Calcutta High Court
Commissioner Of Wealth-Tax vs India Exchange Traders' Association on 21 March, 1991
Equivalent citations: [1992]197ITR356(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 27(1) of the Wealth-tax Act, 1957, the following questions of law have been referred to this court For the assessment years 1979-80 and 1980-81 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee could not he taxed as 'individual' for the purposes of the Wealth-tax Act, 1957, for the assessment years 1979-80 and 1980-81 and, in that view, holding that the assessments for the assessment years 1979-80 and 1980-81 are liable to be annulled ?"
For the assessment years 1981-82 to 1983-84 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the direction of the Commissioner of Wealth-tax (Appeals) that the valuation of unquoted shares as made by the assessee on the basis of valuation report by a registered value and not the break-up value of the share as per Rule 1D of the Wealth-tax Rules, 1957, should be taken?"
2. So far as the question for the assessment years 1979-80 and 1980-81 is concerned, the same deals with the issue whether an association of persons can be subjected to wealth-tax under the 1957 Act. This issue is covered by the assessee's own case for the assessment years 1972-73 to 1974-75 by a judgment delivered on December 22, 1989, in Matter No. 48 of 1982 (CWT v. India Exchange Traders Association). Following the said decision, this question is answered in the affirmative and in favour of the assessee.
3. The facts relating to the question pertaining to the assessment years 1981-82 to 1983-84 are that the assessee was holding certain shares. The shares were not quoted on the stock exchange. The assessee adopted the value of such shares on the basis of the valuation report of the registered valuer. The Wealth-tax Officer did not accept the valuation shown and he applied Rule 1D of the Wealth-tax Rules, 1957. As the assessments were cancelled by the Commissioner of Wealth-tax (Appeals), he did not give any finding on this issue. However, the contention of the assessee was accepted by the Tribunal. The Tribunal in fact held that the provisions of Rule 1D are directory. The question, therefore, is whether Rule 1D of the Rules is directory or mandatory.
4. Mr. Bajoria, learned counsel for the assessee, has drawn our attention to three decisions of the Supreme Court and submitted that these decisions have laid down the principles of valuation of shares of non-investment companies. It is his contention that Rule 1D cannot be pressed into service where the method approved by the Supreme Court will be applicable. In other words, Rule 1D is not mandatory.
5. Since the submissions of learned counsel are mainly, if not wholly, based on the principles laid down by the three decisions of the Supreme Court, it is necessary for us to examine these decisions closely and, in particular, in the light of the observations which have been highlighted by learned counsel.
6. The first decision of the Supreme Court is in CWT v. Mahadeo Jalan [1972] 86 ITR 621, where the Supreme Court laid down that the yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation (pages 633 and 634 of the Reports).
7. This view was reiterated by the Supreme Court in CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38. At pages 45 and 46 of the Reports, it was laid down as under :
"It is clear from this decision that where the shares in a public company are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date would represent the value of the shares. But where the shares in a public limited company are not quoted on the stock exchange or the shares are in a private limited company the proper method of valuation to be adopted would be the profit-earning method. This method may be applied by taking the dividends as reflecting the profit-earning capacity of the company on a reasonable commercial basis but if it is found that the dividends do not correctly 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 profits 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. Of course, 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 figure of profits in such a case would have to be adjusted in order to arrive at the real profit-earning capacity of the company. It would, thus, be seen that in the case of a company which is a going concern and whose shares are not quoted on the stock exchange, the profits which the company has been making and should be capable of making or, in other words, the profit-earning capacity of the company would ordinarily determine the value of the shares. That is why in Mahadeo Jalan's case , the court quoted with approval the following observations of Williams J. in McCathie v. Federal Commissioner of Taxation (69 Commonwealth Law Reports 1): '... the real value of shares which a deceased person holds in a company at the date of his death will depend more on the profits which the company has been making and should be capable of making, having regard to the nature of his business, than upon the amounts which the shares would be likely to realise upon a liquidation', and stated in no uncertain terms that: 'The general principles of valuation in a going concern is the yield on the basis of average maintainable profits, subject to adjustment, etc., which the circumstances of any particular case may call for'. The break-up method would not be appropriate for valuation of shares of a company which is a going concern, because as pointed out by the court in Mahadeo Jalan's case , 'among the factors which govern the consideration of the buyer and the seller where the one desires to purchase and the other wishes to sell, the factor or break-up value of a share as on liquidation hardly enters into consideration where the shares are of a going concern'. It is only where a company is ripe for winding up or the situation is such that the fluctuations of prof its and uncertainty of conditions at the date of valuation prevent any reasonable estimation of the profit-earning capacity of the company, that the valuation by the break-up method would be justified."
8. At page 47 of the Reports, it was laid down as under :
"The Revenue then pointed out that the principles of valuation set out by the court in Mahadeo Jalan's case were merely broad guidelines and they did not obviate the necessity of considering each case on its own facts and circumstances and, in support of this contention, the Revenue relied on the observation made by the court that, in setting out these principles, the court had not ' tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as 'will be applicable to the facts of each case'. Now, it is true, as observed by the court, that there cannot be any hard and fast rule in the matter of valuation of shares in a limited company and, ultimately, the valuation must depend upon the facts and circumstances of each case, but that does not mean that there are no well-settled principles of valuation applicable in specific fact-situations and, whenever a question of valuation of shares arises, the taxing authority is in an uncharted sea and it has to innovate new methods of valuation according to the facts and circumstances of each case. The principles of valuation as formulated by the court are clear and well-defined and it is only in deciding which particular principle must be applied in a given situation that the facts and circumstances of the case become material. It is significant to note that, immediately after making the above observation, the court hastened to make it clear, as if in answer to a possible argument which might be advanced on behalf of the Revenue on the basis of that observation that 'the yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation."
