COMMISSIONER OF GIFT TAX, BOMBAY ETC. v. SMT. KUSUMBEN D. MAHADEVIA ETC (2)

Citation: [1980] 2 S.C.R. 357

Court: Supreme Court of India

Bench: P.N. BHAGWATI, R.S. PATHAK

Case summary

Judgment text

35'7 COMMISSIONER OF GIFT TAX, BOMBAY ETC. SMT. KUSUMBEN D. MAHADEVIA ETC. December 5, 1979 JP. N. BHAGWATI AND R. S. PATHAK, JJ. J Gift Tax and Wealth Tax Act-The Tribunal refused to refer the case to the High Court and the High Court refused to call for reference on the ground that the question was decided by the Supreme Court-Question of law not raised before the Tribunal and not dealt with by it-if could be said to arise out of Its order. ,. The Chartered Accountants of the assessee company, which was an investment company, valued its shares by applying the profit earning method of valuatidn of shares without making any adjustment in the profits of the company. The Gift Tax and '\'ealth Tax Officers did not accept this method and valued che shares by applying the break-up method.

The Appellate Assistant Commissioner applied a different method called "the rule of three" and reduced the l> valuation of the shares; but the figures determined by him were still higher than those clain1ed bv the """e':oee. The Revenue preferred an appeal against the ordei of the Appe11ate Assistant Commissioner becaqse the valuation of the shares ma. de by the Gift Tax and Wealth Tax Officers was reduced by him : the assessee preferred an appeal against the order of the Appellate Assistant Commissioner becau. ;:e he did not accept the valuation put forward by the assessee. The Tribunal accepted the valuation made· by the hares in the/ '[ comp3. ny and the Tribunal was right in accepting the figures of valuation in the -i report of the Chartered Accountants based on the application of the profit '""-. \ earning method. [366G-H, 367A] 2. It is well settled that no question can be referred to the High Court unless it arises out ·of the order of the Tribunal.

A question of law can be said to arise out ,of the order of the Tn"bunal only if it is dealt with by the Tribunal or is raised before it, though not decided by tho Tnbunal. A question of law not J -raised before the Tribunal and not dealt with by it in its order cannot be saidt, ' to arise -out of its order, even if on the facts of the case stated in the order, the , ' ' question fairly arises. [368C·D] In the instant case the question sought to be raised by the Revenue was neither raised before the Tribunal nor decided by it ana the only argument advanced before the Tribunal was that the mean of tho values arrived at on an application of the profit earning method and the break up method should be taken to be the ,.. uue of the shares. No argument was addressed to the Tribu· • nal that the break-up method should be adopted because that was the primary method prescribed by rule 10(2) and the Tribunal had no occasion to deal 'F with such argument.

The question did not arise out of the order of the Tribunal and it could not be required to be referred to the I-Iigh Court. f36SJ? -F] CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 129 and 512 of 1976. · Appeals by Special Leave from the Judgment and Order dated 19-6-1975 of the Bombay Hi~h Court in Gift Tax Application Nos. 1 and 2 of 1975. AND \ CIVIL APPEAL NOS. 755-756 OF 1976 '11 Appeals by Special LeiiVe from the Judgment and Order dated 8-12-1975 of the Bombay High Court in W. T. A. No. 15/75. AND COMMISSIONER OF OIFT TAX v. KUSUMBEN (Bhagwati, J. ) 359 CIVIL APPEAL NO. 1787 OF 1977 Appeal by Special Leave from the Judgment and Order datod 18-12-1976 of the Bombay High Court in W. T. A. No. 24/76. AND CIVIL APPEALS NOS. 1639-1645 OF 1977 Appeals by Special Leave from the Judgment and Order dated 3-11-1976 of the Bombay High Court in Writ Petition Nos. 16, 17 and 21/76 and Judgment and Order dated 4-11-1976 in W. T. A. .. Nos. 20 and 23/76. S. T. Desai, S. P.

Nayar and Miss A. Subhashini for the Appellants. ,N. A. Palkhiwala, S. P. Mehta, H. P. Raina, Ravinder Narain, Mrs. A. K. Verma, Talat Ansari and A. N. Haksar for the Respondents. The Judgment of the Court was delivered by BHAGWATI, J. These appeals by special leave raise a short questicin as to whether a ·reference should have been called for by the High Court in each of these cases. Some of these cases are under the Gift Tax Act while others under the Wealth Tax Act. They all relate to the valuation of the orc'inary shares of a private limited company called Mafat! al Gagalbhai Pvt. Ltd. which is admittedly an investment company. The . assessee in these cases claimed in the course of assssments to gift tax or wealth tax, as the case may be, that the value of the shares should be taken to be the figure arrived at by M/s. C. C. Chokay & Co.

