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TMI Blog1988 (2) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the principles laid down by the decision of the Supreme Court in the case of CWT v. Mahadeo Jalan [1972] 86 ITR 621. The WTO, however, did not accept the assessee's contention and determined the market value of the unquoted shares as per rule 1D. 3. The assessee appealed to the CWT (Appeals) before whom it was submitted that the WTO should have determined the value of unquoted shares held by the assessee yield method basis. The CWT (Appeals) following the decision of the Bombay High Court in the case of Smt. Kusumben D. Mahadevia v. N. C. Upadhya [1980] 124 ITR 799, upheld the assessee's contention. Against he order of the CWT (Appeals) the department has come up in appeal before the Tribunal. 4. In WTA No. 440 (Cal.) /1986, the assessee, namely, Lyons Range Merchants Association, the WTO valued the unquoted shares held by the assessee by adopting break-up value method as prescribed under rule 1D. The CWT (Appeals) following the decision of the Appellate Tribunal, Delhi Bench 'B' (Special Bench) in the case of WTO v. Seth Sudhir Kumar Modi [1985] 14 ITD 194, as also the decision of the Appellate Tribunal, Calcutta Bench 'B' in the case of WTO v. Sheo Prosad Nopany [198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the contention that rule 1D is mandatory. For the same proposition reliance has also been placed on the decision of the Special Bench in the case of Seth Sudhir Kumar Modi and the decision of the Appellate Tribunal, Calcutta Bench 'B' in the case of Sheo Prosad Nopany. Shri Pal also cited the decision of the Appellate Tribunal, Bangalore Bench in the case of WTO v. Shivanand V. Salgaocar (1984) 10 ITD 471 in support of the contention that the valuation of unquoted shares have necessarily to be determined in accordance with the provision of rule 1D. Shri Pal also placed reliance on the decision of the Bombay High Court in the case of CWT v. Pratap Bhogilal (1987) 167 ITR 501 for the proposition canvassed by him before us. Shri Pal then submitted that in the case of Smt. Bella Cajeton Travasso v. Third WTO (1987) 166 ITR 49, the Bombay High Court has held that the Valuation Officer could not refuse to consider the applicability of rule 1BB of the Wealth-tax Rules, 1957 while entertaining the reference made by the Wealth-tax Officer. This authority, according to Shri Pal, supported the proposition that rule 1D is mandatory even for the Valuation Officer in a case where valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case Bench Relevant asst. ------------------------------------------------------------------------------------------------ 1. (1987) 28 TTJ 193 Ashwin C. Choksey A-Bench Bombay, 1978-79 (Bombay) (HUF) v. Fourth Wealth-tax Officer. 2. (1987) 28 TTJ 308 Wealth-tax Officer v. C-Bench, Calcutta 1981-82 1982-83 (Cal) K.S. Ranganna. 3. (1987) 28 TTJ 116 Kanhayalal Sawhney v. A-Bench, Delhi 1973-74 1974-75 (Delhi) Wealth-tax Officer. 4. (1987) 28 TTJ 378 Wealth Tax Officer v. D-Bench Bombay. 1980-81 (Bom.) Smt. V.B. Garware 5. (1987) 28 TTJ 381 Inspecting Asstt. A-Bench, Bombay 1978-79 1979-80 (Bom.). Commissioner v. Anil Kumar Jalan 6. (1987) 28 TTJ 244 Fifth Wealth Tax Officer C- Bench, Bombay. 1977-78 1983-84 (Bom) v. Smt Savitri T. Mehta. 7. (1986) 24 TTJ 257 Wealth-tax Officer v. D-Bench, Delhi 1975-76 1976-77 (Delhi) Devendra Kumar Jain 8. (1987) 20 ITD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this rule is to arrive at a fair market value of unquoted shares, Shri Bajoria further contended that even under rule 1D as in section. 7(1) itself, the emphasis is on the market value of the asset and that while determining the valuation of unquoted shares they are not to be give a deemed or fictitional value. Shri Bajoria also contended that the rules framed under/section. 46(2)(a) are aimed to subserve the machinery provision contained in section. 7(1) and that if in a given case recourse to the provision of rule 1D does not lead to a fair market value of shares, it should not be applied. If rule 1D is held to be mandatory, in some cases it may lead to an unjust result. According to Shri Bajoria the intention of the Legislature as gathered from the provision of section 7(1) is that the market value of an asset as on the relevant valuation date, should be determined for the purpose of charging tax on the net wealth of an assessee. Shri Bajoria also contended that the valuation of shares has to be determined in accordance with the principles laid down by the decision of the Bombay High Court in the case of Smt. Kusumben D. Mahadevia and that the WTO would be free to apply his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57-58 