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Commissioner Of Wealth-Tax, Central v. Balbhadradas Bangur.

Calcutta High Court

Apr 28, 1982

Judgment

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References

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Factual and Procedural Background

This is a reference under section 27(1) of the Wealth-tax Act, 1957 concerning valuation of unquoted shares held by an individual assessee for the assessment years 1961-62 to 1964-65 (valuation dates: 31 March 1961, 31 March 1962, 31 March 1963 and 31 March 1964). The issue related to valuation of shares of five limited companies not quoted on the stock exchange:

General Investment Co. Ltd.
Indian Investment Co. Ltd.
Oriental Co. Ltd.
Luxmi Salt Co. Ltd.
Mugneeram Bangur & Co. Pvt. Ltd.

Procedurally, the Wealth-tax Officer (WTO) had initially valued the shares by the break-up (asset) method. On appeal the Appellate Assistant Commissioner (AAC) accepted the yield (capitalised potential yield) method for the first four companies, applying an average yield of the immediately preceding five years and specific "years' purchase" multipliers (four assessment years used 14, 13, 12 and 10 years' purchase respectively), after deducting 10% for lack of negotiability and adverse factors; the AAC directed the WTO to verify figures and apply that valuation. For Mugneeram Bangur & Co. Pvt. Ltd., the AAC sustained the break-up method but directed the WTO to factor in the market value of shares held by that company when computing break-up valuation.

On further appeal the Income-tax Appellate Tribunal (the Tribunal) dismissed the Revenue's appeals in respect of the four years and partly allowed the assessee's appeals by directing that, because the assessee conceded that profits of the predecessor partnership could be treated as profits of the limited company for computing average yield, the shares of Mugneeram Bangur & Co. Pvt. Ltd. should also be valued on the same yield formula as the other four companies; accordingly the assessment orders were to be modified.

The Tribunal referred the following question to the High Court under s.27(1): whether the value of the unquoted shares of the five companies should be computed by capitalising their average potential yield at a number of years' purchase and not on the basis of break-up value method for the assessment years 1961-62 to 1964-65.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the value of the unquoted shares of the five named companies should be computed by capitalising their average potential yield at a certain number of years' purchase and not on the basis of the break-up value method for the wealth-tax assessment years 1961-62 to 1964-65?

Arguments of the Parties

Assessee's Arguments

The assessee's counsel contended that Mugneeram Bangur & Co. Pvt. Ltd. was not materially different from the other four companies and therefore should not be valued by break-up when the other four were valued on the yield basis.
The counsel pointed out that the business of Mugneeram Bangur & Co. had previously been carried on by a partnership firm and was converted into a private limited company; he asserted that profits of the partnership firm for earlier years could be treated as the profits of the limited company for the purpose of computing average yield.
At the Bar the assessee's counsel expressly stated that the assessee would have no objection to treating the partnership-firm profits as company profits for the purpose of arriving at average yield and applying the same formula as applied to the other four companies.

