Commissioner of Wealth Tax Vs. Mahadeo
Jalan & Mahabir Prasad Jalan [1972] INSC 216 (13 September 1972)
REDDY, P. JAGANMOHAN REDDY, P. JAGANMOHAN
KHANNA, HANS RAJ
CITATION: 1973 AIR 1023 1973 SCR (2) 215 1973
SCC (3) 157
CITATOR INFO :
F 1980 SC 769 (1,7) RF 1988 SC 522 (4)
ACT:
Wealth Tax Act, 1957-Section 7-Basis of
valuation of shares in Private Limited Companies.
HEADNOTE:
On the question as to what is the basis of
valuation of shares in private limited companies for the purpose of section 7
of the Wealth-tax Act, 1957,
HELD : The general principle of valuation in
a going concern is the yield on the basis of average maintainable profits,
subject to adjustment etc, which the circumstances of any particular case may
call for. An examination of the various aspects of valuation of shares in a
limited company would lead to the following conclusions .(a)Where the shares in
a public limited company are quoted on the stock exchange and there are
dealings in term, the price prevailing on the valuation date is the value of
the shares.
(b)Where the shares are of a public limited
company which are not quoted on stock exchange or of a private limited company
the valuation 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 would 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. 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.
(c)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 transfer, will also be taken
into consideration in arriving at a valuation.
(d) 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.
(e)Where the company is ripe for winding up
the break-up value method determined what would be realised by that process.
(f)As in Attorne v General of Ceylon v.
Mackie a valuation by reference to the assets would be justified where as in
that case the fluctuations of profits and uncertainty of the conditions at the
date of the valuation prevented any reasonable estimation of prospective
profits and dividends.
The above principles are not intended to lay
down any hard and fast rule, because, ultimately the facts and circumstance of
each case, the 216 nature of the business, the prospects of profitability and
such other considerations will have to be taken into account as will be
applicable to the facts of each case. But one thing is clear, the market value,
unless in exceptional circumstances, 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, nonetheless, is one of the methods.
Attorney General of Ceylon v. Mackie [1952] 2
All. E.R. 775 P.C., Smith v. Revenue Commissioners, 1931 Irish Reports 643, Mc.
Cathie v. The Federal Commissioner of Taxation, 69 Commonwealth Law Reports
page I and Federal Commissioner of Taxation v. Sagar, 71 C.L.R. 422 referred
to.
(3)This Court has power to reframe the
question as framed by the High Court so long as a new and different question is
not raised but confine it only to resettling or reframing a question formulated
by the Tribunal or by the High Court so as to bring out the real issue between
the parties. [221E] Narain Swadeshi Weaving Mills v. Commissioner of E.P.T., 26
I.T.R. 765 at 774 and Kusum Ben De Mahadavia v. Commissioner of Income-tax, 39
I.T.R. 540 at 544 referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 1135 & 1136 of 1969.
Appeals by special leave from the judgment
and order dated December 12, 1967 of the Assam & Nagaland High Court at
Gauhati in Wealth Tax Reference Nos. 3 and 4 of 1966.
AND Civil Appeals Nos. 1765 to 1767 of 1969.
Appeals from the judgment and order dated
February 4, 1969 of the Assam & Nagaland High Court at Gauhati in Civil
Rule No. 6 (m) of 1.965.
Ved Vyas, B. B. Ahuja, S. P. Nayar and R. N.
Sachthey for the appellant.
M. C. Setalvad and S. C. Majumdar for the
respondents.
