COMMISSIONER OF WEALTH TAX versus MAHADEO JALAN & MAHABIR PRASAD JALAN

Citation: [1973] 2 S.C.R. 215 · Decided: 13-09-1972 · Supreme Court of India · Bench: P. JAGANMOHAN REDDY · Disposal: Dismissed

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Judgment (excerpt)

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215 
COMMISSIONER OF WEALTH TAX 
v. 
MAHADEO JALAN & MAHABIR PRASAD JALAN 
September 13, 1972 
[P JAGANMOHAN RE!>DY AND ~- R. KHANNA, JJ.) 
Wtalth Tax Act, 1957-Section 7-Basis of valuation of shares in 
Private Limite«. Companies. 
On the que•tion 
a.~ to what is the basis of valuation of shares in 
private limited companies for the purpose of section 7 of the Wealth-tax 
Act, 1957. 
HELD : The general principle of valuation in a going concern is the 
yield on the basis- of average maintainable profits, subject to adjustment 
etc. which the circumstances of any parti~ular case may call for. 
An 
examination of the various aspects of valuation of shares in a limited 
company would lead to the followin~ conclusions :-
(a) Where the shares tn a public limited company are quoted on the 
stock exch~nge and there are dealings in term, the price prevailing on the 
valuation date is the value of the shares. 
(b) Where the shares are of a public limited company whic'h are not 
quoted on stock exchange or of a private limited company the valuation 
is determined bl reference to the dividends if any reflecting the profit 
ea".ning capacity on a reasonable commercial basis. 
But where they do 
·not, then, the amount of yield on that basis will determine the value of 
the share._ 
In other words, the profits which the company has been 
making and •hould be making would ordinarily determine the value. The 
dividend and earning method or yield method are 1110t mutually exclusive; 
both should help in ascertaining the profit earniilg capacity. 
If the result< 
of the two methods differ, an intermediate figure may have to be computed 
by adjustment of unreasonable expenses and adopting a reasonable pro· 
portion of profits. 
( c) In the case of a private limited company also where the e<pellSCI 
Gre incWTed out of all proportion to the commercial venture, they will 
be added back .to the profit• of the company in computing the yield. 
In 
such companies the re'triction on share tran•fer, will also be taken into 
consideration in ·arriving at a valuation. 
(d) Where the dividend yield and earning method break do\\o\ll by 
reason of the clompany's inability to earn profits and declare dividends, 
if the set back i• temporary thein it is ,perhaps posSible to take the esti· 
mate 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 
shar.,. of companies which have suffered similar reverses. 
(e) Where the company " ripe for winding up the break-up value 
method determined what would be realised by that process. 
(f) As in Attorney GenerGr of C•ylon v. Mackie a valuation by refer· 
e;.ee to the a<sets would he justified where as in that ~ 
the fluctuations 
of profits and une«tainty of the conditions at the date of the valuation 
prevented any reasonable estimation of prospet'rive profits and dividends. 
The above principles are not intended to lay down any hard and fast 
rule, because, ultimately the facts and circumstan-:e of each case, the 
, 
216 
SUPREME COURT REPORTS 
[1973] 2 s.c.R. 
nature of the business, the prospects of profitabilitx and such other .:on-
siderations will have to be taken into account "" will be applicable to the 
facts of each case. 
But one thing is clear, the mark.et va!U&, uillsss in 
exceptional circ.umst~nce•, -cannot be determined on the hypothesis that 
because in a private limited company one holder can brin& 'it illll<> liquida-
tion, it .should be valued a• on liquidation by the break-up method. The 
yield method is the generally applic~ble method while the break-up method 
., 
is the ont.· re.sorted to in exceptional circumstances or where the compa.ny 
D 
is ripe for liquidation, but, nonetheless, is one of the method~. 
A1tomey G<"ll<"rai of Cry/011 v. Mt1ckie [1952) 2 Ail. E.R. 775 P.C., 
S111it/i v. Rev£'tllte ('01111ni.vsioners, 1931 Irish Reports 643, Mc. Cathie v. 
Tiu' /,.t'<h'ral l'o:n111issioner of 1't1xation, 69 Commonwealth Law Reports 
pagt.• 1 an<l f't'dt•r<il l'o111111i.\'\'ioner of 1·axotion v. Sagar,, 71 C.L.R. 422 
referred to. 
(3) This Court has power to reframc the question as framed by the 
C 
High Court so Jong ao; a new and different question is not raised but confine 
it O!ll)' to resettling or refran1ing a question formulated by the Tribunal 
or by the High c·ourt so a5 to bl"ing out the real issue between ~he parties. 
[221E] 
Nc.rai11 Swadeshi JVem·i11g Mills v. 

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