{"id":67221,"date":"1994-02-16T00:00:00","date_gmt":"1994-02-15T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/bharat-hari-singhania-and-ors-vs-commissioner-of-wealth-tax-on-16-february-1994"},"modified":"2016-06-02T15:46:03","modified_gmt":"2016-06-02T10:16:03","slug":"bharat-hari-singhania-and-ors-vs-commissioner-of-wealth-tax-on-16-february-1994","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/bharat-hari-singhania-and-ors-vs-commissioner-of-wealth-tax-on-16-february-1994","title":{"rendered":"Bharat Hari Singhania And Ors. … vs Commissioner Of Wealth Tax … on 16 February, 1994"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Bharat Hari Singhania And Ors. … vs Commissioner Of Wealth Tax … on 16 February, 1994<\/div>\n
Bench: S.C. Agrawal, B.P. Jeevan Reddy, A.S. Anand<\/div>\n
           CASE NO.:\nWrit Petition (civil)  1213 of 1990\n\nPETITIONER:\nBHARAT HARI SINGHANIA AND ORS. ETC. ETC.\n\nRESPONDENT:\nCOMMISSIONER OF WEALTH TAX (CENTRAL) AND ORS.\n\nDATE OF JUDGMENT: 16\/02\/1994\n\nBENCH:\nS.C. AGRAWAL & B.P. JEEVAN REDDY & A.S. ANAND\n\nJUDGMENT:\n<\/pre>\n
JUDGMENT<\/p>\n
1994(1)SCR 1033<\/p>\n
The Judgment of the Court was delivered by<\/p>\n
B.P. JEEVAN REDDY, J. Delay condoned, Leave granted.\n<\/p>\n
Substitution in Civil Appeal No. 1587 of 1980 is allowed.\n<\/p>\n
1. The Wealth Tax Act, 1957 was enacted by Parliament providing for levy of
\nwealth tax. Section 3 is the charging section. It levies wealth tax on an
\nindividual, Hindu Undivided Family and Company in respect of their net
\nwealth on the corresponding valuation date at the rate or rates specified
\nin Schedule-I. The expression ‘net wealth’ is defined in clause (m) of
\nSection 2. In short, it means the aggregate value of all the assets
\nbelonging to the assessee on the valuation date minus all his liabilities.
\nSection 7 prescribes the manner in which the value of the assets is to be
\ndetermined. At the relevant time, sub-section (1) of Section 7 read:
\n“Subject to any rules made in this behalf, the value of any asset, other
\nthan cash, for the purposes of this Act, shall be estimated to be the price
\nwhich in the opinion of the Wealth-tax Officer it would fetch if sold in
\nthe open market on the valuation date.” Section 46(1) empowers the Board
\n(Central Board of Direct Taxes) to make rules for carrying out the purposes
\nof the Act. Sub-section (2) particularises the topics with respect to which
\nrules can be made. Clause (a) in sub-section (2) says that Rules made by
\nthe Board may provide for the manner in which the market value of an asset
\nmay be determined. Rules been made as contemplated by the said sub-section.
\nRule 1-B provides the manner in which the life interest is to be valued.
\nRule 1-BB prescribes the manner of valuing the house property. Rule 1-C
\nprescribes the manner in which the market value of unquoted preference
\nshares has to be determined. Rule 1-D, with which we are concerned herein,
\nprescribes the manner in which the market value of unquoted equity shares
\nof companies other than investment companies and managing agency companies
\nis to be determined. Inasmuch we are concerned herein with the
\ninterpretation of the said rule in its various aspects, it would be
\nappropriate to set out the rule in full, as it obtained at the relevant
\ntime:\n<\/p>\n
“1D. The market value of an unquoted equity share of any company, other
\nthan an investment company or a managing agency company, shall be
\ndetermined as follows:\n<\/p>\n
The value of all the liabilities as shown in the balance sheet of such
\ncompany shall be deducted from the value of all its assets shown in the
\nbalance sheet. The net amount so arrived at shall be divided by the total
\namount of its paid-up equity share capital as shown in the balance sheet.
\nThe resultant amount multiplied by the paid-up value of each equity share
\nshall be the break-up value of each unquoted equity share. The market value
\nof each such share shall be 85 per cent of the break-up value so
\ndetermined.\n<\/p>\n
Provided that where, in respect of any equity share, no dividend has been
\npaid by such company continuously for not less than three accounting years
\nending on the valuation date, or in the case where the accounting year of
\nthat company does not end on the valuation date for not less than three
\ncontinuous accounting years ending on a date immediately before the
\nvaluation date the market of such share shall be as indicated in the Table
\nbelow:\n<\/p>\n
THE TABLE<\/p>\n
Number of accounting years ending on the valuation date or in the case
\nwhere the accounting year does not end on the valuation date, the number of
\naccounting years ending on a date immediately preceding the valuation date,
\nfor which no dividend has been paid.\tMarket value<\/p>\n
Three years\t\t82 1\/2 per cent of the break-up value of such share<\/p>\n
Four years\t\t80                   — -do– –\n<\/p>\n
Five years\t\t77r                  ----do----\n\nSix years and above\t75                   ---do---\n\n<\/pre>\n
Explanation I: For the purposes of this rule, “balance sheet”, in relation
\nto any company, means the balance sheet of such company as drawn up on the
\nvaluation date and where there is no such balance sheet, the balance sheet
\ndrawn up on a date immediately preceding the valuation date and in the
\nabsence of both, the balance sheet drawn up on a date immediately after the
\nvaluation date.\n<\/p>\n
Explanation II: For the purpose of this rule-\n<\/p>\n
(i) The following amounts shown, as assets in the balance sheet shall not
\nbe treated as assets, namely: –\n<\/p>\n
(a) Any amount paid as advance tax under section 18A of the Indian Income-
\ntax Act, 1922 (11 of 1922), or under Section 210 of the Income-tax Act,
\n1961 (43 of 1961);\n<\/p>\n
(b) Any amount shown, as liabilities in the balance sheet shall not be
\ntreated as liabilities, namely: –\n<\/p>\n
(a) The paid-up capital in respect of equity shares;\n<\/p>\n
(b) The amount set apart for payment of dividends on preference shares and
\nequity shares where such dividends have not been declared before the
\nvaluation date at a general body meeting of the company;\n<\/p>\n
(c) Reserves, by whatever name called, other than those set apart towards
\ndepreciation;\n<\/p>\n
(d) Credit balance of the profit and loss account;\n<\/p>\n
(e) Any amount representing provision for taxation [other than the amount
\nreferred to in clause (i)(e)] to the extent of the excess over the tax
\npayable with reference to the book profits in accordance with the law
\napplicable thereto;\n<\/p>\n
(f) Any amount representing contingent liabilities other than arrears of
\ndividends payable in respect of cumulative preference shares.”\n<\/p>\n
2.  Rule 1-D was introduced with effect from November 6, 1967. It may be
\nnoticed that by Direct Tax Laws (Amendment) Act, 1989, these Rules have
\nbeen incorporated in Schedule-III to the Act. Rule 11 in the Schedule
\ncorresponds to Rule 1-D.\n<\/p>\n
3.  Among the companies incorporated in India, more than 85% are private
\ncompanies (excluding government own companies). In private limited
\ncompanies, there is always a restriction upon the transfer of shares with
\nthe result that their shares are not quoted on the stock exchange.\n<\/p>\n
Apart from private companies, there may be some public limited companies
\nwhose shares are also not quoted on the stock exchange for one or the other
\nreason. Where the shares are quoted on the stock exchange, it is evident
\nthat their value on the valuation date is the value for the purposes of the
\nAct. In case of unquoted equity shares, a formula, a method, has to be
\ndevised to ascertain their value on the valuation date. Rule 1-D provides
\nfor this situation. It is one of the rules contemplated by the opening
\nwords in sub-section (1) of Section 7.\n<\/p>\n
4.  Let us now analyse the rule to find out what it says. The formula
\nprescribed in the main limb of the Rule is this: take the balance-sheet of
\nthe company; deduct the value of all the liabilities as shown in the
\nbalance-sheet from the value of all the assets shown therein; divide the
\nnet amount so arrived at by the total amount of its paid-up equity share
\ncapital as shown in the balance-sheet; multiply the resultant amount thus
\nobtained by the paid-up value of each equity share; the value so arrived at
\nis the break-up value of each unquoted equity share; 85% of such break-up
\nvalue shall be treated as the market value of the share.\n<\/p>\n
5.  The balance sheet of the company thus constitutes the basis for working
\nthe rule. The rule cannot be worked without the balance sheet. No problem
\nwill arise if the date of the balance sheet and the valuation date
\ncoincide. But this may not always happen. There may be a case where the
\nbalance sheet is prepared on a date earlier than the valuation date of the
\nassessee (shareholder) concerned. This situation is met by Explanation-I.
