Break-up valuation of unquoted shares: written down asset values may apply, but undeclared dividends and contingent tax claims are not deductible.

In valuing unquoted shares under the break-up method, the open-market value on the valuation date is the governing standard, and depreciable assets may be taken at income-tax written down value where the balance-sheet does not reflect their true position; this point favoured the assessee. Proposed but undeclared dividends were not existing liabilities on the valuation date and could not be deducted from gross assets; this point favoured the revenue. Agricultural income-tax paid under protest and shown as recoverable was also not a deductible liability, because no subsisting debt existed on the valuation date; this point likewise favoured the revenue.

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Issues: (i) Whether, in valuing unquoted shares under the break-up method, depreciable assets of the company should be taken at their income-tax written down values instead of balance-sheet values; (ii) Whether liabilities for dividends proposed but not declared on the valuation date should be deducted from the gross assets; (iii) Whether agricultural income-tax paid under protest and shown as recoverable could be deducted from the gross assets while computing break-up value.

Issue (i): Whether, in valuing unquoted shares under the break-up method, depreciable assets of the company should be taken at their income-tax written down values instead of balance-sheet values.

Analysis: The valuation under section 7 of the Wealth-tax Act is the price the shares would fetch in the open market on the valuation date. Where the company's balance-sheet did not provide for depreciation and the record showed that the assets were depreciable and had been treated as such in income-tax assessments, the written down value was a relevant factor for the hypothetical purchaser. The balance-sheet did not necessarily represent the true market position on the facts found.

Conclusion: The issue was decided in favour of the assessee. The written down value could be taken into account in preference to the balance-sheet value.

Issue (ii): Whether liabilities for dividends proposed but not declared on the valuation date should be deducted from the gross assets.

Analysis: The proposed dividend had not become a liability on the valuation date. In valuing shares by reference to the company's assets, only existing liabilities can be deducted; a proposed dividend does not create such a debt. The later declaration or non-declaration of dividend cannot alter the position on the valuation date.

Conclusion: The issue was decided against the assessee and in favour of the revenue. Proposed but undeclared dividends were not deductible.

Issue (iii): Whether agricultural income-tax paid under protest and shown as recoverable could be deducted from the gross assets while computing break-up value.

Analysis: On the valuation date there was no subsisting liability to pay that amount, and the company had treated it as an asset recoverable from the Government. A mere possibility of an adverse result in pending litigation did not establish a deductible liability on that date. The facts disclosed in the balance-sheet did not show the amount to be doubtful in the hands of the company so as to reduce the asset value for break-up purposes.

Conclusion: The issue was decided against the assessee and in favour of the revenue. The amount was not deductible from the gross assets.

Final Conclusion: The reference was answered partly for the assessee and partly for the revenue: the first question succeeded, while the second and third questions failed.

Ratio Decidendi: For valuation of unquoted shares under the break-up method, the relevant figure is the open-market value on the valuation date, and only real, existing, and properly ascertainable factors affecting that value may be taken into account; proposed dividends and non-existent liabilities are not deductible, while depreciable assets may be valued by reference to a proved written down value where the balance-sheet does not reflect the true position.

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