ivil Appeal Nos 129 and 512 of 1 97
Appeals by Special Leave from the Judgment and order dated 19 6 1975 of the Bombay High Court in Gift Tax Application Nos 1 and 2 of 1975
AND CIVIL APPEAL Nos 755 756 OF 1976 Appeals by Special Leave from the Judgment and order dated 8 12 1975 of the Bombay High Court in WTA No 1575
AND 359 CIVlL APPEAL No 1787 OF 1977 Appeal by Special Leave from the Judgment and order dated 18 12 1976 of the Bombay High Court in WTA No 2476
AND CIVIL APPEALS NOS
1639 1645 OF 1977 Appeals by Special Leave from the Judgment and order dated 3 1976 of the Bombay High Court in Writ Petition Nos 16 1 and 2176 and Judgment and order dated 4 11 1976 in WTA Nos 20 and 2376
ST Desai section P Nayar and Miss A Subhashini for the Appellants
N A Palkhiwala section P Mehta H P Raina Ravinder Narain Mrs A K Verma Talat Ansari and A N Haksar for the Respondents
The Judgment of the Court was delivered by BHAGWATI J
These appeals by special leave raise a short question as to whether a reference should have been called for by the High Court in each of these cases
Some of these cases are under the Gift Tax Act while others under the Wealth Tax Act
They all relate to the valuation of the ordinary shares of a private limited company called Mafatlal Gagalbhai Pvt Ltd which is admittedly an investment company
The assessee in these cases claimed in the course of assessment to gift tax or wealth tax as the case may be that the value of the shares should be taken to be the figure arrived at by Ms C C Chokay  Co Chartered Accountants by applying the profit earning method of valuation of shares without making any adjustment in the profits of the company
It is not necessary for the purpose of these appeals to set out the different figures of valuation given in the report of Ms C C Chokay  Co and claimed by the assessees as representing the correct value of the shares on the material dates because the question with which we are concerned is one of principle and the actual figures of valuation are not relevant
The Gift Tax and the Wealth Tax officers did not accept the figures of valuation given by the assessees on the basis of the profit earning method and valued the shares at much higher figures by applying the break up method
This naturally involved the assessees in higher tax liability and hence they preferred appeals to the Appellate Assistant Commissioner
The Appellate Assistant Commissioner applied what has been described in 360 the record as rule of three and reduced the valuation of the shares but the figure determined by the Appellate Assistant Commissioner were still higher than those claimed by the assessees
Since the valuation of the shares made by the Gift Tax and the Wealth Tax officers was reduced by the Appellate Assistant Commissioner the Revenue was dissatisfied and it therefore preferred appeals against the orders of the Appellate Assistant Commissioner to the Tribunal
The assessees were also unhappy with the valuation made by the Appellate Assistant Commissioner since he did not accept the valuation put forward on their behalf and hence they too preferred cross objections in the appeals filed by the Revenue
The appeals and the cross objections in the cases forming the subject matter of Civil Appeal No 12976 ere heard together by the Tribunal
The only controversy before the Tribunal was as to which method should be followed for valuing the shares of the company
The Revenue contended that in the case of an investment company like Mafatlal Gagalbhai Pvt Ltd the proper method of valuation would be to take the mean of two values one arrived at by applying the profit earning method and the other by applying the break up method while the assessees pleaded for adopting only the profit earning method since in their submission that was the only method which could be applied for valuation of shares of a going concern The Tribunal by a common judgment accepted the contention of the assessees and adopted the valuation of the shares made by Ms C C Chokay and Co by applying the profit earning method and in the result rejected the appeals of the Revenue and allowed the cross objections of the assessees
We shall discuss in some detail the reasons which weighed with the Tribunal in coming to this decision when we deal with the arguments of the parties but suffice it to state for the present that in taking this view the Tribunal followed the recent decision of this Court in Commissioner of Wealth Tax vs Mahadeo Jalan  Ors
Similar orders were passed by the Tribunal in the appeals and cross objections relating to the other assessees
The Revenue was obviously aggrieved by the orders of the Tribunal and therefore it made applications to the Tribunal for referring to the High Court the following question of law namely Whether the Tribunal is right in holding that the shares of an investment company has to be valued only on the basis of the yield without taking into account the assets owned and reflected in the balance sheet 361 could be said to arise out of the orders of the Tribunal
The applications for reference were rejected by the Tribunal on the ground that no referable question of law arose out of the orders of the Tribunal
the Revenue thereupon made applications to the High Court for calling for a reference but those applications also met With the same fate
