Kidarsons Industries Pvt. Ltd. vs Hansa Industries P. Ltd. and others

Arun Kumar, J.—Kidarsons Industries Private Limited was incorporated in the year 1963, having its registered office at Allahabad Bank Building, 17, Parliament Street, New Delhi. The company was engaged in business as dealers, importers, manufacturers'' representative and agents for various types of iron and steel and other materials. The authorised capital of the company comprised 20,000 equity shares of Rs. 100 each aggregating to rupees twenty lakhs. The issued and paid-up capital as on June 30, 1988, was Rs. 18,45,700, i.e., 18,457 equity shares of Rs. 100 each. The company is a closely held private company as its shares are mostly held by the Nanda family consisting of four brothers and their mother. The names of the four brothers in order of seniority are Mohinder Nath, Narender Nath, Virender Nath and Rajinder Nath. The contest is between Narender Nath on the one side and the other three brothers and their mother on the other side (hereinafter, Narender Nath will be referred to as "the NN group" and Mohinder Nath, his brothers and mother will be referred to as "the MN group"). The main income of the company was admittedly commission from the agency business of Thyssen Stahl Union of Germany (hereinafter referred to as "TSU"). I have used the word "admittedly" in view of the averments made by "the NN group" in the winding up petition filed by it which was registered as C.P. No. 28 of 1988. All the brothers were carrying on the business of Kidarsons together till the stage was reached when Narender Nath wanted to separate. It appears that Narender Nath succeeded in his efforts to outsmart his other brothers and to get the TSU agency exclusively to himself.

Thyssen Stahl Union of Germany served a notice on Kidarsons terminating their agency with effect from June 30, 1988. From July 1, 1988, the agency was given by TSU to Hansa Industries Pvt. Ltd., a company exclusively belonging to Narender Nath. This was not the end of the matter. The NN group filed a petition for winding up of Kidarsons Industries Pvt. Ltd. on April 4, 1988, in this court under sections 433 and 439 of the Companies Act, 1956 (C.P. No. 28 of 1988). Show-cause notice was issued on the said petition. During the pendency of these proceedings Kidarsons Industries Pvt. Ltd. through the MN group filed the present suit on May 26, 1988, praying for the following reliefs :

(a) A declaration that the defendants must hold the agency agreement of TSU procured by defendant No. 4 for and on behalf of the plaintiff;

(b) Decree of perpetual injunction restraining the defendants, their servants and agents from carrying on the agency business of TSU in India and holding themselves out as the agent of TSU.

Defendant No. 1 in the said suit is Hansa Industries Pvt. Ltd. a company belonging to Narender Nath. Defendant No. 4 is Narender Nath himself, while defendants Nos. 2 and 3 are, respectively, the wife and son of Narender Nath. On June 9, 1988, both the rival groups arrived at a compromise regarding the suit as well as the company petition referred to above. The compromise was recorded in court and forms part of the court proceedings of the said date. In order to give a complete picture, I think it is appropriate to reproduce the terms of settlement between the parties at this stage :

"1. Shri Narender Nath Nanda and his group will transfer or sell their 5654 (later corrected as 5564) equity shares in Kidarsons Industries (P.) Ltd., held by them (including Shri Harbans Lal Kohli) Constituting 30.14 per cent. of the share capital of the company.

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 the company by transferring to him 30.14 per cent. of the assets of the company. The marginal amount not exceeding Rs. 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 make similar compensatory equalisation payment to the company. The parties by consent can, however, agree to a larger amount.

Shri Narender Nath Nanda will file the consent of the other shareholders including Sh. Harbans Lal Kohli of his group in court accepting this compromise.

The other shareholders, Shri Mahinder Nath Nanda, Shri Virender Nath Nanda and Shri Rajinder Nath Nanda groups, will give their acceptance and for this purpose this agreement will be filed in Company Petition No. 28 of 1988, as well and no further proceedings will be taken in the said Company Petition No. 28 of 1988.