Revenue's Arguments

The departmental representative argued that Mugneeram Bangur & Co. Pvt. Ltd. was a newly formed company and therefore its average yield could not be worked out; given its peculiar position, the only course was to adopt the break-up (asset) method for valuation.
The Revenue relied on administrative circulars (CBDT Circular No. 118 of 15 September 1973 and Circular No. 2(WT) of 31 October 1967) and on Rule 1D of the Wealth-tax Rules, contending these supported valuation by asset-backing or by a formula different from that adopted by the Tribunal.
The Revenue’s counsel emphasised that the circulars instructed how to treat wholly-owned subsidiaries and to consolidate asset-backing and maintainable profits, and that these circulars/directives should influence the correct method of valuation.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CWT v. Mahadeo Jalan, [1972] 86 ITR 621 (SC)	Principles for valuing shares for wealth-tax purposes: generally prefer profit-earning / yield method; break-up method reserved for exceptional cases (e.g., company ripe for liquidation); factors (profit-earning capacity, asset-backing as relevant to profit capacity, transfer restrictions, etc.).	The court relied centrally on this decision to hold that the yield/profit-earning method is ordinarily the proper method for non-quoted shares of a going concern and that break-up is for exceptional cases. The court interpreted "asset-backing" in Mahadeo Jalan as relevant to assessing profit-earning capacity, not as a mandate to value by assets.
Commissioner of Gift Tax, Bombay v. Smt. Kusumben D. Mahadevia, [1980] 122 ITR 38 (SC)	Reiterated that for a going concern the profit-earning method is ordinarily appropriate; break-up is inappropriate unless company ripe for winding up or profits fluctuating preventing reasonable estimate.	The court relied on this decision to strengthen the conclusion that the profit-earning / yield method (not break-up) should be applied to going concerns; used it to clarify that combination of methods is not a valid general principle.
Attorney-General of Ceylon v. Mackie, [1952] 2 All ER 775 (PC)	Authority for the proposition that valuation by reference to assets may be justified where fluctuations of profits and uncertainty prevent reasonable estimation of prospective profits.	Referred to as an example of circumstances where break-up method is justified; applied as illustrative authority for exceptional situations warranting asset-based valuation.
K.P. Varghese v. LTO, [1981] 131 ITR 597 (SC)	Discussion on the effect and binding nature of Board circulars; circulars may bind Revenue officers and may be contemporanea expositio in construing statutory provisions.	The court used the Supreme Court's observations to analyse the effect of CBDT circulars: noting that circulars are binding on Revenue officers and may serve as contemporanea expositio, but they do not override judicially laid down principles and are not binding on Tribunals or assessees in the same way.
Navnit Lal C. Javeri v. K.K. Sen, AAC, [1965] 56 ITR 198; Ellerman Lines Ltd. v. Commissioner of Income-tax, [1971] 82 ITR 913	Authorities cited for the proposition that circulars issued by the Board are binding on officers charged with execution of the Act.	These cases were cited within the K.P. Varghese discussion to support the proposition that CBDT circulars are binding on Revenue officers; the High Court relied on this reasoning when assessing the import of the circulars.
Gestetner Duplicators Pvt. Ltd. v. CIT, [1979] 117 ITR 1 (SC)	Referenced concerning effect of circulars and instructions of CBDT.	The court observed that detailed discussion of this authority was unnecessary for the decision but cited it among authorities dealing with the effect of administrative circulars.
CIT v. Swedish East Asia Co. Ltd., [1981] 127 ITR 148 (Cal)	Addressed instruction and effect of CBDT circulars.	Cited as part of the jurisprudence on circulars; the court noted it but did not consider it necessary to examine the point further for deciding the reference.
CWT v. Laxmipat Singhania, [1978] 111 ITR 272 (All)	Held that Rules 1C and 1D (W.T. Amendment Rules, 1967) were applicable with retrospective effect as rules of procedure/evidence, and thus applicable to pending assessments.	The court discussed this decision and disagreed with aspects of it: the High Court considered that Mahadeo Jalan was not considered by that Division Bench and, in any event, Rule 1D did not apply to investment companies (the instant facts). The High Court therefore did not follow the Laxmipat Singhania view on applicability of r.1D here.
CWT v. Sripat Singhania, [1978] 112 ITR 363; Bharat Hari Singhania v. CWT, [1979] 119 ITR 258	Cases cited as reiterations of the view in Laxmipat Singhania regarding retrospective effect of rules.	These were noted as subsequent decisions following a similar approach, but the court in the present case distinguished them on the facts and applicability to investment companies.
CWT v. Smt. Chandrakala Lal, [1978] 111 ITR 185 (Cal)	Affirmed that market value of shares should not vary from assessee to assessee.	The court observed that while the principle is correct, it was not relevant to the facts of the present case where Supreme Court authorities governed the method of valuation to be applied.
CWT v. Bejoy Kumar Karnani, [1979] 117 ITR 543 (Cal)	Local Calcutta High Court decision following Mahadeo Jalan and adopting its principles in similar matters.	The court noted that the question in the present reference was covered by the judgment in Bejoy Kumar Karnani, followed here to answer the reference in favour of the assessee.

Court's Reasoning and Analysis

The High Court's analysis proceeded through a sequence of carefully identified points, relying principally on the Supreme Court's decisions concerning valuation of unquoted shares and on the proper legal effect of administrative circulars and later rules:

The court observed that the Tribunal's view (preferring the yield/profit-earning method over the break-up method for investment companies that are going concerns) was supported by the Supreme Court's decision in CWT v. Mahadeo Jalan, which sets out principles for valuing unquoted shares and indicates the yield method is generally applicable while break-up is for exceptional cases (e.g., where the company is ripe for winding up or profit estimation is impracticable).
It examined CBDT Circular No. 118 (1973) and Circular No. 2(WT) (1967), as well as Rule 1D of the Wealth-tax Rules, and recorded the Revenue's reliance on these administrative instructions which suggested asset-backing / consolidation approaches and specific formulas (including a 9% capitalization rate in certain contexts).
The court emphasised that administrative circulars, while binding on Revenue officers in the execution of the Act and potentially useful as contemporanea expositio in cases of statutory ambiguity, cannot override or displace the legal principles laid down by the Supreme Court. The court relied on the K.P. Varghese discussion to explain the limited role of circulars: they bind Revenue officers but do not bind Tribunals or replace judicial interpretation.
The court analysed the meaning and scope of the term "asset-backing" as used in Mahadeo Jalan and later explained in Mahadevia. It concluded (based on the cited Supreme Court authorities) that "asset-backing" is relevant insofar as it helps assess a company's capacity to maintain profits (and thus its profit-earning capacity), but it should not be read as implying that asset valuation (break-up) is the general or preferred method for going concerns.
The court addressed the contention that Rule 1D (a subsequent rule) or the CBDT circulars should be applied retrospectively. It rejected the argument that r.1D was merely procedural such that it would apply retrospectively to valuation dates prior to its making; the court held valuation affects substantive rights and, further, r.1D in any event did not apply to investment companies (the companies in the instant case).
With respect to Mugneeram Bangur & Co. Pvt. Ltd., the court accepted the Tribunal's practical approach: initially the departmental authorities used break-up because the assessee had not conceded treating partnership profits as company profits. Once the assessee conceded (or agreed) that the partnership profits could be treated as the company's profits for purpose of computing average yield, there was no reason to apply a different method to this company from the other four. Thus, the court directed that Mugneeram Bangur shares be valued on the same yield basis as the other four companies.
Overall, the court concluded that the Tribunal's preference for the yield/profit-earning method over break-up (for these investment companies and in these circumstances) was correct and consistent with binding Supreme Court authority; consequently the Tribunal's answer to the reference was affirmative and in favour of the assessee.

