Break-up value method for unquoted shares upheld as a valid wealth-tax valuation rule

Rule 1D of the Wealth-tax Rules, 1957, prescribing the break-up value method for valuing unquoted equity shares, was examined against section 7(1) of the Wealth-tax Act, 1957 and entry 86 of List I of the Seventh Schedule. The Calcutta High Court noted that the amended valuation scheme permits rules for determining market value and that the Board's rule-making power extended to the prescribed method. It also observed that earlier Supreme Court rulings did not exclude break-up value in every case, but recognised it as one acceptable method, particularly where asset-based valuation is relevant. The rule was upheld as intra vires, with no unconstitutional discrimination shown.

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Issues: Whether rule 1D of the Wealth-tax Rules, 1957, prescribing the break-up value method for valuing unquoted equity shares, was ultra vires section 7(1) of the Wealth-tax Act, 1957, and entry 86 of List I of the Seventh Schedule to the Constitution of India.

Analysis: The valuation scheme under section 7(1), as amended, operates subject to rules made for determining market value, and section 46(2)(a) authorises the Board to prescribe the manner of valuation. The earlier Supreme Court decisions favouring the yield method did not lay down an inflexible rule excluding break-up value in all cases; they treated break-up value as one recognised method, especially where valuation is to be linked with assets. The rule-making power was exercised within the statutory framework, the rule was laid before Parliament, and the later incorporation of the same break-up approach in Schedule III showed that the method was consistent with the legislative policy. No unconstitutional discrimination was shown in applying a uniform method to unquoted shares.

Conclusion: Rule 1D was held to be valid and not ultra vires the Act or the Constitution; the challenge to the rule failed.

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