1991 (6) TMI 44 - HC - Wealth-tax

Court clarifies Wealth-tax Rules on valuing unquoted equity shares

Commissioner Of Wealth-Tax Versus S. Jindal

Commissioner Of Wealth-Tax Versus S. Jindal - [1992] 194 ITR 539, 100 CTR 217, 63 TAXMANN 371 Issues Involved:1. Deduction of the entire provision for taxation from the value of assets in valuing shares under rule 1D of the Wealth-tax Rules.2. Approval of the assessee's method of valuation for unquoted shares over the Wealth-tax Officer's valuation as per rule 1D.3. Adoption of the market value of unquoted equity shares post-1967, ignoring rule 1D.4. Adoption of the market value of unquoted shares of Jindal Aluminium Ltd. at Rs. 100 per share against the value determined by the Wealth-tax Officer.Detailed Analysis:Issue 1: Deduction of the Entire Provision for TaxationThe first question addressed whether, in valuing shares under rule 1D of the Wealth-tax Rules, the entire provision for taxation appearing on the liabilities side of the balance-sheet should be deducted from the value of the assets. This issue was covered by the decision in CWT v. N. Krishnan [1986] 162 ITR 309, where the court held that the question should be answered in the negative and against the assessee.Issue 2: Approval of Assessee's Method of ValuationThe second question examined whether the Tribunal was right in approving the assessee's method of valuation for unquoted shares in preference to the Wealth-tax Officer's valuation under rule 1D. The court noted that the basic question was whether rule 1D is mandatory and exhaustive of the method of valuation. The court highlighted that the value of an asset should be estimated based on its market price on the valuation date, as per section 7 of the Act. The Supreme Court's decision in CWT v. Mahadeo Jalan [1972] 86 ITR 621 (SC) emphasized that the yield method is the most appropriate method for valuing shares of a going concern, while the break-up method is suitable for companies ripe for liquidation. The court concluded that rule 1D should be read as directory, allowing flexibility in applying relevant valuation principles based on the fact situation. Therefore, the Tribunal's approval of the assessee's method was justified.Issue 3: Adoption of Market Value Post-1967The third question addressed whether the Tribunal was justified in adopting the market value of unquoted equity shares after 1967, ignoring rule 1D. The court reiterated that rule 1D should be read in harmony with section 7 and interpreted as a directory provision. The Supreme Court's observations underscored the need for flexibility in valuation methods to avoid arbitrary and unreasonable outcomes. Consequently, the Tribunal's decision to adopt the market value post-1967, ignoring rule 1D, was upheld.Issue 4: Market Value of Jindal Aluminium Ltd. SharesThe fourth question concerned the Tribunal's adoption of the market value of unquoted shares of Jindal Aluminium Ltd. at Rs. 100 per share, against the value determined by the Wealth-tax Officer. Given the court's stance on rule 1D being directory, the Tribunal's adoption of the market value at Rs. 100 per share was deemed appropriate. Therefore, no specific answer was required for this question.ConclusionThe court concluded that rule 1D of the Wealth-tax Rules is directory, not mandatory. Thus, the Wealth-tax Officer is not bound to apply it in all cases of valuing unquoted equity shares in a private limited company. The references were answered accordingly: Question 1 in the negative against the assessee, and Questions 2 and 3 in the affirmative against the Revenue. Question 4 did not call for a specific answer.