Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 13
PETITIONER:
COMMISSIONER OF WEALTH TAX
Vs.
RESPONDENT:
MAHADEO JALAN & MAHABIR PRASAD JALAN
DATE OF JUDGMENT13/09/1972
BENCH:
REDDY, P. JAGANMOHAN
BENCH:
REDDY, P. JAGANMOHAN
KHANNA, HANS RAJ
CITATION:
1973 AIR 1023 1973 SCR (2) 215
1973 SCC (3) 157
CITATOR INFO :
F 1980 SC 769 (1,7)
RF 1988 SC 522 (4)
ACT:
Wealth Tax Act, 1957-Section 7-Basis of valuation of shares
in Private Limited Companies.
HEADNOTE:
On the question as to what is the basis of valuation of
shares in private limited companies for the purpose of
section 7 of the Wealth-tax Act, 1957,
HELD : The general principle of valuation in a going concern
is the yield on the basis of average maintainable profits,
subject to adjustment etc, which the circumstances of any
particular case may call for. An examination of the various
aspects of valuation of shares in a limited company would
lead to the following conclusions .-
(a)Where the shares in a public limited company are quoted
on the stock exchange and there are dealings in term, the
price prevailing on the valuation date is the value of the
shares.
(b)Where the shares are of a public limited company which
are not quoted on stock exchange or of a private limited
company the valuation 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 would
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. 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.
(c)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 transfer, will also be taken into
consideration in arriving at a valuation.
(d) Where the dividend yield and earning method break down
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 13
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 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.
(e)Where the company is ripe for winding up the break-up
value method determined what would be realised by that
process.
(f)As in Attorne v General of Ceylon v. Mackie 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.
The above principles are not intended to lay down any hard
and fast rule, because, ultimately the facts and
circumstance of each case, the
216
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, cannot be determined on the hypothesis that
because in a private limited company one holder can bring it
into liquidation, it should be valued as on liquidation by
the break-up method. The yield method is the generally
applicable method while the break-up method is the one
resorted to in exceptional circumstances or where the
company is ripe for liquidation, but, nonetheless, is one of
the methods.
Attorney General of Ceylon v. Mackie [1952] 2 All. E.R. 775
P.C., Smith v. Revenue Commissioners, 1931 Irish Reports
643, Mc. Cathie v. The Federal Commissioner of Taxation, 69
Commonwealth Law Reports page I and Federal Commissioner of
Taxation v. Sagar, 71 C.L.R. 422 referred to.
(3)This Court has power to reframe the question as framed
by the High Court so long as a new and different question is
not raised but confine it only to resettling or reframing a
question formulated by the Tribunal or by the High Court so
as to bring out the real issue between the parties. [221E]
Narain Swadeshi Weaving Mills v. Commissioner of E.P.T., 26
I.T.R. 765 at 774 and Kusum Ben De Mahadavia v. Commissioner
of Income-tax, 39 I.T.R. 540 at 544 referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1135 &
1136 of 1969.
Appeals by special leave from the judgment and order dated
December 12, 1967 of the Assam & Nagaland High Court at
Gauhati in Wealth Tax Reference Nos. 3 and 4 of 1966.
AND
Civil Appeals Nos. 1765 to 1767 of 1969.
Appeals from the judgment and order dated February 4, 1969
of the Assam & Nagaland High Court at Gauhati in Civil Rule
No. 6 (m) of 1.965.
Ved Vyas, B. B. Ahuja, S. P. Nayar and R. N. Sachthey for
the appellant.
M. C. Setalvad and S. C. Majumdar for the respondents.
The Judgment of the Court was delivered by
JAGANMOHAN REDDY, J. These appeals are by special leave
against the judgment of the High Court of Assam and
Nagaland. Appeal No. 1136 of 1969 is of Mahadeo Mrigendra
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 13
Jalan, by Mahadeo Prasad as the karta of Hindu undivided
family, while appeal No. 11, 135 of 1969 is by him in his
individual capacity. In both these appeals, the Hindu
undivided family as well as the individual were holding
shares in five companies in respect of which shares,
dividend was being declared. The Wealth-tax Officer
computed the valuation of those shares on the basis of the
break-up value and included them in their total wealth. In
217
Appeals Nos. 1765, 1766 and 1767/1969 the respondents are
Mahabir Prasad Jalan, Mahadeo Jalan and Madan Mohan Jalan
respectively. All these appeals pertain to assessment years
195758 and 1958-59. In respect of these years the value of
the shares in private limited companies were included in the
total wealth of the respective assessees on the basis of
their yield though some of the companies were not paying
dividends while others were declaring dividends throughout.
