B.P.JEEVAN REDDY - (1.) DELAY condoned. Leave granted. Substitution in Civil Appeal No. 1587 of 1980 is allowed.
(2.) THE Wealth Tax Act, 1957 was enacted by Parliament providing for levy of wealth tax. Section 3 is the charging section. It levies wealth tax on an individual, Hindu Undivided Family and Company in respect of their net wealth on the corresponding valuation date at the rate or rates specified in Schedule I. THE expression 'net wealth' is defined in clause (m) of Section 2. In short, it means the aggregate value of all the assets belonging to the assessee on the valuation date minus all his liabilities. Section 7 prescribes the manner in which the value of the assets is to be determined. At the relevant time, sub-section (1) of Section 7 read: "Subject to any rules made in this behalf, 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." Section 46(1) empowers the Board (Central Board of Direct Taxes) to make rules for carrying out the purposes of the Act. Sub-section (2) particularises the topics with respect to which rules can be made. Clause (a) in sub-section (2) says that Rules made by the Board may provide for the manner in which the market value of an asset may be determined. Rules have been made as contemplated by the said sub-section. Rule 1-B provides the manner in which the life interest is to be valued. Rule 1-BB prescribes the manner of valuing the house property. Rule 1-C prescribes the manner in which the market value of unquoted preference shares has to be determined. Rule 1D, with which we are concerned herein, prescribes the manner in which the market value of unquoted equity shares of companies other than investment companies and managing agency companies is to be determined. Inasmuch we are concerned herein with the interpretation of the said rule in its various aspects, it would be appropriate to set out the rule in full, as it obtained at the relevant time: "1D. THE market value of an unquoted equity share of any company, other than an investment company or a managing agency company, shall be determined as follows: THE value of all the liailities as shown in the balance sheet of such company shall be deducted from the value of all its assets shown in the balance sheet. THE net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown in the balance sheet. THE resultant amount multiplied by the paid up value of each equity share shall be the break-up value of each unquoted equity share. THE market value of each such share shall be 85 per cent of the break-up value so determined. Provided that where, in respect of any equity share, no dividend has been paid by such company continuously for not less than three accounting years ending on the valuation date, or in the case where the accounting year of that company does not end on the valuation date for not less than three continuous accounting years ending on a date immediately before the valuation date the market of such share shall be as indicated in the Table-below : THE TABLE JUDGEMENT_46_SUPP3_1994Html1.htm Explanation I : For the purposes of this rule, "balance sheet", in relation to any company, means the balance sheet of such company as drawn up on the valuation date and where there is no such balance sheet, the balance sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balance sheet drawn up on a date immediately after the valuation date. Explanation II : For the purpose of this rule- (i) the following amounts shown as assets in the balance sheet shall not be treated as assets, namely :- (a) any amount paid as advance tax under Section 18A of the Indian Income-tax Act, 1922(11 of 1922), or under Section 210 of the Income-tax Act, 1961 (43 of 1961); (b)... (ii) the following amounts shown as liabilities in the balance sheet shall not be treated as liabilities, namely :- (a) the paid up capital in respect of equity shares; (b) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the valuation date at a general body meeting of the company; (c) reserves, by whatever name called, other than those set apart towards depreciation; (d) credit balance of the profit and loss account; (e) any amount representing provision for taxation (other than the amount referred to in clause (1)(e) to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (f) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares. Rule 1-D introduced with effect from 6/11/1967. It may be noticed that by Direct Tax Laws (Amendment) Act, 1989, these Rules have been incorporated in Schedule III to the Act. Rule 11 in the Schedule corresponds to Rule 1-D. Among the companies incorporated in India, more than 80% are private companies (excluding government owned companies). In private limited companies, there is always a restriction upon the transfer of shares with the result that their shares are not quoted on the stock exchange. Apart from private companies, there may be some public limited companies whose shares are also not quoted on the stock exchange for one or the other reason. Where the shares are quoted on the stock exchange, it is evident that their value on the valuation date is the value for the purposes of the Act. In case of unquoted equity shares, a formula, a method, has to be devised to ascertain their value on the valuation date. Rule 1-D provides for this situation. It is one of the rules contemplated by the opening words in sub-section (1) of section 7.
(3.) LET us now analysis the rule to find out what it says. The formula prescribed in the main limb of the Rule is this; take the balance sheet of the company; deduct the value of all the liabilities as shown in the balance-sheet from the value of all the assets shown therein; divide the net amount so arrived at by the total amount of its paid-up equity share capital as shown in the balance-sheet; multiply the resultant amount thus obtained by the paid-up Value of each equity share; the value so arrived at is the break-up value of each unquoted equity share; 85% of such break-up value shall be treated as the market value of the share. The balance-sheet of the company thus constitutes the basis for working the rule. The rule cannot be worked without the balance-sheet. No problem will arise if the date of the balance-sheet and the valuation date coincide. But this may not always happen. There may be a case where the balance-sheet is prepared on a date earlier than the valuation date of the assessee (shareholder) concerned. This situation is met by Explanation I. The Explanation contemplates a situation where the valuation date of the assessee concerned and the date of balance-sheet of the company is not the same. In such a situation, it says take the balance-sheet drawn up on a date immediately preceding the valuation date of the assessee. In case, both these balance-sheets are not available, the Rule says, take the balance-sheet drawn up on a date immediately following the valuation date of the assessee.;