Holding

Rule 1‑D of the Wealth Tax Rules is a valid, mandatory provision that must be applied by all authorities, including valuation officers, for determining the market value of unquoted equity shares, without any deductions for capital‑gains tax, and its explanations and sub‑clauses are to be read as clarified, while shares in companies holding agricultural land cannot be excluded from the shareholder’s wealth.

Summary

The Supreme Court examined the validity and mandatory nature of Rule 1‑D of the Wealth Tax Rules, which prescribes a break‑up formula for valuing unquoted equity shares of companies (excluding investment and managing‑agency companies). It held that the rule is a perfectly valid piece of delegated legislation and must be followed by the Wealth Tax Officer and any valuation officer in every case; the rule is neither optional nor merely directory. The Court ruled that no deduction for capital‑gains tax or other amounts such as provision for taxation, provident fund or gratuity may be made when applying the rule, and that Explanation‑I to the rule is also binding even when the balance‑sheet date does not coincide with the valuation date. The Court clarified the interpretation of sub‑clauses (a) of clause (i) and (e) of clause (ii) of Explanation‑II, confirming the treatment of advance tax paid and taxation provisions. Finally, it rejected the contention that shares in a company whose assets are agricultural land can be excluded from the shareholder’s wealth. The writ petition was dismissed and the appeals were disposed of in accordance with these conclusions.

Issues considered

Whether Rule 1‑D is obligatory or merely directory for valuing unquoted equity shares of companies other than investment or managing‑agency companies.
Whether the valuation officer is bound by Rule 1‑D when valuing such shares.
Whether the break‑up method under Rule 1‑D requires deduction of capital‑gains tax payable on a hypothetical sale.
Whether Rule 1‑D must be applied when the balance‑sheet date differs from the valuation date, or when no balance‑sheet is available.
How sub‑clause (a) of clause (i) and sub‑clause (e) of clause (ii) of Explanation‑II to Rule 1‑D should be interpreted.
Whether a shareholder can exclude shares of a company whose assets consist wholly or partly of agricultural land from his wealth.

Legislation cited

Companies Act (as applicable, Schedule‑VI)
Finance Act, 1980
Finance Act, 1982
Income Tax Act, 1961s. 18A, s. 210
Wealth Tax Act, 1957s. 16A, s. 2, s. 23, s. 24, s. 24(6), s. 3, s. 46(1), s. 46(2), s. 7

Subjects

Wealth TaxUnquoted equity sharesRule 1-DBreak‑up methodValuationCapital gains taxAgricultural landDelegated legislation

Judgment

-I

BHARAT HARi SINGHANIA AND ORS. ETC. ETC. A
v.
-A. COMMISSIONER OF WEALTH TAX (CENTRAL) AND ORS.

FEBRUARY 16, 1994

[S.C. AGRAWAL, B.P. JEEVAN REDDY AND B
AS. ANAND, JJ.]

Wealth TaxAct, 1957/Wealth Tax Rules: Sections 2, 3, 7 and 24(6)/Rule
1-D.
c
Unquoted equity shares of companies other than investment companies
. and managi,ng agency companies-Detemiination of market value-Break-up
method fomiula-Validity of-Rule 1(d) and Explanation I thereto-Perfectly
valid piece of delegated legi,slation-Not in conflict with Section 24(6) of the
Act-Rule being mandatory or directory does not arise-No deduction on
account of capital gains tax payable in case the shares were sold on the D
valuation date-Assessee holding shares in company whose assets comprise
of .igricultural land wholly or partly-Not entitled to exclude such shares from
his wealth.

Rule 1-D of the Wealth Tax Rules prescribed the formula for deter- E
mining the market value of unquoted shares of a company. A'i per the
formula, all the liabilities from all the assets shown in the balance-sheet
have to be deducted; the net amount so arrived at has to be divided by
total amount of paid up equity share capital; the amount thus arrived at
to be multiplied by the paid up value of each equity share and the value
so arrived at is called the break-up value of the share and 85% of such F
break-up value is to be treated as the market value of the share.

In the present Writ Petition and appeals, the adoption of the above-
said formula was challenged, giving rise to the following questions:

(1) Whether it is obligatory to follow Rule 1-D while valuing the
G
unquoted equity shares of companies (other than investment companies
and managing agency com1ranies) or is it merely optional?

· (2) Whether the valuatfon officer is bound by Rule 1-D when valuing
the unquoted equity shares of the companies? H
1033
1034 SUPREME COURT REPORTS (1994) 1 S.C.R.

A (3) Whether the application of the break-up method in Rule 1-D
means that the capital gains-tax, which would be payable in case the said
shares are sold on the valuation date, is liable to be deducted from the
market value determined?

(4) Where the date of a balance-sheet of the company is earlier to
B the valuation date of the assessee, is it obligatory to follow Rule l·D? (The
same question arose where in the absence of such a balance-sheet, the
balance-sheet drawn up on a date immediately following the valuation date
is taken as the basis). ,J.,_

(5) How are sub-clauses (a) of clause (i) and (e) of clause (ii) of
c Explanation-II to Rule 1-D to be read and understood?

(6) Whether the assessee holding shares in a company whose assets
comprise wholly of Tea Estates is entitled to exclude such shares from his
wealth?
D
Upholding the validity of Rule 1-D and answering the questions in
~
favour of the Revenue, this Court

HELD: (On questions 1 and 2):

1.1. Rule 1-D of the Wealth Tax Rules is perfectly valid and effective.
E The Rule bas to be followed in every case where unquoted equity shares of
a company (other than investment company or a managing agency com·
pany) have to be valued. All the authorities under the Act including the
valuation officer are bound by the said Rule. The question of the Rule being
mandatory or directory does not arise. [1068-B)
F
1.2. Section 7(1) of the Wealth Tax Act, 1957 defines the expression
"value of an asset." It is "the price which in the opinion of the Wealth Tax
Officer it would fetch if sold in the open market on the valuation date", but
this is made expressly subject to the Rules made in that behalf•. No
guidance is furnished by the Act to the rule-making authority except to say
G that the Rule made ~ust lead to "ascertainment of the value of the asset
(unquoted equity share) as defined in Section 7. It is thus left to the
rule-making authority to prescribe an appropriate method for the pur- )....
pose. Now, there may be several methods of valuing an asset or for that
method an unquoted equity share. The rule-making authority cannot
H obviOusly prescribe all of them together. It bas to choose one of them which
B.H. SINGHANIA v. C.W.T. 1035

according to it is more appropriate like the one in this case viz. the A
break-up method, which is undoubtedly one of the recognised methods of
valuing unquoted equity shares. Even if it is assumed that there was
another method available which was more appropriate, still the method
chosen cannot be faulted so long as the method chosen is m·~ of the
recognised methods, though less popular. One probable reason why yield B
method or dividend method was not adopted in the case of unquoted equity
shares was that bulk of. these companies are private limited companies
where the dividend declared does not represent the correct state of affairs
and to estimate the probable yield is no simple exercise. The dividends in
these companies is declared to suit the purposes of the persons controlling
the companies. Maintainable profits rather than the dividends declared C
represent the correct index of the value of their shares. The break-up
method based upon the balance-sheet of the company, incorporated in
Rule 1-D, is a fairly simple one, and no serious objection can also be taken
to this course since the basis of the Rule is the balance-sheet of the
company prepared by the company itself - subject, of course, to certain D
modifications provided in Explanation-II. [1046-H; 1047-A-E]

1.3. It cannot be stated as a principle that only the method that leads
to lesser value is the correct method. The idea is a to find out the true
market value and not the value more favourable to the assessee. Accord-
ingly, it cannot be said that Rule 1-D is inconsistent with Section 7(1) or E
that it travels beyond the purview of Section 7. [1047-H, 1048-A]

1.4. A provision is said to be directory when the absence of a strict
or literal compliance with it - and in some cases even non-compliance with F
it - may not vitiate the thing done. On the other hand, a mandatory
provisions is one which has to be obeyed in its letter and spirit and
anything done without such compliance stands vitiated. To say that in all
cases except in the case of companies ripe for winding-up, Rule 1-D ought
not be followed and that only the yield method should be adopted is really
substituting a Rule of choice of assessee in place of the Rule made by the G
rule-making authority under Section 46 of the Act. If the Rule is good and
valid, it has to be followed in each and every case. It is not a matter of
choice or option. The rule-making authority has prescribed only one
method for valuing the unquoted equity s.hares. If this method were not to
be followed, there is no other method prescribed by the Rules. [1048-B-D] H
1036 SUPREME COURT REPORTS [1994) 1 S.C.R.

A 1.5. Where there is a Rule prescribing the manner in which a
particular property has to be valued, the authorities under the Act have
to follow it. They cannot devise their own ways and means for valuing the
assets. It is equally well to remember that Rule 1-D does not treat the
break-up value as the market value. A deduction of 15% is made in the
break-up value to arrive at the market value. It is equally relevant to notice
B that Rule 1-D uses the expression "shall", which prima facie indicates its
mandatory character. (1048-F-GJ

1.6. Section 24, which provides for appeal to the Appellate Tribunal,
too contains an identical provision viz. the proviso to sub-section(S). It
C cannot be said that the Appellate Tribunal is not bound by the Rules. It
is rather odd to say that everybody else is bound by the Ru!es but not the
valuation officer, though his valuation is subject to appeal to the very
authorities who are bound by the Rules. Conversely, it cannot be suggested
th1;tt nobody - except the Wealth Tax Officer is bound by the Rules. All this
only means that there can be only one uniform method of valuation of
D assets under the Act - and not two or more. This would be so whether
reference to valuation officer is obligatory or otherwise. The valuation
officer is equally bound by Rule 1-D - as indeed he is bound by all the other
Rules made under the Act. [1059 B-D)

Commissioner of Wealth-Tax v. Smt. Pushpawati Devi Singhania, 188
E
I.T.R. 364, approved.