The first two appeals which related to a later year seem to
have been heard by the High Court and disposed of on
December 12, 1967 while the last three appeals were disposed
of later on February 4,1969, mainly on the basis of the
judgment of the High Courtin the first two appeals.
For the years 1957-58 and 1958-59relating to the three
persons referred to above, the Wealth-taxOfficer had, is
in the case of assessment for the year 1959-60 adopted the
breakup value of the shares as disclosed on the balance
sheets of the company in computing their value as if each of
the companies was brought to liquidation. This assessment
was confirmed by the Appellate Assistant Commissioner. The
Tribunal however held that certainly this basis is one of
the recognised modes of valuation of the shares of the
private companies which are not saleable in the open market
but in so far as those cases were concerned the valuation on
the basis of the yield derived from the shares will be a
more reasonable method to be adopted in the particular
circumstances of their respective cases. Ac cordingly he
adopted the valuation on that basis in respect of each of
the companies as specified in its order. In the first two
appeals also the Wealth Tax Officer and the Appellate
Assistant Commissioner adopted the break-up value as the
basis as in the other cases, and agreed with that basis
inasmuch as the assessees bad failed to place before the
Wealth-tax Officer and the Appellate Assistant Commissioner
facts and figures relating to dividends declared by the
respective companies. It was also stated by the Tribunal
that at the time of hearing by the Tribunal in the case of
last three appeals, it was apparently not brought to the
notice of the Tribunal that the companies being private
limited companies the dividends declared would be controlled
by persons controlling the companies so as to suit their own
purpose, as such, the maintainable profits rather than the
dividends declared would afford a reasonable basis. While
so stating, it was observed that this aspect of the case
need not be taken note of since the objection before it is
only on the principle whether to adopt the "break-up value"
method. In respect of the first two appeals therefore the
Tribunal held that the adoption of the ’break-up’ value
was in order.
On an application under s. 66(1) the Tribunal referred the
following question for the opinion of the High Court, viz.,
218
"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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 13
question is. sustainable in law ?"
When the reference came up for hearing before the Bench of
the High Court, it was felt that as the question required an
abstract answer as to whether the principle of ’break-up
value’ is sustainable in law and as in their opinion the
Tribunal wanted to refer for the opinion of the Court "the
doubt they experienced in dealing with the case which
related to the question as to whether the ’break-up value’
method is correct method to be adopted in the facts and
circumstances of the case or it is the ’yield value’ method
to be adopted, that question was reframed and a further
statement of the case called for from the Tribunal. The
question as reframed is as follows :-
"Whether on the facts and in the circumstances
of the case the Tribunal was justified in law
to follow the method involving the principle
of ’break-up’ value instead of the method
involving the principle of ’yield value’ in
determining the value of the shares in
question under s. 7 of the Wealth Tax Act ?"
In compliance with this direction the Tribunal drew up a
supplementary statement of the case and submitted it to the
High Court. In that statement the Tribunal stated :
"Before the Appellate Assistant Commissioner
no alternative basis of valuation appear to
have been claimed. For the first time before
the Tribunal, the assessee filed a statement
of the dividends declared by the aforesaid
private companies during the years 1953 to
1957 and claimed that the market value of the
shares should be worked out with reference to
the average percentage of the dividends
declared by each company and on the footing
that the shares quoted in the market at Rs.
