Case: Commissioner Of Wealth Tax Vs. Mahadeo Jalan &amp; Mahabir Prasad Jalan

the following conclusion :-(1) 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 is the value of the shares. (2) Where the shares are 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. In other words, the profits which the company has been making and should be making will ordinarily determine the value. The dividend and earning method or yield method are not mutually exclusive; 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 companys 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 (1952) 2 All ER 775 (supra) a valuation by reference to the assets would be justified where as in that case the fluctuations of profits and uncertainty of the condition at the date of the valuation prevented any reasonable estimation of prospective profits and dividends. 12. In setting out the above principles, 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 one 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. 13. It has been urged before us that the question as framed by the High Court does not correctly indicate the scope of the answer which was called for from that Court and it was suggested that we should reframe the question.We certainly have the power to do so as long as new and different question is not raised but confine it only to resettling or reframing the question formulated by the Tribunal or as in this case by the High Court which called for a statement of the case on a question as reframed by it, before answering it so as to bring out the real issue between the parties: Narain Swadeshi Weaving Mills v. Commr. of E. P. T., 26 ITR 765 at p. 774 = (AIR 1955 SC 176 ) and Kusum Ben D. Mahadevia v. Commr. of Income-tax, (1960) 39 ITR 540 at p. 544 = (AIR 1960 SC 907 ). The question as framed by the High Court is on the assumption that the yield method is the only method applicable and on that basis required the Tribunal to state a case on whether it was justified in law to follow the method involving the principle of break-up value. If the question is reframed bringing out the real issue between the parties which both the Tribunal and the High Court attempted to do it would facilitate a proper answer. We accordingly reframe the question as follows :-"Whether on the facts and circumstances of this case the principle of break-up value adopted by the Tribunald as the basis of valuation of shares in question under Section 7 of the Wealth Tax Act is sustainable in law ? If not what would be the correct basis ? 14. In the first two appeals 1135 and 1136 of 1969 the break-up value method was adopted by the Tribunal and its plea for not adopting the yield method was that a list of dividends were for the first time filed before it in respect of each of the companies. The Wealth Tax Officer and the Appellate Assistant Commissioner, as well as the Tribunal, had the balance sheets of each of the companies before them because the shares were valued on the break-up method in those cases on the basis of those balance sheets. If the balance sheets were filed they would also disclose the dividends as indeed the statement of the case shows that all the companies had declared dividends for the year 1959-60. Even otherwise, the Tribunal as a fact finding authority, could have considered the list or sent them to the Wealth Tax Officer for any further enquiry it required. In the last three appeals, the Tribunal had adopted the yield method. In the result our answer to the first part of the question is in the negative and to the second part our answer is in terms of the principles already set out.

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

Explanation:
0[ds]An examination of the various aspects of valuation of shares in a limited company would lead us to the following conclusion :-(1) 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 is the value of the shares(2) Where the shares are 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. In other words, the profits which the company has been making and should be making will ordinarily determine the value. The dividend and earning method or yield method are not mutually exclusive; 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 companys 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 (1952) 2 All ER 775 (supra) a valuation by reference to the assets would be justified where as in that case the fluctuations of profits and uncertainty of the condition at the date of the valuation prevented any reasonable estimation of prospective profits and dividends12. In setting out the above principles, 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 one 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 methods14. In the first two appeals 1135 and 1136 of 1969 the break-up value method was adopted by the Tribunal and its plea for not adopting the yield method was that a list of dividends were for the first time filed before it in respect of each of the companies. The Wealth Tax Officer and the Appellate Assistant Commissioner, as well as the Tribunal, had the balance sheets of each of the companies before them because the shares were valued on the break-up method in those cases on the basis of those balance sheets. If the balance sheets were filed they would also disclose the dividends as indeed the statement of the case shows that all the companies had declared dividends for the year 1959-60. Even otherwise, the Tribunal as a fact finding authority, could have considered the list or sent them to the Wealth Tax Officer for any further enquiry it required. In the last three appeals, the Tribunal had adopted the yield method. In the result our answer to the first part of the question is in the negative and to the second part our answer is in terms of the principles already set out. In Appeals Nos. 1765 to 1767 of 1969, the method adopted by the Tribunal being the proper method the refusal of the High Court to direct a case to be stated does not call for interference.