Arrears of dividends on cumulative preference shares are deductible as liabilities in share valuation under rule 1D.

Arrears of dividends on cumulative preference shares are treated as deductible liabilities when computing break-up value under rule 1D of the Wealth-tax Rules, 1957. The statutory language in Explanation II(ii) and clause (f) shows that, although amounts in the balance-sheet are generally not treated as liabilities for valuation purposes, arrears of dividend on cumulative preference shares are expressly excluded from contingent liabilities and therefore fall to be deducted. The result is that such arrears reduce the share value for valuation under rule 1D.

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Issues: Whether arrears of dividends on cumulative preference shares are required to be deducted as liabilities while determining the value of shares under rule 1D of the Wealth-tax Rules, 1957.

Analysis: Rule 1D and Explanation II(ii) specify that amounts shown as liabilities in the balance-sheet are not to be treated as liabilities for break-up value purposes, but clause (f) expressly excludes arrears of dividends payable in respect of cumulative preference shares from the category of contingent liabilities. The statutory language is unambiguous and indicates a legislative intention to treat such arrears, when shown in the balance-sheet, as a deductible liability for valuation under rule 1D.

Conclusion: Arrears of dividends on cumulative preference shares are deductible while working out the value of the shares, and the issue is answered in the affirmative in favour of the assessee.

Ratio Decidendi: Where the valuation rule expressly excludes arrears of dividends on cumulative preference shares from the category of contingent liabilities, such arrears are to be treated as liabilities for break-up value computation under rule 1D.

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