100/each would yield a dividend of Rs. 6/-"
It was further stated by the Tribunal that the assessee had
relied on the decision of the Tribunal for the assessment
years 1957-58 and 1958-59 where it determined the market
value of the shares on the yield basis but in so far as the
assessment year 1959-60 it did not accept that the
information furnished before it would be adequate for
working out the market value on the basis of "maintainable
profits" because it was of the view that "in cases of
private companies declaration of dividend would be dictated
by the directors having regard to the advantage in their
personal assessments and not with reference to the capacity
or other business considerations. It went on to say that
219
"The Maintainable profits, would be a certain
percentage (say 80%) of the net profits of the
company after deduction of taxes payable by it
and this would be a measure of potential yield
per share."
In this view the ’break-up’ value adopted by the Income-tax
Officer in respect of the assessments of 1959-60 in the
first two appeals was confirmed.
The High Court however did not agree with the basis adopted
by the Tribunal though it recognised that the break-up value
is also one, of the methods for the purpose of calculation.
It was contended before the High Court on behalf of the
assessee that the ’break-up’ value method will only be
applied to a company which reached the stage of liquidation
and winding up. After considering the respective
contentions and the decisions referred to before it, the
High Court observed as follows
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 13
We are satisfied that so far as the
application of s. 7 of the Wealth Tax Act in
determining the value of the shares of a
deceased person on the data of his death is
concerned, where those shares pertain to a
going concern, the only proper method to adopt
was the ’yield value’ method and we think that
the Tribunal was not justified in making the
assumption that in the case of a private
company the dividend would be controlled by
the persons controlling the company to suit
their own purposes, and that, consequently,
the ’maintainable profits’ should be accepted
as the basis and not the dividends. Unless
there was some substantial material before the
Tribunal to draw a different inference, the
Tribunal, in our opinion, is not justified in
doing so.
We are constrained to note that although the
Tribunal had adopted the ’yield value’ method
in its decisions in regard to the previous
years, the Tribunal had taken a new path and
adopted the ’break-up’ value method as the
basis of the assessment. We feel that there
is no material placed on the record to justify
this change in the method to be adopted in
calculation."
When the application for reference under s. 66(2) in respect
of the last three appeals came before the High Court after
an application under s. 66(1) had been rejected by the
Tribunal, it observed :--
"This is undoubtedly a question of law but the
answer will be covered by the decision of this
Court dated June 9. 1967 ..............
220
and so it thought it unnecessary to ask the Tribunal to
refer the same point again and accordingly rejected the
petitions. The special leave in respect of the first two
appeals is against the judgment of the High Court holding
that the ’yield method’ was the proper method and in respect
of the latter three appeals against the order refusing to
direct the Tribunal to state a case. As a common question
of law has to be determined these appeals are consolidated
and heard together.
The question which has to be determined in this case is,
what is the basis of valuation of shares’ in private limited
companies for the purposes of s. 7 of the Wealth Tax Act (27
of 1957). Sub-s. (1) of s. 7 provides 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 valuation date, as has
already been noticed, is 31st December of the calendar year.
On that date the Wealth-tax Officer will have to ascertain
what the shares will fetch if sold in the open market which
would be the price which a willing seller will accept and a
willing buyer will pay.
In valuing shares of a limited company certain factors have
to be taken into consideration. Firstly, a share is not a
sum of money but is an interest measured by a sum of money
and made up of various rights contained in the articles of
association. They are of different categories such as the
equity shares, preference shares, fully paid-up shares or
partly paid-up shares. Apart from these, there are also
debentures. The shares can be in a public limited company
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 13
or a private limited company and in the latter case they are
subject to certain restrictions. A private company has been
defined in s. 3(iii) of the Companies Act as a company which
by its articles (a) restricts the right to transfer its
shares, if any; (b) limits the number of its members to 50
not including certain categories specified in (i) and (ii)
of that clause and (c) prohibits any invitation to the
public to subscribe for any shares or debentures of the
company subject to the proviso that shares held jointly are
to be treated as if they are held by a single member. A
public company under s. 3 (iv) is a company which is not a
private company. It may be observed that the three
conditions which distinguish a private company from a public
company are cumulative and if any one of the conditions is
not fulfilled the company will be a public company. It may
also be noted that where under the articles of the company
the right to transfer shares is restricted without being
first offered to other members at a price which is either
fixed in advance or in a prescribed manner, or where the
directors have a power to veto a transfer, the fixation of
the value of the share will have to
221
be determined without ignoring the restriction as to
transfer because they, are an inherent element in the
property which has to be valued. This restriction may not
necessarily be deprecatory because the chance of acquiring
the shares of other members in the company on advantageous
terms is itself a benefit. In cases where shares have to be
valued by reference to the assets of the company
restrictions on alienation are irrelevant.
