1979 (11) TMI 11 - HC - Wealth-tax

High Court affirms Rule 1D's mandatory valuation for unquoted shares, overruling assessee's challenge.

The High Court upheld the mandatory nature of Rule 1D of the Wealth Tax Rules, 1957 in determining the market value of unquoted equity shares. The Court ... - Issues:Interpretation of Rule 1D of the Wealth Tax Rules, 1957 regarding the determination of market value of unquoted equity shares.Detailed Analysis:The judgment of the High Court of Kerala dealt with the interpretation of Rule 1D of the Wealth Tax Rules, 1957, specifically regarding the determination of the market value of unquoted equity shares. The case involved different individuals holding shares in a private limited company and their valuation for the assessment year 1972-73. The shares in question had a face value of Rs. 10, but were valued at Rs. 4,025 based on the balance-sheet of the company. The Wealth Tax Officer (WTO) accepted this valuation under section 16(1), and the assessment was completed. However, the assessee appealed to the Appellate Assistant Commissioner (AAC) seeking a revised valuation, which was not allowed. The AAC confirmed the assessment, leading the assessee to appeal to the Income Tax Appellate Tribunal. The Tribunal considered the impending nationalization of the press and its potential impact on the company's share value, deciding to discount the value of the shares to Rs. 30 per share. This decision was based on a judgment related to gift tax and the absence of specific rules for valuing unquoted equity shares under the Gift Tax Act. The Tribunal cited a decision of the Madras High Court, holding that Rule 1D is not mandatory, and allowed the appeals partially by fixing the share value at Rs. 30.The High Court analyzed Section 7 and Rule 1D of the Wealth Tax Act, emphasizing the imperative language used in both provisions. Section 7 mandates that the value of any asset shall be estimated as per the opinion of the Wealth Tax Officer, while Rule 1D outlines the method for determining the market value of unquoted equity shares. The Court rejected the argument that the rule was merely enabling, stating that the use of 'shall' in the rule indicates a mandatory requirement. The Court referenced previous decisions by the Allahabad High Court and the Supreme Court to support the interpretation that the rule must be followed in valuing unquoted equity shares. The Court disagreed with the view that Rule 1D could be understood as directory and not mandatory, as suggested in a treatise and an unreported judgment of the Madras High Court.In conclusion, the High Court held that the Tribunal erred in interfering with the valuation made by the WTO and confirmed by the AAC based on Rule 1D. The Court answered the referred question in favor of the Revenue and against the assessee, directing the appeals to go back to the Tribunal for further proceedings. The judgment emphasized the mandatory nature of Rule 1D in determining the market value of unquoted equity shares under the Wealth Tax Act.