1994 (2) TMI 55 - SC - Wealth-tax

Rule 1D mandatory for valuing unquoted equity shares: follow break-up value with 15% deduction, no alternatives

SC held that rule 1D is mandatory for valuing unquoted equity shares and must be followed by Wealth-tax Officers and Valuation Officers; no alternative ... Determination of the market value of the unquoted shares - Obligatory to follow rule 1D while valuing unquoted equity shares - Hindu undivided family - Valuation date - expression 'net wealth' is defined in clause(m) of section 2 - appropriate method for valuing the unquoted equity shares - expression 'value of an asset' - Held that:- The rule-making authority has prescribed only one method for valuing the unquoted equity shares. If this method were not to be followed, there is no other method prescribed by the rules. The acceptance of the assessees' contention would mean that it would be open to the Wealth-tax Officer to adopt such other method of valuation as he thinks appropriate in the circumstances. This is bound to lead to vesting of uncalled for wide discretion in the hands of Wealth-tax Officers/valuing authorities. It would lead to uncertainty and may be arbitrariness in practice. Where there is a rule prescribing the manner in which particular property has to be valued, the authorities under the Act have to follow it. They cannot devise their own ways and means for valuing the assets. It is equally well to remember that rule 1D does not treat the break-up value as the market value. A deduction of 15 per cent. is made in the break-up value to arrive at the market value. It is equally relevant to notice that rule 1D uses the expression 'shall', which prima facie indicates its mandatory character. Rule 1D is not ineffective or invalid for any of the reasons suggested by learned counsel for the assessees nor can it be said that the Wealth-tax Officer has an option to follow or not to follow the said rule. He has to follow and apply the said rule in each and every case where he has to value the unquoted equity shares of a company. The contention of the assessees that it is merely directory and that it need not be followed at the choice of the Wealth-tax Officer or the assessee, or in the case of a going concern, cannot be accepted. The Valuation Officer is equally bound by rule 1D-as indeed he is bound by all the other Rules made under the Act. This is the view taken by the Allahabad High Court in CWT v. Smt. Pushpawati Devi Singhania [1990 (11) TMI 109 - ALLAHABAD HIGH COURT]. The contrary view taken by the Delhi High Court in Sharbati Devi Jhalani v. CWT [1985 (8) TMI 61 - DELHI HIGH COURT] and other High Courts, if any, is overruled. For the purpose of determining the market value, the sub-section says that the Wealth-tax Officer shall make an estimate of the price which the asset would fetch if sold in the open market on the valuation date. The sub-section speaks of the market value of the asset and not the net income or the net price received by the assessee. This is not a case where a fiction is created by Parliament. It is only a case of prescribing the basis of determination of market value. On the same reasoning, it must be held that no other amounts like provision for taxation, provident fund and gratuity, etc., can be deducted. The contention of learned counsel for the assessee is, therefore, wholly unacceptable. It must be remembered that what is sought to be valued is an unquoted equity share. Since it is not quoted on the stock exchange and there are no dealings in those shares, some formula has to be evolved for determining its value. So long as the formula evolved is reasonable having regard to available circumstances and practicable considerations, the formula cannot be faulted. No formula can be evolved to fit all conceivable situations. Even if the dividend method is adopted, the said problem would still be present. The dividend may have been declared on a date different from the valuation date. For all the above reasons, it is not possible to agree that merely because the valuation date and the date of the balance-sheet are not the same, rule 1D need not be followed. By reading clause (i)(a) and clause (ii)(e) together, the assessee will be getting the benefit of entire ₹ 10 lakhs but so far as the balance-sheet for the purpose of rule 1D is concerned, only ₹ 2 lakhs will be treated as a liability on the valuation date since that is the actual amount still outstanding. We do not think that if the aforesaid clauses are understood as explained herein, there is any prejudice to the assessees or to the Revenue. It indeed reflects the true situation. Thus we do not think it necessary to deal with the opposing views of the High Courts at any length. An assessee holding shares in a company whose assets comprise wholly or partly of agricultural land, is not entitled to exclude such shares from his wealth. Issues Involved:1. Whether it is obligatory to follow rule 1D