Holding and Implications

Core Ruling: THE QUESTION IS ANSWERED IN THE AFFIRMATIVE — the Tribunal was right: the unquoted shares of the listed five companies should be valued by capitalising their average potential yield (the profit-earning / yield method) and not by the break-up (asset) method for the assessment years 1961-62 to 1964-65.

Direct consequences and immediate effects on the parties, as recorded in the opinion:

The appeals of the Revenue for the four years under consideration failed and were dismissed.
The assessee's appeals were partly allowed (including the direction that Mugneeram Bangur & Co. Pvt. Ltd. be valued on the same yield formula as the other four companies where the assessee agreed to treat partnership profits as company profits for computing average yield).
The assessment orders were to be modified in accordance with the Tribunal's directions, and the parties were ordered to pay and bear their own costs.

Broader implications: The court applied and reaffirmed existing Supreme Court principles (notably from Mahadeo Jalan and Mahadevia) favouring the profit-earning / yield method for valuing shares of investment companies that are going concerns. The opinion confines its conclusion to the application of those authorities in the present facts and to the effect on the assessment orders before the court.

Show all summary ...

The Judgment of the Court was delivered by

Sabyasachi Mukharji, J.:— In this reference under s. 27(1) of the W.T Act, 1957, we are concerned with the assessment years 1961-62 to 1964-65 for which the relevant valuation dates were March 31, 1961, March 31, 1962, March 31, 1963 and March 31, 1964, respectively. The assessee is an individual and the issue relates to the valuation of certain shares held by the assessee in limited companies which were not quoted on the stock exchange. The Revenue had gone up in appeal before the Tribunal in respect of these four wealth-tax assessment years because it was not satisfied with the valuation of shares as sustained by the AAC in respect of the following companies:

1. General Investment Co. Ltd.

2. Indian Investment Co. Ltd.

3. Oriental Company Ltd., and

4. Luxmi Salt Company Ltd.

2. The assessee also had gone up in appeal before, the Tribunal in respect of the said four wealth-tax assessment years as the assessee felt aggrieved with the valuation of shares as sustained by the AAC in respect of Mugneeram Bangur & Co. Pvt. Ltd. The face value of the said shares of the five companies was Rs. 100 each. The WTO valued the shares of the five companies on the basis of break-up value method. We will not go into the details of the said valuation. When the matter went up in appeal before the AAC, he found that the valuation of shares of General Investment Co. Ltd., Indian Investment Co. Ltd., Oriental Co. Ltd. and Luxmi Salt Co. Ltd. had been discussed threadbare by the Income-tax Appellate Tribunal in its order pertaining to the appeals of various shareholders for the assessment year 1960-61 and earlier years. The AAC, therefore, agreed with the contentions of the assessee that the yield basis was a very fair and reasonable method for arriving at the market value of the shares of the said four companies. The AAC considered the increase in bank rates of interest from 1960 onwards, the issue of new shares carrying dividend yield of over 9% from 1960 onwards, the report of the bonus commission and various other factors put forth to him on behalf of the assessee. The AAC, accordingly, held that the value of the shares of the said four companies should be computed on the basis of average yield of the immediately preceding five years at fourteen years' purchase price for the assessment year 1961-62, thirteen years' purchase price for the assessment year 1962-63, twelve years' purchase price for the assessment year 1963-64 and ten years' purchase price for the assessment year 1964-65 after deducting 10% from the yield for lack of negotiability and other adverse factors. The valuation of the shares on the said basis was directed to be adopted by the WTO after verification of the correctness of the figures as mentioned in the order of the AAC. It is not necessary for us to set out these in detail. So far as the valuation of shares of Mugneeram Bangur & Co. Pvt. Ltd. was concerned, the AAC agreed with the WTO that the break-up method of valuation, as was adopted by him, was the only fair and reasonable one. However, the AAC directed the WTO to work out the breakup valuation of the shares of Mugneeram Bangur & Co. Pvt. Ltd., after taking into consideration the market value of the shares held by the said Mugneeram Bangur & Co. Pvt. Ltd. As mentioned hereinbefore, the matter went up before the Income-tax Appellate Tribunal. The Tribunal, after taking into consideration the rival contentions, observed in its order, inter alia, as follows:

“After hearing the rival contentions, we are convinced that there is no substance in the appeals of the Department for the four years under consideration. The Appellate Assistant Commissioner has followed a well-founded and scientific method as suggested by the Tribunal in its elaborate order in respect of earlier years. No material has been placed before us for any interference on our part. In our opinion, therefore, the four appeals of the Department have no merit.

So far as the assessee's appeals are concerned, the only grievance of the assessee is in respect of the valuation of share of Mugneeram Bangur & Co. Private Ltd. The Wealth-tax Officer had valued the said shares on the basis of break-up value method. The Appellate Assistant Commissioner, in appeals, agreed with the orders of the Wealth-tax Officer and upheld the break-up value method adopted by him. However, the Appellate Assistant Commissioner directed (the ITO) to work out the break-up value after taking into consideration the market value of the shares held by the said Mugneeram Bangur & Co. Private Ltd.

