1979 (2) TMI 18 - HC - Wealth-tax

Court upholds Rule 1D as discretionary, not mandatory, for valuers.

The court held that Rule 1D of the Wealth-tax Rules, 1957, is valid as a directory rule, not mandatory. Valuers were not strictly bound by Rule 1D and ... Break Up Method, In This Behalf, Quoted Equity Shares Issues Involved:1. Validity of Rule 1D of the Wealth-tax Rules, 1957.2. Whether valuers were bound to value the shares in accordance with Rule 1D.3. Whether the Tribunal should have accepted the value of the shares as determined by the valuers.4. Whether Rule 1D goes beyond the substantive provisions of valuation in Section 7(1) of the Wealth-tax Act, 1957.Issue-wise Detailed Analysis:1. Validity of Rule 1D of the Wealth-tax Rules, 1957:The core issue was whether Rule 1D, which prescribes the break-up value method for valuing unquoted equity shares, was valid. The court noted that Rule 1D, effective from October 6, 1967, mandated that the market value of an unquoted equity share be determined by the break-up value method. The petitioner argued that Rule 1D was ultra vires because it mandated a method that did not align with the substantive provisions of Section 7(1) of the Wealth-tax Act, which requires the valuation to reflect the price the asset would fetch if sold in the open market. The court examined the rule-making power under Section 46 and concluded that Rule 1D should be construed as a directory rule rather than mandatory, to align with the discretionary nature of the rule-making power under Section 46(2)(a). The court emphasized that the rule-making authority intended to provide a method that could be used at the discretion of the Wealth-tax Officer (WTO), not to mandate a single method of valuation. Therefore, Rule 1D was held to be valid as a directory rule.2. Whether valuers were bound to value the shares in accordance with Rule 1D:The court examined whether the valuers appointed under Section 24(6) of the Wealth-tax Act were bound to follow Rule 1D. The Tribunal had found that Rule 1D was mandatory, and thus the valuers should have computed the value of the shares in accordance with it. However, the court held that Rule 1D was directory, not mandatory. Therefore, the valuers were not strictly bound to follow Rule 1D and could use other recognized methods of valuation, such as the yield method, depending on the circumstances of the case.3. Whether the Tribunal should have accepted the value of the shares as determined by the valuers:The Tribunal had rejected the valuers' report, which valued the shares at Rs. 175, and instead upheld the valuation of Rs. 254 per share determined by the revenue authorities using Rule 1D. The court held that the Tribunal erred in ignoring the valuers' report. Under Section 24(6), the Tribunal was required to pass its orders conformably to the decision of the valuers. Hence, the Tribunal should have accepted the valuers' determination of the share value.4. Whether Rule 1D goes beyond the substantive provisions of valuation in Section 7(1) of the Wealth-tax Act, 1957:The petitioner argued that Rule 1D, by mandating the break-up value method, conflicted with Section 7(1), which requires the valuation to reflect the market price. The court noted that the break-up value method is generally used for companies facing liquidation and not for going concerns. The court referred to the Supreme Court's decision in CWT v. Mahadeo Jalan, which emphasized that the yield method is the appropriate method for valuing shares of a going concern, while the break-up value method is reserved for exceptional circumstances. By construing Rule 1D as directory, the court harmonized it with Section 7(1), ensuring that the rule did not override the statute's requirement to determine the market value.Conclusion:The court held that Rule 1D of the Wealth-tax Rules, 1957, is valid as a directory rule and not mandatory. The valuers were not bound to follow Rule 1D exclusively and could use other valuation methods. The Tribunal should have accepted the valuers' report. The answers to the questions referred were: (1) No, the valuers were not bound to value the shares strictly in accordance with Rule 1D; (2) Yes, the Tribunal should have accepted the valuers' valuation; and (3) The question of Rule 1D being ultra vires was not referred by the Tribunal, but the court's interpretation rendered it consistent with Section 7(1). The rule was discharged, and each party was ordered to bear its own costs.