The Judgment of the Court was delivered by
JAGANMOHAN REDDY, J. These appeals are by special leave against the judgment of
the High Court of Assam and Nagaland. Appeal No. 1136 of 1969 is of Mahadeo
Mrigendra Jalan, by Mahadeo Prasad as the karta of Hindu undivided family,
while appeal No. 11, 135 of 1969 is by him in his individual capacity. In both
these appeals, the Hindu undivided family as well as the individual were
holding shares in five companies in respect of which shares, dividend was being
declared. The Wealth-tax Officer computed the valuation of those shares on the
basis of the break-up value and included them in their total wealth. In 217
Appeals Nos. 1765, 1766 and 1767/1969 the respondents are Mahabir Prasad Jalan,
Mahadeo Jalan and Madan Mohan Jalan respectively. All these appeals pertain to
assessment years 195758 and 1958-59. In respect of these years the value of the
shares in private limited companies were included in the total wealth of the respective
assessees on the basis of their yield though some of the companies were not
paying dividends while others were declaring dividends throughout.
The first two appeals which related to a
later year seem to have been heard by the High Court and disposed of on
December 12, 1967 while the last three appeals were disposed of later on
February 4,1969, mainly on the basis of the judgment of the High Court in the
first two appeals.
For the years 1957-58 and 1958-59relating to
the three persons referred to above, the Wealth-tax Officer had, is in the case
of assessment for the year 1959-60 adopted the breakup value of the shares as
disclosed on the balance sheets of the company in computing their value as if
each of the companies was brought to liquidation. This assessment was confirmed
by the Appellate Assistant Commissioner. The Tribunal however held that
certainly this basis is one of the recognised modes of valuation of the shares
of the private companies which are not saleable in the open market but in so far
as those cases were concerned the valuation on the basis of the yield derived
from the shares will be a more reasonable method to be adopted in the
particular circumstances of their respective cases. Ac cordingly he adopted the
valuation on that basis in respect of each of the companies as specified in its
order. In the first two appeals also the Wealth Tax Officer and the Appellate
Assistant Commissioner adopted the break-up value as the basis as in the other
cases, and agreed with that basis inasmuch as the assessees bad failed to place
before the Wealth-tax Officer and the Appellate Assistant Commissioner facts
and figures relating to dividends declared by the respective companies. It was
also stated by the Tribunal that at the time of hearing by the Tribunal in the
case of last three appeals, it was apparently not brought to the notice of the
Tribunal that the companies being private limited companies the dividends
declared would be controlled by persons controlling the companies so as to suit
their own purpose, as such, the maintainable profits rather than the dividends
declared would afford a reasonable basis. While so stating, it was observed
that this aspect of the case need not be taken note of since the objection
before it is only on the principle whether to adopt the "break-up
value" method. In respect of the first two appeals therefore the Tribunal
held that the adoption of the 'break-up' value was in order.
On an application under s. 66(1) the Tribunal
referred the following question for the opinion of the High Court, viz., 218
"Whether on the facts and in the circumstances of the case the principle
of 'break-up' value adopted by the Income-Tax Tribunal as the basis for the
valuation of the shares in question is. sustainable in law ?" When the reference
came up for hearing before the Bench of the High Court, it was felt that as the
question required an abstract answer as to whether the principle of 'break-up
value' is sustainable in law and as in their opinion the Tribunal wanted to
refer for the opinion of the Court "the doubt they experienced in dealing
with the case which related to the question as to whether the 'break-up value'
method is correct method to be adopted in the facts and circumstances of the
case or it is the 'yield value' method to be adopted, that question was
reframed and a further statement of the case called for from the Tribunal. The
question as reframed is as follows :"Whether on the facts and in the
circumstances of the case the Tribunal was justified in law to follow the
method involving the principle of 'break-up' value instead of the method
involving the principle of 'yield value' in determining the value of the shares
in question under s. 7 of the Wealth Tax Act ?" In compliance with this
direction the Tribunal drew up a supplementary statement of the case and
submitted it to the High Court. In that statement the Tribunal stated :
"Before the Appellate Assistant
Commissioner no alternative basis of valuation appear to have been claimed. For
the first time before the Tribunal, the assessee filed a statement of the
dividends declared by the aforesaid private companies during the years 1953 to
1957 and claimed that the market value of the shares should be worked out with
reference to the average percentage of the dividends declared by each company
and on the footing that the shares quoted in the market at Rs.
