ORDER
Shailendra K. Yadav, Judicial Member.
These are cross-appeals – one filed by the revenue and the other by the assessee.
ITA No. 19/Mum./2003 (Revenues appeal)
2. In this appeal, the revenue has raised the following grounds :
“1. On the facts and circumstances of the case and in law, the Commissioner (Appeals) erred in disapproving a method of assessing officer for determining the market value of the shares by break-up method for computing long-term capital gain.
2. On the facts and circumstances of the case and in law, the Commissioner (Appeals) erred in directing the assessing officer to adopt the market value of the shares of M/s. Marico Industries as on 28-12-1995 by yield method and in quantifying the same at Rs. 165 per share.
3. On the facts and circumstances of the case and in law, the CIT(A) erred in deleting the short-term capital gain in the assessment year 1996-97 with a direction to tax the same in the assessment year 1997-98.
4. On the facts and circumstances of the case and in law, the Commissioner (Appeals) erred in directing the assessing officer, that if any higher authority decides that short-term capital gain should be assessed in assessment year 1996-97, then the same should be computed by adopting the sale consideration at Rs. 175 per share and the cost of each share at Rs. 165.”
3. The first issue is regarding methodology employed for determining the market value of unquoted shares. The facts of the case are that the assessee is a Private Trust. It was holding shares of Harsh Archana Trading and Investments Ltd. (herein after referred to as Harsh Archana). These shares had been subscribed to by the assessee in the previous year relevant to the assessment year 1993-94. Harsh Archana went into a voluntary liquidation pursuant to a settlement arbitrated amongst the members of the Mariwala family by the Ex-CJI of India, Justice V.D. Tulzapurkar. Harsh Archana was holding certain shares of Marico Industries Ltd. (herein after referred to as Marico). On distribution of assets in specific pursuant to the liquidation of Harsh Archana, the assessee-trust, on 28-12-1995, had received 4,32,000 shares of Marico. The shares of Marico then were unlisted and unquoted. So, the question arose as to what should be the marked value of these shares for purposes of computing capital gains under section 46(2) of the Income Tax Act, 1961. The assessee-trust had adopted the market value of Rs. 165 per share based on the offer price of Rs. 175 per share in the public issue of Marico shares made in March, 1996. The facts, in this regard, are detailed below.
3.1 In an extraordinary general meeting of shareholders of Marico, a special resolution was passed on 26-12-1995 pursuant to which it was resolved to offer 10,00,000 shares of Marico to the public at a price of not less than Rs. 150 per share and not more than Rs. 180 per share. As per prospectus, the public issue comprised 10,00,000 fresh shares to be issued by Marico and sale of 26,25,000 shares held by the promoters at the same price of Rs. 175 per share. The offer for sale of shares by the promoters included 4,32,000 shares received by the assessee from Harsh Archana. The public issue opened for subscription on 21-3-1996 and closed on 26-3-1996. The issue was oversubscribed by 1.76 times. The basis of allotment in respect of the new shares and allocation in respect of offer for sale was decided on 18th April, 1996. The application money had been received by Marico from the public. On finalization of the basis of allotment/ allocation and transfer of shares on 18-4-1996, the assessee received the money from Marico on 30-4-1996.
3.2 The assessee-trust had filed its return of income for the assessment year 1996-97 on 29-8-1996, declaring a total income of Rs. 699.25 lakhs. Owing to certain errors in the original return, a revised return was filed on 31-12-1996, declaring a total income of Rs. 742.58 lakhs made under section 46(2) of the Income Tax Act, 1961, on receipt of the shares of Marico on distribution of assets held by Harsh Archana. The capital gains were arrived at by taking the value of the shares of Marico at Rs. 165 per share.
3.3 The assessing officer took the view that the original return filed on 29-8-1996 was a return under section 139(5) of the Income Tax Act, 1961. As such, the assessee was precluded from filing a revised return under section 139(5). To regularize the return filed on 31-12-1996, the assessing officer completed the (original) assessment under section 143(3) of the Income Tax Act, 1961, accepting the returned income of Rs. 7,42,57,800. As regards the market value of shares of Marico on the date of distribution of assets of Harsh Archana, i.e., 28-12-1995, wherein the assessing officer held as
“The liquidators distributed the above shares of Marico Industries Ltd. to the company on 28-12-1995. On this date Marico Industries Ltd. was not a listed company. The book value of Marico shares as on 30-9-1995 as per the prospectus was Rs. 30.94 per share. The market value of Rs. 165 per share for 4,32,000 shares of Marico Industries Ltd. has been arrived at on the basis of subsequent price of Rs. 175 per share at which the shares were offered to the public on 21-3-1996 and allotted on 17-4-1996. The share price of Rs. 165 has been determined as under :
Price at which the shares are allotted to the Public
Rs. 175.00
Less:
(1)
Estimated expenditure in connection with Public (actual exp. Per share comes to Rs. 5.42)
Rs. 5.00
(2)
Towards interest cost of 23 months @ 12% p.a.