\nThe Explanation contemplates a situation where the valuation date of the
\nassessee concerned and the date of balance sheet of the company is not the
\nsame. In such a situation, it says, take the balance-sheet drawn up on a
\ndate immediately preceding the valuation date of the assessee In case, both
\nthese balance-sheets are not available, the Rule says, take the balance-
\nsheet drawn up on a date immediately following the valuation date of the
\nassessee.\n<\/p>\n
6. The proviso to the rule deals with the situation where no dividend has
\nbeen paid by the company continuously for not less than three account-ing
\nyears ending on the valuation date of the assessee concerned. Since we are
\nnot concerned with the proviso in these matters, it is not necessary to set
\nout its purport except to say that in the cases contemplated by it, it
\nprovides a still lower percentage of break-up value to be the market value
\nof the share. Depending upon the number of years the dividend is not
\ndeclared, the percentage goes down.\n<\/p>\n
7.   Explanation-II contains two clauses, (i) and (ii). Clause (i) provides
\nthat two types of assets shown in the balance sheet shall not be treated as
\nassets. We are concerned with the first among the two which reads:- “(a)
\nany amount paid as advance tax under section 18A of the Indian Income-tax
\nAct, 1922 (11 of 1922), or under section 210 of the Income-tax Act, 1961.”
\nClause (ii) provides that the several items mentioned therein, which are
\nshown, as liabilities in the balance sheet, shall not be treated as
\nliabilities. We are concerned herein with the liability mentioned under
\nsub-clause (e) which reads: “(e) any amount representing provision for
\ntaxation [other than the amount referred to in clause (i)(a)] to the extent
\nof the excess over the tax payable with reference to the book profits in
\naccordance with the law applicable thereto.” Schedule-VI to the Companies
\nAct prescribes the form in which the balance sheet of a company is to be
\nprepared. It contains four columns. Second column mentions the liabilities
\nand the third column the assets. The advance tax paid by the company under
\nSection 210 of the Income Tax Act is shown as an asset while the amount set
\napart as provision for taxation is shown in the column of liabilities. Now,
\nwhat Explanation does is to direct that the two items mentioned as assets
\nshall not be treated as assets and the six items mentioned as liabilities
\nshall not be treated as liabilities. In other words, it provides for
\nmodification of the balance sheet in certain respects for the purpose of
\nworking the Rule. After the said deletions, the balance sheet becomes the
\nbalance sheet for the purpose of Rule 1-D.\n<\/p>\n
8.  Elaborate arguments have been addressed before us by learned counsel
\nappearing on both sides. Having regard to the contentions urged, the
\nfollowing questions arise for our determination:\n<\/p>\n
(1) Whether it is obligatory to follow Rules 1-D while valuing the unquoted
\nequity shares of companies (other than investment companies and managing
\nagency companies) or is it merely optional? (To borrow the language of the
\nlearned counsel for the assessees, the Rule is not mandatory but
\n‘directory’; while the learned counsel for the Revenue says that the
\nvaluation of an unquoted equity share shall have to be done only in the
\nmanner indicated by the Rule and in no other manner.)<\/p>\n
(2) Whether the valuation officer is bound by Rule 1-D when valuing the
\nunquoted equity shares of the companies?\n<\/p>\n
(3) Whether the application of the break-up method in Rule 1-D means that
\nthe capital gains-tax, which would be payable in case the said shares are
\nsold on the valuation date, is liable to be deducted from the market value
\ndetermined?\n<\/p>\n
(4) Where the date of a balance sheet of the company is earlier to the
\nvaluation date of the assessee, is it obligatory to follow Rule 1-D? (The
\nsame question arises where in the absence of such a balance sheet; the
\nbalance sheet drawn up on a date immediately following the valuation date
\nis taken as the basis).\n<\/p>\n
(5) How are sub-clauses (a) of clause (i) and (e) of clause (ii) of
\nExplanation-II to be read and understood?\n<\/p>\n
(6) whether the assessee holding shares in a company whose assets comprise
\nwholly of Tea Estates is entitled to exclude such shares from his wealth?\n<\/p>\n
9. We shall deal with these questions in their proper order.\n<\/p>\n
QUESTION NO. 1: Whether it is obligatory to follow Rule 1-D while valuing
\nthe unquoted equity shares of companies (other than investment companies
\nand managing agency companies) or is it merely optional?\n<\/p>\n
10. The formula prescribed by Rule 1-D for determining the market value of
\nunquoted equity shares of a company has been set out by us hereinabove. To
\nrepeat, the formula is this: deduct all the liabilities from all the assets
\nshown in the balance-sheet; the net amount so arrived at shall be divided
\nby total amount of the paid-up equity share capital; the amount thus
\narrived at shall be multiplied by the paid-up value of each equity share;
\nthe value so arrived at is called the break-up value of the share and 85%
\nof such break-up value shall be treated as the market value of the share.
\nThis method is, in short, called the ‘break-up method’. The contention of
\nthe learned counsel for the assessees, S\/Sri Debi Pal, M.L. Verma,
\nRamachandran, Harish Salve, G.C. Sharma and P.H. Parekh is this: Section
\n7(1) of the Act contemplates rules being made for determining the market
\nvalue of an asset which means the value which that asset would fetch if
\nsold in the open market on the valuation date. The rule-making authority
\nis-to operates within the confines of Section 7(1). The Rules made by it
\nshould be directed towards ascertaining such market value. Rule 1-D,
\nhowever, does not bring about the said result. It prescribes an arbitrary
\nmethod, the application of which leads to an arbitrary figure unrelated to
\nthe market value of the share on the valuation date. This court has
\nrepeatedly held that the proper and appropriate method for valuing the
\nunquoted equity shares of a going concern is the yield method. The court
\nhas pointed out that the break-up method is not appropriate for the purpose
\nand that this method is adopted in exceptional situations or where the
\ncompany is ripe for winding-up. A method which is appropriate only in the
\ncase of a company ripe for winding-up cannot be treated as a proper or
\nappropriate method for the purpose of valuing the shares of a going
\nconcern. The formula prescribed in Rule 1-D is unrelated to realities. The
\nRule is thus contrary to Section 7(i) and beyond the rule-making authority
\nconferred by the Act. Even if for some reason the Rule is held to be good,
\nit should not be followed in the case of valuation of the unquoted equity
\nshares of a company, which is a going concern. In such cases, the yield
\nmethod alone should be adopted. Only in the case of a company, which is
\nripe for winding-up, its shares must be valued according to the break-up
\nmethod contained in the Rule. In other words, Rule 1-D is not mandatory but
\ndirectory. The majority of the High Courts in the country have taken this
\nview and it should also be accepted by this court.\n<\/p>\n
11.  On the other hand, S\/Sri Gauri Shanker, B.B. Ahuja and Murthy
\nappearing for the Revenue submitted that according to the decisions of this
\nCourt and well-known rules of accountancy followed in this and other
