.B c COMMISSIONER OF WEALTH TAX v. MAHADEO JALAN & MAHABIR PRASAD JALAN September 13, 1972 [P JAGANMOHAN RE!>DY AND ~- R. KHANNA, JJ.) Wtalth Tax Act, 1957-Section 7-Basis of valuation of shares in Private Limite«. Companies.
On the que•tion a.~ to what is the basis of valuation of shares in private limited companies for the purpose of section 7 of the Wealth-tax Act, 1957. HELD : The general principle 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 parti~ular case may call for. An
examination of the various aspects of valuation of shares in a limited company would lead to the followin~ conclusions :- (a) Where the shares tn a public limited company are quoted on the stock exch~nge and there are dealings in term, the price prevailing on the valuation date is the value of the shares.
(b) Where the shares are of a public limited company whic'h are not quoted on stock exchange or of a private limited company the valuation is determined bl reference to the dividends if any reflecting the profit ea".ning capacity on a reasonable commercial basis.
But where they do ·not, then, the amount of yield on that basis will determine the value of the share._ In other words, the profits which the company has been making and •hould be making would ordinarily determine the value. The dividend and earning method or yield method are 1110t mutually exclusive; both should help in ascertaining the profit earniilg capacity. If the result<
of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable pro· portion of profits. ( c) In the case of a private limited company also where the e<pellSCI Gre incWTed out of all proportion to the commercial venture, they will be added back .to the profit• of the company in computing the yield. In
such companies the re'triction on share tran•fer, will also be taken into consideration in ·arriving at a valuation. (d) Where the dividend yield and earning method break do\\o\ll by reason of the clompany's inability to earn profits and declare dividends, if the set back i• temporary thein it is ,perhaps posSible to take the esti· mate of the value of the shares before set back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shar.,. of companies which have suffered similar reverses. (e) Where the company " ripe for winding up the break-up value method determined what would be realised by that process.
(f) As in Attorney GenerGr of C•ylon v. Mackie a valuation by refer· e;.ee to the a<sets would he justified where as in that ~ the fluctuations of profits and une«tainty of the conditions at the date of the valuation prevented any reasonable estimation of prospet'rive profits and dividends. The above principles are not intended to lay down any hard and fast rule, because, ultimately the facts and circumstan-:e of each case, the nature of the business, the prospects of profitabilitx and such other .:on- siderations will have to be taken into account "" will be applicable to the facts of each case.
But one thing is clear, the mark.et va!U&, uillsss in exceptional circ.umst~nce•, -cannot be determined on the hypothesis that because in a private limited company one holder can brin& 'it illll<> liquida- tion, it .should be valued a• on liquidation by the break-up method. The yield method is the generally applic~ble method while the break-up method is the ont.· re.sorted to in exceptional circumstances or where the compa.ny is ripe for liquidation, but, nonetheless, is one of the method~. A1tomey G<"ll<"rai of Cry/011 v. Mt1ckie [1952) 2 Ail. E.R. 775 P.C., S111it/i v. Rev£'tllte ('01111ni.vsioners, 1931 Irish Reports 643, Mc. Cathie v. Tiu' /,.t'<h'ral l'o:n111issioner of 1't1xation, 69 Commonwealth Law Reports pagt.• 1 an<l f't'dt•r<il l'o111111i.\'\'ioner of 1·axotion v. Sagar,, 71 C.L.R. 422 referred to.
(3) This Court has power to reframc the question as framed by the High Court so Jong ao; a new and different question is not raised but confine it O!ll)' to resettling or refran1ing a question formulated by the Tribunal or by the High c·ourt so a5 to bl"ing out the real issue between ~he parties. [221E]
Nc.rai11 Swadeshi JVem·i11g Mills v. Commi.rsioner of E.P.T., 26 I.T.R. 765 at 774 and K11s11111 Ben De MahaJavia v. Commissiontr of JrrcumtJ,- tax, 39 l.T.R. 540 at 544 referred to.