Rs. 5.00
Rs. 10.00
Rs. 165.00
43,200 shares of MIL on 28-12-1995 Ca) Rs. 165 per share Rs. 7,12,80,000
Less:
Deemed dividend cost of acquisition
(Rs. 54,739)
(Rs. 1,26,009)
Rs. 1,80,748
Capital gains under section 46(2)
Rs. 7,10,99,252″
Subsequently, the assessing officer once again reopened the assessment by issue of another notice under section 148 of the Income Tax Act, 1961, dated 31-1-2001. The grounds on which the assessment was reopened are specified in the assessment order as under :
“In this case assessment under section 143(3), read with section 147 of the Income Tax Act, 1961, was done on 15-3-2000 determining the total income at Rs. 7,42,57,800. Assessees income consists of long-term capital gain of Rs. 7,10,99,252. The assessee was holding 1,000 shares of Rs. 100 each of M/s. Harsh Archana Trading and Investment Co. Ltd. since assessment year 1993-94. The said company went into liquidation and the liquidator distributed 4,32,000 shares of M/s. Marico Industries Ltd. held by the said Investment Co. on 28-12-1995. The shares of M/s. Marico Industries Ltd. offered the shares to public at Rs. 175 per share in March, 1996. The assessee along with promoters of the company sold 4,32,000 shares to public for Rs. 175 per share on 26-3-1996 for Rs. 7,12,80,000. Assessee offered the long-term capital gains to tax after reducing the dividend and after Rs. 10 per share towards expenses.”
In the above circumstances, there was long-term capital gain on the receipt of shares on 28-12-1995 under section 46(2) as well as short-term capital gain on subsequent selling to public on 26-3-1996 which were required to be worked out separately and taxed which has not been done. Further, for the purpose of arriving at capital gains under section 46(2), market value of shares of M/s. Marico Industries Ltd. as on 28-12-1995 was not taken as full value of consideration.
In view of the above, the assessing officer was satisfied that the assessment made on 15-3-2000 resulted into under assessment and escapement of revenue is approximately Rs. 2,30,07,063.”
3.4 The assessee had filed return of income (without prejudice) in compliance with the above notice declaring a total income of Rs. 7,42,57,795, which included the long-term capital gains of Rs. 7,10,99,252. The reassessment, which is the subject-matter of this appeal, was completed on 20-3-2002 determining the total income of Rs. 7,84,77,084. While in the original assessment, the long-term capital, gains had been assessed at Rs. 7,10,99,252, in the reassessment it was assessed at Rs. 3,97,73,581. The assessing officer further hold that since the public issue of Marico closed on 26-3-1996 and the money was received in March, 1996, the short-term capital gains on sale of the said block of 4,32,000 Marico shares by the assessee to the public also arose during the previous year to the assessment year 1996-97. The capital gains-long-term and short-term had been computed in the assessment order as under :
Rs.
Being not listed Co. book value Rs. 92.77 per share (value of 4,32,000 shares of Marico Industries Ltd.) Being break-up value
4,00,55,040
(i) Deemed value as per adoption
1,80,711
(ii) Indexed cost of 1,000 shares of Rs. 100
100,711
each
1000 X 283
281
Long-Term Capital Gains
3,97,73,581
Sale of value of 4,32,000 shares @ Rs. 175
7,56,00,000
Less: Book value as on 28-12-1995
4,00,55,040
Short-Term Capital Gains
3,55,44,960
The total capital gains thus adds up to Rs. 7,53,18,541, as against Rs. 7,10,99,252 earlier assessed. The difference of Rs. 42,19,289 comprises the following :
(i) Sale of shares of Marico on 18-4-1996 was treated as sale during the year 1995-96 and difference between the final sale price of Rs. 175 and the break-up value of Rs. 92.77 as on 28-12-1995 was taxed during the assessment year 1996-97 as short-term capital gains;
(ii) Market value of shares of Marico as on 28-12-1995 was taken at Rs. 92.77 per share and long-term capital gains was computed on that basis against market value of Rs. 165 per share had adopted in the original assessment order; and
(iii) Indexed cost of Rs. 1,00,711 was further deducted, though it forms part of deemed value of Rs. 1,80,748.