\ncountries, break-up method is one of the recognised methods of valuing the
\nunquoted equity shares. Where more than one method of valuation is
\navailable to the rule-making authority, it is open to it to choose one of
\nthem. Counsel emphasised that Rule 1-D takes the balance sheet of the
\ncompany itself as the basis and arrives at the valuation, which cannot be
\nsaid to be either arbitrary or unrelated to realities. The counsel
\nsubmitted that every authority under the Act is bound to follow and apply
\nthe said Rule whenever they have to value an unquoted equity share.\n<\/p>\n
12.  We may first lake up the question whether Rule 1-D is void for being
\ninconsistent with the Act or for the reason that it is beyond the rule-
\nmaking authority conferred by the Act. Section 7(1) indeed defines the
\nexpression “value of an asset.” It is “the price which in the opinion of
\nthe Wealth Tax Officer it would fetch if sold in the open market on the
\nvaluation date”, but this is made expressly subject to the Rule made in
\nthat behalf. No. guidance is furnished by the Act to the rule-making
\nauthority except to say that the Rule made must lead to ascertainment of
\nthe value of the asset (unquoted equity share) as defined in Section 7. It
\nis thus left to the rule-making authority to prescribe an appropriate
\nmethod for the purpose. Now, there may be several methods of valuing an
\nasset or for that method an unquoted equity share. The rule-making
\nauthority cannot ob-viously prescribe all of them together. It has to
\nchoose one of them, which according to it is more appropriate. The rule-
\nmaking authority has in this case chosen the break-up method, which is
\nundoubtedly one of the recognised methods of valuing unquoted equity
\nshares. Even if it is assumed that there was another method available,
\nwhich was more appropriate, still the method chosen cannot be faulted so
\nlong as the method chosen is one of the recognised methods, though less
\npopular. One probable reason why yield method or dividend method was not
\nadopted in the case of unquoted equity shares was that bulk of these
\ncompanies are private limited companies where the divided declared does not
\nrepresent the correct state of affairs and to estimate the probable yield
\nis no simple exercise. The dividends in these companies is declared to suit
\nthe purposes of the persons controlling the companies. Maintainable profits
\nrather than the dividends declared represent the correct index of the value
\nof their shares. The break-up method based upon the balance sheet of the
\ncompany, incorporated in Rule 1-D, is a fairly simple one. Indeed, no
\nserious objection can also be taken to this course since the basis of the
\nRule is the balance-sheet of the company prepared by the company itself –
\nsubject, of course, to certain modifications provided in Explanation-II.\n<\/p>\n
13. We are not satisfied that the break-up method adopted by Rule 1-D does
\nnot lead to proper determination of the market value of the unquoted
\nshares. The argument to this effect, advanced by the learned counsel for
\nthe assessees, is based upon the assumption\/premise that the value
\ndetermined by applying the yield method is the correct market value. We do
\nnot see any basis for this assumption. No empirical data is placed before
\nus in support of this submission or assumption. It may be more advantageous
\nto the assessees but that is not saying the same thing that it alone
\nrepresents the true market value. It cannot be stated as a principle that
\nonly the method that leads to lesser value is the correct method. The idea
\nis to find out the true market value and not the value more favourable to
\nthe assessee. Accordingly, the contention that rule 1-D is inconsistent
\nwith Section 7(1) or that it travels beyond that purview of Section 7 is
\nrejected.\n<\/p>\n
14. The next argument that Rule 1-D is not mandatory but directory proceeds
\nupon a certain misconception. A provision is said to be directory when the
\nabsence of a strict or literal compliance with it – and in some cases, even
\nnon-compliance with it – may not vitiate the thing done. On the other hand,
\na mandatory provision is one which has to be obeyed in its letter and
\nspirit and anything done without such compliance stands vitiated. The
\ncounsel for the assessees, however, do not understand the said expressions
\nin the above sense. What they really say is that following Rule 1-D should
\nbe optional. According to them, in all cases except in the case of
\ncompanies ripe for winding-up, Rule 1-D ought not to be followed and that
\nonly the yield method should be. This is really substituting a Rule of the
\nchoice of assessees in the place of the Rule made by the rule-making
\nauthority under Section 46 of the Act. If the Rule is good and valid – as
\nwe find it to be, it has to be followed in each and every case. It is not a
\nmatter of choice or option. The rule-making authority has prescribed only
\none method for valuing the unquoted equity shares. If this method were not
\nto be followed, there is no other method prescribed by the Rules. The
\nacceptance of the assessees’ contention would mean that it would be open to
\nthe Wealth Tax Officer to adopt such other method of valuation as he thinks
\nappropriate in the circumstances. This is bound to lead to vesting of
\nuncalled for wide discretion in the hands of Wealth Tax Officer\/valuing
\nauthorities. It would lead to uncertainty and may be arbitrariness in
\npractice. Where there is a Rule prescribing the manner in which a
\nparticular property has to be valued, the authorities under the Act have to
\nfollow it. They cannot devise (heir own ways and means for valuing the
\nassets. It is equally well to remember that Rule 1-D does not treat the
\nbreak-up value as the market value. A deduction of 15% is made in the
\nbreak-up value to arrive at the market value. It is equally relevant to
\nnotice that Rule 1-D uses the expression ‘shall’. Which prima facie
\nindicates its mandatory character.\n<\/p>\n
15.  Two decisions of this court constitute the bed-rock upon which are
\nfounded (the several submission of the learned counsel for the assessees.
\nThey are Commr. of Wealth Tax. Assam v. Mahadeo Jatan & Ors., 86 I.T.R. 621
\nand Commissioner of Gift Tax, Bombay v. Kusumben D. Mahadevia,<\/a> 122 I.T.R.\n<\/p>\n
38. It is, therefore, necessary to examine the ratio of the said decisions
\nto find out whether they do in fact support their contentions.\n<\/p>\n
16. Mahadeo Jalan was concerned with assessment years 1957-58 and 1958-59.
\nRule 1-D was not in force at that time. The assessee owned shares in
\ncertain private limited companies, which had to be valued for determining
\nthe assessee’s wealth. The question referred to the High Court under
\nSection 66(1) of the Indian Income Tax Act. 1922 was: “whether, on the
\nfacts and in the circumstances of the case, the principle of ‘break-up
\nvalue’ adopted by the Income-tax Tribunal as the basis for the valuation of
\nthe shares in question is sustainable in law.” At the relevant time, sub-
\nsection (1) of Section 7 read differently. It provided that “the value of
\nany asset, other than cash, for the purposes of this Act, shall be
\nestimated to be the price which in the opinion of the Wealth Tax Officer it
\nwould fetch if sold in the open market on the valuation date.” The opening
\nwords “subject to any rules made in this behalf were not there. (These
\nwords were added with effect from April 1, 1965.) The question posed by
\nJaganmohan Reddy, J., speaking for the Bench comprising himself and H.R.