The plaintiff company, Kidarsons Industries Private Limited, Shri Mahinder Nath Nanda, Shri Virender Nath Nanda and Shri Rajinder Nath Nanda agree on behalf of themselves and their respective groups as well as Shri Narender Nath Nanda and his group agree that the defendants in the suit will retain the agency of Thyssen Stahl Union and the company, Kidarsons Industries (P) Ltd., its directors and shareholders will have no concern with the same after June 30, 1988.

That Shri P. N. Khanna, a retired judge is at present acting as a mediator. He will act as a Commissioner, to separate 30.14 per cent. of the assets of the company to be given to Shri Narender Nath Nanda group as set out hereinbefore.

The fee of the Commissioner will be paid by the company and in the first instance shall be Rs. 30,000. The court may, however, increase the same depending upon the work involved.

All payments of arrears of salary/commission and dividend declared so far will be paid to Shri Narender Nath Nanda and his group, as the case may be, within one month from today.

The Commissioner will be free to seek the directions of the court from time to time.

The assets of the company will be valued as on July 1, 1988.

The proceedings in the suit will remain stayed.

The winding up petition, C.J.P. No. 28 of 1988 and Suit No. 1310 of 1988 will be dismissed on Shri Narender Nath Nanda and his group being paid the full value of their shares in specie.

Shri Narender Nath Nanda will be entitled to inspect the books of account in one of the cabins which should be at least 10'' X 8'', in the presence of any official of the company, during working hours. Shri Narender Nath Nanda will give prior notice of his intention to inspect the books.

Shri Narender Nath Nanda will continue to occupy the portion of the property of the company in which he is at present residing as deemed owner/owner, and the value of such portion will be taken into account for evaluating the assets of the company. The value of such part of the property as is occupied by Shri Narender Nath Nanda will be adjusted in the value of his share.

No immovable property of the company will be transferred in the meantime by the company.

That for the purpose of valuation of share of Shri Narender Nath Nanda group, the property No. K-72, Udyog Nagar, Rohtak Road, Delhi, will be treated as the property of the company.

Shri Narender Nath Nanda will cease to be the director of the company on order being passed in terms of this compromise.

That besides the persons who are parties to this compromise and their groups, there are two independent shareholders - the mother, Smt. Krishna Piari, of the parties as well as their Guru Bawa Lalji as well as Priti Properties (P) Ltd. which has one share. Shri Mahender Nath Nanda undertakes to file the consent of the aforesaid three parties to this agreement, and Shri Narender Nath Nanda will co-operate, if required by them. Notwithstanding the consent not being brought by Shri Mahender Nath Nanda, the compromise will still be binding on the parties executing it.

This agreement will be filed in Suit No. 1310 of 1988 and C.P. No. 28 of 1988, and appropriate orders will be passed in the suit.

That the implementation and execution of any decision, order or judgment passed under this compromise will be made by any judge on the original side of the High Court of Delhi.

The parties are agreed that personal papers of Shri Narender Nath Nanda will be taken away by him upon the Commissioner handing the same over to him. All the original documents of title or otherwise, which belong to or relate to the assets of the company, shall be returned by Shri Narender Nath Nanda to the company. In the first instance, they shall be kept with the Commissioner who will, after settlement regarding share transfer, hand them over to the company."

In pursuance of the said compromise, the matter went into the hands of Justice P. N. Khanna, a retired judge of this court, in terms of para 6 of the compromise. Justice Khanna filed his report dated April 12, 1990, in this court concluding that he was unable to have the matter finalised in terms of the settlement. Justice Khanna had requested both the parties to give the valuation of immovable properties belonging to the company. As noticed in his report, the MN group gave him the assessment made in this behalf by Ray and Ray, chartered accountants while the NN group did not respond to this opportunity. Justice P. N. Khanna valued the immovable properties of the company including the goodwill, which, in turn, included value of the rented properties at Rs. 3.65 crores. The value of the goodwill including rented properties was put at Rs. 50 lakhs. According to Justice Khanna, the share of the NN group being 30.14 per cent. in the total assets of the company the said group should get assets worth Rs. 1.10 crores and on that basis he proceeded to allot the Golf Links, New Delhi property to the NN group even though its value, according to Justice Khanna, was about Rs. 1.82 crores.

