Bombay High Court
Dy. Commissioner Of Wealth-Tax vs Dr. N. P. Tolani. on 21 November, 1989
Equivalent citations: [1990]33ITD73(MUM)
ORDER
Per Shri M. A. Ajinkya, Accountant Member - In these appeals by the department relating to four assessees, the only question for consideration is whether the C. W. T. (Appeals) erred in directing the W. T. O. to value the unquoted equity shares of certain private limited companies held by the assessees as per yield method and not as per Rule 1D.
2. The first appellate authority placing reliance on the decisions of the Supreme Court in the cases of CWT v. Mahadeo Jalan [1972] 86 ITR 621, CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 and on the decision of the Bombay High Court in the case of Smt. Kusumben D. Mahadevia v. N. C. Upadhya [1980] 124 ITR 799 held that since the shares were not quoted at the Stock Exchange and the companies in which these shares held were going concerns, the shares should be valued by capitalising the yield and not in accordance with Rule 1D. The first appellate authority has relied on the principles laid down by the Supreme Court and the Bombay High Court referred to above for giving his finding.
3. While presenting the case for the department, Shri R. Prasad, the learned Sr. Departmental Representative urged that a fresh look at the issued of valuation of shares of private limited company, which are not quoted at the Stock Exchange, was called for. He pointed out that with the introduction of Schedule III to the Wealth-tax Act, what was formally prescribed in Rule 1D had been made part of the Act and there was, therefore, no question of considering whether the provisions of the rule were mandatory or discretionary. He argued that Schedule III, though made effective from 1-4-1989, was applicable to all pending proceedings and the issue of valuation of shares before the Tribunal, according to Shri Prasad, was a pending proceeding. For this proposition, he relied on the decision of the Special Bench of the Tribunal in Biju Patnaik v. WTO [1983] 3 ITD 693 (Delhi). Alternatively and without prejudice, Shri Prasad argued that Rule 1D was mandatory and not discretionary. In support of this argument, he relied on a decision of the Supreme Court in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308/20 Taxman 9. Shri Prasad further argued that the Bombay High Court had no occasion to consider the decision of the Supreme Court in Lohia Machines Ltd.s (supra) when it gave its decision in the case of Smt. Kusumben D. Mahadevias case (supra). He also relied on a decision of the Kerala High Court in Mrs. Grace Collis v. CWT [1988] 172 ITR 597 in support of his case that Rule 1D was mandatory and should be followed for the purpose of valuing shares of private limited companies which were not quoted at the Stock Exchange.
4. On the other hand, the counsel for the assessee strongly relied on the order of the first appellate authority and on the authorities cited therein.
5. We have considered the submissions made on both the sides. Firstly, the decisions of the Spl. Bench in Biju Patnaiks case (supra) was given in the context of application of Rule 1BB. The Spl. Bench held that a rule of procedure is retrospective in operation and applies to all pending proceedings. No doubt, it further observed that being procedural and retrospective, Rule 1BB would apply to all pending proceedings, whether they are pending before the WTO or the AAC or the CWT (Appeal) or the Tribunal. However, what is stated by the Spl. Bench in the context of retroactive application of a rule cannot be blindly applied for considering the applicability of Schedule III which was inserted into the Statute Book by the Direct Tax Laws (Amendment) Act, 1989 with effect from 1-4-1989. The applicability of Schedule III cannot be considered without taking into account the amendment of section 7 itself which was brought about by the same Act with effect from 1-4-1989. The section so amended provides that the value of any asset other than cash shall be its value as on the valuation date determined in the manner laid down in Schedule III. This section as well as the Schedule III introduced along with it is operative from 1-4-1989 and cannot be said to be applicable to pending proceedings to which the law as it stood prior to 1-4-1989 applies. If we have to accept the argument that Schedule III as well as the amended section 7(1) is applicable to all the pending wealth-tax proceedings including those pending before the Tribunal, in so far as it relates to the valuation of unquoted shares, then it would mean that section 7 as it stood prior to the amendment and which started with the words "subject to any rules made in this behalf" will have to meaning and will have to be treated as no longer effective or operative. We cannot accept an argument which will render section 7 as it stood prior to the amendment a nullity. It is necessary to mention that the amended section 7 introduced a separate concept of valuation of assets. Section 7(1) (as amended) provided that the value of any asset other than cash for the purpose of the Wealth-tax Act shall be its value as on the valuation date determined in the manner laid down in Schedule III. The concept of market value which formed the basis of section 7 (before its amendment) does not find place in the amended section. After 1-4-1989, it is the value of an asset determined in the manner laid down in Schedule III which is to be adopted in the computation of net wealth, whereas before the amendment the value of an asset for the purposes of the Act was to be estimated on the basis of the price which, in the opinion of the assessing officer, it would fetch if sold in the open market on the valuation date. The rules (which were operative in the context of the old section 7) provided for the procedure of determining the market value of the asset and the decisions given by the Supreme Court and the Bombay High Court, to which reference has been made above, were in the context of section 7 as it stood prior to the amendment. We cannot accept the argument that an amendment which brings about a complete and a substantive change in the concept of valuation of assets should be given retrospective effect when there is nothing in the relevant Act to suggest that the Legislature intended to give such retrospective effect to the amendment.