Before us, the learned counsel appearing for the assessee has urged, that there was no difference between Mugneeram Bangur & Co. Private Ltd. and the other four companies. According to the learned counsel, therefore, the Appellate Assistant Commissioner was not justified in adopting the break-up value method in respect of shares of Mugneeram Bangur & Co. Pvt. Ltd., whereas, while valuing the shares of the other four companies, the Appellate Assistant Commissioner followed the yield basis as suggested by the Tribunal in respect of earlier years. Our attention is drawn by the learned counsel for the assessee to the fact that the business of Mugneeram Bangur & Co. Pvt. Ltd. was being carried on by a partnership firm and that the said business was converted into a private limited company. But this fact was of no consequence, because the yield for earlier years when the business was done by a partnership firm could be treated as the profit of the limited company for purposes of arriving at the average yield. According to the learned counsel, therefore, the departmental authorities were not justified in adopting the break-up value method merely because Mugneeram Bangur & Co. Private Ltd. came into existence only in the present assessment year. The learned counsel made a statement at the bar that the assessee would have no objection whatsoever if the profits of the partnership firm are treated as profits of the limited company for purposes of arriving at the average yield and then applying the same formula as has been applied in respect of shares of General Investment Co. Ltd., Indian Investment Co. Ltd. and the other two companies. The departmental representative, on the other hand, urged that Mugneeram Bangur & Co. Private Ltd. was a newly formed company and, therefore, its average yield could not be worked out. Because of the peculiar position of the said company, the only course open to the departmental authorities was to work out the shares on the basis of break-up value method. The departmental representative also urged that the direction as given by the Appellate Assistant Commissioner for working out the break-up value is reasonable.

After hearing the rival contentions we are of opinion that the departmental authorities had no choice but to work out the value of the shares of Mugneerm Bangur & Co. Private Ltd. on the basis of break-up value method, because the assessee did not concede the position that profits of the partnership firm should be treated as profits of the limited company for working out the average yield. However, there can be no dispute that for working out the value of shares of an investment company, which are not quoted, the most scientific method is the potential yield or the average yield method as has been adopted by the Appellate Assistant Commissioner in respect oi shares of General Investment Co. Ltd., Indian Investment Co. Ltd., etc. Now, that the assessee has conceded the position that the profits of the partnership firm in earlier years may be treated as profits of the limited company for purposes of computing the average yield, there should be no dispute in valuing the shares accordingly. We, therefore, direct that the value of shares of Mugneeram Bangur & Co. Private Ltd. should also be valued according to the same formula of yield basis as the shares of the other four limited companies have been valued for the four years under consideration. The assessment orders shall be modified accordingly.”

3. In the result, the appeals of the Revenue for the four years under consideration failed and were dismissed, whereas the four appeals of the assessee were partly allowed. As mentioned hereinbefore, for the previous years in respect of other companies apart from Mugneeram Bangur & Co, Pvt. Ltd., the matter had been considered by the Tribunal. The question involved in the said matter came up for consideration in Matter No. 355 of 1969, in the case of CWT v. Sri Balbhadradas Bangur and by an order passed and judgment delivered by this court on April 13, 1978, it was, inter alia, held as follows:

“The question in this reference under section 27(1) of the Wealth-tax Act, 1957, is covered by our judgment delivered in Matter No. 377 of 1969 on April, 6, 1978: (Commr. of Wealth-tax, West Bengal III, Calcutta v. Bejoy Kumar Karnani, [1979] 117 ITR 543). In Civil Wealth-tax Reference No. 22 of 1969, the High Court of Rajasthan has taken the same view as this court. By following the same, we answer the question referred in the affirmative and in favour of the assessee. There will be no order as to costs.”

4. The Tribunal thereafter has referred the following question under s. 27(1) of the W.T Act:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the value of the unquoted shares of the following companies should be computed by capitalising their average potential yield at a certain number of years' purchase and not on the basis of break-up value method as adopted by the Wealth-tax Officer and/or by the Appellate Assistant Commissioner for the wealth-tax assessment years 1961-62 to 1964-65?

1. General Investment Co. Ltd.

2. Indian Investment Co. Ltd.

3. Oriental Co. Ltd.

4. Luxmi Salt Co. Ltd.

5. Mugneeram Bangur & Co. Ltd.”

5. Before us the question was argued from various aspects of the matter. We must observe at the outset that we found that so far as companies, other than Mugneeram Bangur & Co. Pvt. Ltd. (are concerned), it appeared to us the view of the Tribunal is supported by the decision of the Supreme Court, to which we shall presently refer. But before we do so, we must note that on behalf of the Revenue our attention was drawn to a circular of the Central Board of Direct Taxes dated September 15, 1973, being Circular No. 118 ([1973] 92 ITR (St.) 1), regarding the valuation of unquoted equity shares of investment companies having a wholly-owned subsidiary. The said circular, inter alia, is as follows:

“2. In partial modification of the above circular, the directions and instructions of the Board with regard to the valuation of unquoted equity shares of investment companies which have wholly-owned subsidiaries (i.e, investment companies having one or more companies which are itself 100% subsidiaries) are as follows:

(a) In arriving at the estimated price which a share of such company would fetch if sold in open market on the relevant valuation date, its ‘asset backing’ must be carefully computed, in accordance with well-settled principles. In other words, the valuation should take into account the complete enterprise consisting of the parent investment company and its wholly-owned subsidiary or subsidiaries as if they were only one company. In arriving at such computation, the reserves of the subsidiary company must necessarily be taken into account.