C1v1L APPELLATE JuR1so1cnoN : Civil Appeals Nos. 1135 & 11 3 6 of 1969. Appeals by special leave from the judgment and order dated December 12. 1967 of the Assam & Nagaland High Court at
Gauhati in Wealth Tax Reference Nos. 3 and 4 of 1966. AND Cil'il Appeals Nos. 1765 to 1767 of 1969. Appeals from the judgment and order dated February 4, 1969 of the Assam & Nagaland High Court at Gauhati in Civil Ruk No. 6 (m) of 1965.
l'ed Vyas, B. B. Ah11ja, S. P. Nayar and R. N. Sachthey for the :ippcllant. M. C. Seta/1•ad and S. C. Majwndar for the respondents. The Judgment of the Court was delivered by JAGANMOHAN REDDY, J.
These appeals are by special leave against the judgment of the High Court of Assam and Nagaland. Appeal No. 1136 of 1969 is of Mahadeo Mrigendra Jalan, by Mahadco Prasad as the karta of Hindu undivided family, while appeal No. 1135 of 1969 is by him in his individual capacity. In both these appeals, the Hindu undivided family as well as the individual were holding shares in five companies in respect of which shares, dividend was being declared. The Wealth-tax
Officer computed the valuatio11. of those shares on the basis of the break-up value and included them in their total wealth. In c COMMR. WEALTH TAX v. M. J/ILAN (Jllgal11ildhi:t11 Reddy, J.).211 Appeal> Nos. 1765, 1766 and 1767 /1969 the respandents
are Mahabir :PraJad Jalan, Mahadeo Jalan and Madan Mohan Jalan respectively. Ali these appeals pertain to assessment years 1957- 58 and 1958-59. In respect of these years the value 0f the shares in private limited companies were included in the
total wealth of the respective assessees on the basis of their yield though some of the companies were not paying dividends while others were declaring dividends throughout. The first
two appeals which related to a later year seem to have been heard by the High Court and disposed of on December 12, 1967 while the last three appeals were disposed of later on February 4,
1969, mainly on the basis of the judgment of the High Court in the first two appeals. For the years 1957-58 and 1958-59 relating to the three persons referred to above, the Wealth-tax
Officer had, as in the case of assessment for the year 1959-60 adopted the break-up value of the shares as disclosed on the balance sheets of the company in computing their value as if each of the companies was brought to
liquidation. This assessment was confirmed by the Appellate Assistant Commissioner. The Tribu- nal however held that certainly this basis is one of the recognised modes of valuation of the shares of the private companies which are not saleable in the open market but in so far as those cases were concerned the valuation on the basis of the yield derived from the shares will be a more reasonable method to be adopted in the particular circumstances of their respective cases. Ac-
cordingly he ·adopted the valuatipn on that basis in respect of each of the companies as specified in its order. In the first two appeal,; also the Wealth Tax Officer and the Appellate Assistant Commissioner adopted the break-up value a~ the basis as in the other cases, and agreed with that basis inasmuch as the assessees had failed to place before the Wealth-tax Officer and the Appel- late Assistant Commissioner facts and figures
relating to divi- dends declared by the respective companies. It was also stated by the Tribunal that at the time of hearing by the Tribunal in the cas~ of last thr~e appeals, it .was apparently not brought to the nol!ce ?f the T~b~mal that the companies being private limit- ed compames the d1v1dends declared
would be controlled bv persons controlli!1g ~he companies so as to suit their own purpose, as such, the mamtamable profits rather than the dividends dec- lared would nffo.rd a reasonable basis.
While so stating, it was o.bserved that tins a~pect of the case need not be taken note of smce the· objectio_n before it is only on the principle whether (O adopt the ·'break-up value" method.
In respect of the first two appeals therefore the Tribunal held tt:at the adoption of the 'break-up' value was in order. On an application under s. 66 (1) the Tribunal referred the following question for the opinion of the High Court, viz., :21s
"\Vhether on the facts and in the circumstances of the case tho principle of 'break-up' vafoe adopted by the Income-Tax Tribunal as the basis for the valuation of the shares in question is sustainable in law ?"