9. At page 48 of the Reports, it was laid down as under :
"It is true that, in the present appeals, the question of valuation arises not only under the Wealth-tax Act, 1957, but also under the Gift-tax Act, 1958, but since the provision for determining the value of an asset is the same in Section 6, Sub-section (1) of the Gift-tax Act, 1958, as it is in Section 7, Sub-section (1) of the Wealth-tax Act, 1957, the principles of valuation laid down in Mahadeo Jalan's case [1972] 82 ITR 621 (SC) must apply equally in relation to valuation of shares to be made for the purpose of the Gift-tax Act, 1958. It was, however, contended on behalf of the Revenue that there is a vital difference between Section 6, Sub-section (1) of the Gift-tax Act, 1958, and Section 7, Sub-section (1) of the Wealth-tax Act, 1957, inasmuch as Section 6, Sub-section (1) of the Wealth-tax Act, 1957, is subject, inter alia, to the provisions of Sub-section (3) of that section and this latter sub section provides that, where the value of any property cannot be estimated under Sub-section (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner and Rule 10, Sub-rule (2), of the Gift-tax Rules, 1958, prescribed the manner of valuation of shares in a private limited company where the Articles of association contain restrictive provisions as to the alienation of shares, by providing that in such a case, the value of the shares 'if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch if, on the date of gift, they could be sold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the articles, but the fact that a special buyer would, for his own special reasons, give a higher price than the prices in the open market shall be disregarded'. The argument of the Revenue was that Messrs. Mafatlal Gagalbhai Pvt. Ltd. was a private limited company and that its Articles of association, admittedly, contained restrictive provisions as to the alienation of shares and, therefore, Rule 10, Sub-rule (2), was applicable and, according to that sub-rule, the value of the shares was required to be ascertained by reference to the value of the total assets of the company and it was only if the value was not so ascertainable that it could be determined in any other manner. The break-up method was thus, according to this sub-rule, the primary method to be applied for arriving at the valuation of the shares and in the circumstances the Tribunal was wrong in determining the value of the shares by applying the profit-earning method, at least so far as the valuation under the Gift-tax Act, 1958, was concerned."
10. At pages 48 and 49 of the Reports, it was laid down as under :
"Now, it is difficult to see how the question whether the valuation of the shares should have been made on the basis of the break-up method by reason of Rule 10(2) of the Gift-tax Rules, 1958, can be required to be referred by the Tribunal to the High Court .... There was no argument addressed to the Tribunal that the break-up method should be adopted because that was the primary method prescribed by Rule 10, sub-rule (2), and the Tribunal had, therefore, no occasion to deal with such an argument.
This question obviously, therefore, does not arise out of the orders of the Tribunal and it cannot be required to be referred to the High Court," .
11. In CGT v. Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai [1988] 170 ITR 144, the Supreme Court laid down that the yield method was the only correct method for valuing the shares of a going concern. The said case came up on appeal by the Revenue against a judgment of the Gujarat High Court in CGT v. Executors and Trustees of the Estate of Late Shri Ambalal Sarabhai [1975] 100 ITR 447 and was concerned with the valuation of the shares of a private company under Rule 10(2) of the Gift-tax Rules, 1958. Both the parties before the High Court proceeded on the basis that in view of Rule 10(2) of the Gift-tax Rules, 1958, the value of the shares had to be determined by the breakup method and the only dispute was with reference to which particular balance-sheet of the company, such value was to be determined. According to the assessee, the balance-sheet last published and available as on the date of gift should be taken into consideration whereas, according to the Revenue, the balance-sheet nearest to the date of the gift though published and available after the date of gift should be taken into consideration. The Gujarat High Court accepted the contention of the assessee that the balance-sheet available on the date of the gift alone should be taken into consideration. Section 6(1) read with Sub-section (3) of the Gift-tax Act, 1958, is pari materia with Section 7(1) of the Act and Rule 10(2) of the Gift-tax Rules, 1958, is akin to Rule 1D of the Wealth-tax Rules, 1957. The High Court proceeded on the basis that it was the common case of the parties that, in terms of Rule 10(2) of the Gift-tax Rules, 1958, the shares had to be valued according to the break-up method. On appeal before the Supreme Court, however, the contention of the Revenue was that the decision of the High Court was clearly erroneous and contrary to the law laid down by the Supreme Court in its decisions in the cases of Mahadeo Jalan [1972] 86 ITR 621 and Kusumben D. Mahadevia [1980] 122 ITR 38. At page 147 of 170 ITR, the contention of counsel for the Revenue is recorded as under :
"Dr. Gauri Shankar, learned senior counsel, urged in support of the appeal that the entire exercise of valuation before the High Court rested on a case .which had no application to the matter ; that the case was governed squarely by the pronouncements of this court in CWT v. Mahadeo Jalan [1972] 86 ITR 621, and, more particularly, in CGT v. Kusumben D. Mahadevia [1980] 122 ITR 38 and that the erroneous view of the High Court as to the principles of valuation should, therefore, not remain unconnected."
12. The contention of counsel for the assessee before the Supreme Court was that since the break-up method was the method agreed to by both the parties, no interference was called for. This contention of the assessee was rejected by the Supreme Court at pages 147 and 148 of 170 ITR as under :
"We are afraid, the basis adopted by the High Court is clearly unsustainable in the light of the pronouncements of this court referred to earlier. 'In Kusumben's case , referring to the principles of valuation relevant to the matter, this court said (at page 45) : .... The view of the High Court cannot, therefore, be said to reflect the position in law correctly.
The correct principle of valuation applicable to a given case is a question of law. The parties can agree upon a principle permissible under and recognised by law. If two or more alternative principles are equally valid and available, it might be permissible for the parties to agree upon one of the alternative modes of valuation in preference to another. In this case, the Revenue cannot be said to be precluded from urging the correct legal position. In the ultimate analysis, it requires to be held that the view of the High Court as to the principle of valuation in determining the value of the kind of shares concerned in this case cannot be held to be correct. The first question of law referred for its opinion would, therefore, require to be answered in the affirmative and the second in the negative, both against the assessee. As a logical consequence, the Tribunal would have to go through, over again, the exercise of determination of the value of the shares adopting the correct principle."
13. However, considering the smallness of the amount, the decision of the High Court was not set aside and the Supreme Court disposed of the matter by laying down as under (at page 149 of 170 ITR) :
"In this view of the matter, we think the appellant should be content with the declaration of the law on the matter, without disturbing the valuation made by the Tribunal and approved by the High Court, though the principle adopted is not supportable in law. We, therefore, decline to interfere in the matter. The valuation is, therefore, left undisturbed."