(b) Applying the above principles:

(i) the value of a share of the parent investment company would have first to be determined on the basis that the parent investment company and its wholly-owned subsidiary or subsidiaries were in fact one single company. This should be done by assimilating and consolidating the balance-sheets of the subsidiary companies with the balance-sheet of the parent investment company. Care must be taken to ensure that in such assimilation and consolidation, the inter-company balances are correctly adjusted.

(ii) maintainable profits would have to be aggregated in respect of the parent investment company and its wholly-owned subsidiary or subsidiaries. The capitalised value should then be arrived at by applying a rate of yield of 9 per cent, to the aggregated ‘maintainable profits’. The method of calculation of ‘maintainable profits’ in respect of the parent investment company and its wholly-owned subsidiary or subsidiaries should be in accordance with the Board's Circular No. 2 (WT) of 1967, i.e, they should be determined separately in accordance with the said circular and then aggregated.”

6. Our attention was also drawn to another circular of October 31, 1967, No. 2 (WT) ([1973] 92 ITR (St.) 2), regarding valuation of unquoted equity shares of investment companies, holding companies and managing agency companies. The said circular, inter alia, is as follows:

“2. Unquoted equity shares of investment companies other than those which are substantially holding companies.— An ‘investment company’ has been defined in rule 1A(g) of the Wealth-tax Rules, 1957, as a company whose total income consists mainly of income which, if it had been the income of an individual, would be regarded as unearned income. Unearned income means all income other than ‘earned income’ as defined in the Finance Act of the relevant year. Although the definition of investment company would not cover a banking/insurance company, but to avoid all doubts in the matter, it is clarified that banking and insurance companies will not be treated as investment companies. Their shares will be valued under rule 1D of the Wealth-tax Rules, 1957.

The average of (a) the break-up value of the shares based on the book value of the assets and liabilities disclosed in the balance-sheet, and (b) the capitalised value arrived at by applying a rate of yield of 9% of its maintainable profits, will be taken to represent the fair market value of the shares of an investment company. Maintainable profits of a company should be calculated as under:

(i) The book profits of the company for the five years immediately preceding the valuation date will be ascertained.

(ii) Adjustments will be made to the book profits of each of the said five years for all non-recurring and extraordinary items of income and expenditure and losses.

(iii) Adjustments will be made for expenditure, which is not of a revenue nature and is debited in the accounts and for receipts, which are revenue receipts, and are not accounted for in the profit and loss account.

(iv) The development rebate, in case it is debited in the books of account, will be added back.

(v) The appropriate tax liability of the company on the book profits so determined will be deducted.

(vi) The profits required for paying dividends on shares with prior rights, i.e, preference shares, shall be excluded.

(vii) The average of the company's book profits, as adjusted above, will be determined.

The maintainable profits thus arrived at will be capitalised, as stated above, by adopting 9% rate of capitalisation.”

7. Our attention was also drawn to r. 1D of the W.T Rules dealing with market value of unquoted equity shares of companies other than investment companies, and managing agency companies. The said rule provided as to how the market value of unquoted equity shares of a company “other than investment or managing agency company” should be determined. The said rule was relevant for the subsequent assessment years. It was submitted that in view of the said rules and the circulars, the method of valuation adopted by the Tribunal was not the correct one in the instant case. The question of valuing shares in companies was considered by the Supreme Court in the case of CWT v. Mahadeo Jalan, [1972] 86 ITR 621. There the Supreme Court observed, for the purpose of wealth-tax, the shares held by the assessee in a company are to be valued under s. 7 of the W.T Act, 1957, though ultimately the facts and circumstances of the case, the nature of the business of the company, the prospects of profitability and such other considerations would have to be taken into account. There the Supreme Court laid down what principles would normally be applicable. The Supreme Court, however, observed that those were not hard and fast rules. But, the market value, except in exceptional cases, could not be determined on the hypothesis that because in a private company one holder could bring it into liquidation it should be valued as on liquidation by the break-up method. The yield method was the generally applicable method while the break-up method was the one resorted to in exceptional circumstances or where the company was ripe for liquidation, but the Supreme Court was of the view that none the less it was one of the methods. The factors which were likely to determine the value of a share on any particular day or at any particular time were: (i) the profit-earning capacity of the company on a reasonable commercial basis;, (ii) its capacity to maintain these profits or a reasonable return for the capital invested; and in special cases, such as investment companies, the asset-backing; (iii) the prospects of capitalisation of its earning in the shape of declararation of bonus shares or where the company was financially and commercially sound, the prospects of issue of further capital when the existing shareholders get a right to apply for and obtain them at a certain price which is generally less than the market value, offering an increased yield on their investment, on the assumption that the company would be able to maintain the same rate or at least increase the aggregate payment of dividends on the increased capital. Where under the articles of the company the right to transfer shares was restricted, the value of the shares should be determined without ignoring the restrictions as to transfer because they were an inherent element in the property which had to be valued. This restriction might not necessarily be depreciatory because the chance of acquiring the shares of other members in the company on advantageous terms was itself a benefit. In cases where shares have to be valued by reference to the assets of the company, restrictions on alienation are irrelevant. Learned advocate for the Revenue, however, strongly relied on the observations of the Supreme Court at p. 628 of 86 ITR:

Our attention was also drawn to the observations of the Supreme Court appearing at pp. 633 and 634 of 86 ITR:

“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 exchange and there are 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 company, the value is determined by reference to the dividends, if any, reflecting the profit-earning 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 shares. In other words, the profits which the company has been making and should be making will ordinarily determine 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. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of profits.

(3) In the case of a private limited company also where the expenses are incurred out of all proportion to the commercial venture, they will be added back to the profits of the company in computing the yield. In such companies the 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 possible to take the estimate 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 shares of companies which have suffered similar reverses.

(5) Where the company is ripe for winding up then the break-up value method determines what would be realised by that process.

(6) As in Attorney-General of Ceylon v. Mackie, [1952] 2 All ER 775 (PC), a valuation by reference to the assets would be justified where as in that case the fluctuations of profits and uncertainty of the conditions at the date of the valuation prevented any reasonable estimation of prospective profits and dividends.

In setting out the above principles, we have 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. But, one thing is clear, the market value, unless in exceptional circumstances to which we have referred, cannot be determined on the hypothesis 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 none the less is one of the methods.”

8. Learned advocate for the Revenue stressed that the Supreme Court has mentioned that asset-backing was a relevant factor to determine the value of shares. According to him, the Supreme Court has accepted that break-up method is one of the methods in appropriate cases. In our opinion, this expression should not be read out of context. The Supreme Court though in the decision as noted hereinbefore has laid down the criterion, and has preferred the yield method, except in case of exceptional circumstances or where the company was ripe for liquidation where breakup method is resorted to, the expression asset-backing, in our opinion, was used in order to convey that the yield or the profitability of the company should be taken into account for certain circumstances, in the background of some peculiar circumstances. This view was further strengthened in the subsequent decision of the Supreme Court where the Supreme Court reiterated this view in the case of Commissioner Of Gift Tax, Bombay v. Smt Kusumben D. Mahadevia , [1980] 122 ITR 38. There the Supreme Court noted that the question as to which method should be adopted for the valuation of shares of a private company which was an investment company and at all material times a going concern—whether the profit-earning method or a combination of the break-up method and the profit-earning method—was a question of law. The Supreme Court observed that in the case of a company which was a going concern and whose shares were not quoted on the stock exchange, the profits which the company had 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 its shares. The break-up value would not be appropriate for the valuation of shares of such a company because among the factors which governed the consideration of the buyer and the seller where the one desired to purchase and the other wished to sell, the factor of break-up-value as on liquidation hardly entered into consideration where the shares were of a going concern. It was only where a company was ripe for winding up, or the situation was such that the fluctuations of profits and uncertainty of conditions at the date of valuation prevented any reasonable estimation of the profit-earning capacity of the company, that a valuation by the break-up method would be justified. A combination of the two methods, viz., the profit-earning method and the break-up method, though it might sound acceptable as a compromise formula, could not be accepted as a valid principle of valuation of shares. Where the shares in a public company were quoted on the stock exchange and there were dealings in them, the price prevailing on the valuation date would represent the value of the shares. But where the shares of a public limited company were, not quoted on the stock exchange or the shares were of a private limited company, the proper method of valuation to be adopted would be the profit-earning method. This method might be applied by taking the dividends as reflecting the profit-earning capacity of the company on reasonable commercial basis, but if it was found that the dividends did not correctly reflect the profit-earning capacity because only a small proportion of the profit was distributed by way of dividends and a large amount of profits was systematically accumulated in the form of reserve, the dividend method of valuation might be rejected and the valuation might be made by reference to the profits. As a matter of fact incidentally we may note that we are not concerned with a choice between the two methods—the profit-earning method and the yield method. This case did not proceed before the Tribunal or the authorities below on that basis. The controversy was whether it should be the break-up method or the yield method. The Tribunal has held that the profit-earning method was preferable to the break-up method. The Supreme Court noted that the profit-earning method took into account the profits which the com pany had been making and should be capable of making and the valuation according to this method, was based on the average maintainable profits. Of course, for the purpose of such valuation, the taxing authority was not bound by the figure of profits shown in the profit and loss account because it was possible that the amount of profits might 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. We are not concerned with this aspect of the controversy either. What the Supreme Court meant when it said in the case of Mahadeo Jalan, [1972] 86 ITR 621, as referred to hereinabove, that in the case of an investment company, the asset-backing was a relevant factor in determining the value of its shares was that in order to determine the, capacity of the company to maintain its profits the asset-backing would be a relevant consideration. The profit-earning capacity of the company would naturally have to take into account not only the profits which the company was actually making but also the profits which the company would be capable of making, and in order to arrive at a proper estimate of the latter, the asset-backing would be a relevant factor in the case of an investment company. It is not correct to read the observation as suggesting that a valuation of the assets would be a relevant factor in determining the value of the shares. The Supreme Court (at p. 46 of 122 ITR) approved of its observations in the previous decision in Mahadeo Jalan's case, [1972] 86 ITR 621. In this connection, we may profitably refer to the observation of the Supreme Court at pp. 46 and 47 (of 122 ITR):