The shares the transfer of which is not restricted may be
sold on the stock exchanges for which there is official
market quotation. There may also be shares in public
limited companies for which there are no quotations on the
stock exchange. Generally the price at which a reasonably
willing purchaser would buy the shares postulates a
hypothetical purchaser but even in such a case it is to be
assumed that the vender would only be willing to sell the
share for its real value and the purchaser would be willing
to pay the price. This has to be always determined
nationally. Where shares in a company are brought and sold
on the stock exchange and there are no abnormalities
affecting the market price, the price at which the shares
are changing hands in the ordinary course of business is
usually their true value. These quotations generally
reflect the value of the asset having regard to the several
factors which are taken into consideration by persons who
transact business on the stock exchange and by the buyers
who want to invest their money in any particular share or
shares. Even where they are quoted on the stock exchange,
the quotations do not depend entirely on the yield or the
dividend declared. There are several factors which are
taken into consideration which affects and determines the
quotations, namely the factors which are taken into
consideration by a person who wants to sell his shares and
the factors which a buyer who wants to purchase them
considers as determining the price which price the buyer is
willing to pay and the seller to receive. Leaving aside any
distress sales, the factors which in our view are likely to
determine the fixation of a share on any particular day or
at any particular time is, firstly, the profit-earning
capacity of the company (in a reasonable commercial basis;
secondly, its capacity to maintain those profits or a
reasonable return for the capital invested, and in special
cases such as investment companies, the asset-backing; the
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 13
prospects of capitalisation of its earning in the shape of
declaration of bonus shares or where the company is
financially and commercially sound, the prospects of issue
of further capital where the existing shareholders have a
right to apply for and obtain them at a certain price which
is generally less than the market value, offering an
increased yield on his investment, on the assumption that
the company will be able to maintain the same rate or at
least increase the aggregate payment of divi-
222
dends on the increased capital. It may be mentioned that a
new share issue, whether an existing shareholder subscribes
for them or not, invariably reduces the average unit cost of
hi; total holding with the consequent increase in the rate
of his average return on the cost.
Take the case of a person who wishes to buy shares in a
particular company. If his purpose is only to invest, he
might enquire as to what are the various companies which
have good prospects and are a sound investment, often
referred to as "as good as guilt edged securities". This
would involve the ascertainment of whether the concern in
which he intends to invest is financially and commercially
sound, what is the yield that it will give on the capital
which he invests, whether that yield will be maintained,
whether the shares will appreciate in value and are easily
marketable whenever he desires to dispose of them. In
certain cases a person may want to take risks by investing
in shares which having, regard to various trends in the
commercial world and in any particular industry has
prospects of improvement and the value of the shares going
up with the corresponding prospect of the return or yield
obtainable on the capital invested being much higher than
what he would get in other sounder concerns. There may yet
be investors who notwithstanding that the company is not in
a solvent condition or is unable to pay dividends for a
number of years are willing to purchase the controlling
interest for the purpose of manipulation or ’bringing it to
liquidation for obtaining some benefit. Ignoring such
cases, where a purchaser or seller is considering the
various factors for purchase or sale of shares in a company,
the dominant factor determining the price he will pay or
receive as the case may be is the yield.
