Civil Appeal No 982 NT of 1975
From the Judgment and order dated 10101974 of the Gujarat High Court in Gift Tax Reference No 1 of 1973
Dr V Gauri Shanker KC Dua CV Subha Rao and Miss A Subhashini for the Appellant
TA Ramachandran Sonet P Mehta
DN Misra and Ms Sunita Narhari for the Respondent
The Judgment of the Court was delivered by VENKATACHALIAH J
This appeal by certificate by the Commissioner of Income Tax Gujarat directed against the order dated 10101974 of the Gujarat High Court in Gift Tax Ref
No 1 of 1973 raises a question touching the correct principles of valuation of certain shares constituting the subject matter of a gift held in a company incorporated in the United Kingdom analogous to a private limited company in India
Shri Ambalal Sarabhai since deceased held 480 shares in an English Company Ms Bakubhai  Ambalal Ltd London the share capital of which consisted of 2000 shares of 10 each
On 17101964 under eight deeds of gift the said Ambalal Sarabhai made gifts of the said 480 shares to certain members of his family
In the proceedings of the assessment to gift tax respecting said gifts the question of the proper basis for determination of the value of the gifts having arisen the assessee contended that as the shares were not quoted in the stock exchange their value be determined on the average of break up value indicated by the balance sheets of the Company as on 3131964 and 3131965
The former figure was Rs507 and the latter Rs333 per share the average of the two being Rs420 per share
The assessee also contended that in view of the decision of the General Body of the company dated 4101961 to increase its share capital by issue of additional 2000 shares at 10 each the value of the shares constituting the subject matter of the gifts which were transferred ex right would stand depreciated
344 The Gift Tax Officer did not accept the contentions of the asses see
He proceeded to value the shares at Rs507 per share on the basis of the break up value yielded by and deducible from the balance sheet as on 3131964
The Appellate Assistant Commissioner dismissed the assessee s appeal
In the further appeal before the Income Tax Appellate late Tribunal the Tribunal placing reliance on what it considered to be the principles of valuation appropriate to such cases said to be contained in Lynal  Anr
vs IR C HL  valued the shares at Rs450 each said to represent the break up value on the basis of the balance sheet of 3131963
The Tribunal held that it could not take into consideration any other document except the published in formation which in this case was the balance sheet as on 3131963
The Tribunal at the instance of both the revenue and the assessee stated a case and referred three questions of law for the opinion of the High Court the first two at the instance of the revenue and the third at the instance of the assessee
The assessee it must be observed did not press the question referred at his instance and the High Court accordingly did not express any opinion on it
The two questions referred for the opinion of the High Court at the instance of the Revenue were 1 Whether on the facts and in circumstances of the case
the finding of the Tribunal based on the ratio of the case decided by the House of Lords in Lynall and Another vs Inland Revenue Commissioner 83 l
TR 563 and basing the valuation of the shares of Bakubhai and Ambalal Ltd London on its balance sheet as at 31363 instead of 31364 is bad in law 2 Whether on the facts and in the circumstances of the case the Tribunal was right in law in accepting the valuation of the shares as returned by the assessee and deleting Rs27360 added by the Gift Tax officer under Section 153 of the Act The High Court by its order now under appeal answered the questions against the revenue
It held The only information which was available as on October 17 1964 was in the form of the balance sheet as of March 31 1963 and hence the Tribunal was right when it took into consideration for the purpose of arriving at the value of the 345 shares by the break up method the balance sheet as at March 31 1963 and not as the revenue was contending for the balance sheet as of March 31
Dr Gauri Shanker Learned Senior Counsel urged in support of the appeal that the entire exercise of valuation before the High Court rested on a case which had no application to the matter that the case was governed squarely by the pronouncements of this Court in Commissioner of Wealth Tax Assam vs Mahadeo Jalan  Ors and more particularly in Commissioner of Gift tax Bombay vs Smt
Kusumben D Mahadevia  and that the erroneous view of the High Court as to the principles of valuation should therefore not remain uncorrected
Shri Ramchandran learned senior counsel for the assessee in the
light of the aforesaid pronouncements to this 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 igh Court
He however invited our attention to the following observations of the High Court  