“It is only where a company is ripe for winding up or the situation is such that the fluctuations of profits 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. The Revenue leaned heavily on the observation in Mahadeo Jalan's case, [1972] 86 ITR 621 (SC), that the factors likely to determine the valuation of a share include ‘in special cases such as investment companies, the asset-backing’ and urged on the strength of this observation that in the case of an investment company, the asset-backing was a relevant consideration and the break-up method could not, therefore, be considered as totally irrelevant. This contention, we are afraid, is based on a wrong reading of the observation of the court. When the court said that in the case of an investment company, the asset-backing is a relevant factor in the determination of the value of the shares, what the court meant was that in order to determine the capacity of the company to maintain its profits the asset-backing would be a relevant consideration. The profit-earning capacity of the company which would determine the valuation of the shares would naturally have to take into account not only the profits which the company is actually making but also the profits which the company should be capable of making and in order to arrive at a proper estimation of the latter, the asset-backing would be a relevant factor in the case of an investment company. It would not be right to read the observation of the court as suggesting that valuation of the assets would be a relevant factor in determining the valuation of the shares. The Revenue, of course, did not plead for exclusive adoption of the break-up method and wanted the mean of the values arrived at by applying the break-up method and the profit-earning method to be taken as representing the valuation of the shares, but we do not see on what principle can a combination of the two methods be justified. There is no authority either in any judicial decision or in any standard text book on valuation of shares which recognises the validity of a combination of the two methods, though it may sound acceptable as a compromise formula. In fact, Adamson has criticised this combination of the two methods as unscientific in his book on The Valuation of Company Shares and Business (Fourth edition), at page 55, where he has said:

‘The mere averaging of two results obtained by quite different bases of approach can hardly be said to represent any logical approach, whatever its merit as a compromise. Despite its evident popularity in any quarters, it has not been given judicial recognition in decisions involving the fixation of a value by the court.’

The combination of the two methods advocated on behalf of the Revenue has, thus, no sanction of any judicial or other authority and cannot be accepted as a valid principle of valuation of shares.”

9. Therefore, the combination of two methods which was advocated by the Revenue has been characterised by the Supreme Court as having no sanction of any judicial or other authority and cannot be accepted as a valid principle of valuation of shares. Therefore, it appears to us that, apart from the fact that the circulars were issued subsequently and apart from the fact that the circulars could not bind the Revenue (sic) or did not bind the Tribunals, it appears to us that in view of the Supreme Court decision, the method suggested by the circulars, to which reference has been made, was not a method which has the sanction of law. So far as r. 1D of the W.T Rules 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, r. 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.

10. Before we deal with this aspect of the matter we must refer to a decision of the Supreme Court in which, according to the Revenue, circulars have been given pre-eminence. Our attention was drawn to the decision of the Supreme Court in the case of K.P Varghese v. LTO, [1981] 131 ITR 597, where the Supreme Court was dealing with sub-s. (2) of s. 52 of the I.T Act, 1961. We are not concerned with the actual controversy in that case.

11. Our attention was drawn to certain observation regarding a circular. The Supreme Court noted that soon after the introduction of sub-s. (2) of s. 52 of the I.T Act, 1961, the CBDT in exercise of the power conferred under s. 119 of the Act issued a circular dated 7th July, 1964, explaining the scope and object of sub-s. (2) in certain terms. The Supreme Court first referred to the terms in which the said circular was issued. The circular also drew the attention of the I.T authorities to the assurance given by the Finance Minister in his speech and thereafter the circular tried to explain the position. The circular observed, inter alia, as follows (at p. 611 of 131 ITR):

“It has come to the notice of the Board that in some cases the Income-tax Officers have invoked the provisions of s. 52(2) even when the transactions were bona fide. In this context reference is invited to the decision of the Supreme Court in Navnit Lal C. Javeri v. K.K Sen, AAC, [1965] 56 ITR 198 and Ellerman Lines Ltd. v. Commissioner of Income-tax, [1971] 82 ITR 913, wherein it was held that the circular issued by the Board would be binding on all officers and persons employed in the execution of the Income-tax Act. Thus, the Income-tax Officers are bound to follow the instructions issued by the Board.”

