- (1.) These appeals by special leave raise a short question 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 ordinary shares of a private limited company called Mafatlal Gagalbhai Pvt. Ltd. which is admittedly an investment company: The assessee in these cases claimed in the course of assessments 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. Choksy and Co., Chartered Accountants, by applying the profit 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 figure of valuation given in the report of M/s. C. C. Choksy and 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 Wealth Tax 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 Appellate Assistant 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 Commissioner were still higher than those claimed by the assessees. Since the valuation of the shares made by the Gift Tax 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 the 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 like Mafatlal Gagalbhai Pvt. Ltd., the proper method of valuation would be to take the mean of two values, one arrived at by applying the profit earning method and the other by applying the break-up method, while the assessees pleaded for adopting only the profit-earning 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. Choksy and Co. by applying 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 decision 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 Commr. of Wealth Tax v. Mahadeo Jalan, (1972) 86 ITR 621. Similar orders were passed by the Tribunal in the appeals and cross-objections relating to the other assessees. The Revenue was obviously aggrieved by the orders of the Tribunal and, therefore, it made applications to the Tribunal for referring to the High Court the following question of 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 sheet." said to arise out of the orders of the Tribunal. The applications for reference were rejected by the Tribunal 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 with the same fate. Hence the Revenue preferred petitions for special leave to appeal in the case of all the assessees and special leave having been granted in some of the petitions, the present appeals have come up for hearing before us.
(2.) The sole question that arises for determination in these appeals is whether any question of law arises out of the orders of the Tribunal which needs to be referred to the High Court. It is true that there there must be a question of law arising out of the order of the Tribunal before a reference can be made, but it is not every question of law that is required to be referred by the Tribunal to the High Court. Where the answer to the question of law is self-evident or is concluded by a decision of this Court, it would be futile to make a reference and in such a case the Tribunal would be justified in refusing to refer the question to the High Court : vide Commr. of I. - T. v. Chander Bhan, (1966) 60 ITR 188 (SC); Mathura Prasad v. Commr. of I.- T., (1966) 60 ITR 428 (SC) and Commr. of I. - T. v. Indian Mica Supply Co. P. Ltd., (1970) 77 ITR 20 (SC). Now there can be no doubt that in the present case the question as to which method should be adopted for valuation of the shares of Mafatlal Gagalbhai Private Ltd., a private limited company which was an investment company and at all material times a going concern - whether it should be the profit earning method or a combination of the break-up method and the profit earning method - is clearly a question of law. But the argument of the assessees was that the determination of this question was completely covered by a recent decision of this Court in Commr. of Wealth Tax v. Mahadeo Jalan, (1972) 86 ITR 621 in favour of the assessees and no useful purpose would be served by calling for a reference. The Revenue conceded that the decision in Mahadeo Jalan's case did lay down certain principles for valuation of shares in a limited company, but its contention was that these principles were no more than board 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 it was necessary to make a reference so that the proper method for valuation of the shares of Mafatlal Gagalbhai Pvt. Co Ltd. could be determined by the High Court. The controversy between the parties thus centred round the question as to what was decided by this Court in Mahadeo Jalan's 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 Jalan's case, all that would be necessary to be done for arriving at the valuation of the shares in Mafatlal Gagalbhai Company Private Limited 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.
(3.) The decision in Mahadeo Jalan's case was rendered under the Wealth Tax Act and the question was as to what was the appropriate method for valuation 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 reference, the High 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 value 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, Irish and Australian Courts, laid down the following principles for valuation of shares in a limited company: (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 method 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. Since the company involved in this case was a private limited company which was a going concern, the Court following the above 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 the valuation of the shares.;