ORDER
B.M. Kothari, A.M.
1. These two appeals by the assessees involve consideration of a common point and both of them have raised identical grounds in their respective appeals which are reproduced hereunder :
1. “That the learned CWT(A) has erred in upholding the valuation of unquoted equity shares of Control and Switch Gear Co. Ltd. at Rs. 419 per share as adopted by the AO as against Rs. 339 worked out and declared by the petitioner in the return of wealth filed.
2. That the authorities below have erred in holding that the value of the fixed assets for the purpose of computation of value of equity shares under Sch. III of the Act is to be taken at Rs. 89,76,737 whereas the correct value of fixed assets as per the relevant rules works out to Rs. 76,09,000 only.
3. That CWT(A) has erred in not appreciating that for the purpose of computation of the value of unquoted equity shares under Sch. III of the WT Act, the total value of the assets stated in the balance sheet of company has to be reduced by depreciation in accordance with the rates applicable under the IT Act and the Rules. The mere fact that depreciation at the said rates is not shown in the balance sheet for some reason, does not entitle the AO to take the full value of the assets minus the depreciation actually shown (and not the depreciation allowable as per the provisions of IT Act and Rules). In this respect, the AO and the learned CWT(A) have not considered the notes forming part of the accounts appended to the balance sheet.
4. That the order of the AO in valuing the equity shares of Control and Switch Gear Co. Ltd., at Rs. 419 per share as against Rs. 339 declared by the petitioner and the action of the CWT(A) in upholding the said order of the AO is against law and facts of the case.”
2. Shri B. B. Ahuja, the learned senior advocate, contended that both these assessees own certain number of shares of M/s. Control Switch Gear Co. Ltd. Both of them had valued those shares in conformity with the relevant rules contained in Sch. III of the WT Act, 1957. The valuation of the said shares was computed by the assessees at Rs. 339 per share on the basis of following statement :
Computation of the value of an equity share of Controls & Switchgear Co. Ltd., as per balance sheet of 30th June, 1988.
Rs. Rs.
Fixed Assets (WDV as per IT Rules) 76,09,000
Investment 4,00,000
Current assets, Loan and Advances 3,95,06,056
Less : Advance tax paid - 20,26,758
Pre-paid expenses 1,07,613 - 21,34,371
3,73,71,685
------------
Total Assets 4,53,80,685
Less : Liabilities : Secured Loans
1,52,94,306
Current liabilities and provision 2,42,72,445
3,95,66,751
------------ -------------
Net worth 58,13,934
Number of shares 13,720
Break-up value 58,13,934 = 423.75
----------- 13,720
Value (80% of break-up value) = 339 Say Rs. 339
2.1. The AO had taken the value of the fixed assets at Rs. 89,76,737 as shown in the audited balance sheet of the said company as against the value of fixed assets taken by the assessee at Rs. 76,09,000 in the aforesaid chart for computing the value of the equity share of the said company.
2.2. The learned senior advocate submitted that for purposes of computing the value of unquoted equity share, the AO also ought to have taken into consideration Note No. 2 which was forming part of the audited accounts of the said company relating to the year ended on 30th June, 1988. It was pointed out that the provisions of s. 350 of the Companies Act were amended by the Companies (Amendment) Act, 1988 w.e.f. 15th June, 1988, as a result of which the company had to provide for the amount of depreciation at the rate specified in Sch. XIV of the Companies Act. The company was earlier providing for depreciation on reducing balance method at the rates prescribed in the IT Rules. After amendment of s. 350 of the Companies Act, w.e.f. 15th June, 1998, the company had written off the depreciation according to straightline method (SLM). This change in the method of providing for depreciation from the year under consideration resulted in difference between the value of fixed assets as shown in the balance sheet and the value of fixed assets being WDV as per IT Rules.
2.3. The learned senior advocate further submitted that r. 11(2) of Sch. III provides that value of all the liabilities as shown in the balance sheet of such company, shall be deducted from the value of its assets shown in the balance sheet and the net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown in the balance sheet for the purposes of computing the value of unquoted shares of such companies. The explanation in the said r. 11 of Sch. III further provides that for the purposes of this rule “balance sheet” in relation to any company means, the balance sheet of such company including the notes annexed thereto and forming part of the accounts. He, therefore, emphasises that the “note on account” of forming part of the accounts of the company ought to have been taken into consideration by the AO while computing the value of such unquoted shares. In the Note No. 2, forming part of the accounts, it has clearly been stated that in past years, depreciation was being calculated on reducing balance method at the rate prescribed by income-tax for the full period as at the close of the respective years. In view of the amendment of the Companies Act and in terms of Sch. XIV thereto, depreciation has been calculated in the year ended on 30th June, 1988, at rates prescribed therein. If this note would have been taken into consideration by the AO, he would have adopted the value of fixed assets as per the WDV worked out in accordance with the IT Rules.