When the reference came up for hearing before the · Bench of the High Court, it was felt that as the question required an ab- itrac,t answer as to whether the principle of 'break-up value' is sustainable in law and as in their opinion the Tribunal wanted to refer for the opinion of the Court "the doubt they experienced in dealing with the case which related to the question ,as to whether the 'break-up value' method is correct method to be adopti:Q in the facts and circumstances· of the case or it is the 'yield value' method to be adopted, that question was re-framed and a further statement of the case called for from the Tribunal. The question as re-framed is as follows :-
"Whether on the facts and in the circumstances of the case the Tribunal was justified in law to follow the c method involving the princiJ,>le of 'break-up' value ins- tead of the method involving the principle of 'yield
value' in determining the value of the shares in question under s. 7 of the Wealth Tax Act?" In compliance with this direction the Tribunal drew up a supple- mentary statement of the case and submitted it to the High Court. In that statement the Tribunal stated :
"Before the Appellate Assistant Commissioner no al- ternative basis of valuation appear to have been claim- ed. For the first time before the Tribunal, the assessee filed a statement of the dividends declared· by the afore- said private companies during the years 1953 to 1957
and claimed that the market value of the shares should be worked out with reference to the average percentage of the dividends declared by each company and on the footing that the shares quoted in the market at Rs.-100/-
each would yield a dividend of Rs. 6/·" It was· further stated by the Tribunal that the asseisee had relied on the decision of the Tribun.al for the assessment years 1957-58 and 1958-59 where it determined the 11rnrket value of the shares on the yield basis but in so far .as the assessment year 1959-60 it did not accept that the information furnished before it would be :1dequate for working out the market value on the basis of "maintainable profits" because it was of the view that "in cases of private companies declaratio11 of dividend would be dictated bv the directors having regard to the advantage in their personal a~scssmcnts and not ~ith reference to the capacity or other busi- 11ess considerations. It went on to say that
t.:.: c COMM&. 'Wl!ALTH TAX v. M. JALAN (Ja:anmohan Reddy, J.) 219 "The 'maintainable profits' would be. a certain per- centage ( S<ty 80%) of the net profits of the company after deduction of taxes payable by it and this would
be a measure of potential yield per share." In this view the 'break-up' value adopted by the Income-tax Officer in respect of the asseisments of 1959-60 in the first two appeals was confirmed.
The High Court however did not agree with the basis adopted by the Tribunal though it recognised that the break-up value is also one of the methods for the purpose of calcullttion. It was contended before the High Court on behalf of the assessee that the 'break-up' value method will only be applied to a company which reached the stage of liquidation and wind!ng up.
After considering the respective contentions and the decisions referred to before it, the High Court observed as follows :- ·we are satisfied that so far as the application of s. 7 of the Wealth Tax Act in determining the value of
the shares of a deceased person on the data of his death is concerned, where those shares pertain to a going con- cern, the only proper method to adopt was the 'yield value' method and we think that the Tribunal was not
justified in making the assumption that in the case of a private company the dividend would be controlled by the persons controlling the i;:ompany to suit thek own purposes, and that, consequently,
the 'maintainable profits' should be accepted as the basis and not the divi- der.ds. Unless there was some substantial material be- fore the Tribunal ·to draw a different inference, the Tri- bunal, in our opinion, is not ju~tified in doing so.
We are constrained to note that although the Tri- bunai had adopted the 'yield value' method in its deci- sions in regard to the previous. years, the Tribunal had taken a new path and adopted ··the 'break-up' value
method as the basis of the assessment. We feel that there is no material placed on the record to justify this change in the method to be adopted in calculation." When the application for reference under s. 66 ( 2) in respect of the_ last three appea!J came before the High Court after an appli- cation under s. 66 ( 1) had been rejected by the Tribunai
it observed :– "This is undoubtedly a question of law but the ans- wer will be covered by the decision of this Court dated June 9, 1967 ………… " SUPREMl COURT R~POR'tS [1913) 2 S.C.ll..
and so it thought it unnecessary to ask the Tribunal to refer the same point again and accordingly rejected the petitions. The – special leave in respect of the first two appeals is against the judg- ment of the High Court holding that the 'yield method' was the proper method and in respect of the latter three appeals against the order refusing to direct the Tribunal to state a case. As a
cor.m1on question of law has to be detennined these appeals are cons0lidated and heard together. The question which has to be detennined in this case is, what is the basis of valuatic-n of shares in private limited com- panies for the purposes of s. 7 of the Wealth Tax Act (27 of 19'.,7). Sub-s. (I) of s. 7 provides that "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." The yaluation date, as has already been noticed, is 3 lst Decem- ber of the. calendar year.
