W.T.A. NO. 160/IB OF 1999-2000 VS W.T.A. NO. 160/IB OF 1999-2000, 2000 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1169 (1999)

(a) Wealth Tax Rules, 1963---

----R.8(2)(c)(i)---Valuation of share---Rule 8(2)(c)(i) having no reference to market value was ultra vires the Wealth Tax Act, 1963.

1998 PTD 3900 explained.

(b) Wealth Tax Rules, 1963---

----R.8(2)(c)(i)---Valuation of share of unlisted company---Assessing Officer valued the share on the basis of break-up value---Assessee contended that R.8(2)(c)(i), to the extent of adopting higher value of the two i.e. face value and break-up value, was ultra vires the Wealth Tax Act, 1963 and lower of the two values was to be adopted as in the case of listed companies---First Appellate Authority, agreeing with the contention of the assessee, directed the Assessing Officer to accept the face value of the share as declared-- Validity---Contention that face value had to be considered as market value was not accepted and break-up value was equated with the market value-- Face value as a measure of valuation had disappeared with the declaration of R.8(2)(c)(i) as ultra vies, therefore, break-up value had to be adopted for the valuation of share of unlisted companies---Assessing Officer, thus, was justified to adopt break-up value for valuation of share---Order of the First Appellate Authority was vacated and that of the Assessing Officer restored by the Appellate Tribunal.

1998 PTD 3900 rel./explained.

Nadir Mumtaz Warraich, D. R. for Appellant.

Habib Fakhruddin, F.C.A. for Respondent.

Date of hearing: 18th October, 1999.

ORDER

MANSOOR AHMED (ACCOUNTANT MEMBER).---This departmental appeal is directed against order, dated 16-2-1999 passed by the learned CWT(A), Rawalpindi in respect of assessment year,1997-98.

2. The point at issue is the valuation of shares held by the assessee in an unlisted company. The assesssee declared the value of shares at Rs.300,435. However, the Assessing Officer valued the shares at Rs.375,180 on the basis of their break-up value. The contention taken before the learned CWT (A) was that no doubt rule 8(2)(c)(i) of the Wealth Tax Rules, 1963, provides for the valuation of the shares of unlisted companies at face value or break-up value whichever is higher, but the Honourable Lahore High Court in a judgment reported as 1998 PTD 390(1 has held the rule to the extent of adopting higher value of the two i.e. face value and break-up value to be ultra vires and has directed to adopt lower of the two values as in the case of listed companies. Agreeing with the contention of the assessee's counsel, the learned CWT (A) directed drat the face value of the shares, as declared, be accepted. The Department contests the order of the learned CWT(A) through this appeal.

3. The learned D.R. supports the assessment order by stating that the valuation of shares has rightly been made, in accordance with the Rules. The learned A.R. of the assessee repeats the argument as were advanced at the first appellate stage. Referring to the case cited 'as 1998 PTD 3900 in re: Munir Ahmed and others v. Federation of Pakistan, he argues that the rule regarding valuation of shares of unlisted companies was held to be discriminatory and hence ultra vires. Therefore, the valuation of shares of unlisted companies has to be made on the basis of their face value.

4. We have carefully gone through the aforesaid judgement of the Honourable Lahore High Court and find that it does not support the contention of the learned A.R. of the assessee. The; basic principle enunciated, through this judgment is that rules for valuation of assets have to provide for .the method of determining the market value of the assets. With reference to rule-making power conferred by section 46(2)(a) of the Wealth Tax Act, 1963, it was held as under:---

"5. It is obvious from the above, that the power has been delegated to the Board to frame rules so as to determine the market value of the asset. The use of word 'market' is not without significance for it requires that the value should be such which a willing buyer shall pay to a willing purchaser. If in a rule, valuation fixed has no reference to the market value, it would be ultra vires of the Act as it is against section 46. "

Since the method of valuation prescribed by rule 8(2)(c)(i) of the Wealth Tax Rules, 1963, is not based on market value, it was held to be ultra vires. It, is not correct to say that only that part of the aforesaid rule which pertains to valuation of shares of unlisted companies was struck down. This is clear from the concluding para. of the judgment which reads as under:---

"In view of the above, all these, petitions are allowed and rule 8(2)(c)(i) of the Wealth Tax Rules, 1963 is declared to be ultra vires and of no legal effect. The authorities concerned shall proceed to calculate and levy tax on the market value of the shares held by the petitioners. No order as to costs."

It is, thus, clear that the entire rule 8(2)(c)(i) has been declared to be ultra' vires. This interpretation is in line with the principle laid down that any rule which has no reference to market value is ultra vires of the Wealth Tax Act, 1963.

5. Now comes the question as to what method is to be applied for valuation of shares of unlisted companies. In this connection, the contention taken before the High Court was that as no criterion is available for determining the market value, per force face-value has to be considered as the market value. This contention was, however, not accepted and the break-up value was equated with the market value. We would like to refer to para.8 and relevant part of para. 9 of the judgment, which is reproduced as under:--

"8. It is, however, submitted that there is no yard-stick available with the Government for determining the market value, and therefore, per face value has to be considered as the market value.

9. This contention loses sight of the fact that the rule provides for working out the market value i.e. break-up value of the share. If this measure has been adopted for fixing the value of the share, there could possible be no objection . " (under lining by us).

From the above, it is abundantly clear that in the view of the Honourable Lahore High Court , the break-up value of a share of an unlisted company represents its market value. The face-value as a measure of valuation has disappeared with the declaration of rule 8(2)(c)(i) as ultra vires and of no legal effect. That being the case, the break-up value is to be adopted for the valuation of shares of unlisted companies. The Assessing Officer was, therefore, justified to adopt break-up value for valuation of shares held by the assessee. The order of the learned CWT(A) is, therefore, vacated and that of the Assessing Officer restored.

6. The departmental appeal succeeds.

C.M.A./M.A.K./7/Tax(Trib.) Order accordingly.