, Chartered Accountants, by applying the · protit earning method of valuation of shares without making any adjustment in the profits of the company. It is not necessary for the purpose of these appeals to set out the different figures of valuation given in the report of M/s. c. C. Chokay & Co. and claimed by the assessees as representing the correct value of the shares on the material dates, • because the question with which we are concerned is one of principle and the actual figures of valuation are not relevant. The Gift Tax and the 1' Wealth TaJi Officers did not accept the figures of valuation given by the · assessees on the basis of the profit earning method and valued the shares at much higher figures by applying the break-up method. This naturally involved the assessees in higher tax liability and hence they preferred appeals to the Appellate Assistant Commissioner.

The Apoellate Assis'ant Commissioner applied what has been described in ' the record as 'rule of three· and reduced the valuation of the shares but the figures determined by the Appellate Assistant Com- ;\, missioner were still higher tlurn those claimed by the assessees, Since the valuation of the shar~• made by the Gift Tall. and the Wealth Tax Officers was reduced by the Appellate Assistant Commissioner, the Revenue was dissatisfied and it, therefore, preferred appeals against the orders of the Appellate Assistant Commissioner to the Tribunal. The assessees were also unhappy . with the valuation made by the Appellate Assistant Commissioner since he did not accept the valuation put forward on their behalf and hence they too preferred cross objections in the appeals . filed by the Revenue. The appeals and the cross objections in :he cases forming the subject .. ) ,' matter of Civil Appeal No. 129/76 were heard together by the\ Tribunal.

The only controversy before the Tribunal was as to which \ method should be followed for valuing the shares of the company. \ The Revenue contended that in the case of an investment company 1 like M;afatlal Gagalbhai Pvt. Ltd. , the proper method of valuation \ would be to take the mean of two values, one arri>ved at by applying the profit earning method and the other by applying the break-up method, while the assessees pleaded for adopting only the profitearning method, since in their submission that was the only method which could be applied for valuation of shares of a· going concern. -:!! The Tribunal by a common judgment accepted the contention of the assessees and adopted the valuation of the shares made by M/s. C. C. Chokay and Co. by apolying the profit earning method and ,in the result rejected the appeals of the Revenue and allowed the cross objections of the assessees.

We shall discuss in some detail the reasons which weighed with' the Tribunal in coming to this deci- ·~ sion, when we deal with the arguments of the parties, but suffice it to state for the present that in taking this view, the Tribunal followed the recent decision of this Court in Commissioner of Wealth-Tax v. Mahadeo Jakin & Ors. (') Similar orders wrre passed by the Tribunal in the appeals and cross-objections relatipg to the other assessees. J The Revenue was obviously aggrieved by the orders of the Tribunal and, therefore, it made appkaticns to the Tribunal for referring to ' t'he High Court the folbv:ng qu? stion cf law, namely, "Whether the Tribunal is right in holding that the shares of an investment company has to be valued only on the basis of the yield without taking into account the assets owned and reflected in the balance shee:. " (1) 86 l. T. R.. 621. COMMISSIONER OF GIFT TAX v. KUSUMBEN (Bhagwati, J. ) 36 I could be said to arise out of the orders of the Tribunal.

The applicalions for reference were rejected by the Tribuna! on the ground that no . ; referable question of law arose out of the orders of the Tribunal. The Revenue thereupon made applications to the High Court for calling for a reference but those applications also met wit! ; the same fate. Hence the Revenue preferred petitions for special leave to appeal in the case of all the assessees ard special leave having been granted in some of the petitions, the present appeals have come up for hearing before us. The sole question that arises for determination in these appeals is whether any question of Jaw arises out of the orders of the Tribunal which needs to be referred to the High Court. It is trne that there must be a question of law arisiog out of the order of the Tribunal before a reference can be made, but it is not every question of Jaw that is required to be referred by the Tribunal to the High Court.

Where the answec to the question of Jaw is self-evident or is concluded by a decision of this Court, it would be futile to make a reference and io such a case the Tribunal would be justified in refusing to refer the question to the High Court vide C. l. T. v. 2 Chander Bhan;(') Mathura Pr,1sad v. C. l. T. ( ) and C. l. T. v. Indian Mica Supply Co. Ltd. (') Now there can be no doubt tha' in the present case the question as to which method should bf' ' '. "l''- •• ed for valuation of the shares of Mafatlal Gagalbhai Private Ltd. , a ' private limited company which was an iovestment company and at all material times a going conc·ern-whether it should be the profit ' earning method or a combination of the break-up method and the profit earning method-is clearJy a question of Jaw. But the argument of the assessees was that the determination of this question was completely covered by a r·ecent decision of this Court in Com- ••• missioner of Wealth Tax v.