On that date the Wealth-tax Officer will have to ascertain what the share~ will fetch if sold in the open 111arkct which would be the price which a wj11ing seller will accept and a willing buyer will pay.
In valuing shares of a limited company .certain factors have to be talten into consideration. Firstly, a share is not a sum of money but i~ an interest measured by a sum of money and made up of variou' rights contained in the articles of association. They are of different categories such as the equity shares, preference share.>. fully paid-up shares or partly paid-up shares. Apart from these, there are also debentures.
The shares can be in a public limited company or a 1private limited company and in the latter cnse they are subject to certain restrictions. A private comp~ny bas been defined in s. 3 (iii) of the Companies Act as · a sornpany which by its articles (a) restricts the right to transfer its shares. if any; (b) limits the number of its members to ,50 not including certain categories specified in (i) and (ii) of that clause and ( c) prohibits any invitation to the public to subscribe for any share~ or debentures of the company sub.iect to the pro- viso that shares held jointly are to be treated as if they are held by a single member.
A public company under s. 3 (iv) is a company which is not a private company. Tt may be observed that the three conditions which distinguish a private company frcm a public ,company are cumulative and if ·any one of the con- dition.s is not fulfilled the company will be a public company. It 111ny also he noted that where under the articles of the company the right to transfer shares is restricted withmit being first offered tl' other members at a price which is either fixed in advance or in a prescribed manner. or where the directors have a power to vetc a transfer. the fixation of the value of the share will have to c
c p ff COMMP,. Wl!i\LTH TAX v. M. JALAN (Jaganmohan Reddy, J.) 22 l be determined without ignoring the restriction as to transfer be- cause they are an inherent element in the property which .has· to be valued
This restriction may not n~cessanly be depncato~·y because the chance of acquiring the shares of other members m the company on advantageous terms is itself a benefit. In cases where shares have to be valued by reference -to the assets of the company restrictions on alienation are irrelevant.
The shares the transfer of which is not restricted may be sold on the stock exchanges for which there is official market quota- tio:i .. There may also be shares in public limited compani9s for which there are no quotations on the stock exchange.
Gene- rally the price at which a reasonably willing purchaser would buy the shares post.ulates a hypothetical purchaser- but even in such a case it is to be assumed that the vender would only be willing to sell the share for its real value and the purchaser would be willing to pay the price. This has to , be always detennined notionally. Where shares in a company are brought and sold on the stock exchange and there are no abnormalities affecting the market price, the price at which the shares are changing hands in the o;dmary course of business is usually their true value. These quotations genetally reflect the valtte of the asset having regard to the several factors which are taken into consideration by per- sons who transact business on the stock exchange and by the buyers who want to invest their money in any particular share or shares.
Even where they are quoted on the stock exchange, the quotations do not depend entirely on the yield or the dividend declared. There are several factors which are taken into con- sideration which affects and determines the. quotations,
namely the factors which are taken into consideration by a person who wants to sell his shares and the factors which a buyer who wants to purchas~ the.m. considers as determining the price which price the bi;yer IS willing to plly and the seller to receive.
Leavina aside any. distress sal~s. the factors which in our view are likely to detel1!11ne th~ fix~hon of a share on anv particular day or at any partir.ular tune 1s, firstly, the profit-earning capacity of the comp~ny ~m a reasonable commercial basis; secondly, its capacity- to mamtam those profits or a reasonable return for the capital in- vested, an.d in special cases such as investment companies, the a.sset-backmg; the prospects of capitalisation of its earnin<> in the shape .of declaration of ?onus shares or where the com;any is financ1ally and commerc1ally sound. the prospects of issue of fur- ther capital ~vhere the existing shareholders liave a right to aoplv for and obtam them at ~ certain price which is generally less than the market valu~, offermg an increased vield on his investment. en the assumption that the company will be able to maintain the same rate or at least increase the aggregate payment of divi- [1973) 2 S.C.R.
