Shivashankar Bhat, J.
1. The appeal is by three of the respondents in the company petition whereby the present respondents Nos. 1 and 2 had approached the court under sections 397, 398 and 433(f) of the Companies Act, 1956 (“the Act” for short). The parties will be referred hereinafter with reference to their rankings in the company petition. The reliefs sought by the petitioners are :
“(a) Declaring that minutes as recorded in the meeting of the board of directors purported to have been held on November 14, 1987, November 28, 1987, February 13, 1988, are illegal, improper and be deleted from the minutes book of the meeting of the board of directors ;
(b) Declaring that no meeting was held pursuant to the meeting notices dated March 19, 1988, May 14, 1988 and July 26, 1988 on March 28, 1988, May 25, 1988, and March 6, 1988, or any other date and even if any such meeting was held, that the same is non est. in the eye of law;
(c) Declaring that petitioners continue to be directors of the first respondent-company ;
(d) Declaring that the purported co-option of the fourth respondent as a director of the first respondent is illegal and non est in the eye of law ;
(e) Declaring the fifth respondent not to take on record From No. 32 filed by respondent No. 2 on August 19, 1988, purporting to notify that fifth respondent that petitioners Nos 1 and 2 had vacated their office as directors of the first respondent-company pursuant to section 283(1)(g) of the Companies Act and that the fourth respondent had been co-opted as a director of the first respondent-company ;
(f) Issuing an order of permanent injunction restraining respondents Nos. 2 and 3 from interfering with the rights of the petitioner to act as directors of the first respondent-company;
(g) Issuing an order of permanent injunction against the fourth respondent from acting as director of the first respondent-company.
(h) Directing respondents Nos. 2 and 3 of the purchase shares of petitioners in the first respondent-company at a value of Rs. 1,000 per share or directing respondents Nos. 2 and 3 to sell their shareholding of the first respondent-company to the petitioners at the same value of rs. 1,000 per share.
(i) If this Hon’ble court is pleased to hold that the facts and circumstances do not warrant any feasible order under sections 397, 398 read with section 402 of the Companies Act, alternatively, it is prayed that this Hon’ble court may be pleased to order that the first respondent-company, Messrs. Rakhra Sports Private Limited, No. 6, Commercial Street, Bangalore-560 001, be wound up on the ground that it is just and equitable to do so under section 433(f) of the Companies Act, 1956 ;
(j) Grant such other order or orders as this Hon’ble court may deem fit to grant on the facts and circumstances of the case including award of costs.”
2. The learned company judge has valued each share at Rs. 930.85 and directed respondents Nos. 2 and 3 to buy the shares of the petitioners at the said rate, failing which the petitioners were permitted to purchase the shares of respondents Nos. 2 and 3 at the same rate.
3. The first respondent-company was incorporated in the year 1983. There is no dispute in the instant case that, earlier the petitioners and respondents Nos. 2 and 3 were carrying on the business as partners ; earlier thereto, the business seems to have been carried on by the two brothers, C. L. Rakhra and B. L. Rakhra ; still earlier, it seems the business was started only by C. L. Rakhra in the year 1932. There is also no dispute that the nominal share capital of the company in question is Rs. 5 lakhs divided into 5,000 equitable shares of Rs. 100 each. The issued and subscribed share capital Rs. 2,50,000 of 2,500 equity shares of Rs. 100 each. The petitioners own 50 per cent. of the issued shares while the other 50 per cent. is owned by respondents Nos. 2 and 3.
4. The petitioners aver that the business called Rakhra Sports Company was started by C. L. Rakhra and his brother, B. L. Rakhra, in the year 1932. Respondents Nos. 2 and 3 are the sons of C. L. Rakhra, while the first petitioner is the son of B. L. Rakhra being the wife of Vedaprakash Rakhra, as son of B. L. Rakhra. There was a partnership between the two brothers aforesaid and after the death of C. L. Rakhra, the second respondent was inducted as a partner in his place. Similarly, on the demise of B. L. Rakhra, the second petitioner was inducted as a partner. The firm has been dealing in sports goods and is located in Commercial Street, Bangalore. For a few number of years there were four partners, that is to say, the two petitioners and respondents Nos. 2 and 3. They decided to convert the firm into a private limited company. Consequently, the company in question was incorporated on December 2, 1983. The main objects to be pursued by the company on its incorporation, as stated in the memorandum of association, includes :
“To take over as a going concern, the partnership firm “Rakhra Sports Company’ situated at No. 6, Commercial Street, Bangalore 560 001, as at the assets and liabilities at book value, as reflected in its balance-sheet drawn as on that date, and to pay the vendors thereof by allotment of equity shares treated as fully paid up in the company.”
5. The erstwhile partners became the directors of the company. The articles of association states that the members of the company shall be of two family groups, “family group-A” shall consist of Krishnakumar Rakhra (second respondent), etc., and “family group-B” shall consist of the first petitioner, etc. The idea is to clearly maintain the distinction between the members belonging to the branch of C. L. Rakhra and the branch of B. L. Rakhra. According to the petitioners, the first directors shall be permanent directors and there is no dispute that the quorum for a meeting of the board of directors shall be three directors which ensures that at least one member belonging to each group will be present at the Board meeting. The banking arrangements also indicate that each group will have a say in the matter of issuing cheques or in the borrowings. The petitioners further state that in February , 1985, the company acquired additional premises on lease which are situated in Bishop Cotton School’s Complex, Residency Road, Bangalore (hereinafter referred as “Cotton Complex”). The new business is done in the new leasehold Premises under the style of “Rakhra’s Super Sports”. An advance of Rs. 43,890 was paid towards the lease and the monthly rent was Rs. 4,389. The business commenced in Cotton Complex with effect from January 5, 1986. The averments in the company petition further show that there was a dispute between the parties subsequently in the year 1987, as to whether the new business at Cotton Complex should be continued or not in view of the loss incurred in the said business. The petitioners seem to have suggested the continuation of the business or to hand over the leasehold to the first petitioner wherein he would start a new business of his own. The petitioners assert that the new business was not in sports goods and, therefore, the question of any competition with the company’s business would not arise. The petitioners further assert that certain meetings of the board were held without due notice to the petitioners and that the minutes of the said meetings were wrongly recorded in the minutes book. Subsequently, respondents Nos. 2 and 3 filed Form No. 32 declaration before the Registrar of Companies stating that the fourth respondent was co-opted as a director consequent upon the vacancies caused by the failure of the petitioners to attend three consecutive meetings. The petitioners asserts that there was a total loss of mutual trust which was the very essence of the understanding between the parties in the matter of business of the first respondent-company. Certain instances are given in the company petition in this regard. It is unnecessary to detail the averments in the company petition in view of certain events which happened in the course of this litigation. The second respondent as the chairman of the company had a casting vote and this mattered mush when the two groups fell apart.
6. The petitioners, however, assert that there was a complete deadlock in the management of the company and the business of the company could not be carried on since the quorum for a valid board meeting was absent. “Mutual trust” also has been lost. The petitioners also state that the winding up of the company would unfairly prejudice the rights of the parties though respondents Nos. 2 and 3 are conducting the affairs of the company in a manner prejudicial to the interests of the company. The exclusion of the petitioners from the management and control of the company and induction of the fourth respondent as a director, who is a total stranger to the family, are all instances warranting invocation of the provisions of section 398 of the Act. The petitioners also, alternatively, pray for the winding up of the company in case an appropriate order under section 397 and 398 cannot be made.
7. The respondents in their objection statement assert that the business was initially started by C. L. Rakhra in or about the year 1932 as his proprietary concern and in the year 1946, B. L. Rakhra came to Bangalore as a refugee from Pakistan and thereafter he was taken as a partner “out of sheer pity”. The third respondent joined the business as a partner in the year 1957-58 and the first petitioner became a partner in the year 1960. C. L. Rakhra died in the year 1975. In the year 1977, the second respondent who was serving in the Indian Air Force retired and joined the firm as a partner. After the death of B. L. Rakhra his daughter-in-law, the second petitioner, was taken as a partner. In the year 1983, the company came into existence by incorporation. It is found in the objection statement of these respondents Nos. 2 and 3 that the second respondent had a casting vote as the chairman of the company. They further assert that the petitioners attended some of the meetings, drew sitting fees but later asserted that they did not attend the meetings and on the same day of drawing the sitting fees, they were returned. They denied the allegation that the petitioners are sought to be excluded from the management and that there can be no deadlock in the affairs of the company because the second respondent respondent as the chairman had the casting vote and, therefore, the board of directors as well as the general body meeting could decide, effectively, any question coming up before them.
8. There is no dispute that the parties tried to resolve their dispute by resort to the sale or purchase of the shares belonging to the other group. For this purpose, the company’s auditor was requested to evaluate the share value.
9. In this connection, articles 4 and 5 of the articles of association are relevant which are reproduced below :
“4. No member shall transfer his/her shares, save with the previous sanction of the directors, and the directors may refuse to recognise any transfer for which they need not state.
5. Any shareholder desiring to transfer his share shall apply to the directors in the prescribed form and notifying the number of shares, share value and the name of the proposed transferee. In case of disputes regarding the fair value of shares, it shall be decided or fixed by the company’s auditor. The value so fixed shall be deemed to be fair value. A member who wants to transfer his/her shares by way of sale to any person who is not a member of the company can do so only when the existing members are not willing to purchase the same. On receipt of intimation from the existing members whether any of them is interested in the purchase of those shares. The board shall, for this purpose, offer the shares for sale to the members, in an equitable manner and in proportion to their existing shareholdings, by giving a month’s time for the members to accept the offer in full or in part. If none of them or same only are interested in the offer and all or some of the shares remain unaccepted, the board shall forthwith intimate that fact to the transferor-member who can afterwards transfer these unaccepted shares to any person in the immediate family group of other members representing the `B’ family.”