As a matter of fact it may be pointed out that before the Tribunal it was common ground that the value of the shares should be ascertained by following the break up value method and the only difference was as to with reference to balance sheet of what date the total value of the assets has to be ascertained  and urged that in view of the consensus between the parties as to the basis of valuation it was not now open to the Revenue to turn around and urge the application of an altogether different principle
We are afraid the basis adopted by the High Court is clearly unsustainable in the light of the pronouncements of this court referred to earlier
The reference to and reliance upon the Lynall principle was somewhat in apposite and misplaced
That case principally dealt with the impermissibility of reliance on classified information considered confidential and privileged from disclosure
Pointing out the inadequacy of the break up value method this court in Mahadeo Jalan s case referred with approval to the following observations of Williams J in Mc
Cathie vs Federal Commissioner s of Taxation    the real value of the shares  will depend 346 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 liquidation  
In Kusumben s case referring to the principles of valuation relevant to the matter this court said  
But where the shares in a public 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 he applied by taking the dividends as reflecting the profit earning capacity of the company on a reason able 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   The view of the High Court cannot therefore be said to reflect the position in law correctly
The correct principle of valuation applicable to a given case Is a question of law
The parties can agree upon a principle permissible under and recognised by law
If two or more alternative principles ar equally valid and available it might be permissible for the parties to agree upon one of the alternative modes of valuation in preference to 347 another
In this case the revenue cannot be said to be precluded from urging the correct legal position
In the ultimate analysis it requires to be held that the view of the High Court as to the principle of valuation in determining the value of the kind of shares concerned in this case cannot be held to be correct
The first question of law referred for its opinion would otherwise require to be answered in the affirmative and the second in the negative both against the assessee
As a logical consequence the Tribunal would have to go through over again the exercise of determination of the value of the shares adopting the correct principle
But the matter is already two and a half decades old
The gift was in the year 1964
The total Gift Tax as now assessed is Rs5661
Upon a fresh determination of the value of the shares adopting the somewhat intricate processes inherent in the profit method  of valuation the difference in the quantum of the tax might perhaps not be substantial
The magnitude of the mechanism for refixation of the value of the gifts and the difference in the quantum of the tax it might result in do not bear a reasonable or sensible proportion
Having regard to the pecuniary involvement in the case which is obviously small we think we should not expose the parties to a fresh round of litigation
In this view of the matter we think appellant should be content with the declaration of the law on the matter without disturbing the valuation made by the Tribunal and approved by the High Court
though the principle adopted is not supportable in law
We therefore decline to interfere in the matter
The valuation is therefore left undisturbed  9
The appeal is disposed of accordingly
In the circumstances of the case there will be no order as to costs
NPV Appeal disposed of


Summary:
 The appellant an employee of the Institute of Constitutional and Parliamentary Studies ICPS for short was dismissed from service by order dated November 17 1982 as a result of disciplinary action
He challenged the dismissal order by a writ petition before the High Court
The question whether the ICPS was a State  within the meaning of Article 12 of the Constitution arose for consideration as a major issue in the matter before the High Court
A Single Judge of the High Court dismissed the petition holding that the employer was neither an agency nor an instrumentality of the government and did not constitute State  as above said and therefore was not subject to the writ jurisdiction of the High Court
The appeal against that judgment of the Single Judge was dismissed by the Division Bench of the High Court
Aggrieved by the decision of the High Court the appellant moved this Court by special leave
Disposing of the appeal the Court  HELD In the course of hearing Dr Anand Prakash counsel for the ICPS respondent No 2 stated that whether the Institute be State  or not within the meaning of Article 12 of the Constitution the employer was prepared to give a fresh opportunity to the appellant to meet the charges against him
With that concession the order of dismissal etc
passed against the appellant should have been set aside and the matter should have gone before the enquiry officer but Dr Anand Prakash as also counsel for the Union of India invited the Court to decide the issue as to whether the ICPS constituted State  within the constitutional meaning of the term