100/each would yield a dividend of Rs.
6/-" It was further stated by the Tribunal that the assessee had relied on
the decision of the Tribunal for the assessment years 1957-58 and 1958-59 where
it determined the market value of the shares on the yield basis but in so far
as the assessment year 1959-60 it did not accept that the information furnished
before it would be adequate for working out the market value on the basis of
"maintainable profits" because it was of the view that "in cases
of private companies declaration of dividend would be dictated by the directors
having regard to the advantage in their personal assessments and not with
reference to the capacity or other business considerations. It went on to say
that 219 "The Maintainable profits, would be a certain percentage (say
80%) of the net profits of the company after deduction of taxes payable by it
and this would be a measure of potential yield per share." In this view
the 'break-up' value adopted by the Income-tax Officer in respect of the
assessments of 1959-60 in the first two appeals was confirmed.
The High Court however did not agree with the
basis adopted by the Tribunal though it recognised that the break-up value is
also one, of the methods for the purpose of calculation.
It was contended before the High Court on
behalf of the assessee that the 'break-up' value method will only be applied to
a company which reached the stage of liquidation and winding up. After
considering the respective contentions and the decisions referred to before it,
the High Court observed as follows We are satisfied that so far as the
application of s. 7 of the Wealth Tax Act in determining the value of the
shares of a deceased person on the data of his death is concerned, where those
shares pertain to a going concern, the only proper method to adopt was the
'yield value' method and we think that the Tribunal was not justified in making
the assumption that in the case of a private company the dividend would be
controlled by the persons controlling the company to suit their own purposes,
and that, consequently, the 'maintainable profits' should be accepted as the
basis and not the dividends. Unless there was some substantial material before
the Tribunal to draw a different inference, the Tribunal, in our opinion, is
not justified in doing so.
We are constrained to note that although the
Tribunal had adopted the 'yield value' method in its decisions in regard to the
previous years, the Tribunal had taken a new path and adopted the 'break-up'
value method as the basis of the assessment. We feel that there is no material
placed on the record to justify this change in the method to be adopted in
calculation." When the application for reference under s. 66(2) in respect
of the last three appeals came before the High Court after an application under
s. 66(1) had been rejected by the Tribunal, it observed :-"This is
undoubtedly a question of law but the answer will be covered by the decision of
this Court dated June 9. 1967 ..............
220 and so it thought it unnecessary to ask
the Tribunal to refer the same point again and accordingly rejected the
petitions. The special leave in respect of the first two appeals is against the
judgment of the High Court holding that the 'yield method' was the proper
method and in respect of the latter three appeals against the order refusing to
direct the Tribunal to state a case. As a common question of law has to be
determined these appeals are consolidated and heard together.
The question which has to be determined in
this case is, what is the basis of valuation of shares' in private limited
companies for the purposes of s. 7 of the Wealth Tax Act (27 of 1957). Sub-s.
(1) of s. 7 provides that "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." The valuation date, as has already been noticed, is
31st December of the calendar year.
On that date the Wealth-tax Officer will have
to ascertain what the shares will fetch if sold in the open market which would
be the price which a willing seller will accept and a willing buyer will pay.
In valuing shares of a limited company
certain factors have to be taken into consideration. Firstly, a share is not a
sum of money but is an interest measured by a sum of money and made up of
various rights contained in the articles of association. They are of different
categories such as the equity shares, preference shares, fully paid-up shares
or partly paid-up shares. Apart from these, there are also debentures. The
shares can be in a public limited company or a private limited company and in
the latter case they are subject to certain restrictions. A private company has
been defined in s. 3(iii) of the Companies Act as a company which by its
articles (a) restricts the right to transfer its shares, if any; (b) limits the
number of its members to 50 not including certain categories specified in (i)
and (ii) of that clause and (c) prohibits any invitation to the public to
subscribe for any shares or debentures of the company subject to the proviso
that shares held jointly are to be treated as if they are held by a single
member. A public company under s. 3 (iv) is a company which is not a private
company. It may be observed that the three conditions which distinguish a
private company from a public company are cumulative and if any one of the
conditions is not fulfilled the company will be a public company. 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 a prescribed manner, or where the
directors have a power to veto a transfer, the fixation of the value of the
share will have to 221 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 deprecatory 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.