10. Messrs. Ramaswamy and Company admittedly is the auditor of the company. It seems that the company’s auditor was requested by both groups to take the assistance of another auditor by name Shah to fix the value of the shares. The record discloses that, according to messrs. Ramaswamy and Company, each share was valued at Rs. 326 as per the said auditor’s letter dated April 27, 1988. However, the other auditor, Shah, seems to have valued each share at Rs. 1,000. At this juncture it is necessary to refer to the events that happened by virtue of the orders of the court, after filing of this company petition.
11. The company petition was filed in August, 1988. Thereafter, the matter came before the learned company judge on various dated regarding interim orders. On september 16, 1988, the learned company judge (Bopanna J.) heard learned counsel for the parties about the interim arrangement and on that date the parties seem to have agreed upon a formula to settle the dispute inter se. The learned company judge, in his order dated September 16, 1988, stated that :
“On the material placed, it appears to me that this dispute is amenable to an amicable settlement out of court. It was suggested by this court whether the claim of the petitioners could be settled on payment of the present market value of the shares held by the them as the parties were thinking on these lines as is evident from two valuation reports furnished by the respective groups.
According to the petitioners, the value of the equity shares in the first respondent company would be in the region of Rs. 1,000 per share. According to the second respondent’s group, in terms of the report furnished by their auditor, it is about Rs. 326.80 per equity share. The differential gap in this valuation could be resolved only by getting the shares valued by a third valuer, who is not connected either with the petitioner or with the second respondent’s group. But pending such adjudication by third valuer, the petitioners had offered to pay before this court a sum of Rs. 1,000 per share forthwith and settle the claims of the second respondent’s group ; but the second respondent’s group is not prepared to accept that offer though the valuation of the petitioners’ valuer is on the higher side. But they made a counter-offer that they would purchase the petitioner’s share by making a down payment of Rs. 600 per share and thereafterwards seek the correct valuation of the share by a third valuer. They have also sought for time till September 30, 1988, to make this payment. As a preliminary step to effect a settlement between the parties it is ordered that the second respondent’s group shall pay the petitioners tentatively a sum of Rs. 600 per share and that amount shall be received by the petitioners in part satisfaction of their claim in this company petition. After such payment, the valuation of the shares shall be made by a reputed firm of auditors acceptable to both the parties. The choice of the firm is left to the parties and they shall make appropriate submissions in this respect on the next date of hearing.
However, it is contended by learned counsel for the respondents that this payment should be without reference to the claim of the petitioner to the leasehold right of the premises that the company had obtained in Cotton Complex, situated on Residency Road, Bangalore. Whether this condition shall be imposed on the petitioner will be considered by this court in exercise of its powers under the provisions of section 402 of the Companies Act. Payment of Rs. 600 per share would be subject to the order of this court on this aspect of the case at the time of recording the final compromise between the parties.”
12. On September 30, 1988, the matter again came up before the same learned company judge, on which date a sum of Rs. 7,50,000 wa aid to the petitioners by respondents Nos. 2 and 3 (respondents Nos. 2 and 3 and their group will be referred hereinafter as the “contesting respondents” for the sake of convenience). In the order of the learned company judge, it is stated that these payments are subject to adjustment against the valuation of shares to be made by the auditors to be appointed by the court. A list of auditors had been furnished by the respective groups, out of whom the learned company judge selected Messrs. Brahmiah and Company (suggested by the contesting respondent group) and Messrs. B. K. Ramadyani and Company (suggested by the petitioners) for making the necessary valuation and the auditors were to make the valuation and the auditors were to make the valuation independently of each other. Thereafter, the learned company judge observed :
“The reports of these auditors will be subject to the final order of this court on the question of valuation. Payments made today aggregating to Rs. 7,50,000 will also be subject to the final valuation to be made on the basis of the auditor’s report.”
13. The learned company judge further stated that :
“Learned counsel for the petitioners submitted that necessary instructions made to be issued to the auditors regarding valuation of the shares in question. I think the proper course to be adopted is to direct both the parties to file their respective memo of instructions to the auditors not on the mode of valuation but on the assets of the company to be taken into consideration for the purpose of valuation.”
14. It is not necessary to refer to other directions in this order.
15. Thereafter, the two valuers gave their respective opinions. The report of Brahmiah and Company is dated October 31, 1988. The principles applied are generally stated by the auditors in the report such as the restrictions imposed by the articles of association regarding the transfer of shares, provision for resolving the dispute regarding the fair value of shares by the company’s auditors, etc. For this purpose, the profit to be adopted for valuation was estimated as follows :
_________________________________________________________________________ Accounting Turnover Gross profit Expenses Profit year debited to before tax P&L account __________________________________________________________________________ 1984-85 24,26,552 4,11,216 3,72,115 39,101 1985-86 26,89,035 4,52,978 4,22,972 30,004 1986-87 29,69,425 4,75,400 4,97,186 Loss 21,786 1987-88 34,49,798 7,75,389 5,04,152 2,71,237 ___________ ___________ ____________ ___________ _____________ Total for 86-87 and 64,19,223 12,50,789 10,01,338 2,49,451" 87-88 __________________________________________________________________________ 16. The increased turnover during the year 1987-88 was found to be due to the large orders received in the previous year amounting to Rs. 3,69,768 and one-time orders for Rs. 61,248 with a higher margin of profit. Therefore, the auditors says : "Hence it may not be correct to adopt the turnover and gross profit of 1987-88 as a respective year. Instead it will be fair to take the average of the turnover and gross profit for the two years, 1986-87 and 1987-88."
17. The auditors point out that all the directors are whole-time directors in respect of remuneration by way of salary, sitting fees and medical expenses. Therefore, for purpose of taking the profit the profit for valuation purposes, one-third of the remuneration paid to the directors were excluded again which came to Rs. 44,213. Thereafter, the report reads thus :
“(c) The profit of the company adopted for valuation of shares is as follows :
Turnover (average for 1986-87 and 1987-88 as above) 6,25,394 Less : Actual expenses (average for 1986-87 and 1987-88 as above) 5,00,669 ___________ 1,24,725 Less : Income-tax at 63% 78,576 ___________ 46,146 Add : One-third of payments to directors 44,213 ____________ 90,362 ____________ A safe investment in deposits with scheduled banks fetches 11 per cent. On capitalisation at 11 per cent. of profit of Rs. 90,362, the value of one share will be - 90,362 / 11 X 100 /2,500 = 328" 18. The said auditors thereafter proceeded to apply the "intrinsic value method" and observed as follows : "Intrinsic Value Method :
The assets comprise current assets and office furniture and fittings which are subject to depreciation. Hence as per wealth-tax valuation rules the book value of assets is adopted. However, the value shown against `miscellaneous expenditure’ is excluded. The intrinsic value of each share of the company is as follows :
Value of assets per balance-sheet (excluding the balance of `Miscellaneous expenditure' Rs. 5,207) 9,33,018 Less : Value of liabilities per balance-sheet 5,92,980 __________ Net worth of the company 3,40,038 __________ Value of one share is 3,40,038 /2,500 = Rs. 136"
19. The auditors note that the business premises are in a good business locality and could be passed on to a third party at the prevailing trade practice for a consideration of Rs. 30 lakhs. However, the company was a going concern and the possibility of earning `pagari’ or premium did not arise and hence not considered. The leasehold rights were not valued on the ground that there was a stipulation against sub-leaning the premises and that “the present profit earned is partly due to the lower rentals, but for which the profit would have been lower, and the value of the share under the profitability method reduced”. The current assets such as per the book value. Regarding goodwill, the auditors say that it should be considered. However, the exact value of the goodwill is not forthcoming in the report. This auditor concludes that the value of each share is Rs. 328 as on March 31, 1988, as per the profitability method as already stated. Though, this auditor refers to the current assets and the goodwill, no reference is made to them in terms of value. Similarly the value of the leasehold rights also is not forthcoming. The gross profit for the four years at Rs. 12,50,789 is divided by two to arrive at the average for two years at Rs. 6,25,394. From this the actual expenses of Rs. 5,00,669 is deducted and then Income-tax of 63 per cent. is further deducted.
20. The other auditor, Messrs. Ramadhyani and Company, gave their report on November 16, 1988. After discussing the various methodologies, they proceeded to give the valuation, first on maintainable profits basis. They observed that the profitability trend during 1988-89 is the same as that prevailing during 1988-89 is the same as that prevailing during the previous year and that the high incidence of profit during 1987-88 was due to execution of large one-time orders which are not likely to be repeated in future years. They also noticed that is case the lease at Cotton Complex is terminated there will be a reduction in the overheads by about Rs. 60,000. The auditors thereafter proceeded to give weightage of three to the profits of the year 1987-88, while for the previous two years after giving the average profits weightage of one was given. In this process weightage average was arrived at as. Rs. 2,07,372. A sum of Rs. 50,000 was added out of the total remuneration payable to the directors. This Rs. 50,000 was added to arrive at the maintainable profits. The report thereafter states thus :
“4.11. In the above circumstances, the maintainable profits are calculated as under :-
(a) Weighted average profits as per paragraph 4.8 above 2,07,372 (b) Add : remuneration to directors (refer para 4.10 above) 50,000 ___________ 2,50,372 (c) Income-tax thereon at 63 per cent. (including surcharge) of the profits as per para 4.8 above. We understand that no portion of remuneration paid to directors have been allowed in the income-tax assessments of the company. 1,30,644 ____________ (d) Maintainable profits of the company after tax 1,26,728" ____________
21. These auditors stated that a fair rate of capitalisation ought to be 15 per cent. and thus arrived at the value of an equity share at Rs. 338. Thereafter, the break-up value method was applied. For this purpose, goodwill as well as the value of the lease hold interest were valued. While the value of the leasehold interest was Rs. 1.43 lakhs, the value of the goodwill was arrived at Rs. 3 lakhs. Ultimately, the break-up method value was given as follows :
“5.6 In the above circumstances, the value of an equity share of the company on the break-up value method is worked out as under :
(a) Net worth as per para 5.1 above 3,45,245 (b) Value of leasehold rights as per paragraph 5.4 above 12,60,000 (c) Value of goodwill of the company as per paragraph 5.4 above 3,00,000 ____________ 19,05,245 (d) Less : Value of accrued gratuity liability (not provided in the books) as per paragraph 5.5 above 5,000 _____________ 19,00,245 _____________ Number of equity shares 2,500 Break-up value per share 760"
22. The auditors proceeded further to evolve another formula of their own by giving weightage of 2 to the maintainable profits resulting in Rs. 676 and weightage of one to the break-up value method leading to the figure Rs. 760 and the total profit of Rs. 1,436 was divided by the total weightage of three which gave the weighted average as Rs. 479. Thereafter, the auditors proceeded to refer to some observations of justice Williams regarding the controlling interest and its valuation. A few other factors like telephone connections “pending orders”, benefits arising out of long association, were referred to, and they concluded :
“Taking these factors into account, we are making up the value of an equity share arrived at as per paragraph 6.3 above by 50 per cent. Such enhanced value will work out to Rs. 719 per share.”