Hence the Revenue preferred petitions for special leave to appeal in the case of all the assessees and special leave having been granted in some of the petitions the present appeals have come up for hearing before us
The sole question that arises for determination in these appeals is whether any question of law arises out of the orders of the Tribunal which needs to be referred to the High Court
It is true that there must be a question of law arising out of the order of the Tribunal before a reference can be made but it is not every question of law that is required to be referred by the Tribunal to the High Court
Where the answer to the question of law is self evident or is concluded by a decision of this Court it would be futile to make a reference and in such a case the Tribunal would be justified in refusing to refer the question to the High Court vide CIT vs Chander Bhan Mathura Prasad vs CIT and CIT vs Indian Mica Supply Co Ltd Now there can be no doubt that in the present case the question as to which method should bf ed for valuation of the shares of Mafatlal Gagalbhai Private Ltd a private limited company which was an investment company and at all material times a going concern whether it should be the profit earning method or a combination of the break up method and the profit earning method is clearly a question of law
But the argument of the assessees was that the determination of this question was completely covered by a recent decision of this Court in Commissioner of Wealth Tax vs Mahadeo Jalan  others in favour or the assessees and no useful purpose would be served by calling for a reference
The Revenue conceded that the decision in Mahadeo Jalan s case 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 hence it was necessary to  make a reference so that the proper method for valuation of the shares of Mafatlal Gagalbhai Pvt Co Ltd could be determined 362 by the High Court
The controversy between the parties thus centered round the question is to what was decided by this Court in Mahadeo jalan s case and whether it laid down what method should be applied for valuation of shares of a private limited company which is an t investment company carrying on business as a going concern
If the method to be applied in such case could be found to have been judicially laid down by this Court in Mahadeo jalan s case all that would be necessary to be done for arriving at the valuation of the shares in Mafatlal Gagalbhai Company Private Limited would be to apply that method and it would be wholly unnecessary to call for a reference
Let us therefore examine the decision in Madhadeo jalan s case and see whether any principle of valuation of shares is laid down in it which would be applicable in case of a company like Mafatlal Gagalbhli Private Limited
The decision in Mahadeo jalan s case was rendered under
the Wealth tax Act and the question was as to what was the appropriate method for valuation of shares of a private limited company for the purpose of wealth tax
The Tribunal adopted the break up method and arrived at the valuation of the shares on that basis but on a reference the High Court took the view that in case of a company which is a going concern the only proper method of valuation of shares is the yield value method and nlt the break up method
The Revenue carried the matter in appeal to this Court and in a judgment delivered by Jaganmohan Reddy J this Court examined the question of valuation of shares in depth and after referring to various decisions of the English Irish and Australian Courts laid clown the following principles for valuation of shares in a limited company 1 Where the shares in a public limited company quoted on the stock exchange and there are dealings in them the price prevailing on the valuation date is the value of the shares
2 Where the shares arc of a public limited company which are not quoted on a stock exchange or of a private limited company the value is determined by reference to the dividends if any reflecting the profit earning capacity on a reasonable commercial basis
But where they do not then the amount of yield on that basis will determine the value of the shares
Tn other words the profits which the company has 11 been making and should be making will ordinarily determine the value
The dividend and earning method or yield method are not mutually exclusive 363 both should help in ascertaining the profit earning capacity as indicated above
If the results of the two methods differ an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of profits
3 In the case of a private limited company also where the expenses are incurred out of all proportion to the commercial venture they will be added back to the profits of the company in computing the yield In such companies the restriction on share transfers will also be taken into consideration as earlier indicated in arriving at a valuation
4 Where the dividend yield and earning method break down by reason of the company s inability to earn profits and declare dividends if the set back is temporary then it is perhaps possible to take the estimate of the value of the shares before set back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses
5 Where the company is ripe for winding up then the break up value method determines what would be realised by that process