<lends on the increased capital. It may be mentioried that new shar.: issue, whether an existing shareholder subscribes for them or not, invariably reduces the average unit cost of hi$ total holding with the consequent increase in the rate of hi5 average return on the cost .•
Take tlie case of a person who wishes to buy shares in a particuiar company. lf his purpose is only to invest; he might enquire as to what are the various companies which have good pro5pects and are a sound investment, often referred to as "as good as guilt edged securties".
This would involve the ascer- tainment of whether the concern in which he intends to invest is ;inanciully and commercially sound, what is the yield that it will · g!ve on the capital which he invests, whether that yield will be mainiained, whether the shares will appreciate in value and are easily marketable whenever he desires to dispose of them.
In certain cases a person may wan~ to take risks by investing in shares which having regard to various trends in the commercial world and in any particular industry has prospects of improvement ·and the value of the shares going up with the corresponding pros- pect of the return or yield obtainable on the capital invested be- ing much higher than what he would get in other sounder con- cern~. There may yet be investors who notwithstanding that the comp<iny is not in a solvent condition or is unable to pay divi- drnds for a number of years· are willing to purchase the con- trolling interest for the purpose of manipulation or bringing it to liquidation for obtaining some benefit. Ignoring such ca.ses, whcrr a purchaser or seller is considering the various factors for purchse or sale of shares in a company, the dominant factor dcterv·ining the price he will pay or reeeive a~ the ca5e may· be is the yield.
Now, what are the factors which a seller will take into con- sideration when he wants to sell his shares ? Where he is not obliged to sell because he is not in need of money, he would first consider whether the i'eturn he is getting is reasonable hav- ing regard to the current market price.
Here again· the factor of yield would enter into his consideration not so much on the capital he initiall;jnvested but on that which he expects to realise on the sale; · He 111.ay have a better investment in view which will give on it a higher yield or ensure for his
capital better prospects. It may be he may not expect a higher dividend to be maintained or that these dividends are likely to be reduced or there is a likelihood of the security of capital being in
jeopardy, and therefore he wishes to make a prudent sale. From what we have stated, among the factors which govern the con- sideration of the buyer and the seller where the one desires to purchase and the other wishes to sell,
the factor of break-up c JI c COMMR. WEALTH TAX v. M. JALAN (Jaganmohan Reddy,/.) 223 value of a share .as on liquidation hardly enters into consideration where the shares are of a going concern.
The basic yield method in cases where shares are quoted and transactions take place on the share market may not be c!ifferent but where shares are not quoted, it is in these latter cases the yield must be determined after takinll into account various factors as to
which a reference has been made earlier. If profits are not reflected in the dividends which are declared and a low-earnin& yield for the shares is shown by the company which is unrealistic on a consideration of the financial affairs disclosed for that year, the Wealth-tax Officer can on an exami- nation of the balance sheet ascertain the profit earning capacity of the concern and on the basis of the potential yield which the shares would earn, fix the valuation.
In the Estate Duties Act both here, in England and in analogous Acts in some of the other Commonwealth Countries, similar provisions as under the Wealth-tax Act provide for estimating the value of the assets to be the price which in the opinion of the concerned officer would fetch if sold in the open market on the date of the death. In dealin~ with the valuation of assets under such Acts Green on Death- l)uties (sixth edition) considers factors
other than those of valuation by reference to dividends. At page 407 it is sta.ed :- "Not infrequently, the. dividends represent only a small proportion of the company's profits and lar·ge
sums are systematically accumulated. in the form of reserves. It is important to remember in this con- nection that the interests of shareholders in unquoted companies often differ from
those of ir. vestors in quoted shares, especially as respects dividend policy. Where the shares are held by a few individuals (parti- cularly members of a single family), it will not neces-
sarily be to _their advantage to have the greatest possible amount paid out to them as dividends. Re- tention of the profits by the company may suit them better than tire receipt of taxable dividends.