23. The report of Messrs. C. K. S. Rao and Associates, Consulting Engineers and Architects, is enclosed to the report of Messrs. B. K. Ramadhyani and Company.
24. The petition came up before the learned company judge on July 7, 1989. The learned judge opined that the contesting parties have not arrived at any settlement and that this court is not bound in law or otherwise to take up the task of the value and fix it ;
“Therefore, that approach should be given up in so far as it relates to valuation. The orders made on September 16, 1988, and September 30, 1988, are recalled. The payment made subject to the stipulation contained in the order of September 30, 1988, shall be returned to the respondent, i.e., a sum of Rs. 7,50,000.”
25. The company petition was ordered to be brought up for enquiry hereafter.
26. The above order was challenged in appeal in O.S.A. No.15 of 1989. The Division Bench reversed the order of the learned company judge dated July 7, 1989. The judgment of the Appellate Bench is dated August 16, 1989. The relevant observations of the Appellate Bench as as follows :
“On giving our thoughtful consideration to the entire matter, we find that those two orders, passed in the presence of the parties and with their consent, could not be recalled just because the parties were not willing to purchase the shares of others at the price quoted by each one of them. By virtue of the earlier orders, independent valuers had been appointed to determine the value of the shares. They have also submitted their report. No new fact has come into existence which would warrant the recalling of the earlier orders. In this view of the matter, we find that the impugned order of the learned company judge cannot legally be sustained. Consequently, we allow this appeal and set aside the order of the learned judge dated July 7, 1989.”
27. The resultant position is that the earlier two orders made by the learned company judge are to be given effect to on the basis that they are consent orders and the parties are bound by the terms stated in the said orders. After the above O. S. A. was disposed of, the present order under appeal came to be made.
28. The learned company judge proceeded to discuss the question raised before him observing at para 60 of his order :
“This is not a case where the petitioners are selling the shares to the respondents and the respondents are purchasing the shares only to invest. In the case of investment the investor has to see what would be the dividend only out of the net profit after deducted as his been done by the company’s auditor, Messrs. Ramaswamy and Co., for this is a case in which the value of the share of the company is to be determined as if the company is under `national liquidation’, but in reality it may not.”
29. Thereafter, at para 70, it was held :
“It is an undisputed fact that the court has passed orders on September 16, 1988, and September 30, 1988, and directed the petitioners to sell their shares to respondents Nos. 2 and 3 and by consent of parties two valuers have been appointed to value the shares. This has been done without going into the question who is the oppressor and who is the oppressed among those two groups. It is also an undisputed fact that the petitioners as well as respondents Nos. 2 and 3 are having equal shares of 50 per cent. each. The two valuers have adopted two different methods for valuing the shares of the company which have not been found favour with both the petitioners and respondents Nos. 2 and 3. To my mind the methods adopted by the valuers to arrive at the valuation of the shares of the company are not totally wrong or incorrect. In fact, certain required factors have been taken into consideration. The two valuers ought to have, while adopting the methods of valuation of shares, viz., the profitability method and the asset method, viewed from the angle, the company was under `national liquidation” and the purchaser-respondent would get 100 per cent. control of the company which is a `valuable commodity’. Had the valuers taken into consideration all the items including the factor that one of the groups of purchasers get cent. per cent. controlling interest in the company, they would have arrived at quite a different value of the share which would be a somewhat fair value. It is true in a matter like this it is difficult to arrive at a mathematical precision in valuation of shares. Since the two valuers have taken both the profitability and asset methods (break-up method) and arrived at two different figures as to the valuation of the share which are not accepted by either party, except taking such figures from the valuation report they have claimed rs. 1,200 (petitioner) and Rs. 326 (respondents) as the correct valuation of the share. To resolve this dispute, this court will have to scan through the valuation report and adjust the equities between the parties by fixing the fair price of the shares.”
30. The conclusion arrived at para 73 also requires reproduction :
“Both the valuers have adopted the profitability method. Messrs. Ramadhyani and Co. has taken the maintainable profit of Rs. 2,51,585 without adding back Rs. 60,000 being the course of Messrs. Rakhra Sports Pvt. Ltd., at Bishop Cottons ; and if capitalised the said maintainable profit at 11 per cent. the value of the share will be at 914-85 rupees per share. This is clearly shown at the working-sheet referred to above. Taking the maintainable profit at Rs. 1,25,752 as determined by Messrs. Brahmayya and Co., adding thereto both Rs. 44,213 (excess remuneration and rs. 60,000 (savings of loss of Messrs. Rakhra Sports Ltd.,) capitalising it at 11 per cent. the value of the shares will be Rs. 832.50 as shown in the chart referred to above. In these two methods the factor as to the chart referred to above. In these two methods the factor as to the purchaser of the shares getting cent. per cent. control of the company has not been taken into consideration. If that is added then both the valuations of the share referred to above would be higher than what have been indicated in their respective valuation reports.
To my mind it appears, the valuation of the share at Rs. 914.85 per share as indicated above based on the maintainable profit as per Messrs. Ramadhyani and Company at Rs. 2,51,585 and capitalising at 11 per cent. would be the fair value by adding to it another sum of Rs. 16 business of special circumstances of this case, viz., that complete control of the company is being given to respondents Nos. 2 and 3 `A’ group of the shareholders, i.e., the fair share value would be fixed at Rs. 930 per share.”
31. Learned counsel for the appellants and the respondents have reiterated their contentions. While Mr. Udaya Holla emphasised the principles stated by the Supreme Court in Mahadeo Jalan’s case , as governing the valuation of shares, Mr. Raghavan contended that the court should apply various methodologies to evaluate the respective interests and the highest value should be paid to the interest of the outgoing shareholders.
32. There can be no doubt that the first respondent-company is in the nature of a “quasi-partnership” ; though initially started as a proprietary concern, the business was continued for a long period by the partners (who were direct brothers and the members of their families) ; this firm was converted into a private limited company subsequently. The articles of association of the company restrict the transfer of shares, to prevent the shares from going outside the family members ;the shareholders are grouped as “A” and “B” to represent the respective branches of the two brothers.
33. Having regard to the decision of the Court of Appeal in Yenidje Tobacco Co. Ltd., In re  2 Ch 426 and of the House of Lords in Ebrahimi v. Westbourne Galleries Ltd.  AC 360, a company of the kind before us (the first respondent) could be called a quasi- partnership and, therefore, when a set of shareholders seek to go out of the company or are to be sent out of the company, the court’s power to apply the just and equitable consideration (under sections 397, 398 and 402) of the Companies Act is quite wide since considerations governing section 433(f) could equally be attracted to the situation. In fact in Yenidge Tobacco Company’s case  2 Ch 426, the Court of Appeal pointed out that when there are only two persons interested (in the instant case before us, it is “two groups”) and a deadlock is created, it is just and equitable that the company should be wound up.
34. At page 432, on learned judge observed :
“It has been urged upon us that, although it is admitted that the `just and equitable’ clause is not to be limited to cases ejusdem generis, it has nevertheless been held according to the authorities not to apply except where the substratum of the company has gone or where there is a complete deadlock. Those are the two instances which are given, but I should be very sorry, so far as my individual opinion goes, to hold that they are strictly the limits of the `just and equitable’ clause as found in the Companies Act. I think that in a case like this we are bound to say that circumstances which would justify the winding up of a partnership between these two by action are circumstances which would induce the court to exercise its jurisdiction under the just and equitable clause and to wind up the company.
Astbury J. dealt with this case, as it seems to me, in most satisfactory way, and at the end of his judgment he says that he tried to suggest a solution : he suggested that the to should continue or try to continue for six months to see if they could get on better or that they should appoint one or more additional directors to assist them in the business : but this neither would do. If even there was a case of deadlock, I think it exists here ; but, whether it exists or not, I think the circumstances are such that we ought to apply, if necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been conteplated by the parties when the company was formed and which ought to be terminated as soon as possible. We are told that we ought not to do it because the company is prosperous, making large profits, rather larger profits than before the disputes became so acute. I think one’s knowledge of what one in the streets is sufficient to account for that, having regard to the number of cigarettes that are sold, and we can take judicial notice of that in judging whether the business is much larger than it was before. Whether such profit would be made in circumstances like this or not, it does not seem to me to remove the difficulty which exists. It is contrary to the good faith and essence of agreement between the parties that the state of things which we find here should be allowed to continue.”
35. At page 435 , another learned judge pointed out :
“I am prepared to say that in a case like the present, where there are only two persons interested, where there are no shareholders other than those who, where there are no means of overruling by the action of a general meeting of shareholders the trouble which is occasioned by the quarrels of the two directors and shareholders, the company ought to be wound up if there exists such a ground as would be sufficient for the dissolution of a private partnership at the suit of of one of the partners against the other. Such ground exists in the present case. I think, therefore, that it is just and equitable that the company should be wound up.”