6 As in Attorney General of Ceylon vs Mackie a valuation by reference to the assets would be justified where as in that case the fluctuations of profits and uncertainty of the conditions at the date of the valuation prevented any reasonable estimation of prospective profits and dividends Since the company involved in this case was a private limited company which was a going concern the Court following the above principles negatived the applicability of the break up method for valuation of the shares and upheld the view taken by the High Court that the yield method was the proper method for arriving at the valuation of the shares
It is clear from this decision that where the shares in a public limited company are quoted on the stock exchange and there are dealings in them the price prevailing on the valuation date would represent the value of the shares
But where the shares in a public 364 limited company are not quoted on the stock exchange or the shares are in a private limited company the proper method of valuation to be adopted would be the profit earning method
This method may be applied by taking the dividends as reflecting the profit earning capacity of the company on reasonable commercial basis but if it is found that the dividends do not correctly reflect the profit earning capacity because only a small proportion of the profits is distributed by way of dividends and a large amount of profits is systematically accumulated in the form of reserves the dividend method of valuation may be rejected and the valuation may be made by reference to the profits
The profit earning method takes into account the profits which the company has been making and should be capable of making and the valuation according to this method is based on the average maintainable profits
Of course for the purpose of such valuation the taxing authority is not bound by the figure of profits shown in the profit and loss account because it is possible that the amount of profits may have suffered diminution on account of unreasonable expenditure or the directors having chosen to take away a part of the profits in the form of remuneration rather than dividends
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 the Court quoted with approval the following observations of Williams J in McCathie vs Federal Commissioner of Taxation  the real value of shares which a deceased person holds in a company on 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 principle of valuation in a going concern is the yield on the basis of average maintainable profits subject t adjustment etc
which the circumstances of any particular case may fall for
The break up method would not be appropriate for valuation of shares of a company is a going concern because as pointed out by the Court in Mahadeo Jalan s case among the factors which govern the consideration of the buyer and the seller where the one desires to purchase and the other 365 wishes to sell the factor or 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 a 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
The Revenue leaned heavily on the observation in Mahadeo Jalan s case that the factors likely to determine the valuation of a share include in special cases such as investment companies the asset backing and urged on the strength of this observation that in the case of an investment company the asset backing was a relevant consideration and the break up method could not therefore be considered as totally irrelevant
This contention we are afraid is based on a wrong reading of the observation of the Court
When the Court said that in case of an investment company the asset backing is a relevant factor in determination of the value of he shares what the Court meant was in order to determine the capacity of the company to maintain its profits the asset backing would be a relevant consideration
The profit earning capacity of the company which would determine the valuation of the shares would naturally have to take
into account not only the profits which the company is actually making but also the profits which the company should be capable of making and in order to arrive at a proper estimation of the latter the asset backing would be a relevant factor in case of an investment company
It would not be right to read the observation of the Court as suggesting that valuation of the assets would be a relevant factor in determining the valuation of shares
The Revenue of course did not plead for exclusive adoption of the break up method and wanted the mean of the values arrived at by applying the break up method and the profit earning method to be taken as representing the valuation of the shares but we do not see on what principle can a combination of the two methods be justified
There is no authority either in any judicial decision or in any standard text book on valuation of shares which recognises the validity of a combination of the two methods though it may sound acceptable as a compromise formula
In fact Adamson has criticised this combination of the two methods as unscientific in his book on The Valuation of Company Shares and Businesses Fourth Edition at page 55 where he has said The mere averaging of two results obtained by quite different basis of approach can hardly be said to represent any logical approach whatever its merit as a compromise
366 Despite its evident popularity in many quarters it has not been given judicial recognition in decisions involving the fixation of a value by the Court
 The combination of the two methods advocated on behalf of the Revenue has thus no sanction of any judicial or other authority and cannot be accepted as a valid principle of valuation of shares