Mahadeo Jalan & Others(') in favour of the assessees and no useful purpose would be served by calling for a referece. The Revenue conceded that the decision in Mahadeo Jalan's case did lay down certain principles for valua. tion of shar? s in a limited company, bnt its o:ontention was that these principles were no more than broad-guidelines and they did not eliminate the necessity of finding out the appropriate method of valuation in each • case which came before the taxing authority and hence i1 was necessary td make a . reference so that the proper method for valuation of ~ the shares: M MafatlaL Gagalbhai Pvt. Co. Ltd. could be determined ' ell 6b ttX' ms / ' (~160J!! i'.. R. 428 ·,1,, (3J,. 17r W:. R. ~· (4},. ~~,,,T. ~. 62),, 2-21 SCI/80 by the High Court. The controversy between the parties thus oentred round the question os to what was decided by this Court in Mahadeo Jalan'.

i case and whether it laid down what method should be applied for valuation of shares of a private limited company which is an investment company carrying on business as a going concern. If the method to be applied in such a case could be found to have been judicially laid down by this Court in Mahadeo JalaJZ't, case, all that would be. necessary to be done for arriving at the valuation of the shares in Mafatlal Gagalbhai Company Private Lim:ted would be to apply that method and it would be wholly unnecessary to call for a reference. Let us, therefore, examine the decision in Mahadeo Jalan's case and see whether any principle of valuation of shares is laid down in it which would be applicable in case of a company like Mafatlal Gagalbhai Private Limited. The decision in Ma/wdeo Jalan's case was rendered unde. r the Wealth-tax Act and the question was as to what was the apprapriate method for valuatfon of shares of a private limited company for the purpose of wealth tax.

The Tribunal adopted the break-up method and arrived at the valuation of the shares on that basis, but on a referel!. ce, the Hi~h Court took the view that in case of a company which is a going concern the only proper method of valuation of shares is the yield valwe method and not the break-up method. The Revenue carried the matter in appeal to this Court and in a judgment delivered by Jaganmohan Reddy, J. this Court examined the question of valuation of shares in depth and after referring to various ' decisions of the English, Trish and Australian Courts, laid down the following principles for valuation of shares in a limited company : "(! ) 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 valua. tion 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 • privats limited company the value is determined by reference to the dividends if any, reflecting the profit- • earniug 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. , Jn other words, the profits which the company has 1 been making and should be making will ordinarily determine the value. The dividend and earning method or yield method are not mutually exclusive; ' 4 COMMISSIONER OF GIFT TAX v. KUSUMBEN (Bhagwati, J. ) 363 both should help in ascertaining the profit earning A 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.

B ( 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 fill, computing the yield. In such companies the restriction on share transfers will also be taken into consideration as earlier indic cated in arriving at a valuation. ( 4) Where the dividend yield and earning method break down by reason of th. e company's inability· to ·earn profits and declare dividends, if the set-back is temporary then it is perh2. ps possible to take the esti- D 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 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 E realised by that process. (6) As in Attorney-General of Ceylon v. 1'vlackie [1952] 2 All. E. R. , 775 (P. C.

) a valuation by reference to the assets would be justified where as in that case the fluctuations of profits and uncertainty of the F conditions at the date of the valuation prevented any reasonable estimation of prospective profits and dividends. " 4 Since the company involved in this case was a private limited company which was a going concern, the Court following the above G principles, negatived the applicability of the break-up method for valuation of the shares and upheld the view taken by the High Court that the yield method was the proper method for arriving at ) th! IO valuation of the shares. It is clear from this decision that where the shares in a public limited company are quoted on the stock exchange and there are H dealings in them, the price prevailing on the valuation date would represent the value of the shares. But where the shares in a public [1980] 2 S. C. R.

A limited company are not quoted on the stock exchange or the shares are in a private limited company the proper method of valuation to be adopted would be the profit earning method. Thi~ method may be applied by taking the dividends as reflecting the profit earning capacity of the company on reasonable commercial basis but if it is found that the dividends do not correctly reflect B the profit earning capacity because only a small proportion of the profits is distributed by way of dividends and a large amount of profits is systematically accumulated in the form of reserves, the dividend method of valuation may be rejected and the valuation may be made by reference to the profits. The profit-earning method takes into account the _profits which the company has been C making and should be capable of making and the valuation, according to this method is based on the average maintainable profits.

