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TMI Blog1991 (7) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares at Rs. 445 each. He determined the value of the shares in accordance with the Central Board of Direct Taxes Circular No. 332A, dated March 31, 1982. The assessee preferred an appeal before the Commissioner of Incometax (Appeals ) and contended, inter alia, that the, liability towards the gratuity and pension fund shown in the balance-sheet and taken into account by the registered valuer while arriving at the maintainable profit should also have been considered by the Wealth-tax Officer. The Commissioner of Income-tax (Appeals) accepted the contention of the assessee and directed the Wealth-tax Officer to see whether the gratuity and pensionary liabilities were in the nature of ascertained liabilities evaluated to be taken into account for determination of the maintainable profit. If the Wealth-tax Officer finds the said liabilities to be in the nature of current provision, they have to be naturally adjusted in the determination of the maintainable profit. Against the said order of the Commissioner of Income-tax (Appeals), the Department went up in appeal. The Tribunal, relying upon the decision of the Madras High Court in the case of CWT v. S. Ram [1984] 147 ITR 278, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company for the five years immediately preceding the valuation date will be ascertained, and adjustments will be made to the book profit for each of the said five years for all non-recurring and extraordinary items of income and expenditure and losses. It has also been submitted that the liability for gratuity ascertained on an actuarial basis is a liability in praesenti and is a provision which is usually shown in the balance-sheet by way of deduction from the assets in respect of which they are made. We have considered the submissions made on behalf of the parties and also the decisions cited at the Bar. As per the Board's instructions contained in its Circular No. 332A, dated March 31, 1982, in the case of an investment company which is a going concern and whose shares are not quoted on the stock exchange, the profits which the company has been making and should be capable of making or in other words the profit-earning capacity of the company would, ordinarily, determine the value of its shares. Instructions to this effect are contained in paragraph 3(ii) of the aforesaid circular. Under paragraph 4, certain adjustments are to be made for working out the maintainable p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as a reserve under clause 7(2) of Part III to the Sixth Schedule. Since there was not sufficient material on record regarding whether the appropriation made by the company (Vazir Sultan Tobacco Co.) towards gratuity reserve was based on any actuarial valuation or whether it was an appropriation of an ad hoc amount, the Supreme Court remanded the matter to the taxing authority to decide the issue in the light of the principles stated by the court. In the case of CWT v. Mahadeo Jalan [1972] 86 ITR 621, it has been held by the Supreme Court, inter alia, that, where for the purpose of wealth-tax, the shares held by an assessed in a company are to be valued under section 7 of the Wealth-tax Act, 1957, though ultimately the facts and circumstances of the case, the nature of the business of the company, the prospects of profitability and such other considerations will be taken into account, the following principles are normally applicable (1) Where the shares are of a public company and are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares. (2) Where the shares are of a public company which are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or where the company is ripe for liquidation ; but none the less it is one of the methods. The factors which are likely to determine the value of a share on any particular day or at any particular time are : (i) the profit-earning capacity of the company on a reasonable commercial basis; (ii) its capacity to maintain these profits or a reasonable return for the capital invested; and in special cases such as investment companies, the asset backing ; (iii) the prospects of capitalisation of its earning in the shape of declaration of bonus shares or where the company is financially and commercially sound, the prospects of issue of further capital where the existing shareholders have a right to apply for and obtain them at a certain price which is generally less than the market value, offering an increased yield on their investment, on the assumption that the company will be able to maintain the same rate or at least increase the aggregate payment of dividends on the increased capital. Where under the articles of the company the right to transfer shares is restricted, the value of the shares should be determined without ignoring the restrictions as to transfer because they are an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his method may be applied by taking the dividends as reflecting the profit earning capacity of the company on reasonable commercial basis, but, if it is found that the dividends do not correctly reflect the profit-earning capacity because only a small proportion of the profits is distributed by way of dividends and a large amount of profits is systematically accumulated in the form of reserves, the dividend method of valuation may be rejected and the valuation may be made by reference to the profits., The profit-earning method takes into account the profits which the company has been making and should be capable of making and the valuation, according to this method, is based on the average maintainable profits. Of course, for the purpose of such valuation, the taxing authority is not bound by the figure of profits shown in the profit and loss account because it is possible that the amount of profits may have suffered diminution on account of unreasonable expenditure or the directors having chosen to take away a part of the profits in the form of remuneration rather than as dividends. The figure of profits in such a case would have to be adjusted in order to arrive at the real profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding companies.; (ii) of investment companies which are substantially holding companies ; and (2) Board's Circular No. 118 dated September 15, 1973 , (in partial modification of Circular dated October 31, 1967) for valuation of unquoted equity shares of investment companies which have wholly owned subsidiaries. 2. The question of valuation of unquoted equity shares of investment companies has been re-examined in the light of the Supreme Court's decision in the case of CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38. The Board's Circulars dated October 31, 1967, and September 15, 1973 , therefore, stand modified as set out in the succeeding paragraphs. 3. In the light of the above-quoted Supreme Court's decision as also its earlier decision in Mahadeo Jalan's case [1972] 86 ITR 621, the following guidelines are issued for the valuation of unquoted equity shares of investment companies referred to in paragraph 1 above : (i) The principle of combination of the two methods, i.e., the average of- (a) the break-up value of shares based on the book value of the assets and liabilities disclosed in the balance-sheet ; and (b) the capitalised value arrived at by applyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k profits so determined will be deducted. (vi) The profits required for paying dividends on shares with prior rights, i.e., preference shares, shall be excluded. (vii) The average of the company's book profits, as adjusted above, will be determined. The rate of capitalisation may be taken at ten per cent. of the maintainable profits of the company in the case of investment companies other than those which derive the major part of their income from house property and 8.5 per cent. in the case of investment companies which derive the major part of their income from house property. 5. In the case of unquoted equity shares of investment companies which are substantially but not wholly holding companies, the fair market value of the shares will be determined by adding a premium of ten per cent. to the value of shares arrived at on the basis as set out in the preceding paragraph. 6. The valuation of unquoted equity shares of an investment company which has a wholly-owned subsidiary should be worked out on the basis that the parent investment company and wholly owned subsidiary or subsidiaries were, in fact, one single company, on the same lines as laid down in Circular dated Se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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