Aapka Consultant Judgment Series- In this series, we are providing case analysis of Landmark Judgments of Hon’ble Supreme Court of India.
Commissioner of Gift Tax, Bombay Vs. Smt. Kusumben D. Mahadevia
AIR 1980 SC 769, (1980) 2 SCC 238,  2 SCR 357
Hon’ble Judges/Coram : P.N. Bhagwati and R.S. Pathak, JJ.
Date of Decision: 05.12.1979
The case pertains to 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 assessment to gift tax or wealth tax, as the case may be, that the value of the shares should be taken by applying the profit earning method of valuation of shares without making any adjustment in the profits of the company. The Gift Tax and the Wealth Tax Officers did not accept the figures and valued the shares at much higher figures by applying the break-up method. This naturally involved in higher tax liability and hence they preferred appeals to the Appellate Assistant Commissioner. Not being satisfied by the order of the Appellate Assistant Commissioner, both the parties preferred appeals to the Tribunal. The Tribunal by a common judgment accepted the contention of the assessees and adopted the valuation of the shares by applying the profit earning method and in the result rejected the appeals of the Revenue and allowed the cross objections of the assessees. Revenue applied to the Tribunal for reference to the High Court but the same was declined by the Tribunal and High Court. Therefore, Revenue applied for the leave of this court under Article 136 of the Indian Constitution.
- Whether any question of law arises out of the orders of the Tribunal which needs to be referred to the High Court?
- What was decided by this Court in Mahadeo Jalan’s case (AIR 1973 SC 1023) 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?
It is true that 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.
In the case of Mohadeo Jalan, the Supreme Court laid down that:-
(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  2 All. E.R 775 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.
It is clear from this decision that 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 would represent the value of the shares. Where the shares in a public 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.
There cannot be any hard and fast rule in the matter of valuation of shares in a limited company and ultimately the valuation must depend upon the facts and circumstances of each case, but that does not mean that there are no well settled principles of valuation applicable in specific fact-situations and whenever a question of valuation of shares arises, the taxing authority is in an uncharted sea and it has to innovate new methods of valuation according to the facts and circumstances of each case. The principles of valuation as formulated by the Court are clear and well-defined and it is only in deciding which particular principle must be applied in a given situation that the facts and circumstances of the case become material. The Court made it clear that 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.”
In the present case Mafatlal Gagalbhai & Co. Pvt. Ltd. was a private limited company which was a going concern and it was neither ripe for liquidation nor were there any exceptional circumstances which should attract the applicability of the break-up method. The profit earning method was, therefore, the only method which could properly be applied for arriving at the valuation of the shares in the company and the tribunal was right in accepting the figures of valuation in the Report Accounting Firm 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.
No question of law arises which demands the reference to the High Court and the case at hand is covered by the ratio of the Mohadeo Jalan Case.
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