The Revenue than pointed out that the principles of valuation set out by the Court in Mahadeo Jalan s case were merely broad guidelines and they did not obviate the necessity of considering each case on its own facts and circumstances and in support of this contention the Revenue relied on the observation made by the Court that in setting out these principles the Court had not tried to L 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
 Now it is true as observed by the Court that there cannot be any hard and fast rule in the matter of valuation of shares in a limited company and ultimately the valuation must depend upon the facts and circumstances of each case but that does not mean that there are no well settled principles of valuation applicable in specific fact situations and whenever a question of valuation of shares arises the taxing authority is in an uncharted sea and it has to innovate new methods of valuation according to the facts and circumstances of each case
The principles of valuation as formulated by the Court are clear and well defined and it is only in deciding which particular principle must be applied in a given situation that the facts and circumstances of the case become material
It is significant to note that immediately after making the above observation the Court hastened to make it clear as if in answer to a possible argument which might be advanced on behalf of the Revenue on the basis of that observation that the yield method is the generally applicable cable method while the break up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation
Here in the present case Mafatlal Gagalbhai  Co Pvt Ltd was a private limited company which was a going concern and it was neither ripe for liquidation nor were there any exceptional circumstances which should attract the applicability of the break up method
The profit earning method was therefore the only method which 367 could properly be applied for arriving at the valuation of the shares ill the company and the tribunal was right in accepting the figures of valuation in the Report of Ms C C Choksy Co based on the application of the profit earning method
The answer to the question of law relating to the method to be adopted for valuation of shares in the company was clearly concluded by the decision in Mahadeo Jalan s case and the High Court was therefore justified in refusing to call for a reference on this question
It is true that in the present appeals the question of valuation arises not only under the Wealth Tax Act but also under the Gift Tax Act but since the provision for determining the value of an asset is the same in section 6 sub section 1 of the Gift Tax Act as it is in section 7 sub section 1 of the Wealth Tax Act the principles of valuation laid down ill Mahadeo Jalan s case must apply equally i relation to valuation of shares to be made for the purpose of the Gift Tax Act
It was however contended on behalf OF the Revenue that there is a vital difference between section sub section t of the Gift Tax Act and section 7 sub section 1 of the Wealth Tax Act in aS much aS section S sub section  1  of the Gift Tax Act is subject inter alia to the provision of sub section 3 of that section and this latter sub section provides that where the value of any property cannot be estimated under sub section  1  because it is not saleable in the open market the value shall be determined in the prescribe manner and Rule 10 sub rule 2 of the Gift Tax Rules prescribes the manner of valuation of shares in a private limited company where the Articles of Association contain restrictive provision as to the alienation of shares by providing that in such a case the value of the shares if not ascertainable by reference to the value of the total assets of the company shall be estimated to be what they would fetch if on the date of gift they could be sold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the articles but the fact that a special buyer would for his own special reasons give a higher price that the price in the open market shall be disregarded
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 alienation of shares and therefore Rule 10 sub rule 2 was applicable and according to that sub rule the value of the shares was required to be 1 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 368 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 ill determining the value of the shares by applying the profit earning method atleast so far as the valuation under the Gift Ta Act was concerned
Now it is difficult to see how the question whether the valuation of the shares should have been made on the basis of the break up method by reason of Rule 10 sub rule 2 of the Gift Tax Rules can be required to be referred by the Tribunal to the High Court
It is well settled that no question can be referred to the High Court unless it arises out of the order of the Tribunal and as pointed out by this Court in Commissioner of Income tax vs Scindia Steam Navigation Co Ltd a question of law can be said to arise out of the order of the Tribunal only if it is dealt with by the Tribunal or is raised before though not decided by the Tribunal and a question of law not raised before the tribunal and not dealt with by it in its order cannot be said to arise out of its order even if on the facts of the case stated in the order the question fairly arises