263H 264A C The main question for consideration then was whether ICPS was a State 
ICPS could become State  only if it was found to be an authority within the territory of India or under the control of the Government of India
264DG 261 ICPS is a registered society
The emergence of a new generation within less than two decades of independence gave rise to a feeling that the people s representatives in the Legislatures required the acquisition of the appropriate democratic bias and spirit
ICPS was born as a voluntary organisation to fulfil this requirement
The Speaker of the Lok Sabha was its first President
Three Ministers a former Chief Justice of India and a former Attorney General joined as its Vice Presidents
Some of the public officers were associated in its Administrative set up
Services of some employees of Parliament were lent to it
While Article 12 refers to Parliament as such a few members of Parliament cannot be considered as Parliament so as to constitute that body as referred to in Article 12
The Speaker and the Ministers who joined as Vice Presidents of the Society were there in their personal capacities and not as Ministers etc
There were many people in the category of Vice President Executive Chairman Treasurer and members who were not a part of the Government and some of them did not belong to Parliament
281A F The objects of the Society were not governmental business
Many of the objects of the Society were not confined to the two Houses of Parliament and were intended to have an impact on Society at large
281G H The Memorandum of the Society permitted acceptance of gifts donations and subscriptions
No material was placed before the Court for the stand that the Society was not entitled to receive contributions from any indigenous source without government sanction
Since government money has been coming the usual conditions attached to government grants have been applied and enforced
If the Society s affairs were really intended to be carried on as a part of the Lok Sabha or Parliament as such the manner of functioning would have been different
The accounts of the Society are subject to audit as the affairs of the Societies receiving government grants are
Government imposes conditions and restrictions when grants are made and the Society is also subject to the same and the mere fact that such restrictions are made is not a determinative aspect281H 282 A D There are registered societies which have been treated as State  but in the case of each of them either governmental business had been undertaken by the Society or what was expected to be the public obligation of the State  had been undertaken to be performed as a part of the Society s function
282H 283A 262 Having given anxious consideration to the facts of the case the Court is not in a position to hold that ICPS is either an agency or an instrumentality of the State so as to come within the purview of other authoritiesin Article 12 of the Constitution
ICPS is a case of its type typical in many ways and normal tests may perhaps not properly apply to test its character
Even if some institution becomes State  within the meaning of Article 12 its employees do not become holders of Civil posts so as to become entitled to the cover of Article 311 of the Constitution
They would however be entitled to the benefits of Part III of the Constitution
It is unnecessary to examine the appellant s case keeping Articles 14 and 16 of the Constitution in view as on the concession of counsel for ICPS the proceedings would have to re open
283C E In the result the appellant would be entitled to the following reliefs
The order of dismissal set aside and the proceedings restored to the stage of enquiry
283F The appellant shall be deemed to have been restored to service and he would become entitled to normal relief available in such a situation
He should be deemed to be in service and his suspension would not continue
His suspension which had merged into dismissal is vacated
It shall however be open to the employer to make any direction as is deemed appropriate in that behalf in future
283F G The appellant becomes entitled to salary for the past period subject to his satisfying the authorities that he had not earned any income during that period
283H The appellant shall be given a reasonable opportunity by the enquiring officer to meet the charges and the enquiry shall be completed within four months
283H 284A The enquiry officer shall allow inspection to the appellant of all records relevant to the enquiry
284B Rajasthan State Electricity Board Jaipur vs Mohan Lal and Ors
   Smt
Ujjam Bai vs State of Uttar Pradesh 1963 l SCR 778 Sabhajit Tewary vs Union of India Sardar Singh Raghuvanshi  Anr
   Ramana Dayaram Shetty vs The 263 International Airport Authority of India  Ors   Managing Director Uttar Pradesh Warehousing Corporation  Anr
vs Vinay Narayan Vajpayee   Ajay Hasia etc
vs Khalid Mujib Sehravardi  Ors etc
   Som Prakash Rekhi v Union of India and Anr   BSMinhas vs Indian Statistical Institute  Ors  and P K Ramachandra Iyer and Ors
vs Union of India and Ors