TaxTMI 
TaxTMI 
1988 (2) TMI 107
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....foresaid companies should be determined on the basis of the principles laid down by the decision of the Supreme Court in the case of CWT v. Mahadeo Jalan [1972] 86 ITR 621. The WTO, however, did not accept the assessee's contention and determined the market value of the unquoted shares as per rule 1D. 3. The assessee appealed to the CWT (Appeals) before whom it was submitted that the WTO should have determined the value of unquoted shares held by the assessee yield method basis. The CWT (Appeals) following the decision of the Bombay High Court in the case of Smt. Kusumben D. Mahadevia v. N. C. Upadhya [1980] 124 ITR 799, upheld the assessee's contention. Against he order of the CWT (Appeals) the department has come up in appeal before the Tribunal. 4. In WTA No. 440 (Cal.) /1986, the assessee, namely, Lyons Range Merchants Association, the WTO valued the unquoted shares held by the assessee by adopting break-up value method as prescribed under rule 1D. The CWT (Appeals) following the decision of the Appellate Tribunal, Delhi Bench 'B' (Special Bench) in the case of WTO v. Seth Sudhir Kumar Modi [1985] 14 ITD 194, as also the decision of the Appellate Tribunal, Calcutta Bench ....
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....e of Biju Patnaik v. WTO (1982) 1 SOT 623 in support of the contention that rule 1D is mandatory. For the same proposition reliance has also been placed on the decision of the Special Bench in the case of Seth Sudhir Kumar Modi and the decision of the Appellate Tribunal, Calcutta Bench 'B' in the case of Sheo Prosad Nopany. Shri Pal also cited the decision of the Appellate Tribunal, Bangalore Bench in the case of WTO v. Shivanand V. Salgaocar (1984) 10 ITD 471 in support of the contention that the valuation of unquoted shares have necessarily to be determined in accordance with the provision of rule 1D. Shri Pal also placed reliance on the decision of the Bombay High Court in the case of CWT v. Pratap Bhogilal (1987) 167 ITR 501 for the proposition canvassed by him before us. Shri Pal then submitted that in the case of Smt. Bella Cajeton Travasso v. Third WTO (1987) 166 ITR 49, the Bombay High Court has held that the Valuation Officer could not refuse to consider the applicability of rule 1BB of the Wealth-tax Rules, 1957 while entertaining the reference made by the Wealth-tax Officer. This authority, according to Shri Pal, supported the proposition that rule 1D is mandatory even f....
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....------------ Reported in Title of the case Bench Relevant asst. ------------------------------------------------------------------------------------------------ 1. (1987) 28 TTJ 193 Ashwin C. Choksey A-Bench Bombay, 1978-79 (Bombay) (HUF) v. Fourth Wealth-tax Officer. 2. (1987) 28 TTJ 308 Wealth-tax Officer v. C-Bench, Calcutta 1981-82 & 1982-83 (Cal) K.S. Ranganna. 3. (1987) 28 TTJ 116 Kanhayalal Sawhney v. A-Bench, Del....
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....p; 1976-77 & 1977-78 (Cal) Madhukant J. Shah ------------------------------------------------------------------------------------------------ 8. Yet another argument advanced by Shri Chakraborty was that since there was divergence of judicial opinion on the question whether the provision of rule 1D is directory or mandatory, the view favourable to the assessee should be adopted and in support of this contention reliance has been placed on the decision of the Supreme Court in the case of CIT v. Vegetable Products Ltd. (1973) 88 ITR 192. 9. Shri R. N. Bajoria who appeared before us on behalf of the assessee, Lyons Range Merchant Association submitted that for the purpose of finding out whether rule 1D is directory or mandatory the scheme of the Act will have to be examined. Shri Bajoria pointed out that section 3 is the charging section under which tax is chargeable in respect of the net wealth of an assessee. It was then pointed out that the expression 'net wealth' is defined in section 2(m). Shri Bajoria then referred to....
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....tion if in given case the market value of unquoted shares can be determined by applying the provisions of rule 1D and that this discretion vested in the WTO is not taken away by this rule which prescribes on of the methods of determining the value of unquoted shares. 10. Shri Bajoria then countered the argument advanced on behalf of the department and based on the opening words "subject to any rules in this regard" occurring in section 7(1) by submitting that these words merely signified that while determining the value of unquoted shares the WTO has also to keep in view the provision of rule 1D and that considering the facts and circumstances of a given case he is free to choose one of the recognised methods for valuation of the unquoted shares in accordance with the principles laid down by the Supreme Court in the case of Mahadeo Jalan. The subject of section 7(1) as also of rule 1D being to arrive at the market value of an asset, the WTO while keeping in view the provision of rule 1D, has to determine the market value of unquoted shares and while doing so, he has the discretion to apply a proper method. Shri Bajoria referred to the observations of the Appellate Tribunal, Bomb....
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....tion 2(m) shows that the aggregate value of the assets is to be computed in accordance with the provisions of the Act. Section 7(1) is the relevant machinery section. It runs as follows : "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 price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date." 13. The words "subject to any rules made in this behalf" were substituted for the words "the value" by the Wealth-tax (Amendment) Act, 1964 with effect from 1-4-1965. The Board in exercise of the powers conferred on it under section 46(2)(a) framed rules for determining the market value of certain assets including unquoted shares of a company other than an investment company or a managing agency company. 14. Section 46(1) provides that the Board may, by notification in the Official Gazette, make rules of carrying out the purposes of this Act. Sub-section (2) of section 46 reads as under : "46(2) : In particular, and without prejudice to the generality of the foregoing power, rules made under this section may provide for (a) the m....
