BHARAT HARI SINGHANIA VS COMMISSIONER OF WEALTH TAX
1995 P T D 997
[207 I T R 1]
[Supreme Court of India]
Present: S. C Agrawal, B.P. Jeevan Reddy and Dr. A.S. Anand, JJ
BHARAT HARI SINGHANIA and others
Versus
COMMISSIONER OF WEALTH TAX and others
Writ Petition (Civil) No.1213 of 1990 with Civil Appeals Nos.990 of 1976, 2952 and 2953 of 1977, 413 and 2445 of 1978, 1584 to 1595 of 1980, 3206 to 3212 of 1981, 189 to 195 and 470 to 476 of 1982, 4231 of 1983, 2766 to 2811-A of 1989, 1629, 1630, 1823, 1849 to 1852, 1854 to 1856, 1888 and 1889, 1919 to 1922, 4476 and 6191 to 6202 of 1990, 483 to 485, 1591 to 1596, 2131, 2448 to 2450, 2466 to 2467, 2540, 2841, 2860, 3108, 3403, 3404, 3449 to 3452, 3708, 3709, 3927, 4299, 4951, 4953, 4954 of 1991, 233 to 236, 1969, 2865 to 2883, 3357, 3928, 4634, 3709, 4934, 5376, 5377, 13037 to 13170 of 1992, 1511, 1524, 1543, 1575, 1653. 1660, 1685, 2147 to 2155, 5977, 6002, 6003 and 9811 of 1993, decided on 16/02/1994.
(a) Wealth Tax-
----Valuation---Unquoted equity shares other than shares of Investment Company or Managing Agency Company---Rule 1-D prescribing uniform break-up method for valuing shares with balance-sheet of Company as base-- Even if Company were going concern---Valid---Rule-making authority-- Central Board of Direct Taxes---Right to choose one of several recognised . methods although less popular-- Can prescribe simple uniform method for all cases---Valuation Officer---Creature of statute---Bound by R.1-D in same way as he is bound by other rules and Act---Notional capital gains tax not to be deducted---Rule applicable even if assessee's valuation date does not coincide with date of balance-sheet of company---Provision for taxation---Amount of advance tax already paid, to be deducted from provision, if shown as part of liability---Indian Wealth Tax Act, 1957, Ss. 7(1), (3), 16A, 24(5), 46(1), (4)-- Indian Wealth Tax Rules, 1957, R. 1-D, Expln. II, Cls. (i) (a) & (e).
Rule 1-D of the Wealth Tax Rules, 1957, prescribing the break-up method or valuing unquoted equity shares of a company (other than an investment company or a managing agency company) is perfectly valid and effective. Neither is it inconsistent with section 7(1) of the Wealth Tax Act, 1957, nor does it travel beyond the purview of section 7(1).
Section 7(1) of the Wealth Tax Act, 1957, defines the expression "value of an asset". It is "the price which in .the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date" but this is made expressly subject to the rules made in that behalf No guidance is furnished by the Act to the rule-making authority except to say that the rule made must lead to ascertainment of the value of the asset (unquoted equity share) as defined in section 7. It is thus left to the rule-making authority to prescribe an appropriate method for the purpose. There may be several methods of valuing an asset or for that matter an unquoted equity share. The rule-making authority cannot prescribe all of them together it has to choose one of them which according to it is more appropriate. The rule-making authority has in rule 1-D chosen the break-up method, which is undoubtedly one of the recognised methods of valuing unquoted equity shares. Even if it is assumed that there was another method available, which was more appropriate, still the method chosen cannot be faulted so long as the method chosen is one of the recognised methods, though less popular. The break-up method based upon the balance-sheet of the company incorporated in rule 1-D; is a fairly simple one. No serious objection can be taken to this course since the basis of the rule is the balance-sheet of the company prepared by the company itself---Subject, of course, to certain modifications provided in Explanation 11.
Rule 1-D has to be followed in valuing each and every case of unquoted equity shares of a company (other than an investment company or a managing agency company). It is not a matter of choice or option. The rule making authority has prescribed only one method for valuing the unquoted equity shares. If this method were not to be followed, there is no other method prescribed by the rules. Where there is a rule prescribing the manner in which a particular property has to be valued, the authorities under the Act have to follow it. They cannot devise their own ways and means for valuing the assets.
The decision of the Supreme Court in CWT v. Mahadeo Jalan (1972) 86 ITR 621, does not purport to lay down any hard and fast rule. It recognises that various factors in ea, case will have to be taken into account to determine the method of valuation to be applied in that case. The dividend yield method is not the only method indicated in the case of a going concern there is the earning method and then a combination of both methods. The several qualifications added make these methods highly cumbersome and time-consuming. Compared to them, the break-up method incorporated in rule 1-D is far simpler and far less time-consuming. It prescribes a simple uniform method to be followed in all cases. All that the Wealth Tax Officer has to do is to take the balance-sheet, delete some items from the columns relating to assets and liabilities as directed by Explanation II and then apply the formula contained in the rule.
The requirement in section 46(4) of the Wealth Tax Act, 1957, of laying the rules made by the Central Board before both Houses of Parliament is one form of parliament control. But by that means, the rules do not acquire the status of stat to made by Parliament. Even after they are laid before both Houses of Parliament, they continue to be delegated legislation.
All the authorities under the Wealth Tax Act, including the Valuation Officer, are bound by rule 1-D. The Valuation Officer is a creature of the statute. He is, therefore, bound by the provisions of the statute and the rules made thereunder unless there is something either in the Act or in the rules to indicate otherwise.
The scope and purport of the non obstante clause in section 7(3) has to be ascertained by reading it in the context of the provisions contained in section 7 and consistent wit the scheme of the enactment. If so read, it only means this ordinarily it is for the Wealth Tax Officer to estimate the price which in his opinion an asst would fetch if sold in the open market on the valuation date but where a Wealth Tax Officer refers the question of valuation of an asset to the Valuation Officer under section 16-A, it is for the Valuation Officer to make he estimate which estimate is binding upon the Wealth Tax Officer as provided in subsection (6) of section 16-A. Thus, in a case referred to a Valuation Officer, the estimate is made by the Valuation officer instead of the Wealth Tax Officer. This is the limited function and purpose of the non obstante clause, "notwithstanding anything contained in subsection (1)" in section 7(3).
(b) Wealth tax---
----Net wealth---Company whose assets comprise wholly or partly of agricultural lands---Shareholder not entitled to exclude value of shares in Company from his net wealth---Indian Wealth Tax Act, 1957, S.2(e):---[Sharbati Devi Jhalani v. CWT (1986) 159 ITR 549 (Delhi) reversed].
While valuing the unquoted equity s ayes of a company under rule 1-D no deduction on account of capital gains tax which would have been payable in case the shares were sold on the valuation date can be made. There is no sale of the asset and there is no question of capital gains tax being attracted or being paid. Section 7(1) speaks of i he market value of the asset and not the net income or the net price received y 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, no other amounts like provision for taxation, provident find and gratuity, etc., can be deducted. Rule 1-D is exhaustive on the subject.
s
Merely because the valuation date of the assessee and the date with reference to which the balance-sheet of the company is drawn do not coincide, it cannot be said that rule 1-D is not mandatory r that it need not be followed. The break-up method contained in rule 1-D is not the balance-sheet of the company as the basis for working the rule. That rule cannot be worked in the absence of the balance-sheet. But there may b cases where the date of the balance-sheet and the valuation date of the assessee do not coincide. It is to meet such a situation that Explanation I is p voided in rule 1-D. The Explanation says that where the date on which the, balance-sheet is drawn up does not coincide with the valuation date of the assessee, "the balance-sheet drawn up on a date immediately preceding the valuation date" shall be adopted as the basis for working the rule. Yet another situation contemplated by the Explanation is where both the above situation, are absent, "the balance-sheet drawn up on a date immediately after the valuation date" shall be adopted as the basis. This is the most reasonable thing to do. Once the basis of working the rule is the balance-sheet, one must necessary have the balance-sheet. Without a balance-sheet the rule cannot be worked. It is for this reason that Explanation I says what it does. Normally one would expect every company to prepare its balance-sheet on the due date. Sometimes, there may be a default on the part of the company in preparing its balance-sheet on time. But on the basis of such exceptional circumstances, the rule cannot be faulted. Indeed, the Explanation also provides that in the absence of both the said situations, the balance-sheet drawn up on a date immediately after the valuation date shall be adopted.