Sharbati Devi Jhalani v. Commissioner of Wealth-Tax, 159 I.T.R. 549,
overruled.

Commissioner of Wealth Tax, Assam .v. Mahadeo Jalan & Ors., 86
F
I.T.R. 621; Commissioner of Gift Tax, Bombay v. Kusumben D. Mahadevia,
122 I.T.R. 38; Commissioner of Gift Tax v. Executors & Trustees of the Estate
of late Shri Ambal~l Sarabhai, 170 I.T.R. 144 and Dr. D. Renuka v. Com-
missioner of Wealth Tax, 175 I~T.R. 615, referred to.

G Brochure "Guidelines for valuation of equity shares of companies and
the business and net assets of branches'~ issued by the Ministry of Finance,
Department of Economic Affairs, Investment Division, referred to.

On question 3:

H 2.1. While valuing the unquoted equity shares under Rule 1-D no
B.H. SINGHANIA v. C.W.T. 1037

deductions on account of capital gains tax which would have been payable A
in case the said shares were sold on the valuation date can be made.
Similarly, no other deductions including provision for taxation, provident
fund and gratuity are admissible. Rule 1-D is exhaustive on the subject.
(1068-C]
2.2. It is not possible to accept the contention of the assessees that B
price sub-section(l) of section 7 creates a fiction of sale price of such asset

... on the valuation date for the purpose of determining its market value, that
once a fiction is created~ it must be carried to its logical extent and the
court should not allow its imagination to be boggled by any other con-
~

siderations, that if an asset is sold, it would be subject to capital gains tax,
that for finding out the net wealth received in the hands of assessee, one
c
must necessarily deduct the capital gains tax or that then alone one can
arrive at the net price which the assessee will receive • and that should be
, the market value. Tber~ is no sale of the asset and there is no question of
capital gains tax being attracted or being paid. For the purpose of deter-
mining the market value, the sub-section says that the Wealth Tax Officer D
shall make an estimate of the price which the asset would fetch if sold in
the open market on the valuation date. The sub-section speaks of the
market value of the asset and not the net income or the net price received
by the assessee. This is not a case where a fiction is created by the
Parliament. It is only a case of prescribing the basis of determination of
market value. On the same reasoning, it must be held that no other
E
amounts like provision for taxation, provident fund and gratuity etc. can
be deducted. (1059-H, 1060-A·C]

On Question 4:
F
3.1. Explanation-I to Rule 1-D is a perfectly valid piece of delegated
legislation and has to be followed. Merely because the valuation date of
the assessJQent and the date with reference to which the balance-sheet of
the company is drawn do not coincide, it cannot be said that Rule l·D is
not mandatory or that it need not be followed. (1068-E]
G
3.2. The court must adjudge the constitutionality of a legislation by
the generality of its provisions and not by its crudities and inequities •
.(
Ordinarily speaking, the gap, if any, between the valuation date and the
date of the balance-sheet would not be too long. It would a few months.
There may be some fluctuations in the fortunes of the company within that H
1038 SUPREME COURT REPORTS [1994] 1 S.C.R.

A period. Precisely for this reason, the market value adopted by Rule 1-D is
not the break-up value as such but only 85 per cent of it. Moreover there )...
is no reason to presume that the fluctuation, if any, would be only one way.
It can also be the other way i.e., to the benefit of the assessee, in which
case the Revenue will stand to lose its legitimate revenue. But all this is
no ground for holding either that Explanation-I is inconsistent with Sec-
B tion 7(1) or that Rule 1-D should not be followed unless the valuation date
and the date of balance sheet is identical. (1063-D-F]

3.3. So long as the formula evolved is reasonable having regard to
available circumstances and practicable considerations, the formula can-
C not be faulted. No formula can be evolved to fit all conceivable situations.
Even if the dividend method is adopted, the said problem would still be
present. The dividend may have been declared on a date different from the
valuation date. For all the above reasons, it is not possible to agree that
merely because the valuation date and the date Qf balance-sheet are not
the same, Rule 1-D need not be followed. [1064-CD]
D
R.K Garg v. Union of India, (1981) l\.I.R. 2138, relied on.

New Orleans v. Duke, [1976] 427 U.S. 297, referred to.

On Question 5:
E
4.1. Sub-clause(a) of clause(i) and sub-clause(3) of clause(ii) of
Explanation-II in Rule 1-D have to be read and understood in the manner
indicated herein below. (1068-F]

F 4.2. Ordinarily the.re will be no occasion for tlJe Wealth Tax Officer
to rely upon the words "other than the amount referred to in clause (i)(a)."
However, if in the case of the balance-sheet of any company, the said
amount of advance tax paid is also shown as a liability i.e., if the said
amount is included in the amount set apart as provision towards taxation,
it would obviously have to be deleted from the column of liabilities - and
G this is also what the aforesaid words in clause (ii)(e) say. Clause (ii)(e) is
in a sense complimentary to clause (i)(a). Truly speaking1the advance tax
paid is not really an asset but the proforma of balance-sheet in Schedule-
_)...
VI to the Companies Act requires it to be shown as such. What clause (i) (a)
does is to remove the said amount from the list of assets for the purpose
H of Rule 1-D. It is then that d~use (ii)(e), which speaks of liabilities, says
B.H. SINGHANIA v. C.W.T. 1039

that only that amount which is still remaining to be paid shall be treated A
as a liability on the valuation date. If in the provision for taxation made
in the column of liabilities in the balance-sheet, the amount of advance tax
already paid is again shown as a liability, it will not be treated as a liability.
It must be remembered that the advance tax has already gone out of the
profits and debited in the account books of the company. This is the true B
function of both the sub-clauses. (1065 D-G]

~ Commissioner of Income Tax v. M. Lakshmaiah & Anr., 174 I.T.R.4;
Commissioner of Wealth Tax v. N. Krishnan, 162 I.T.R. 309; Ashok Kumar
Oswal(Minor) v. Commissioner of Wealth Tax, Patiala, 148 I.T.R. 620 and
Commissioner of Wealth Tax, Gujarat-I v. Ashok K Parikh, 129 I.T.R. 46; C
referred to.

On Question 6:

5.1. An assessee holding shares in a company whose assets comprise
~ wholly or partly of agricultural land, is not entitled to exclude such shares D
from his wealth. (1068-F]

5.2. Wealth being assessed is that of the shareholder and ·not of the
company. The company may own agricultural assets and if the t:ompany
were to be liable to wealth tax, the said assets may be excludeble in its
hands. But that has no relevance to the case of a shareholder. The E
shareholder does not own and cannot claim any portion of the property
• held by the company of which he is a shareholder, since company is an
independent juristic entity. (1067-C-D]

Bacha F. Guzader v. Commissioner of Income Tax, (1955) 1 S.C.R. F
876, relied on.

ORIGINAL APPELLATE JURISDICTION: Writ Petition (C) No.
1213 of 1990 etc. etc.

(Under Article 32 of the Constitution of India) G
-4. M.L. Verma, Basant Mehta, S. Ganesh, Ms. Priya Hingorani, Ashok
Mathur and M.M. Kshatriya for the Petitioners/Appellants.

Dr. V. Gaurishankar, J. Ramamurthy, S. Rajappa, M.B. Rao, B.S.
Ahuja and D.S. Mahra for the Respondents. H
1040 SUPREME COURT REPORTS [1994) 1 S.C.R.

A The Judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. Delay condoned, Leave granted.
Substitution in Civil Appeal No. 1587 of 1980 is allowed.

B 1. 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)
C 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: "Sub-
ject 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
D 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
CClll: be made. Clause (a) in sub-section (2) says that Rules made by the
E Board may provide for the manner in which the market value of an asset
may be detertnined. Rules been made as contemplated by the said sub-sec-
tion. 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 1-D, with which we are concerned
F 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 herejn
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:
G
"lD. The market value of an unquoted equity share of any com-
pany, other than an investment company or a managing agency
company, shall be determined as follows:

The value of all the liabilities as shown in the balance sheet of such
H company shall be deducted from the value of all its assets shown
I
I

B.H.SINGHANIA v. C.W.T.[JEEVANREDDY,J.J 1041

in the balance sheet. The net amount so arrived at shall be divided A
by the total amount of its paid-up equity share capital as shown in
the balance sheet. The resultant amount multiplied by the prud-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.
B
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 C
a date immediately before the valuation date the market of such
share shall be as indicated in the Table below:

THE TABLE

Number of accounting years ending Market value D
on the valuation date or in the case
where the accounting year does not
end on the valuation date, the
number of accounting years ending
on a date immediately preceding the E
vahtation date, for which no
dividend has been paid.
Three years 821/2 per cent of the break-up value
of such share
Four years 80 ---do--- F
Five years 77-VZ ---do---
Six years and above 75 ---do---

Explanation· I: For the purposes of this rule, "balance sheet", in
relation to any company, means the balance sheet of such company G
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.
H
\
1042 SUPREME COURT REPORTS [1994] 1 S.C.R.