It is obvious that this question sought to be raised on behalf of the Revenue was neither raised before the Tribunal nor decided by it and the only argument advanced before the Tribunal was that the mean of the values arrived at on an application of the profit earning method and the break up method should be taken to be the value of the shares
There was no argument addressed to the Tribunal that the breakup method should be adopted because that was the primary method prescribed by Rule 10 sub rule 2 and the Tribunal had therefore no occasion to deal with such argument
This question obviously therefore does not arise out of the orders of the Tribunal and it cannot be required to be referred to the High Court
These were the only contentions urged on behalf of the Revenue and since there is no substance in them the appeals fail and are dismissed with costs NKA Appeals dismissed


Summary:
The Chartered Accountants of the assessee company which was an investment company
VL ed its shares by applying the profit earning method of valuation of shares without making any adjustment in the profits of the company
The Gift Tax and Wealth Tax officers did not accept this method and valued The shares by applying the break up method
The Appellate Assistant Commissioner applied a different method called the rule of three and reduced the valuation of the shares but the figures determined by him were still higher than those claimed by the assessee
The Revenue preferred an appeal against the order of the Appellate Assistant Commissioner because the valuation of the shares made by the Gift Tax and Wealth Tax officers was reduced by him the assessee preferred an appeal against the order of the Appellate Assistant Commissioner because he did not accept the valuation put forward d by the assessee
The Tribunal accepted the valuation made by the Chartered Accountants and rejected the Revenue s appeal
The Department s request for making reference to the High Court was rejected on the ground that no referable question of law arose out of the order of the Tribunal
The High Court refused to call for a reference
It was contended on behalf of the assessee before this Court that the determination of this question was completely covered by the decision of this Court in Commissioner of Wealth Tax vs Mahadeo Jalan and no useful purpose would be served by calling for reference
On the other hand the Revenue contended that 1 the decision in Mahadeo Jalan s case laid down no more than broad guidelines which did rot eliminate the necessity of finding out the appropriate method of valuation in each case and therefore it was necessary to make a reference so that the proper method of valuation of shares could be determined by the High Court
2 The break up method according to rule 102 of the Gift Tax Rules is the primary method to be applied for arriving at the valuation of the shares and since in this case the articles of association contained a restrictive provision as to the alienation of the shares the Tribunal was wrong in determining the value of I i the shares by applying the profit earning method so far as the valuation under the Gift Tax Act was concerned
358 Dismissing the appeals  HELD 1
It is not every question of law that is require to referred by the Tribunal to he High Court
Where the answer to the question of law is self evident or is concluded by a decision of this Court no reference would be justified 361 C D The answer to the question of law relating to the method adopted for valuation of shares in the company was clearly concluded by the decision in Mahadeo Jalan s case and the High Court was justified in refusing to call for a reference on this question
367A B In the instant case the assessee was a private limited company which was a going concern
lt was neither ripe for liquidation nor were there any exceptional circumstances which should attract the applicability or the break J up method
The profit earning method was therefore the only method which could properly be applied for arriving at the valuation of the shares in the company and the Tribunal was right in accepting the figures of valuation in the report of the Chartered Accountants based on the application of the profit earning method
366G H 367A 2
It is well settled that no question can be referred to the High Court unless it arises out of the order of the Tribunal
A question of law can be said to arise out of the order of the Tribunal only if it is dealt with by the Tribunal or is raised before it though not decided by the Tribunal
A question of law not raise before the Tribunal and not dealt with by it in is order cannot be said to arise out of its order even if on the facts of the case stated in the order the question fairly arises
368C D In the instant case the question sought to be raised by the Revenue was l  neither raised before the Tribunal nor decided by it and the only argument t advanced before the Tribunal was that the mean of the values arrived at on an application of the profit earning method and the break up method should be taken to be the value of the shares
No argument was addressed to the Tribunal that the break up method should be adopted because that was the primary method prescribed by rule 102 and the Tribunal had no occasion to deal with such argument
The question did not arise out of the order of the Tribunal and it could not be required to be referred to the High Court
3i F