BANERJEE, J. - (1.) THIS is a reference under s. 64(1) of the ED Act, 1953. The question referred to this Court is : "Whether, on the facts and in the circumstances of the case, in computing the break-up value of the shares held by the deceased in M/s Minerals and Metal (P) Ltd. on the basis of the balance- sheet of that company as on 18th June, 1958, the Tribunal was justified in, (a) valuing the goodwill of that company at Rs. 50,000 ; (b) allowing, as a deduction from the assets, the proposed dividend of Rs. 74,740 as provided for in the balance-sheet ?"
(2.) THE circumstances under which the above question comes up for consideration are hereinafter related in brief. One Shrimati Shanti Devi Rungta died on 26th Sept., 1958. THE deceased held 440 ordinary shares of the face value of Rs. 100 each in M/s Minerals and Metals (P) Ltd. It is not disputed that the total of ordinary shares issued by M/s Minerals and Metals (P) Ltd. was 2,020 shares of Rs. 100 each fully paid up. It is not also disputed that the shares were not quoted in the stock exchange. In determining the value of the shares held by the deceased, the Asstt. CED proceeded to determine the break-up value of the shares on the basis of the net assets of the company as disclosed in the balance-sheet as on 18th June, 1958. He computed the net assets of the company, firstly, at Rs. 4,05,034. In arriving at the figure, he did not allow any deduction for proposed dividend, which was shown as liability in the balance-sheet. As the balance-sheet did not include any value for the goodwill of the company, he estimated the value of the goodwill at Rs. 1,10,000 and added back the same to the value of the net assets as computed by him. THE method employed by the Asstt. CED in valuing the goodwill is hereinafter set out : "THE value of each share in the company on the book-value of the assets as on 18th June, 1958, comes to nearly Rs. 200. THE average annual profits of the company for the 3 years ended 18th June, 1958, amount to Rs. 1,09,300. Allowing 20 per cent. margin for any future fall in the profits, the future annual profits are estimated at Rs. 87,500. THE capital employed other than goodwill is about Rs. 4 lakhs. Estimating the normal yield at 15 per cent., the annual profits amounted to Rs. 60,000. Thus the annual super-profits worked out to Rs. 27,500. Taking goodwill at the 4 years' purchase of super-profits the same works out to Rs. 1,10,000." Having added back the value of the goodwill to the value of the other assets of the company, the Asstt. CED arrived at the figure Rs. 5,15,034 for 2,020 issued shares and found that the break- up value of each share may be taken at the round figure of Rs. 250. The value of the shareholdings of the deceased, namely 440 shares at Rs. 250 per share, was thus taken at Rs. 1,10,000. Dissatisfied with the valuation made by the Asstt. CED, the accountable person appealed before the Appellate CED. The Appellate CED partly allowed the appeal on the valuation of shares of Minerals and Metals (P) Limited on the following ground : "On going through the calculation of the goodwill of the business made by the Asstt. CED, I find that he took the normal yield at the rate of 15 per cent. of the capital employed other than goodwill and took four year's purchase of the annual super- profits of Rs. 27,500. In my opinion, the value of the goodwill was fair and reasonable. Here also, the Asstt. CED had not taken into account the contingent liability. After deducting 30 per cent. of the claim for contingent liability, namely, Rs. 1,60,000, net assets would come to Rs. 4,50,000 (roundly). On this basis, the value of each share would come to Rs. 223. I, however, take the value of each share of this company at Rs. 220 per share. This means a reduction of Rs. 30 per share of 440 shares, that is, Rs. 13,200."
(3.) NOT satisfied with the small success before the Appellate CED, the accountable person preferred an appeal before the Tribunal. It was argued before the Tribunal that goodwill was no doubt an asset but because such an asset was not shown in the balance- sheet, the same should not be included for the purpose of estate duty. Alternatively, it was contended that the valuation of the goodwill taken at 4 year's purchase of the annual super-profits was in any event too high. The Tribunal partly accepted the contention of the accountable person with the following observation : "There can be no doubt that goodwill, if there is one, can be computed and taken into consideration in placing the valuation on the shares of the company. In this case, Minerals and Metals (P) Ltd. have been consistently earning considerable profits. In computing the goodwill, the Asstt. CED had allowed 20 per cent. margin for any future fall in the profits and it is after this deduction that the annual profits were estimated at Rs. 87,500. But to value the goodwill at four years' purchase of the annual super-profits of Rs. 27,500 was, in our opinion, very high. Taking into consideration the fact that the deceased was holding a minority interest in this private limited company and could exercise no control over the dividend policy of the company, in our opinion, a round figure of Rs. 50,000 for the value of the goodwill on the basis of two years' purchase of the super-profits would be a more correct estimate of the value of goodwill. The net assets of the company will thus be reduced by a sum of Rs. 60,000 on this score." There was another objection taken by the accountable person before the Tribunal, namely, that the proposed dividend of Rs. 74,740 should have been deducted in arriving at the break-up value of the private company. The Tribunal allowed this claim with the following observations : "As regards the proposed dividend, relying on the decision of the Calcutta High Court, in the Gift-tax case of Kasturchand Jain vs. GTO (1962) 42 ITR 288 (Cal), we must hold that this is also an allowable deduction in computing the break-up value of the shares. On this basis, the net assets of the company work out to Rs. 3,15,260 and the break-up value per share works out to Rs. 155. The 440 shares in Minerals and Metals (P) Ltd. should be valued accordingly." ;