while valuing unquoted equity shares or is it merely optional.2. Whether the Valuation Officer is bound by rule 1D when valuing unquoted equity shares.3. Whether the application of the 'break-up method' in rule 1D means that the capital gains tax, which would be payable if the shares are sold, is liable to be deducted from the market value determined.4. Where the date of a balance-sheet of the company is earlier to the valuation date of the assessee, is it obligatory to follow rule 1D.5. How are sub-clause (a) of clause (i) and sub-clause (e) of clause (ii) of Explanation II to be read and understood.6. Whether the assessee holding shares in a company whose assets comprise wholly tea estates is entitled to exclude such shares from his wealth.Detailed Analysis:Issue 1: Whether it is obligatory to follow rule 1D while valuing unquoted equity shares or is it merely optional.The court held that rule 1D is mandatory and not merely directory. The rule prescribes the 'break-up method' for valuing unquoted equity shares, which involves deducting liabilities from assets shown in the balance-sheet, dividing the net amount by the total paid-up equity share capital, and then multiplying by the paid-up value of each equity share. The resultant value, after applying an 85% factor, is treated as the market value. The court rejected the contention that rule 1D is inconsistent with section 7(1) or beyond the rule-making authority. It emphasized that the rule is a recognized method for valuing unquoted shares and must be followed in each case.Issue 2: Whether the Valuation Officer is bound by rule 1D when valuing unquoted equity shares.The court determined that the Valuation Officer is bound by rule 1D. The non obstante clause in section 7(3) does not exempt the Valuation Officer from following the rules made under the Act. The court clarified that the Valuation Officer, as a creature of the statute, must adhere to the rules, ensuring uniformity in the method of valuation across all cases.Issue 3: Whether the application of the 'break-up method' in rule 1D means that the capital gains tax, which would be payable if the shares are sold, is liable to be deducted from the market value determined.The court ruled that no deductions on account of capital gains tax or other amounts like provision for taxation, provident fund, and gratuity can be made while applying rule 1D. The sub-section speaks of the market value of the asset, not the net income or net price received by the assessee. The rule is exhaustive on the subject, and the contention for deductions was deemed wholly unacceptable.Issue 4: Where the date of a balance-sheet of the company is earlier to the valuation date of the assessee, is it obligatory to follow rule 1D.The court upheld the validity of Explanation I to rule 1D, which addresses situations where the balance-sheet date does not coincide with the valuation date. The rule mandates using the balance-sheet drawn up immediately preceding or following the valuation date. The court found this approach reasonable and consistent with the legislative intent, rejecting the argument that rule 1D need not be followed if the dates do not coincide.Issue 5: How are sub-clause (a) of clause (i) and sub-clause (e) of clause (ii) of Explanation II to be read and understood.The court explained that clause (i)(a) excludes advance tax paid under section 210 of the Income-tax Act from being treated as an asset. Clause (ii)(e) specifies that only the amount equal to the tax payable on book profits is treated as a liability, excluding any excess provision for taxation. The court clarified that these clauses ensure that the balance-sheet reflects the true financial position, benefiting the assessee by reducing assets and liabilities appropriately.Issue 6: Whether the assessee holding shares in a company whose assets comprise wholly tea estates is entitled to exclude such shares from his wealth.The court rejected the contention, stating that the wealth being assessed is that of the shareholder, not the company. The shareholder does not own any portion of the company's property directly. The decision in Bacha F. Guzdar v. CIT was cited, which established that dividend income from a company with agricultural assets is not 'agricultural income' for tax purposes, reinforcing that the shareholder's wealth includes the value of such shares.Conclusion:1. Rule 1D is valid and mandatory for valuing unquoted equity shares.2. The Valuation Officer must follow rule 1D.3. No deductions for capital gains tax or other provisions are allowed under rule 1D.4. Explanation I to rule 1D is valid, and the rule must be followed even if balance-sheet and valuation dates do not coincide.5. Sub-clause (a) of clause (i) and sub-clause (e) of clause (ii) must be read to reflect true financial positions, excluding certain assets and liabilities.6. Shares in a company with agricultural assets cannot be excluded from the shareholder's wealth.