A 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
B Income-tax Act, 1922 (11 of 1922), or under Section 210 of the
Income-tax Act, 1961 (43 of 1961);
'
(b) any amount shown as liabilities in the balance sheet shall not -,I

be treated as liabilities, namely:-

c (a) the paid-up capital in respect o(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; •
D ~

( c) reserves, by whatever name called, other than those set apart
towards depreciation;

(d) credit balance of the profit and loss account;

E ( e) any amount representing provision for taxation [other than the
amount referred to in clause (i)(e)] to the extent of the excess over
the tax payable with reference to the book profits in accordance
with the law applicable thereto; ~

(t) any amount representing contingent liabilities other than ar-
F rears of dividends payable in respect of cumulative preference
shares."

2. Rule 1-D was introduced with effect from November 6, 1967. It
may be noticed that by Direct Tax Laws (Amendment) Act, 1989, these
G Rules have been incorporated in Schedule-III to the Act. Rule 11 in the
Schedule corresponds to Rule 1-D.

3. Among the companies incorporated in India, more than 85% are
private companies (excluding government owned companies). In private
limited companies, there is always a restriction upon the transfer of shares
H with the result that their shares are not quoted on the stock exchange.
I
B.H. SINGHANIA v. C.W.T. [JEEVAN REDDY, J.] 1043

Apart from private companies, there may be some public limited com- A
panies 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 B
for this situation. It is one of the rules contemplated by the opening words
in sub-section (1) of Section 7.

4. Let us now analyse 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- C
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 D
shall be treated as the market value of the share.

5. 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 E
balance-sheet is prepared on a date earlier than the valuation date of the
' assessee (shareholder) concerned. This situation is met by Explanation-I.
4'. 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 p
a date immediately preceding the valuation date of the assessee. In case,
both these balance-sheets are not available, the Rule says, take t~e balance-
sheet drawn up on a date immediately following the valuation date of the
assessee.

6. The proviso to the rule deals with the situation where no dividend G
has been paid by the company continuously for not less than three account-
ing years ending on the valuation date of the assessee concerned. Since we
are not concerned with the proviso in these matters, it is not necessary to
set out its purport except to say that in the cases contemplated by it, it
provides a still lower percentage of break-up value to be the market value H
1044 SUPREME COURT REPORTS [1994) 1 S.C.R.

A of the share. Depending upon the number of years the dividend is not
declared, the percentage goes down.

7. Explanation-II contains two clauses, (i) and (ii). Clause (i)
provides that two types of assets shown in the balance-sheet shall not be
treated as assets. We are concerned with the first among the two which
B reads:- "(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." Clause (ii) provides that the several items men-
tioned therein, which are shown as liabilities in the balance-sheet, shall not
be treated as liabilities. We are concerned herein with the liability men-
C tioned under sub-clause (e) which reads: "(e) any amount representing
provision for taxation [other than the amount referred to in clause (i)(a)]
to the extent of the excess over the tax payable with re.ference to the book
profits in accordance with the law applicable thereto." Schedule-VI to the
Companies Act prescribes the form in which the balance-sheet of a com-
pany is to be prepared. It contains four columns. Second column mentions
D the liabilities and the third column the assets. The advance tax paid by the
company under Section 210 of the Income Tax Act is shown as an asset
while the amount set apart as provision for taxation is shown in the column
of liabilities. Now, what Explanation does is to direct that the two items
mentioned as assets shall not be .treated as assets and the six items
E mentioned as liabilities shall not be treated as liabilities. In other words, it
provides for modification of the balance-sheet in certain respects for the
purpose of working the Rule. After the said deletions, the balance-sheet "
becomes the balance-sheet for the purpose of Rule 1-D. _,,.f
8. Elaborate arguments have been addressed before us by learned
F counsel appearing on both sides. Having regard to the contentions urged,
the following questions arise for our determination:

(1) Whether it is obligatory to follow Rules 1-D while valuing the
unquoted equity shares of companies (other than investment companies
G and managing agency companies) or is it merely optional? (To borrow the
language of the learned counsel for the assessees, the Rule is not man-
datory but 'directory'; while the learned counsel for the Revenue say that
the valuation of an unquoted equity share shall have to be done only in the
manner indicated by the Rule and in no other manner.)

H (2) Whether the valuation officer is bound by Rule 1-D when valuing.
f
B.H. SINGHANIA v. C.W.T. [JEEV AN REDDY, J.] 1045

the unquoted equity shares of the companies? A
(3) Whether the application of the break-up method in Rule 1-D
means that the capital gains-tax, which would be payable in case the said
shares are sold on the valuation date, is liable to be deducted from the
market value determined?
B
(4) Where the date of a balance-sheet of the company is earlier to
the valuation date of the assessee, is it obligatory to follow Rule 1-D? (The
same question arises where in the absence of such a balance-sheet, the
balance-sheet drawn up on a date immediately following the valuation date
is taken as the basis).
c
(5) How are sub-clauses (a) of clause (i) and (e) of clause (ii) of
Explanation-II to be read and understood?

(6) whether the assessee holding shares in a company whose assets
comprise wholly of Tea Estates is entitled to exclude such shares from his D
wealth?

9. We shall deal with these questions in their proper order.

QUESTION NO.I: Whether it is obligatory to follow Rule 1-D while
valuing the unquoted equity shares of companies (other th:m investment E
companies and managing agency companies) or is it merely optional?

10. The formula prescribed by Rule 1-D for determining the market
value of unquoted equity shares of a company has been set out by us
hereinabove. To repeat, the formula is this: deduct all the liabilities from
all the assets shown in the balance-sheet; the net amount so arrived at shall F
be divided by total amount of the paid-up equity share capital; the amount
thus arrived at shall be multiplied by the paid-up value of each equity share;
the value so arrived at is called the break-up value of the share and 85%
of such break-up value shall be treated as the market value of the share.
This method is, in short, called the 'break-up method'. The contention of
the learned counsel for the assessees, S/Sri Debi Pal, M.L. Verma, G
Ramachandran, Harish Salve, G.C. Sharma and P.H. Parekh is this: Section
7(1) of the Act contemplates rules being made for determining the market
value of an asset which means the value which that asset would fetch if sold
in the open market on the valuation date. The rule-making authority is-to
operate within the confines of Section 7(1). The Rules made by it should H
A
1046 SUPREME COURT REPORTS (1994) 1 S.C.R.

be directed towards ascertaining such market value. Rule 1-D, however,
'
I

does not bring about the said result. It prescribes an arbitrary method, the
application of which leads to an arbitrary figure unrelated to the market
value of the share on the valuation date. This court has repeatedly held
that the proper and appropriate method for valuing the unquoted equity
shares of a going concern is the yield method. The court has pointed ·out
B that the break-up method is not appropriate for the purpose and that this
method is adopted in exceptional situations or where the company is ripe
for winding-up. A method which is appropriate only in the case of a
company ripe for winding-up cannot be treated as a proper or appropriate
method for the purpose ·of valuing the .shares of a going concern. The
c formula prescribed in Rule 1-D is unrelated to realities. The Rule is thus
contrary to Section 7(i) and beyond the rule-making authority conferred by
the Act. Even if for some reason the Rule is held to be good, it should not
be followed in the case of valuation of the unquoted equity shares of a
company which is a going concern. In such cases, the yield method alone
D should be adopted. Only in the case of a company which is ripe fpr
winding-up, its shares must be valued according to the break-up method
contained in the Rule. In other words, Rule 1-D is not mandatory but
directory. The majority of the High Courts in the country have taken this
view and it should also be accepted by this court.

E 11. On the other hand, S/Sri Gauri Shanker, B.B. Ahuja and Murthy
appearing for the Revenue submitted that according to the decisions of this'
Court and well-known rules of accountancy followed in this and other
countries, break-up method is one of the recognised methods of valuing
the unquoted equity shares. Where more than one method of .valuation is
available to the rule-making authority, it is open to it to choose one of them.
F
Counsel emphasised that Rule 1-D takes the balance-sheet of the company
itself as the basis and arrives at the valuation which cannot be said to be
either arbitrary .or unrelated to realities. The counsel submitted that every
authority under the Act is bound to follow and apply the said Rule
whenever they have to value an unquoted equity share.
G
12. We may first take up the question whether Rule 1-D is void for >-
being inconsistent with the Act or for the reason that it is beyond the
rule-making authority conferred by the Act. Section 7(1) indeed defines
the expression "value of an asset." It is "the price which in the opinion of
H the Wealth Tax Officer it would fetch if sold in the open market on the
B.H.SINGHANIA v. C.W.T.(.TEEVANREDDY,J.J 1047

valuation date", but this is made expressly subject to the Rule made in that A
behalf. No. guidance is furnished by the Act to the rule-making authority
except to say that the Rule made must lead to ascertainment of the value
of the asset (unquoted equity share) as defined in Section 7. It is thus left
to the rule-making authority to prescribe an appropriate method for the
purpose. Now, there may be several method of valuing an asset or for that
method an unquoted equity share. The rule-making authority cannot ob-
B
viously prescribe all of them together. It has to choose one of them which
according to it is more appropriate. The rule-making authority has in this
case chosen the break-up method, which is undoubtedly one of the recog-
nised methods of valuing unquoted equity shares. Even if it is assumed that
there was another method available which was more appropriate, still the c
method chosen cannot be faulted so long as the method chosen is one of
the recognised methods, though less popular. One probable reason why
yield method or dividend method was not adopted in the case of unquoted
equity shares was that bulk of these companies are private limited com-
panies where the divided declared does not represent the correct state of D
affairs and to estimate the probable yield is no simple exercise. The
dividends in these companies is declared to suit the purposes of the
persons controlling the companies. Maintainable profits rather than the
dividends declared represent the correct index of the value of their shares.
The break-up method based upon the balance-sheet of the company,
incorporated in Rule 1-D, is a fairly simple one. Indeed, no serious E
objection can also be taken to this course since the basis of the Rule is the
balance-sheet of the company prepared by the company itself - subject, of
course, to certain modifications provided in Explanation-II.