14. Relying on the aforesaid decisions and, in particular, the underlined portions of the aforesaid judgments, Mr. Bajoria, submits that, in spite of the provisions of Rule 10(2) of the Gift-tax Rules, 1958, which are akin to Rule 1D of the Wealth-tax Rules, 1957, the Supreme Court laid down that the only proper method for valuing the shares of a going concern was the yield method and not the breakup method. The three decisions of the Supreme Court in Mahadeo Jalan [1972] 86 ITR 621, Kusumben D. Mahadevia [1980] 122 ITR 38 and Late Ambalal Sarabhai [1988] 170 ITR 144 clearly lay down that, save and except exceptional circumstances, the only proper method for valuing the shares of a going concern is the yield method and not the break-up method. He, therefore, submits that Rule 1D would be the proper method of valuing the shares of companies which are ripe for liquidation or of such companies in which exceptional circumstances exist. However, the method laid down in Rule 1D would be wholly inapplicable to companies which are not ripe for liquidation and where exceptional circumstances do not exist. The method laid down in Rule 1D is not an equally valid alternative method for finding out the market value of the shares of a going concern. It would be wholly inapplicable in such cases and cannot provide the market value. It is his contention that the provisions of Rule 1D should be construed as directory, mainly applicable only to those cases where the break-up value method is appropriate, that is, companies which are ripe for liquidation or going concerns which are having exceptional circumstances which make the yield method inapplicable.
15. In support of his contention that Rule 1D is directory, he refers to Section 7(1) and Section 46(2)(a). Sub-section (1) of Section 7 of the Act provides "subject to any rules made in this behalf", There could be some controversy as to the exact scope of these words, but Mr. Bajoria contends that the matter is beyond doubt in view of the provisions of section 46(2)(a) of the Act relating to rule-making powers. Section 7 lays down "subject to any rules" which would mean such rules as it is lawful and competent for the Board to make in terms of Section 46.
16. Under the provisions of Section 46(2), such rules are to provide the manner in which the market value of any asset can be determined. In other words, the rule made must aim at determining the market value of the asset in a well-recognised or accepted manner. If any rule is made which would not lead to determination of the market value, then it would be beyond the rule-making power and would be invalid. It is well-settled that an interpretation which would uphold the validity of the rule or notification should be preferred to the one which would not do so. Accordingly, Rule 1D should be construed as directory in nature.
17. Mr. Bajoria says that if the rule is procedural in nature, it should be construed as directory. He derives inspiration from the interpretation placed on Rule 1BB by this court. He contends that ,the procedural law applies retrospectively to pending proceedings. If Rule 1D is construed to be mandatory and applicable even in cases of going concerns, not having any exceptional circumstances, then it would be a substantive provision overriding the law laid down in the said decisions of the Supreme Court and the well-established principles of valuation. The provision of Rule 1BB of the Rules deals with valuation of residential house and is akin to Rule 1D. It has been held in several cases including that of this court that the provisions of Rule 1BB are procedural and hence apply to pending proceedings. (See CWT v. Shri Kasturbhai Mayabhai [1987] 164 ITR 107 (Guj) and Smt. Manjushree Biswas v. CWT ). Procedure is a handmaid of justice and has to yield to ensure substantive justice. Procedural laws are normally construed to be directory. If the provisions are considered to be in the realm of substantive law, then retrospective effect cannot be given in pending proceedings unless such retrospectivity is given by the Legislature itself.
18. Mr. Bajoria has drawn our attention to the decisions of High Courts taking the view that the provisions of Rule 1D are directory. The said decisions are as follows :
(a) Smt Kusumben D. Mahadevia v. N.C. Upadhya [1980] 124 ITR 799 (Bom).
(b) K.M. Mammen v. WTO [1983] 139 ITR 357 (Mad).
(c) Dr. D. Renuka v. CWT .
(d) Sharbati Devi Jhalani v. CWT [1986] 159 ITR 549 (Delhi).
19. He has also drawn our attention to the decisions of High Courts taking the view that the provisions of Rule 1D are mandatory. These decisions are as follows :
(a) CWT v. Laxmipat Singhania and CWT v. Sripat Singhania . These cases were followed by the Allahabad High Court in the cases of CWT v. Padampat Singhania [1979] 117 ITR 443 and Bharat Hari Singhania v. CWT [1979] 119 ITR 258.
(b) CWT v. Mamman Varghese [1983] 139 ITR 351 (Ker).
20. It is necessary for us at this stage to examine these decisions which have dealt with several aspects of this question. It will be our endeavour to discuss these cases with reference to the different aspects dealt with by these decisions. The first question is whether the yield method is the only proper method of valuing the shares of a going concern and consequently the break-up method is not applicable to such cases. In Laxmipat Singhania [1978] 111 ITR 272, the Allahabad High Court, at page 276, observed :
"A well-accepted method of valuing an unquoted equity share is on the basis of its break-up value" . According to Mr. Bajoria, this observation of the Allahabad High Court is directly contrary to the aforesaid three decisions of the Supreme Court. It is his contention that the attention of the Allahabad High Court was not drawn in the said case to the decision of the Supreme Court in Mahadeo Jalan [1972] 86 ITR 621, which had been reported by them. This was pointed out by this court in CWT v. Balbhadradas Bangur [1984] 148 ITR 149, at pages 163-164. The Allahabad High Court merely followed its view in Laxmipat Singhania in the subsequent decisions in Sripat Singhania and Padampat Singhania . This fact was also noted by this court in Balbhadradas Bangur [1984] 148 ITR 149 at page 164.
In Smt. Kusumben D. Mahadevia [1980] 124 ITR 799, the Bombay High Court, at pages 810-816, discussed the Supreme Court decision in Mahadeo Jalan [1972] 86 ITR 621 and the leading authorities on valuation, accountancy and English cases and came to the conclusion that the breakup value method is not the proper method and the yield method is the only method for valuing the shares of a going concern. It observed that this aspect had great relevance in determining the nature of Rule 1D.
In Sharbati Devi Jhalani [1986] 159 ITR 549, the Delhi High Court held at page 562 that: "If the value so determined is more than the value returned and the provisions of Rule 3B are applicable, then the question of valuation of the said shares has to be referred by the Wealth-tax Officer to the Valuation Officer, under Section 16A. The Valuation Officer, when a reference has been made to him, has to determine the value of the unquoted shares in accordance with the provisions of Section 7(3) of the Act, i.e., he has to determine the price which those shares will fetch if sold in the open market on the valuation date. It is obvious that the Valuation Officer is not to determine the value of the unquoted shares by applying the break-up value method. The correct method of valuing such shares would be the method as approved by the Supreme Court in CWT v. Mahadeo Jalan [1972] 86 ITR 621 and CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38, which is by applying the yield method. The break-up value method is to be used only if the company, on the valuation date, is ripe for winding up".