Now, what are the factors which a seller will take into con-
sideration when he wants to sell his shares ? Where he is
not obliged to sell because he is not in need of money, he
would first consider whether the return he is getting is
reasonable having regard to the current market price. Here
again the factor of yield would enter into his consideration
not so much on the capital he initially invested but on that
which he expects to realise on the sale. He may have a
better investment in view which will give on it a higher
yield or ensure for his capital better prospects. It may be
he may not expect a higher dividend to be maintained or that
these dividends are likely to be reduced or there is a
likelihood of the security of capital being in jeopardy, and
therefore he wishes to make a prudent sale. From what we
have stated, among the factors which govern the con-
sideration of the buyer and the seller where the one desires
to purchase and the other wishes to sell, the factor of
break-up
223
value of a share as on liquidation hardly enters into
consideration where the shares are of a going concern. The
basic yield method in cases where shares are quoted and
transactions take place on the share market may not be
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 13
different but where shares are not quoted, it is in these
latter cases the yield must be determined after taking into
account various factors as to which a reference has been
made earlier.
If profits are not reflected in the dividends which are
declared and a low-earning yield for the shares is shown by
the company which is unrealistic on a consideration of the
financial affairs disclosed for that year, the Wealth-tax
Officer can on an examination of the balance sheet ascertain
the profit earning capacity of the concern and on the basis
of the potential yield which the shares would earn, fix the
valuation. In the Estate Duties Act both here, in England
and in analogous Acts in some of the other Commonwealth
’Countries, similar provisions as under the Wealth-tax Act
provide for estimating the value of the assets to be the
price which in the opinion of the concerned officer would
fetch if sold in the open market on the date of the death.
In dealing with the valuation of assets under such Acts
Green on Death Duties (sixth edition) considers factors
other than those of valuation by reference to, dividends.
At page 407 it is stated :-
"Not infrequently, the dividends represent
only a small proportion of the company’s
profits and large sums are systematically
accumulated in the form of reserves. It is
important to, remember in this connection that
the interests of shareholders in unquoted
companies often differ from those of investors
in quoted shares, especially as respects
dividend policy. Where the shares are held by
a few individuals (particularly members of a
single family), it will not necessarily be to
their advantage to have the greatest possible
amount paid out to them as dividends. Re-
tention of the profits by the company may suit
them better than the receipt of taxable
dividends. A purchase of shares in a company
which distributes only a small fraction of its
profits is unlikely to prove attractive to, an
investor in search of current income, but the
open market is by no means confined to such
investors. It includes, for instance, the
existing members of the company, to whom the
shares may be more valuable than to others and
who may wish to exclude outsiders, and surtax
payers whose goal is capital appreciation
rather than current income."
224
Again at page 409 it is observed
"A valuation by reference to earnings is
apposite as respects unquoted shares whenever
the dividend alone does not truly represent
the profitability of the company......... The
"dividend" and "earnings" methods of valuation
are not mutually exclusive and both may be
used in conjunction. Where the value brought
out by one differs widely from that shown by
the other, an intermediate figure may be
appropriate ................
Where a company is engaged in a profitable
business, but the shareholders are also
directors and prefer to take what they need
from the company in the form of remuneration
rather than dividends, the profits distributed
by way of remuneration must be taken into
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 13
account in the valuation. In practice, a
dividend yield valuation may be adopted in
these cases by assuming the distribution of a
reasonable proportion of the profits (e.g. the
average distribution of the comparable
companies) as dividend: alternatively the
value may be estimated by reference to
earnings. In either case, the profits will be
adjusted to include remuneration paid in
excess of a normal management charge."
But where a person who holds shares in a company which is
making losses and where it does not justify a declaration of
dividends even from reserves as a temporary boost or where
there is a possibility of its capital structure being
affected or if that state of depression continues in other
words the company is ripe for liquidation, the valuation may
well be the break-up value of the shares. In this case,
however, we need not go into all the niceties and important
qualification and limitations which may have to be applied
in cases where the company’s assets and liabilities have to
be taken into consideration in fixing the value of the
shares. The general principle of valuation in a going
concern is the yield on the basis of average maintainable
profits, subject to adjustment etc. which the circumstances
of any particular case may call for. In Attorney General of
Ceylon v. Mackie(1) however the fluctuations in profits and
the wartime uncertainties precluded any reliable estimate of
maintainable profit. In these exceptional circumstances it
was held that in the absence of definite evidence to the
contrary the value of the business as a going concern
exceeded that of the tangible assets. Lord Reid referring
to the argument that in accepting
(1) [1952] 2 All E.R. 775 P.C.