13. We are not satisfied that the break-up method adopted by Rule F
1-D does not lead to proper determination of the market value of the
unquoted shares. The argument to this effect, advanced by the learned
counsel for the assessees, is based upon the assumption/premise that the
value determined by applying the yield method is the correct market value.
We do not see any ba~is for this assumption. No empirical data is placed
before us in support of this submission or assumption. It may be more G
advantageous to the as:;essees but that is not saying the same thing that it
alone represents the tri.e market value. It cannot be stated as a principle
that only the method that leads to lesser value is the correct method. The
idea is to find out the true market value and not the value more favourable
to the assessee. Accordingly, the contention that rule 1-D is inconsistent H
\
I

1048 SUPREME COURT REPORTS (1994) 1 S.C.R.

A with Section 7(1) or that it travels beyond that purview of Section 7 is
rejected.

14. The next argument that Rule 1-D is not mandatory but directory
proceeds upon a certain misconception. A provision is said to be directory
when the absence of a strict or literal compliance with it - and in some
B cases, even non-compliance with it - may not vitiate the thing done. On the
other hand, a mandatory provision is one which has to be obeyed in its
letter and spirit and anything done without such compliance stands vitiated.
The counsel for the assessees, however, do not understand the said expres-
sions in the above sense. What they really say is that following Rule 1-D
c should be optional. According to them, in all cases except in the case of
companies ripe for winding-up, Rule 1-D ought not to be followed and that
only the yield method should be. This is really substituting a Rule of the
choice of assessees in the place of the Rule made by the rule-making
authority under Section 46 of the Act. If the Rule is good and valid - as
we find it to be, it has to be followed in each and every case. It is not a
D matter of choice or option. The rule-making authority has prescribed only
one method for valuing the unquoted equity shares. If this method were
not to be followed, there is no other method prescribed by the Rules. The
acceptance of the assessees' contention would mean that it would be open
to the Wealth Tax Officer to adopt such other method of valuation as he
thinks appropriate in the circumstances. This is bound to lead to vesting
E of uncalled for wide discretion in the hands of Wealth Tax Officer/valuing
authorities. It would lead to uncertainty and may be arbitrariness in prac-
tice. Where there is a Rule prescribing the manner in which a particular
property has to be valued, the authorities under the Act have to follow it.
They cannot devise their own ways and means for valuing the assets. It is
F equally well to remember that Rule 1-D does not treat the break-up value
as the market value. A deduction of 15% is made in the break-up value to
arrive at the market value. It is equally relevant to notice that Rule 1-D
uses the expression 'shall', which prima f acie indicates its mandatory char-
act er.

G 15. Two decisions of this court constitute the bed-rock upon which
are founded the several submission of the learned counsel for the assessees.
They are Commr. of Wealth Tax, Assam v. Mahadeo Jalan & Ors., 86 I.T.R.
621 and Commissioner of Gift Tax, Bombay v. Kusumben D. Mahadevia,
122. I.T.R. 38. It is, therefore, necessary to examine the ratio of the said
H decisions to find out whether they do in fact support their contentions.
f

B.H. SINGHANIA v. C.W.T. (JEEV AN REDDY, J.] 1049

16. Mahadeo Jalan was concerned with assessment years 1957-58 and A
1958-59. Rule 1-D was not in force at that time. The assessee owned shares
in certain private limited companies which had to be valued for determin-
ing the assessee's wealth. The question referred to the High Court under
Section 66(1) of the Indian Income Tax Act, 1922 was: "whether, on the
facts and in the circumstances of the case, the principle of 'break-up value'
adopted by the Income-tax Tribunal as the basis for the valuation of the
B
shares in question is sustainable in law." At the relevant time, sub-section
(1) of Section 7 read differently. It provided that "the value of any asset,
4 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." The opening words "subject to c
any rules made in this behalf' were not there. (These words were added
with effect from April 1, 1965.) The question posed by Jaganmohan Reddy,
J ., speaking for the Bench comprising himself and H.R. Khanna, J. was
"what is the basis of valuation of shares in private limited companies for
the purpose of Section 7 of the Wealth Tax Act?" After discussing the D
relevant principles and decisions, the learned Judge enunciated the follow-
ing principles:

"An examination of the various aspects of valuation of shares in a
limited company would lead us to the following conclusion:
E
(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 F
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 deter~.Une the value of the shares. In other words, the
profits which tht. company has been making and should be making G
will ordinarily c'etermine the value. The dividend and earning
method or yield method are not mutually exclusive; both should
help in ascertaining the prbfit earning capacity as indicated above.
If the results of the iwo methods differ, an intermediate figure may
have to be computed by adjustment of unreasonable expenses and H
\
1050 SUPREME COURT REPORTS (1994] 1 S.C.R.

A 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
B 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 profit and declare
c 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.
D
(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 Attomey-General of Ceylon v. Mackie, (1952] 2 All E.R.
775 (P.C.) a valuation by reference to the assets would be justified
E 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.

In setting out the above principles, we have not tried to lay
F down any hard and fast rule because ultimately the facts and
circumstances of each case, the nature of business, the prospects
of profitability and such other considerations will have to be taken
into account as will be applicable to the facts of each case. But,
one thing is clear, the market value, unless in exceptional cir-
cumstances to which we have referred, cannot be determined on
G the hypothesis that because in a private limited company one
holder can bring it. into liquidation, it should be valued as on
liquidation by the break-up method. The yield method is thi;!
generally applicable method while the break-up method is the one
resorted to in exceptional circumstances or where the co~pany is
H ripe for liquidation but nonetheless is one of the methods."
J

B.H.SINGHANIA v. C.W.T.[JEEVANREDDY,J.] 1051

17. In Kusumben D. Mahadevia, a Bench comprising P.N. Bhagwati A
and R.S. Pathak, JJ. affirmed the aforesaid principles and added the
following observation:

"Now it is true, as observed by the court, that there cannc.c be any
hard and fast rule in the matter or valuation of shares in a limited
B
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 c
circumstances of each case. The principles of valuation as formu-
lated by the court are clear and well-defined and it is only in
deciding which particular principle must be applied in a given
situation at the facts and circumstances of the case become
material. It is significant to note that immediately after making the D
above observation the court hastened to make it clear, as if in
answer to a possible argument which might be advanced on behalf
of the revenue on the basis of that observation that the yield
method it 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." E

18. Kusumben D. Mahadevia was concerned with the valuation of
shares in an investment company which was, of course, a goin'g concern.
The valuation of unquoted equity shares in investment companies is
governed by a different Rule, viz., Rule 1-E - which was later incorporated F
as Rule 12 in Schedule-III of the Act.

19. Now, let us examine the principles enunciated in Mahadeo Jalan.
The decision recognises that the break-up method "nonetheless is one of
the methods" of valuation of such shares, though the said method is said
to be appropriate in exceptional circumstances or where the company is G
ripe for liquidation. The normal method in the case of a going concern is
stated to be the dividend method or they yield method. If one reads the
proposition (2) emuiciated in the decisions carefully, one would immedi-
ately recognise the several practical difficulties. Firstly, it is stated that the
"dividends, if any, reflecting the profit-earning capacity on a reasonable H
1052 SUPREME COURT REPORTS [1994] 1 S.C.R.

A commercial basis" shall be the basis. It is worth pointing out that it is not
).....
the dividends declared that is the basis but the "dividends reflecting the
profit-earning capacity on a reasonable commercial basis." It is then stated
that if the dividends declared do not reflect the profit-earning capacity on
a reasonable commercial basis, one has to adopt the 'earning method',
which is explained as meaning "the profits which the company has been
B making and should be making." It is then stated that if the results of two
methods (dividend method and earning method) differ, "an intermediate
figure may have to be computed by adjustment of unreasonable expenses
and adopting a reasonable proportion of profits." One need not emphasise >
the amount of investigation the Wealth Tax Officer has to do in each case
c - and an assessee may own shares in any number of companies. This is not
all. ·where in a private limited company, disproportionate expenses are
incurred, such disproportionate expenses have to be added back to the
profits of the company in computing the yield. Again, in a case where
dividend and earning method break down "by reason of the company's
inability to earn profits and declare dividends" and "if the set-back is .,,.
.
D
temporary", then "it is perhaps possible to take tl}.e 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." A very daunting task indeed even for the
most efficient and expert value~. Propositions (5) and (6) set out in the
E judgment recognise that where the company is ripe for winding-up or
where the fluctuation of profits and uncertainty of conditions at the date
of valuation prevent a reasonable estimation of prospective profits and
dividends, the break-up method can be adopted. All the above proposi-
tions, it is relevant to point out, are qualified by the statement: "in setting
F out the above principles, we have not tried to lay down any hard and fast
rule because ultimately the facts and circumstances of each case, the nature
of the business, the prospects of profitability and such other considerations
will have to be taken into account as will be applicable to the facts of each
·~
case."