and 1958-59. Rule 1D was not on the statute book at that time and, therefore, the decision of the Supreme Court in that case will have no application to the facts of the case in hand. 12. We have carefully considered the rival submissions and have gone through the various authorities cited before us on behalf of the parties. Before considering the contentions advanced on behalf of the parties it will be useful to examine the relevant provisions of the Act. Section 3 lays down that subject to the other provisions contained in the Act, there shall be charged for every asst. year commencing on and from the first day of April, 1957, a tax (hereinafter referred to as 'wealth-tax') in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in Schedule I. The expression 'net wealth' is defined in section 2(m) as the amount by which the aggregate value computed in accordance with the provisions of the Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in exces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances in which and the extent to which petty amounts of interest payable by assessees maybe ignored; (e) the areas within which Valuation Officers may exercise jurisdiction; (ee) the manner in which and the conditions subject to which Valuation Officers, overseers, surveyors and assessors may exercise their powers under sub-section (1) of section 38A; (f) any other matter which has to be prescribed for the purposes of this Act." 15. The provisions contained in rule 1D in so far as they are relevant for the present appeals run as under : "Rule 1D : The market value of an unquoted equity share of any company, other than an investment company or a managing agency company, shall be determined as follows : .............. (not relevant)" 16. The scheme of the Act is to tax the net wealth of the assessee and for the purpose of achieving this object the market value of the assets held by the assessee has to be determined in accordance with he provisions of section 7(1). The market value of an asset to be determined under section 7(1) by the WTO is to be the price which, in the opinion of the WTO, it would fetch if sold in the open market on the valuation date. The words "su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 16A, the Valuation Officer would not be bound to value the unquoted shares by adopting the method prescribed by rule 1D. The valuation to be determined by the Valuation Officer has to be the price which, in his opinion, the asset would fetch if sold in the open market on the valuation date. So, if the view that rule 1D is mandatory is to be accepted, it would follow that if the WTO himself proceeds to determine the valuation of unquoted shares it would be imperative for him to adopt the break-up value method as prescribed under rule 1D whereas if he refers the valuation under section 16A to the Valuation Officer, the latter would have an unfettered discretion to arrive at the market value of the asset by following the method which would lead to the desired result. He would not be bound to follow rule 1D. It could not be the intention of the Legislature that different methods of valuation may be adopted in similar cases for determining the value of unquoted shares. A harmonious construction has to be given to the provisions contained in sub-sections (1) and (3) of section 7 and if it is so done, it would lead to the conclusion that the provision of rule 1D is not mandato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the words 'may' and 'shall' in the same section does go to show that he use of the word 'may' in clause (a) of section 46(2) was intended to vest discretion in the WTO in the matter of valuation of unquoted shares in spite of the fact that the Board has framed rule 1D which prescribes a particular method of valuation of unquoted shares of a company. 20. Rule 1D has been framed for the purpose of determining the market value of unquoted equity shares. So, the emphasis is on determination of market value. The rule is thus intended to enable the WTO to determine under section 7(1) the price of an asset if it is sold in the open market on the valuation date. Rules have been framed for the purpose of carrying out the object of section 7(1), viz., to determine the market value of an asset. The contention of the learned departmental representative that the words "subject to any rules made in this behalf" occurring in section 7(1) gave priority to the rules over the section itself cannot be accepted as the rules have been framed to subserve the object of the section and not to subvert the very purpose for which the section has been enacted. In this connection reliance has been plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f