance of acquiring the shares of other members in the company on advantageous terms is itself a benefit. In cases where shares have to be valued by reference to the assets of the company restrictions on alienation are irrelevant. From this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectly reflecting the intention of Parliament because the rule, after its framing, had been laid before both the Houses of Parliament for its approval. If Parliament had thought that the rules were not in conformity with its intention, it would not have refrained from expressing its disapproval. Therefore, the rules not having been disapproved or modified when laid before each House of Parliament soon after they were made as required by section 296 of the Income-tax Act, 1961, Parliament gave its approval to the rule knowing that the rule provided for a particular measure. The Supreme Court, in connection with that case, held that it should not, however, be understood that even if a rule purported to be made under a statute, it would still be valid and have the force of law if it is placed before each House of Parliament and has not been disapproved by either House. But it would definitely show the intention of the law-makers. The same is true of rule 1D. Rule ID, after having been framed in 1967, was placed before each House of Parliament in terms of section 46(4). Therefore, it cannot be said that the rule was contrary to the legislative intent specially in the context of the ame ..... X X X X Extracts X X X X X X X X Extracts X X X X
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