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TMI Blog1978 (4) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant period, the assessee held a number of shares in Karnani Properties Ltd. and Karnani Investment Pvt. Ltd. The WTO, following an order of the Tribunal in the wealth-tax assessment of Bejoy Kumar Karnani (individual), estimated the value of these shares by the method known as " break-up value " method. The shares of Karnani Properties Ltd. were accordingly valued at Rs. 6 per share for the assessment years 1957-58 and 1958-59 and at Rs. 6 23, Rs. 6.18 and Rs. 6.18, respectively, for the other assessment years, i.e., 1959-60, 1960-61 and 1961-62. The shares of Karnani Investment Pvt. Ltd. had to be valued for the assessment years 1959-60, 1960-61 and 1961-62. Again following the " break-up value " method, the WTO estimated the value o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Rs. 50,000, Rs. 43,000 and Rs. 8,000, respectively, for the assessment years 1957-58 to 1961-62. Accordingly, the net earning from the shares of this company was held to be about 3%. The Tribunal took into account that the rental income of the said company was affected by reason of the existence of a number of old tenants in the properties. The Tribunal also took into account that the value of the land belonging to the company had appreciated though not reflected in its balance-sheet. The Tribunal held that the shares of this company were more valuable than an ordinary share, yielding return of only 3%, and, accordingly, valued the same at 50% of par value, i.e., Rs. 2.50 per share. In valuing the shares of Karnani Investment Pvt. Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alan [1972] 86 ITR 621, for the following observations in the judgment. " Leaving aside any distress sales, the factors which in our view are likely to determine the fixation of a share on any particular day or at any particular time is, firstly, the profit earning capacity of the company on a reasonable commercial basis; secondly, its capacity to maintain those profits or a reasonable return for the capital invested, and in special cases such as investment companies, the asset-backings, 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors which were likely to determine the value of the share of a company at any particular time. The main factors were, first, the profit earning capacity of the company and second, the, company's capacity to maintain such profits in future. It is only in determining the capacity of a company to maintain its profits and thus secure a reasonable return for capital invested, that the asset-backings of an investment company had to be looked into. He submitted that it was not laid down by the Supreme Court that in valuing the shares of an investment company, the profit earning capacity of the company should be ignored entirely and break-up method followed. In support of this contention, Mr. Bajoria drew our attention to further observations of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany 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. (3) In the case of a private limited company also wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, the market value, unless in exceptional circumstances to which we have referred, cannot be determined on the hypothesis that because in a private limited company one holder can bring it into liquidation, it should be valued as on liquidation by the break-up method. The yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation but none the less is one of the methods. " The submissions of Mr. Bajoria are not without substance. From the observations of the Supreme Court it appears to us that the break-up method is to be followed only, in exceptional circumstances, e.g., where the company is ripe for liquidation ; not that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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