AI Drafter 
TaxTMI 
TaxTMI 
2003 (9) TMI 16
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....quoted shares?" The brief facts necessary for adjudication of the above said questions of law are as follows: The applicant-assessee was holding 14,040 equity shares in Malayala Manorama Co. Ltd., Kottayam. The said shares had a face value of Rs. 10 each. In October, 1985, the assessee sold the said shares to Smt. Rachel Mammen and Shri Roy Mammen, Bangalore, at Rs. 5 per share. The Gift-tax Officer noted that the purchasers are the grand children of Sri K. M. Mathew, who is the uncle of the assessee. The officer was of the view that the shares had been sold at a price lower than the market value and so the provisions of the Act were attracted. The officer had also noted that in the wealth-tax assessment in the case of another shareholder the market value of the shares had been assessed at Rs. 44.14 per share. The officer accordingly proposed to take the market value of the unquoted equity shares by applying the provisions of rule 1D of the Wealth-tax Rules and adopted the value of Rs. 44.14. The market value of 14,040 shares was thus determined at Rs. 6,19,725. As the consideration received by the assessee at Rs. 5 per share was only Rs. 70,200, the balance amount of Rs. 5,49,5....
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.... as alleged by the officer. He submitted that the said two persons are the grand children of Sri K. M. Jacob, the brother of Sri K. M. Mathew and that the assessee had married the daughter of Sri K. M. Oommen, another brother of Sri K M. Mathew. Counsel submitted that the purchasers are not the relations of the assessee as understood in the taxation laws. He also submitted that the Assessing Officer had valued the shares at the value fixed in the case of another assessee in the wealth tax assessment by applying rule 1D of the Wealth-tax Rules. Counsel submitted that rule 1D of the Wealth-tax Rules was omitted with effect from April 1, 1989, by the Wealth-tax (Second Amendment) Rules, 1989. Counsel also submitted that though the Commissioner of Income-tax (Appeals) had not accepted the case of the assessee that no gift is involved in the transaction the said authority relying on the decision of the Supreme Court in Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 which held that the appropriate method for valuation of unquoted shares is the yield method and not the break-up method and the shares were valued by applying the yield method. Counsel also submitted that the assessee had also ....
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....ed by the two appellate authorities we do not find any reason to interfere with the said finding. In the above circumstances, the first question referred is answered in the negative, i.e., in favour of the Revenue and against the assessee. Coming to the second question it is a substantial question of law regarding the application of the provisions of rule 1D of the Wealth-tax Rules for valuation of unquoted shares of a company in the absence of a similar provision in the Gift-tax Rules. If the provisions of rule 1D of the Wealth-tax Rules are to be applied for valuation of unquoted shares of a company and since rule 1D of the Wealth-tax Rules is mandatory as held by the Supreme Court in Bharat Hari Singhania's case [1994] 207 ITR 1, the only method of valuation of shares is the break-up method and there is no scope for application of any other method. In the instant case, the Commissioner of Income-tax (Appeals) relying on the decision of the Supreme Court in Smt. Kusumben D. Mahadevia's case [1980] 122 ITR 38 which held that the yield method was to, he applied, directed valuation of the appropriate method valued at the shares of the assessee by applying the yield method. Thus t....
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....he Gift-tax Officer that there were no willing buyers in the market for purchasing those shares since the Central Government had introduced a Bill for diffusion of ownership in newspaper industry which sought to limit the holdings of a director and his relations to 5 per cent, of the total share capital. The Gift-tax Officer observed that there was no valid basis for estimating the value of the shares at their face value and determined the value of the gifted shares as Rs. 73,089 at the rate of Rs. 40.25 per share, that being the value arrived at on the basis of the last balance-sheet. He completed the assessment accordingly. The assessee filed appeal before the Appellate Assistant Commissioner, who allowed the appeal substantially by determining the value of the gifted shares at Rs. 12.50 per shareholding that there was some force in the argument of the assessee that the shares had not been listed on the stock exchange and were not easily saleable. The Department took up the matter in appeal before the Tribunal and the Tribunal determined the value of the gifted shares at Rs. 30 per share, taking note of the news reports published in the newspapers and the statement made by the Mi....
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....v. CED (1984] 145 ITR 238 which has also taken a similar view. The Division Bench had also referred to the decision of the Supreme Court in CWT v. Mahadeo Jalan [1972] 86 ITR 621 and in Kusumben D. Mahadevia v. CGT [1980] 122 ITR 38 (SC). Regarding the determination of the value of unquoted shares, in the former decision rendered in the context of the Wealth-tax Act, the Supreme Court held that the Wealth-tax Officer can on an examination of the balance-sheet, ascertain the profit-earning capacity of the concern and, on the basis of the potential yield, fix the valuation and in the latter case rendered in the context of the provisions of the Gift-tax Act itself the Supreme Court expressed the broad principles which should govern the determination of the value for the purpose of the Gift-tax Act. However, the Division Bench has taken the view that the only method which can be adopted for the valuation of unquoted shares for the purpose of gift-tax is as provided under rule 1D of the Wealth-tax Rules which is mandatory. Here, it must be noted that though the Division Bench has referred to the principles of valuation of unquoted shares laid down by the Supreme Court particularly in Ku....