That there may be fluctuations between the date of the balance-sheet of the company and the valuation date, one way or the other, is no ground for holding that Explanation I to rule 1-D is inconsistent with section 7(1) or that rule 1-D should not be followed unless the valuation date or the date of the balance-sheet are identical.
CWT v. Pushpawati Devi Singhania (Smt.) (1991) 188 ITR 364 (All.) approved.
Sharbati Devi Jhalani v. CWT (1986) 159 ITR 549 (Delhi) reversed.
In tax legislation, the Legislature must be provided a greater latitude and a greater play in the joints.
Garg (R.K.) v. Union of India (1982) 133 ITR 239 (SC) applied.
If in the case of the balance-sheet of the company the amount of tax paid, which- is shown as an asset and has to be deducted from the value of the assets as required by clause (i) (a) of Explanation II to rule 1-D, is also shown as a liability, i.e. if that amount is included in the amount set apart as provision towards taxation, it would obviously have to be deleted from the column of liabilities and this is also what clause (ii)(e) says. Clause (ii) (e) is in a sense complementary to clause (i) (a). The advance tax paid is not really an asset but the pro forma of balance-sheet in Schedule VI to the Companies Act requires it to be shown as such. What clause (i) (a) does is to remove the said amount from the list of assets for the purpose of rule 1-D. It is then that clause (ii)(e), which speaks of liabilities, says that only that amount which is still remaining to be paid shall be treated as a liability on the valuation date. If in the provision for taxation made in the column of liabilities in the balance-sheet, the amount of advance tax already paid is again shown as a liability, it will not be treated as a liability. This is the true function of both the sub-clauses.
CIT v. M. Lakshamalah (1988) 174 ITR 4 (AP); CWT v. N. Krishnan (1986) 162 ITR 309 (Kar.) and Ashok Kumar Oswal (Minor) v. CWT (1984) 148 ITR 620 (P and H) impliedly approved.
CWT v. Ashok K. Parikh (1981) 129 ITR 46 (Guj.) impliedly disapproved.
An assessee holding shares in a company whose assets comprise wholly or partly agricultural land is not entitled to exclude such shares from his net wealth. The wealth that is assessed is that of the shareholder and not of the company. The company may own agricultural assets and if the company were to be liable to wealth tax, the said assets may be excludable in its hands. But that has no relevance to the case of a shareholder. The shareholder does not own and cannot claim any portion of the property held by the company of which he is a shareholder. The company is an independent juristic entity.
Bacha F. Guzdar (Mrs.) v. CIT (1955) 27 ITR 1: (1955) 25 Comp. Cas. 1(SC) applied.
Bharat Hari Singhania v. CWT (1979)119 ITR 258 affirmed.
Attorney-General of Ceylon v. Mackie (1952) 2 All ER 775 (PC); CGT v. Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai (1988) 170 ITR 144 (SC); CGT v. Kusumben D. Mahadevia (Sint.) (1980) 122 ITR 38 (SC); CWT v. Mahadeo Jalan (1972) 86 ITR 621(SC); Morey v. Doud (1957) 354 US 457; New Orleans v. Duke (1976) 427 US 297; Renuka (D) (Dr.) v. CWT (1989) 175 ITR 615 (AP) and Secretary of Agriculture v. Central Reig. Refining Co. (1950) 94 L Ed. 381(USSC) ref.
(c) Rules-----
--- Provision requiring laying rules before Parliament---Effect---Rules do not acquire status of statute---Continue to be delegated Legislation---Indian Wealth Tax Act, 1957, S. 46(4).
(d) Interpretation of statutes----
---- Non obstante clause---Scope and purport---To be ascertained by reading it in the context and consistent with scheme of statute---"Notwithstanding anything contained in subsection (1)"---Scope of---Indian Wealth Tax Act, 1957, S.7(3).
(e) Interpretation of statutes---
--- Taxing statutes---Legislature must be provided greater latitude.
Dr. D. Pal, Senior Advocate (Ms. Priya Hingorani and M.M. Kshatyriya, Advocates with him) for the Assessee (in the writ petition).
S. Ganesh, Advocate and Mrs. A.K. Verma, Advocate (of Messrs J.B. Dadachanji & Co., Advocates) for the Assessee (in CA. Nos.1588 to 1592 of 1980).
G.C. Sharma, Senior Advocate (T.R. Talwar and Ashok Mathur, Advocates with him) for the Assessees (in CA. Nos. 1591 to 1596 of 1991).
Ms. Indira Jaisingh, H.N. Salve and R.F. Nariman, Senior Advocates (Sunil Dogra and P.H. Parekh, Advocates with them) for the Assessees (in CAs. Nos.2766 of 1989 and 1888 and 1889 of 1990).
M.L. Verma, Senior Advocate (Ms. Gitanjali Mohan, Advocate with him) for the Assessee (in CA. No.3'108 of 1991).
N.K. Poddar, Senior Advocate (Ms. Radha Rangaswamy, Advocate with him) for the Assessee (in S.L.P. (Civil) No.14869 of 1991).
T.A. Ramachandran, Senior Advocate (Mrs. Janaki Ramachandran, Advocate with him) for the Assessee in S.L.P. (Civil) No.1866 of 1993.
M.N. Shroff, Advocate for the Assessees (in C-As. Nos.3226 to 3228 and 3209 to 3212 of 1981 and 189 to 195 and 470 to 476 of 1982).
Dr. V. Gaurishankar, J. Ramamurthty and B.B. Ahuja, Senior Advocates (S. Rajappa, Manoj Arora, M.B. Rao, B.S. Ahuja, Ranbir Chandra D.S. Mahra and B. Krishna Prasad, Advocates with them) for the Department.
JUDGMENT
B.P. JEEVAN REDDY, J.---Delay condoned. Leave granted.
Substitution in Civil Appeal No. 1587 of 1980 is allowed.
