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TMI Blog1991 (3) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares made by the Wealth-tax Officer ?" In view of the sharp conflict of judicial opinion that prevailed on the sole question arising for consideration as to whether rule 1D of the Wealth-tax Rules ("the Rules") was mandatory or directory, the matter was referred for decision by a Full Bench of this court. The cases have, accordingly, come up before us for consideration. We shall briefly refer to the facts of the case before going into the controversy. The assessee, the respondent is a non-resident to whom 1,962 shares of the face value of Rs. 100 each had been allotted in a private limited company, M/s. Company De Mendes (P.) Ltd. This allotment was irregular as prior approval of the Reserve Bank of India had not been obtained for the allotment to the non-resident. The Reserve Bank of India, therefore, objected to the allotment, as early as in 1965, and refused to give ex post facto approval for the registration of the shares in the name of the assessee. The company was directed to "arrange to have the defect rectified" under advice to the bank. Since the defect notified was not rectified, the bank reminded the company in March 1966, stating that if no reply was receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal to the Appellate Tribunal, who by the order annexure C dated June 6, 1981, allowed the appeals. The Revenue contended that, for unquoted shares like these, the break up method was the only method of valuation prescribed under the Rules. The Tribunal disagreed with this contention and followed the decision of the High Court of Bombay in Kusumben D. Mahadevia v. N. C. Upadhya, ITO [1980] 124 ITR 799 to hold that it was not mandatory to follow rule 1D and that, in appropriate cases, deviation from the method envisaged in that rule was permissible. The Tribunal then went on to consider the matter on merits and came to the conclusion that it took about nine years from 1965 to 1974 for the assessee to find a willing purchaser, and that, for the reasons stated, the face value adopted by the assessee for the shares in question reflected their real market value. The appeals were thus allowed. It is on these facts that the question of law was referred and the question was reframed by this court as stated in paragraph 1 hereinabove. In drawing up the statement of the case, the Tribunal took note of the fact that this court had, in CWT v. Mamman Varghese [1983] 139 ITR 351, held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... categorise those assets which are exempted or excluded in the computation of the net wealth. Section 7 lays down the mode of determination of the value of assets. We shall quote sub-section (1) which is relevant : "7(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." Section 46 contains the rule-making power. It authorises the Central Board of Direct Taxes to make rules for carrying out the purposes of the Act. The relevant parts of the section, namely, sub-section (1) and clauses (a) and (f) of sub-section (2) are extracted below : "46(1) The Board may, by notification in the Official Gazette, make rules for carrying out the purposes of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, rules made under this section may provide for (a) the manner in which the market value of any asset may be determined... (f) any other matter which has to be, or may be, prescribed for the purposes of this Act." No rules as envisaged by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------ Three years 82 1/2 per cent of the break up value of such share. Four years 80 do. Five years 77 1/2 do Six years and above 75 do " ------------------------------------------------------------------------------------------------- The mode of valuation prescribed is that known as the break-up method of valuation. The Wealth-tax Officer has adopted this method in valuing the 1962 shares of the assessee. The contention of the Revenue is that it is obligatory for the, officer to follow this method, because of rule 1 D, and that it is not open to him to fix the value of the shares in any other manner. Therefore, the question for consideration is whether rule 1 D is mandatory or directory. It is now well established that the question whether a provision is mandatory or directory depends upon the intent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 139 ITR 357, a copy of which had been annexed as annexure D to the statement of the case. In the light of the decisions of the Allahabad High Court, the Bench did not also find its way to accepting the opinion expressed in Volume I of the Fifth Edition of Sampath Iyengar's Treatise on the Three New Taxes that rule 1D should be understood as being directory and not mandatory. The decision of this court had been rendered on November 14, 1979, though it was reported only much later, in 1983 in the Income Tax Reports. This decision was applied by another Bench of this court, without any discussion, in the case, Grace Collis v. CWT [1988] 172 ITR 597. This court did not, at the time it rendered the decision in Mamman Varghese [1983] 139 ITR 351 (Ker), have the advantage of seeing the decision of the High Court of Bombay in Kusumben D. Mahadevia v. N. C. Upadhya, ITO [1980] 124 ITR 799 which, though rendered on February 21, 1979, was reported only in the year 1980. In that case, the High Court of Bombay had taken the view that rule 1D was not mandatory, but only directory. The same view had been taken by the High Court of Madras in K. M. Mamman v. WTO [1983] 139 ITR 357 to which ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e function of fixing the open market price to the decision of the executive rule-making authority to be done in the manner chosen by it. The rules can at best lay down only guidelines to enable the Wealth-tax Officer to determine the value of the asset, in the performance of his functions under section 7(1). When the substantive provision in section 7(l) itself has not created any mandatory or fictional mode of valuing the asset, we cannot read the rules as imposing, for fixation of the market price, such a mandate or creating a fiction. The rule-making power is itself indicative of the position that no imperative rules are to be framed and that, on the other hand, only guidelines which the assessing authority may follow are to be laid down. This is evident from sub-clause (a) of sub-section (2) of section 46 which is illustrative of the general power conferred by subsection (1) of the section. Sub-section (2) provides that the rules framed under section 46(1) may provide for the manner in which the market value of the asset may be determined. The use of the word "may" is indicative of the fact that the Legislature has only authorised the laying down of guidelines for the determina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter cases the yield must be determined after taking into account various factors to which a reference has been made earlier." In CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38, the Supreme Court again went into the question of valuation of shares in great detail. The shares concerned were of a private limited company, which was a going concern. The assessee pleaded that they should be valued by applying the profit-earning method of valuation but the Gift-tax and Wealth-tax Officers chose to value them at much higher figures, adopting the break up value method. The Supreme Court considered the matter in detail and held (pp. 45, 46) : " But where the shares in a public limited company are not quoted on the stock exchange or the shares are in a private limited company the proper method of valuation to be adopted would be the profit-earning method .... in the case of a 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 the shares .... The break-up method would n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the various Allahabad decisions: CWT v. Laxmipat Singhania [1978] 111 ITR 272, CWT v. Sripat Singhania [1978] 112 ITR 363, CWT v. PadamPat Singhania [1979] 117 ITR 443 and Bharat Hari Singhania v. CWT [1979] 119 ITR 258, or in the decisions of this court in Mamman Varghese [1983] 139 ITR 351 and Grace Collis [1988] 172 ITR 597. The use of the word "shall" in rule 1D by itself is insufficient to make it mandatory when the context, the purpose and the object of the rule point to the contrary. Any other view will make rule 1 D beyond the scope of the power under section 46(2)(a). It will also be oppressive and lead to unjust results as pointed out by the Andhra Pradesh High Court in Dr. Renuka's case [1989] 175 ITR 615. A court should be loathe to place a construction which will lead to such results. We are of the opinion that the provisions of section 7(1), section 46 and rule 1D do not oblige us to read the rule as mandating only one method of valuation of the unquoted shares, barring every other mode of valuation. Counsel for the Revenue placed reliance on the decisions in Punjab Sikh Regular Motor Service v. Regional Transport Authority, AIR 1966 SC 1318 and Joginder Singh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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