6. If may be pointed out in this connection that after the amendment brought about by the Direct Taxes Amendment Act, which introduced Schedule III, Wealth-tax (2nd Amendment) Rules, 1989 were introduced under No. S. O. 348/E/dated 9-5-1989 [177 I. T. R. (Statutes) page 146]. These rules provide specifically that rules 1B, 1BB, 1C, 1D, etc., shall be omitted and shall be deemed to have been so omitted on the first day of April, 1989. This would mean, by implication, that these rules were operative prior to 1-4-1989 and that, therefore, the decisions given by the various High Courts and Supreme Court at a time when these rules were operative will have to be followed. For reasons, we would not accept Shri Prasads argument that the provisions of Schedule III and the amended section 7 should be applicable to the pending proceedings including proceedings before the Tribunal. If the Legislature wanted to make the operation of Schedule III as well as the amended provisions of section 7 retrospective, it would have stated so when the amendment to this section was brought about by the Direct Tax Laws (Amendment) Act, 1989. We are therefore, unable to accept Shri Prasads argument that Schedule III should be made applicable to the present proceedings for considering the question of valuation of unquoted equity shares.
7. The second limb of Shri Prasads arguments is that all the decisions relied upon by the first appellate authority did not have occasion to deal with the decision of the Supreme Court in Lohia Machines Ltd.s case (supra). In our opinion, the decision of the Supreme Court in Lohia Machines Ltds case (supra) was given in the context of the controversy raised in that section and cannot be applied generally for interpreting the rules under the Wealth-tax Act. It was argued in that case that Rule 19A of the I. T. Rules, 1962 was outside the scope of the rule making authority conferred on the Central Board and the Supreme Court held that that Rule was a perfectly valid piece of subordinate legislation. In the present appeals, we are not concerned with deciding the validity of Rule 1D. The Supreme Court considered the history of Rules 19 and 19A of the I. T. Rules, the purpose for which such Rule was made and the context in which it was made and gave the finding that it did. The decision of the Supreme Court cannot be cited as an authority for the proposition that Rule 1D of the Wealth-tax Rules is mandatory when the consideration of such Rule has come up for judicial interpretation by several High Courts. The controversy in the context of Rule 1D has been whether this Rule is mandatory or directory. The Allahabad High Court in several decisions like CWT v. Padampat Singhania [1979] 117 ITR 443, CWT v. Laxmipat Singhania [1978] 111 ITR 272, CWT v. Sripat Singhania [1978] 112 ITR 363 and Bharat Hari Singhania v. CWT [1979] 119 ITR 258 have held that Rule 1D is mandatory. The same view has been taken by the Kerala High Court in the case of CWT v. Mamman Varghese [1983] 139 ITR 351 which was followed by it in the case of Mrs. Grace Collis (supra). All these decisions except the last mentioned were considered by the Andhra Pradesh High Court in the case of Dr. D. Renuka v. CWT [1989] 175 ITR 615. The Andhra Pradesh High Court also considered the Bombay High Court decision in Smt. Kusumben D. Mahadevias case (supra) and the Supreme Court decision in Mahadeo Jalns case (supra). Their Lordships of the Andhra Pradesh High Court at page 621 of the report (175 ITR) made the following observations which may usefully be quoted :
"This is a case where it is possible for the court to take either view. While the view commended by the Department is based upon a literal interpretation of the rule, the view contended for by the assessee cannot be said to be unreasonable. Indeed, it is this situation which has led to a sharp division of opinion between the High Courts in India - Allahabad and Kerala High Courts adopting the literal interpretation and the Bombay and Delhi High Courts taking the other view. Both the views have certain merits and are open to certain criticism, which aspect is quite evident from the preceding discussion. However, on a consideration of the rival points of view, we are inclined to adopt the view commended by the assessee - and which view is supported by the Bombay and Delhi High Courts, besides the Madras High Courts. The main reason why we have chosen not to adopt the view that it brings about a situation unrelatable to realities and it would be unjust to assessees in general to adopt that view, more particularly in the case of wealth-tax."
We would respectfully follow the above rationale for upholding the view taken by the first appellate authority. It may in this context be stated that the Bombay High Court in a very recent decision in the case of Mrs. Shardaben B. Mafatlal v. CIT [1989] 177 ITR 463/42 Taxman 126 also held that in the case of a company, the shares of which are not quoted in any Stock Exchange, the shares need not be valued on the break up method in terms of Rule 1D of the Wealth-tax Rules if the company is a going concern. The profit earning method is the only method which could be properly applied for arriving at the valuation of shares in such a case. This decision, being a decision of the jurisdictional High Court, is binding and we follow the same.
8. Finally, we may state that we are primarily concerned with the question of the manner of valuing the shares of private limited companies which are not quoted at the Stock Exchange and not whether rule 1D is mandatory or directory. The Supreme Court has spelt out the principles that should be followed for making valuation of such shares. The Bombay High Court have relied on the decisions of the Supreme Court, namely, those in the case of Mahadeo Jalan (supra) and CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 for giving their finding in their latest pronouncement in Mrs. Shardaben D. Mafatlals case (supra). Therefore, we do not consider it necessary to re-consider our decision of this issue. The arguments advanced by Shri Prasad in this regard are, therefore, rejected.
9. Consequently, we would confirm the orders of the first appellate authority for the reasons stated therein and following the authorities mentioned above and dismiss the appeals.