The Wealth Tax Act, 1957 was enacted by Parliament providing for levy of wealth tax. Section 3 LS the charging section. It levies wealth tax on an individual, Hindu undivided family and company in respect of their net wealth on the corresponding valuation date at the rate or rates speed in Schedule 1. The expression "net wealth" is defined in clause (m) of section 2. In short, it means the aggregate value of all the assets belonging to the assessee on the valuation date minus all his liabilities. Section 7 prescribes the manner in which the value of the assets is to be determined. At the relevant time, sub-section (1) of section 7 reads:--
"Subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date." Section 46(1) empowers the Board (Central Board of Direct Taxes) to make rules for carrying out the purposes of the Act. Subsection (2) particularizes the topics with respect to which rules can be made. Clause (a) in subsection (2) says that rules made by the Board may provide for the manner in which the market value of an asset may be determined. Rules have been made as contemplated by the said subsection. Rule 1-B provides the manner in which the life interest is to be valued. Rule 1-BB prescribes the manner of valuing house property. Rule 1-C prescribes the manner in which the market value of unquoted preference shares has to be determined. Rule 1-D, with which we are concerned herein, prescribes the manner in which the market value of unquoted equity shares of companies other than investment companies and managing agency companies is to be determined. Inasmuch as we are concerned herein with the interpretation of the said rule in its various: aspects, it would be appropriate to set out the rule in full, as it obtained at the relevant time:
"1-D. The market value of an unquoted equity share of any company, other than an investment company or a managing agency company, shall be determined as follows:
The value of all the liabilities as shown in the balance-sheet of such company shall be deducted from the value of all its assets shown in the balance-sheet. The net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 85 per cent of the break-up value so determined:
Provided that where, in respect of an equity share, no dividend has been paid by such company continuously for not less than three accounting years ending on the valuation date, or in a case where the accounting year of that company does not end on the valuation date, for not less that: three continuous accounting years ending on a date immediately before the valuation date, the market value of such share shall be as indicated in the Table below:--
THE TABLE
| Number of accounting years ending on the valuation date or in a case where the accounting year does not end on the valuation date, the number of accounting years ending on a date immediately preceding the valuation date, for which no dividend has been paid. | Market value. |
| (1)(2) |
| Three years | 82-1/2 % | of the break-up value of such share. |
| Four years | 80 % | -do |
| Five years | 77-1/2 % | -do |
| Six years and above | 75 % | -do- |
Explanation I: --For the purposes of this rule, `balance-sheet' in relation to any company, means the balance-sheet of such company as drawn up on the valuation date and where there is no such balance-sheet, the balance-sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balance-sheet drawn up on a date immediately after the valuation date.
Explanation II.---For the purpose 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 for payment of dividends on preference shares and equity shares where such dividends have ;'lot 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) j 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."
Rule 1-D was introduced with effect from October 6, 1967. It may be noticed that by the Direct Tax Laws (Amendment) Act, 1989, these rules have been incorporated in Schedule Ill to the Act. Rule 11 in the Schedule corresponds to rule 1-D.
Among the companies incorporated in India, more than 85 per cent are private companies (excluding Government owned companies). In private limited companies, there is always a restriction upon the transfer of shares with the result that their shares are not quoted on the; stock exchange. Apart from private companies, there may be some public limited companies whose shares are also not quoted on the stock exchange for one or the other reason. Where the shares are quoted on the stock exchange, it is evident that their value on the valuation date is the value for the purposes of the Act. In case of unquoted equity shares, a formula, a method, has to be devised to ascertain their value on the valuation date. Rule 1-D provides for this situation. It is one of the rules contemplated by the opening words in subsection (1) of section 7.
Let us now analyses the rule to find out what it says. The formula prescribed in the main limb of the rule is this take the balance-sheet of the company; deduct the value of all the liabilities as shown in the balance-sheet from the value of all the assets shown therein divide the net amount so arrived at by the total amount of its paid-up equity share capital as shown in the balance-sheet multiply the resultant amount thus obtained by the paid-up value of each equity share; the value so arrived at is the break-up value of each unquoted equity share; 85 per cent of such break-up value shall be treated as the market value of the share.
The balance-sheet of the company thus constitutes the basis for working the rule. The rule cannot be worked without the balance-sheet. No problem will arise if the date of the balance-sheet and the valuation date coincide. But this may, not always happen. There may be a case where the balance-sheet is prepared on a date earlier than the valuation date of the assessee (shareholder) concerned. This situation is met by Explanation 1. The Explanation contemplates a situation where the valuation date of the assessee concerned and the date of balance-sheet .of the company is not the sane. In such a situation, it says, stake the balance-sheet drawn up on a date immediately preceding the valuation date of the assessee. In case both these balance-sheets are not available, the rule says, take the balance-sheet drawn up on a date immediately following the valuation date of the assessee.
The proviso to the rule deals with the situation where no dividend has 'been paid by the company continuously for not less than three accounting years ending on the valuation date of the assessee concerned. Since we are not concerned with the proviso in these matters, it is not necessary to set out its purport except to say that in the cases contemplated by it, it provides a still lower percentage of the break-up value to be the market value of the share. Depending upon the number of years the dividend is not declared, the percentage goes down.
Explanation II contains two clauses (i) and (ii). Clause (i) provides that two types of assets shown in the balance-sheet shall not be treated as assets. We are concerned with the first among the two which
"(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:" Clause (ii) provides that the several items mentioned therein, which are shown as liabilities in the balance-sheet shall not be treated as liabilities. We are concerned herein with the liability mentioned under sub-clause (e) which reads:--- (e) anyamount 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". Schedule VI to the Companies Act prescribes the form in which the balance-sheet of a company is to be prepared. It contains four columns. The second column mentions the liabilities and the third column the assets. The advance tax paid by the company under section 210 of the Income-tax Act is shown as an asset while the amount set apart as provision for taxation is shown in the column of liabilities. Now, what the Explanation does is to direct that the two items mentioned as assets shall not be treated as assets and the six items mentioned as liabilities shall not be treated as liabilities. In other words, it provides for modification of the balance-sheet in certain respects for the purpose of working the rule. After the said deletions, the balance-sheet becomes the balance-sheet for the purpose of rule 1-D.
Elaborate arguments have been addressed before us by learned counsel appearing on both sides. Having regard to the contentions urged, the following questions arise for our determination:
(1) Whether it is obligatory to follow rule 1-D while valuing the unquoted equity shares of companies (other than investment companies and managing agency companies) or is it merely optional? (To borrow the language of learned counsel for the assesses, the rule is not mandatory but "directory" while learned counsel for the Revenue says that the valuation of an unquoted equity share shall have to be done only in the manner indicated by the rule and in no other manner).
(2) Whether the Valuation Officer is bound by rule 1-D when valuing the unquoted equity shares of the companies?
(3) 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?
(4) Where the date of a balance-sheet of the company is earlier to the valuation date of the assessee, is it obligatory to follow rule 1-D? (The same question arises where in the absence of such a balance-sheet, the balance-sheet drawn up on a date immediately following the valuation date is taken as the basis.)
(5) How are sub-clause (a) of clause (i) and sub-clause (e) of clause (ii) of Explanation II to be read and understood?
(6) Whether the assessee holding shares in a company whose assets comprise wholly tea estates is entitled to exclude such shares from his wealth?
We shall deal with these questions in their proper order:
Question No. 1: --Whether it is obligatory to follow rule 1-D while valuing the unquoted equity shares of companies (other than investment companies and managing agency companies) or is it merely optional?
The formula prescribed by rule 1-D for determining the market value of unquoted equity shares of a company has been set out by us hereinabove. To repeat, the formula is this: deduct all the liabilities from all the assets shown in the balance-sheet the net amount so arrived at shall be divided by total amount of the paid-up equity share capital the amount thus arrived at shall be multiplied by the paid-up value of each equity share; the value so arrived at is called the break-up value of the share and 85 per cent of such break-up value shall be treated as the market value of the share. This method is in short, called the "break-up method". The contention of learned counsel for the assessees, S/Sri Devi Pal M.L. Verma, Ramachandran, Harish Salve, G.C. Sharma and P.H. Parekh, is this: Section 7(1) of the Act contemplates rules being made for determining the market value of an asset which means the value which that asset would fetch if sold in the open market on the valuation date. The rule-making authority is to operate within the confines of section 7(1). The rules made by it should be directed towards ascertaining such market value. Rule 1-D, however, does not bring about the said result. It prescribes an arbitrary method, the application of which leads to an arbitrary figure unrelated to the market value of the share on the valuation date. This Court has repeatedly held that the proper and appropriate method for valuing the unquoted equity shares of a going concern is the yield method. The Court has pointed out that the break-up method is not appropriate for the purpose and that this method is adopted in exceptional situations or where the company is ripe for winding-up. A method which is appropriate only in the case of a company ripe for winding-up cannot be treated as a proper or appropriate method for the purpose of valuing the shares of a going concern. The formula prescribed in rule 1-D is unrelated to realities. The rule is thus contrary to section 7(1) and beyond the rule-making authority conferred by the Act. Even if for some reason the rule is held to be good, it should not be followed in the case of valuation of the unquoted equity shares of a company which is a going concern. In such cases, the yields method alone should be adopted. Only in the case of a company which is ripe for winding-up, its shares must be valued according to the break-up method contained in the rule. In other words, rule 1-D is not mandatory, but directory. The majority of the High Courts in the country have taken this view and it should also be accepted by this Court.