4. The assessee took the matter in appeal before the first appellate authority, wherein the same was opposed on the point of reopening of assessment. Rejecting the contention of the assessee in this regard, the Commissioner (Appeals) upheld the reopening of assessment in question.
4.1 Regarding other grounds of appeal against the assessing officer taking the market value of share C@ Rs. 92.77 per share against Rs. 165 taken by the assessee for the purposes of computing capital gains under section 46(2) of the Income Tax Act, 1961. It was submitted by the assessee that the break-up value of Rs. 92.77 arrived at by the assessing officer was itself wrong. This value was arrived at on the basis of the balance sheet of Marico as at 31-3-1995. Subsequent to March 1995, there were bonus issues and, accordingly, as per the prospectus the book value of shares of Marico was Rs. 30.94 per share. On the contrary, the assessee had adopted the market value of the shares on the basis of adjusted sale price to public. Besides this, various contentions were raised before the Commissioner (Appeals).
4.2 The Commissioner (Appeals) observed that the action of assessing officer was unsustainable. Neither the reason recorded for reopening nor the reassessment order disclose any reasons for rejecting the assessees computation of market value of the shares. Likewise, no reasons have been given by the assessing officer for adopting the break-up value method for computing the market value of the shares. Even the computation of the value adopted had not been given. The assessing officer did not even refer to the decisions cited by the assessee, which decisions are directly on the point. No reasons were given as to why these decisions were not applicable.
4.3 Though it remains unstated in the assessment order, the record suggests that in valuing the shares of Marico by the break-up method, the assessing officer could have been guided by rule 11 of Schedule III of the Wealth Tax Act. The question is whether this action of the assessing officer was sustainable. Under the provisions of section 46(2), the market value of the assets received on liquidation of a company had to be taken for computing capital gains. The term market value has not been defined in the Income Tax Act. However, the term fair market value has been defined in section 2(22B) of the Income Tax Act as the price which the capital asset would ordinarily fetch in the open market on the relevant date. The terms market value and fair market value are cognate expressions. The definition of FMV in the Income Tax Act is in pari materia with the general definition of value of assets, which existed in section 7 of the Wealth Tax Act until 31-3-1989. Both have their basis as the concept of hypothetical sale in the open market between a hypothetical seller and buyer. But the general definition under the Wealth Tax Act was subject to rule for valuation of assets. Once any Wealth Tax Rule prescribes for valuation on any basis other than hypothetical sale it will have digressed from the basis for working out FMV under the Income Tax Act. Valuation under any rule is artificial and strait-jacketed. Such valuation will seldom correspond to the actual market value. Thus, valuation of a residential house property under rule 1BB of the Wealth Tax Rules, operative from 1-4-1979, was based on capitalizing rent as per municipal valuation of the property. Such valuation will hardly ever correspond to the FMV based on the concept of hypothetical sales of the property. Rule 1BB based valuation of a property cannot, therefore, be even a rough indicator of its FMV. Similar will be the position with respect to valuation of shares as per rule 11 of Schedule-III of the Wealth Tax Act. Incidentally, this rule had been deleted with effect from 1-4-1993 pursuant to shares having been excluded from the definition of assets in section 2(e) of the Wealth Tax Act. Thus, this rule did not exist on the statute book during the assessment year under appeal, i.e., assessment year 1996-97. Besides, insofar as the rule prescribed a method of valuation which was at variance with the concept of hypothetical sale as contained in section 2(22B) of the Income Tax Act, the same had no application to the Income Tax Act.
4.4 Further, the Commissioner (Appeals) observed that the principle is accepted that provisions of one statute cannot be automatically applied to the another, even if cognate statute. The decision rendered by the Honble Karnataka High Court in the case of Saraswathi Estate v. CAIT (2001) 251 ITR 168 (Ker), wherein it was held that the interpretation of the wordings in a particular section cannot be made automatically applicable in the context of the interpretation of provisions of another enactment though both the provisions under the two enactments may be meant for levying penalties. Similarly, the decision rendered by the Honble Calcutta High Court in the case of CIT v. General Assurance Society Ltd. ( 1980) 121 ITR 727 (Cal), wherein it was that for the purposes of section 12B of the Income Tax Act, 1922, the FMV of the suit properties as on 1-1-1954 may not be determined on the same basis or formula as adopted for computing the compensation in accordance with the First Schedule to the LIC Act, 1956. Also the decisions rendered by the Honble Bombay High Court in the case of CIT v. New India Assurance Co. Ltd. (1980) 122 ITR 633 (Bom) and CIT v. Oriental Government Security Life Assurance Co. Ltd. (1983) 141 ITR 215 (Bom), wherein it was held that in determining the market value of the assets as on 1- 1- 1954, for the purpose of computing capital gains of an insurance company from the compensation received on the acquisition of its life insurance business under the Life Insurance Act, 1956, the Tribunal is not bound by the formula adopted in that Act for determining compensation.
