Income Tax Appellate Tribunal - Chandigarh
Inspecting Assistant Commissioner vs Neelam Kumar Oswal on 27 October, 1986
Equivalent citations: [1987]20ITD336(CHD)
ORDER
F.C. Rustagi, Judicial Member
1. WT Appeal Nos. 336 and 337 of 1984 are appeals by the revenue arising out of two orders of the AAC relating to the assessment years 1976-77 and 1977-78. CO. Nos. 13 and 14 of 1984 are by the assessee arising out of the above appeals. Since the grounds of appeal by the revenue and the cross-objections by the assessee are identical and relate to the same issue, viz., the value of shares held by the assessee in a limited company, the appeals as well as the cross-objections are being disposed of by a common order.
2. The common grounds by the revenue for both the assessment years read as under :
Assessment Year 1976-77 :
1. On the facts and in the circumstances of the case, the learned AAC has erred in computing the value of shares of Oswal Woollen Mills held by the assessee at Rs. 18 per share as against Rs. 59.99 computed by the WTO on the basis of Rule 1D of the Wealth-tax Rules, 1957.
2. The AAC has further erred in reducing the value of house property from Rs. 32,000 to Rs. 26,563 ignoring the appreciation in prices, since the last valuation date.
Assessment Year 1977-78 :
On the facts and in the circumstances of the case, the learned AAC has erred in determining the value of shares of Oswal Woollen Mills held by the assessee at Rs. 25 per share as against Rs. 90.04 per share adopted by the WTO.
The common ground taken by the assessee in the cross-objections reads as under:
Without prejudice to your humble appellant's other objections regarding maintainability of the appeal, it is submitted that the learned AAC erred in law and on facts by evolving a new method for valuing the share alleged to be the earning yield method and also by rejecting the valuation report of a recognised registered valuer. Without prejudice, if the value fixed by learned AAC is disturbed it is prayed that the value of the equity share fixed by Mr. S.K. Mittal registered valuer vide his valuation report dated 27-9-1982 already on record may kindly be directed to be adopted.
3. Before considering the issues involved, we consider it worthwhile to state in brief the facts of the case. The assessee purchased certain shares in Oswal Woollen Mills Ltd. which is a public limited company whose shares are not quoted on the stock exchange. Oswal Woollen Mills Ltd. closed their accounts on 31st December every year up to 31-12-1978. Thereafter, the previous year ends on 30th of June every year. For the two assessment years before us, viz., 1976-77 and 1977-78, the previous years of Oswal Woollen Mills Ltd. ended on 31-12-1975 and 31-12-1976, respectively. The valuation dates in the case of the assessee for two assessment years under appeal are 31-3-1976 and 31-3-1977, respectively. The assessee valued the shares in Oswal Woollen Mills Ltd. for the two assessment years before us on the principles laid down by the Hon'ble Supreme Court in the case of CWT v. Mahadeo Jalan [1972] 86 ITR 621, i.e., on earning yield basis. The WTO, however, did not accept the value returned by the assessee on yield basis. He substituted the same by the value worked out on break-up method provided in Rule 1D of the Wealth-tax Rules, 1957 ('the Rules'). The assessee aggrieved by the orders of the WTO went in appeal before the AAC who has directed the valuation to be adopted on yield basis. However, while directing the value to be adopted on yield basis, there is some departure from the value arrived at by the assessee even on yield basis. The value fixed by the AAC even though on yield basis is more than the value declared by the assessee. These findings of the AAC have been disputed in appeals and the cross-objections. The appeals by the revenue are that the AAC has wrongly applied the yield method for valuing the shares ignoring the value under Rule 1D. The grievance of the assessee, on the other hand, is that the AAC has not correctly valued the shares on the basis of yield method. The principal issue before us, therefore, is whether Rule 1D is mandatory or directory. In case it is held to be directory, then the question will be whether the value fixed by the AAC on yield basis is the correct value or it needs modification as canvassed by the assessee.