On the other band, S/Sri Gauri Shankar, B.B. Ahuja and Murthy, appearing for the Revenue, submitted that according to the decisions of this Court and the well-known rules of accountancy followed in this and other countries, the break-up method is none of the recognised methods of valuing the unquoted equity shares. Where more than one method of valuation is available to the rule-making authority, it is open to it to choose one of them. Counsel emphasised that rule 1-D' takes the balance-sheet of the company itself as the basis and arrives at the valuation which cannot be said to be either arbitrary or unrelated to realities. Counsel submitted that every authority under the Act is bound to follow and apply the said rule whenever they have to value an unquoted equity share.
We may first take up the question whether rule 1-D is void for being inconsistent with the Act or for the reason that it is beyond the rule-making authority conferred by the Act. Section 7(1) indeed defines the expression "value of an asset". It is "the price which in the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date", but this is made expressly subject to the rules made in that behalf. No guidance is furnished by the Act to the rule-making authority except to say that the rule made must lead to ascertainment of the value of the asset (unquoted equity share) as defined in section 7. It is thus left to the rule-making authority to prescribe an appropriate method for the purpose. Now, there may be several methods of valuing an asset or for that matter an unquoted equity share. The rule-making authority cannot obviously prescribe all of them together. It has to choose one of them which according to it is more appropriate. The rule making authority has in this case chosen the break-up method, which is undoubtedly one of the recognised methods of valuing unquoted equity shares. Even if it is assumed that there was another method available which was more appropriate, still the method chosen cannot be faulted so long as the method chosen is one of the recognised methods, though less popular. One probable reason why the yield method or the dividend method was not adopted in the case of unquoted equity shares was that the bulk of these companies are private limited companies where the dividend declared does not represent the correct state of affairs and to estimate the probable yield is no simple exercise. The dividends in these companies is declared to suit the purposes of the persons controlling the companies. Maintainable profits rather than the dividends declared represent the correct index of the value of their shares. The break-up method based upon the balance-sheet of the company, incorporated in rule 1-D, is a fairly simple one. Indeed, no serious objection can also be taken to this course since the basis of the rule is the balance-sheet of the company prepared by the company itself---subject, of course, to certain modifications provided in Explanation II.
We are not satisfied that the break-up method adopted by rule 1-D does not lead to a proper determination of the market value of the unquoted shares. The argument to this effect, advanced by learned counsel for the assessees, is based upon the assumption/premises that the value determined by applying the yield method is the correct market value. We do not see any basis for this assumption. No empirical data is placed before us in support of this submission or assumption. It may be more advantageous to the assessees but that is not saying the same thing that it alone represents the true market value. It cannot be stated as a principle that only the method that leads to the lesser value is the correct method. The idea is to find out true market value and not the value more favourable to the assessee. Accordingly, the contention that rule 1-D is inconsistent with section 7(1) or that it travels beyond the purview of section 7 is rejected.
The next argument that rule- 1-D is not mandatory but directory proceeds upon a certain misconception. A provision is said to be directory when the absence of a strict or literal compliance with it---and in some cases, even non-compliance with it---may not vitiate the thing done. On the other hand, a mandatory provision is one which has to be obeyed in its letter and spirit and anything done without such compliance stands vitiated. Counsel for the assessees, however, de not understand the said expressions in the above sense. What they really say is that following rule 1-D should be optional. According to them, in all cases, except in the case of companies ripe for winding-up, rule 1-D ought not to be followed and that only the yield method should be. This is really substituting a rule of the choice of the assessees in the place of the rule made by the rule-making authority under section 46 of the Act. If the rule is good and valid, as we find it to be, it has to be followed in each and every case. It is not a matter of choice or option. The rule-making authority has prescribed only one method for valuing the unquoted equity shares. If this method were not to be followed, there is no other method prescribed by the rules. The acceptance of the assessees' contention would mean that it would be open to the Wealth Tax Officer-to adopt such other method of valuation as he thinks appropriate in the circumstances. This is bound to lead to vesting of uncalled for wide discretion in the hands of Wealth Tax Officers/valuing authorities. It would lead to uncertainty and may be arbitrariness in practice. Where there is a rule prescribing the manner in which a particular property has to be valued, the authorities under the Act have to follow it. They cannot devise their own ways and means for valuing the assets. It is equally well to remember that rule 1-D does not treat the break-up value as the market value. A deduction of 15 per cent. is made in the break-up value to arrive at the market value. It is equally relevant to notice that rule 1-D uses the expression "shall", which prima facie indicates its mandatory character.
Two decisions of this Court constitute the bed-rock upon which are founded the several submissions of learned counsel for the assessees. They are CWT v. Mahadeo Jalan (1972) 86 ITR 621 (SC) and CGT v. Kusumben D. Mahadevia (1980) 122 TTR 38 (SC). It is, therefore, necessary to examine the ratio of the said decisions to find out whether they do in fact support their contentions.
Mahadeo Jalan's case (1972) 86 ITR 621(SC) was concerned with the assessment years 1957-58 and 1958-59. Rule 1-D was not in force at that time. The assessee owned shares in certain private limited companies, which had to be valued for determining the assessee's wealth. The question referred to the High Court under section 66(1) of the Indian Income-tax Act, 1922, was "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?" At the relevant time, subsection (1) of section 7 read differently. It provided that "the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date." The opening words "subject to any rules made in this behalf' were not there. (These words were added with effect from April 1, 1965). The question posed by Jaganmohan Reddy, J., speaking for the Bench comprising himself and H.R. Khanna, J., was "what is the basis of valuation of shares in private limited companies for the purposes of section 7 of the Wealth Tax Act?" After discussing the relevant principles and decisions, the learned Judge enunciated the following principles (at page 633):
" 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 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 the 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 v. Mackie (1952) 2 All ER 775 (PC), 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.
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 shareholder 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 of the methods."
In Kusumben D. Mahadevia's case (1980) 122 ITR 38 (SC), a Bench comprising P.N. Bhagwati and R. S. Pathak, JJ. affirmed the aforesaid principles and added the following observation ( at page 47):
"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 method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation'."
Kusumben D. Mahadevia's case (1980) 122 ITR 38 (SC) was concerned with the valuation of shares in an investment company which was, of course,. a going concern. The valuation of unquoted equity shares in investment companies is governed by a different rule, viz., rule 1-E, which was later incorporated as rule 12 in Schedule III of the Act.
Now, let us examine the principles enunciated in Mahadeo Jalan's case (1972) 86 ITR 621 (SC). The decision recognises that the break-up method "nonetheless is one of the methods" of valuation of such shares, though the said method is aid to be appropriate in exceptional circumstances or where the company is ripe for liquidation. The normal method in the case of a going concern is stated to be the dividend method or the yield method. If one reads proposition (2) enunciated in the decision carefully, one would immediately recognise the several practical difficulties. Firstly, it is stated that the "dividends, if any, reflecting the profiteering capacity on a reasonable commercial basis" shall be the basis. It is worth pointing out that it is not the dividends declared that is the basis but the "dividends reflecting the profit earning capacity on a reasonable commercial basis". It is then stated that if the dividends declared do not reflect the profit-earning capacity on a reasonable commercial basis, one has to adopt the "earning method", which is explained as meaning "the profits which the company has been making and should be making ". It is then stated that if the results of two methods (dividend method and earning method) differ, " an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of profits". One need not emphasise the amount of investigation the Wealth Tax Officer has to do in each case---and an assessee may own shares in any number of companies. This is not all. Where in a private limited company, disproportionate expenses are incurred, such disproportionate expenses have to be added back to the profits of the company in computing the yield. Again, in a case where dividend and earning methods break down " by reason of the company's inability to earn profits and declare dividends" and "if the set-back is temporary", then "it is perhaps possible to take the estimate of the value of the shares before the 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". A very daunting task indeed even for the most efficient and expert valuer. Propositions (5) and (6) set out in the judgment recognise that where the company is ripe for winding-up or where the fluctuation of profits and uncertainty of conditions at the date of valuation prevent a reasonable estimation of prospective profits and dividends, the break-up method can be adopted. All the above propositions, it is relevant to point out, are qualified by the statement: " 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".
