Case: Commnr.Of Wealth Tax, Hyderabad Vs. Trustees Of Heh

9 of the judgment. 24. The question as to whether the Valuation Officer is bound by Rule 1 -D or not was answered in the affirmative. 25. As regards the question as to whether the application of the break-up method in Rule 1-D means that the capital gains tax, which would be payable in case the said shares are sold on the valuation date, is liable to be deducted from the market value determined, it was held: “The contention of the learned counsel, in this behalf, is rather involved if not obscure. The argument runs thus: Section 7)(1) says that the value of an asset shall be the price which such asset would fetch if sold in the open market on the valuation date. In other words, the sub-section creates a fiction of sale of such asset on the valuation date for the purpose of determining its market value. Once a fiction is created, it must be carried to its logical extent and the Court should not allow its ima gination to be boggled by any other considerations. If an asset is sold, it would be subject to capital gains tax. For finding out the net wealth received in the hands of assessee, one must necessarily deduct the capital gains tax. Then alone one can arrive at the net price which the assessee will receive - and that should be the market value. We must say that the entire argument is misplaced. There is no sale of the asset and there is no question of capital gains tax being attracted or being paid. For the purpose of determining the market value, the sub-section says that the Wealth Tax Officer shall make an estimate of the price which the asset would fetch if sold in the open market on the valuation date. The sub-section speaks of the market value of the asset and not the net income or the net price received by the assessee. This is not a case where a fiction is created by Parliament. It is only a case of prescribing the basis of determination of market value. On the same reasoning, it must be held t hat no other amounts like provision for taxation, provident fund and gratuity etc. can be deducted. The contention of the learned counsel for the assessees is, therefore, wholly unacceptable.” 26. This Court in that case was concerned with the applicability of Rule 1-D of the Wealth Tax Rules, 1957 which lays down the criteria for determining the valuation of shares. 27. Explanation II appended to Rule 1-D is as under: “Explanation II : For the purposes of this Rule -(i) the following amounts shown as assets in the balance-sheet shall not be treated as assets, namely -(a) any amount paid as advance tax under Section 18-A of the Indian Income Tax Act, 1922 (11 of 1922), or under Section 210 of the Income Tax Act, 1961 (43 of 1961).(b) any amount shown in the balance-sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset;(ii) the following amounts shown as liabilities in the balance-sheet shall not be treated as liabilities, namely-(a) the paid-up capital in respect of equity shares;(b) the amount set apart from payment of dividends on preference shares and equity shares where such dividends have not been declared before the valuation date at a general body meeting of the company;(c) reserves, by whatever name called, other than those set apart towards depreciation;(d) credit balance of the profit and loss account;(e) any amount representing provision for taxation (other than the amount referred to in clause (i)(a)) to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;(f) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.”28. The following principles emerge from the said decision: (a) What is relevant is the market value of the shares i.e. what sale price the shares would fetch if sold in the open market on the valuation date.(b) There is no legal fiction of sale created by Parliament; and therefore no deemed capital gains tax on sale is to be considered.(c) The next realization by the assessee after meeting expenses is not material. 29. It is very important to note that this judgment was not concerned with what price a buyer would offer for the shares on the valuation date but only whether the seller can claim certain deductions from the price which the buyer would be willing to offer. In this case, however, this Court is only concerned what price the buyer would offer for the interest of the remainderman.30. There cannot be any doubt or dispute that the question as regards capital gains liability will not affect the value of the shares or land inasmuch the same is incurred by the seller. In such an event, therefore, the price which the buyer would be prepared to offer would not be affected by the seller’s capital gains liability or any the expenses which may be incurred by him. On the other hand, the estate duty payable by the trustees on the termination of the life interest would be a relevant factor for determination of the price which a willing and informed buyer would offer for purchase of the remainder interest. The remainder interest is merely the right of the remainderman to receive an amount from the trustees on the termination of the life interest of the life tenant, the purchaser, therefore, would take into consideration any factor which would potentially reduce the amount that the would ultimately receive from the trustees towards his remainder interest. The risk or hazard of estate duty liability will have a direct impact on the purchaser of the remainder interest and, thus, will be a relevant factor for the purpose of determination of valuation of the interest to be held by the remainderman.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]e question, therefore, must be answered having regard to the relevant provisions of the Wealth Tax Actthe Estate Dutyis not in dispute that on the death of holder of thethe provisions ofthe Estate DutyAct would be applicable. The estate duty so determined in terms of(2) of Section 74 of the Act shall be the first charge on such interest.14. There cannot, therefore be any doubt or dispute that the position has to be evaluated having regard to the value of the assets assessable at each relevant date. It is further not in doubt or dispute that the value of the jewelleries would be be the price which a willing or informed buyer would offer therefor. As arrears of the estate duty would be a charge on the property, the same beingthe potential estate duty liability shall be a relevant factor while determining the market value of the jewelleries. Whenever there is a charge or encumbrance in the property, the right of a seller to sell the same would be subject to such charge. The restrictions and disadvantages attached to the right of the assessee would indisputably diminish the value of the property to the said extent.It is very important to note that this judgment was not concerned with what price a buyer would offer for the shares on the valuation date but only whether the seller can claim certain deductions from the price which the buyer would be willing to offer. In this case, however, this Court is only concerned what price the buyer would offer for the interest of the remainderman.30. There cannot be any doubt or dispute that the question as regards capital gains liability will not affect the value of the shares or land inasmuch the same is incurred by the seller. In such an event, therefore, the price which the buyer would be prepared to offer would not be affected by thecapital gains liability or any the expenses which may be incurred by him. On the other hand, the estate duty payable by the trustees on the termination of the life interest would be a relevant factor for determination of the price which a willing and informed buyer would offer for purchase of the remainder interest. The remainder interest is merely the right of the remainderman to receive an amount from the trustees on the termination of the life interest of the life tenant, the purchaser, therefore, would take into consideration any factor which would potentially reduce the amount that the would ultimately receive from the trustees towards his remainder interest. The risk or hazard of estate duty liability will have a direct impact on the purchaser of the remainder interest and, thus, will be a relevant factor for the purpose of determination of valuation of the interest to be held by the remainderman.