Even before the report of Justice Khanna had been filed in this court, the second round of litigation started between the parties in the shape of applications made by both the groups. In August, 1990, the matter came back to Mahinder Narain J. and on August 9, 1990, it was recorded "It is agreed between the parties that valuation of the shares of the business of Kidarsons Industries (P) Ltd. and the immovable properties owned by this company has to be done. This should be done, in my opinion, by professional valuers". The parties were given time to give the names of five valuers each side in a sealed cover so that if there was a common name, the court could appoint such a person. It is obvious from this order that the method followed by Justice Khanna as a local Commissioner that he simply valued the assets of the company and tried to allocate them was not correct and was not what was desired. The assets alone could not be valued and distributed without taking into consideration the liabilities. Therefore, it was felt that the shares of the company needed to be valued and this is what the parties agreed to on August 9, 1990.

In the list of chartered accountants filed by both the parties there was no common name. Therefore, on being pointed out by counsel for the defendants that the company branch of this court maintains a list of chartered accountants, the court called for the list. On August 30, 1990, the following order was passed :

(since subsequently some corrections were made in the order dated August 30, 1990, I am reproducing the rectified order only).

"I have seen the list of senior chartered accountants which is maintained by the company section. Parties have not agreed upon the name of any chartered accountant for the purpose of valuation. V. Shankar Aiyar and Company who are on the said panel are appointed as chartered accountants for the purposes of valuation of the assets of the company. They will also give valuation of the shares according to the valuation of the assets and liabilities of the company. This valuation of the shares is needed to determine the value of 30.14 per cent. of the assets of the company. The chartered accountant will determine the value of the shares keeping in view the provisions of clauses 2 and 14 of the agreement between the parties. The report of the chartered accountant shall be given in terms of orders dated June 9, 1988, and August 9, 1990.

The report to be given by the chartered accountant within two months.

The chartered accountant will intimate the parties of their fees, which amount will be paid by the parties in equal shares."

V. Sankar Aiyar and Co. who were appointed as the chartered accountants to determine the value of the shares, filed their report dated November 12, 1990, in this court. It is the said report which is the subject-matter of challenge at present. Only the NN group filed objections against the report of the valuers on May 13, 1991.

From the report of V. Sankar Aiyar and Co., it appears that for purposes of carrying out their assignment as per the directions of this court the company, Kidarsons Industries Pvt. Ltd., furnished its balance-sheet as on June 30, 1988, certified by its auditors to be correct in accordance with the books as produced and information as supplied to them. The audited balance-sheets for the years ending September 30, 1985, September 30, 1986, September 30, 1987, and September 30, 1988, were also furnished by the company to the chartered accountants besides the valuation report of Ray and Ray, chartered accountants, approved valuers regarding the immovable properties to which reference was also made by Justice Khanna in his report. V. Sankar Aiyar and Co. have noted in para. 3.2 of the report that "since the valuations have been carried out nearer to the date of July 1, 1988, being the relevant date for this report, they have been adopted". V. Sankar Aiyar and Co. did not take into account the goodwill as well as the value, if any, of tenancy rights. For this they have given reasons in their report. The total value of the four immovable properties owned by the company was taken as under :

"5.(b) The buildings comprise the following and their value as per approved valuers are given below :

(Rs.) Residential building C-326, defense Colony, New Delhi (as valued by Sakhuja Mallick and Associates), Report, dated July 22, 1988 36,33,200 Residential premises No. 41, Golf Links, New Delhi (as valued by Sakhuja Mallick and Associates), Report, dated July 4, 1988 2,12,07,000 Office premises No. 2-E, 2nd Floor, 71, Park Street, Calcutta (as valued, by A.K. De, Calcutta), Report, dated August 6, 1988 24,99,000 Office premises No. 34-B, Third floor, Nariman Bhawan, Bombay (as valued by C.D. Vaidya and Co.), Report, dated August 12, 1988 35,00,000 ------------------- 3,08,39,200." -------------------

The total value of the assets has been given as under :

(Rs.) "Immovable properties 3,08,39,200 Land of Udyog Nagar, Rohtak Road 40,000 Movable assets 6,00,000 Trade investments 7,20,000 Share in Chitrakoot Properties Ltd. 1,000 Stock-in-trade 21,64,000 Sundry debtors 22,44,036 Cash and bank balances 90,60,540 Loans and advances 11,64,714 Commission accrued as on June 30, 1988 18,00,000 ------------------- 4,86,33,490." -------------------