\nKhanna, J. was “what is the basis of valuation of shares in private limited
\ncompanies for the purpose of Section 7 of the Wealth Tax Act?” After
\ndiscussing the relevant principles and decisions, the learned Judge
\nenunciated the following principles:\n<\/p>\n
“An examination of the various aspects of valuation of shares in a limited
\ncompany would lead us to the following conclusion:\n<\/p>\n
(1) Where the shares in a public limited company is quoted on the stock
\nexchange and there are dealings in them, the price prevailing on the
\nvaluation date is the value of the shares.\n<\/p>\n
(2) Where the shares are of a public limited company, which are not quoted
\non a stock exchange, or of a private limited company the value is
\ndetermined by reference to the dividends if any, reflecting the profit-
\nearning capacity on a reasonable commercial basis. But, where they do not,
\nthen the amount of yield on that basis will determine the value of the
\nshares. In other words, the profits, which the company has been making and
\nshould be making will ordinarily, determine the value. The dividend and
\nearning method or yield method are not mutually exclusive; both should help
\nin ascertaining the profit earning capacity as indicated above. If the
\nresults of the two methods differ, an intermediate figure may have to be
\ncomputed by adjustment of unreasonable expenses and adopting a reasonable
\nproportion of profits.\n<\/p>\n
(3) In the case of a private limited company also where the expenses are
\nincurred out of all proportion to the commercial venture, they will be
\nadded back to the profits of the company in computing the yield. In such
\ncompanies the restriction on share transfers will also be taken into
\nconsideration as earlier indicated in arriving at a valuation.\n<\/p>\n
(4) Where the dividend yield and earning method break down by reason of the
\ncompany’s inability to earn profit and declare dividends, if the set-back
\nis temporary then it is perhaps possible to take the estimate of the value
\nof the shares before set-back and discount it by a percentage corresponding
\nto the proportionate fall in the price of quoted shares of companies which
\nhave suffered similar reverses.\n<\/p>\n
(5) Where the company is ripe for winding up then the break-up value method
\ndetermines what would be realised by that process.\n<\/p>\n
(6) As in Attorney-General of Ceylon v. Mackie, [1952] 2 All E.R. 775
\n(P.C.) a valuation by reference to the assets would be justified where as
\nin that case the fluctuations of profits and uncertainty of the conditions
\nat the date of the valuation prevented any reasonable estimation of
\nprospective profits and dividends.\n<\/p>\n
In setting out the above principles, we have not tried to lay down any hard
\nand fast rule because ultimately the facts and circumstances of each case,
\nthe nature of business, the prospects of profitability and such other
\nconsiderations will have to be taken into account as will be applicable to
\nthe facts of each case. But, one thing is clear, the market value, unless
\nin exceptional circumstances to which we have referred, cannot be
\ndetermined on the hypothesis that because in a private limited company one
\nholder can bring it into liquidation, it should be valued as on liquidation
\nby the break-up method. The yield method is the generally applicable method
\nwhile the break-up method is the one resorted to in exceptional
\ncircumstances or where the company is ripe for liquidation but nonetheless
\nis one of the methods.”\n<\/p>\n
17.  In Kusumben D. Mahadevia, a Bench comprising P.N. Bhagwati and R.S.
\nPathak, JJ. affirmed the aforesaid principles and added the following
\nobservation:\n<\/p>\n
“Now it is true, as observed by the court, that there cannot be any hard
\nand fast rule in the matter or valuation of shares in a limited company and
\nultimately the valuation must depend upon the facts and circumstances of
\neach case, but that does not mean that there are no well-settled principles
\nof valuation applicable in specific fact-situations and whenever a question
\nof valuation of shares arises, the taxing authority is in an uncharted sea
\nand it has to innovate new methods of valuation according to the facts and
\ncircumstances of each case. The principles of valuation as formulated by
\nthe court are clear and well defined and it is only in deciding which
\nparticular principle must be applied in a given situation at the facts and
\ncircumstances of the case become material. It is significant to note that
\nimmediately after making the above observation the court hastened to make
\nit clear, as if in answer to a possible argument which might be advanced on
\nbehalf of the revenue on the basis of that observation that the yield
\nmethod it the generally applicable method while the break-up method is the
\none resorted to in exceptional circumstances or where the company is ripe
\nfor liquidation.”\n<\/p>\n
18.  Kusumben D. Mahadevia was concerned with the valuation of shares in an
\ninvestment company, which was, of course, a going concern. The valuation of
\nunquoted equity shares in investment companies is governed by a different
\nRule, viz., Rule 1-E – which was later incorporated as Rule 12 in Schedule-
\nIll of the Act.\n<\/p>\n
19. Now, let us examine the principles enunciated in Mahadeo Jalan. The
\ndecision recognises that the break-up method “nonetheless is one of the
\nmethods” of valuation of such shares, though the said method is said to be
\nappropriate in exceptional circumstances or where the company is ripe for
\nliquidation. The normal method in the case of a going concern is stated to
\nbe the dividend method or they yield method. If one reads the proposition
\n(2) enunciated in the decisions carefully, one would immediately recognise
\nthe several practical difficulties. Firstly, it is stated that the
\n“dividends, if any, reflecting the profit-earning capacity on a reasonable
\ncommercial basis” shall be the basis. It is worth pointing out that it is
\nnot the dividends declared that is the basis but the “dividends reflecting
\nthe profit-earning capacity on a reasonable commercial basis.” It is then
\nstated that if the dividends declared do not reflect the profit-earning
\ncapacity on a reasonable commercial basis, one has to adopt the ‘earning
\nmethod’, which is explained as meaning “the profits which the company has
\nbeen making and should be making.” It is then stated that if the results of
\ntwo methods (dividend method and earning method) differ, “an intermediate
\nfigure may have to be computed by adjustment of unreasonable expenses and
\nadopting a reasonable proportion of profits.” One need not emphasise the
\namount of investigation the Wealth Tax Officer has to do in each case – and
\nan assessee may own shares in any number of companies. This is not all.
\nWhere in a private limited company, disproportionate expenses are incurred;
\nsuch disproportionate expenses have to be added back to the profits of the
\ncompany in computing the yield. Again, in a case where dividend and earning
\nmethod break down “by reason of the company’s inability to earn profits and
\ndeclare dividends” and “if the set-back is temporary”, then “it is perhaps
\npossible to take the estimate of the value of the shares before set-back
\nand discount it by a percentage corresponding to the proportionate fall in
\nthe price of quoted shares of companies which have suffered similar
\nreverses.” A very daunting task indeed even for the most efficient and
\nexpert valuer. Propositions (5) and (6) set out in the judgment recognise
\nthat where the company is ripe for winding-up or where the fluctuation of
\nprofits and uncertainty of conditions at the date of valuation prevent a
\nreasonable estimation of prospective profits and dividends, the break-up
\nmethod can be adopted. All the above propositions, it is relevant to point
\nout, are qualified by the statement: “in setting out the above principles,
\nwe have not tried to lay down any hard and fast rule because ultimately the
\nfacts and circumstances of each case, the nature of the business, the
\nprospects of profitability and such other considerations will have to be
\ntaken into account as will be applicable to the facts of each case.”\n<\/p>\n
20. The statement of law in the decision would thus establish that it does
\nnot purport to “lay down any hard and fast rule.” It recognises that
\nvarious factors in each case will have to be taken into account to
\ndetermine the method of valuation to be applied in that case. The dividend
\nyield method is not the only method indicated in the case of a going
\nconcern; there is the ‘earning method’ and then a combination of both
\nmethods. The several qualifications added to the above rules, as already
\nstated, make them highly cumbersome and time-consuming. The Wealth Tax
\nOfficer has to examine the facts and circumstances of each case including
\nthe nature of the business, prospects of profitability and similar other
\nconsiderations before finally determining whether to apply the dividend
\nmethod, yield method or whether the break-up method should be followed.
\nThere may be cases where an assessee may be holding shares of a large
\nnumber of private companies or other public limited companies whose shares
\nare not quoted. Compared to them, the break-up method incorporated in Rule
\n1-D is far simpler and far less time-consuming. It prescribes a simple
\nuniform method to be followed in all cases. All that the Wealth Tax Officer
\nhas to do is to take the balance sheet, delete some items from the columns
\nrelating to assets and liabilities as directed by Explanation-II, and then
\napply the formula contained in the Rule. He need not have to look into the
\nprofitability, the earning capacity and the various other factors mentioned
\nin propositions (2), (3) and (4) of the decision. The decision, it bears
\nrepetition, recognises that break-up method ”nonetheless is one of the
\nmethods.” In the circumstances, it is difficult to agree with the learned
\ncounsel for the assessees either that break-up method is not a recognised
\nmethod or that yield method is the only permissible method for valuing the
\nunquoted equity shares. It is not as if the rule-making authority has
\nadopted a method unknown in the relevant circles or has devised an
\nimpermissible method. There is no empirical data produced before us to show
\nthat break-up method does not lead to the determination of market value of
\nthe shares. Merely because yield method may be more advantageous from the
\nassessee’s point of view, it does not follow that it alone leads to the
\nascertainment of true market value and that all other methods are erroneous
\nor misleading. This aspect we have emphasised hereinbefore too.\n<\/p>\n
21.  The decision in Kusumben D. Mahadevia does no more than reiterate the
\nprinciples and observations in Mahadeo Jalan.\n<\/p>\n
22.  Dr. Gauri Shanker brought to our notice a brochure entitled
\n“Guidelines for valuation of equity shares of companies and the business
\nand net assets of branches”, issued by the Ministry of Finance, Department
\nof Economic Affairs, Investment Division (vide F.  No.  S.l l   (21)
\nC.C.I.(11)\/90 dated July 13, 1990, published in (1990) 60 Company Case
\n(St.) 121] . The said guidelines are stated to be applicable to the
\nvaluation of inter alia equity shares of companies, private and public
\nlimited. Para (5) in Part-II says that the object of the valuation process
\nis to make a best reasonable judgment of the value of the equity shares of
\na company, referred to in the said guidelines as ‘fair value’. For
\ndetermining the fair value, three methods are devised, viz., (1) net asset
\nvalue method; (2) profit earning capacity value method; and (3) market
\nvalue method in the case of listed shares. Para (6) shows that what is
\nreferred to, as net asset value is roughly the break-up method incorporated
\nin Rule. 1-D. The relevance of these guidelines lies in the fact that they
\ndo indicate and reaffirm that break-up method is one of the recognised
\nmethods of valuing equity shares.\n<\/p>\n
23. Sri ML. Verma placed strong reliance upon the decisions of this Court
\nin Commissioner of Gift-Tax v. Executors & Trustees of the Estate of Late
\nSh. Ambalal Sarabhai,<\/a> 170 I.T.R. 144 in support of his contention. The
\nquestion in the said case related to valuation of certain shares, which
\nwere the subject matter of a gift. The shares were of a company
\nincorporated in the United Kingdom, which was analogous to a private
\ncompany in India. The assessee contended that the shares must be valued
\napplying the break-up method taking the average of the balance sheets dated
\nMarch 31, 1963 and March 31, 1964. The Gift Tax Officer adopted the break-
\nup method but only on the basis of the balance sheet as on March 31, 1964.
\nWhen the matter reached the High Court, it opined that the Gift Tax Officer
\nought to have taken the balance sheet as on March 31, 1963 and not as on
\nMarch 31, 1964. Before this Court, however, the Revenue contended, on the
\nbasis of Mahadeo Jalan and Kusumben D. Mahadevia, that the correct method
\nwas to adopt the yield method and not the break-up method. While upholding
\nthe contention of the Revenue, the Court refused to interfere in the matter
\nhaving regard to the numbers of years that have elapsed since the
\ncontroversy arose and also because the amount involved was very small.