12. The CBDT thereafter instructed the ITOs that while completing the assessments they should keep in mind the assurance given by the Finance Minister and the provisions of s. 52(2) of the I.T Act might not be invoked in cases of bona fide transactions. The Supreme Court noted that these circulars were binding on the Revenue in administering or executing the provision enacted in sub-s. (2), but, quite apart from their binding character, the Supreme Court was clearly of the opinion that the circulars were in the nature of contemporanea expositio furnishing legitimate aid in the construction of sub-s. (2) of s. 52. The Supreme Court noted at pages 612-613 of the report that the principle of contemporanea expositio is a relevant consideration in construing certain provisions. Where doubt arises as to the construction of a provision of law, in such a case if there are contemporary expositions by the relevant authorities, they may be utilised in aid in coming to a construction, but that is not the position here in this case. It appears to us that in view of the language and clear enunciation of the principle, there is no difficulty as to how the shares of this type of a company are to be valued. There is no question of taking into consideration any contemporary view for the introduction of these principles. Therefore, this principle of contemporanea expositio which might be utilised in case of doubt before the court in construing a provision does not really call for our consideration. But the Supreme Court even in those circumstances at pp. 611-612 of 131 ITR, made it quite clear that these circulars were really binding on the Revenue authorities. But these were not binding either on the Tribunal or on the assessee.

13. Our attention was drawn to certain observation of the Allahabad High Court in the case of CWT v. Laxmipat Singhania, [1978] 111 ITR 272. The Division Bench of the Allahabad High Court observed that regarding the valuation of the unquoted shares for the purpose of assessment to wealth-tax for the assessment years 1965-66 and 1966-67, for which the valuation dates were March 31, 1965, and March 31, 1966, respectively, the question arose whether r. 1C and r. 1D introduced by the W.T (Amendment) Rules, 1967, by notification dated October 6, 1967, were applicable with retrospective effect. The Allahabad High Court was of the view that the rules prescribed the method of valuation of unquoted preference shares and unquoted equity shares respectively. As these two rules were made long subsequent to the first exercise of the rule-making power (when the original rules were made), the said two rules could not be given retrospective effect by virtue of s. 46(3) of the W.T Act. It was contended for and on behalf of the Revenue that these rules were merely procedural in nature and did not affect the substantive right of the assessee and would, therefore, be applicable to pending proceedings and, as the assessment orders in the instant cases were made only on March 31, 1970, the said rules would be applicable to the instant case. It was held by the Allahabad High Court that in determining the value of an unquoted preference share, the paid-up value thereof and the rate of dividend paid in respect thereof which were prescribed by r. 1C as the criteria were undoubtedly relevant factors. Likewise, for determining the value of an unquoted equity share, r. 1D prescribed the break-up value as the basis which was a well-accepted method of valuing unquoted equity shares. These two rules must be regarded as rules of evidence or procedure and not as rules of substantive law. Therefore, rr. 1C and 1D, inserted in the W.T Rules by the W.T (Amendment) Rules, 1967, on October 6, 1967, were applicable to pending assessments of the assessee 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. It appears from the judgment that the attention of the Allahabad High Court was not drawn to the decision of the Supreme Court in the case of Mahadeo Jalan, [1972] 86 ITR 621, which dealt with the question of valuation of unquoted shares. In so far as the Allahabad High Court, however, held that r. 1D affected the valuation of the shares, with great respect we cannot agree with this aspect of the matter. In any event, this is academic because the Supreme Court in the case of Mahadeo Jalan, [1972] 86 ITR 621, has laid down the principles which would be applicable in resolving this controversy. Furthermore, it appears to us that r. 1D would not be applicable because the facts of the instant case were different from the facts of the Allahabad High Court case as it appears from the judgment because here this is an investment company and r. 1D does not apply to an investment company in express terms. This view of the Allahabad High Court was reiterated by subsequent decision in the case of CWT v. Sripat Singhania, [1978] 112 ITR 363 and the decision of the Allahabad High Court in the case of Bharat Hari Singhania v. CWT, [1979] 119 ITR 258.

14. Our attention was drawn to a decison of this court in the case of CWT v. Smt. Chandrakala Lal, [1978] 111 ITR 185, where it was reiterated that the market value of the shares could not vary from assessee to assessee. This principle is correct. But in the facts of this case as the Supreme Court has laid down the principle and the Tribunal has followed that principle, we are of the opinion that this principle laid down by the Division Bench of the Calcutta High Court has no relevancy in the facts and circumstances of the case.

15. Our attention was drawn to a decision in the case of CWT v. Bejoy Kumar Karnani, [1979] 117 ITR 543 (Cal), where this court followed the principles laid down in the case of CWT v. Mahadeo Jalan, [1972] 86 ITR 621 (SC). Therefore, it is not necessary for us to discuss in detail the said decision. Our attention was also drawn to the observation in the case of Gestetner Duplicators Pvt. Ltd. v. CIT, [1979] 117 ITR 1, at p. 13 (SC). Regarding the effect of the circular, it is not necessary for us, in view of the facts which we have set out hereinbefore, to discuss this principle in detail any more. Reference was also made to a decision in the case of CIT v. Swedish East Asia Co. Ltd., [1981] 127 ITR 148 (Cal), on the instruction and effect of the circular of the CBDT. In the view we have taken and in view of the controversy and the position as explained before, it is also not necessary to examine this in further detail. So far as the valuation of shares of Mugneeram Bangur & Co. Pvt. Ltd. is concerned, in view of the fact that this was a partnership firm which was transformed into a private limited company immediately before the preceding year, the Tribunal proceeded on a correct principle as set out hereinbefore. In the premises, we answer the question in the affirmative and in favour of the assessee. In the facts and circumstances of the case, parties will pay and bear their own costs.

Suhas Chandra Sen, J.:— I agree.