2.4. The learned counsel further submitted that the expression used in r. 11(2) of Sch. III “value of all assets shown in that balance sheet” does not mean that value as shown in the balance sheet is sacrosanct. There is a difference between the expression “value of all assets shown in that balance sheet” and the expression “value as shown in the balance sheet of all its assets”. He, therefore, urged that the WDV of assets as per IT Rules adopted by the assessee for computation of the value of a equity share of the said company is in conformity with the balance sheet of the company read along with the notes annexed thereto and forming part of the accounts of the company. The learned senior advocate, then invited our attention towards r. 14 of Sch. III of WT Act providing for mode and manner applicable for global valuation of assets of business. Rule 14(2)(a)(i) clearly provides that value of any asset as disclosed in the balance sheet in case of depreciable assets shall be taken at the WDV as per IT Rules. A harmonious construction of rr. 11 and 14 of Sch. III also supports the value of Rs. 339 per share worked out by the assessee by adopting the WDV of the fixed assets as per IT Rules.
2.5. He further argued that if the company itself could have been assessable to tax, the value of the share would have been computed as per r. 14 of Sch. III by adopting the WDV of fixed assets as per IT Rules. It is beyond comprehension that the value of the same share as on the same valuation date in the hands of the shareholder can be determined at a figure different than the value of the share in the hands of the company.
2.6. The learned senior advocate further submitted that the learned Departmental Representative may place reliance on judgment of the Hon’ble Supreme Court in the case of Bharat Hari Singhania vs. CWT (1994) 207 ITR 1 (SC). He drew our attention towards the observations made by the Hon’ble Supreme Court at p. 20 where the arguments advanced by Dr. Gaurishankar based on the guidelines for valuation of equity shares of companies issued by the Ministry of Finance, Deptt. of Economic Affairs have been recorded. A copy of the said guidelines published in (1990) 68 Company Cases (St) 121 relating to the principles and method of valuation was also submitted. The learned counsel invited out attention towards para 6.2 (viii) of the said guidelines in which the approach required to be adopted for making a provision for depreciation have been explained.
2.7. The learned senior advocate also invited our attention towards the judgment of Hon’ble Supreme Court in the case of CWT vs. Aluminium Corpn. of India Ltd. (1972) 85 ITR 167 (SC) at p. 172. It was held by the Hon’ble Supreme Court that revaluation in the absence of any evidence to show that it was incorrect, undoubtedly afforded a sound basis for valuing the assessee’s assets. But then, when the value of those assets had to be determined on the valuation dates, the WTO should have deducted from the 1956 valuation, when revaluation was made, the depreciation of those assets after they were revalued. Undoubtedly, these assets were subject to wear and tear and there was no evidence to show that the market value of those assets had gone up after they were valued. The learned counsel submitted that in the present case the value of depreciable assets has gone down because of wear and tear and also on account of obsolescence. The depreciation as per IT Rules, is, therefore, required to be deducted arriving at a fair market value of those assets and such WDV as per IT Rules will also be in conformity with r. 11 and 14 of Sch. III.
2.8. Learned senior advocate also drew our attention towards the judgment of Hon’ble Supreme Court in the case of Bharat Hari Singhania & Ors. (supra) at p. 34, 207 ITR, where the conclusions arrived at by the Hon’ble Supreme Court have been summarised. The learned lawyer submitted that those findings do not in any manner go against the claim of the assessee, as the Hon’ble Supreme Court was not at all concerned with consideration of such an aspect relating to value of depreciable assets, for the purposes of valuing the unquoted equity shares. He submitted that the said judgment of Hon’ble Supreme Court, therefore, does not at all apply to the facts of the present case.
2.9. The learned counsel also invited our attention towards a judgment of Hon’ble Supreme Court in the case of CIT vs. K. Ramakrishnan (1993) 202 ITR 997 (Ker) at p. 1002. The aforesaid judgment was cited with a view to support the argument that a precedent is an authority only for what it actually and explicitly decides and no more. It would be too much to imply and read into its propositions what may seem to flow even incidentally or logically from it.