G 20. The statement of law in the decision would thus establish that it
does not purport to "lay down any hard and fast rule." It recognises that
>
various factors in each case will have to be taken into account to determine ..hi
the method of valuation to be applied in that case. The dividend yield
method is not the only method indicated in the case of a going concern;
H there is the 'earning methpd' and then a combination of both methods. The
{
I
B.H. SINGHANIA v. C.W.T. [JEEVAN REDDY, J.] 1053

several qualifications added to the above rules, as already stated, make A
them highly cumbersome and time-consuming. The Wealth Tax Officer has
to examine the facts and circumstances of each case including the nature
of the business, prospects of profitability and similar other considerations
before finally determining whether to apply the dividend method, yield
method or whether the break-up method should be followed. There may B
be cases where an assessee may be holding shares of a large number of
private companies or other public limited companies whose shares are not
quoted. Compitfed to them, the break-up method incorporated in Rule 1-D
is far simpler and far less time-consuming. It prescribes a simple uniform
method to be followed in all cases. All that the Wealth Tax Officer has to
do is to take the balance-sheet, delete some items from the columns C
relating to assets and liabilities as directed by Explanation-II, and then
apply the formula contained in the Rule. He need not have to look into
the profitability, the earning capacity and the various other factors men-
tioned in propositions (2), (3) and (4) of the decision. The decision, it bears
repetition, recognises that break-up method ''nonetheless is one of the D
methods." In the circumstances, it is difficult to agree with the learned
counsel for the assessees either that break-up method is not a recognised
method or that yield method is the only permissible method for valuing the
unquoted equity shares. It is not as if the rule-making authority has adopted
a method unknown in the relevant circles or has devised an impermissible
method. There is no empirical data produced before us to show that E
break-up method does not lead to the determination of market value of
the shares. Merely because yield method may be more advantageous from
the assessee's point of view, it does not follow that it alone leads to the
ascertainment of true market value and that all other methods are er-
roneous or misleading. This aspect we have emphasised hereinbefore too. F

21. The decision in Kusumben D. Mahadevia does no more than
reiterate the principles and observations in Mahadeo fa/an.

22. Dr. Gauri Shanker brought to our notice a brochure entitled
"Guidelines for valuation of equity shares of companies and the business G
and net assets of branches", issued. by the Ministry of Finance, Department
of Economic Affairs, Investment Division [vide F. No. S.11 (21)
C.C.1.(11)/90 dated July 13, 1990, published in (1990) 60 Company Cases
(St.) 121). The said guidelines are stated to be applicable t9 the valuation
of inter alia equity shares of companies, private and public limited. Para H
1054 SUPREME COURT REPORTS [1994) 1 S.C.R.

A (5) in Part-II says that the object of the valuation process is to make a best ~
reasonable judgment of the value of the equity shares of a company,
referred to in the said guidelines as 'fair value'. For determining the fair
value, three methods are devised, viz., (1) net asset value method; (2) profit
earning capacity value method; and (3) market value method in the case
.B of listed shares. Para (6) shows that what is referred to as net asset value
is roughly the break-up method incorpo~ated in Rul~ 1-D. The relevance
of these guidelines lies in the fact that they do indicate and reaffirm that
break-up method is one of the recognised methods of valuing equity shares.
~

23. Sri M.L. Verma placed strong reliance upon the decisions of this
c Court in Commissioner of Gift-Tax v. Executors & Trnstees of the Estate of
Late Sh. Ambalal Sarabhai, 170 I.T .R. 144 in support of his contention. The
question in the said case related to valuation of certain shares which were
the subject-matter of a gift. The shares were of a company incorporated in
the United Kingdom which was analogous to a private company in India. .,
D The assessee contended that the shares must be valued applying the
break-up method taking the average of the balance-sheets dated Mar~h 31,
1963 and March 31, 1964. The Gift Tax Officer adopted the break-up
method but only on the basis of the balance sheet as on March 31, 1964.
When the matter reached the High Court, it opined that the Gift Tax
Officer ought to have taken the balance-sheet as on March 31, 1963 and
E not as on, March 31, 1964. Before this Court, however, the Revenue
conte11ded, on the basis of Mahadeo Jalan and Kusumben D. Mahadevia,
that the correct method was to adopt the yield method and not the
break-up method. While upholding the contention of the Revenue, the
Court refused to interfere in the matter having regard to the numbers of
F years that have elapsed since the controversy arose and also because the
amount involved was very small. Firstly, it may be seen that the matter had.
arisen under the Gift Tax Act and Rule 1-D did not in terms apply to it.
The shares were of a British Company which was analogous to a private
limited company in India. Upto the stage of High Court, both the Revenue
and the assessee were ad aidem in applying the break-up method. The only
G question was which balance sheet was required to be taken as the basis?
In this Court, however, the Revenue shifted its stand and wanted the yield ~
).
method to be applied, which contention was .upheld following the aforesaid
two decisions. This decision does not, therefore, lay down any different
propositions than those enunciated in Mahadeo Jalan and Kusumben D.
H Mahadevia. Incidently, this case establishes that in case of some companies,
f
I

B.H. SINGHANIA v. C.W.T. [JEEVAN REDDY, J.] 1055

break-up method is more advantageous to the assessees than the yield A
method. In other words, it is not always that yield method is more ad-
vantageous to the assessees.

24. Dr. Gauri Shankar submitted that in as much as Section 46
provides for the Rules being laid before both the Houses of Parliament for
the specified period, it must be deemed that the Parliament has approved
B
these Rules. The consequence, according to the learned counsel, is that the
Rules have acquired a higher status - almost as good as that of the statute
itself. It is not possible to agree. The requirement of laying before that
House is one form of parliamentary control. But by that means, the Rules
do not acquire the status of the statute made by Parliament. Indeed, the c
Rules are effective as soon as they are made and published. The Parliament
is, no doubt, entitled to modify the said Rules in such manner as it thinks
appropriate or even annul them. But it does not mean that the Rules
become effective only after the expiry of the period for which they are to
be laid before the Parliament. Section 46(4) expressly provides that any D
such modification or annulment of Rules by Parliament "shall be without
prejudice to the validity of anything previously done under that rule." To
reiterate, the Rules even after they are laid before both Houses of Parlia-
ment for the specified period, yet continue to be delegated legislation. All
that may be said is that the Parliament did not find any justification to
amend or modify the Rules and nothing more. E

25. It is brought to our notice that a good number of High Courts
have taken the view now espoused by the assessees and that only the
Allahabad High Court has taken the contrary view. Inasmuch as the
decisions of the High Courts upholding the assessees' contention are based F
mainly upon the decisions of this Court in Mahadeo Jalan and Kusumben
D. Mahadevia - which decisions we have already dealt with - we do not
think it necessary to examine the reasoning of the High Courts separately.
Sri M.L. Verma particularly emphasised the observation in Dr. D. Renuka
v. Commissioner of Wealth-Tax 175 I.T.R. 615, a decision of Andhra G
Pradesh High Court (rendered by a Bench comprising one of us, Jeevan
~ Reddy, J.) holding that the break-up method brings about a situation
unrelatable to realities and unjust to the assessees in general. It must be
stated that the said observations were influenced by the views of the
majority of the High Courts and also because the Bench did not have the
benefit of an indepth debate, as has taken place now in this Court. Indeed, H
1056 SUPREME COURT REPORTS [1994) 1 S.C.R.

A the decision of this Court in Executors of Ambalal Sarabhai indicates that
'break-up' method is not always advantageous to the Revenue nor is the
'yield method' always advantageous to the assessees.

26. For all the above reasons, we hold that Rule 1-D is not ineffective
or invalid for any of the reasons suggested by the learned counsel for the
B assessees nor can it be said that the Wealth Tax Officer has an option to
follow or not to follow the said Rule. He has to follow and apply the said
Rule in each and every case where he has to value the unquoted equity
shares of a company. The contention of the assessees that it is merely
directory and that it need not be followed at the choice of the Wealth Tax
c Officer or the assessee, or in the case of a going concern, cannot be
accepted.

