Valuation of unquoted equity shares of investment companies, holding companies, etc. – Guidelines therefor
1. Reference is invited to : ( i) the Board’s Circular No. 2 (WT) of 1967, dated 31-10-1967 [Clarification 3] for valuation of unquoted equity shares (a) of investment companies other than those which are substantially holding companies; and (b) of investment companies which are substantially holding companies; and (ii) the Board’s Circular No. 118, dated 15-9-1973 [printed here as Clarification 2] (in partial modification of circular dated 31-10-1967) for valuation of unquoted equity shares of investment companies which have wholly-owned subsidiaries.
2. The question of valuation of unquoted equity shares of investment companies has been re-examined in the light of the Supreme Court’s decision in the case of CGT v. Smt. Kusumben D. Mahadevia  122 ITR 38. The Board’s Circulars dated 31-10-1967 and 15-9-1973, therefore, stand modified as set out in the succeeding paragraphs.
3. In the light of the above-quoted Supreme Court’s decision as also its earlier decision in CWT v. Mahadeo Jalan  86 ITR 621, the following guidelines are issued for the valuation of unquoted equity shares of investment companies referred to in paragraph 1 above.
1. The principle of combination of the two methods, i.e., the average of—
(a) the break-up value of shares based on the book value of the assets and liabilities disclosed in the balance sheet; and
(b) the capitalised value arrived at by applying certain rate of yield of the maintainable profits,
has to be discarded.
2. In the case of a company which is a going concern and whose shares are not quoted on the stock exchange, the profits which the company has been making and should be capable of making or, in other words, the profit-earning capacity of the company would ordinarily determine the value of its shares.
3. In the case of a company which is ripe for winding up or if the situation is such that the fluctuations of profits and uncertainty of conditions on the date of valuation prevent any reasonable estimation of the profit-earning capacity of the company, the break-up value method will have to be adopted. The later decision of the Supreme Court also refers to its observations in the case of Mahadeo Jalan (supra ) as under :
“….The yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation….” (p. 634)
4. The question of application of the break-up value method will depend upon the facts and circumstances of the case. One of the cases of exceptional circumstances referred to in (3) above can be where the assets of the company comprise wholly or mainly of jewellery, precious stones, etc., and the company carries on business of hiring out such assets. In such a case if the income from hiring out of jewellery, gold ornaments, etc., is exceptionally low as compared to the normal return expected of these assets, the break-up value method would be more appropriate.
4. For the purpose of para 3( 2) above, the following adjustments may be made for working out the maintainable profits :
1. The book profits of the company for the five years immediately preceding the valuation date will be ascertained.
2. Adjustments will be made to the book profits for each of the said five years for all non-recurring and extraordinary items of income and expenditure and losses.
3. Adjustments will be made for expenditure which is not of a revenue nature and is debited in the accounts and for receipts which are revenue receipts and are not accounted for in the profit and loss account.
4. The development rebate/investment allowance, in case it is debited in the books of account, will be added back.
5. The appropriate tax liability of the company on the book profits so determined will be deducted.
6. The profits required for paying dividends on shares with prior rights, i.e., preference shares, shall be excluded.
7. The average of the company’s book profits, as adjusted above, will be determined. The rate of capitalisation may be taken at 10 per cent of the maintainable profits of the company in the case of investment companies other than those which derive the major part of their income from house property and 8.5 per cent in the case of investment companies which derive the major part of their income from house property.
5. In the case of unquoted equity shares of investment companies which are substantially but not wholly holding companies, the fair market of the shares will be determined by adding a premium of 10 per cent to the value of shares arrived at on the basis as set out in the preceding paragraph.
6. The valuation of unquoted equity shares of an investment company which has a wholly-owned subsidiary should be worked out on the basis that the parent investment company and wholly-owned subsidiary or subsidiaries were, in fact, one single company, on the same lines as laid down in circular dated 15-9-1973. The rates of yield to be applied would be 10 per cent and 8.5 per cent as mentioned in para 4 above.
7. The above may please be brought to the notice of all the Assessing Officers in your charge. These instructions will apply to all pending assessments and will hold the ground until rules for the valuation of above shares, which are under consideration of the Board, come into force.
Circular : No. 332A [F. No. 326/2/80-WT], dated 31-3-1982.