21. In Dr. D. Renuka's case [1989] 175 ITR 615, the Andhra Pradesh High Court, after considering the Supreme Court decision in Mahadeo Jalan's case [1972] 86 ITR 621 and the said decision of the Bombay High Court in Smt. Kusumben D. Mahadevia's case [1980] 124 ITR 799 and of the Delhi High Court in Sharbati Devi Jhalani's case [1986] 159 ITR 549, preferred the view of the Bombay and Delhi High Courts as, according to it, that was related to realities and dissented from the view of the Allahabad High Court in Laxmipat Singhania's case [1978] 111 ITR 272 and other cases following it.
22. According to Mr. Bajoria, the Bombay, Delhi and Andhra Pradesh High Courts, in consonance with the principles laid down in the said three decisions of the Supreme Court referred to above, held that the only method for valuing the shares of a going concern was the yield method and not the break-up method. This view, according to Mr. Bajoria, was also shared by this court in the said case of Balbhadradas Bangur [1984] 148 ITR 149 at pages 163-164 and the said view of the Allahabad High Court that the break-up method was also the proper method for valuing the shares of a going concern was dissented from, being contrary to the Supreme Court decision in Mahadeo Jalan [1972] 86 ITR 621.
23. The second aspect is whether the provisions of Rule 1D are to be construed as directory and are applicable only to cases where the company is ripe for liquidation or in exceptional circumstances where the value cannot be obtained by the yield method, in short, whether Rule 1D can be applied to a going concern. Section 7 read with Section 46(2)(a) empowers making of only such rule as would enable determination of the market value of shares in a given set of circumstances. Hence, the words "subject to any rules made in this behalf", learned counsel contends, do not contemplate that a rule can be framed and would be mandatorily applicable although with reference to which the market value cannot be obtained. Such an interpretation would amount to overriding the substantive provisions of the Act. Accordingly, the provisions of Rule 1D are to be construed as directory and applicable only to cases where the company is ripe for liquidation or in exceptional circumstances.
24. The Allahabad High Court in Laxmipat Singhania's case [1978] 111 ITR 272 and Sripat Singhania's case [1978] 112 1TR 363 did not at all consider these aspects. On the other hand, it proceeded on the basis that the break-up method was a well-recognised method for valuing the shares of a going concern.
25. The Bombay High Court in Smt. Kusumben D. Mahadevia's case [1980] 124 ITR 799, at pages 817-818, discussed this aspect and held that the rules must provide for a method which is a valid method for determining the market value.
26. The Andhra Pradesh High Court in Dr. D. Renuka's case [1989] 175 ITR 615, at page 620, considered this aspect and agreed with the Bombay High Court's view. The Delhi High Court in Sharbati Devi Jhalani's case [1986] 159 ITR 549, did not consider and deal with this aspect.
27. The third aspect is that if Rule 1D were to be construed as mandatory, many of the provisions of the Act will be rendered nugatory. Mr. Bajoria's contention is that, if Rule 1D were to be construed as mandatory, then the provisions of Section 7(3) read with Section 16A relating to reference to the Valuation Officer and the powers of the appellate authorities under Section 23(1) read with Sub-section (3A) and Section 24(1) read with Sub-section (5) and/or Sub-sections (6) to (8B) would be rendered meaningless. If the provisions of Rule 1D were held mandatory, then the entire process for determining the value would be a mere arithmetical exercise and the elaborate provisions for reference to the Valuation Officer, the giving of opportunity by the appellate authorities to the Valuation Officer in appellate proceedings, would all be rendered otiose. Further, the provisions of Section 7(3) which are not subject to any rules made under the Act and are notwithstanding the provisions of Section 7(1) would, in effect, be made subject to the rules and Section 7(1).
28. The Allahabad High Court in Sripat Singhania's case [1978] 112 ITR 363, at page 366, held that there is nothing in Rule 1D to indicate that it shall be followed only by the Wealth tax Officer and that, after the framing of the rules, the valuation of the unquoted shares had to be determined under Section 7(1) read with Rule 1D. It further held at pages 366 and 367 of the Reports that the powers exercisable by the Tribunal under Section 24 are not different from those exercisable by the Wealth-tax Officer under Section 7(1) and that an appellate court or authority exercises the same power as the trial court or assessing authority and that the use of the words "as it thinks fit" in Section 24(5) does not take away or whittle down the binding effect of Rule 1D. Mr. Bajoria points out that no submissions were made and considered by the Allahabad High Court with reference to Section 7(3) read with Section 16A and to hearing the Valuation Officer in appellate proceedings and that Section 7(3) was not subject to any rules and was made notwithstanding the provisions of Section 7(1).
29. The Bombay High Court in Smt Kusumben D. Mahadevia's case [1980] 124 ITR 799, at pages 808 and 809, noted these provisions and, at pages 822 and 823, held that the provisions of valuation under Section 16A and the appellate provisions in Section 24 clearly indicate that Rule 1D was not of mandatory nature.
30. The Andhra Pradesh High Court in Dr. D. Renuka's case [1989] 175 ITR 615, did not specifically advert to this aspect but agreed with the reasoning of the Bombay High Court.
31. The Delhi High Court in Sharbati Devi Jhalani's case [1986] 159 ITR 549 at pages 554 and 555, noted the provisions of sections 7(3) and 16A and held at page 561 that once reference is made to the Valuation Officer, the value of the asset has to be determined by the Valuation Officer in accordance with Section 7(3) and, for determining such valuation, the shares cannot be valued under Rule 1D and have to be valued as laid down by the Supreme Court in the cases of Mahadeo Jalan [1972] 86 ITR 621 and Smt. Kusumben D. Mahadevia [1980] 122 ITR 38, namely, by the yield method. It further held at page 562 that the appellate authorities are not bound by the said Rule 1D as the powers of the appellate authorities under Sections 23 and 24 of the Act cannot be restricted by the provisions of Rule 1D and a rule cannot be so construed as to override, restrict or amend the provisions of the substantive statute.
32. The other aspect of the question is whether the provision of the rules should be so construed as to make it intra vires the Act and not ultra vires ; and, for so construing, the word "shall" should be read as "may".
33. In the case of Sripat Singhania [1978] 112 ITR 363, the Allahabad High Court, at page 366, merely observed that " After the framing of the rules in 1967, the valuation of unquoted equity shares has to be determined under Section 7(1) read with Rule 1D". The above aspects, Mr. Bajoria contends, were not at all argued or considered by the Allahabad High Court.