The statement of law in decision would thus establish that it does not l purport to " lay down any hard and fast rule". It recognises that various factors in each case will have to be taken into account to determine the method of valuation to be applied in that case. The dividend yield method is not the only method indicated m the case of a going concern; there is the `earning method' and then a combination of both methods. The several qualifications added to the above rules, as already stated, make them highly cumbersome and time consuming. The Wealth Tax Officer has to examine the facts and circumstances of each case including the nature of the business, the prospects of profitability and similar other considerations before finally determining whether to apply the dividend method or the yield method or whether the break-up method should be followed. There may be cases where an assessee may be holding shares of a large number of private companies or other public limited companies whose shares are not quoted. Compared to them, the break up method incorporated in rule 1-D is far simpler and far less time consuming. It prescribes a simple uniform method to be followed in all cases. All that the Wealth Tax Officer has to do is to take the balance-sheet, delete some items from the columns relating to assets and liabilities as directed by Explanation II, and then apply the formula contained in the rule. He need not look into the profitability, the earning capacity and the various other factors mentioned in propositions (2), (3) and (4) of the decision. The decision, it bears repetition, recognises that the break-up method "nonetheless is one of the methods". In the circumstances, it is difficult to agree with learned counsel for the assessees either that the break-up method is not a recognised method or that the yield method is the only permissible method for valuing the unquoted equity shares. It is not as if the rule-making authority has adopted a method unknown in the relevant circles or has devised an impermissible method. There is no empirical data produced before us to show that break-up method does not lead to the determination of market value of the shares. Merely because the yield method may be more advantageous from the assessee's point of view, it does not follow that it alone leads to the ascertainment of the true market value and that all other methods are erroneous or misleading. This aspect we have emphasised hereinbefore too.
The decision in Kusumben D. Mahadevia's case (1980) 122 ITR 38 (SC) does no more than reiterate the principles and observations in Mahadeo Jalan's case (1972) 86 ITR 621(SC).
Dr. Gauri Shankar brought to our notice a brochure entitled "Guidelines for valuation of equity shares of companies and the business and net' assets of branches", issued by the Ministry of Finance, Department of Economic Affairs, Investment Division (vide F. No. S.11(21 C.C.I. (11) of 1990, dated July 13, 1990, published in (1990) 68 Comp. Cas. (St.) 121). The said guidelines are stated to be applicable to the valuation of, inter alia, equity shares of companies, private and public limited. Paragraph (5) in Part 11 says that the objective of the valuation process is to make a best reasonable judgment of the value of the equity share of a company, referred to in the said guidelines as the "fair value". For determining the fair value, three methods are devised, viz., (1) the net asset value method; (2) the profit-earning capacity value method; and (3) the market value method in the case of listed shares. Paragraph (6) shows that what is referred to as the net asset value is roughly the break-up method incorporated in rule 1D. The relevance of these guidelines lies in the fact that they do indicate and reaffirm that the break-up method is one of the recognised methods of valuing equity shares.
Sri M.L. Verma placed strong reliance upon the decision of this Court in CGT v Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai (1988) 170 ITR 144 (SC) in support of his contention. The question in the said case related to valuation of certain shares which were the subject-matter of a gift. The shares were of a company incorporated in the United Kingdom which was analogous to a private company in India. The assessee contended that the shares must be valued applying the break-up method taking the average of the balance-sheet, dated March 31, 1963, and March 31, 1964. The Gift Tax Officer adopted the break-up method but only on the basis of the balance-sheet as on March 31, 1964. When the matter reached the High Court, it opined that the Gift Tax Officer ought to have taken the balance-sheet as on March 31,1963, and not as on March 31, 1964. Before this Court, however, the Revenue contended, on the basis of Mahadeo Jalan's case (1972) 86 ITR 621 (SC) and Kusumben D. Mahadevia's case (1980) 122 ITR 38 (SC), that the correct method was to adopt the yield method and not the break-up method. While upholding the contention of the Revenue, the Court refused to interfere in the matter having regard to the number of years that have elapsed since the controversy arose and also because the amount involved was very small. Firstly, it shay be seen that the matter had arisen under the Gift Tax Act and rule 1-D did not in terms apply to it. The shares were of a British company, which was analogous to a private limited company in India. Up to the stage of High Court, both the Revenue and the assessee were ad idem in applying the break up method. The only question was which balance-sheet was required to be taken as the basis. In this Court, however, the Revenue shifted its stand and wanted the yield method to be applied, which contention was upheld following the aforesaid two decisions. This decision does not, therefore, lay down any proposition different from than those enunciated in Mahadeo Jalan's case (1972) 86 ITR 621 (SC) and Kusumben D. Mahadevia's case (1980) 122 ITR 38 (SC). Incidentally this case establishes that in the case of some companies, the break-up method is more advantageous to the assessees than the yield method. In other words it is not always the yield method that is more advantageous to the assessees.
Dr. Gauri Shankar submitted that inasmuch as section 46 provides for the rules being laid before both Houses of Parliament for the specified period, it must be deemed that Parliament has approved these rules. The consequence, according to learned counsel, is that the rules have acquired a higher status-- almost as good as that of the statute itself. It is not possible to agree. The requirement of laying before the House is one form of parliamentary control. But by that means, the rules do not acquire the status made by Parliament. Indeed, the rules are effective as soon as they are made and published. Parliament is; no doubt, entitled to modify the said rules in such manner as it thinks appropriate or even annul them. But it does not mean that the rules become effective only after the expiry of the period for which they are to be laid before Parliament. Section 46(4) expressly provides that any such modification or annulment of rules by Parliament "shall be without prejudice to the validity of anything previously done under that rule". To reiterate, the rules even after they are laid before both Houses of Parliament for the specified period, yet continue to be delegated legislation. All that may be said is that Parliament did not find any justification to amend or modify the rules and nothing more.
It is brought to our notice that a good number of High Courts have taken the view now espoused by the assessees and that only the Allahabad High Court has taken the contrary view. Inasmuch as the decisions of the High Courts upholding the assessees' contention are based mainly upon the decisions of this Court in Mahadeo Jalan's case (1972) 86 ITR 621 and Kusumben D. Mahadevia's case (1980) 122 ITR 38---which decisions we have already dealt with---we do not think it necessary to examine the reasoning of the High Courts separately. Sri M.L. Verma, particularly emphasised the observation in Dr. D. Renuka v. CWT (1989) 175 ITR 615, a decision of the Andhra Pradesh High Court (rendered by a Bench comprising one of us Jeevan Reddy, J.) holding that the break-up method brings about a situation unrelatable to realities and unjust to the assessees in general. It must be stated that the said observations were influenced by the views of the majority of the High Courts and also because the Bench did not have the benefit of an in depth debate, as has taken place now in this Court. Indeed, the decision of this Court in Executors of Ambalal Sarabhai's case (1988.) 170 IM 144, indicates that "break-up" method is not always advantageous to the Revenue nor is the "yield method" always advantageous to the assessees.