225
the balance sheet method the Supreme Court of Ceylon erred
in law because that can only give a break up value which it
was necessary to find the value of the business as a going
concern observed at p. 779
"It is true that a purchaser of the shares
held by the deceased could. have obtained a
controlling interest in the company as a going
concern, and in their Lordships’ judgment it
is right to value these shares by reference,
to the value of the company’s business as a
going concern. No doubt, the value of an
established business as a going concern
generally exceeds and often greatly exceeds
the total value of its tangible assets. But
that cannot be assumed to be universally true.
If it is proved in a particular case that at
the relevant date the business could not have
been sold for more than the value of its
tangible assets, then that must be taken to be
its value as a going concern. In their
Lordships’ judgment it has been proved in this
case that the deceased’s holding could not
have been sold in September, 1940, at a price
based on any hi-her figure than the value of
the tangible assets of the company."
In the Irish case of Smith v. Revenue Commissioners(1) on
which on behalf of the Revenue reliance was placed on the
deceased and his son held all the shares in the private
company the transfer of which was restricted. It was also
found that the deceased had the controlling shares and that
both father and son drew yearly remuneration for the work
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 13
done by them, the former getting pound 3000 per annum and
the latter pound 1000 per annum. The average of dividend
for the six previous years’ was 5.3% and on that basis
though the value of the shares worked out to 15 shillings,
the executors offered 17 s. 6 d. The Revenue however fixed
the value of the share at 22 s. 6 d. on the basis that the
deceased who had a preponderating voting power could have
brought it into voluntary liquidation and therefore the
value should be worked out on the basis of excess of assets
over liabilities as would be adopted in such a winding up.
It was found by the Commissioners that the remuneration paid
to the deceased at a figure of pound 3000 per annum for such
business was out of all proportion to the value of their
service. Hanna, J. observed at p. 654 :-
"In this I agree : but, on the other hand,
considerable weight must be given to the view
put forward by the petitioners that it was a
family company,
(1) [1931] Irisha Reports 643.
16-L348SupCI/73
226
.lm15
where greater latitude would be given in the remuneration of
the directors, who were the principal owners; and that it
was a unique business, in which both the directors had
special knowledge, and to which they gave constant daily
attention, and had a special personal relationship with the
majority of the customers. A purchaser in a hypothetical
market of any of these shares would recognise the value of
these factors, and make due allowance for much more than the
ordinary remuneration. The evidence on either side went
into great detail, and after the consideration of it I think
that this company can be fairly regarded as one capable of
_earning on a commercial basis 10 per cent on its capital,
and so I find. But, if this is to be taken as the principal
test, it must be subject to the consideration, on the one
hand, of the restrictions upon the transfer of the shares,
and, on the other, of the added value by reason of the
splendid security of the company’s position."
It will be seen that this case does not support the
contention that because the deceased was in a _position to
bring the company into voluntary liquidation the break-up
value principle should be applied. If at all it is against
that contention because on the evidence the valuation was
determined on the profit earning capacity of the company.
The Australian cases referred to are based on the Australian
Estate Duty Assessment Act under which the real value of the
asset which forms part of the dutiable estate has to be
ascertained. Even then, it was held in Mc. Cathie v. The
Federal Commissioner of Taxation(1) that the real value of
shares held by a deceased on his death depends more upon the
profits which the company has been making and should be
capable of making having regard to the nature of his
business than upon the amounts which the shares would be
likely to realise upon liquidation, and that moneys paid as
fees to directors in excess of a reasonable amount should be
treated as profits when determining the reasonable earning
capacity of a proprietory company which bears the character
of a partnership trading with limited liabilities.
Williams, J. at page It ,observed :
"......the real value of shares which a
deceased person holds in a company at the date
of his death will depend more on the profits
which the company has been making and should
be capable of making, having regard to the
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 13
nature of its business, than upon the amounts
which the shares would be likely to realise
upon a liquidation."
(1) 69 Commonwealth Law Reports page 1.