2.10. The learned senior advocate thus strongly urged that the value of Rs. 339 per equity share of Control and Switch Gear Co. Ltd. shown by these assessees should be accepted.
3. The learned Departmental Representative relied upon the reasons mentioned in the assessment order as well as in the order of CIT(A). He also placed reliance on the judgment of Hon’ble Supreme Court in the case of Bharat Hari Singhania (supra). He strongly supported the order of CIT(A).
4. We have carefully considered the submissions made by the learned representatives of the parties and have also gone through the orders of the learned Departmental authorities. We have also carefully gone through all the judgments cited by the learned representatives of both sides and have also perused the various other documents submitted in the compilation to which our attention was drawn during the course of hearing.
4.1. It may be relevant to reproduce the relevant rr. 11 and 14 of Sch. III to WT Act in order to properly appreciate the rival contentions made by the learned representatives of both sides :
“11. Unquoted equity shares in companies other than investment companies. – (1) The value of unquoted equity shares in any company, other than an investment company, shall be determined in the manner set out in sub-r. (2).
(2) The value of all the liabilities as shown in the balance sheet of such company shall be deducted from the value of all its assets shown in that balance sheet; the net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown in the balance sheet; the result multiplied by the paid-up value of each equity share shall be the break-up value so determined shall be the value of the unquoted equity share for the purposes of this Act.
“Explanation. – For the purposes of this rule, “balance sheet”, in relation to any company, means the balance sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date and, where there is no such balance sheet, the balance sheet drawn up on a date immediately preceding the valuation date, and, in the absence of both, the balance sheet drawn up on a date immediately after the valuation date.
14. Global valuation of assets of business. – (1) Where the assessee is carrying on a business for which accounts are maintained by him regularly, the net value of the assets of the business as a whole, having regard to the balance sheet of such business on the valuation date after adjustments specified in sub-r. (2) shall be taken as the value of such assets for the purposes of this Act.
(2) For the purposes of sub-r. (1) –
(a) the value of any asset as disclosed in the balance sheet shall be taken to be, –
(i) in the case of an asset on which depreciation is admissible, its written-down value;
(ii) in the case of an asset on which no depreciation is admissible, its book value;
(iii) in the case of closing stock, its value adopted for the purposes of assessment under the IT Act for the previous year relevant to the corresponding assessment year;
4.2. A plain reading of the aforesaid provisions clearly indicate that the notes annexed to the audited balance sheet and forming the part of the accounts should also be taken into consideration while computing the value of unquoted equity shares of such companies. Rule 14 – although it does not apply specifically in relation to valuation of unquoted equity shares assessable as wealth in the hands of shareholder, but it certainly prescribed rules applicable for valuation of assets of business for determining the net value of assets of the business assessable under the provisions of WT Act in the case of assessee who is carrying on such business. The said r. 14 clearly indicates that in case of depreciable assets on which depreciation is admissible, the WDV of such assets will be taken into consideration for computing the net value of the assets of the business. A harmonious construction of these two rules relating to determination of the value of the assets, clearly supports the contention of the learned senior advocate that for computing value of unquoted equity shares of such companies, the value of fixed assets ought to have been taken at the WDV worked out as per IT Rules. The judgment of the Hon’ble Supreme Court in the case of Bharat Hari Singhania (supra) does not contain any specific finding against this proposition. The CWT(A) has simply held that r. 14 of Sch. III of WT Act is not applicable as the said rule applies only where a business is owned and carried on by the assessee himself. He has further held that the AO was right in applying the r. 11(2) of Sch. III and had rightly taken the value of assets at their book value. While giving such findings, the learned CWT(A) had completely ignored the note number 2 appended with the audited balance sheet which form part of the accounts for the relevant year ended on 30th June, 1988. It is clear that both the AO as well as CWT(A) completely overlooked the Explanation appearing below r. 11 of Sch. III. If the said note, forming part of the audited balance sheet would have been taken into consideration in the true and correct perspective, there would have been no justification in rejecting the mode and method of valuation of such unquoted equity share worked out by the assessee.
5. On a careful consideration of the entire relevant facts and material, the relevant provisions of law and the aforesaid judgments, we are of the considered opinion that the CWT(A) ought to have accepted the value of equity shares of the said company owned by the assessee’s as declared by them. We accordingly directed the AO to accept the declared value of such shares in the hands of both these appellants.
6. In the result, both the appeals are allowed.