A pur- chase of shares in a company which distributes only a small fraction of its profits is unlikely to prove at- ractive to an investor in search of current income, but the open market is by no means confined to such in-
vestors. It includes, for instance, the existing mem- bers of the company, to whom the share·s may be more valu~ble than to others and who ma;- wish to exclude 011ts1d~rs,, and surt~x payers whose
goal is capital appreciation rather than current income." (1973) 2 S.C.lt. Again at page 409 it is observed :- "A valuation by reference to earnings is apposite as respects unquoted shares
whenever the dividend alone does not truly represent the profitability of the company.. . . . . . . . The "dividend" and "earnings'' methods of valuation are not mutually exclusive and
!>oth may be used in conjunction. Where the value brought out -by one differs widely f~om that shown by the other, an intermediate figure may be appropriate Where a company is engaged in a profitable busi-
ness, but the shareholders are also directors and prefer to take what they need from the company in the form of remuneration rather than dividends, the profits dis- tributed by way of remuneration must be taken into
account in the valuation. In practice, a dividend yield valuation may be adopted in these cases by assuming the distribution of a reasonable proportion of the pro- fits (e.g. the average distribution of the
comparable companies) as dividend: alternatively the value may be estimated by reference to earnings. In either case, the profits will be adjusted to, mclude remuneration paid in excess of a normal management charge."
But where a person who holds shares in a company which. is making losses and where it does not justify . a declaration of dividends even from reserves as a temJ20rary boost or where there is a possibility ·of its capital structure being affected or if that state of depression continues in ·other words the company is ripe for liquidation, the valuation may well be the break-up value of the shares. In this case, however, we need not go into all the nicities and · important
qualification aml limitations . which may have to be applied in cases where the company's assets and liabilities have to be taken into consideration in fix- ing the value of the shares. The general principle of valuation in a going concern is the xield on the basis of average maintain- able profits, sµbject to ;id1ustment etc. which the circumstances of any particular qse may call for.
In Attorney General of Ceylon v. Mackie(') however the fluctuations in profits and the wartime uncertainities precluded any rejiable estilnate_ .of main- tainable profit. In these exception~! ci_rc\Jmstances· it- '.l11"as held
that in the iibsence of definite eyidcnce to the contracy the- value of th~ business 11s a going concern exceeded tha~ of the tangible asse~s. Lord Reid r!\ferri11.g to the argument that in accepting (l) [l9S2] 2 All F,R 77S .P:C.
It'. c COMMR. WEALTH TAX v. M. JALAN (Jaganmohan Reddy, J.) 225 the bala.•ce sneet method the Supreme Court of Ceylon erred in law because that can only give a break up value which it was necessary to find the value of the business as a going concern observed at p. 779 :-
"It is true that a purchaser of the shares held by the deceased could have obtained a controlling inte- rest in the company as a going concern, and in t,heir Lordships' 'judgment it is right to value these
shares by reference to the value of the company's business as a going concern, No doubt, the value of an estab- lished bu~incss as a going concern generally exceeds and often greatly exceeds
the total value of its tangible assets. But that cannot be assumed to be uni- versally true, If it is proved in a particular case, that at the relevant date the business could not have been
sold for more than the value of its tangible assets, then that must be taken to be its .value as a goi~g con- cern, ln their Lordships· judgment it h:1s been proved in this case that the decenscd's holding could not have
te,en sold in September, 1940. at a price based on any higher figure· than the value of the tangible assets of the company,'' ln the Irish case of Smith v, Revenue CommlHioners(1)
on which on behalf of the Revenue reliance was placed on the 'deceased and his son held all the shares in the private company the transfer of which was restricted, It was also found that the
deceased had the controlling shares and that both father and son drew yearly remuneration for the work done 'by them. the former getting £ 3000 per annum and the latter £ 1000 per
annum, The average of dividend for the six previous years was 5.3j( and on that basis though the value of the shares worked out to 15 shillings, the executors offered 17 s. 6 d. The Revenue however fixed the value of the share at 22 s, 6 d. on the basis that the deceased who ',had a
prepondeq1ting voting power could have brought it into voluntary liquidation and therefore the value should be worked out on the basis of excess of assets over liabilities as would be adopted in such a winding up. · It was found by the Commissioners that the remuneration paid to the deceased at a figure of £ 3000 per annum for such busines; was out of all proportion to the value of their service. Hanna. J, observed at p, 654 :-
"In this I agree : but. on the other hand, con- si.derable "".e!ght must be ,given to the view put forward by the petit10ners that it was a family company, (I) [1931] Trish Reports 64'.
