1981 (8) TMI 99 - AT - Income Tax

Tribunal Upholds Valuation Method for Unquoted Shares Excluding Goodwill Value

The Tribunal upheld the Commissioner (Appeals)'s decision to value unquoted shares using the break-up value method under rule 1D of the Wealth-tax Rules, ... Valuation of unquoted shares under rule 1D of the Wealth-tax Rules - exclusion of goodwill from break-up value - application of Wealth-tax valuation rules to Gift-tax valuation - reduction in break-up value for non-payment of dividend under the proviso to rule 1D - profit-yielding method versus break-up value methodValuation of unquoted shares under rule 1D of the Wealth-tax Rules - exclusion of goodwill from break-up value - application of Wealth-tax valuation rules to Gift-tax valuation - Goodwill is not to be added to the break-up value of unquoted shares when valuing shares under rule 1D for gift-tax purposes. - HELD THAT: - The Tribunal upheld the Commissioner (Appeals)'s adoption of rule 1D of the Wealth-tax Rules for valuing the unquoted shares for gift-tax purposes, relying on precedent that where a statutorily recognised method of valuation for unquoted shares exists, that method may be employed for allied fiscal statutes. In consequence, the market value derived from the balance-sheet based break-up calculation does not permit addition of an imputed goodwill figure unless the goodwill has been purchased for a price and is to be treated as an asset not shown in the balance sheet under the relevant rule. No authority or rule was shown to permit adding an independent market value of goodwill to the break-up value in the facts of this case, and rule 2C indicates purchased goodwill alone is to be added where applicable. The departmental contention that goodwill should be added was therefore rejected. [Paras 6]The finding of the Commissioner (Appeals) excluding goodwill from the break-up valuation is sustained; the department's appeals on this point fail.Valuation of unquoted shares under rule 1D of the Wealth-tax Rules - reduction in break-up value for non-payment of dividend under the proviso to rule 1D - The reduction in break-up value provided by the proviso to rule 1D for companies not declaring dividend must be applied when rule 1D is used for valuation. - HELD THAT: - The Tribunal found that once rule 1D is adopted for valuation, its proviso - which prescribes specified reductions in market value where dividends have not been paid for prescribed periods - cannot be ignored. The Commissioner (Appeals) had expressed that a reduction should be allowed but the operative wording in his order omitted the reduction; the Tribunal treated that omission as unintended and held there is no justification for denying the benefit conferred by the proviso. The allowance of the reduction is however directed to be subject to verification by the assessing officer. [Paras 9]The assessee's claim for reduction under the proviso to rule 1D is allowed and the assessing officer is directed to give effect to the reduction after verification.Final Conclusion: The department's appeals are dismissed. The assessee's appeals are allowed to the extent that valuation of the unquoted shares is to follow rule 1D (excluding goodwill) and the reduction under the proviso to rule 1D for non-payment of dividend is to be applied subject to verification by the assessing officer. Issues:1. Valuation of unquoted shares for gift-tax purposes under rule 1D of the Wealth-tax Rules.2. Inclusion of goodwill value in determining the value of unquoted shares.3. Allowance of reduction in share value for non-payment of dividends by the company.Analysis:1. The appeals before the Appellate Tribunal ITAT BOMBAY-D pertained to the valuation of unquoted shares for gift-tax assessment for the years 1973-74 and 1974-75. The assessee contended that the shares should be valued using the break-up value method under rule 1D of the Wealth-tax Rules. The Gift Tax Officer (GTO) valued the shares based on the balance sheet and average net profit, including goodwill value, resulting in a specific per share value for each assessment year.2. The Commissioner (Appeals) accepted the assessee's argument, citing the Karnataka High Court ruling that supported the use of rule 1D for valuation and excluded goodwill value from the calculation. The department, in its appeal, challenged this exclusion of goodwill value from the total assets of the company in determining the share value, arguing that it should be included.3. The assessee also appealed, claiming a 25% deduction from the break-up value due to the company's non-declaration of dividends for six years. The Commissioner (Appeals) acknowledged the need for a reduction under the proviso to rule 1D for cases with no dividend payments but failed to provide a reason for not allowing the reduction in the final valuation. The Tribunal directed the GTO to verify and allow the reduction as per the proviso to rule 1D when determining the share value.4. The Tribunal referenced the Karnataka High Court ruling and the Supreme Court decision in similar cases, affirming the use of rule 1D for valuing unquoted shares under the Gift-tax Act. It emphasized that the method of valuation should align with recognized practices and that goodwill value should not be added unless specifically purchased for a price. The Tribunal dismissed the department's appeals and allowed the assessee's appeals, directing the GTO to apply the reduction as per the proviso to rule 1D in determining the share value.In conclusion, the Tribunal upheld the Commissioner (Appeals)'s decision to value the unquoted shares using the break-up value method under rule 1D of the Wealth-tax Rules, excluding the goodwill value. It also directed the GTO to allow the reduction in share value as per the proviso to rule 1D for cases with no dividend payments by the company.