Yield method governs valuation of private company shares; break-up value applies only in exceptional liquidation-like cases.

For valuation of shares in a private limited company under section 7 of the Wealth-tax Act, 1957, the open-market value is ordinarily to be determined by the yield or earnings basis reflecting maintainable profits, because a going concern should be valued by its profit-earning capacity rather than a hypothetical liquidation figure. The dividend and earnings methods may be used together with necessary adjustments for abnormal expenses or distorted dividend policy. Break-up value is confined to exceptional cases, such as where the company is ripe for winding up or reliable estimation of future profits is not possible; therefore, the break-up value method is not sustainable merely because the company is private.

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Issues: Whether, for valuation of shares in a private limited company under section 7 of the Wealth-tax Act, 1957, the break-up value method is sustainable in law or whether the yield value method is the proper basis.

Analysis: Section 7 requires the value of an asset to be estimated at the price it would fetch if sold in the open market on the valuation date. For shares in a going concern, particularly in a private limited company, the decisive factor is ordinarily the profit-earning capacity reflected by maintainable profits and yield, not the hypothetical liquidation value. The dividend and earnings methods are not mutually exclusive and may be used to ascertain a reasonable market value, with adjustments where necessary for abnormal expenses or distorted dividend policy. The break-up value method is appropriate only in exceptional cases, such as where the company is ripe for winding up or where reliable estimation of prospective profits is not possible.

Conclusion: The break-up value method, adopted merely because the shares were in a private limited company, is not sustainable in law. The yield method is the generally applicable basis, and the appeals fail.

Final Conclusion: Shares of a going private company must ordinarily be valued on the basis of yield and maintainable profits, with break-up value confined to exceptional situations of liquidation or comparable uncertainty.

Ratio Decidendi: Under section 7 of the Wealth-tax Act, 1957, the open-market value of shares in a going concern is ordinarily to be determined by the yield or earnings basis reflecting maintainable profits, while break-up value applies only in exceptional circumstances.

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