34. In the case of Mamman Varghese [1983] 139 ITR 351, the Kerala High Court followed the said decision of the Allahabad High Court in Sripat Singhania [1978] 112 ITR 363, and dissented from the decision of the Madras High Court in the case of K.M. Mammen v. WTO [1983] 139 ITR 357. At page 355 of the Reports, the Kerala High Court has held as follows :
"The section itself opens with the words 'Subject to any rules made in this behalf', thereby bringing out the paramountcy of the rules. The section then proceeds to use imperative language by providing that the value of any asset '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. Turning to the rule again, we notice the imperativeness of the provision in the direction that the value of an unquoted equity share 'shall' be determined.
In the context and from the purport of the section and the rule, we do not see any warrant or justification for construing the expression 'shall' in the section and the rule as 'may' or in understanding this provision as directory and not mandatory. On the other hand, we think, that effect should be given to the plain and simple provision of the rule. Counsel for the Revenue cited the decisions in CWT v. Sripat Singhania and CWT v. Padampat Singhania . In the earlier of these cases, a Division Bench of the Allahabad High Court explained the position thus (at page 366)."
35. At page 356 of the Reports, the view of the Allahabad High Court that the appellate authorities are also bound by the provisions of the said rule while exercising their appellate powers under Section 24(5) of the Act was followed. Mr. Bajoria points out that there is no discussion in this case on any of the aspects relating to sections 7(3) and 16A, giving of opportunity to the Valuation Officer by the appellate authorities, etc., as noted by the Bombay, Delhi and Andhra Pradesh High Courts.
36. In Smt. Kusumben D. Mahadevia's case [1984] 124 ITR 799, the Bombay High-Court, at pages 816-823, discussed this aspect. It held that, on a proper construction of the different provisions of the Act, viz., sections 7, 16A, 46(2)(a), etc., the rules should be construed as directory and its validity should be upheld by such a construction. In K.M. Mammen's case [1983] 139 ITR 357, the Madras High Court dismissed a writ petition challenging the validity of Rule 1D on the ground that it was unreasonable and arbitrary by holding that the said rule was merely an enabling provision and the word "shall", in the said rule, was not always mandatory and could be read as having the effect of "may" depending upon the circumstances of each case.
37. In Sharbati Devi Jhalani's case [1986] 159 ITR 549, the Delhi High Court dealt with this aspect at page 558 of the Reports as under :
"If the contention of the respondents is accepted, who contend that the value has only to be determined by invoking the principle of the break-up value of the shares of the last balance-sheet drawn up, then the said rule may, in all probability, be violative of Section 3. As already noticed, Section 3 read with Sections 2(m) and 2(q) requires the net wealth of an assessee to be determined as on the valuation date. No rule can be framed which would provide for a value to be determined on a date other than the valuation date. If we were to hold that Rule 1D would cover all the cases of unquoted shares, irrespective of the date on which the last balance-sheet of the company was drawn up, then the said rule may have to be struck down as being contrary to the provisions of the Act. By a rule, the provisions of the Act cannot be nullified or altered. When the Act enjoins the determination of the net wealth of an assessee on the valuation date, by a rule, a different date cannot in effect be fixed. For an assessee whose valuation date, say, is March 31, 1979, and whose assets consist of unquoted shares of a company, you cannot ignore the actual value of those shares on March 31, 1979, and arrive at his net wealth by taking what may have been the value of those shares much earlier. It can happen that whereas when the last balance-sheet was drawn up, the company may have been prosperous but, on the valuation date of the assessee, it might have become commercially insolvent and the actual value of the shares may be nil. If Rule 1D provides such an outcome, then it may have to be held that it is contrary to Section 3 of the Act.
In order to uphold the validity of Rule 1D and, at the same time, not to do violence to the language of the relevant provisions, we are of the opinion that where the valuation date of the company and of the assessee is the same, then the application of Rule 1D is mandatory."
38. It is the contention of Mr. Bajoria that the Delhi High Court has also accepted the principles laid down by the Bombay High Court, Andhra Pradesh High Court and Madras High Court that the provisions of Rule 1D should be so construed so as to make it intra vires. The Delhi High Court felt that Rule 1D would be violative of the provisions of the Act if it was made applicable even to a case where the valuation date of the assessee and the accounting year of the company were not the same.
39. The last aspect of the question is whether Rule 1D prescribes a rule of procedure. It is the contention of Mr. Bajoria that all High Courts including the Allahabad High Court are unanimous and have held that the provisions of Rule 1D do not relate to the substantive law but deal with the procedure only.
40. The Allahabad High Court in Laxmipat Singhania's case [1978] 111 ITR 272, at page 276, held that "Rules 1C and 1D must be regarded as rules of evidence or procedure and not rules of substantive law. It follows that Rules 1C and 1D which were inserted in the Wealth-tax Rules, 1957, by the Wealth-tax (Amendment) Rules, 1967, were applicable to pending assessments of the assessees even though such assessments related to assessment years prior to the date of coming into force of those rules and the relevant valuation dates were also prior to that date ".
41. The Bombay High Court in Smt. Kusumben D. Mahadevia's case [1980] 124 ITR 799, at pages 817-818 held :
"Section 7(1) is thus a machinery provision which requires the Wealth-tax Officer to hypothetically assume that there is an open market and the property can be sold in such market and it is on that basis that the value of the asset has to be determined for the purposes of computation of the net wealth of the assessee ... Section 7(1) thus being a machinery provision, the scope of the power to be exercised under the provision must be ultimately to determine the price of an asset if it is sold in the open market on the valuation date .... It will not be possible to construe or determine the validity of Rule 1D merely on the terms of Rule 1D itself. The scope of the power under which it has been made is also relevant to decide the scope of Rule 1D."
42. Again, at page 819, the Bombay High Court held :
"Now, so far as Rule 1D is concerned, it prescribes a certain procedure for computing the market value."
43. The Kerala High Court, in Mamman Varghese's case [1983] 139 ITR 351, followed the decision of the Allahabad High Court in Sripat Singhania's case [1978] 112 ITR 363 and did not specifically discuss this aspect.
44. The Delhi High Court in Sharbati Devi Jhalani's case [1986] 159 ITR 549 also proceeded on the basis that Rule 1D prescribes a method for determining the value of unquoted shares.
