TaxTMI 
TaxTMI 
1991 (3) TMI 107
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....circumstances of the case, the Appellate Tribunal was justified in interfering with the valuation of shares made by the Wealth-tax Officer ?" In view of the sharp conflict of judicial opinion that prevailed on the sole question arising for consideration as to whether rule 1D of the Wealth-tax Rules ("the Rules") was mandatory or directory, the matter was referred for decision by a Full Bench of this court. The cases have, accordingly, come up before us for consideration. We shall briefly refer to the facts of the case before going into the controversy. The assessee, the respondent is a non-resident to whom 1,962 shares of the face value of Rs. 100 each had been allotted in a private limited company, M/s. Company De Mendes (P.) Ltd. This allotment was irregular as prior approval of the Reserve Bank of India had not been obtained for the allotment to the non-resident. The Reserve Bank of India, therefore, objected to the allotment, as early as in 1965, and refused to give ex post facto approval for the registration of the shares in the name of the assessee. The company was directed to "arrange to have the defect rectified" under advice to the bank. Since the defect notified ....
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....rmed in so far as they related to the market value of the 1962 shares. The assessee went up in second appeal to the Appellate Tribunal, who by the order annexure C dated June 6, 1981, allowed the appeals. The Revenue contended that, for unquoted shares like these, the break up method was the only method of valuation prescribed under the Rules. The Tribunal disagreed with this contention and followed the decision of the High Court of Bombay in Kusumben D. Mahadevia v. N. C. Upadhya, ITO [1980] 124 ITR 799 to hold that it was not mandatory to follow rule 1D and that, in appropriate cases, deviation from the method envisaged in that rule was permissible. The Tribunal then went on to consider the matter on merits and came to the conclusion that it took about nine years from 1965 to 1974 for the assessee to find a willing purchaser, and that, for the reasons stated, the face value adopted by the assessee for the shares in question reflected their real market value. The appeals were thus allowed. It is on these facts that the question of law was referred and the question was reframed by this court as stated in paragraph 1 hereinabove. In drawing up the statement of the case, the....
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....iii). Section 4 enumerates certain assets to be included in the net wealth of the assessee. Sections 5 and 6 categorise those assets which are exempted or excluded in the computation of the net wealth. Section 7 lays down the mode of determination of the value of assets. We shall quote sub-section (1) which is relevant : "7(1) Subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date." Section 46 contains the rule-making power. It authorises the Central Board of Direct Taxes to make rules for carrying out the purposes of the Act. The relevant parts of the section, namely, sub-section (1) and clauses (a) and (f) of sub-section (2) are extracted below : "46(1) The Board may, by notification in the Official Gazette, make rules for carrying out the purposes of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, rules made under this section may provide for (a) the manner in which the market value of any asset may be determined... (f)....
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....bsp; Market value the number of accounting years ending on a date immediately preceding the valuation date, for which no dividend has been paid. ------------------------------------------------------------------------------------------------- 1 2 ------------------------------------------------------------------------------------------------- Three years &n....
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.... that it is obligatory for the, officer to follow this method, because of rule 1 D, and that it is not open to him to fix the value of the shares in any other manner. Therefore, the question for consideration is whether rule 1 D is mandatory or directory. It is now well established that the question whether a provision is mandatory or directory depends upon the intent of the Legislature and not upon the language in which the intent is clothed. The court must carefully get into the underlying idea of the provisions and ascertain the purpose to be achieved notwithstanding the text of the provision. The use of the word "shall" does not conclude the matter. The word is no doubt obligatory in its ordinary import. But it need not be given that connotation in each and every case, and a provision can be interpreted as directory despite the use of the word "shall", with reference to the context, the subject-matter and the object of the statute in question (Rubber House v. Excellsior Needle Industries Pvt. Ltd. [1989] AIR 1989 SC 1160 ; JT 1 SC 488). In short, the construction ultimately depends on the provision itself keeping in view the object, design, purpose and scope of the enactment....
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....urt of Bombay in Kusumben D. Mahadevia v. N. C. Upadhya, ITO [1980] 124 ITR 799 which, though rendered on February 21, 1979, was reported only in the year 1980. In that case, the High Court of Bombay had taken the view that rule 1D was not mandatory, but only directory. The same view had been taken by the High Court of Madras in K. M. Mamman v. WTO [1983] 139 ITR 357 to which reference was made in dissent in Mamman Varghese [1983] 139 ITR 351 (Ker). The High Court of Andhra Pradesh had occasion to deal with the matter recently with reference to the divergent opinions expressed by the various High Courts on the point in Dr. D. Renuka v. C WT [1989] 175 ITR 615 (AP). The court observed that there was much to be stated in favour of either view, whether the rule was mandatory or directory, but the Bombay view was preferred for the reason that the view of the Allahabad and Kerala High Courts that it was mandatory brought about a situation unrelated to realities and it would be unjust to assessees to adopt that view, particularly in the case of wealth-tax. It is in this background that we have to consider whether rule 1D is mandatory or directory. Section 3 of the Act provides for ....
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....on 46 which is illustrative of the general power conferred by subsection (1) of the section. Sub-section (2) provides that the rules framed under section 46(1) may provide for the manner in which the market value of the asset may be determined. The use of the word "may" is indicative of the fact that the Legislature has only authorised the laying down of guidelines for the determination of the value of the asset, and not rules enjoining strict compliance with them in the matter of valuation. This is quite in consonance with the spirit and scheme of section 7(1) vesting in the Wealth-tax Officer the right to form his opinion regarding the open market price and to fix the value of the asset based thereon. It is true that section 46(2) (a) is only illustrative of the general provision under section 46(1), but section 46(l) itself does not authorise the framing of any imperative or binding rule, doing away with the prescriptions of section 7(1). When the illustrative power is specific that the executive rule-making authority is only given power to specify the mode in which the value may be determined, it is not for the rule-making authority to make a rule which is imperative in its ....
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....uation to be adopted would be the profit-earning method .... 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 .... The break-up method would not be appropriate for valuation of shares of a company which is a going concern, because as pointed out by the court in Mahadeo Jalan's case [1972] 86 ITR 621, 629 (SC), 'among the factors which govern the consideration of the buyer and the seller where the one desires to purchase and the other wishes to sell, the factor of break-up value of a share as on liquidation hardly enters into consideration where the shares are of a going concern'. It is only where company Is ripe for winding up or the situation is such that the fluctuations of profits and uncertainty of conditions at the date of valuation prevent any reasonable estimation of the profit-earning capacity of the company, that the valuation by the break-up method would be justified. " Having stated so, the court frowned upon the Revenue's a....