36. This approach was approved by the Supreme Court is Hind Overseas Private Ltd. v. Raghunath Prasad Jhunjhunwalla . However, on facts, it was held by the Supreme Court that the company before the court was not in the nature of a quasi- partnership. The Supreme Court held, at page 571 (at page 99 of 46 Comp Cas) :
“In Ebrahimi’s case  AC 360 (HL), the company which was first formed by the two erstwhile partners, Ebrahimi and Nazar, was joined by Nazar’s son, George Nazar, as the third director and each of the two original shareholders transferred to him 100 shares so that at all material times Ebrahimi held 400 shares, Nazar 400 shares, Nazar 400 shares and George Nazar 200 shares. The Nazars – father and son – thus had a majority of the votes in general meeting. Unit the dispute all the three remained directors. Later on an ordinary resolution was passed by the company in general meeting by the votes of Nazar and George Nazar removing Ebrahimi from the office of director. That let to the petition for winding up before the court.
The following features are found in Ebrahimi’s case  AC 360 (HL) :
(1) There was a prior partnership between the only two members who later on formed the company.
(2) Both the shareholders were directors sharing the profits equally as remuneration and no dividends were declared.
(3) One for the shareholders’ son acquired shares from his father and from the second shareholder, Ebrahimi, and joined the company as the third shareholder director with 200 shares (100 from each).
(4) After that there was a complete ouster of Ebrahimi from the management by the votes of the other two directors, father and son.
(5) Although Ebrahimi was a partner, Nazar had made it perfectly clear that he did not regard Ebrahimi as a partner but regarded him as 9an employee in repudiation of Ebrahimi’s status as well as of the relationship.
(6) Ebrahimi though ceasing to be a director lost his right to share in the profits through director’s remunerations retaining only the change of receiving the dividends as a minority shareholder.
Bearing in mind the above features in the case, the House of Lords allowed the petition for winding up by reversing the judgment of the court of appeal and restoring the order of Plowman J.
None of the parties questions the principles as such adumbrated by the House of Lards in Ebrahimi’s case  AC 360 or even those in the earlier Yenidje’s case  CH 426 and indeed these are sound principles depending upon the nature, composition and character of the company. The principles, good as they are, their application in a given case or in all cases, generally, creates problems and difficulties.”
37. The facts of the instant case can lead to only one conclusion that the business concern of the parties hereto was being carried on, in reality, by the parties as partners, in the garb of an incorporated company.
38. Though Mr. Holla would like us to hold that there cannot be any deadlock in the management of the company, in view of the casting vote of the chairman, we cannot do so. The management of a company and its effectiveness are not to be considered theoretically ; if Mr. Holla’s submission is accepted, it will be ousting a group of shareholders, who actually has a 50 per cent. interest in the entire company.
39. Here, this theory of voting power need not detain us any further. In view of the two orders of the learned company judge dated August 16, 1988 and September 30, 1988, the contesting parties are precluded from contending otherwise than that one of the groups (petitioners) has to be paid by the other group (contesting respondents) so that the other group may continue to control to company thereafter. The only question to be considered in this appeal, is whether the shares where fairly valued by the learned company judge and if not, what value should be given to those shares. A few more facts may be referred to :
Before the petitioners fled the company petition, the parties had jointly requested the company’s auditors, Messrs. Ramaswamy and Co., to value the shares. In this connection, Messrs. Ramaswamy and Co. was asked to discuss the matter with another auditor referred to as Shah. Obviously, there was disagreement as to the value amongst those two character accountants. V. S. Ramaswamy stated in his letter dated April 27, 1988, that the valued the shares of the company as a going concern. In his report he admits that goodwill of the company has to be taken note of for valuing the shares of the company as a going concern. By applying the so called “accountancy principles”, the goodwill was values at Rs. 2,94,000. This is based on the average of the net profit for five years, multiplied by 3 1/2 to arrive at the goodwill. The estimated net profit of Rs. 84,000 was again capitalised by applying the multiple of 10 to apply the “capitalisation method”. The resultant figure of Rs. 8,40,000 was against considered while proceeding to value the goodwill, as follows:
“Value of goodwill – Total value less net asset of the business.
= Rs. 8,40,000 (-) Rs. 6,00,000, paid-up capital + estimated profit for the year ended March 31, 1988 + Rs. 3,40,000″
Average value of goodwill = 2,94,00 + 3,40,000
____________________ = Rs. 3,17,000
Valuation of goodwill as per pugri system was considered by him as not proper as the company is not starting a new business. Therefore, he concludes :
“In may considered view the fair value of the shares will be –
Paid-up capital + Expected profit in 1987-88 + goodwill –
2,50,00- + 2,50,000 + 3,17,000 = 8,17,000.
Value per equity shares = 8,17,000
___________ = Rs. 326.80″
40. Thus, there was an amalgam of various elements which are normally considered separately to evaluate the value, under different methods. In other method adopted by Messrs. Ramaswamy and Co. is an amalgamation of the methods followed under the “super profit method”, and the “asset method”, by simplifying those methods. Shah, in his letter dated May 18, 1988, addressed to the first petitioner disagreed with the above valuation made by Ramaswamy and Company ; Shah suggested, to follow either of the two methods (i) yield method, or (ii) intrinsic value method. Under the “yield method” he considered the exceptionally high profit earned by the company during the year ending March 31, 1988, as indicative of the future trend and stated that ” at least capitalising this by 10, he arrived at the company’s worth (with issued shares of 2,500), as Rs. 25,00,000 ; therefore, each share was valued at Rs. 1,000. Under the “intrinsic value method”, he pointed out that the balance-sheet of the company would not disclose the value of leasehold rights of the premises and that the value of existing business connections also should not be ignored. The leasehold interest in the premises at Commercial Street was valued at Rs. 30,00,000 and then without further details, he reiterated his valued at Rs. 30,00,000 and then without further details, he reiterated his valuation of the share at Rs. 1,000.
41. The two extreme valuations one by Ramaswamy and Co. (at Rs. 326.80_ and the other by Shah (at Rs. 1,000), naturally gave scope for extreme rivalry between the two sets of parties. The further two reports of Messrs. Brahmayya and Co. and Messrs. Ramadayani and Co. in no way contributed to soften the hard stand taken by the parties.
42. During the pendency of the proceedings before the company court, the petitioners started their own business concern. The contesting respondents were apprehensive of the new venture of the petitioners because, the latter was also using the business name of “Rakhra Stores”. Therefore, the contesting respondents moved the court by filing Company Application No. 900 of 1990, to restrain the petitioners from using the words “Rakhra Stores” in their business concern. This application was allowed by an order dated June 8, 1990. The submission of the applicants that the company’s name had a “goodwill” and that by virtue of two orders of the court dated September 16, 1988, and September 30, 1988, the respondents were to run of the company’s business, and, therefore, the petitioners shall not use the name of the company, in their business concern called “Rakhra Sports and Agencies”, was accepted. The court held :
“One of the questions involved pertains to the right to take over the company, by any one group of shareholders, in case, winding up of the company is not just and equitable. Already, the court has proceeded on this line, by directing the applicants to pay rs. 7 1/2 lakhs to the present respondents Nos. 1 and 2 and what balance should be payable is pending consideration. A perusal of the reports of the two auditors shows that the goodwill of the company is a relevant factor while valuing these shares. In fact, both sets of parties to not dispute this fact. Present respondents Nos. 1 and 2 in their main petition at para 34(h) have sought as one of the reliefs, the purchase of the shares of the applicants at Rs. 1,000 per share, or that the present applicants should be directed to see their shares to the former at the same rate. That the company as a going concern has its name as a substantial element in its goodwill cannot be denied and is not denied. In the submissions of the petitioners (i.e., present respondents Nos. 1 and 2 ) dated December 1, 1988, on the valuation made by Messrs. Brahmayya and Co., is attracted as it has failed to take note of the goodwill in its proper perspective. If the company is not to be wound up, its existing goodwill including its trade name has to be preserved.
If the trade name can be freely used by the parties without reference of the company and by those who are not likely to continue to do business in the company’s name, the damage or injury likely t be caused to the company cannot be ignored.”
43. Again, the court proceeded to say, –
“It is an admitted case that the company in question is a family concern, more in the nature of a partnership ; in fact, earlier it was a partnership firm, as per section 53 of the Indian Partnership Act, 1932, after a firm is dissolved (only in the absence of a contrary to the contrary between the partners) every partner may restrain any other partner may restrain any other partner from carrying on a similar business in the firm name or using any of the property of the firm for his own benefit, until the affairs of the company have been finally wound up ; but this does not affect the partner who bought the goodwill. As per section 14, properties of the firm includes goodwill of the business. Contract between the parties as to who should get the goodwill and hence it can be used on dissolution, is permissible and its terms enforceable.
Goodwill is an intangible asset, being the whole advantage of the reputation and connections formed with the customers together with the circumstances which make the connection durable. It is attributable, location and other features (vide Law of Partnership in India, By Desai, fifth edition, page 97). Assuming that Rakhra is a family name, the trade name `Rakhra Sports’ having attained certain advantages and reputation, would certainly contribute to the value of the goodwill of the first applicant company. Even if the company is treated as a partnership, its trade name has a special significance to its partners and should be protected for the benefit of those who are to carry on the partnership business, as against those who are likely to go out of the concern. Those who are out of the firm should be allowed to exploit the trade name of the company for their own benefit own and they cannot be permitted to carry on business under a similar name which may erode and dilute the goodwill of the the company. It is immaterial that the company has no registered `trade mark’ right in the name of `Rakhra Sports’, and it is also immaterial that the company does not produce any goods. It is carrying on business and is shown to have acquired a reputation with a trade name of `Rakhra Sports’.”
44. It was concluded, –
“Since the first respondent and his group are venturing afresh into the business, it does not matter to them what name they adopt for their trading purposes ; but adoption of a name, resembling that of the first applicant company, certainly would injure the applicants’ interests.”
45. The above order brings out clearly that, even according to the contesting respondents (who are the appellants before us) the company’s name is part of its “goodwill” and is quite valuable to them and, therefore, cannot be given up by them.