\nFirstly, it may be seen that the matter had arisen under the Gift Tax Act
\nand Rule 1-D did not in terms apply to it. The shares were of a British
\nCompany, which was analogous to a private limited company in India. Upto
\nthe stage of High Court, both the Revenue and the assessee were ad aidem in
\napplying the break-up method. The only question was which balance sheet was
\nrequired to be taken as the basis? In this Court, however, the Revenue
\nshifted its stand and wanted the yield method to be applied, which
\ncontention was upheld following the aforesaid two decisions. This decision
\ndoes not, therefore, lay down any different propositions than those
\nenunciated in Mahadeo Jalan and Kusumben D. Mahadevia. Incidently, this
\ncase establishes that in case of some companies, break-up method is more
\nadvantageous to the assessees than the yield method. In other words, it is
\nnot always that yield method is more advantageous to the assessees.\n<\/p>\n
24.  Dr. Gauri Shankar submitted that in as much as Section 46 provides for
\nthe Rules being laid before both the Houses of Parliament for the specified
\nperiod, it must be deemed that the Parliament has approved these Rules. The
\nconsequence, according to the learned counsel, is that the Rules have
\nacquired a higher status – almost as good as that of the statute itself. It
\nis not possible to agree. The requirement of laying before that House is
\none form of parliamentary control. But by that means, the Rules do not
\nacquire the status of the statute made by Parliament. Indeed, the Rules are
\neffective as soon as they are made and published. The Parliament is, no
\ndoubt, entitled to modify the said Rules in such manner as it thinks
\nappropriate or even annul them. But it does not mean that the Rules become
\neffective only after the expiry of the period for which they are to be laid
\nbefore the Parliament. Section 46(4) expressly provides that any such
\nmodification or annulment of Rules by Parliament “shall be without
\nprejudice to the validity of anything previously done under that rule.” To
\nreiterate, the Rules even after they are laid before both Houses of
\nParliament for the specified period, yet continue to be delegated
\nlegislation. All that may be said is that the Parliament did not find any
\njustification to amend or modify the Rules and nothing more.\n<\/p>\n
25.  It is brought to our notice that a good number of High Courts have
\ntaken the view now espoused by the assessees and that only the Allahabad
\nHigh Court has taken the contrary view. Inasmuch as the decisions of the
\nHigh Courts upholding the assessees’ contention are based mainly upon the
\ndecisions of this Court in Mahadeo Jalan and Kusumben D. Mahadevia – which
\ndecisions we have already dealt with – we do not think it necessary to
\nexamine the reasoning of the High Courts separately. Sri M.L. Verma
\nparticularly emphasised the observation in Dr. D. Renuka v. Commissioner of
\nWealth-Tax 175 I.T.R. 615, a decision of Andhra Pradesh High Court
\n(rendered by a Bench comprising one of us, Jeevan Reddy, J.) holding that
\nthe break-up method brings about a situation unrelatable to realities and
\nunjust to the assessees in general. It must be stated that the said
\nobservations were influenced by the views of the majority of the High
\nCourts and also because the Bench did not have the benefit of an in-depth
\ndebate, as has taken place now in this Court. Indeed, the decision of this
\nCourt in Executors of Ambalal Sarabhai indicates that ‘break-up’ method is
\nnot always advantageous to the Revenue nor is the ‘yield method’ always
\nadvantageous to the assessees.\n<\/p>\n
26. For all the above reasons, we hold that Rule 1-D is not ineffective or
\ninvalid for any of the reasons suggested by the learned counsel for the
\nassessees nor can it be said that the Wealth Tax Officer has an option to
\nfollow or not to follow the said Rule. He has to follow and apply the said
\nRule in each and every case where he has to value the unquoted equity
\nshares of a company. The contention of the assessees that it is merely
\ndirectory and that it need not be followed at the choice of the Wealth Tax
\nOfficer or the assessee, or in the case of a going concern, cannot be
\naccepted.\n<\/p>\n
Question No. 2:- Whether the valuation officer is bound by Rule 1-D when
\nvaluing the unquoted equity shares of the companies?\n<\/p>\n
27.  Ordinarily, it is for the Wealth Tax Officer to value the assets of an
\nassessee, whatever be their nature. Section 7(1) says so. Sub-section (3)
\nof Section 7, however, says that “(Notwithstanding anything contained in
\nsub-section (1) where the valuation of any asset is referred by the Wealth
\nTax Officer to the Valuation Officer under Section 16A, the value of such
\nasset shall be estimated to be the price which in the opinion of the
\nValuation Officer it would fetch if sold in the open market on the
\nvaluation date………..” Sub-section (1) of Section 16A prescribes the
\nsituations in which the Wealth Tax Officer may refer the valuation of any
\nasset to the valuation officer. Sub-sections (2) to (4) prescribe the
\nprocedure to be followed by the valuation officer on such reference. In
\nshort, he has to give notice to the assessee, receive the evidence produced
\nby him, make appropriate enquiry and then send his report under sub-
\nsection (5) to the Wealth Tax Officer. Sub-section (6) says that “on
\nreceipt of the order under sub-section (3)* or sub-section (5) from the
\nvaluation officer, the Wealth Tax Officer shall, so far as the valuation of
\nthe asset in question is concerned, proceed to complete of the assessment
\nin conformity with the estimate of the Valuation Officer.”  In other words,
\nthe order or the valuation made by the valuation officer, as the case may
\nbe, is binding on the Wealth Tax Officer.\n<\/p>\n
* Sub-Section (3) says that on reference from Wealth Tax Officer, if the
\nvaluation officer is of the opinion that the asset has been correctly
\nvalued in the return filed by the assessee. he shall pass an order to that
\neffect and send it to the Wealth Tax Officer.\n<\/p>\n
28. The contention of the learned counsel for the assessees is that the
\nvaluation officer is not bound by and is not obliged to observe Rule 1-D.
\nIt is submitted that the valuation officer has to determine the market
\nvalue of the asset referred to him independently and applying such method
\nas appears appropriate to him in the circumstances. His only object is to
\ndetermine the correct market value. The contention is mainly based upon the
\nnon-obstante clause found at the inception of sub-section (3) of Section 7.
\nIt is argued that the non-obstante clause – “notwithstanding anything
\ncontained in sub-section (1)” – indicates clearly that the valuation
\nofficer is not bound by the rules referred to in and by sub-section (1) of
\nSection 7. We find it difficult to agree. Valuation Officer is a creature
\nof the statute. He is, therefore, bound by the provisions of the statute
\nand the Rules made thereunder unless there is something either in the Act
\nor in the rules to indicate otherwise. The question is whether the said
\nnon-obstante clause has that effect. The scope and purport of the said non-
\nobstante clause has to be ascertained by reading it in the context of the
\nprovisions contained in Section 7 and consistent with the scheme of the
\nenactment. If so read, it only means this: Ordinarily it is for the Wealth
\nTax Officer to estimate the price which in his opinion an asset would fetch
\nif sold in the open market on the valuation date but where the Wealth Tax
\nOfficer refers the question of valuation of an asset to the valuation
\nofficer under Section 16-A, it is for the valuation officer to make the
\nsaid estimate which estimate shall be binding upon the Wealth Tax Officer
\nas provided in sub-section (5) of Section 16-A. Thus, in a case referred to
\nvaluing officer, the estimate is made by the valuing officer instead of
\nWealth Tax Officer. This is the limited function and purpose of the said
\nnon-obstante clause “notwithstanding anything contained in sub-section (1)”
\nin Section 7(3). It may be noticed that the relevant language of sub-
\nsection (1) and sub-section (3) is identical, viz., “shall be estimated to
\nbe the price which, in the opinion of the Wealth Tax Officer, it would
\nfetch if sold in the open market on the valuation date.” It would be rather
\nodd to say that these words when used in sub-section (1) mean something
\ndifferent from what they mean in sub-section (3) – asset is the same,
\nobject (to find the market value) is the same, proceedings are one and the
\nsame and yet it is suggested that the method of valuation would differ from
\nWealth Tax Officer to valuation officer! If the intention of the Parliament
\nwas to say that the valuation officer is not bound by the Rules made under
\nSection 46 governing the valuation of assets, it would have said so
\nclearly. If a creature of the statute was sought to be elevated to a status
\nabove the Rules – an unusual thing to do – one would expect the Parliament
\nto say so in clear and unambiguous words. Section 16-A, which provides for
\nthe reference to, enquiry by the order to be passed by the valuing officer
\ngives no indication whatsoever that the valuation officer is not bound by
\nthe Rules made under the Act. The Rules provide for the method of valuing
\nlife interest (1B), house property (1BB), unquoted preference shares (1C),
\nunquoted equity shares (1D), quoted equity and preference shares (1F),
\njewellery (1G), interest in partnership\/association of persons (2) and
\nassets of industrial undertakings (2H) and so on and so forth. The Rules
\nalso provide for certain assets and certain liabilities shown in the
\nbalance sheet to be ignored while valuing the net value of assets of a
\nbusiness as a whole under Rule 2-A. It is difficult to believe that none of
\nthese Rules govern the valuation by the valuation officer. The problem is
\nthat the learned counsel for the assessees tend to assume that valuation
\nofficers are meant only for valuing unquoted equity shares forgetting for a
\nmoment that they are meant for valuing all kinds of assets and that many of
\nthe assets present inherent difficulties in valuing them, e.g., jewellery,
\npieces of art, antiques, industrial undertakings and businesses as a whole
\nand so on.\n<\/p>\n
29. There is yet another reason why the assessees’ contention cannot be
\naccepted. Sub-section (6) of Section 16-A makes the opinion of valuation
\nofficer binding upon the Wealth Tax Officer but not upon the appellate
\nauthorities. Indeed, sub-section (3-A) of Section 23 (which provides for
\nappeal from the orders of Wealth Tax Officer to the Appellate Assistant
\nCommissioner) indicates clearly that the A.A.C. can depart from the
\nvaluation officer’s valuation. It reads:\n<\/p>\n
“(3A) If the valuation of any asset is objected to in an appeal under
\nclause (1) of sub-section (1) or of sub-section (1A), the Appellate
\nAssistant Commissioner or, as the case may be, the Commissioner (Appeals)
\nshall,–\n<\/p>\n
(a)  in a case where such valuation has been made by a Valuation Officer