For all the above reasons, we hold that rule 1-D is not ineffective or invalid for any of the reasons suggested by learned counsel for the assessees nor can it be said that the Wealth Tax Officer has an option to follow or not to follow the said rule. He has tc follow and apply the said rule in each and every case where he has to value the unquoted equity shares of a company. The contention of the assessees that it is merely directory and that it need not be followed at the choice of the Wealth Tax Officer or the assessee, or in the case of a going concern, cannot be accepted. .
Question No2: Whether the Valuation Officer is bound by rule 1-D when valuing the unquoted equity shares of the companies?
Ordinarily, it is for the Wealth Tax Officer to value the assets of an assessee, whatever be their nature. Section 7(1) says so. Subsection (3) of section 7, however, says that "(Notwithstanding anything contained in subsection (1), where the valuation of any asset is referred by the Wealth Tax Officer to the Valuation Officer under section 16-A, the value of such asset shall be estimated to be the price which, in the opinion of the Valuation Officer, it would fetch if sold in the open market on the valuation date...") Subsection (1) of section 16A prescribes the situations in which the Wealth Tax Officer may refer the valuation of any asset to the Valuation Officer. Subsections (2) to (4) prescribe the procedure to be followed by the Valuation Officer on such reference. In short, he has to give notice to the assessee, receive the evidence produced by him, make appropriate enquiry and then send his report under subsection (5) to the Wealth Tax Officer. Subsection (6) says that " on receipt of the order under subsection (3) or subsection (5) from the Valuation Officer, the Wealth Tax Officer shall, so far as the valuation of the asset in question is concerned, proceed to complete the assessment in conformity with the estimate of the Valuation Officer." In other words, the order or the valuation made by the Valuation Officer, as the case may be, is binding on the Wealth Tax Officer.
The contention of learned counsel for the assessees is that the Valuation Officer is not bound by and is not obliged to observe rule 1D. It is submitted that the Valuation Officer has to determine the market value of the asset referred to him independently and applying such method as appears appropriate to him in the circumstances. His only object is to determine the correct market value. The contention is mainly based upon the non obstante clause found at the inception of subsection (3) of section 7. It is argued that the non obstante clause---"notwithstanding anything contained in subsection (1)" indicates clearly that the Valuation Officer is not bound by the rules referred to in and by subsection (1) of section 7. We find it difficult to agree. The 'Valuation Officer is a creature of the statute. He is, therefore, bound by the provisions of the statute and the rules made there under unless there is something either in the Act or in the rules to indicate otherwise. The question is whether the said non obstante clause has that effect. The scope and purport of the said non obstante clause has to be ascertained by reading it in the context of the provisions contained in section 7 and consistent with the scheme of the enactment. If so read, it only means this: Ordinarily it is for the Wealth Tax Officer to estimate the price which in his opinion an asset would fetch if sold in the open market on the valuation date but where the Wealth Tax Officer refers the question of valuation of an asset to the Valuation Officer under section 16-A, it is for the Valuation Officer to make the said estimate which estimate shall be binding upon the Wealth Tax Officer as provided in subsection (6) .of section 16-A. Thus, in a case referred to a Valuation Officer, the estimate is made by the Valuation Officer instead of the Wealth Tax Officer. This is the limited function and purpose, of the said non obstante clause "notwithstanding anything contained in subsection (1)" in section 7(3). It may be noticed that the relevant language of subsection (1) and subsection (3) is identical, viz., "shall be estimated to be the price which, in the opinion of the Wealth Tax Officer. It would fetch if sold in the open market on the valuation date". It would be rather odd to say that these words when used in subsection (1) mean something different from what they mean in subsection (3) the asset is the same, the object (to find the market value) is the same, the proceedings are one and the same and yet it is suggested that the method of valuation would differ from Wealth Tax Officer to the Valuation Officer? If the intention of Parliament was to say that the Valuation Officer is not bound by the rules made under section 46 governing the valuation of assets, it would have said so clearly. If a creature of the statute was sought to be elated to a status above the rules---an unusual thing to do---one would expect Parliament to say so in clear and unambiguous words. Section 16-A which provides for the reference to, enquiry by and the order to be passed by the Valuation Officer gives no indication whatsoever that the Valuation Officer is not bound by the rules made under the Act. The rules provide for the method of valuing life interest (1-B), house property (1-BB). unquoted preference shares (1C), unquoted equity shares (1-D), quoted equity and preference shares (1-F), jewellery (1-G), interest in partnership/association of persons (2), and assets of industrial undertakings (2-H) and so on and so forth. The rules also provide for certain assets and certain liabilities shown in the balance-sheet to be ignored while valuing the net value of assets of a business as a whole under rule 2-A. It is difficult to believe that none of these rules govern the valuation by the Valuation Officer. The problem is that learned counsel for the assessees tend to assume that Valuation Officers are meant only for valuing unquoted equity shares forgetting for a moment that they are meant for valuing all kinds of assets and that many of the assets present inherent difficulties in valuing them. e.g., jewellery, pieces of art, antiques, industrial undertakings and businesses as a whole and so on.
There is yet another reason why the assessees' contention cannot be accepted. Subsection (6) of section 16-A makes the opinion of the Valuation Officer binding upon the Wealth Tax Officer but not upon the appellate authorities. Indeed, subsection (3A) of section 23 (which provides for appeals from orders of the Wealth Tax Officer to the Appellate Assistant Commissioner) indicates clearly that the Appellate Assistant Commissioner can depart from the Valuation Officer's valuation. It reads:
"(3-A) If the valuation of any asset is objected to in an appeal under clause (a) of subsection (1) or of subsection (1-A), the Appellate Assistant Commissioner or, as the case may be, the Commissioner (Appeals) shall,---
(a) in a case where such valuation has been made by a Valuation Officer under section 16-A, give such Valuation Officer an opportunity of being heard;
(b) in any other case, on a request being made in this behalf by the Wealth Tax Officer, give an opportunity of being heard to any Valuation Officer nominated for the purpose by the Wealth Tax Officer."
Now, it is not argued that the Appellate Assistant Commissioner is not bound by the rules while valuing the assets. If he is so bound, does it not mean that he will necessarily have to set aside the valuation made by the Valuation Officer if it is not in accordance with the rules and value the asset himself in accordance with the rules? Section 24, which provides for appeal to the Appellate Tribunal, too contains an identical provision (vide the proviso to subsection (5)). Again it is not suggested that the Appellate Tribunal is not bound by the rules. It is rather odd to say, that everybody else is bound by the rules but not the Valuation Officer, though his valuation is subject to appeal to the very authorities. who are bound by the rules. Conversely, it cannot be suggested that nobody except the Wealth Tax Officer is bound by the Rules. This would be a ridiculous suggestion, if made. All this only means that there can be only one uniform method of valuation of assets under the Act---and not two or more. This would be so whether reference to the Valuation Officer is obligatory---as contended on the basis of a Board Circular---or otherwise.
We are, therefore, of the opinion that the Valuation Officer is equally bound by rule 1-D as indeed he is bound by all the other Rules made under the Act. This is the view taken by the Allahabad High Court in CWT v. Smt. Pushpawati Devi Singhania (1991) 188 ITR 364. The contrary view taken by the Delhi High Court in Sharbati Devi Jhalani v. CWT (1986) 159 ITR 549 and other High Courts, if any, is overruled.
Question No. 3: 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?
The contention of 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 marker on the valuation date. In other words, the subsection 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 imagination to boggle 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 subsection 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 subsection 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 that no other amounts like provision for taxation, provident fund and gratuity, etc., can be deducted. The contention of learned counsel for the assessee is therefore, wholly unacceptable.