The shares the transfer of which is not
restricted may be sold on the stock exchanges for which there is official
market quotation. There may also be shares in public limited companies for
which there are no quotations on the stock exchange. Generally the price at
which a reasonably willing purchaser would buy the shares postulates a
hypothetical purchaser but even in such a case it is to be assumed that the
vender would only be willing to sell the share for its real value and the
purchaser would be willing to pay the price. This has to be always determined
nationally. Where shares in a company are bought and sold on the stock exchange
and there are no abnormalities affecting the market price, the price at which the
shares are changing hands in the ordinary course of business is usually their
true value. These quotations generally reflect the value of the asset having
regard to the several factors which are taken into consideration by persons who
transact business on the stock exchange and by the buyers who want to invest
their money in any particular share or shares. Even where they are quoted on
the stock exchange, the quotations do not depend entirely on the yield or the
dividend declared. There are several factors which are taken into consideration
which affects and determines the quotations, namely the factors which are taken
into consideration by a person who wants to sell his shares and the factors
which a buyer who wants to purchase them considers as determining the price
which price the buyer is willing to pay and the seller to receive. 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 (in 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-backing; 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 his 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. It may be mentioned
that a new share issue, whether an existing shareholder subscribes for them or
not, invariably reduces the average unit cost of hi; total holding with the
consequent increase in the rate of his average return on the cost.
Take the case of a person who wishes to buy
shares in a particular company. If his purpose is only to invest, he might
enquire as to what are the various companies which have good prospects and are
a sound investment, often referred to as "as good as guilt edged
securities". This would involve the ascertainment of whether the concern
in which he intends to invest is financially and commercially sound, what is
the yield that it will give on the capital which he invests, whether that yield
will be maintained, whether the shares will appreciate in value and are easily
marketable whenever he desires to dispose of them. In certain cases a person
may want to take risks by investing in shares which having, regard to various
trends in the commercial world and in any particular industry has prospects of
improvement and the value of the shares going up with the corresponding
prospect of the return or yield obtainable on the capital invested being much
higher than what he would get in other sounder concerns. There may yet be
investors who notwithstanding that the company is not in a solvent condition or
is unable to pay dividends for a number of years are willing to purchase the
controlling interest for the purpose of manipulation or 'bringing it to
liquidation for obtaining some benefit. Ignoring such cases, where a purchaser
or seller is considering the various factors for purchase or sale of shares in
a company, the dominant factor determining the price he will pay or receive as
the case may be is the yield.
Now, what are the factors which a seller will
take into consideration when he wants to sell his shares ? Where he is not
obliged to sell because he is not in need of money, he would first consider
whether the return he is getting is reasonable having regard to the current
market price. Here again the factor of yield would enter into his consideration
not so much on the capital he initially invested but on that which he expects
to realise on the sale. He may have a better investment in view which will give
on it a higher yield or ensure for his capital better prospects. It may be he
may not expect a higher dividend to be maintained or that these dividends are
likely to be reduced or there is a likelihood of the security of capital being
in jeopardy, and therefore he wishes to make a prudent sale. From what we have
stated, among the factors which govern the consideration of the buyer and the
seller where the one desires to purchase and the other wishes to sell, the
factor of break-up 223 value of a share as on liquidation hardly enters into
consideration where the shares are of a going concern. The basic yield method
in cases where shares are quoted and transactions take place on the share
market may not be different but where shares are not quoted, it is in these
latter cases the yield must be determined after taking into account various
factors as to which a reference has been made earlier.
