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1998 Supreme(Del) 232
High Court Of Delhi
HANSA INDUSTRIES PRIVATE LIMITED - Appellant
Versus
KIDARSONS INDUSTRIES PRIVATE LIMITED - Respondent
First Appeal (OS) 39 of 1993
Decided On : 03/25/1998
A.BHATTACHARYA, A.C.GULATI, K.K.JAIN, M.K.ARORA, S.K.DHOLAKIA, V.P.Singh
Headnote:Goodwill - Valuation of — The main business of the company i.e. of sales agency taken away by one of the shareholders — The company cannot have any goodwill of past performance — The valuers rightly not considered any value of goodwill.
Income Tax Act, 1961 - Section 46 & 45 — Capital gains — Transfer of capital assets — Liquidation of company — Distribution of assets to the shareholders cannot be regarded as transfer of assets — Analogy of dissolution of partnership cannot be extended to transfer of capital assets by shareholders.
Valuation of shares - Considerations for — Consideration of realisable value of assets and deduction of capital gain affirmed.
Held:
The Institute of Chartered Accountants in "Study on Shares Valuation prepared by its research committee, while dealing with the question as to how the shares should be valued on the basis of the valuation of assets, has laid down three steps which are to be followed: i) valuation of assets; ii) ascertain of liabilities; and iii) fixation of value of different types of equity shares. We, in the present case, are concerned only with the first step as there is no dispute about the liabilities and as there are only one type of equity shares, thereforee, third step is not necessary. While dealing with valuation of assets it says that two problems which present themselves in valuing the assets of the company are : whether they should be taken from the book value or realisable value. In these times of changing price levels, it is unrealistic to take book values of different assets of a company -particularly fixed assets, if the values have changed materially since the date of their acquisition. In such cases, thereforee, realisable value of the assets should be ascertained, if necessary, with the help of expert valuers. Normally such value of assets would be taken after taking into account the cost of realisation, as well as the capital gains and other taxes which the company may have to pay on such realisation. An important departure from this principle is found in the Wealth-Tax Rules for valuation of unquoted equity shares, which specifically require the assets to be taken at their book value. Generally, the value of the assets will have to be taken on a going concern basis. But there may be cases where it would be reasonable to take the liquidation value of assets. The points arising from the judgment given in New Zealand Insurance Co. Ltd. v. Commissioner of Inland Revenue, are very illuminating in this regard. There is always a notional liquidation underlying asset valuation, and in principle, that method is generally used to ascertain what would be the net value of the shareholder if liquidation were carried out. Consequently, a deduction equal to the amount of expenses of liquidation is proper in the application of this method.
We cannot accept the contention of the appellants that at the time of valuing the shares, the valuer ought not to have deducted the capital gains from the value of the assets of the company. In our view, not only that the valuers were within their right to deduct the capital gains from the value of the assets of the company but every deduction made by the valuers like the cost of realisation, etc. has also been rightly deducted and we find nothing wrong in the same.
( 1 ) THE appellants in this appeal have challenged the order dated 5th February, 1993 passed by Hon ble the Single Judge dismissing their objections to the report of M/s. V. Shankar Aiyer and Company, Chartered Accountants valuing the shares of respondent No. 1 company and directing the implementation of the settlement arrived at between the parties on 9th June, 1988 in accordance with the report of the Chartered Accountant. Certain other directions were also given by Hon ble the Single Judge in the impugned order. Before we deal with the controversies raised in this appeal, a few facts relevant for its disposal are given hereinbelow :-
( 2 ) THE respondent company is a closely held private company of the appellants and respondents 2 to 4. The entire shareholding of the company is held by the family except that a few shares are held by some of the relatives and friends of the parties. The family consist of four brothers and their mother. While the appellant No. 4 and members of his family are on one side, the other three brothers namely, Mohinder Nath, Virender Nath and Rajendra Nath and their mother were on the other side. The mother of the parties had died during the pendency of the proceedings. The appellant group is herein referred to as the "nn" group and the other group is referred to as the "mn" group.
( 3 ) THE authorised capital of the company comprised of 20,000 equity shares of Rs. 100. 00 each. Issued and paid up capital as on 30th June, 1988 was Rs. 18,45,700. 00 i. e. 18,457 equity shares of Rs. 100. 00 each. The NN group jointly held 5,564 equity shares in the company while the remaining issued and subscribed capital of the company belong to the MN group.
( 4 ) TILL about 30th June, 1988 the main income of the company was the commission from the agency business of M/s. Thyssen Sthal Union of Germany (in short referred to as "tsu" ). It appears that there arose certain disputes between the brothers, and the appellant No. 4, therefore, with his efforts got the TSU agency exclusively to himself. TSU, accordingly, served a notice on the company terminating their agency w. e. f. 30th June, 1988. From 1st July, 1988 the agency was given by TSU to Hansa Industries Private Limited, a company belonging to appellant No. 4.
( 5 ) THE appellants filed a petition for winding up of Kidarsons Industries Private Limited in this Court under Sections 433 and 439 of the Companies Act, 1956. The said petition was filed mainly on the ground that as the agency has been terminated by TSU, the main income of the company has gone and, therefore, it was just and equitable to wind up the company. During the pendency of this petition, the respondents filed the present suit for declaration that the appellants hold the agency agreement of TSU for and on behalf of the company and for an injunction restraining the appellants from carrying on the agency business of TSU in India holding themselves out as their agent. During the pendency of these proceedings, the parties arrived at a compromise whereby Narender Nath Nanda and his group agreed to transfer their equity shares in Kidarsons Industry Private Limited constituting 30. 14% of the share capital of the company in favour of the respondents. The price of these shares was to be paid to NN Group or their nominees in specie by transferring to them 30. 14% of the assets of the company. The TSU agency was to be retained by Narender Nath Nanda and his group. Some of the terms of the settlement are reproduced as under :-
2. THAT the price of the aforesaid 5654 (later corrected as 5564) equity shares of Kidarsons Industries (P) Ltd. , will be paid to Shri Narendra Nath Nanda, and/or his nominees in specie by Company by transferring to him 30. 14 per cent of the assets of the Company. Marginal amount not exceeding 5 lakhs may be paid by the company to Shri Narender Nath Nanda and/or his nominees as the case may be, in cash if found necessary. Similarly Shri Narender Nath Nanda may mak