4. We shall first take up the issue as to whether Rule 1D is mandatory or otherwise. The learned departmental representative vehemently argued that Rule 1D is mandatory. It is binding on the assessing officer. He has no option to adopt any other method of valuation. He, therefore, contended that the AAC has wrongly held the rule as not mandatory and fixed the value on yield basis. In support of the above contentions, he referred to Section 7(1) of the Wealth-tax Act, 1957 ('the Act') and pointed out that it was subject to rules and, therefore, any rules framed in the matter of valuation under Section 7(1) will prevail over the main provisions in the section. According to him, this section opens with the words 'subject to any rules made in this behalf which postulated that the rules were paramount. Then he referred to Rule 1D and stated that even the rule uses the imperative language and directs that the value of unquoted equity shares shall be determined in accordance with its provisions. He further urged that the language of the section and Rule 1D clearly points out that the same are mandatory and there was no justification for construing the expression 'shall' in the section and the rule as 'may'. He also referred to Section 46 of the Act, i.e., rule-making power of the Board referring to Sub-section (1) thereof he stated that it provided that the Board may by notification in the Official Gazette make rules for the carrying out of the purposes of this Act. He pointed out that the word 'may' used in subsection (1) is to be constructed as 'shall' in certain cases to give effect to the main provisions of the Act. In this connection, he referred to Section 14 of the Act where it is stipulated that every person if his net wealth on the valuation date was of such an amount as to render him liable to wealth-tax under the Act, shall furnish to the WTO a return in the prescribed form and verified in the prescribed manner. He pointed out that unless the return was in the prescribed form and verified in the prescribed manner, it would not be a valid return under Section 14 and unless the form was prescribed by the Board by rules, Section 14 will become nugatory and that will forfeit the purpose of the Act itself. In certain cases, he contended the power of the Board to frame rules was discretionary. He again referred to Section 7(1) and pointed out that the opening words of sub-section are 'subject to any rules made in this behalf. According to him, if there are any rules then these will have preference over the provisions in the section and if there are no rules, then the provisions of the section will hold the field. To this extent the rule-making power of the Board is discretionary. Then he hastened to add that once the Board exercised its discretionary power to frame rules and framed rules, then the rules become mandatory. He also pointed out that the Board has framed Rule 1D for giving effect to the provisions contained in Section 7(1) and, therefore, the rules having been framed for achieving the purpose of that section are mandatory. In support of the above contentions he relied on direct judgments of the Kerala High Court in the case of CWT v. Mamman Varghese [1983] 139 ITR 351, the Allahabad High Court in the case of CWT v. Sripat Singhania [1978] 112 ITR 363, again two judgments of the Allahabad High Court in the cases of Bharat Had Singhania v. CWT [1979] 119 ITR 258 and CWT v. Laxmipat Singhania [1978] 111 ITR 272. He also referred to the judgment of the Delhi High Court in the case of Sharbati Devi Jhalani v. CWT [19861 159 ITR 549 where the rule was held to be mandatory except in case where the valuation date in the cases of the assessee were different from the balance sheet dates of the company in which shares were held. The learned departmental representative pointed out that Explanation I below Rule 1D provided for situations where balance sheets of the companies where shares are held by the assessee, are on dates different from the valuation dates of the assessee. According to him, the judgment of the Delhi High Court in Sharbati Devi Jhalanis case (supra) had the effect of declaring the Explanation I below Rule 1D as ultra vires Section 7(1). He urged that the Tribunal was not competent to go into the vires of the rules and, therefore, it was bound to follow the rule unless the said rule was held to be ultra vires by the Hon'ble High Court of jurisdiction. He further urged that there was no such judgment of the Hon'ble Punjab and Haryana High Court