If profits are not reflected in the dividends
which are declared and a low-earning yield for the shares is shown by the company
which is unrealistic on a consideration of the financial affairs disclosed for
that year, the Wealth-tax Officer can on an examination of the balance sheet
ascertain the profit earning capacity of the concern and on the basis of the
potential yield which the shares would earn, fix the valuation. In the Estate
Duties Act both here, in England and in analogous Acts in some of the other
Commonwealth 'Countries, similar provisions as under the Wealth-tax Act provide
for estimating the value of the assets to be the price which in the opinion of
the concerned officer would fetch if sold in the open market on the date of the
death.
In dealing with the valuation of assets under
such Acts Green on Death Duties (sixth edition) considers factors other than
those of valuation by reference to, dividends.
At page 407 it is stated :"Not
infrequently, the dividends represent only a small proportion of the company's
profits and large sums are systematically accumulated in the form of reserves.
It is important to, remember in this connection that the interests of
shareholders in unquoted companies often differ from those of investors in
quoted shares, especially as respects dividend policy. Where the shares are
held by a few individuals (particularly members of a single family), it will
not necessarily be to their advantage to have the greatest possible amount paid
out to them as dividends. Retention of the profits by the company may suit them
better than the receipt of taxable dividends. A purchase of shares in a company
which distributes only a small fraction of its profits is unlikely to prove
attractive to, an investor in search of current income, but the open market is
by no means confined to such investors. It includes, for instance, the existing
members of the company, to whom the shares may be more valuable than to others
and who may wish to exclude outsiders, and surtax payers whose goal is capital
appreciation rather than current income." 224 Again at page 409 it is
observed "A valuation by reference to earnings is apposite as respects
unquoted shares whenever the dividend alone does not truly represent the
profitability of the company......... The "dividend" and
"earnings" methods of valuation are not mutually exclusive and both
may be used in conjunction. Where the value brought out by one differs widely
from that shown by the other, an intermediate figure may be appropriate
................
Where a company is engaged in a profitable
business, but the shareholders are also directors and prefer to take what they
need from the company in the form of remuneration rather than dividends, the
profits distributed by way of remuneration must be taken into account in the
valuation. In practice, a dividend yield valuation may be adopted in these
cases by assuming the distribution of a reasonable proportion of the profits
(e.g. the average distribution of the comparable companies) as dividend:
alternatively the value may be estimated by reference to earnings. In either
case, the profits will be adjusted to include remuneration paid in excess of a
normal management charge." But where a person who holds shares in a
company which is making losses and where it does not justify a declaration of
dividends even from reserves as a temporary boost or where there is a
possibility of its capital structure being affected or if that state of
depression continues in other words the company is ripe for liquidation, the
valuation may well be the break-up value of the shares. In this case, however,
we need not go into all the niceties and important qualification and
limitations which may have to be applied in cases where the company's assets
and liabilities have to be taken into consideration in fixing the value of the
shares. The general principle of valuation in a going concern is the yield on
the basis of average maintainable profits, subject to adjustment etc. which the
circumstances of any particular case may call for. In Attorney General of
Ceylon v. Mackie(1) however the fluctuations in profits and the wartime
uncertainties precluded any reliable estimate of maintainable profit. In these
exceptional circumstances it was held that in the absence of definite evidence
to the contrary the value of the business as a going concern exceeded that of
the tangible assets. Lord Reid referring to the argument that in accepting (1)
[1952] 2 All E.R. 775 P.C.
225 the balance sheet method the Supreme
Court of Ceylon erred in law because that can only give a break up value which
it was necessary to find the value of the business as a going concern observed
at p. 779 "It is true that a purchaser of the shares held by the deceased
could. have obtained a controlling interest in the company as a going concern,
and in their Lordships' judgment it is right to value these shares by
reference, to the value of the company's business as a going concern. No doubt,
the value of an established business as a going concern generally exceeds and
often greatly exceeds the total value of its tangible assets. But that cannot
be assumed to be universally true.
