1988 (7) TMI 27 - HC - Wealth-tax

Court rules on deductibility of liability and valuation of unquoted shares in tax case

The court ruled in favor of the Revenue regarding the deductibility of liability due to the Life Insurance Corporation, stating that the liability is not ... Debt Due, Deduction, Exempted Assets, Wealth Tax Issues Involved:1. Deductibility of liability due to Life Insurance Corporation.2. Valuation method for unquoted shares of Biological Evans Ltd.Summary:Issue 1: Deductibility of Liability Due to Life Insurance CorporationThe first issue concerns whether the liability due to the Life Insurance Corporation is allowable as a deduction. The court answered this in the affirmative, in favor of the Revenue and against the assessee, following the decision in Mohd. Ashroff Khan v. CWT [1985] 154 ITR 830. Thus, the liability due to the Life Insurance Corporation is not allowable as a deduction since the debt is incurred on the exempted asset.Issue 2: Valuation Method for Unquoted Shares of Biological Evans Ltd.The second issue pertains to whether the unquoted shares of Biological Evans Ltd. should be valued as per rule 1D of the Wealth-tax Rules, 1957. The assessment years involved are 1981-82, 1982-83, and 1983-84. The Wealth-tax Officer rejected the 'yield method' used by the assessee and applied the 'break-up method' as per rule 1D. The Appellate Assistant Commissioner directed a reassessment, but the Income-tax Appellate Tribunal upheld the application of rule 1D, deeming it mandatory.Section 7(1) of the Wealth-tax Act prescribes the mode of valuation of assets, subject to rules made in this behalf. Rule 1D, introduced by the Wealth-tax (Amendment) Rules, 1967, specifies the 'break-up method' for valuing unquoted equity shares. The rule mandates deducting liabilities from assets as shown in the balance-sheet, dividing the net amount by the paid-up equity share capital, and then adjusting the result to 85% to determine the market value.The court noted a division of opinion among High Courts. The Allahabad and Kerala High Courts held rule 1D as mandatory, while the Bombay, Delhi, and Madras High Courts viewed it as directory, arguing that the 'break-up method' does not reflect the true market value for going concerns and should be applied only when a company is ripe for winding up.The court preferred the view of the Bombay, Delhi, and Madras High Courts, holding that rule 1D is directory. It lies within the discretion of the Wealth-tax Officer to apply the rule. For going concerns, the 'yield method' should be used unless it fails to determine the market value as per section 7(1). Rule 1D should be applied for companies ripe for winding up.Conclusion:The court answered the second question in the negative, in favor of the assessee and against the Revenue, holding that rule 1D is directory and not mandatory. The shares of a going concern should be valued using the 'yield method' unless it fails to determine the market value, in which case rule 1D may be applied.