and, therefore, the judgment of the Delhi High Court to that extent was not binding on Chandigarh Bench of the Tribunal. He also referred to the order of the Calcutta Bench 'B' of the Tribunal in the case of WTO v. Sheo Prasad Nopany [1986] Tax. 82(4)-13 where the rule has been held to be mandatory. Then he referred to the order of the Special Bench of the Tribunal in the case of Biju Patnaik v. WTO [1982] 1 SOT 623 (Delhi). He pointed out that by the above order, the Special Bench of the Tribunal has held Rule 1BB of the Rules for purposes of giving effect to provisions in Section 7(1) as mandatory. Rule 1D was also for purposes of giving effect to the provisions contained in Section 7(1) and there was no reason why Rule 1D should not be held mandatory. He also relied on the judgment of the Hon'ble Supreme Court in the case of Pandit Lakshmi Kant Jha v. CWT [1973] 90 ITR 97 and also pointed to the judgments in Punjab Sikh Regular Motor Services v. Regional Transport Authority AIR 1966 SC 1318 and Joginder Singh v. Dy. Custodian General of Evacuee Property AIR 1967 SC 145-148 and urged that according to the rules of interpretation as laid down by the Supreme Court, Rule 1D must prevail over the statutory provisions. Referring to the judgments of the Hon'ble Supreme Court in the cases of Mahadeo Jalan (supra) and CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 he pointed out that those were the cases when Rule 1D was not on the statute book. Further, the principles laid down therein were for general purposes when there was no rule like Rule 1D in existence. Further, the principles for valuation of shares laid down by the Supreme Court did not prescribe any rigid formula. He also pointed out that the Bombay High Court in the case of Smt. Kusumben D. Mahadevia v. CWT [1980] 124 ITR 799 did not follow the above principles of interpreting rules and statutes and, therefore, the judgments of the Kerala and Allahabad High Courts supra should be followed.
5. The learned Counsel for the assessee, on the other hand, maintained that Rule 1D was directory and not mandatory. Reliance in this connection was placed on the Bombay High Court judgment in the case of Smt. Kusumben D. Mahadevia (supra). He also relied on the judgment of the Supreme Court in the case of Mahadeo Jalan (supra) where the Supreme Court has laid down the principles for valuing the unquoted equity shares of a going concern on yield basis. These observations had been reiterated with emphasis by the Supreme Court in its subsequent decision in the case of Smt. Kusumben D. Mahadevia (supra). He also stated that the Hon'ble Supreme Court had stated that the only valid method of valuation of unquoted equity shares of a going concern was the earning yield method. He further pointed out that Rule 1D was approved by the Hon'ble Supreme Court being the proper method of valuation of unquoted equity shares of a company which was ripe for liquidation and also in the cases of some other companies where some specified circumstances existed. He, therefore, urged that it was incorrect to hold that the principles of valuation laid down in Mahadeo Jalan's case (supra) were meant only up to the assessment year 1967-68 because thereafter Rule 1D was put on the statute book with effect from 6-10-1967. Had it been so, the Supreme Court would have mentioned it specifically in its decision given on 13-9-1972 when Rule 1D was on the statute book. In the case of Smt. Kusumben D. Mahadevia (supra) he pointed out that the Bombay High Court had referred to a number of judgments of the Supreme Court before arriving at the conclusion that Rule 1D was directory and not mandatory. He also pointed out that if Rule 1D was held to be mandatory then it would be violative of Section 46 and ultra vires. Since the Bombay High Court has held Rule 1D to be directory, therefore, it was held by that Court that Section 46(2)(a) was not violated. He also emphasised that it was the duty of the Tribunal particularly when the Tribunal was not competent to go into the vires of any section or rule to accept the finding of the High Court and hold that rule was only of directory nature. If the Tribunal held Rule 1D as mandatory, it would be violating the principles of natural justice relating to harmonious construction and for carrying out the purposes of the Act, some violence to the language should be done as held by the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597-98. The learned Counsel for the assessee also pointed out that what the