If it is proved in a particular case that at
the relevant date the business could not have been sold for more than the value
of its tangible assets, then that must be taken to be its value as a going concern.
In their Lordships' judgment it has been proved in this case that the
deceased's holding could not have been sold in September, 1940, at a price
based on any hi-her figure than the value of the tangible assets of the
company." In the Irish case of Smith v. Revenue Commissioners(1) on which
on behalf of the Revenue reliance was placed on the deceased and his son held
all the shares in the private company the transfer of which was restricted. It
was also found that the deceased had the controlling shares and that both
father and son drew yearly remuneration for the work done by them, the former
getting pound 3000 per annum and the latter pound 1000 per annum. The average
of dividend for the six previous years' was 5.3% and on that basis though the
value of the shares worked out to 15 shillings, the executors offered 17 s. 6
d. The Revenue however fixed the value of the share at 22 s. 6 d. on the basis
that the deceased who had a preponderating voting power could have brought it
into voluntary liquidation and therefore the value should be worked out on the
basis of excess of assets over liabilities as would be adopted in such a
winding up.
It was found by the Commissioners that the
remuneration paid to the deceased at a figure of pound 3000 per annum for such
business was out of all proportion to the value of their service. Hanna, J.
observed at p. 654 :"In this I agree : but, on the other hand,
considerable weight must be given to the view put forward by the petitioners
that it was a family company, (1) [1931] Irisha Reports 643.
16-L348SupCI/73 226 .lm15 where greater
latitude would be given in the remuneration of the directors, who were the
principal owners; and that it was a unique business, in which both the
directors had special knowledge, and to which they gave constant daily
attention, and had a special personal relationship with the majority of the
customers. A purchaser in a hypothetical market of any of these shares would
recognise the value of these factors, and make due allowance for much more than
the ordinary remuneration. The evidence on either side went into great detail,
and after the consideration of it I think that this company can be fairly
regarded as one capable of _earning on a commercial basis 10 per cent on its
capital, and so I find. But, if this is to be taken as the principal test, it
must be subject to the consideration, on the one hand, of the restrictions upon
the transfer of the shares, and, on the other, of the added value by reason of
the splendid security of the company's position." It will be seen that
this case does not support the contention that because the deceased was in a
_position to bring the company into voluntary liquidation the break-up value
principle should be applied. If at all it is against that contention because on
the evidence the valuation was determined on the profit earning capacity of the
company.
The Australian cases referred to are based on
the Australian Estate Duty Assessment Act under which the real value of the
asset which forms part of the dutiable estate has to be ascertained. Even then,
it was held in Mc. Cathie v. The Federal Commissioner of Taxation(1) that the
real value of shares held by a deceased on his death depends more upon the
profits which the company has been making and should be capable of making
having regard to the nature of his business than upon the amounts which the
shares would be likely to realise upon liquidation, and that moneys paid as
fees to directors in excess of a reasonable amount should be treated as profits
when determining the reasonable earning capacity of a proprietary company which
bears the character of a partnership trading with limited liabilities.
Williams, J. at page It ,observed :
"......the real value of shares which a
deceased person holds in a company at the date of his death will depend more on
the profits which the company has been making and should be capable of making,
having regard to the nature of its business, than upon the amounts which the
shares would be likely to realise upon a liquidation." (1) 69 Commonwealth
Law Reports page 1.
227 In that case it was found that the
business could not be said to be conducted with any lack of probity but since
the remuneration received by ladies of the family who did not render any
service was not admissible it was added to the profits in arriving at a
reasonable earning capacity.