45. The Andhra Pradesh High Court in Dr. D. Renuka's case [1989] 175 ITR 615, also proceeded on the basis that Rule 1D laid down a method for determining the value and agreed with the reasonings of the Bombay High Court in Smt. Kusumben D. Mahadevia's case [1980] 124 ITR 799.
46. Mr. Bajoria also contends, as we have already noted, that the fact that the rules framed for valuation of assets are procedural was also accepted with reference to Rule 1BB, which was framed for determining the value of residential immovable property by rental method. The decision of the Gujarat High Court in CUT v. Shri Kasturbhai Mayabhai [1987] 164 ITR 107, holding that Rule 1BB was procedural and hence retrospective in operation was followed by this court in Smt. Manjushree Biswas v. CWT [1988] 171 ITR 348. According to learned counsel, the procedural laws are handmaids of justice and, in case of any conflict, such procedural laws should yield to ensure justice (see Kalipada Das v. Bimal Krishna Sen Gupta .
47. He contends that the provisions of Rule 1D cannot be applied to the cases of a going concern in which no exceptional circumstances exist, as it would not lead to determination of the market value of the shares. Accordingly, the procedural law of Rule 1D should be held directory in nature and applicable only to cases where exceptional circumstances exist or the company is ripe for liquidation.
48. According to him, the only proper and reasonable interpretation consistent with the provisions of the Act, namely, Sections 7(1), 7(3), 16A, 24, 26, 46(2) and the said three decisions of the Supreme Court referred to earlier would be to hold that Rule 1D is directory in nature and would apply to cases of concerns which are ripe for liquidation or going concerns in which exceptional circumstances exist. The break-up method provided in Rule 1D is no method at all for determining the value of the shares of a going concern as laid down in the said three decisions of the Supreme Court and, accordingly, the provisions of Rule 1D in such cases can have no mandatory effect. It is not a case where there are two methods equally valid for determining the market value and the rule chooses one of them. It is a case where the method prescribed by the rule is not at all a method for determining the value of the shares of a going concern. Mr. Bajoria argued that Rule 1D or 1BB is merely an enabling provision for determining the market value and cannot become in itself a substantive provision.
49. At this stage, we must point out that this court in Balbhadradas Bangur's case [1984] 148 ITR 149 has held that the rule is not-merely a procedural matter. It affects the substantive right of the assessee. At page 162 of the Reports, the court observed as follows :
"So far as Rule 1D of the Wealth-tax Rules, 1957, is concerned, it appears that, being a subsequent rule, the said rule would not be applicable. It was, however, urged before us that, as the rule was a procedural matter, it would have retrospective effect. We are unable to accept the contention that the rule was merely a procedural matter because the valuation of the shares affects the substantive right of the assessee concerned. In any event, Rule 1D will be applicable to the shares of companies other than an investment company but we are concerned with the shares of an investment company. Therefore, the rule would not be attracted."
50. We have given our anxious consideration to the elaborate and able arguments made by Mr. R. N. Bajoria.
51. Section 7 of the Wealth tax Act, 1957, provides that, subject to any rules made in this behalf, the value of any assets shall be estimated to be the price which, in the opinion of the Assessing Officer, it would fetch if sold in the open market on the valuation date. In other words, the market value of the asset is to be found out. The other Sub-sections (2), (3) and (4) of Section 7 are notwithstanding the provisions of Sub-section (1) and are, therefore, in the nature of special provisions. The power to make the rules is conferred by Section 46 of the Act. Clause (a) of Sub-section (2) lays down that such rules may provide the manner in which the market value of any asset may be determined. The words "market value" are not defined in the Act. Rule 1D was inserted by the Wealth-tax (Amendment) Rules, 1967 (see [1967] 66 ITR (St.) 44). It lays down the mode of computation of the market value of unquoted equity shares of companies other than investment companies and managing agency companies. The said rule would be relevant for determining the value of equity shares of all companies other than investment companies and managing agency companies. Such other companies are hereinafter referred to as non-investment companies. The said rule would be applicable in respect of non-investment companies, irrespective of whether they are ripe for liquidation or are going concerns or whether there are special circumstances which make the yield method unworkable. The method laid down by Rule 1D is what is known as the break-up value method.
52. As indicated, the contention of learned counsel for the assessee principally rests on the three Supreme Court decisions, viz., Mahadeo Jalan's case [1972] 86 ITR 621, Kusumben D. Mahadevia's case [1980] 122 ITR 38 and Executors and Trustees of the Estate of Late Ambaial Sarabhai's case [1988] 170 ITR 144. In Mahadeo Jalan's case [1972] 86 ITR 621, the Supreme Court held that the proper method of valuing unquoted equity shares of a company which is a going concern is the profit-earning method. In other words, the profit-earning capacity of a going concern would ordinarily determine the value of its shares. The break-up method was considered inappropriate since the break-up method is relevant only whore the company is ripe for winding up. According to the Supreme Court, the factors which actuate the buyer and seller is the profit potential ; the break-up value of a share as on liquidation hardly enters into the consideration where the shares are of a going concern. This principle of valuation as formulated in Mahadeo Jalan's case was reiterated in Kusumben D. Mahadevia's case . It has been held in the latter case that the provisions for determining the value of an asset is the same as in Section 6, Sub-section (1) of the Gift-tax Act, 1958, as it is in Section 7, Sub-section (1) of the Wealth-tax Act, 1957. The principles of valuation laid down in Mahadeo Jalan's case must apply equally in relation to valuation of shares to be made for the purpose of the Gift-tax Act, 1958. This observation was made because the Supreme Court was concerned with the valuation under the Gift-tax Act, 1958, while the principles laid down in Mahadeo Jalan's case was under the Wealth-tax Act, 1957. The Supreme Court in Kusumben D. Mahadevia's case [1980] 122 ITR 38, has also referred to Rule 10, Sub-rule (2), applicable for valuing the unquoted equity shares of a company. According to Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958, the value of such shares was required to be ascertained by reference to the value of the total assets of the company and it was only if the value was not so ascertainable that it could be determined in any other manner. The Supreme Court, however, held that the profit-earning method as earlier enunciated by the Supreme Court in Mahadeo Jalan's case being the proper method should be applied, at least so far as the valuation under the Gift-tax Act, 1958, is concerned.