Question No. 4: Where the date of a balance-sheet of the company is earlier to the valuation date of the assessee, is it obligatory to follow rule 1D? (The same question arises where in the absence of such a balance-sheet, the balance-sheet drawn up on a date immediately following the valuation date is taken as the basis).
The "break-up method" contained in rule 1-D takes the balance-sheet of the company as the basis for working the rule. The said rule cannot be worked in the absence of the balance-sheet. But there may be cases where the date of the balance-sheet and the valuation date of the assessee do not coincide. It is to meet such a situation that Explanation I is provided in rule 1-D. The explanation says that where the date on which the balance-sheet is drawn up does not coincide with the valuation date of the assessee, "the balance-sheet drawn up on a date immediately preceding the valuation date" shall be adopted as the basis for working the rule. Yet another situation contemplated by the Explanation is where both the above situations are absent, "the balance-sheet drawn up on a date immediately after the valuation date, shall be adopted as the basis. Now one would think that this was the most reasonable thing to do in the circumstances but the contention of learned counsel for the assessees runs thus: the asset of an assessee has to be valued as on the valuation date and not with reference to any other date; if the balance sheet is drawn up with reference to a date anterior to the valuation date, it cannot be said that such balance-sheet reflects the position obtaining on the valuation date; many things may happen between the date of the balance-sheet and the valuation date; the value of the shares may go down; the company may be closed or any other untoward development may depreciate the value of the shares; this difficulty would be more pronounced if the balance-sheet drawn up on a date immediately preceding the valuation date is taken irrespective of how many years before it may have been prepared. In our opinion, the submission has no substance. Once the basis of working the rule is the balance-sheet, one must necessarily have the balance-sheet. Without a balance-sheet the rule' Cannot be worked. It is for this reason that Explanation I says what it does. Normally one would expect every company to prepare its balance-sheet on the due date. Sometimes, there may be a default on the part of the company in preparing its balance-sheet on time. But on the basis of such exceptional circumstances, the rule cannot be faulted. Indeed the Explanation also provides that in the absence of both the said situations, the balance-sheet drawn up on a date immediately after the valuation date shall be adopted, One 'must remember that we are dealing with a taxing statute and that in the legislation, I the Le stature must be provided a greater latitude and a greater play in the joints. Us aspect has been elucidated and explained in the decision of a Constitution Bench in R.K. Garg v. Union of India (1982) 133 ITR 239; AIR 1981 SC 2138 and deserves to be quoted in full:
"Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. It has been said by no less a person than Holmes J., that the Legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matter, where, having regard to the nature of the problems required to be dealt with, greater play in the joint has to be allowed to the Legislature. The Court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud (1957) 354 US 457, where Frankfurter, J., said in his inimitable style:
`In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The Legislature after all has the affirmative responsibility. The Courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the Judges have been overruled by events, self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability'."
The Court must always remember that `legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry', that exact wisdom and nice adoption of remedy are not always possible and that `judgment is largely a prophecy based on meagre and un interpreted experience'. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call the trial and error method and, therefore, it cannot provide for all possible situations or anticipate all, possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The Courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Reig. Refining Co. (1950) 94 L.Ed. 381, be converted into Tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but, that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any Legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation, which may be made by those subject to its provisions, and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore add the constitutionality of such legislation by the generality of its provision and net by its crudities or inequities or by the possibilities of abuse of an of its provisions. If any crudities, inequities or possibilities of abuse come to light, the Legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the Legislature in dealing with complex economic issues"
The above statement of law of the Constitution Bench makes it clear that the mere fact that some crudities and inequities result as a result of complicated experimental economic legislation, the legislation cannot be struck down on that ground alone and that the Courts cannot be converted into Tribunals for relief from such crudities and inequities. The Court must adjudge the constitutionality of a legislation by the generality of its provisions and not by its crudities and inequities. Ordinarily speaking, the gap if any, between the valuation date and the date of the balance-sheet would not be too long. It would a few months. True it is that there may be some fluctuations in the fortunes of the company within that period. Precisely for this reason, the market value adopted by rule 1-D is not the break-up value as such but only 85 per cent of it. Moreover, there is no reason to presume that the fluctuation, if any, would be only one way, i.e., to the prejudice of the assessee. The fluctuation may also be the other way, i.e., to the benefit of the assessee, in which case the Revenue will stand to lose its legitimate revenue. But all this is no ground for holding either that Explanation I is inconsistent with section 7(1) or that rule 1-D should not be followed unless the valuation date and the date of the balance-sheet are identical. Saying so would be putting too restrictive an interpretation upon a taxation provision and would be contrary to the spirit of the statement of law in R. K. Garg's case (1982) 133 ITR 239 (SC).
Strong reliance is placed by learned counsel for the assessees upon the decision of the Delhi High Court in Sharbati Devi Jhalani's case (1986) 159 ITR 549, which is indeed the subject-matter of appeal before us, viz., Civil Appeals Nos. 1591-96 of 1991. The first proposition affirmed by the High Court is (at page 558): "When the Act enjoins the determination of the net wealth of an assessee on the valuation date, by a rule, a different date cannot... be fixed... (and that).... If rule 1-D provides such an outcome, then it may have to be held that it is contrary to section 3 of the Act." The Court, however, did not declare the rule void but held that the rule is merely directory and not mandatory in cases where the valuation date and the date of the balance-sheet do not coincide. We are afraid, we cannot agree with this reasoning. It must be remembered that what is sought to be valued is an unquoted equity share. Since it is not quoted on the stock exchange and there are no dealings in those shares, some formula has to be evolved for determining its value. So long as the formula evolved is reasonable having regard to available circumstances and practicable considerations, the formula cannot be faulted. No formula can be evolved to fit all conceivable situations. Even if the dividend method is adopted, the said problem would still be present. The dividend may have been declared on a date different from the valuation date.
For all the above reasons, it is not possible to agree that merely because the valuation date and the date of the balance-sheet are not the same, rule 1-D need not be followed.
Question No. 5: How are sub-clause (a) of clause(i) and sub-clause (e) of clause (ii) of Explanation II to be read and understood?