It is also worth noticing that s. 16-A(l) (c)
of the Australian Act has vested a discretion in the Commissioners to make an
assessment on "an estimate of the sum which the holder of shares should be
expected to receive in the event of the company being voluntarily wound up at
the date of the death of the deceased". While considering the provision
above referred to, it was observed by Williams, J. in Federal Commissioner of
Taxation v. Sagar(l) that "...... where a company is a going concern the
instances would appear to be rare in which it would be proper to use para (c).
One instance might be where the deceased held or controlled sufficient shares
to enable him to pass a special resolution that the company be wound up
voluntarily, but even then it would appear to be preferable, where practicable,
to use paras (a) or (b)." An examination of the various aspects of
valuation of shares in a limited company would lead-us to the following conclusion:(1)Where
the shares in a public limited company 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 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 bases. But where they do
not then the amount of yield on that basis will determine the value of the
shares. In other words, the will ordinarily determine the value. The dividend
and earning 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 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 (1) 71 C.L.R.
422.
228 computing the yield. In such companies
the restriction on share 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. Mackie
(supra) a valuation by reference to the assets would be justified where as in
that case the fluctuations of profits and uncertainty of the conditions at the
date of the valuation prevented any reasonable estimation of prospective
profits and dividends.
In setting out the above principles, we have
not tried to lay down any hard and fast rule because ultimately the facts and
circumstances of each case the nature of the business, the prospects of
profitability and such other considerations will have to be taken into account
as will be applicable to the facts of each case. But one thing is clear, the market
value unless in exceptional circumstances to which we have referred, cannot be
determined on the hypotheses 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 nonetheless is one of the
methods.
It has been urged before us that the question
as framed by the High Court does not correctly indicate the scope of the answer
which was called for from that court and it was suggested that we should
reframe the question. We certainly have the power to do so as long as new and
different question is not raised but confine it only to resettling or reframing
the question formulated by the Tribunal or as in this case by the High Court
which called for a statement of the case on a question as reframed by it,
before answering it so as to bring out the real issue between the parties :
Narain Swadeshi Weaving Mills v. Commissioner
of E.P.T.(1) and Kusum Ben De Mahadavia v. Commissioner of Income-tax(1).
The question as framed by the High Court is
on the (1) 26 I.T.R. 765 at 774.
(2) 39 I.T.R. 540 at 544.
229 assumption that the yield method is the
only method applicable and on that basis required the Tribunal to state a case
on whether it was justified in law to follow the method involving the principle
of break-up value. If the question is reframed bringing out the real issue
between the parties which both Tribunal and the High Court attempted to do it
would facilitate a proper answer. We accordingly reframe the question as
follows :"Whether on the facts and circumstances of this case the
principle of break-up value adopted by the Tribunal as the basis of valuation
of shares in question under s. 7 of the Wealth-tax Act is sustainable in law ?
If not what would be the correct basis ? In the first two appeals 1135 and 1136
of 1969 the break-up value method was adopted by the Tribunal and its plea for
not adopting the yield method was that a list of dividends were for the first
time filed before it in respect of each of the companies. The Wealth-tax
Officer and the Appellate Assistant Commissioner, as well as the Tribunal, had
the balance sheets of each of the companies before them because the shares were
valued on break-up method in those cases on the basis of those balance sheets.
If the balance sheets were filed they would also disclose the dividends as
indeed the statement of the case shows that all the companies had declared
dividends for the year 1959-60. Even otherwise, the Tribunal as a fact finding
authority, could have considered the list or sent them to the Wealth-tax
Officer for any further enquiry it required. In the last three appeals, the
Tribunal had adopted the yield method. In the result our answer to the first
part of the question is in the negative and to the second part our answer is in
terms of the principles already set out. In Appeals Nos. 1765 to 1767 of 1969,
the method adopted by the Tribunal being the proper method the refusal of the
High Court to direct a case to be stated does not call for interference. For
these reasons, all the appeals are dismissed with costs. One hearing fee.
K.B.N. Appeals dismissed.
Back