Question No. 2:- Whether the valuation officer is bound by Rule 1-D
when valuing the unquoted equity shares of the companies?
D
27. Ordinarily, it is for the Wealth Tax Officer to value the assets of
an assessee, whatever be their nature. Section 7(1) says so. Sub-section (3)
of Section 7, however, says that "(Notwithstanding anything contained in
sub-section (1) where the valuation of any asset is referred by the Wealth
E Tax Offic~r to the Valuation Officer under Section 16A, the value of such
asset shall be estimated to be the price which in the opinion of the
Valuation Officer it would fetch if sold in the open market on the valuation
date ..........." Sub-section (1) of Section 16A prescribes the situations in
which the Wealth Tax Officer may refer the valuation of any asset to the ....
valuation officer. Sub-sections (2) to (4) prescribe the procedure to be
F followed by the valuation officer on such reference. In short, he has to give
notice to the assessee, receive the evidence produced by him, make ap-
propriate enquiry and then send his report under sub- section (5) to the
Wealth Tax Officer. Sub-section (6) says that "on receipt of the order under
sub-section (3)* or sub-section (5) from the valuation officer, the Wealth
G Tax Officer shall, so far as the valuation of the asset in question is
concerned, proceed to complete of the assessment in conformity with the
estimate of the Valuation Officer." In other words, the order or the
valuation made by the valuation officer, as the case may be, is binding on
Sub-Section (3) says that on reference from Wealth Tax Officer, if the valuation officer
is of the opinion that the asset has been correctly valued in the return filed by the
H asscssee, he shall pass an order to that effect and send it to the Wealth Tax Officer.
B.H.SINGHANIA v. C.W.T. [JEEVAN REDDY,J.] 1057

the Wealth Tax Officer. A

28. The contention of the learned counsel for the assessees is that
the valuation officer is not bound by and is not obliged to observe Rule
1-D. It is submitted that the valuation officer has to determine the market
value of the asset referred to him independently and applying such method B
as appears appropriate to him in the circumstances. His only object is to
determine the correct market value. The contention is mainly based upon
"- the non-obstante clause found at the inception of sub-section (3) of Section
7. It is argued that the non-obstante clause - "notwithstanding anything
contained in sub-section (1)" - indicates clearly that the valuation officer is
not bound by the rules referred to in and by sub-section (1) of Section 7. C
We find it difficult to agree. Valuation Officer is a creature of the statute.
He is, therefore, bound by the provisions of the statute and the Rules made
thereunder unless there is something either in the Act or in the rules to
indicate otherwise. The question is whether the said non-obstante clause
has that effect. The scope and purport of the said non-obstante clause has D
to be ascertained by reading it in the context of the provisions contained
in Section 7 and ~onsistent with the scheme of the enactment. If so read,
it only means this: Ordinarily it is for the Wealth Tax Officer to estimate
the price which in his opinion an asset would fetch if sold in the open
market on the valuation date but where the Wealth Tax Officer refers the
question of valuation of an asset to the valuation officer under Section E
16-A, it is for the valuation.officer to make the said estimate which estimate
shall be binding upon the Wealth Tax Officer as provided in sub-section
(5) of Section 16-A. Thus, in a case referred to valuing officer, the estimate
is made by the valuing officer instead of Wealth Tax Officer. This is the
limited function and purpose of the said non-obstante clause "notwithstand- F
ing anything contained in sub-section (1)" in Section 7(3). It may be noticed
that the relevant language of sub-section (1) and sub-section (3) is identi-
cal, viz., "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." It would be rather odd to say that these words when used
in sub-section (1) mean something different from what they mean in G
sub-section (3) - asset is the same, object (to find the market value) is the
same, proceedings are one and the same and yet it is suggested that the
method of valuation would differ from Wealth Tax Officer to valuation
officer! If the intention of the Parliament was to say that the valuation
officer is not bound by the Rules made under Section 46 governing the H
1058 SUPREME COURT REPORTS [1994) 1 S.C.R.

A valuation of assets, it would have said so clearly. If a creature of the statute
was sought to be elevated to a status above the Rules - an unusual thing
to do - one would expect the Parliament to say so in clear and unambiguous
words. Section 16-A, which provides for the reference to, enquiry by the
the order to be passed by the valuing officer giyes no indication whatsoever
that the valuation officer is not bound by the Rules made under the Act.
B The Rules provide for the method of valuing life interest (lB), house
property (lBB), unquoted preference shares (le), unquoted equity shares
(10), quoted equity and preference shares (lF), jewellery (IG), interest in
partnership/association of persons (2) and assets of industrial undertakings
(2H) and so on and so forth. The Rules also provide for certain assets and
c certain liabilities shown in the balance-sheet to be ignored while valuing
the net value of assets of a business as a whole under Rule 2-A. It is difficult
to believe that none of these Rules govern the valuation by the valuation
officer. The problem is that the learned counsel for the assessees tend to
assume that valuation officers are meant only for valuing unquoted equity
D shares forgetting for a moment that they are meant for valuing all kinds of
assets and that many of the assets present inherent difficulties in valuing
them, e.g., jewellery, pieces of art, antiques, industrial undertakings and
businesses as a whole and so on.

29. There is yet another reason why the assessees' contention cannot
E be accepted. Sub-section (6) of Section 16-A makes the opinion of valua-
tion officer binding upon the Wealth Tax Officer but not upon the appel,
late authorities. Indeed, sub-section (3-A) of Section 23 (which provides
for appeal from the orders of Wealth Tax Officer to the Appellate Assis-
tant Commissioner) indicates clearly that the A.AC. can depart from the
valuation officer's valuation. It reads:
F
"(3A) If the valuation of any asset is objected to in an appeal under
clause (1) of sub-section (1) or of sub-section (lA), the Appellate
Assistant Commissioner or, as the case may be, the Commissioner
(Appeals) shall,--
G
(a) in a case where such valuation has been made by a Valuation
Officer under section 16A, give such Valuation Officer an oppor-
tunity of being heard;

(b) in any other case, on a request being made in this behalf by
H the Wealth-tax Officer, give an opportunity of being heard to any
B.H. SINGHANIA.v. C.W.T. [JEEVAN REDDY, J.] 1059

Valuation Officer nominated for the purpose by the Wealth-tax A
Officer."

30. Now, it is not argued that the Appellate Assistant Commissioner
is not bound by the Rules while valuing the assets. If he· is so bound, does
it not mean that he will necessarily have to set aside the valuation made by
valuation officer if it is not in accordance with the Rules and value the asset B
himself in accordance with the Rules? Section 24, which provides for
appeal to the Appellate Tribunal, too contains an identical provision [vide
the proviso to sub-section (5)]. Again it is not suggested that the Appellate
Tribunal is not bound by the Rules. It is rather odd to say that everybody
else is bound by the Rules but not the valuation officer, though his C
L valuation is subject to appeal to the very authorities who are bound by the
' Rules. Conversely, it cannot be suggested that nobody except the Wealth
Tax Officer is bound by the Rules. This would be a ridiculous suggestion,
if made. All this only means that there can be only one uniform method of
valuation of assets under the Act - and not to or more. This would be so
whether reference to valuation officer is obligatory - as contended on the
D
basis of a Board circular - or otherwise.

31. We are, therefore, of the opinion that the valuation officer is
equally bound by Rule 1-D - as indeed he is bound by all the other Rules
made under the Act. This is the view taken by the Allahabad High Court E
in Commissioner of Wealth-Tax v. Smt. Pushpawati Devi Singhania, 188
l.T.R. 364. The contrary view taken by the Delhi High Court in Sharbati
Devi Jhalani v. Commissioner of Wealth-Tax, 1591.T.R. 549 and other High
Courts, if any, is overruled.
F
32. Question No. 3:- Whether the application of the 'break-up
method' in Rule 1-D means that the capital gains-tax, which would be
payable in case the said shares are sold on the. valuation date, is liable to
be deducted from the market value determined?

33. The contention of the learned counsel, in this behalf, is rather G
involved if not obscure. The argument runs thus: Section 7(1) says that the
value of an asset shall be the price which such asset would fetch if sold in
the open market on the valuation date. In other words, the sub-section
creates a fiction of sale of such asset on the valuation date for the purpose
of determining its market value. Once a fiction is created, it must be carried H
1060 SUPREME COURT REPORTS (1994] 1 S.C.R.

A to its logical extent and the court should not allow its imagination to be
boggled by any other considerations. If an asset is sold, it would be subject
to capital gains tax. For finding out the net wealth received in the hands
of assessee, one must necessarily deduct the capital gains tax. Then alone
one can arrive at the net price which the assessee will receive - and that
should be the market value. We must say that the entire argument is
B misplaced. There is no sale of the asset and there is no question of capital
gains tax being attracted or being paid. For the purpose of determining the
market value, the sub-section says that the Wealth Tax Officer shall make
an estimate of the price which the asset would fetch if sold in the open >-
market on the valuation date. The sub-section speaks of the market value
c of the asset and not the net income or the net price received by the
.,:...
assessee. This is not a case where a fiction is created by the Parliament. It
is only a case of prescribing the basis of determination of market value. On
the same reasoning, it must be held that no other amounts like provision
for taxation, provident fund and gratuity etc. can be deducted. The con-
tention of the· learned counsel for the asse'ssees is, therefore, wholly unac-
D
ceptable.

Question No. 4:- Where the date of a balance sheet of the company
is earlier to the valuation date of the assessee, is it obligatory to follow Rule
1-D? (The same question arises where in the absence of such a balance-
E sheet, the balance-sheet drawn up on a date immediately following the
valuation date is taken as the basis).