\nunder section 16A, give such Valuation Officer an opportunity of being
\nheard;\n<\/p>\n
(b)  in any other case, on a request being made in this behalf by the
\nWealth-tax Officer, give an opportunity of being heard to any Valuation
\nOfficer nominated for the purpose by the Wealth-tax Officer.”\n<\/p>\n
30. Now, it is not argued that the Appellate Assistant Commissioner is not
\nbound by the Rules while valuing the assets. If he is so bound, does it not
\nmean that he will necessarily have to set aside the valuation made by
\nvaluation officer if it is not in accordance with the Rules and value the
\nasset himself in accordance with the Rules? Section 24, which provides for
\nappeal to the Appellate Tribunal, too contains an identical provision [vide
\nthe proviso to sub-section (5)]. Again it is not suggested that the
\nAppellate Tribunal is not bound by the Rules. It is rather odd to say that
\neverybody else is bound by the Rules but not the valuation officer, though
\nhis valuation is subject to appeal to the very authorities who are bound by
\nthe Rules. Conversely, it cannot be suggested that nobody except the Wealth
\nTax Officer is bound by the Rules. This would be a ridiculous suggestion,
\nif made. All this only means that there can be only one uniform method of
\nvaluation of assets under the Act – and not to or more. This would be so
\nwhether reference to valuation officer is obligatory – as contended on the
\nbasis of a Board circular – or otherwise.\n<\/p>\n
31.  We are, therefore, of the opinion that the valuation officer is
\nequally bound by Rule 1-D – as indeed he is bound by all the other Rules
\nmade under the Act. This is the view taken by the Allahabad High Court in
\nCommissioner of Wealth-Tax V. Smt. Pushpawati Devi Singhania, 188 I.T.R.\n<\/p>\n
364. The contrary view taken by the Delhi High Court in Sharbati Devi
\nJhalani v. Commissioner of Wealth-Tax, 159 I.T.R. 549 and other High
\nCourts, if any, is overruled.\n<\/p>\n
32.  Question No. 3:- Whether the application of the ‘break-up method’ in
\nRule 1-D means that the capital gains-tax, which would be payable in case
\nthe said shares are sold on the valuation date, is liable to be deducted
\nfrom the market value determined?\n<\/p>\n
33.  The contention of the learned counsel, in this behalf, is rather
\ninvolved if not obscure. The argument runs thus: Section 7(1) says that the
\nvalue of an asset shall be the price which such asset would fetch if sold
\nin the open market on the valuation date. In other words, the sub-section
\ncreates a fiction of sale of such asset on the valuation date for the
\npurpose of determining its market value. Once a fiction is created, it must
\nbe carried to its logical extent and the court should not allow its
\nimagination to be boggled by any other considerations. If an asset is sold,
\nit would be subject to capital gains tax. For finding out the net wealth
\nreceived in the hands of assessee, one must necessarily deduct the capital
\ngains tax. Then alone one can arrive at the net price, which the assessee
\nwill receive – and that should be the market value. We must say that the
\nentire argument is misplaced. There is no sale of the asset and there is no
\nquestion of capital gains tax being attracted or being paid. For the
\npurpose of determining the market value, the sub-section says that the
\nWealth Tax Officer shall make an estimate of the price, which the asset
\nwould fetch if sold in the open market on the valuation date. The sub-
\nsection speaks of the market value of the asset and not the net income or
\nthe net price received by the assessee. This is not a case where a fiction
\nis created by the Parliament. It is only a case of prescribing the basis of
\ndetermination of market value. On the same reasoning, it must be held that
\nno other amounts like provision for taxation, provident fund and gratuity
\netc. can be deducted. The contention of the’ learned counsel for the
\nassessees is, therefore, wholly unacceptable.\n<\/p>\n
Question No. 4:- Where the date of a balance sheet of the company is
\nearlier to the valuation date of the assessee, is it obligatory to follow
\nRule 1-D? (The same question arises where in the absence of such a balance
\nsheet; the balance-sheet drawn up on a date immediately following the
\nvaluation date is taken as the basis).\n<\/p>\n
34. The ‘break-up method’ contained in Rule 1-D takes the balance sheet of
\nthe company as the basis for working the Rule. The said Rule cannot be
\nworked in the absence of the balance sheet. But there may be cases where
\nthe date of balance sheet and valuation date of the assessee does not
\ncoincide. It is to meet such a situation that Explanation-I is provided in
\nRule 1-D. The Explanation says that where the date on which the balance
\nsheet is drawn does not coincide with the valuation date of the assessee,
\n“the balance sheet drawn up on a date immediately preceding the valuation
\ndate” shall be adopted as the basis for working the rule. Yet another
\nsituation contemplated by the Explanation is where both the above
\nsituations are absent, “the balance sheet drawn up on a date immediately
\nafter the valuation date” shall be adopted as the basis. Now, one would
\nthink that this was the most reasonable thing to do in the circumstances
\nbut the contention of the learned counsel for the assessees runs thus: the
\nasset of an assessee has to be valued as on the valuation date and not with
\nreference to any other date; if the balance-sheet is drawn up with
\nreference to a date anterior to the valuation date, it cannot be said that
\nsuch balance-sheet reflects the position obtaining on the valuation date;
\nmany things may happen between the date of balance sheet and the valuation
\ndate; the value of the shares may go down; the company may be closed or any
\nother untoward development may depreciate the value of the shares; this
\ndifficulty would be more pronounced if the balance-sheet drawn up on a date
\nimmediately preceding the valuation date is taken irrespective of how many
\nyears before it may have been prepared. In our opinion, the submission has
\nno substance. Once the basis of working the rule is the balance sheet, one
\nmust necessarily have the balance sheet. Without a balance sheet the Rule
\ncannot be worked. It is for this reason that the Explanation-I says what it
\ndoes. Normally one would expect every company to prepare its balance sheet
\non the due date. Sometimes, there may be a default on the part of the
\ncompany in preparing its balance sheet on time. But on the basis of such
\nexceptional circumstances, the Rule cannot be faulted. Indeed the
\nExplanation also provides that in the absence of both the said situations,
\nthe balance sheet drawn up on a date immediately after the valuation date
\nshall be adopted. One must remember that we are dealing with a taxing
\nstatute and that in tax legislation, legislature must be provided a greater
\nlatitude and greater play in the joints. This aspect has been eludicated
\nand explained in the decision of a Constitution Bench in R.K. Garg v. Union
\nof India, 1981 A.I.R. 2138 and deserves to be quoted in full:\n<\/p>\n
“Another rule of equal importance is that laws relating to economic
\nactivities should be viewed with greater latitude than laws touching civil
\nrights such as freedom of speech, religion etc. It has been said by no less
\na person than Holmes. J., that the legislature should be allowed some play
\nin the joints, because it has to deal with complex problems which do not
\nadmit of solution through any doctrinaire or straight jacket formula and
\nthis is particularly true in case of legislation dealing with economic
\nmatters, where, having regard to the nature of the problems required to be
\ndealt with, greater play in the joints has to be allowed to the
\nlegislature. The Court should feel more inclined to give judicial deference
\nto legislative judgment in the field of economic regulation than in other
\nareas where fundamental human rights are involved. Nowhere has this
\nadmonition been more felicitously expressed than in Morey v. Doud,* [1957]
\n354 US 457 where Frankfurter, J. said in has inimitable style:\n<\/p>\n
“In the utilities, tax and economic regulation case, there are good reasons
\nfor judicial self-restraint if not judicial deference to legislative
\njudgment. The legislature after all has the affirmative responsibility. The
\nCourts have only the power to destroy, not to reconstruct. When these are
\nadded to the complexity of economic regulation, the uncertainty, the
\nliability to error, the bewildering conflict of the experts, and the number
\nof times the judges have been overruled by events, self-limitation can be
\nseen to be the path to judicial wisdom and institutional prestige and
\nstability.”\n<\/p>\n
The Court must always remember that “legislation is directed to practical
\nproblems, that the economic mechanism is highly sensitive and complex, that
\nmany problems are singular and contingent, that laws are not abstract
\npropositions and do not relate to abstract units and are not to be measured
\nby abstract symmetry” that exact wisdom and nice adaption of remedy are not
\nalways possible and That “judgment is largely a prophecy based on meagre
\nand uninterrupted experience.” Every legislation particularly in economic
\nmatters is essentially empiric and it is based on experimentation or what
\none may call trial and error method and therefore it cannot provide for all
\npossible situations or anticipate all possible abuses. There may be
\ncrudities and inequities in complicated experimental economic legislation
\nbut on that account alone it cannot be struck down as invalid. The Courts
\ncannot, as pointed out by the United States Supreme Court in Secy, of
\nAgriculture v. Central Roig. Refining Co., (1950) 94 L ed 381, be converted
\ninto tribunals for relief from such crudities and inequities. There may
\neven be possibilities of abuse, but that too cannot of itself be a ground
\nfor invalidating the Legislation, because it is not possible for any
\nlegislature to anticipate as if by some divine prescience, distortions and
\nabuses of its legislation which may be made by those subject to its
\nprovisions and to provide against such distortions and abuses. Indeed,
\nhowsoever great may be the care be-stowed on its framing, it is difficult
\nto conceive of a legislation which is not capable of being abused by
\nperverted human ingenuity. The Court must therefore adjudge the
\nconstitutionality of such legislation by the generality of its provisions
\nand not by its crudities or inequities or by the possibilities of abuse of
\nany of its provisions. If any crudities, inequities or the possibilities of
\nabuse come to light the legislature can always step in and enact suitable
\namendatory legislation. That is the essence of pragmatice approach which
\nmust guide and inspire the legislature in dealing with complex economic
\nissues.”\n<\/p>\n
(emphasis added)<\/p>\n
* It is true that Morey v. Doud, was overruled later by the United States
\nSupreme Court in New Orleans v. Duke, [1976] 427 U.S. 297, but the said
\nfact does not detract from the validity of the rule stated in Morey v.