I o-U48SupCll73 where greater latitude would be given in the remune- ration of the directors, who were the principal owners; and· that it was a· unique business, iri which both the
directors had special knowledge, and to which they gave constant daily attention, and had a special per- sonal relationship with the majority of the customers. A purchaser in a hypothetical market of any of these
shares would recognise the. value of these factors,, and make due allowance for much more than the ordi- nary remuneration. The evidence on either side went into great detail, and after the consideration of it I
think that this company can be fairly regarded as one capable of earning on a comR1ercial basis 10 per cent on its capiial, and so 1 find. But, if this is to be taken as the principal test, it must .be subject to
the consideration, on the one hand, of the restrictions upon the transfer of the shar~s. and; on the other, of the added value by reason of the splendid security of the company's position."
It will be seen that this case does not support the contention th.at because the deceased was in a position to bring the com- pany into voluntary liquidation the break-up value principle
should be applied. If at all it is against that contention because on the evidence the valuation was deterniined on the profit earning capacity of the q>mpany. The Australian cases refer-
red to are based on the Australian Estate Duty Assessment Act under which the real value of the asset which fornis part of the dutiable estate has to be ascertained. Even then, it was held in Mc. Cathie v. The Federal Commissioner of Taxation(!) that the real value of shares held by a deceased on his death depends more upon 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 r7alise upon liquidation, and that moneys paid as fees to directors .in excess of a reasonable amount should be treated as profits when determining the reasonable earning capacity of a proprietory company which bears the character of a partner- ship trading with limited liabilities.
Williams, J. at page observed : ", . . . 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 its business. than upon the amounts which the shares would be likely to realise upon a liquidation."
(1) 69 Commonwealth Law Reports page !. c ll c COMMR. WEALTH TAX v .. M, JALAN (Jaganmohan Reddy, ].) .22'l' In that case it was found that the business could not be said to be conducted with any lack of probity but since the remunera- tion received by ladies of the family who did not render any service was not admissible it was added to the profits in arriv- ing at a reasonable earning capacity.
It is also worth noticing thats. 16-A(l)(c) of the Austra- lian Act has vested a discretion in the Commissioners to make . an assessment on "an estimate of the sum which the holder of shares should be expected to receive in the event of the com- pany being voluntarily wound up at the date of the death
of the dee.eased". While considering the provision above referred to, it was observed by Williams, J. in Federal Commissioner of Taxation v. Sagar( 1) that ". . . . where a company is a going
concern the instances. would appear to be rare in which it would be proper to use para ( c). One instance might be where the deceased held or controlled sufficient shares to enable him to pass a special resolution
that the company be wound up voluntarily, but even then it would appear to be preferable, where practicable, to use paras (a) or (b)." An examination of the various aspects of valuation of shares in a limited company would lead us to the following conclusion :- ( 1) Where the shares in a public limited company are quoted on the stock eX<;hange and there <lfe dealings in them, the price prevailing on the valuation date is the value of the shares. (2) Where the shares are of a public limited company which are not quoted on a stock. exchange or of a private limited com- pany the value is determined by reference to the dividends if any reflecting the profit-earning capacity on a reasonable commercial bases. But where they do not then the amount of yield on that basis will determine the value of the shares.