34. The 'break-up method' contained in Rule 1-D takes the balance-
sheet of the company as the basis for working the Rule. The said Rule
F cannot be worked in the absence of tlie balance-sheet. But there may be
cases where the date of balance sheet and valuation date of the assessee
do not coincide. It is to meet such a situation that Explanation-I is provided
in Rule 1-D. The Explanation says that where the date on which the
balance-sheet is drawn does not coincide with the valuation date of the
assessee, "the. balance sheet drawn up on a date immediately preceding the
G valuation date" shall be adopted as the basis for working the rule. Yet
another situation contemplated by the Explanation is where both the above
,l.-
situations are absent,. "the balance sheet drawn up on a date immediately
after the valuation date" shall be adopted as the basis. Now, one would
think that this was the most reasonable thing to do in the circumstances
H but the contention of the learned counsel for the assessees runs thus: the
B.H.SINGHANIA v. C.W.T.[JEEVANREDDY,J.J 1061

asset of aii assessee has to be valued as on the valuation date and not with A
reference to any other date; if the balance-sheet is drawn up with reference
to a date anterior to the valuation date, it cannot be said that such
balance-sheet reflects the position obtaining on the valuation date; many
things may happen between the date of balance sheet and the valuation
date; the value of the shares may go down; the company may be closed or B
any other untoward development may depreciate the value of the shares;
this 'difficulty would be more pronounced if the balance-sheet drawn up on
a date immediately preceding the valuation date is taken irrespective of
how many years before it may have been prepared. In our opinion, the
submission has no substance. Once the basis of working the rule is the
balance-sheet, one must necessarily have the balance-sheet. Without a C
balance-sheet the Rule cannot be worked. It is for this reason that the
Explanation-I says what it does. Normally one would expect every company
to prepare its balance-sheet on the due date. Sometimes, there may be a
default on the part of the company in preparing its balance-sheet on time.
But on the1 basis of such exceptional circumstances, the Rule cannot be D
faulted. Indeed the Explanation also provides that in the absence of both
the said situations, the balance-sheet drawn up on a date immediately after
the valuation date shall be adopted. One must remember that we are
dealing with a taxing statute and that in tax legislation, legislature must be
provided a greater latitude and greater play in the joints. This aspect has
been eludicated and explained in the decision of a Constitution Bench in E
R.K Garg v. Union of India, 1981 A.LR. 2138 and deserves to be quoted
in full:

"Another rule of equal importance is that laws relating to economic
activities should be viewed with greater latitude than laws touching F
civil rights such as freedom of speech, religion etc. It has been said
by no less a person than Holmes. J., that the legislature should be
allowed some play in the joints, because it has to deal with complex
problems which do not admit of solution through any doctrinaire
or straight jacket formula and this is particularly true in case of
legislation dealing with economic matters, where, having regard to G
the nature of the problems required to be dealt with, greater play
in the joints has to be allowed to the legislature. The Court should
feel more inclined to give judicial deference to legislative judgment
in the field of economic regulation than in other areas where
fundamental human rights are involved. Nowhere has this admoni- H
1062 SUPREME COURT REPORTS {1994) 1 S.C.R.

A tion been more felicitously expressed than in Morey v. Doud,*
[1957] 354 US 457 where Frankfurter, J. said in has inimitable style:

"In the utilities, tax and economic regulation case, there are good
reasons for judicial self-restraint if not judicial deference to legis-
lative judgment. The legislature after all has the affirmative respon-
B
sibility. The Courts have only the power to destroy, not to
reconstruct. When these are added to the complexity of economic
regulation, the uncertainty, the liability to error, the· bewildering
conflict of the experts, and the number of times the judges have
been overruled by events, self-limitation can be seen to be the path
c to judicial wisdom and institutional prestige and stability." ·

.The Court must always remember that "legislation is directed to
practical problems, that the economic mechanism is highly sensi-
tive and complex, tha~ many problems are singular and contingent,
D that laws are not abstract propositions and do not relate to abstract
units and are not to b~ measured by abstract symmetry" that exact
wisdom and nice adaption of remedy are not always possible and
That "judgment is largely a prophecy based on meagre and
uninterpreted experience." Every legislation particularly in
economic matters is essentially empiric and it is based on ex-
E
perimentation or what one may call trial and error method and
therefore it cannot provide for all possible situations or anticipate
all possible abuses. There may be crudities and inequities in com-
plicated experimental economic legislation but on that account alone
it cannot be struck down as invalid. The Courts cannot, as pointed
F out by the United States Supreme Court in Secy. of Agricultzire v.
Central Roig. Refining Co., (1950) 94 L ed 381, be converted into
tribunals for relief from such crudities and inequities. There may
yven be possibilities of abuse, but that too cannot of itself be a
ground for invalidating the Legislation, because it is not possible
G for any legislature to anticipate as if by some divine prescience,
distortions and abu.ses of its legislation which may be made by
those subject to its provisions and to provide against such distor-
It is true that Morey v. Doud, was overruled later by the United States Supreme Court
in New Orleans v. Duke, (1976) 427 U.S. 297, but the said fact does not detract from
the validity of the rule stated in Morey v. Doud, nor does it in any manner affect the
H principle stated by this Court.
f

B.H.SINGHANIA v. C.W.T. [JEEVAN REDDY,J.] 1063

tions and abuses. Indeed, howsoever great may be the care be- A
stowed on its framing, it is difficult to conceive of a legislation
which is not capable of being abused by perverted human in-
genuity. The Couri must therefore adjudge the constitutionality of
such legislation by the generality of its provisions and not by its
cmdities or inequities or by the possibilities of abuse of any of its
provisions. If any crudities, inequities or the possibilities of abuse
B
come to light the legislature can always step in and enact suitable
amendatory legislation. That is the essence of pragmatice approach
which must guide and inspire the legislature in dealing with com-
plex economic issues."
c
(emphasis added)

35. The above statement of law of the Constitution Bench makes it
clear that the mere fact that some crudities and inequities result as a result
of complicated experimental economic legislation, the legislation cannot be D
struck down on that ground alone and that the courts cannot be·converted
into tribunals for relief from such crudities and inequities. The court must
adjudge the constitutionality of a legislation by the generality of its
provisions and not by its crudities and inequities. Ordinarily speaking, the
gap, if any, between the valuation date and the date of the balance-sheet
would not be too long. It would a few months. True it is that there may be E
some fluctuation in the fortunes of the company within that period. Precise-
ly for this reason, the market value adopted by Rule 1-D is not the break-up
value as such but only 85 per cent of it. Moreover, there is no reason to
presume that the fluctuation, if any, would be only one way, i.e., to the
prejudice of the assessee. The fluctuation may also be the other way, i.e., F
to the benefit of the assessee, in which case the Revenue will stand to lose
its legitimate revenue. But all this is no ground for holding either that
Explanation-I is inconsistent with Section 7(1) or that Rule 1-D should not
be followed unless thr! valuation date and the date of balance sheet is
identical. Saying so would be putting too restrictive an interpretation upon
a taxation provision and would be contrary to the spirit of the statement G
~. of law in R.K. Garg.

36. Strong reliance is placed by the learned counsel for the assessees
upon the decision of the Delhi High Court in Sharbati Devi Jhalani which
is indeed the subject-matter of appeal before us, viz., Civil Appeal H
\
1064 SUPREME COURT REPORTS [1994) 1 S.C.R.

A Nos.1591-96 of 1991. The first proposition affirmed by the High Court is:
"when the Act enjoins the determination of the net wealth of an assessee
on the valuation date, by a rule a different date cannot be fixed ...... (and
that) ....... If Rule 1-D provides such an outcome then it may have to be held
that it is contrary to the Section 3 of the Act." The Court, however, did not
declare the Rule void but held that the rule is merely directory and not
B mandatory in cases where the valuation date and the date of the balance-
sheet do not coincide. We are afraid, we cannot agree with this reasoning.
It must be remembered that what is sought to be valued is an unquoted
equity shares. Since it is not quoted on the stock exchange and there are
no dealings in those shares, some formula has to be evolved for determining
c its value. So long as the formula evolved is reasonable having regard to
available circumstances and practicable considerations, the formula cannot
be faulted. No formula can be evolved to fit all conceivable situations. Even
if the dividend method is adopted, the said problem would still be present.
The dividend may have been declared on a date different from the valua-
D tion date.
37. For all the above reasons, it is not possible to agree that merely
because the valuation date and the date of balance-sheet are not the same,
Rule 1-D need not be followed.

E 38. Question No. 5:- How are sub-clause (a) of clause (i) and sub-
clause (e) of clause (ii) of Explanation-II to be read and understood?