Act provided was the levy of wealth-tax on real assets and the value of the shares under Rule 1D will only be artificial and not real which is not permissible under the Jaw. Reliance in this connection was placed on the judgment of the Supreme Court in the case of Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198-204 and the judgment of the Federal Court in UP v. Atiqa Begum [1940] FCR 110-134. Referring to the judgment of the Allahabad High Court, he submitted that the same were patently against the Supreme Court decisions inasmuch as the Allahabad High Court has asserted that breakup method incorporated in Rule 1D is a well recognised method of share valuation while the Supreme Court's finding is that the only valid method of valuation of unquoted shares of a company which is a going concern is the yield method. Break-up method of a going concern was not a well recognised method by any of the renowned commentators on the subject discussed by the Hon'ble Supreme Court. Further, the Allahabad High Court had completely ignored the common sense observation of the Supreme Court that transacting equity shares of a going concern, the assets and reserves of the company are not a consideration between a willing buyer and willing seller. It was, therefore, urged that the Allahabad High Court decisions should be ignored. It was also stated that the Allahabad High Court itself in its subsequent decision in the case of Satish Kumar Modi v. WTO [1980] 4 Taxman 463 did not follow its own earlier decision in Laxmipat Singhania's case (supra). In the later decision, the Allahabad High Court has held that Rule 1D is not mandatory. It was also stated that the AAC was competent to disregard the opinion of the expert and he could pick faults therein and amend the same accordingly. For this proposition, he relied on the judgment of the Bombay High Court in CIT v. Ganesh Builders [1979] 116 ITR 911 at p. 919. On the basis of the above submissions, he urged that Rule 1D was only directory.
6. We have given careful consideration to the rival submissions. Before considering the various authorities relied upon by the rival parties, it would, in our opinion, be necessary to refer to the provisions relating to the valuation in the Act and the Rules. Section 7(1) provides how to determine the value of assets. Section 7(1) which is relevant for our purpose reads as under :
7(1) Subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date.
Explanation : For the removal of doubts, it is hereby declared that the price or other consideration for which any property may be acquired by or transferred to any person under the terms of a deed of trust or through or under any restrictive covenant in any instrument of transfer shall be ignored for the purpose of determining the price such property would fetch if sold in the open market on the valuation date.
Sub-sections (2), (3) and (4) of Section 7 which also deal with valuation are exception to the general rules. Neither of the parties put up their claims under these sub-sections. The same are, therefore, not considered by us. As reproduced above, Sub-section (1) of Section 7 opens with the words 'subject to any rules made in this behalf. This postulates that valuation of any asset other than cash has to be adopted as it would fetch if sold in the open market on the valuation date. Valuation of an asset involves many factors, e.g., in the case of immovable property it has to be considered whether it is a commercial property, industrial property or residential house ; its location, whether in an industrial or commercial complex or residential area ; its situation in a particular locality, i.e., centrally placed, corner plot, at the back ; returns from the property ; comparable sales transactions of properties similarly placed ; uses to which the property is put or is likely to be put. There are various other factors which may influence the value of an asset. In the case of shares, similarly many factors may influence the same. In the case of a company whose shares are not quoted on the stock exchange, a buyer will first consider the returns, i.e., dividends declared in earlier years. Sometimes, dividends are not declared at all for a number of years or may not have been declared to the full extent possible. In such situation, it will not reflect the correct return. It is often argued that where the dividends are not declared to the fullest extent possible, resort may be had to be provisions contained in Section 104 of the Income-tax Act, 