In other words, the will ordinarily determine the value. The dividend and earning will ordinarily detem1ine the value. The dividend and earning method or yield method are not mutually exclusive; both should help in ascertaining the profit earning capacity as indicated above. 1f the results of the two methods differ, an intermediate figure may have to be computed by adjustment cf unreasonable expenses and adopting a reasonable proportion of profits .
.( 3) In the case of a private limited company als 1 where the expe1.se3 are incurred out of all proportion to the commercial venture, they will be added back to the profits of the company in (I) 71
C.L.R. 422. computing the yie!d. IO such ·companies tine restriction on share transfers will also be taken into consideration as earlier indicated in arriving at a valuation. ( 4) Where the dividend yield and earning method break
down by reason of the company's inability to earn profits and declare dividends. if the set back is temporary then it is perhaps pos~ible to take the estimate of the value of the shares before set oack and discount it by a percentage corresponding to the pro- portionate fall in the price of quoted shares of companies which haw suffered similar reverses.
( 5) Where the company is ripe for winding up then the brc~k-up value method determines what would be realised by that process. (6) As in A1torney Ueneru/ of Ceylon v. Mackie (supra) a
valuation by reference to the a1>ets would be justified where as in th::t case the fluctuations of profits and uncertainty of the con- ditions at the date of the valuation prevented any reasonable estimation of prospective profits and dividends.
In setting out the above principles, we hav~ 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 pros- pects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case. But one thing is clear, the market value unless in exceptional cir- cumstances to which we have referred, cannot be detennined on the hypotheses that because in a private limited company one holder can bring it into liquidation, it should be valued as on
liquidation by the break-up method. 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 but nonetheless is one of the methods. It has been urged before us that the question as framed by the High Court does not correctly indicate the scope of the answer which was called for ff9m that court and it was suggested that we should reframe the question.
We certainly have the power to do so as long as new and different question is not raised but confine it -only to resettling or reframing the question fonnulated by the Tribunal or as in this case by the High Court which called for a statement of the case on a question as reframed by it, before answering it so as to bring out the real issue between the parties : Narain Swadeshi Weaving Mills v. Commissioner of E.P.T.(') and Ku.mm Ben De Maha1avia v.
Commissioner of /ncome- tax (2). The question as framed by the High Court is on the (l) 261.T.R. 165 at 774. (2) 39 I.T.R. 540 at 544. c c . COMMR. WBA~TH TAX v. M. J"ALAN (Jaganmohan Reddy, /.) 229 assumption that the yield method is the only method applicable and on that basis required the 'Fribunal to -state a case on whether it was justifie!l in law to follow the method involving the princi- · pie of break-up val\le. If the question is re-framed bringing out the real issue between the parties which both Tribunal and the High Court attempted to do it would facilitate a proper answer. We accordingly reframe the question as follows :-
"Whether on the facts and circumstances of this case the principle of brea~-up value adopted by the Tribunal as the basis of valuation of shares in question under s. 7 of the Wealth-tax Act is sustainable iii law?
If not what would be the correct basis ? In the first two appeals 1135 and 1136 of 1969 the beark-up value method was adopted by the Tribun<Jl and its plea for not adopting the yield method was that a list of dividends were for· the- first lime filed before it in respect of each of the companies. The Wealth-tax Officer and the Appellate Assistant Commis· sioner, as well as the Tribunal, had the balance sheets of each of the compa'!ics before them because the shares were valued on break-up method in those cases on the basis of th,_ose balance 'hects.
If the balance sheets were filed they would also disclose the dividends as indeed the statement of the case shows that all the companies had declared dividends for the year 1959-60.
Even otherwise, the Tribunal as a fact finding authority, could have considered the list. or sent them to the Wealth-tax Officer for any further enquiry it required. . In the last three appeals, the Tribunal had adopted the yield method. In the result our answe1' to the fir>! part of the question is in the negative and to the second part our answer is in terms of the principles alteady set out.
In Appeals Nos. 1765 to 1767 of 1969, the method adopted by the Tribunal being the proper method the reftisal uf the High Court to direct a case to be stated does not call for interference.
For these reasons, all the appeals are dismissed with costs. One hearing fee. K.B.N. Appeals dismissed.