46. Mr. Raghavan, learned counsel for the petitioners, pointed out that the petitioners offered to buy the shares of the respondents at Rs. 1,050 per share and that the entire offer made in the “submissions of the petitioners on the valuation reports filed by Messrs. Brahmayya and Co. and Messrs. B. K. Ramadhyani and Co.” dated December 1, 1988, still holds good. The order stated in para 21 of the above submissions reads :
“Notwithstanding what is stated above, the petitioners reiterate :
(1) their offer to purchase the shares of respondents Nos. 2 and 3 in the first respondent-company at a value of Rs. 1,050 per share and are willing to let respondents Nos. 2 and 3 to have the benefit of premises of the first respondent at Cotton Complex.
(2) If it is the case of the respondents that the premises at Commercial Street, have no value, the petitioners are willing to sell their shares at the face value that is Rs. 100 per share and in turn take possession of the shop premises at Commercial Street and two godown premises at Golar lane, 1st Cross, Commercial Street, Bangalore.
(3) The petitioners are also prepared to accept Rs. 100 less, that is, Rs. 950 per share and the leasehold rights of Cotton Complex premises.”
Can it be said that petitioners having offered the highest price should be allowed to purchase the shares of the respondents because, but such a sale of the respondent’s shares, the latter would not suffer any fiscal injury ?
47. The two orders of the learned company judge made in September, 1988 (referred to already by us), proceed on the assumption that, in spite of the higher offer of the petitioners the respondents are to be allowed to purchase the shares of the petitioners at a “fair value” ; the question of bidding for the shares by the rival groups, by necessary implication, was ruled out and the parties consented to that situation. Therefore, what remains, is to find out the fair value of the shares of the petitioners to be sold to the respondents.
48. The learned company judge treated the company an in national liquidation, but, ultimately valued the shares, by capitalising the gross profit.
49. Mr. Udaya Holla Strongly relied on two decisions of the Supreme Court, wherein, for purposes of Wealth-tax and Gift-tax Act, equity shares had to be valued and the value of to be the “market value”. The methodology applied in those cases is the only relevant to learned counsel there is no difference between the “fair value” and the “market value”.
50. Mr. Udaya Holla submitted that the fair value can be only be the market value and that under section 7 of the Wealth-tax Act, an asset is valued on the basis of its market value ; valuation of shares, as assets, was considered by the Supreme Court in CWT v. Mahadeo Jalan and the principle enunciated therein, he to be followed in all cases of valuation. The shares valued in the said case were the shares in private limited companies. The Supreme Court said, at page 1025 (at page 626) :
“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.”
51. While considering the various factors likely to influence an investor in shares, the court held at page 1026 that (at page 628) :
“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.”
52. However, there may be instances where profits of the company are not reflected in the dividends ; as to this situation, Supreme Court observed, at page 1027 (at page 629 of 86 ITR) :
“It 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 capital of the concern and on the basis of the potential yield which the shares would earn, fix the valuation.”
53. Green’s Dealth is quoted in this represent, which reads (at page 629):
“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. Retention of the profits by the comapny 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 on 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 wise to exclude outsiders, and surtax payers whose gola is capital appreciation rather than current income.”
54. Again, at page 409 (Green’s Death Duties), 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 account in the valuation. In practice, a dividends, the profits distribution by way of remuneration must be taken into account in the valuation. In practice, a dividend yield valuation may be adopted in those cases by assuming the distribution of a reasonable proportion of the profits (e.g., the average distribution of the comparable companies) as dividend : althernatively 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.”
55. Futher, the court observed that, when the company is ripe for liquidation or has been consistently incurring losses, the valuation may well be the break-up value of the shares. Thereafter, the court held (at page 630) :
“The general principle of valuation in a going concern is the yieyld on the basis of average maintainable profits, subject to adjustment, etc., which the circumstances of any particular case may call for.”
56. Six factors were stated in page 1029 and thereafter the Supreme Court said (at page 634 fo 86 ITR) :
“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 business in a private limited company one holder can bring in into liquidation, it should be valued as on liquidation by the break-up mehtod. The yield menthod is the generally applicable method while the break-up method in the one resorted to in exceptional circumstances or where the company is ripe for liquidation but nonetheless is one of the methods.”
57. The entire discussion was in the context of section 7 of the Wealth- tax Act and the question framed by the Supreme Court is found at page 1029 of AIR 1973 SC, (at the end of para 13) (at page 634 of 86 ITR). Though the decision is under that Wealth-tax Act, guidance is amply found in the judgment to identify the normal, general principles governing the valuation of unquoted equity shares. The dominant factor is always the yield method.
58. This decision was followed in CGT v. Smt. Kasumban D. Mahadevia, , where the valuation of ordinary shares, in an investment company came upfor consideration. The actual question before the court was, whether any question of law arose out of the orders of the Tribunal requiring reference to the High Court. After referring to the earlier decision rendered in Mahadeo Jalan’s case  86 ITR 621, the court observed, at page 772 (at page 45 of 122 ITR) :
“But where the shares in a public limited company are not quoted on the stock pexchange or the shares are in private limited company the proper method of valuation to be adopted would be the profit earning method. This method may be applied by taking the dividends as reflecting the profit earning capacity of the company on a reasonable commercial basis but if it is found that the dividends do not correctly do not correctly reflect the profit earning capacity because only a samll proportion of the profits is distributed by way of dividends and large amount of profits is systematically accumulated in the form of reserves, the dividend menthod of valution may be rejected and the valuation may be made by reference to the profits. The profit- earing method takes into account the profits which company has been making and the valuation, according to this method, is based on the average maintainable profits.”
59. The court rejected the Revenue’s contention that combination of two methods (break-up and average maintainable profit methods) has no sanction of any judicial or other authority. There is another observation, at page (at page 45 of 122 ITR) :
“The profit-earning capacity of the company would ordinarily determine the value of the shares. That is why in Mahadeo Jalan’s case the court quoted with approval the following observations of Williams J. In McCathie v. Federal Commissioner of Taxation (69 CLR 1) `…the real value of shares which a decased person holds in a company at the date of his death will depend more on the profits which the company has been makeing 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 realise upon a liquidation’ and stated in no uncertaion terms tht `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 circumstancess of any particular case may call for’. The break-up method could not be appropriate for valuation of shares of a company which is a going concern because as pointed out by the court in Mahadeo Jalan’s case  86 ITR 621, “amoug the factors which govern the consideration of the buyer and seller where the one desires to purchase and the other wishes to sell, the factor of break-up value of a share as on liquidation hardly enters into consideration where the shares are of a going concer’. It is only where a company is ripe for winding up or the situation is such that the fluctuations of profits and uncertainly 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 menthod would be justified. The Revenue leaned heavily on the observation n Mahadeo Jalan’s case  86 ITR 621 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 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 capcity of the company which 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 case of an investment company. It would not be right to read the obseration of the court pas suggesting that valuation of the assets would be a relevant factor in determining the value of the shares.”
60. This was a case where the court was concerned with the shares in an investment company and, therefore, naturally, the profit-earning capacity of the company would be the dominant test.
61. However, we were not assisted by any decision rendered in this country in connection with the sale of shares amongst two groups in a proviate limited company (which is a quasi-partnership).
62. The principals formulated by American courts are found in Vol. 18A, American Jurisprudence (second edition), page 706, paras 836 and 838. It is stated there :
“Whether it arises under appraisal statutes or in other situations, the process of valuation of dissenters’ shares has generally required appraisers and the courts to examine various factors or items of value, the major ones being asset value, market value, and earnings value. But regardless of the method used, the tendency of the courts is to consider all relevant or material factors and elements. However, all three elements do not have to influence the result in every valuation proceeding. It suffices if they are all considered. Compelling the consideration of all of them, including those where may turn our to be unreliable in a particular case, has the salutary effect of assuring more complete justification by the appraiser of the conclusion he reaches. It also provides a more concrete basis for court review. Also, the three elements are not always discrete, defiitionally, they may even flow into one another. The underlying theory is one of compensation the owner of the stock for his property right and no one method of valuation should be relied upon exclusively. The task of placing a specific monetary value upon stock is by means as simple arithmetical process. It often calls for the application of judgment, and courts in many instances rely on the judgment made by exports in the filed the appraisers chosen by the parties.
(2) It is recognised that an appraisal of stock of a dissenting stockholder should take into consideration assets or net assets value, which depends on the real worth of the corporate assets as determined by physical appraisals, accurate inventories, and realistic allowances for depreciation and obsolescence. Asset value represents a judgment as to the fair market value of the assets based on the price that would be agreed on by a willing seller and a willing buyer under no cnmpulsion to sell or buy. Net asset value is the share which the stock represents in the value of the net assets of the corporation. Such assets include every kind of property and value. Thus, all assets, tangible or intangible, includikng goodwill and book value, should be taken into consideration. The courts will also consider the nature of the business and various other special factors.”
63. The Institute of Chartered Accounts of India has published a booklet called A Study on Share Valuation. Mainly, it is concerned with valution of shares or tax purposes. However, Chapter V refers to “valuation of shares for other purposes” and states, “It can be safely said that for all those purposes, the fair value arrived at on the basis of open market may be accepted, because in normal circumstances the open market price will be the fair value”. We may exclaim that the real problem before us to the find out this open market value. Chapter VI deals with “maintainable profits basis”, including the concept of projection of the future maintainable profit. There is a statement at page 18 that past average profit should be calculated after deducting tax at current rates, a statement obviously based on the assumption that deducting tax at current rates, a statement obviously based on the assumption that dividends are declared subject to corporate taxes.
64. As well be seen presently, this approach to the taxation is not adopted by English courts, while estimating the company’s both based on the average profits.
65. Chapter VII of the booklet deals with “Assets-Basis”. The importance of goodwill as an intangible asset of a business enterprise has been noted.
66. Chapter IX provides for special consideration, such as the acquisition of a controlling interest. The pre-emptive clauses in a private company are referred to as affecting the valuation.