Explanation II in rule 1-D contains two clauses. Clause (i) provides the two items shown as assets in the balance-sheet shall not be treated as assets for the purpose of rule 1-D. Similarly, clause (ii) says that six items shown as liabilities in the balance-sheet shall not be treated as liabilities for the purpose of rule 1-D. In other words, the balance-sheet of the company with the aforesaid modifications shall be the basis for working the rule. Schedule VI to the Companies Act, as already stated, prescribes the form in which the balance-sheet of a company has to be prepared. Of the four columns provided therein, columns (2) and (3) relate to liabilities and assets. The advance tax paid under section 210 of the Income-tax Act, though already paid, is shown as an asset as required by Schedule VI. Clause (i)(a) of Explanation 11, however, says that it shall not be treated as an asset. To this extent, it is in favour of the assessee because the assets as shown in the balance-sheet will stand reduced to that extent. Now, clause (ii)(e) says that in case the balance-sheet specifies any amount as "provision for taxation" in the column of liabilities, the Wealth Tax Officer shall treat only that amount as a liability which is equal to the tax payable with reference to the book profits. Any excess over the said amount shall not be treated as a liability. Sub-clause (e) of clause (ii) while referring to the "amount representing provision for taxation "qualifies the said words by the words following, viz., " other than the amount referred to in clause (i)(a)". This is as it ought to be. The amount referred to in clause (i)(a) is shown in the balance-sheet as an asset whereas clause (ii)(e) speaks of an amount shown as a liability in the balance-sheet. Now no company would show the amount of advance tax paid, which is shown as an asset in the column relating to assets, simultaneously as a liability in the column of liabilities. The same amount cannot be shown both as an asset as well as a liability. No auditor would be a party to the preparation of such a balance-sheet. Ordinarily, therefore, there will be no occasion for the Wealth Tax Officer to rely upon the said words "other than the amount referred to in clause (i)(a)". However, if in the case of ' the balance-sheet of any company, the said amount of advance tax paid is also shown as a liability, i.e., if the said amount is included in the amount set apart r as provision towards taxation, it would obviously have to be deleted from the column of liabilities---and this is also what the aforesaid words in clause (ii)(e) say. Clause (ii)(e) is in a sense complementary to clause (i)(a). Truly speaking, the advance tax paid is not really an asset but the pro forma of balance-sheet in Schedule VI to the Companies Act requires it to be shown as such. What clause (i)(a) does is to remove the said amount from the list of assets for the purpose of rule l-D. It is then that clause (ii)(e), which speaks of liabilities, says that only that amount which is still remaining to be paid shall be treated as a liability on the valuation date. If in the provision for taxation made in the column of liabilities in the balance-sheet, the amount of advance tax already paid is again shown as a liability, it will not be treated as a liability. It must be remembered that the advance tax has already gone out of the profits and been debited in the account books of the company. This is the true function of both the sub-clauses. The situation is best explained by giving an illustration. Take a case where a company has paid Rs. 8 lakhs by way of advance tax which is shown as an asset in the balance-sheet. The company has made a provision of Rs. 15 lakhs for taxation, which is shown as a liability in the balance-sheet. The Wealth Tax Officer estimates the tax payable on the basis of book profits at Rs.10 lakhs. What he is asked to do by clause (ii)(e) is not to treat the excess Rs. 5 lakhs as a liability. The tax liability as arrived at by him is only Rs. 10lakhs, but inasmuch as Rs. 8 lakhs has already been paid and only Rs. 2 lakhs remains payable, the said Rs. 2 lakhs alone will be treated as a liability on the valuation date. It must be remembered that Rs. 8 lakhs already paid is deleted from the "assets" shown in the balance-sheet. What is shown as an asset cannot at the same time be shown as a liability This does not mean that tax liability is treated by the Wealth Tax Officer only as Rs. 2 lakhs. It is Rs. 10 lakhs. Rs. 8 lakhs has already gone out of the profits and debited in the books of the company. By reading clause (i)(a) and clause (ii)(e) together, the assessee will be getting the benefit of entire Rs. 10 lakhs but so far as the balance-sheet for the purpose of rule 1-D is concerned, only Rs.2 lakhs will be treated as a liability on the valuation date since that is the actual amount still outstanding. We do not think that if the aforesaid clauses are understood as explained herein, there is any prejudice to the assessees or .to the Revenue. It indeed reflects the true situation. It is brought to our notice that the Andhra Pradesh High Court has taken a similar view in CIT v. M. Lakshmaiah (1988) 174 ITR 4 and that similar view has also been taken by the Karnataka High Court in CWT v. N. Krishnan (1986) 162 ITR 309, and the Punjab and Haryana High Court in Ashok Kumar Oswal (Minor) v. CWT (1984) 148 ITR 620. On the other hand, the Gujarat High Court in CWT v. Ashok K. Parikh (1981) 129 ITR 46 has taken a different view, which has been adopted by some other High Courts. It is enough to indicate that if the said sub-clauses are understood in the manner indicated and clarified by us, counsel for the assessees agree that they have no grievance. In this view of the matter, we do not think it necessary to deal with the opposing views of the High Courts at any length.
Question No.6: Whether the assessee holding shares in a company whose assets comprise wholly of tea estates is entitled to exclude such shares from his assets?
Sri N.K. Poddar appearing for the petitioner in S.L.P.(C) No.14869 of 1991 raised the above question. The assessment year concerned is 1983-84. His contention is that the company, shares whereof were held by the assessee on the relevant valuation date, is a company whose asset comprised wholly of agricultural land. He submitted that though agricultural land was included in the definition of assets on and from April 1, 1970, they were excluded from the purview of assets by the two provisos, (provisos 1 and 2), appended to the definition of "assets" by the Finance (No.2) Act, 1980, with effect from April 1, 1981, and the Finance Act, 1982, with effect from April 1,1983, respectively. So far as the assessee in this special leave petition is concerned, he falls under the second proviso which means that agricultural land including the land comprised in any tea plantation shall not be included in the "assets" of the company as defined in section 2(e). In our opinion, the contention has no substance:- Wealth being assessed is that of the shareholder and not of the company. The company may own agricultural assets and if the company were to be liable to wealth-tax, the said assets may be excludable in its hands. But that has no relevance to the case of a shareholder. The shareholder does not own and cannot claim any portion of the property held by the company of which he is a shareholder. The company is an independent juristic entity. This aspect has been put beyond any doubt by the decision of this Court in Bacha F. Guzdar v. CIT (1955) 27 ITR 1;1 SCR 876. It is held therein that even though a tea company growing and manufacturing tea gets an exemption of 60 per cent of the profits as agricultural income in accordance with Rule 24 framed under section 59 of the Indian Income-tax Act, 1922, the dividend income received by the shareholder of such a company is not "agricultural income" within the meaning of section 1 of the said Act, nor is it exempt from income- tax under section 4(3)(viii) of the Act. It was held further that the dividend of the shareholder is the outcome of his right to participate in the profits of the company arising out of the contractual relation between the company and the shareholder and that the shareholder does not acquire any interest in the assets of the company till after the company is wound up. The position of a shareholder of a company, it was explained, is altogether different from that of a partner of a firm. In our opinion, the said decision of the Constitution Bench fully answers the said question. Accordingly, Sri Poddar's contention is rejected.
In view of our opinion that Valuation Officer is also bound by the rules under the Act, the question of any conflict between rule 1-D and subsection (6) of section 24 cannot and does not arise. This aspect has been dealt with by the Allahabad High Court in Smt. Pushpawati Devi Singhania's case (1991) 188 ITR 364. We agree with it.
We summarise our conclusions thus:
(1) Rule 1-D is perfectly valid and effective. The rule has to be followed in every case where unquoted equity shares of a company (other than an investment company or a managing agency company) have to be valued. All the authorities under the Act including the Valuation Officer are bound by the said rule. The question of the rule being mandatory or directory does not arise.
(2) While valuing the unquoted equity shares under rule 1-D, no deductions on account of capital gains tax which would have been payable in case the said shares were sold on the valuation date can be made. Similarly, no other deduction including provision for taxation, provident fund and gratuity are admissible. Rule 1-D is exhaustive op the subject.
(3) Explanation 1 to rule 1-D is a perfectly valid piece of delegated (legislation and has to be followed. Merely because the valuation date of the assessee and the date with reference to which the balance-sheet of the company is drawn up do not coincide, it cannot be said that rule 1-D is not mandatory or that it need not be followed.
(4) Sub-clause (a) of clause (i) and sub-clause (e) of clause (ii) have to be read and understood in the manner indicated in this judgment 1 hereinabove.
(5) An assessee holding shares in a company whose assets comprise wholly or partly of agricultural land, is not entitled to exclude such shares from his wealth.
For the above reasons, the writ petition questioning the validity of rule 1-D is dismissed. So far as the appeals are concerned, some are by the assessees and some by the Revenue. It is not possible, having regard to the very large number of matters posted before us, to answer the question separately in each case. Accordingly, we direct that all the appeals shall be disposed of in terms of the opinion expressed herein. In cases where the Tribunal has dismissed the applications of the Revenue filed under section 27(3) of the Wealth Tax Act, the appeals filed by the Revenue against such orders are allowed herewith and the question asked for shall be deemed to have been referred and answered in the terms indicated in this judgment. Correspondingly, the appeals filed by the assessees against orders of High Courts dismissing their applications under section 27(3) are dismissed. The Tribunals shall pass appropriate orders in each case accordingly. No costs.
M.BA./431/T.F. Order accordingly.