53. It is true that the Revenue urged before the Supreme Court that the primary method prescribed by Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958, was the break-up method. The alternative method was required to be adopted only in case of impracticability of the break-up method in any particular case. But the Supreme Court did not pronounce on that issue as the same was not referred by the Tribunal to the High Court and, therefore, that question did not fall for determination by the Supreme Court. The Supreme Court, therefore, did not decide that issue. Thus, the question of preference for break-up method in Sub-rule (2) of Rule 10 of the Gift-tax Rules, 1958, was not considered in Kusumben D. Mahadevia's case . Mr. Bajoria, learned counsel for the assessee, has fairly conceded this position.
54. In the third case, i.e., Executors and Trustees of the Estate of Late Ambalal Sarabhai [1988] 170 ITR 144, the Supreme Court, however, preferred the yield method to the break-up method holding that the High Court was in error in adopting the break-up method.
55. We have already examined the decisions which have been cited from the Bar and noted the comments made by Mr. Bajoria. The Bombay High Court, in Kusumben D. Mahadevia's case [1980] 124 ITR 799, held that Section 7(1) is a machinery provision which requires the Wealth-tax Officer to hypothetically assume that there is an open market and that the property can be sold in such a market and it is on that basis that the value of the asset has to be determined for the purposes of computation of the net wealth of the assessee. Section 7(1) thus being a machinery provision, the scope of the power to be exercised under the provision must be ultimately to determine the price of an asset if it is sold in the open market on the valuation date. It will not be possible to construe or determine the validity of Rule 1D merely on the terms of Rule 1D itself. The scope of the power under which it has been made is also relevant to decide the scope of Rule 1D. According to the Bombay High Court, when Section 7(1) opens with the words "Subject to any rules made in this behalf", the rules contemplated are the rules which would enable the Income-tax Officer to determine the price. In other words, any rule made must be for the purposes of carrying out the object of Section 7, the object being to determine the market value as contemplated by Section 7(1). The normally permissible method of determining the market value in the case of unquoted shares is the yield method though, under exceptional circumstances, the break-up method would also be utilised. Considering the scheme of Section 46(2) first in the light of the fact that the proper method for valuing shares of a private company not quoted in any stock exchange is not the break-up value method but the yield method, and, secondly, in the context that the Legislature has used in Section 46(2) "may" and "shall" in the same section, it clearly appears that the use of the word "may" in Clause (a) of Section 46(2) was intended to vest a discretion in the Wealth-tax Officer in the matter of valuation of unquoted shares of a private company. The scope of the rule-making power is restricted so as to provide by a rule a mode in which the market value of an asset may or would be determined. The rule-making power under Section 46(2) can be exercised only for the purpose of making a rule giving discretion to the Wealth-tax Officer to apply the rule, if necessary, and compute the value according to the manner prescribed in that rule. Hence, the provisions of Rule 1D are not mandatory. It was, therefore, urged by learned counsel that the adoption of the break-up value method of Rule 1D for a company as a going concern cannot be mandatory in view of the said decisions of the Supreme Court.
56. As we have indicated, learned counsel also placed heavy reliance on the decision of the Delhi High Court in Sharbati Devi Jhalani's case [1984] 159 ITR 549, wherein the Delhi High Court has held that Rule 1D cannot be mandatory because such a view conflicts with Sections 7(3) and 16A of the Wealth-tax Act, 1957, and Rule 3B of the Wealth-tax Rules, 1957. Where the value so determined under Rule 1D is more than the value returned attracting the provisions of Rule 3B, the question of the valuation of said shares has to be referred to the Valuation Officer under Section 16A. The Valuation Officer, again, in the event of such reference, has to determine the value of the unquoted shares in accordance with the provisions of Section 7(3) of the Act, i.e., he has to determine the price which those shares would fetch if sold in the open market on the valuation date. From this, it is obviously clear that the Valuation Officer should not determine the value of the unquoted shares by applying the break-up value method as an invariable rule. The Delhi High Court in the said case has further held that the acceptance of the break-up value method as per Rule 1D creates further incongruities with the provisions of the Act. If the value has only to be determined by invoking the principle of the break-up value of the shares on the basis of the last balance-sheet drawn up, then, the said rule may, in all probability, be violative of Section 3 read with Sections 2(m) and 2(q) as the complement and the said provisions require the net wealth of an assessee to be determined as on the valuation date. Where the valuation date of the assessee does not coincide with the date of the balance-sheet of the company, the value of the shares as per the break-up method as prescribed by Rule 1D shall have to be made on a date other than the valuation date of the assessee. The court observed that if Rule 1D is to cover all the cases of unquoted shares, irrespective of the dates on which the last balance-sheet of the company was drawn up, then it would mutilate the provisions of Sections 3 and 2(q) and the said rule may have to be struck down as contrary to the provisions of the Act. A rule cannot nullify or alter the provisions of the Act. If Rule 1D provides for. such an outcome, then it may have to be held that it overrides the very charging section of the Act. Finally, the Delhi High Court, in order to uphold the validity of Rule 1D and at the same time not do violence to the language of the section, took the view that Rule 1D can be mandatory only where the valuation date of the company and the balance-sheet date of the assessee are the same.
57. The other argument advanced was that the provisions of Section 7(3) read with Section 16A relating to reference to the Valuation Officer and the power of the appellate authorities under Section 23(1) read with Sub-section (3A) and Section 24(1) read with Sub-section (5) and/or Sub-sections (6) to (8)(b) would be rendered redundant, if Rule 1D is construed as mandatory. Thus, the argument canvassed is that a reading of Rule 1D as mandatory makes the rule ultra vires the Act to which aspect we shall come shortly.
58. In our view, the three Supreme Court decisions which inspired the assessee and on which heavy reliance was placed are distinguishable. The first decision, viz., CWT v. Mahadeo Jalan [1972] 86 ITR 621, was delivered by the Supreme Court in the context of the position prevailing prior to the framing of Rule 1D. Therefore, the Supreme Court did not have any occasion to go into the question of the imperative nature or otherwise of the provisions of Rule 1D. It is true that, in the second decision of the Supreme Court in Smt. Kusumben D. Mahadevia's case [1980] 122 ITR 38, a similar view was taken by the Supreme Court even after taking note of the provisions of Sub-rule (2) of Rule 10 of the Gift-tax Rules. The said provisions, however, gave the taxing authority two options, either to adopt the break-up method or, in the case of the impracticability of the break-up method, any other appropriate method. The Supreme Court, however, despite the primacy given to the break-up method by the said Sub-rule (2) of Rule 10, applied the profit-earning method.