\nDoud, nor does it in any manner affect the principle stated by this Court.\n<\/p>\n
35.  The above statement of law of the Constitution Bench makes it clear
\nthat the mere fact that some crudities and inequities result as a result of
\ncomplicated experimental economic legislation, the legislation cannot be
\nstruck down on that ground alone and that the courts cannot be converted
\ninto tribunals for relief from such crudities and inequities. The court
\nmust adjudge the constitutionality of legislation by the generality of its
\nprovisions and not by its crudities and inequities. Ordinarily speaking,
\nthe gap, if any, between the valuation date and the date of the balance
\nsheet would not be too long. It would a few months. True it is that there
\nmay be some fluctuation in the fortunes of the company within that period.
\nPrecisely for this reason, the market value adopted by Rule 1-D is not the
\nbreak-up value as such but only 85 per cent of it. Moreover, there is no
\nreason to presume that the fluctuation, if any, would be only one way,
\ni.e., to the prejudice of the assessee. The fluctuation may also be the
\nother way, i.e., to the benefit of the assessee, in which case the Revenue
\nwill stand to lose its legitimate revenue. But all this is no ground for
\nholding either that Explanation-I is inconsistent with Section 7(1) or that
\nRule 1-D should not be followed unless the valuation date and the date of
\nbalance sheet is identical. Saying so would be putting too restrictive an
\ninterpretation upon a taxation provision and would be contrary to the
\nspirit of the statement of law in R.K. Garg.\n<\/p>\n
36. Strong reliance is placed by the learned counsel for the assessees upon
\nthe decision of the Delhi High Court in Sharbati Devi Jhalani, which is
\nindeed the subject matter of appeal before us, viz., Civil Appeal
\nNos.1591-96 of 1991. The first proposition affirmed by the High Court is:
\n“when the Act enjoins the determination of the net wealth of an assessee on
\nthe valuation date, by a rule a different date cannot be fixed ……(and
\nthat)…….If Rule 1-D provides such an outcome then it may have to be
\nheld that it is contrary to the Section 3 of the Act.” The Court, however,
\ndid not declare the Rule void but held that the rule is merely directory
\nand not mandatory in cases where the valuation date and the date of the
\nbalance sheet do not coincide. We are afraid, we cannot agree with this
\nreasoning. It must be remembered that what is sought to be valued is an
\nunquoted equity shares. Since it is not quoted on the stock exchange and
\nthere are no dealings in those shares, some formula has to be evolved for
\ndetermining its value. So long as the formula evolved is reasonable having
\nregard to available circumstances and practicable considerations, the
\nformula cannot be faulted. No formula can be evolved to fit all conceivable
\nsituations. Even if the dividend method is adopted, the said problem would
\nstill be present. The dividend may have been declared on a date different
\nfrom the valuation date.\n<\/p>\n
37.  For all the above reasons, it is not possible to agree that merely
\nbecause the valuation date and the date of balance sheet are not the same,
\nRule 1-D need not be followed.\n<\/p>\n
38.  Question No. 5:- How are sub-clause (a) of clause (i) and sub-clause\n<\/p>\n
(e) of clause (ii) of Explanation-II to be read and understood?\n<\/p>\n
39.   Explanation-II in Rule 1-D contains two clauses. Clause (i) provides
\nthat two items shown as assets in the balance sheet shall not be treated as
\nassets for the purpose of Rule l-D. Similarly, clause (ii) says that six
\nitems shown, as liabilities in the balance sheet shall not be treated as
\nliabilities for the purpose of Rule 1-D. In other words, the balance sheet
\nof the company with the aforesaid modifications shall be the basis for
\nworking the rule. Schedule-VI to the Companies Act, as already stated,
\nprescribes the form in which the balance sheet of a company has to be
\nprepared. Of the four columns provided therein, columns (2) and (3) relate
\nto liabilities and assets. The advance tax paid under Section 210 of the
\nIncome-tax Act, though already paid, is shown as an asset as required by
\nSchedule-VI. Clause (i)(a) of Explanation-II, however, says that it shall
\nnot be treated as an asset. To this extent, it is in favour of the assessee
\nbecause the assets as shown in the balance sheet will stand reduced to that
\nextent. Now, Clause (ii)(e) says that in case the balance sheet specifies
\nany amount as ‘provision for taxation’ in the column of liabilities, the
\nWealth Tax Officer shall treat only that amount as a liability, which is
\nequal to the tax payable with reference to the Book profits. Any excess
\nover the said amount shall not be treated as a liability. Sub-clause (e) of
\nClause (ii) while referring to the “amount representing provision for
\ntaxation” qualifies the said words by the words following, viz., “other
\nthan the amount referred to in clause (i)(a)”. This is, as it ought to be.
\nThe amount referred to in clause (i)(a) is shown in the balance sheet as an
\nasset whereas clause (ii)(e) is speaking of an amount shown as a liability
\nin the balance sheet. Now no company would show the amount of advance tax
\npaid, which is shown as an asset in the column relating to assets,
\nsimultaneously as a liability in the column of liabilities. The same amount
\ncannot be shown both as an asset as well as a liability. No auditor would
\nbe a party to the preparation of such a balance sheet. Ordinarily,
\ntherefore, there will be no occasion for the Wealth Tax Officer to rely
\nupon the said words “other than the amount referred to in clause (i)(a)”.