Of course, for the purpose of such valuation, the taxing authority is not bound by the figure of profits shown in the profit and loss account because it is possible that the amount of profits may bave suffered diminution on account of unreasonable expenditure or the directors D having choi;en to take away a part of the profits in the form of remuneration rather than dividends. The figure of profits in such a case would have to be adjusted in order to arrive at the real profit earning capacity of the company. It would, thus, be seen that in the case of a company which is a going concern and whose shares are I not quoted on the stock exchange, the profits which the company has been making and should be capable of making or in other ( words, the profit-earning capacity of the company would ordinarily determine the value of the shares. That is why in Mahadeo Jalan's case the Court quoted with approval the following observations cl. Williams, J. in M1;. Sa~hie v.

Federal Commissioner , of Taxation(') F . ". . . . the real va! tie' of . shares which a deceased person holds in a 1 cornparW on :thed~t~' of' liis cleath win depend more on the profits which tlie'c6iiipany has been making and should be 9apable of making, having regard to the nature of its business, than Uptlrdhe amounts which . tMJShatesrwould be likely to ~ealise iup Here in the present case Mafatlal Gagalbhai & Co. Pvt. Ltd. was a private limited company which was a going concern and it was H neither ripe for liquidation nor were there any exceptional circums- t lances which should attract the applicability of the break-up method. The profit earning method was,· therefore, the only method which COMMISSIONf. R OF GIFT TAX v, KUSUMBEN (Blwgwati, J,) 367 could properly be applied for arriving at the valuation of the shares in the company and the tribur. al was right in accepting the figures of valuation in the Report of M/s. C. C. Choksy & Co.

, based on the application of the profit earning method. The answer to the question of law relating to the method to be adopted for valuation of shares in the company was clearly concluded by the decision in Mahadeo Jalan's case and the High Court was, therefore, justified in refusing to call for a reference on this question. It is true that in the present appeals, the question of valuation arises not only under the Wealth Tax Act but also under the Gift Tax Act, but since the provision for determining the value of an asset is the same in section 6 sub-section (1) of the Gift Tax Act as it is in section 7 sub-section (1) of the Wealth Tax Act, the prini:iples of valuation laid down in Mahadeo Jedan' t apply equally in relation to valuation of shares to be made for the purpose ,of the Gift Tax Act.

It was, however, contended on behalf of the Revenue that there is a vital difference between section 6 sub-section (1) of the Gift Tax Act and section 7 sub-section (1) of the Wealth Tax Act in as much as section 5 sub-section (1) of the Gift Tax Act is subject inter alia to the provision of sub-section (3) of that section and this latter sub-sec1ion provides that where the value of • any property cannot be estimated under sub-section (1) because it is not saleable in the open ma,:ket, the value shall be determined in the prescribed manner and Rules 10 sub-rule (2) of the Gift Tax Rules prescribes the manner of valuation of shares in a private , ·..

--' limited company where the Articles of Association contain restrictive provision as to the alienation of shares, by providing that in such a case, the value of the shares "if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch if on the date of gift they could be sold in th ve provision as to the alienation of shares and, therefore, Rule 10 sub-rule (2) was applicable and according to that sub-rule, the value of the shares was required to be \ n ascertained by reference to the value of the total assets of the company and it was only if the value was not so ascertainable that it could be determined in any other manner.

The break-up method was thus, according to this sub-rule, the primary method to be applied for arriving at the valuati(ln of the shares and in the circumstances the Tribunal was wrong in determining the value of the shares by applying the profit earning method, atleast so far as the valuation under the Gift Tax Act was concerned. Now it is difficult to see how the question whether the valuation of the shares should have been made on the basis of the break-up method by reason of Rule 10 sub-rule (2) of the Gift Tax Rules can be required to be referred by the Tribunal to the Hi•gh Court. It is well settled that no question can be referred to the High Court unless it arises out of the order of the Tribunal and, as pointed out by this Court in Conuniss! oner of lncon1e-tax v. Scindia Stean1 Nai·igation Co. Ltd.

('), a question of law can be said to arise out of the order of the Tribunal only if it is dealt with by the Tribunal or is raised before though not decided by the Tribunal and a question of law not raised before the Tribunal and not dealt with by it in its' 0 order cannot be said to arise out of its order, even if on the facts of the case stated in the order the question fairly arises. It is obvious that this question sought to be raised on behalf of the Revenue was neither rai·sed before the Tribunal nor decided by it and the only argument advanced before the Tribunal was that the mean of the values arrived at on an application of the profit earning method and the break-up method should be taken to be the value of the shares. There was no argument addressed to the Tribunal that the breakup method should be adopted becausz that was the primary method prescribed by Rule 10 sub-rule (2) and the Tribunal had, therefore, no occasion to deal with such argument.

This question obviously, therefore, does not arise out of the orders of the Triobunal and it cannot be required to be referred to the High Court. These were the only contentions urged on behalf of the Revenue and since there is no substance in them, the appeals fail and are dismissed with costs. I N. K. A. Appeals dismissed. • (! ) 42 l. T. R.