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

1. These appeals are by special leave against the judgment of the High Court of Assam and Nagaland. Appeal No. 1136 of 1969 is of Mahadeo Mrigendra Jalan, by Mahadeo Prasad as the karta of Hindu undivided family while appeal No. 1135 of 1969 is by him in his individual capacity. In both these appeals, the Hindu undivided family as well as the individual were holding shares in five companies in respect of which shares, dividend was being declared. The Wealth-tax Officer computed the valuation of those shares on the basis of the break-up value and included them in their total wealth. In Appeals Nos. 1765, 1766 and 1767/1969 the respondents are Mahabir Prasad Jalan, Mahadev Jalan and Madan Mohan Jalan respectively. All these appeals pertain to assessment years 1957-58 and 1958-59. In respect of these years the value of the shares in private limited companies were included in the total wealth of the respective assessees on the basis of their yield though some of the companies were not paying dividends while others were declaring dividends throughout. The first two appeals which related to a later year seem to have been heard by the High Court and disposed of on December 12, 1967 while the last three appeals were disposed of later on February 4, 1969, mainly on the basis of the judgment of the High Court in the first two appeals. For the years 1957-58 and 1958-59 relating to the three persons referred to above, the Wealth-tax Officer had, as in the case of assessment for the year 1959-60 adopted the break-up value of thhe shares as disclosed on the balance sheets of the company in computing their value as if each of the companies was brought to liquidation. This assessment was confirmed by each company. This assessment was confirmed by the Appeals Assistant Commissioner. The Tribunal however held that certainly this basis is one of the recognised modes of valuation of the shares of the private companies which are not saleable in the open market but in so far as those cases were concerned the valuation on the basis of the yield derived from the shares will be a more reasonable method to be adopted in the particular circumstances of their respective cases. Accordingly he adopted the valuation on that basis in respect of each of the companies as specified in its order. In the first two appeals also the Wealth Tax Officer and the Appellate Assistant Commissioner adopted the break-up value as the basis as in the other cases, and agreed with that basis inasmuch as the assessees had failed to place before the Wealth-tax Officer and the Appellate Assistant Commissioner facts and figures relating to dividends declared by the respective companies. It was also stated by the Tribunal that at the time of hearing by the Tribunal in the case of last three appeals, it was apparently not brought to the notice of the Tribunal that the companies being private limited companies the dividends declared would be controlled by persons controlling the companies so as to suit their own purpose, as such, the maintainable profits rather than the dividends declared would afford a reasonable basis. While so stating, it was observed that this aspect of the case need not be taken note of since the objection before it is only on the principle whether to adopt the break-up value method. In respect of the first two appeals therefore the Tribunal held that the adoption of the break-up value was in order.        2. On an application under Sec. 66 (1) the Tribunal referred the following question for the opinion of the High Court, viz.,"Whether on the facts and in the circumstances of the case the principle of "break-up" value adopted by the Income-tax Tribunal as the basis for the valuation of the shares in question is sustainable in law ?"When the reference came up for hearing before the Bench of the High Court, it was felt that as the question required an abstract answer as to whether the principle of break-up value is sustainable in law and as in their opinion the Tribunal wanted to refer for the opinion of the Court "the doubt they experienced in dealing with the case which related to the question as to whether the break-up value method is correct method to be adopted in the facts and circumstances of the case or it is the yield value method to be adopted, that question was re-framed and a further statement of the case called for from the Tribunal. The question as re-framed is as follows :-"Whether on the facts and in the circumstances of the case the Tribunal was justified in law to follow the method involving the principle of break-up value instead of the method involving the principle of yield value in determining the value of the shares in question under Section 7 of the Wealth Tax Act ?"In compliance with this direction the Tribunal drew up a supplementary statement of the case and submitted it to the High Court. In that statement the Tribunal stated :"Before the Appellate Assistant Commissioner no alternative basis of valuation appears to have been claimed. For the first time before the Tribunal, the assessee filed a statement of the dividends declared by the aforesaid private companies during the year 1953- to 1957 and claimed that the market value of the shares should be worked out with reference to the average percentage of the dividends declared by each company and on the footing that the shares quoted in the market at Rs. 100/- each would yield a dividend of Rs. 6/-."It was further stated by the Tribunal that the assessee had relied on the decision of the Tribunal for the assessment years 1957-58 and 1958-59 where it determined the market value of the shares on the yield basis but in so far as as the assessment year 1959-60 it did not accept that the information furnished before: it would be adequate for working out the market value on the basis of "maintainable profits" because it was of the view that "in cases of private companies declaration of dividend would be dictated by the directors having regard to the advantage in their personal assessments and not with reference to the capacity or other business considerations. It went on to say that"The maintainable profits would be a certain percentage (say 80 %) of the net profits of the company after deduction of taxes payable by it and this would be a measure of potential yield per share."In this view the break-up value adopted by the Income-tax Officer in respect of the assessments of 1959-60 in the first two appeals was confirmed.        3. The High Court however did not agree with the basis adopted by the Tribunal though it recognised that the break-up value is also one of the methods for the purposes of calculation. It was contended before the High Court on behalf of the assessee that the break-up value method will only be applied to a company which reached the stage of liquidation and winding up. After considering the respective contentions and the decisions referred to before it, the High Court observed as follows :-"We are satisfied that so far as the application of Section 7 of the Wealth Tax Act in determining the value of the shares of a deceased person on the date of his death is concerned, where those shares pertain to a going concern, the only proper method to adopt was the yield value method and we think that the Tribunal was not justified in making the assumption that in the case of a private company the dividend would be controlled by the person controlling the company to suit their own purposes, and that, consequently, the maintainable profits should be accepted as the basis and not the dividends. Unless there was some substantial material before the Tribunal to draw a different inference the Tribunal, in our opinion, is not justified in doing so.        We are constrained to note that although the Tribunal had adopted the yield value method in its decision in regard to the previous years, the Tribunal had taken a new path and adopted the break-up value method as the basis of the assessment. We feel that there is no material placed on the record to justify this change in the method to be adopted in calculation."When the applications for reference under Section 66 (2) in respect of the last three appeals came before the High Court after an application under Section 66 (1) had been rejected by the Tribunal, it observed :-is undoubtedly a question of law but the answer will be covered by the decision of this Court dated June 9, 1967. ......." and so it thought it unnecessary to ask the Tribunal to refer the same point again and accordingly rejected the petitions. The special leave in respect of the first two appeals is against the judgment of the High Court holding that the yield method" was the proper method and in respect of the latter three appeals against the order refusing to direct the Tribunal to state a case. As a common question of law has to be determined these appeals are consolidated and heard together.

Reasoning:
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.