39. Explanation-II in Rule 1-D contains two clauses. Clause (i)
provides that two items shown as assets in the balance-sheet shall not be
treated as assets for the purpose of Rule 1-D. Similarly, clause (ii) says that
F six items shown as liabilities in the balance-sheet shall not be treated as
liabilities for the purpose of Rule 1-D. In other words, the balance-sheet
of the company with the aforesaid modifications shall be the basis for
working the rule. Schedule-VI· to the Companies Act, as already stated,
prescribes the form in which the balance-sheet of a company has to be
G prepared. Of the four columns provided therein, columns (2) and (3) relate
to liabilities and assets. The advance tax paid under Section 210 of the
Income-tax Act, though already paid, is shown as an asset as required by
Schedule-VI. Clause (i)(a) of Explanation-II, however, says that it shall not
be treated as an asset. To this extent, it is in favour of the assessee because
H the assets as shown in the balance-sheet will stand reduced to that extent.
B.H.SINGHANIA v. C.W.T.(JEEVANREDDY,J.] 1065

Now, Clause (ii)(e) says that in case the balance-sheet specifies any amount A
as 'provision for taxation' in the column of liabilities, the Wealth Tax
Officer shall treat only that amount as a liability which is equal to the tax
payable with reference to the Book profits. Any excess over the said
amount shall not be treated as a liability. Sub-clause(e) of Clause (ii) while
referring to the "amount representing provision for taxation" qualifies the B
said words by the words following, viz., "other than the amount referred to
in clause (i)(a)". This is as it ought to be. The amount referred to in clause
(i)(a) is shown in the balance-sheet as an asset whereas clause (ii)(e) is
speaking of an amount shown as a liability in the balance-sheet. Now no
company would show the amount of advance tax paid, which is shown as
c
an asset in the column relating to assets, simultaneously as a liability in the
column of liabilities. The same amount cannot be shown both as an asset
as well as a liability. No auditor would be a party to the preparation of
such a balance-sheet. Ordinarily, therefore, there will be no occasion for
the Wealth Tax Officer to rely upon the said words "other than the amount
referred to in clause (i)(a)". However, if in the case of the balance-sheet D
of any company, the said amount of advance tax paid is also shown as a
liability, i.e., if the said amount i.s included in the amount set apart as
provisions towards taxation, it would obviously have to be deleted from the
column of liabilities - and this is also what the aforesaid words in clause
(ii)(e) say. Clause (ii)(e) is in a sense complimentary to clause (i)(a). Truly E
speaking, the advance tax paid is not really an asset but the proforma of
balance-sheet in Schedule-VI to the Companies Act requires it to he shown
as such. What clause (i)(a) does is to remove the said amount from the list
of assets for the purpose of Rule 1-D. It is then that clause (ii)(e), which
speaks of liabilities, says that only that amount which is still remaining to
F
be paid shall only be treated as a liability on the valuation date. If in the
provision for taxation made in the column of liabilities in the balance-sheet,
the amount of advance tax already paid is again shown as a liability, it will
not be treated as a liability. It must be remembered that the advance tax
has already gone out o'' the profits and debited in the account books of the
company. This is the true function of both the sub-clauses. The situation is G
best explained by giving an illustration. Take a case where a company has
paid eight lacs by way of advance tax which is shown as an asset in the
balance sheet. The company has made' a provision of fifteen lacs for
taxation which is shown as a liability in the balance-sheet. The Wealth Tax
H
\
1066 SUPREME COURT REPORTS [1994) 1 S.C.R.

A Officer estimates the tax payable on the basis of Book profits at ten lacs.
What he is asked to do by clause (ii)(e) is not to treat the excess five lacs
as a liability. The tax liability as arrived at by him is only ten lacs, but
inasmuch as eight lacs has already been paid and only two lacs remains
payable, the said two lacs alone will be treated as a liability on.the valuation
B date. It must be remembered that eight lacs already paid is deleted from
the 'assets' shown in the balance- sheet. What is shown as an asset cannot
at the same time be shown.as a liability. This does not mean that tax liability
is treated by Wealth Tax Officer only as two lacs. It is ten lacs. Eight lacs
has alre~dy gone out of the profits and debited in the books of the
C company. By reading Clause (i)(a) and Clause (ii)(e) together, the assessee
will be getting the benefit of entire ten lacs but so far as the balance-sheet
for the purpose of Rule 1-D is cc!lcerned, only two lacs will be treated as
a liability on the valuation date since that is the actual amount still out-
standing. We do not think that if the aforesaid clauses are understood as
explained herein, there is any prejudice to the assessees or to the Revenue.
D It indeed reflects the true situation. It is brought to our notice that the
Andhra Pradesh High Court has taken a similar view in Commissioner of
Income Tax v. M. Lakshmaiah & Anr. 174 l.T.R. 4 and that similar view
has also been taken by the Karnataka High Court in Commissioner of
Wealth Tax v. N. Krishnan, 162 I.T.R. 309 and Punjab & Haryana High
E Court in Ashok Kumar Oswal (Minor) v. Commissioner of Wealth Tax,
Patiala, 148 l.T.R. 620. On the other hand, Gujarat High Court in Com-
missioner of Weal~ Tax, Gujarat-I v. Ashok K. Parikh, 129 l.T.R. 46 has
taken a different view which has been adopted by some other High Courts.
It is enough to indicate that if the said sub-clauses are understood in the
F manner indicate~ and clarified by us, the counsel for the assessees agree
that they have no grievance. In this view of the matter, we do not think
necessary to deal with the opposing views of the High Courts at any length.

Question No. 6:7 Whether the assessee holding shares in a company
whose assets comprise wholly of Tea Estates is entitled to exclude such
G shares from his assets?

40. Sri N.K. Poddar appearing for the petitioner in S.L.P.(C) No.
14869 of 1991 raised the above question. The assessment year concerned
is 1983-84. His contention is that the company, shares whereof were held
H by the assessee on the relevant valuation date, is a company whose assets
B.H.SINGHANIA v. C.W.T.[JEEVANREDDY,J.) 1067

comprised wholly of agricultural land. He submitted that though the A
agricultural land was included in the definition of assets on and from April
1, 1970, they were excluded from the purview of assets by the two provisos
(Provisos 1 & 2) appended to the definition of "assets" by the Finar..;e Act,
1980 with effect from April 1, 1981 and Finance Act, 1982 with effect from
April 1, 1983 respectively. So far as the assessee in this S.L.P. is concerned, B
he falls under the 2nd proviso which means that agricultural land including
the land comprised in any tea plantation shall not be included in the
~
"assets" of the company as defined in Section 2(e). In our opinion, the
contention has no substance. Wealth being assessed is that of the
shareholder and not of the company. The company may own agricultural
assets and if company were to be liable to wealth tax, the said assets may
c
be excludible in its hands. But that has no relevance to the case of a
shareholder. The shareholder does not own and cannot claim any portion
of the property held by the company of which he is a shareholder. The
~
company is an independent juristic entity. This aspect has been put beyond
any doubt by the decision of this Court in Bacha F. Guzdar v. Commissioner D
of Income-Tax, [1955] 1 S.C.R. 876. It is held therein that even though a

- Tea company growing and manufacturing Tea gets an exemption of 60%
of the profits as agricultural income in accordance with Rule 24 framed
under Section 59 of the Indian Income Tax Act, 1922 the dividend income
received by the shareholder of such company is not "agricultural income" E
within the meaning of Section 1 of the said Act, nor is it exempt from
Income Tax under Section 4(3)(viii) of the Act. It was held further that the
dividend of shareholder is the outcome of his right to participate in the
profits of the company arising out of the contractual relation between the
company and the shareholder and that the shareholder does not acquire
F
any interest in the assets of the company till after the company,cs wound
up. The position of a shareholder of a company, it was explained, is
altogether different fr6m that of a partner of a firm. In our opinion, the
said decision of the Constitution Bench fully answers the said question.
Accordingly, Sri Poddar's contention is rejected.
G
~
41. In view of our opinion that valuation officer is also bound by the
-1'
Rules under the Act, the question of any conflict between Rule 1-D and
sub-section (6) of Section 24 cannot and does not arise. This aspect has
been dealt with by the Allahabad High Court in Smt. Pushpawati Devi
H
\
1068 SUPREME COURT REPORTS [1994] 1 S.C.R.

A Singhania. We agree with it.

42. We summarise our conclusions thus:

(1) Rule 1-D is perfectly valid and effective. The Rule has to be
followed in every case where unquoted equity shares of a company (other
B than investment company or a managing agency com'pany) have to be
valued. All the authorities under the Act including the valuation officer are
bound by the said Rule. The question of the Rule being mandatory or '
)._
directory does not arise.

·c (2) While valuing the unquoted equity shares under Rule 1-D, no
deductions on account of capital gains tax which would have payable in
case the said shares were sold on the valuation date can be made. Similarly,
no other deductions including provision for taxation, provident fund and
gratuity are admissible. Rule 1-D is exhaustive on the subject.
..t
D (3) Explanal1on-I to Rule 1-D is a perfectly valid place of delegated
legislation and has to be followed. Merely because the valuation date of
the assessee and the date with reference to which the balance-sheet of the
company i.s drawn do not coincide, it cannot be said that Rule 1-D is not
mandatory or that it need not be followed.
..
E
(4) Sub-clause (a) of clause (i) and sub-clause (e) of clause (ii) have
to be read and understood in the manner indicated in this judgment
hereinabove.

(5) An assessee holding shares in a company whose assets comprise
F
wholly or partly of agricultural land, is not entitled to exclude such shares
from his wealth.

43. For the above reasons, the writ petition questioning the validity
of Rule 1-D is dismissed. So far as the appeals are concerned, some are
...
G by the assessees and some by the revenue. It is not possible, having regard
to the very large number of matters posted before us, to answer the ~
.1-
question separately in each case. Accordingly, we direet that all the appeals
shall be disposed of in terms ·of the opinion expressed herein. In cases,
where the Tribunal has dismissed the applications of the Revenue filed
H under Section 27(3) of the Wealth Tax Act, the appeals filed by the
B.H. SINGHANIA v. C.W.T. [JEEVAN REDDY, J.] 1069

Revenue against such orders are allowed herewith and the question asked A
for shall be deemed to have been referred and answered in the terms
indicated in this judgment. Correspondingly, the appeals filed by the
assessees against orders of the High Courts dismissing their applications
under Section 27(3) are dismissed. The Tribunals shall pass appropriate
orders in each case accordingly. No Costs.
B
G.N. Petitions dismissed.

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