Break-up valuation under Rule 1D excludes transferred assets and allows deduction of crystallised tax liabilities.

For break-up valuation of unquoted equity shares under Rule 1D of the Wealth-tax Rules, assets transferred under a court-approved scheme of arrangement and already reflected in the finalised balance-sheet cannot continue to be treated as assets of the transferor company. A crystallised additional income-tax liability, quantified and final by the balance-sheet date, is a real liability and may be deducted in computing break-up value, notwithstanding the exclusion for a mere provision for taxation. The stated position leaves only arithmetical quantification to be completed after hearing the assessee.

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Issues: (i) Whether, in valuing unquoted equity shares under Rule 1D of the Wealth-tax Rules, 1957, the amount of Rs. 1,03,50,437 transferred from the general reserve pursuant to a court-approved scheme of arrangement was to be added back to the assets of the transferor company; (ii) whether additional income-tax liability that had been quantified and had become final by the date of finalisation of the balance-sheet was deductible while computing break-up value.

Issue (i): Whether the amount of Rs. 1,03,50,437 transferred from the general reserve pursuant to a court-approved scheme of arrangement was to be added back to the assets of the transferor company.

Analysis: The valuation under Rule 1D had to proceed on the basis of the balance-sheet as finalised for the relevant date. The scheme of arrangement, approved by the High Court with retrospective effect, had already transferred the assets and liabilities of the Kanjur Division to the transferee company, and the corresponding amount had been debited to general reserve in the transferor company's accounts. Once that adjustment had been given effect in the balance-sheet, the transferred net assets could not continue to be treated as assets of the transferor company for break-up valuation.

Conclusion: The amount was not to be added back to the transferor company's assets, and the assessee succeeded on this issue.

Issue (ii): Whether additional income-tax liability that had been quantified and had become final by the date of finalisation of the balance-sheet was deductible while computing break-up value.

Analysis: Although Explanation II(ii)(e) to Rule 1D excludes mere provision for taxation in excess of tax payable on book profits, that exclusion was held not to cover a liability that had already been quantified and had become final. A crystallised tax liability is a real liability of the company and, in principle, must reduce the break-up value of shares. The only matter left open was arithmetical quantification by the Assessing Officer after granting opportunity of hearing.

Conclusion: The additional finalised tax liability was deductible in principle, and the assessee succeeded on this issue, subject to quantification.

Final Conclusion: The appeals succeeded substantially on both valuation controversies, and the matter was sent back only for limited quantification of the deductible tax liability.

Ratio Decidendi: For break-up valuation under Rule 1D, amounts already transferred out of the company pursuant to a court-approved scheme cannot be treated as its assets, and quantified tax liabilities that have become final are deductible notwithstanding the exclusion for mere provision for taxation.

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