4.5 Thus, there is no authority for importing the valuation under the Wealth Tax Act for the purpose of the Income Tax Act, particularly when the context does not so warrant. The Income Tax Act is replete with the provisions which draw upon other enactments not only for definition of terms used in the Income Tax Act but even for computation of income. Thus, in section 2(29) the term legal representative has the meaning assigned to it in the CPC, 1908. Similarly, the term public servant has the same meaning as in section 21 of IPC. Section 115JA(2) prescribed preparation of profit and loss account in accordance with the Companies Act. Section 55A, on reference to Valuation Officer, draws upon the provisions of the Wealth Tax Act. However, the definition of fair market value contained in section 2(22B) of the Income Tax Act, 1961 does not make any reference to the Wealth Tax Act not even for persons who were assessed to Wealth-tax.
For these reasons, the assessing officer was not justified in computing the market value of Marico shares by employing the break-up method as prescribed under rule 11 of Schedule-III of the Wealth Tax Act, particularly as the said rule stood deleted with effect from 1-4-1993.
4.6 On the authority of the Supreme Court of India, the principle was established that the unquoted shares of a going-concern are to be valued on the yield method. The decision rendered by the Honble Supreme Court in the case of CWT v. Mahadeo Jalan (1972) 86 ITR 621 (SC), it was held as under :
“An examination of the various aspect 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 was 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 of yield method are not mutually exclusive; both should help in ascertaining the profit-earning capacity as indicated above. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of profits.
(3) In the case of a private limited company also where the expenses are incurred out of all proportion to the commercial venture, they will be added back to the profits of the company in computing the yield. In such companies the restriction on share transfers will also be taken into consideration as earlier indicated in arriving at a valuation.
(4) Where the dividend yield and earning method break down by reason of the companys inability to earn profits and declare dividends, if the setback is temporary then it is perhaps possible to take the estimate of the value of the shares before set-back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses.
(5) Where the company is ripe for winding-up the break-up value method determines what would be realized by that process.
(6) As in Attorney- 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.
In setting out the above principles, the assessee did not try 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 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 application 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.”
In the case of CGT v. Smt. Kusumben D. Mahadevia (1980) 122 ITR 381 (SC), rendered by the Honble Supreme Court, wherein their Lordships have held as under :
“It would thus, be seen that in the case of a company which is a going concern and whose shares are not quoted on the stock exchange, the profits which the company has been making and should be capable of making or, in other words, the profit-earning capacity of the company would ordinarily determine the value of the shares. That is why in Mahadeo Jalans case (1972) 86 ITR 621, 632, 630 (SC), the court quoted with approval the following observations of Williams, J. in Mc Cathie v. Federal Commissioner of Taxation (69 Commonwealth Law reports 1) :
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 nature of its business, than upon the amounts which the shares would be likely to realize upon liquidation, and stated in no uncertain terms that: The general principles 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. The break-up method would not be appropriate for valuation of shares of a company which is a going-concern, because as pointed out by court in Mahadeo Jalans case amongst mount the factors which govern the consideration of the buyer and the seller where the one desires to purchase and the other wishes to sell, the factor or break-up value of a share as on liquidation hardly enters into consideration where the shares are of a going-concern. It is only where a company is ripe for winding-up or the situation is such that the fluctuations of profits and uncertainty of conditions at the date of valuation prevent any reasonable estimation of the profit-earning capacity of the company, that the valuation by the break-up method would be justified. The revenue leaned heavily on the observation in Mahadeo Jalans case that the factors likely to determine the valuation of a share include, in special cases such as investment companies, the asset backing and urged on the strength of this observation that in the case of an investment company, the asset-backing was a relevant consideration and the break-up method could not, therefore, be considered as totally irrelevant. This contention, we are afraid, is based on a wrong reading of the observation of the court. When the court said that in the case of an investment company, the asset-backing is a relevant factor in the determination of the value of the shares, what the court meant was that in order to determine the capacity of the company to maintain its profits the asset-backing would be a relevant consideration. The profit-earning capacity of the company would determine the valuation of the shares would naturally have to take into account not only the profits which the company is actually making, but also the profits which the company should be capable of making and in order to arrive at a proper estimation of the latter, the asset-backing would be, a relevant factor in the case of an investment company. It would not be right to read the observation of the court as suggesting that valuation of the assets would be a relevant factor in determining the valuation of the shares. The revenue, of course, did not plead for exclusive adoption of the break-up method and wanted the mean of the values arrived at by applying the break-up method and the profit-earning method to be taken as representing the valuation of the shares, but we do not see on what principle can a combination of the two methods be justified. There is no authority either in any judicial decision or in any standard text book on valuation of shares which recognizes the validity of a combination of the two methods, though it may sound acceptable as a compromise formula.”