67. In Rastom Cavasjee Cooper v. Union of India, , a few observations were made regarding the valuation of “goodwill” and of the unexpired period of leases in a going concern. At page 611, the Supreme Court observed (at page 385 of 40 Comp Cas) :
“It undertaking of a banking company taken over as a going concern would ordinarily include the goodwill and the value of theunexpired period of loag-term leases in the prevailing conditions in urban areas. But goodwill of the banks is not one of the items in the assets in the Schedule, and in clause (f) though provided is made for including a part off the premium paid in respect of leasehold properties proportionate to the unexpired period, no value of the leasehold interest for the unexpiried period is given.
Goodwill of a business is an intangible asset : it is the whole advantage of the reputation and connections formed with the customers together with the circumstances making the connection durable. It is that compondent of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years or in excess of normal amounts because of its reputation, location and other features : Trego v.Hunt  AC 7. Goodwill of an undertakining, therefore, is the value of the attraction to customers arising from the name, and reputation for skill, integrity, efficient business management, or efficient services.
Business of banking thrives on its reputation for probity of its dealings, efficiency of the service it provides. courtesy and promptness of the staff, and above all the confidence it inspires among the customers for the safety of the funds entruestee. The Reserve Bank, it is true exercises stringent control over the transactions which banks carry on in India. Existence of these powers and exercise thereof may and do ensure to a certain extent the safety of the funds entrusted to the banks. But the business which a bank attracts still depends upon the confidencen which the depositor reposes in the management. A bank is not like a grocer’s shop : a customer does not extend his patronage to a bank merely because it has a branch easily accessible to him. Outside the public sector, there are 50 ndian scheduled banks, 13 foreign banks, besides 16 non- schedules banks. The deposits in the banks not taken over under the Act range between Rs. 400 crores and a few lakhs of rupees. Deposits attracted by the major private commercial banks are attributable largely to the personal goodwill of the management. The regulatory provisions of the Banking Companies Act and the control which the Reserve Bank exercises over the banks may a certain extent reduce the chance of the resources of the banks being misused, but a banking company for it business still largely depends upon the reputation of its management. We are unable to agree with the contention raised in the union’s affidavit are unable to agree with the contention raised in the unsion’s affidavit that a banking establishment has no goodwill, nor are we able to accept the plea raised by the Attorney- Genearl that the value of goodwill of a bank is insignificant and it may be ignored in valuing the undertaking as a going concern.
Under clause (f) of Schedule II provision is made for valuing a proportionate partof the premium paaid in respect of all leasehold proerties for the unexpired duration of the leases, but there is no provision made for payment of compensation for the unexpired period of the leases. Having regard to the present day conditions it is clear that with rent control on leases operating in various States, the unexpired period of leases has also a substantial value.
The value determined by excluding important components of the undertaking, such as the goodwill and value of the unexpired period of leases will not, in our judgment, be compensation for the undertaking.”
68. Let us turn our attention to the principles applied by the courts in England under similar situations.
69. In Bird Precision Bellows Ltd., In re  3 All ER 444 (Ch D) ;
 2 WR 869, the court has occassion to consider the problem of valuation the shares under similar circumstances. The court found that the company was in the nature of a quasi-partnership ;though the petitioners approached the court with an allegation of oppression by the majority shareholders, their shares are not to be valued either at a premium or at a discount and that a fair value should be fixed by the court, for the sale of their shares, to the respondents. The learned judge held that on this question of “discount” or “premium”, there is no rule of universal application ; on the other hand the general rule is to adopt a fair basis of valuation. At page 450, the learned judge observed (at page 878 of  2 WLR) :
“In summary, there is in my judgment no rule of universal application. On the other hand, there is a general rule in a case where the company is at the material time a quasi-partnership and the purchase order is made in respect of the shares of a quasi-partner, Although I have taken the case where there has in fact been unfairly prejudicial conduct on the part of the majority as being the state of affairs most likely to result in a purchase order, I am of the opinion that the same conseqences oughtp usually to follow in a case like the prsent where there has been an agreement for the price to be determined by the court without any admission as to such conduct. It seems clear to me that, even without such conduct, that is in general the fair business of a valuation in a quasi-partnership case, and that it should be applied in this case unless the respondents have established that the petitioners acted in such a way as to deserve their exclusion from the company.”
70. Each part had nominated his valuer. The learned judge said at page 456 :
“There was a certain amount of common ground between the two valuers. Firstlym, they agreed that a dividend basis of valuation, being the one which is usually only relevant in a case of a company with a record of paying significant dividends was inappropriate in this cse. Secondly, they agreed that the appropriate basis was one which involved looked both at the earnings of the business and at the value of its net tangible asset. The latter ignores goodwill, which is the measure of profits which the business can earn over and above a normal return on its net asset value. Mr. Milburn did not make an independent valuation on a net tangible asset busis but relied on the company’s draft balance-sheet as at August 31, 1981. However, he was broadly content to accept Mr. Foster’s figure of 412,000. I think that there may have been a slight, but probably unimportant difference of emphasis between them on the function and utility of the net tangible asset value in relation to the earnings value. They both agreed, in view of the good tradingp record of the company, the net tangible asset valuation should be made on a going concern basis and not on a break-up basis.
As described by Mr. Milburn, the first step in an earnings valuation is to apply to that figure a multiple which is known as the `profit to earning ratio’ or `P/E ratio’ (for short) and which represents the yield which a purchaser on a willing buyer willing seller basis could expect on his investment. Mr. Foster agreed that these were the two steps in the exercise, but there were fundamental disagreements between him and Mr. Milburn as to the correct figures to be assigned to the maintainable level of profit and the multiple respectively.”
71. Thereafter, the company’s maintainable level of profits before tax was goven. It was further noticed that during the year 1981, the cash flow forecast ws extremely optimistic. But there was a difference of opinion as to the estimate for the year 1981-82. The learned judge accepted the estimate of Mr. Bird and Mr. Foster on this aspect. The next difference of opinion between the two valuers was with regard to the multiple to be appllied to the estimated profit for 1981-82. The other valuer, i.e., Mr. Foster maintained that it was wrong to take only the estimated figure for 1981-82, but opined that an average of the figure of 1981-82 and the actual figures for the preceding two years should be taken, to which the estmiate of the average excessive director’s emoluments were to be added. To this a multiple of three was applied ; the result was the “earnings-based valuation”. The valuation bassed on the “net tangibel asset value” was also given which was slightly lower than the former figure. The learned judge said at page 458 :
“In may view the basis approch of Mr. Foster to the qustion of maintainable level of profits is to be preferred to that of Mr. Milburn. In other words, I think that a purchaser would be more likely to take an average of three years actual and anticipated profits rather than to rely only on the most recent figure, particularly since it could only be an estimate and the company was stil a yound one.”
72. To the said figure, an appropriate multiple was applied, on a consideration of the company’s progress during the further previous years. The court said :
“Although I have assumed that a willing purchaser would take an average of the actual or anticipated profits for the three most recent years, he would undoubtedly have looked further back in order to wsee the earlier record of the company. If he had done that, he would have seen that form 1977-78 onwards, i.e., from only two years afrom its birth, the company had been making a profit which, with one slight setback in the follwwing year, had steadily increased from 80,000 to 175,000 . I think he would have though that those figures showed that this was a well run an soundly based company. Even in times of great recession in the industry, he would in my view not have expected a yield of as much as 33 per cent. on this investment and would, therefore, have been prepared to apply a multiple of more than three. I think that he would have been well satisfied with a yield of something over 25 per cent. In my judgment the correct muttiple in this case is 3.75, which reflects of yield of 26.66 per cent. It that is applied to a net maintainable profit of 146,000, it produced a valuation on an earnings basis of 547,000.”
73. Thereafter, the learned judge proceeded to say :
“The final step is for me to compare that figure with the net tangible asset value of 412,000. Here, if there was any significant difference of approach, which I do not think there was, I prefer that of Mr. Milburn. He said that a purchaser would look at the net tangible asset value in order to see whether it gave him comfort or caused him concern when compared wiht the earningss valuation. In this case he said that the net tangibel asset value would give the purchaser conmfort and it is to be remembered that he said that in relation to a higher earnings valuation that I have adopted. I accept that evidence. Adapting Mr. Miburn’s phraseology to my figures, I think it is clear that a purchaser would think that the assets were well capable of turning over a profit of around 35 per cent.
I value the shares of the company as a whole at 547,500. I determine the price at which the resspondents are jointly and severally to purchase the shares of the petitioners at 18,25 each.”
74. The above decision of the Chancery Division is a good guidance for us. The court has to apply both the methods and compare them, before arriving at a fair value. However, in the above case, there was unanimity regarding the net tangible assets and as to its valuation. The difference pertained to the earings-based valuation. On this question, the court preferred to consider the average profits of the last three years (including the estimated profits of the latest year, though the year had not come to an end) and thereafter, to apply the multimple, looked further back in order to see the earlier record of the company. Under the condition of that counting, the expected gross profit was estimated rouhtly as 25 per cent. and hence a multiple of 3.75 was chosen. The gross profit whihc is to be the basis for applying the multiple and to consider the expected return on investment, is a pre-tax profit and not a profit after paying the income-tax. However, the court had no occasion to cosider the impart of the “goodwill” (probably because it was a young company started in or about the year 1975).
75. The decision was affirmed by the Court of Appeal ; the decision in Bird Precision Bellows Ltd., In re [1985 3 All ER 523. There, the appellants contended (at page 523) :
“(i) that under section 75(4)(d) the cort was not entitled to consider the merits of the case when fixing the value of the shares, (ii) that the court was limited to fixing the market price of the shares, i.e., according to the proportionate size of the shareholding in relationp to the whole of the issued share capital but taking into account whether the shareholding formed a majority, or minority holding, (iii) that the court could not , e.g., by deciding that there should be no discount for the fact that the shares were a minority holding, fix a price which had the effect of reduing or incureasing the ordinary open market value of the shares, and (iv) that it was in implied terms of the concerned order that the shares where to be purchased at the ordinary open market value for a minority holding, i.e., at discount.”