unreasonable expenses and adopting a reasonable proportion of profits. (3) 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 shares transfers will also be taken into consideration as earlier indicated in arriving at a valuation. (4) Where the dividend yield and earning method break down by reason of the company's inability to earn profits and declare dividends, if the set-back is temporary then it is perhaps possible to take the estimate of the value of the shares before set-back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses. (5) Where the company is ripe for winding up then the break-up value method determines what would be realised by that process. (6) As in Attorney-General of Ceylon v. Mackis a valuation by reference to the assets would be justified whereas in the case the fluctuations of profits and uncertainty of the conditions at the date of the valuation prevented an reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of the decision of the Bombay High Court in the case of Smt. Kusumben D. Mahadevia, but without assigning any reason chose to follow the decision of the Allahabad High Court in the case of CWT v. Laxmipat Singhania (1978) 111 ITR 272 and held that rule 1D is mandatory. 27. The aforesaid decisions of the Allahabad High Court as also the decision of the Kerala High Court in the case of Mamman Varghese, no doubt, expressed the view that rule 1D is mandatory. The Delhi High Court in the case of Sharabati Devi Jhalani took a different view. Their Lordships held that in order to uphold the validity of rule 1D and at the same time, not to do violence to the language of the relevant provisions, the application of rule 1D is mandatory in a case where the valuation date of the company and of the assessee is the same. Where, however, the two dates do not coincide, then the applicability of rule 1D will be directory and not mandatory. 28. We have already held above that in a case where the valuation of any asset is referred by the WTO to the Valuation Officer under/section. 16A, the Valuation Officer would not be bound to value the unquoted shares by adopting the method prescribed by ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that case related to computation of valuation of unquoted shares in accordance with rule 1D. 31. In the case of Smt. Bella Cajeton Travasso, the dispute related to the valuation of certain immovable properties. It was held by the Bombay High Court that the Valuation Officer could not refuse to consider the applicability of rule 1BB while entertaining the reference made by the WTO under/section. 16A. This case was decided by a single Hon'ble Judge of the Bombay High Court. The question whether rule 1BB is mandatory or directory was not considered by his Lordship. Moreover, the Division Bench case of Smt. Kusumben D. Mahadevia decided by the Bombay High Court was neither cited before nor was considered by his Lordship in the said case. In our opinion, therefore, the decision in the case of Smt. Bella Cajeton Travasso does not in any way help the case of the department. 32. In the case of Pratap Bhogilal cited on behalf of the department there was no dispute about the applicability of rule 1D. The dispute related to the computation of valuation of unquoted shares under rule 1D. This authority also does not add any strength to the view canvassed on behalf of the department. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld i appeal by the CWT (Appeals). In this case also the issue is to be considered again in the light of our finding that rule 1D is directory and not mandatory and in accordance with the principles laid down by the Supreme Court in the case of Mahadeo Jalan. 37. In view of what has been said above, we set aside the impugned order of the CWT (Appeals) in both the cases and direct the WTO to redetermine the valuation of unquoted shares in accordance with principles laid down by the Supreme Court in the case of Mahadeo Jalan. 38. NO other point survives for consideration in the appeal filed by the department. In the other appeal the grievance raised in ground No. 1 is that the CWT (Appeals) has not considered the assessee's ground that in case the WTO wanted to reject the valuation report of the registered valuer, he was required under law to refer the matter to the Departmental Valuation Officer under section 16A of the WT Act, 1957. In the first place, this ground does not arise out of the order of the CWT (Appeals). Secondly, in view of our finding recorded above and the direction given to the WTO, the question raised under ground No. 1 becomes academic. For these reasons we re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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