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.... this behalf. We are unable to persuade ourselves to accept the contention advanced on behalf of the department that the aforesaid words indicate that the WTO while determining the value of unquoted shares, is bound to follow the provisions contained in rule 1D which prescribes break-up value method of determining the valuation of unquoted shares. There are more than one reason to reject the contention advanced in this regard on behalf on the department. It is noticeable that value of an asset to be estimated by the WTO has to be the price which, in his opinion, the asset would fetch if sold in the open market on the valuation date. The use of the words "in the opinion of the Wealth-tax Officer" occurring in section 7(1) indicates that in the matter of arriving at the market value of an asset, a discretion has been given to the WTO to adopt a method to enable him to arrive at a fair and proper market value of the asset. When the object of section 7(1) is to enable the WTO to determine the market value of an asset which is includible in the wealth of an assessee it cannot be fettered by placing limitations on it while issuance of guidelines in the form of rule 1D can be permitted. I....
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....sideration and then exercise his discretion in such a manner that the method followed by him leads to the determination of a fair and proper market value of the asset. 18. Much emphasis has been laid by the learned departmental representative n the use of the word 'shall' in rule 1D to buttress his view that rule 1D is mandatory. It is well settled that the use of the expression 'may' or 'shall' is never considered decisive while considering the question whether a particular provision under a statute or the rule framed thereunder is mandatory or directory. If an authority is required on the point, reference ma be made to the decision of the Punjab and Haryana High Court in the case of Raj Pasul Oswal v. CWT (1987) 35 Taxman 509. In the case of Smt. Kusumben D. Mahadevia also it has been held by their Lordships of the Bombay High Court that the use of the word 'shall' is never conclusive of the nature of the provision, that is, whether it is mandatory or directory. So, the use of the word 'shall' in rule 1D cannot be itself lead to the conclusion that its provision is mandatory in nature. 19. Under section 46(2)(a) the rules made by the Board may provide for the manner in whic....
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....of making section 64(iii) subject to the provisions of section 27(1) of the IT Act, 1961. In that context, it was held that the words 'subject to' occurring in section 64(iii) merely give priority to clause (i) of section 27 where it applies. This authority, in our opinion, does not go in aid of the contention advanced before us on behalf of the department. 21. The learned departmental representative also placed reliance on the decision of the Calcutta High Court in the case of Sardar Bahadur Sardar Indra Singh Trust v. CIT (1954) 26 ITR 670 in support of the contention that rules have statutory force. In that case it was held by the Calcutta High Court that the requirements of rules 36 and 37 of the Income-tax Rules framed under the Indian Income-tax Act, 1922 were mandatory as they were to be read as part of the Act. This authority does not, however, lay down a rule of universal application that every rule framed under a statute must be held to be mandatory in nature. 22. Their Lordships of the Supreme Court had an opportunity to consider in detail the methods of valuation of equity shares in Mahadeo Jalan's case. After examining various aspects of valuation of shares in a ....
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....nciples, we have not tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case. But, not thing is clear, the market value, unless in exceptional circumstances to which we have referred, cannot be determined on the hypothesis that because in a private limited company one holder can bring it into liquidation, it should be valued as on liquidation by the break-up method. The yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation but nonetheless is one of the methods." 23. True, the assessment years involved in Mahadeo Jalan's case related to a period prior to the enactment of rule 1D but the principles laid down by their Lordships for determining the valuation of unquoted shares are still valid and hold the filed. In view of the principles laid down by the Supreme Court in the aforesaid case normally permissible method of determining the market value of un....
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....his connection we refer the decision of the Delhi High Court in the case of Sharbati Devi Jhalani, where their Lordships of the Delhi High Court have made the following observations at page 561 of the report : "Once such a reference has been made, the valuation has then to be determined by the Valuation Officer. The value of the asset which has to be determined by the Valuation Officer has to be arrived at according to section. 7(3) of the Act. Sub-section(3) of section 7 clearly provides that the asset is to be valued by the Valuation Officer by determining what will be its price if sold in the open market on the valuation date. In case the asset is a house, then the determination is to be of its market value on the valuation date as specified in sub-section (4). Sub-section (3) opens with the words 'notwithstanding anything contained in sub-section (1)'. This will mean that notwithstanding there being anything contrary in sub-section. (1), the Valuation Officer is to estimate the value of an asset in the manner specified in sub-section. (3). In other words, the powers of the Valuation Officer are not subject to any rules which may be made in determining the value of an asset. ....
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....arly lays down that the value of any asset for the purpose of assessment would be that, which in the opinion of the WTO, would be the estimated price thereof in the open market on the valuation date. The said opinion or estimate is, however, made subject to the rules prescribed in this behalf. Therefore, if the valuation of the asset concerned is required to be determined under section 7(1), the rules promulgated and referred to in the section are necessarily attracted. In this case the question whether rule 1BB of rule 1D is mandatory or directory did not come up for consideration before their Lordships. This authority cannot, therefore, be relied upon in support of the contention that rule 1D is mandatory. It may further be noted that in this case it has been had that section 7(1) is a procedural section and that rule 1D or rule 1BB laid down methods for determination of valuation and did not affect in any manner either the charging of tax or rates of tax be imposed. 34. There has been divergence of opinion by various High Courts as pointed out above. It is well settled that where two views are possible the view favourable to the assessee should be adopted as held by the Supre....