Competing share valuation methods yield vs breakup reframed question to clarify legal issue; appeal dismissed

Whether the SC may reframe a question referred by the Tribunal to correctly state the legal issue: Held that the Supreme Court is empowered to reframe a referral where the original question fails to indicate the proper scope of inquiry; the Court may reformulate the question to bring out the real issue for adjudication. Applying this principle to competing valuation methodologies for shares (yield method versus breakup method), the Court determined the appropriate legal approach to valuation under the statutory scheme and, on that basis, dismissed the revenue's appeal.

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Issues: Whether, on the facts and circumstances of the case, the principle of break-up value adopted by the Tribunal as the basis of valuation of shares under section 7 of the Wealth-tax Act is sustainable in law and, if not, what is the correct basis of valuation.

Analysis: Section 7 requires estimation of the price which the asset would fetch if sold in the open market on the valuation date. Shares of public companies quoted on a stock exchange are valued by the market price. For unquoted or private company shares, valuation is ordinarily by reference to dividends or the profit-earning capacity (yield method) reflecting average maintainable profits, with adjustments (for example, adding back disproportionate expenses) where appropriate. The break-up value (asset or liquidation value) is an accepted method only in exceptional circumstances, such as where the company is ripe for winding up or fluctuations/uncertainties prevent any reasonable estimate of prospective profits. Restrictions on transfer in private companies and special remunerations may affect valuation but do not justify treating the break-up value as the general rule for going concerns. The Tribunals adoption of break-up value must be supported by substantial material showing that yield/earnings methods are inapplicable; otherwise the yield/maintainable profits method is the generally appropriate basis.

Conclusion: The break-up value principle is not generally sustainable in law for valuation of shares of a going concern; the correct general basis is the yield method founded on average maintainable profits, with break-up valuation confined to exceptional cases where liquidation or inability to estimate future profits is established. The appeals by the Revenue are dismissed and the valuation principles as stated are affirmed in favour of the assessee.

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