76. The Court of appeal held that under sesction 75(4) (comparable to section 402(b) and (c) of our Companies Act), the court had a very wide discretion to give appropriate relief which the court considered fair and equitable and that the court had an unfettered discretion to fix a purchase price for the petitioner’s shares which was fair in all the circumstances ; furthermore, under the consent order, the parties had intended that the purchae price for the shares should be fixed by the court in the exercise of its discretion under seciton 75. The Court of Appeal, after referring to a passage in the decision of the House of Lords, in Ebrahimi’s case  2 All ER 492 ;  AC 360, pointed out that the real dispute between the parties was on the question of the “proper price” payable to the petitioners. Oliver L.J. observed, at page 529 of  3 All ER :
“In may judgment the `proper’ price is the price which the court in its idscretion determines to be proper having regard to all the circumstances of the case.”
77. At page 531, the lerned judge quoted the observations of Lord Denning made in Scottish Co-operative Wholesale Society Ltd. v. Meyer  3 All ER 66, 89 ;  AC 324, 369 :
“One of the most useful orders mnetioned in the section – which will enable the court to do justice to the injured shareholders – is t order the oppressor to buy their shares at a fair price ; and a fair price would be, I think, the value which the shares would have have at the date of the petition,if there has been no oppression. Once the oppressor has bought the shares, the company can survive. It can continue to operate. That is a matter for him. It is, no doubt, true that an order of this kind gives to the oppressed shareholder what is, in effect, money compensatin for the injury done to them ; but I see no objection to this. The section gives a large discretion to the court, and it is well exercised in marking an oppressor make compensation to those who have suffered at his hands.”
78. As to this observation and another earlier decision, Oliver L. J. said in connection withe respondents’ arguments (at page 531) :
“They seem to me to be entirely against them because, as it seems to me, they indicate as clearly as can be the wide discretion which the court has in directing the basis on which shares should be valued for the purpose of a purchase ordered under this section. It may be true that in can be compensatory, but what the court is required to do, in the exercise of its very wide discretion, is to do what is just and equitable between the parties.”
79. The learned judge further said that since it was a quasi-partnership case. “it woud be appropriate that the shares of the company should be valued as a whole and that the petitioners should then simply be paid the proportionate part of that value which was represented by their shareholding, without there bein made a discount for the fact that this was a minority shareholding”. The court also referred to the pre- emptive clause in the articles of association, which required that the seller of the shares and to first offer the shares to the other shares and in case there was a dispute, the fair value was to be certified by the auditors. The court, after referring to Dean v Prince  Ch 409, quoted a passage from it to say that in such a situation, the right way to see what the entire shares of the company wee worth, would be to see what the business itself was worth.
80. In Buckingham v. Francis  2 All ER 738, Buckingham’s 20 shares were to be valued, arising out of a dispute between him and others, who held only 30 shares. The business of the company was, mainly, to supply the printing industry in East Anglia, materials and equipment. There was no dispute that the value must be ascertained ona quasi- partnership basis, “that is to say the worth of the company as a whole must be calculated”. At page 739, the court stated :
“There is common ground in the following respects :
(1) The value must be ascertained on a quasi-partnership basis, that is to say, the worth of the company as a whole must be calculated, and then an appropriate proportion (two-fifths) attributed to Mr. Bucking- hams 20 shares. No regard need be had to the question whether they were a majority interest, or a minority interest, or neither.
(2) It is the value of the company as a going concern which must be assessed, not the break-up value of its assets in a liquidation. However, the break-up value can be used as a longstop, if the value as a going concern was less.
(3) the break-up value of this company was very small or nothing at all. (That cannot perhaps be described as a common ground ; but it is clearly established on the evidence. The company’s assets consisted lergely of stock and debtors, which could be expressed to realise in a liquidation less than their balance-sheet value, and very little more than the amount required to satisfy the companys creditors.”
81. The net assets figure, undiscounted, was 39,000. The figures for “sales”, “gross profit”, “overheads and profit before taxation” from the time when the company started trading, till December 31, 1981, were sharply to start with, showed an even steeper downward trend. One of the valuers adopted an aset value, which the court found to be actually an “earnings value” in disguise. To the net asset value, the value of goodwill (based on future profits) was added. At page 741, the court quoted Accountant’s Digest, which referred to this method ; the excerpt reads :
“Super profits approach. The super profits approach has a long and ancient predigre and appears in one form or another in most texts. Idea behind it is that there is a normal rate of return that can be earned on assets of a certain type but over a number of years it may be possible to earn profits in excess of this normal level. This method assumes that the purchaser will buy, in addition to the normalised value of the assets, a number of years’ super profits. the procedure is to estimate the value of the net assets on a going concern basis and to add to this the value of the super profits. The annual super profits are calculated by deducting from maintainable profits a sum which is equivalent to the normal rate of return on net assets. These super profits are then multimplied by a factor representating the number of years’ purchase. The value of the super profits is entered in the accounts as goodwill. The super profits method has the theoretical attraction that it recognises the transitory nature of above average performance. In practice, it has serious shortcomings. The preoccuption with net asset value, which is practice is based on balance-sheet amounts, is unhealthy. Few businessmen would admit that their company’s growth rates were a temporary phenomenon, nor would most of them reocgnise the concept of super profits. The going rate of return on net assets must be a highly subjective assessment, as must also be the amount and duration of super profits. How is one to know the going rate for the purchase of super profits ? This valuation basis leads to highly esoterc arguments divorced from reality.”
82. This method was not accepted by the court. the learned judge said, “the objection to this method, apart from its complication, is that in the present case I can see no basis for adopting a figure of 10 per cent. as the normal level of profits for this company, or even for this industry. And, if one does adopt the normal level of profits, it is speculative as to how long and by how much it would be exceeded. Theprognosis that the annual average for the past there and a quarter years woud be repreated in the future, and that a buyer of the company woud be prepared to pay five years’ purchase for that prospect, is unsupported by evidence. Nor can I see much sense in basis even part of the valuation on the book value of the net assets. They would have realised far less in a liquidation ; and when a company such as this one is valued as a going concern it is earnings and not assets that are significant. I reject this method of calculation.” The other valuer, Burns, produced a valuation based solely on earnings. This approach, in principle, was held to be correct ; however, as to this methodology, following comments were made :
“In may judgment the approach of Mr. Burns is in principle correct. The vlaue of the company was the capitalised sum representing further profits. But there are two unknowns; what the future profits woud be, and what price/earnings ratio would commend itself to a purchaser as appropriate for capitalisation. It is possible to make an allowance for risks in calculating either figure. What one much guard agaist is making allowance for the same risks twice over, i.e., in the assessment for futhure profits and also in the choice of a price/earnings ratio. In order to avoid that, the assessment of future profits can be made on a best guess basis, allowing for risks but without either undue caution or exaggeration, ad a price/earnings ratio can then be chosen on the basis that the figure for future profits is the probable answer. That seems to me the best method for the present case ; in other cases the converse method could be adopted, and the allowance for risk could be incorporated in the ratio rather than the profit figure, or part of it in one and part in the other.”
83. The futher maintainable profits was estimated by the court at 6000 per annum, and thereafter the court proceeded to consider the figure of the multiplier on a “per-tax basis and not post-tax”. The court opined that the purchaser of the company would be content with a yield of 25 per cent. and, therefore, themultiplier of four was arrived at. However, Staughton J. made the following observations at page 743 :
“Frankly I doubt whether businessmen are ruled by accountants when deciding how much to pay for a private company. They no doubt seek the advice of accounts beforehand, and are told what likely price-earnings ratio would emerge from various different figures as the purchase price. And afterwards they are told, no doubt, what is the likely price/earnings ratio on the purchase price which they have decided to pay. But I wonder whether, in the crucial stage between, when they are deciding on a price, business acumen or hunch does not pay a far larger part than the calculation of accounts.”
84. This case illustrates that under certain circumstances the “maintainable future profits” method would be the most appropriate method. This was a company which had no substantial assets to apply the `break-up value’ method.
85. The decision also shows that the estimated profit is to be a pre-tax profit, to which an appropriate multiplier is to be applied.
86. The decision of the Chancery Division in Bird Precision Bellows Ltd., In re  3 All ER 444 also shows that the “maintainable level of profits” method has a dominant role to play in the evaluation of the company’s worth. However, to consider the appropriate multiplier, the company’s history and past performance also should be taken note of.
87. The net tangible asset value should be kept in mind and be compared with the other value arrived at by the application of the “maintainable level of profits” method and if both the figures substantially compare with each other, then the latter figure could be accepted as representing the company’s worth.
88. In both the above cases, goodwill as an intangible asset was not considered, obviously because it was not present.
89. The methodology for valuation of a company’s worth should vary with the company’s features. If it is a quasi-partnership of recent origin and, therefore, a young business concern, the company may not possess significant goodwill ; on the other hand, if it is an old business establishment which, in the course of time, because a private limited company (though, in fact, a quash-partnership), and has earned goodwill, the advantage of such goodwill should not be ingnored while evaluating the company’s worth ; otherwise, it will result in ignoring commercial realities. The worth of a company as a going concern would, and should, normally, include its tangible and intangible assets which are being commercially exploited.
90. When two group who have been working together for decades fall apart and seek separation, each group is entitled to have a proportionate worth of the business built up by all of them together.
91. Though, in the instant case, the evaluation of the shares in done by virtue of the consent orders, the source of the court’s power is in section 402. Under section 397, the court is empowered to make an order “as it thinks fit” ; similar is the power vested in the court under section 398. Power under section 402 is a power which may be exercised without prejudice to the generality of the powers of the court under sections 397 and 398, and, therefore, such a power can in no way be of a limited nature. A power to make an order as the court thinks fit would necessary comprise within it a power to make an order which is just and equitabl in the circumstances of the case, because, essentially, this is a unlimited judicial power.
92. The court cannot ignore the realities, while evaluating the worth of a quasi-partnership. Sence of justice and principles of equity demand that every one concerned should be placed on par (proportionate to their interest in the business concern).