1961, i.e., levy of additional tax for not declaring the statutory dividends. It is difficult to accept this argument because a buyer in the market will have no access to such records. Then a buyer in the market will only refer to the balance sheet which will reflect the correct profits of the company and also the reserves which the company may have accumulated over the years which may be available to the shareholders subsequently in the form of bonus shares. The buyer may also look into the aspects. This may also be linked with the bonus shares because in order to get over-draft facility, the company may convert its reserves into bonus shares. Another factor that may affect the valuation is the availability of the import licence for plant, raw material, collaboration agreement for expansion, etc., prospects of issue of right shares and right convertible debentures. This is another factor which influences the market value of the shares. On the top of it, the industrial policy of the Government and the management running it are also responsible for the valuation of shares. While yield method may be one of the recognised methods for valuing the shares by a company, but it is not fool-proof. So many other factors as enumerated above enter into the valuation of shares. In the absence of any guidelines, the assessees were free to value the shares taking the above factors into consideration. This gave different valuation by different experts. There was no uniformity in valuation. In order to overcome this difficulty, the Government was armed with powers to make rules under which valuation should be done. It is with this end in view that Rule 1D was framed by the Board. The break-up method of valuing the shares may also not be a fool-proof method. Sometimes, it may give higher value than earning yield method while in another case it may give lower value. This fact is manifest from the case of the assessee itself inasmuch as for the two years under consideration, the value has been done by the assessing officer taking resort to Rule 1D while in subsequent assessment years, he has valued the shares on earning yield basis as that basis gave higher valuation of the shares. When no dividend is declared at all in a particular year would not mean that the value of the shares is nil. In such cases issue of bonus shares by the company will tend to increase the value of the shares. No single method, in our opinion, would give the correct value. Valuing by different experts would only be estimates of the value. The one which is more nearer to the market value may have to be adopted. In order to overcome the fluctuation's in the estimates of value by different methods and also to bring uniformity the Government thought it fit to make provisions for framing rules for valuing shares of certain companies whose shares are not quoted on the stock exchange. With this end in view, Section 7(1) was amended with effect from 1-4-1965 when the words subject to any rules made in this behalf were inserted. The Hon'ble Supreme Court had the occasion to interpret Section 7(1) in the case of Pandit Lakshmi Kant Jha (supra) with the following observations :
Bare reading of the section makes it plain that subject to any rules which may be made in this behalf, the value of the assets, other than cash, has to be the price which the assets, in the opinion of the Wealth-tax Officer, would fetch in the open market on the valuation date. It would, therefore, follow that in the absence of any rule prescribing a different criterion, the value of an asset, other than cash, should be taken to be the price which it would fetch if sold in the open market on the valuation date. No rules prescribing a different criterion in respect of the value of quoted stocks and shares have been brought to our notice....
It would thus be seen that the Supreme Court wanted to give preference to any rules made under Section 7(1) over the provisions contained in Section 7(1) itself. In the Principles of Statutory Interpretation by G.P. Singh, the following observations have been made on how to interpret the phrase 'subject to any rules made in this behalf :
Similarly, when a statutory provision is in the form 'except as may be otherwise prescribed by rules' or when it is 'subject to the rules' the rules are made to prevail over the statutory provision See Punjab Sikh Regular Motor Services v. Regional Transport Authority AIR 1966 SC 1318 and Joginder Singh v. Dy. Custodian General of Evacuee Property AIR 1967 SC 145 page 148.