\nHowever, if in the case of the balance-sheet of any company, the said
\namount of advance tax paid is also shown as a liability, i.e., if the said
\namount is included in the amount set apart as provisions towards taxation,
\nit would obviously have to be deleted from the column of liabilities – and
\nthis is also what the aforesaid words in clause (ii)(e) say. Clause (ii)(e)
\nis in a sense complimentary to clause (i)(a). Truly speaking, the advance
\ntax paid is not really an asset but the proforma of balance sheet in
\nSchedule-VI to the Companies Act requires it to be shown as such. What
\nclause (i)(a) does is to remove the said amount from the list of assets for
\nthe purpose of Rule 1-D. It is then that clause (ii)(e), which speaks of
\nliabilities, says that only that amount which is still remaining to be paid
\nshall only be treated as a liability on the valuation date. If in the
\nprovision for taxation made in the column of liabilities in the balance
\nsheet, the amount of advance tax already paid is again shown as a
\nliability, it will not be treated as a liability. It must be remembered
\nthat the advance tax has already gone out of the profits and debited in the
\naccount books of the company. This is the true function of both the sub-
\nclauses. The situation is best explained by giving an illustration. Take a
\ncase where a company has paid eight lacs by way of advance tax, which is
\nshown as an asset in the balance sheet. The company has made a provision of
\nfifteen lacs for taxation, which is shown as a liability in the balance
\nsheet. The Wealth Tax Officer estimates the tax payable on the basis of
\nBook profits at ten lacs. What he is asked to do by clause (ii)(e) is not
\nto treat the excess five lacs as a liability. The tax liability as arrived
\nat by him is only ten lacs, but inasmuch as eight lacs has already been
\npaid and only two lacs remains payable, the said two lacs alone will be
\ntreated as a liability on the valuation date. It must be remembered that
\neight lacs already paid is deleted from the ‘assets’ shown in the balance-
\nsheet. What is shown as an asset cannot at the same time be shown as a
\nliability. This does not mean that tax liability is treated by Wealth Tax
\nOfficer only as two lacs. It is ten lacs. Eight lacs has already gone out
\nof the profits and debited in the books of the company. By reading Clause\n<\/p>\n
(i)(a) and Clause (ii)(e) together, the assessee will be getting the
\nbenefit of entire ten lacs but so far as the balance-sheet for the purpose
\nof Rule 1-D is concerned, only two lacs will be treated as a liability on
\nthe valuation date since that is the actual amount still out-standing. We
\ndo not think that if the aforesaid clauses are understood as explained
\nherein, there is any prejudice to the assessees or to the Revenue. It
\nindeed reflects the true situation. It is brought to our notice that the
\nAndhra Pradesh High Court has taken a similar view in Commissioner of
\nIncome Tax v. M. Lakshmaiah & Anr. 174 I.T.R. 4 and that similar view has
\nalso been taken by the Karnataka High Court in Commissioner of Wealth Tax
\nv. N. Krishnan, 162 I.T.R. 309 and Punjab & Haryana High Court in Ashok
\nKumar Oswal (Minor) v. Commissioner of Wealth Tax, Patiala, 148 I.T.R. 620.
\nOn the other hand, Gujarat High Court in Com-missioner of Wealth Tax,
\nGujarat-I v. Ashok K. Parikh, 129 I.T.R. 46 has taken a different view
\nwhich has been adopted by some other High Courts. It is enough to indicate
\nthat if the said sub-clauses are understood in the manner indicated and
\nclarified by us, the counsel for the assessees agree that they have no
\ngrievance. In this view of the matter, we do not think necessary to deal
\nwith the opposing views of the High Courts at any length.\n<\/p>\n
Question No. 6:- Whether the assessee holding shares in a company whose
\nassets comprise wholly of Tea Estates is entitled to exclude such shares
\nfrom his assets’?\n<\/p>\n
40. Sri N.K. Poddar appearing for the petitioner in S.L.P.(C) No. 14869 of
\n1991 raised the above question. The assessment year concerned is 1983-84.
\nHis contention is that the company, shares whereof were held by the
\nassessee on the relevant valuation date, is a company whose assets
\ncomprised wholly of agricultural land. He submitted that though the
\nagricultural land was included in the definition of assets on and from
\nApril 1, 1970, they were excluded from the purview of assets by the two
\nprovisos (Provisos 1 & 2) appended to the definition of “assets” by the
\nFinance Act, 1980 with effect from April 1, 1981 and Finance Act, 1982 with
\neffect from April 1,1983 respectively. So far as the assessee in this
\nS.L.P. is concerned, he falls under the 2nd proviso, which means that
\nagricultural land including the land comprised in any tea plantation shall
\nnot be included in the “assets” of the company as defined in Section 2(e).
\nIn our opinion, the contention has no substance. Wealth being assessed is
\nthat of the shareholder and not of the company. The company may own
\nagricultural assets and if company were to be liable to wealth tax, the
\nsaid assets may be excludible in its hands. But that has no relevance to
\nthe case of a shareholder. The shareholder does not own and cannot claim
\nany portion of the property held by the company of which he is a
\nshareholder. The company is an independent juristic entity. This aspect has
\nbeen put beyond any doubt by the decision of this Court in Bacha F. Guzdar
\nv. Commissioner of Income-Tax,<\/a> [1955] 1 S.C.R. 876. It is held therein that
\neven though a Tea company growing and manufacturing Tea gets an exemption
\nof 60% of the profits as agricultural income in accordance with Rule 24
\nframed under Section 59 of the Indian Income Tax Act, 1922 the dividend
\nincome received by the shareholder of such company is not “agricultural
\nincome” within the meaning of Section 1 of the said Act, nor is it exempt
\nfrom Income Tax under Section 4(3)(viii) of the Act. It was held further
\nthat the dividend of shareholder is the outcome of his right to participate
\nin the profits of the company arising out of the contractual relation
\nbetween the company and the shareholder and that the shareholder does not
\nacquire any interest in the assets of the company till after the company is
\nwound up. The position of a shareholder of a company, it was explained, is
\naltogether different from that of a partner of a firm. In our opinion, the
\nsaid decision of the Constitution Bench fully answers the said question.
\nAccordingly, Sri Poddar’s contention is rejected.\n<\/p>\n
41. In view of our opinion that valuation officer is also bound by the
\nRules under the Act, the question of any conflict between Rule 1-D and sub-
\nsection (6) of Section 24 cannot and does not arise. This aspect has been
\ndealt with by the Allahabad High Court in Smt. Pushpawati Devi Singhania.
\nWe agree with it.\n<\/p>\n
42.  We summarise our conclusions thus:\n<\/p>\n
(1) Rule 1-D is perfectly valid and effective. The Rule has to be followed
\nin every case where unquoted equity shares of a company (other than
\ninvestment company or a managing agency company) have to be valued. All the
\nauthorities under the Act including the valuation officer are bound by the
\nsaid Rule. The question of the Rule being mandatory or directory does not
\narise.\n<\/p>\n
(2) While valuing the unquoted equity shares under Rule 1-D, no deductions
\non account of capital gains tax which would have payable in case the said
\nshares were sold on the valuation date can be made. Similarly, no other
\ndeductions including provision for taxation, provident fund and gratuity
\nare admissible. Rule 1-D is exhaustive on the subject.\n<\/p>\n
(3) Explanation-I to Rule 1-D is a perfectly valid place of delegated
\nlegislation and has to be followed. Merely because the valuation date of
\nthe assessee and the date with reference to which the balance sheet of the
\ncompany is drawn do not coincide, it cannot be said that Rule 1-D is not
\nmandatory or that it need not be followed.\n<\/p>\n
(4) Sub-clause (a) of clause (i) and sub-clause (e) of clause (ii) have to
\nbe read and understood in the manner indicated in this judgment
\nhereinabove.\n<\/p>\n
(5) An assessee holding shares in a company whose assets comprise wholly or
\npartly of agricultural land, is not entitled to exclude such shares from
\nhis wealth.\n<\/p>\n
43.  For the above reasons, the writ petition questioning the validity of
\nRule 1-D is dismissed. So far as the appeals are concerned, some are by the
\nassessees and some by the revenue. It is not possible, having regard to the
\nvery large number of matters posted before us, to answer the question
\nseparately in each case. Accordingly, we direct that all the appeals shall
\nbe disposed of in terms of the opinion expressed herein. In cases, where
\nthe Tribunal has dismissed the applications of the Revenue filed under
\nSection 27(3) of the Wealth Tax Act, the appeals filed by the Revenue
\nagainst such orders are allowed herewith and the question asked for shall
\nbe deemed to have been referred and answered in the terms indicated in this
\njudgment. Correspondingly, the appeals filed by the assessees against
\norders of the High Courts dismissing their applications under Section 27(3)
\nare dismissed. The Tribunals shall pass appropriate orders in each case
\naccordingly.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Bharat Hari Singhania And Ors. … vs Commissioner Of Wealth Tax … on 16 February, 1994 Bench: S.C. Agrawal, B.P. Jeevan Reddy, A.S. Anand CASE NO.: Writ Petition (civil) 1213 of 1990 PETITIONER: BHARAT HARI SINGHANIA AND ORS. ETC. ETC. RESPONDENT: COMMISSIONER OF WEALTH TAX (CENTRAL) AND ORS. DATE OF JUDGMENT: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-67221","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nBharat Hari Singhania And Ors. ... vs Commissioner Of Wealth Tax ... on 16 February, 1994 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/bharat-hari-singhania-and-ors-vs-commissioner-of-wealth-tax-on-16-february-1994\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Bharat Hari Singhania And Ors. ... vs Commissioner Of Wealth Tax ... on 16 February, 1994 - 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