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....or counsel appearing for the Revenue submitted that the case was squarely covered by the pronouncements of the Supreme Court in Mahadeo Jalan's case [1972] 86 ITR 621 and Kusumben D. Mahadevia's case [1980] 122 ITR 38 (SC) and that the erroneous view of the High Court as to the principles of valuation should, therefore, not remain uncorrected. The Supreme Court also noted that senior counsel for the assessee in the light of the aforesaid two pronouncements of the Supreme Court found it difficult to support the principles on which the determination of the value of the shares proceeded before the authorities as well as before the Tribunal and the High Court. The Supreme Court observed that the basis adopted by the High Court is clearly unsustainable in the light of the pronouncements of the Supreme Court in the light of the two decisions mentioned above. The Supreme Court thereafter referred to the principles of valuation laid down in Kusumben D. Mahadevia's case [1980] 122 ITR 38 (SC) and held that the view taken by the High Court cannot be said to reflect the position in law correctly. Thus, the Supreme Court has followed the principles laid down by the Supreme Court in Kusumben....
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....s a going concern-whether the profit-earning method or a combination of the break-up method and the profit-earning method. It was observed that a combination of the two methods, viz., the profit-earning method and the break-up method, though it may sound acceptable as a compromise formula, cannot be accepted as a valid principle of valuation of shares. The question, it must be noted, arose in the context of valuation of shares of a private company for the purpose of gift-tax. The question considered was as to whether the shares of an investment company have to be valued only on the basis of the yield without taking into account the assets owned and reflected in the balance-sheet. The Revenue then conceded that the decision in Mahadeo Jalan's case [1972] 86 ITR 621 (SC) did lay down certain principles for valuation of shares in a limited company, but its contention was that these principles were no more than broad guidelines and they did not eliminate the necessity of finding out the appropriate method of valuation in each case which came before the taxing authority and it was necessary to make a reference so that the proper method for valuation of the shares of Mafatlal Gagalbhai P....
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....ividends. The figure of profits in such a case would have to be adjusted in order to arrive at the real profit-earning capacity of the company. It would, thus, be seen that in the case of a company which is a going concern and whose shares are not quoted on the stock exchange, the profits which the company has been making and should be capable of making or, in other words, the profit-earning capacity of the company would ordinarily determine the value of the shares. That is why in Mahadeo Jalan's case [1972] 86 ITR 621, 630, 632 (SC), the court quoted with approval the following observations of Williams J. in McCathie v. Federal Commissioners of Taxation (69 Commonwealth Law Reports 1):'. . . the real value of shares which a deceased person holds in a company at the date of his death will depend more on the profits which the company has been making and should be capable of making, having regard to the nature of its business, than upon the amounts which the shares would be likely to realise upon a liquidation,' and stated in no uncertain terms that: 'The general principles of valuation in a going concern is the yield on the basis of average maintainable profits, subject to adjustmen....
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....his own special reasons give a higher price than the price in the open market shall be disregarded". The Supreme Court noted that the argument of the Revenue was that Mafatlal Gagalbhai Pvt. Ltd. was a private limited company and its articles of association admittedly contained restrictive provision as to the lienation of shares and, therefore, rule 10(2) was applicable and according to that sub-rule, the value of the shares was required to be ascertained by reference to the value of the total assets of the company and it was only if the value was not so ascertainable that it could be determined in any other manner. The break-up method was thus, according to this sub-rule, the primary method to be applied for arriving at the valuation of the shares and in the circumstances the Tribunal was wrong in determining the value of the shares by applying the profit-earning method, at least so far as the valuation under the Gift-tax Act was concerned. The Supreme Court declined to consider this question for the reason that this question did not arise out of the order of the Tribunal. The Supreme Court further observed that the Revenue did not raise this question regarding the application of ....
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....tated that the proper method for valuation of unquoted shares of a private company is the yield method and not the break up value method. This position has been reiterated by the Supreme Court in Ambalal Sarabhai's case [1988] 170 ITR 144 which was rendered in the context of the provisions of the Gift-tax Act itself. Of course this decision is subsequent to the decision of this court in Mammen Mathew's case [1986] 158 ITR 466. Thus the position is settled that in the absence of any rules similar to rule 1D of the Wealth-tax Rules regarding the valuation of unquoted shares of a private company the proper method of valuation of unquoted shares is the yield method. We find that though the assessee had relied on the three decisions of the Supreme Court in Kusumben D. Mahadevia's case [1980] 122 ITR 38; Mahadeo Jalan's case [1972] 86 ITR 621 and Ambalal Sarabhai's case [1988] 170 ITR 144, the Tribunal had brushed aside all those decisions and had relied on the decision of this court in Mammen Mathew's case [1986] 158 ITR 466 and the decision of the Supreme Court in Singhania's case [1994] 207 ITR 1 to hold that the valuation of equity shares of Malayala Manorama Co. Ltd. has to be made ....