4.7 In the case of Grindlays Bank Ltd. v. CIT (1986) 158 ITR 799, the Calcutta High Court, following the above decisions of the Supreme Court held that for purposes of section 55(2) of the Income Tax Act, the FMV of unquoted shares should be computed as per the yield method.
4.8 Applying the above principles to the facts of the instant case, the Commissioner (Appeals) held that the market value of Marico shares on the date of distribution of assets of Harsh Archana, i.e., on 28-12-1995 should appropriately be valued as per the profit-earning or yield method. Marico was, at the material time, a going-concern and was launched on the growth path. It was, at that time, posting an impressive top and bottom line year after year and continues to do so to this day. No wonder then that its public issue at a premium of Rs. 165 per share got oversubscribed at a time when the share market was languishing. Thus, there were no such exceptional circumstances which called for valuation of its share by the break-up method. As held by the Supreme Court, the appropriate method would be the profit-earning yield method. Accordingly, during the course of appellate proceedings the assessee was required to furnish valuation on this basis. The assessee had furnished the report of N.A. Shah Associates, Chartered Accountants, according to which on applicable of the yield or price earning method, the market value of Marico shares as on 28-12-1995 had been worked out at Rs. 187 per share. It was submitted by the assessee that this value more or less corresponds to that indicated in the prospectus of Marico or, for that matter, even to the issue price of Marico shares to the public. It is also noteworthy that Marico shares when listed on the stock exchange opened with a quotation of Rs. 260.50 on
2-3-1996 on the Bombay Stock Exchange and maintained an average price of more than Rs. 275 in the first three months. Thus, whether computed as per the profit-earning method or estimated with reference to the price quoted on the stock exchange, the market value of Marico shares as on 28-12-1995 works out to be more than Rs. 165 adopted by the assessee for computing long-term capital gains under section 46(2) of the Income Tax Act, 1961. If this higher value is adopted, the result will be that the returned long-term capital gains will increase and the short-term capital gains on actual sale of shares to the public for Rs. 175 will be converted into loss. The direct effect would be to reduce the overall tax liability of the assessee. Thus, adoption of the higher value of Rs. 187 per share will result in an unintended advantage for the assessee at the cost of the revenue. Such advantage, though otherwise allowable, if claimed, cannot be granted in the instant case as no such claim had been made by the assessee at any stage. Not even at the appellate stage. For these reasons, the Commissioner (Appeals) held that for computing long-term capital gains under section 46(2) of the Act, the market value of Marico shares as on 28-12-1995 should be taken at Rs. 165 per share as claimed by the assessee. The assessing officer was directed to recompute the capital gains accordingly. Consequent upon, the cost of the said shares will be reckoned as Rs. 165 per share in terms of section 55(2)(b)(iii) of the Income Tax Act for computing the short-term capital gains on sale of the shares to the public. In view of the above discussion, we are entirely in agreement with the well reasoned findings of the Commissioner (Appeals). So, the Commissioner (Appeals) is justified in adopting the value of share of M/s. Marico Industries as on 28-12-1995 by yield method and quantifying the same at Rs. 165 per share. Accordingly, we uphold the order of the Commissioner (Appeals).
CO. No. 40/Mum/2004
4.9 Since we have upheld the order of the Commissioner (Appeals) in the revenues appeal, the cross-objections arising out of the order of Commissioner (Appeals) need no adjudication. The same is dismissed without being prejudice to the merits of the same.
5. As a result, the appeal of the revenue as well as the C.O. filed by the assessee is dismissed.