In view of the language of Section 7(1) as noted above and as interpreted by the Hon'ble Supreme Court in several cases, Rule 1D must prevail over the statutory provisions. The Bombay High Court in the case of Smt. Kusumben D. Mahadevia (supra) has held the rules as directory. It appears that the Hon'ble Bombay High Court interpreted Section 7(1) and Rule 1D made thereunder not in accordance with the principles enunciated by the Hon'ble Supreme Court. We would also agree with the learned departmental representative that it is discretionary with the Board to frame rules in view of the provisions contained in Section 46(2)(a) but once the rules are framed, they are mandatory and binding on the department. The judgments of the Supreme Court in the cases of Mahadeo Jalan (supra) and Smt. Kusumben D. Mahadevia (supra) were rendered at a time when Rule 1D was not on the statute book. The Kerala and Allahabad High Courts' judgments supra which are directly on the issue, in our opinion, deserve to be followed. The Hon'ble Delhi High Court has taken the view that Rule 1D is not mandatory insofar as the balance sheet dates of the company where shares are held differ from the valuation dates of the assessee. In other words, Explanation I below Rule 1D is held by the Delhi High Court to be not binding and has the effect of holding the rule as ultra vires of the section. We are afraid, we cannot adopt this view while sitting in the jurisdiction of the Punjab and Haryana High Court in the absence of any such decision from the High Court of jurisdiction. Otherwise it will tend to make the law unworkable by us in this territory which we are not competent to hold. Even the Supreme Court in the case of Smt. Kusumben D. Mahadevia (supra) has held that in such cases, proper method of valuation of shares to be adopted would be the profit-earning method but this method may be applied by taking the dividends as reflecting the profit-earning capacity of the company on reasonable commercial basis, but if it is found that the dividends do not correctly reflect the profit-earning capacity because only a small proportion of the profits is distributed by way of dividends and a large amount of profits is systematically accumulated in the form of reserves, the dividend method of valuation may be rejected and the valuation may be made by reference to the profits. The profit-earning method takes into account the profit which the company has been making and should be capable of making and the valuation according to this method is based on the average maintainable profits. It has further been observed that for the purpose of such valuation, the taxing authority is not bound by the figure of profits shown in the profit and loss account because it is possible that the amount of profits may have suffered diminution on account of unreasonable expenditure or the directors having chosen to take away a part of the profits in the form of remuneration rather than dividends. The above observations go against the profit-earning method even though the above observations were made by the Hon'ble Supreme Court at a time when Rule 1D was not on the statute book. After Rule 1D was inserted, the situation has changed inasmuch as the rule is of binding nature and the assessing authorities have no option to adopt a different yardstick for arriving at the value of the shares in the company before us. In view of the above discussions, we have no hesitation in holding that Rule 1D is mandatory and binding on all. The Special Bench of the Tribunal in the case of Biju Patnaik (supra) has also taken the same view holding Rule 1BB relating to value of a house which is wholly and mainly used for residential purposes as mandatory which has also been framed for giving effect to the provisions of Section 7(1).
7. Since we have held Rule 1D to be mandatory and binding on all, we do not consider it necessary to go into the valuation made by the AAC on earning yield basis. The cross-objections by the assessee are bound to be rejected on this point.
8. Another ground which is only for the assessment year 1976-77 is that the AAC has erred in reducing the value of house property from Rs. 32,000 to Rs. 26,563 ignoring the appreciation in prices since the last valuation date. The assessee owned house property in Mohalla Vakilan, Ludhiana. Its value has been declared for this year at Rs. 26,563 as determined by the registered valuer vide his report dated 13-3-1974. Taking into consideration the continuous rise in value of property at Ludhiana, the WTO adopted the value of the above property at Rs. 32,000 as on 31-3-1976. The AAC has reduced the same to Rs. 26,563 as according to him the valuation of this property in the case of another co-owner, i.e., J.L. Oswal who holds one-fourth share in this building has been accepted by the WTO at Rs. 26,563 for the assessment year 1976-77. The learned departmental representative contended that the AAC has wrongly reduced the value ignoring the appreciation in prices since the last valuation report by the registered valuer. The learned counsel for the assessee, on the other hand, has supported the order of the AAC.
9. We have considered the rival submissions. While allowing relief, the AAC has relied on the judgment of the Punjab and Haryana High Court in the case of Jaswant Rai v. CWT[1977] 107 ITR 477. The submission by the learned departmental representative is that this ruling of the High Court has since been overruled by the same High Court and, therefore, the same does not hold the field. Taking into consideration that the value of Rs. 26,563 was adopted in 1974 and the valuation date before us is 31-3-1976, we consider the value fixed by the WTO at Rs. 32,000 as reasonable. The order of the AAC is, therefore, reversed and that of the WTO restored.
10. In view of the above discussions, the appeals by the revenue are allowed and the cross-objections by the assessee are dismissed.