227
In that case it was found that the business could not be
said to be conducted with any lack of probity but since the
remuneration received by ladies of the family who did not
render any service was not admissible it was added to the
profits in arriving at a reasonable earning capacity.
It is also worth noticing that s. 16-A(l) (c) of the Austra-
lian Act has vested a discretion in the Commissioners to
make an assessment on "an estimate of the sum which the
holder of shares should be expected to receive in the event
of the company being voluntarily wound up at the date of the
death of the deceased". While considering the provision
above referred to, it was observed by Williams, J. in
Federal Commissioner of Taxation v. Sagar(l) that
"...... where a company is a going concern the
instances would appear to be rare in which it
would be proper to use para (c). One instance
might be where the deceased held or controlled
sufficient shares to enable him to pass a
special resolution that the company be wound
up voluntarily, but even then it would appear
to be preferable, where practicable, to use
paras (a) or (b)."
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 bases. But where they do not then the
amount of yield on that basis will determine the value of
the shares. In other words, the will ordinarily determine
the value. The dividend and earning 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
(1) 71 C.L.R. 422.
228
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
byreason of the company’s inability to earn profits and
declaredividends, if the set back is temporary then it is
perhaps possible to take the estimate of the value of the
shares before set back and discount it by a percentage
corresponding to the proportionate fall in the price of
quoted shares of companies which have suffered similar
reverses.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 13
(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 (supra) 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 hypotheses that
because in a private limited company one holder can bring it
into liquidation, it should be valued as on liquidation by
the break-up method. The yield method is the generally
applicable method while the break-up method is the one
resorted to in exceptional circumstances or where the
company is ripe for liquidation but nonetheless is one of
the methods.
It has been urged before us that the question as framed by
the High Court does not correctly indicate the scope of the
answer which was called for from that court and it was
suggested that we should reframe the question. We certainly
have the power to do so as long as new and different
question is not raised but confine it only to resettling or
reframing the question formulated by the Tribunal or as in
this case by the High Court which called for a statement of
the case on a question as reframed by it, before answering
it so as to bring out the real issue between the parties :
Narain Swadeshi Weaving Mills v. Commissioner of E.P.T.(1)
and Kusum Ben De Mahadavia v. Commissioner of Income-tax(1).
The question as framed by the High Court is on the
(1) 26 I.T.R. 765 at 774.
(2) 39 I.T.R. 540 at 544.
229
assumption that the yield method is the only method
applicable and on that basis required the Tribunal to state
a case on whether it was justified in law to follow the
method involving the principle of break-up value. If the
question is reframed bringing out the real issue between the
parties which both Tribunal and the High Court attempted to
do it would facilitate a proper answer. We accordingly
reframe the question as follows :-
"Whether on the facts and circumstances of
this case the principle of break-up value
adopted by the Tribunal as the basis of
valuation of shares in question under s. 7 of
the Wealth-tax Act is sustainable in law ? If
not what would be the correct basis ?
In the first two appeals 1135 and 1136 of 1969 the beark-up
value method was adopted by the Tribunal and its plea for
not adopting the yield method was that a list of dividends
were for the first time filed before it in respect of each
of the companies. The Wealth-tax Officer and the Appellate
Assistant Commissioner, as well as the Tribunal, had the
balance sheets of each of the companies before them because
the shares were valued on break-up method in those cases on
the basis of those balance sheets. If the balance sheets
were filed they would also disclose the dividends as indeed
the statement of the case shows that all the companies had
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 13
declared dividends for the year 1959-60. Even otherwise,
the Tribunal as a fact finding authority, could have
considered the list or sent them to the Wealth-tax Officer
for any further enquiry it required. In the last three
appeals, the Tribunal had adopted the yield method. In the
result our answer to the first part of the question is in
the negative and to the second part our answer is in terms
of the principles already set out. In Appeals Nos. 1765 to
1767 of 1969, the method adopted by the Tribunal being the
proper method the refusal of the High Court to direct a case
to be stated does not call for interference. For these
reasons, all the appeals are dismissed with costs. One
hearing fee.
K.B.N. Appeals dismissed.
230