59. As indicated earlier, the question of primacy of the break-up method in Rule 10(2) of the Gift-tax Rules was left out of consideration in the said judgment as the same was not referred to the High Court by the Tribunal.
60. The Supreme Court did not have, the opportunity of examining the impact of Rule 1D inserted by the Wealth-tax (Amendment) Rules, 1967, as the Supreme Court was concerned with the question of valuation under the Gift-tax Act and the Rules framed thereunder.
61. Rule 1D as framed, unlike Rule 10(2) of the Gift-tax Rules, gives the taxing authorities no option to adopt Rule 1D. It has made the adoption of the break-up method a categorical imperative for valuing the unquoted equity shares. It has laid down elaborate provisions which per se constituted a self-contained code. In our opinion in CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38, the Supreme Court permitted adoption of the yield method by reason of the option provided for in Rule 10(2) of the Gift-tax Rules. There is no such alternative provided for by Rule 1D of the Wealth-tax Rules. Thus, the Supreme Court has had no occasion to adjudge the scope, effect and impact of Rule 1D as framed. The question remains whether, even in the absence of any alternative to it, Rule 1D can be eschewed and the profit-earning method adopted.
62. The Bombay High Court in Smt. Kusumben D. Mahadevia's case [1980] 124 ITR 799, has raised an important aspect. It has pointed out that while conferring on the Board the power to frame the rules for valuation, Rule 46(2)(a) has used the expression the manner in which the market value of any asset "may" be determined, but the expression "shall" has been used in Section 46(2)(b). Thus, the discreet use of the words "may" and "shall", in different parts of Section 46(2), projects the intention of the Legislature to vest through Section 46(2)(a) a discretion in the Wealth-tax Officer in the matter of valuation of unquoted shares of a private company.
63. But the use of "may" has to be understood as " shall" because of the opening expression "Subject to any rules made in this behalf" in Section 7. The making of the rule may be discretionary for the Board. But, once the rule is made, that will have a governing effect on the substantive provision as contained in Sub-section (1) of Section 7 and its adoption shall be imperative for the Taxing Officer. This view has been taken by the Kerala High Court in CWT v. Mamman Varghese [1983] 139 ITR 351. According to that decision, the opening words "Subject to any rules made in this behalf" bring out the paramountcy of the rules and the section also uses imperative language by providing that the valuation of any asset shall be determined subject to the rules. Rule 1D also uses imperative language and the break-up method is a categorical imperative under the rule.
64. Learned counsel's argument that Rule 1D is ultra vires the various provisions of the Act may be a plea for striking down the rule altogether but the question of vires of the rule does not fall within the reference jurisdiction of the High Court as held by the Supreme Court in Beharilal Shyamsunder v. STO [1966] 60 ITR 260 : [1966] 17 STC 508 and K.S. Venkataraman and Co. Pvt. Ltd. v. State of Madras . It is not the case of the assessee that the rules should be struck down ; what the assessee contended is that it should be disregarded. But such ouster of the rule on the ground that it is ultra vires could be supported if there were an alternative method of the rule. It is, however, not the case that the rule contained two methods, one ultra vires and the other intra vires--to choose between. Rule 1D leaves no alternative. What learned counsel to the assessee wants us to hold would amount to creating an alternative for Rule 1D. But this court cannot substitute itself for the rale-making authority and relegate Rule 1D as framed to obsolescence and to graft the yield method as its other limb. In this connection, it has also to be borne in mind that a rule cannot be too easily obliterated in view of the fact that every rule has the sanctity of parliamentary approval as it is required to be placed before Parliament for its scrutiny and approval under Section 46(4).
65. In fact, the arguments against the vires of Rule 1D carry little conviction. Because the rules clearly provide for taking the book value of the assets and the liabilities as per the balance-sheet, there is no question of determination of value of individual assets. There is, therefore, no scope for the provisions of Sections 7(3) and 16A and Rule 3B being invoked by reason of the application of Rule 1D.
66. The Delhi High Court's view in Sharbati Devi Jhalani's case [1986] 159 ITR 549 requires serious consideration as to whether the prescription in Rule 1D, Explanation (1), that where the valuation date of the assessee does not coincide with the date on which the balance-sheet of the company is drawn up the immediately preceding balance-sheet and, in its absence, the balance-sheet drawn up on a date immediately after the valuation date should be taken for valuation does violence to Sections 3 and 2(q). But this disparity in dates is not avoidable even if the profit-earning method is adopted. Similar fact-situation is bound to arise in the event of valuing the unquoted shares on the profit method. Therefore, that cannot be a ground for holding Rule 1D ultra vires.
67. Learned counsel for the assessee also referred to the decision of the Calcutta High Court in CWT v. Balbhadradas Bangur [1984] 148 ITR 149, but that decision is not relevant since it dealt with the question of the determination of value of unquoted shares of an investment company. Rule 1D however deals exclusively with unquoted shares of companies other than investment companies. There had been in fact no rule for valuing the unquoted shares of an investment company. Therefore, the position with regard to the unquoted shares of an investment company is similar to that obtaining in Mahadeo Jalan's case [1972] 86 ITR 621, where the Supreme Court decided the issue in the absence of any rule for valuing unquoted shares of companies other than investment companies.
68. It may be mentioned that the Direct Tax Laws (Amendment) Act, 1989, has recast, with effect from April 1, 1989, i.e., for and from the assessment year 1989-90, the existing provisions of Section 7 which deals with the determination of value of assets for the purposes of the Wealth-tax Act. The main change which has been effected as a result of such recasting is that the rules for valuation of assets have been made a part of the Wealth-tax Act itself by inserting Schedule III to the Act instead of such rules having been made by the Central Board of Direct Taxes in exercise of its rule-making power. It clearly manifests the legislative intent. It gives an indication of the legislative recognition of the principles embodied in the erstwhile Rule 1D. It is, in essence, declaratory of the validity of Rule 1D. Parliament must be presumed to be aware of the conflicting decisions of the High Courts, but even then, by incorporating Rule 1D in the Schedule to the Act, it has given recognition to the views of the High Courts that Rule 1D is mandatory in its application to the valuation of unquoted shares of non-investment companies. Subsequent legislation may be looked at in order to see what is the proper interpretation to be put upon earlier rules where the earlier rules are capable of more than one interpretation.
69. For the reasons aforesaid, we answer the question for the assessment years 1981-82 to 1983-84 in the negative and in favour of the Revenue.
70. There will be no order as to costs.
Shyamal Kumar Sen, J.
71. I agree.