93. By confiming the attention to the valuation by only one method the court may miss the real worth of the company.
94. The English decisions referred to above further reveal that, in the process of evaluation, the question of any premium or discount would not be normally considered, even though the shares are to be valued for the purpose of sale and purchase amongst the rival groups of a quasi-partnership concern ; that will be inequitable at least to one of the groups.
95. Another aspect to be clarified here pertains to the relevancy of tax on the gross profit of the company. The “maintainpable level of profits” is to be arrived at without reference to tax liability. Mr. Udaya Holla’s contention that tax liability should be deducted may have relevane to evaluate the market value of shares for tax purposes. Here, we are concerned with the worth of the company and the percentage of profit normally expected of a person purchasing the company. Tax liability on the income continues, even after one invests one’s capital elsewhere. For example, if pre-tax gross profit is Rs. 1,00,000 and the expected return on the investment is 10 per cent., the capital value will be Rs. 10 lakhs. When this ten lakhs rupees is deposited in a bank or a safe company, interest earned (assuming it to be 10 per cent.) is again taxed. If the gross profit after tax liability is deducted, is Rs. 50,000 then a higher multiple has to be applied to capitalise it ; if not, the multiple of 10 would take the capital value of Rs. 5 lakhs and when this is deposited in a bank or a company, the interest earned again gets taxed. The return expected on an investment, is a return expected on an investment, is a return of an income ; the investor does not look at the tax liability as such. To reduce the tax liability, the assessee may have recourse to lawful tax-planning methods. The English cases referred to by us establish that, in Enland, courts do not deduct the tax liability while computing the gross profit while evaluating the company’s worth.
96. One more aspect of the problem requires to be considered. In a company dealing in manufactured articles, there may not be much tangible assets, except the stock-in-trade, deposits if any, vehicles, etc. The main asset of the company may comprise intangibles like goodwill and the benefits that arise out of the location of the leasehold premises. In such a suitation, the tangilble asset-valuation method may not depict the clear worth of the company. To take an extreme example, we may consider the case of company trading as a commission agent, it does not requir any capital investment except good premies ; the real assets are the business connections of the company including the goodwill earned, if any. In terms of annual profits, the company may be very prosperious. Here the comparison between the asset-value and the “maintainable level of profits” value can be achieved only by selecting a proper multiple to capitalise the profit. The percentage of return expected in such a case will be quite high, because no tangible investment in terms of money has to be made.
97. The company in the instant case is a sound company with a goodwill of its own, earned in the course of its business which was estabilished as early as the year 1932. It is a family concern. Dividends are not declared ; the sharesholders have been enjoying the fruits of the business by way of remuneration, allowances and perquisites. The business is located in Commercial Street which is a prominent commercial centre in Banglore. The leasehold of the premises itself is quite valuable. The balance-sheet figures of gross profit, in the circumstances, would not disclose the real profit of the company and sufficient case has to be taken while estimating the maitainable level of profits of the company without being unduly influened by those figures stated in the balance-sheet.
98. In Bird Precision Bellows Ltd., In re  3 All ER 444, the court took the average of the gross profits of the latest available profits of the two years and the subsequent year’s estimated profit, to arrive at the maintainable level of profits and then added back the excess remuneration drawn by the directors. The company petition was filed in October, 1981. Therefore, the available gross profits for the years 1980-81 with the estimated gross profits for 1981-82 were considered (vide page 457; the basic position of Mr. Foster, one of the valuers). The court observed that this took into consideration the average of three years’ actual and anticipated profits (page 458). The company, however, was a young company. Therefore, the consider th emultiple, the company’s past performance was also looked into, so that one could be assured that the company was “well run and soundly based company”.
99. By applying the above approach to the instant case, the last two years were 1986-87 and 1987-88 ; in the middle of year 1988-89 , the learned company judge directed the respondents to pay the petitioners Rs. 600 per share, subject to further valuation. The available figures of gross profit for these years, are (1) loss of Rs. 21,786, (2) profit of Rs. 2,71,237 and (3) profit of Rs. 1,88,188. The average will be Rs. 1,45,880.
100. This is company which did not declare any dividend. Both groups were drawning remuneration, allowances, medical benefits, etc. It is not quite safe to rely on the estimate of the gross profits as reflecting the reeal picture, because the directors obviously were liberal in drawning various sums for their peronal benefits in lieu of the dividends. A sum of Rs. 50,000 should, therefore, be added back as excess remuneration as has been suggested by Messrs. Ramadhyani and Co. (para 4,10 of Ramadhyani’s report). The memo of instructions dated October 22, 1988, filed by the petitioners in the proceedings given the total remuneration of directors at Rs. 9,500, apart from other allowances of Rs. 1,000 per month. Therefore, the maintainable level of profits will be Rs. 1,95,880.
101. A reasonably good investor would further probe into the affairs of the company to discover that since the year 1985 (after February, 1985), the company opened a branch at Cotton Complex and has been incurring a loss in the business conducted in that brach ; however,the lease of the premises was on a monthly rent od Rs. 4,389 with an advance of rs. 43,890. While the respndents were anxious to close this business, the petitioners opined that these premises can be utilised in a better way. The learned company judge has added to the maintainable level of profits a further sum of Rs. 60,000 on account of closing this business, so that, the company’s gross profit would go up. This cannot be termed as an erroneous approach. If, however, this sum of Rs. 60,000 is not added, naturally, the percentage of profit on the investment will be lower, resulting in applying a higher multiple.
102. If Rs. 60,000 is added, the average profit will be Rs. 2,55,880, (rounded off the Rs. 2,56,000). The investor’s yield was considered as 11 per cent. The company is basically a well run, stable and sound company ; therefore, the investment’s approach will be an approach to obtain a constant return, which is safe. A return of 12 to 13 per cent., therefore, cna be safely accepted as the expected returned return and, therefore, can be safely accepted as the expected return and, therefore, can be multiple of eight to capitalise the profits. The capitalised figure, representing the company’s worth will, therefore, be (Rs. 2,56,000 x 8) = Rs. 20,48,000. The value of an equity share would be Rs. 819.50.
103. While selecting the multiple of 8, we have also noted, that according to Messrs. Ramadhyani and Co., the expected return will be 15 per cet. (This will take the multiple to 6. 66), but this low multiple, seem to us not acceptable in the circumstances of this case.
104. Re : Assets : Company had stock-in-trade, vehicles, reserves, and abundant goodwill.The interest in the leasehold premies at Commercial Street is a very valuable interest. Messrs. Ramaswamy and Co. values the goodwill at Rs. 3,17,000. Messrs. Brahmaiah and Co. has, quite strangely, ignored these aspects. Messrs. Ramadhyani and Co. has not valued the leasehold at Cotton Complex, but accepted the value of leasehold interest at Commercial Street premises at Rs. 12,60,000. Mr. Udaya Holla contended that it was an unregistered lease and hence the reference to the unexpired period of the lease should be ignored. We do not think so. The unexpirted period is of a short during and the protection afforded by the Karnataka Rent Control Act to a tenant cannot be ignored. Both parties are anxious to have these premises ; the bar agaisnt sub-letting is not an insurmountable hurdle to use this premises profitably. However, we reduce the value of this leasehold interest to Rs. 10 lakhs. The book value of other assets at Rs. 3,45,245 cannot be accepted as reflecting the real figures. The current assets for the year ending March 31, 1989, is shown at Rs. 6,01,939 in the balance-sheet, in addition to the other advances. Therefore, assets are to be valued as follows :
Current asset 6,02,000 Goodwill 3,00,000 Leaseholding 10,00,000 ______________ Total 19,02,000 This figure of Rs. 19,02,000 is slightly higher than the valuation figure given by Messrs. Ramadhyani and Co. This capital worth of the company is certainly comparable with the "income-capitalised value" of the company's worth of Rs. 20,48,000. 105. Therefore, the value of an equity share at Rs. 820 (i.e., Rs. 819.50 rounded off) seems to us quite fair and reasonable.
106. The valuation has to relate back to September 30, 1988 (the date on which the payment at Rs. 600 per share to the petitioners were recorded, subject to further valuation). Therefore, it is just and equitable that petitioners should be paid interest on his balance sum receivable by them. We direct the payment of interest on the balance sum payable by the contesting respectents to the petitioners at the rate of 10 per cent. per annum with effect from October 1, 1988, till the date of payment.
107. The petitioners have offered to purchase the shares at Rs. 1,000 per share. This may be for reasons best known to them ; probably they have been nourishing great hopes of larger profits during future years or the offer was made, to bring a psychological pressure on the valuers knowing fully well that the contesting respondents, would not, under any circumstances, give up the business at Commercial Street, since the business was initially started by their father, B. L. Rakhra, in the year 1932. The court cannot be influenced by this high offer of the petitioners which is not based on any realities by this offer of the petitioners which is not based on any realities affectingthe valuation of the company’s worth.
108. In the result we allow this appeal partly, Respondents Nos. 2 and 3 shall pay the petitioners for their sharees at the rate of Rs. 820 per equity share ; the balance amount payable after deducting the payments made already at rs. 600 per share, shall bear interest at the rate of 10 per cent. per annum with effect from Octoberp 1, 1988. The order of the learned company judge is modified to this extent. The contesting respondents are granted six weeks’ time to deposit into court the amount payable to the petitioners as per this order, failing which the petitioners shall proceed to deposit the value of the shares of the contesting respondents at the same rate, within six weeks from the date of the expiry of the first six weeks time granted herein to the contesting respondents ; however, the question of any interest on the amount to be paid by the petiioners to the said respondents would not arise as these respondents have been running the company all these years ; the other conditions stated in the order of the learned company judge shal continue to operate subject to these modifications.
109. In the event of the contesting respondents in the company petition faiing to pay to the petitioners as per this order and the petitioners proceed to purchase the shares of those respondents, the parties are at liberty to move the company court for appropriate orders regarding the profits earned by the company during the period of this litigation.
110. Appeal partly allowed. No order as to costs.