The chartered accountants have thereafter determined the liabilities, details whereof are given in the report. The total liabilities have been worked out as Rs. 3,17,34,920. Deducting the total liabilities from total assets, the net assets have been valued at Rs. 1,68,95,570. This being the value of 18,457 equity shares the value of each share on the basis of net assets works out to Rs. 916 according to the valuers. From this a deduction of 20 per cent. has been made on account of restrictions on transfer of shares of the company. This works out to Rs. 183 per share. Thus the total value of each share has been worked out by the chartered accountants as Rs. 733.

The defendants, i.e., the NN group have raised various objections against the report of V. Sankar Aiyar and Co., chartered accountants. On the other hand, the stand taken by the MN group is that though according to them the value of shares ought to have been much less than what has been determined by the valuers, in order to put an end to litigation, they accept the valuation as fixed by the expert valuers.

The following objections have only been pressed by the NN group against the report of the valuers V. Sankar Aiyar and Co. :

Shares of the company were not required to be valued. Only the assets had to be valued and 30.14 per cent. thereof had to be given to the NN group.

The valuers were acting as a local Commissioner. The parties should have been given notice of the proceedings before them and should have been given opportunity to place relevant material before them along with opportunity of hearing.

Valuation of the immovable properties of the company was not done independently.

The function of valuation of shares, assuming that the shares were to be valued, is a judicial function and should not have been delegated by the court to a local commissioner.

The valuers did not take into account the value of goodwill and tenancy rights of the tenanted properties while assessing total value of the assets of the company.

The value of the Udyog Nagar plot was taken at a very low figure.

The method of share valuation followed by the valuers and deduction on account of capital gains tax was wrong.

Deduction on account of restriction on transfer of shares was wrong.

The NN group is a deemed owner of portions of the Golf Links property which are in the possession of Narender Nath and as per clause 14 of the settlement he has to continue to occupy the same and he cannot be thrown out of the property. Before dealing with the objections, it is worth noticing that an argument had also been raised on behalf of the NN group that Justice Khanna''s report had not been specifically rejected nor had Justice Khanna been removed. Therefore, the appointment of V. Sankar Aiyar and Co. was invalid and without jurisdiction. However, during the course of hearing this objection was not pressed.

Shares need not be valued :

Learned counsel for the objector relies on clause 2 of the settlement wherein it is stated that the price of the shares has to be paid to the NN group in specie by the company by transferring 30.14 per cent. of the assets of the company. On this basis it is urged that only assets had to be valued and assets to the extent of 30.14 per cent. had to be earmarked and given to the NN group. Firstly, this argument is not open in view of the agreement between the parties recorded in court on August 9, 1990, wherein it was agreed that valuation of the shares of the business of Kidarsons Industries Pvt. Ltd. and immovable properties owned by the company had to be done. In pursuance of this agreement the objector even filed a list of chartered accountants proposed as valuers by the objector. The agreement was thus also acted upon. It is not open to the objector to raise this objection now. Secondly, it will not be correct to give assets to the extent of 30.14 per cent. to the NN group without reference to liabilities. The NN group cannot have a share in the assets without accounting for the liabilities. It was for this reason that in the order dated September 4, 1990, the court specifically directed that the values/chartered accountant will give valuation of the shares according to the valuation of the assets and liabilities of the company. It was further observed that this valuation of the shares was needed to determine the value of 30.14 per cent. of the assets of the company. This order was not challenged by any party and became final. The objector cannot be permitted to raise this objection, specially now when he finds that the report of the valuers has gone against him. The objection is misconceived and is rejected.

Valuer was acting as a local Commissioner and ought to have given notice and opportunity to the parties.

Great emphasis had been placed on this objection. The thrust of the argument is that the appointment of the valuers has to be taken to be under Order XXVI of the Code of Civil Procedure, and, Therefore, as a local Commissioner the valuers were obliged to give notice to the parties and give opportunity to them to place material on record and for oral hearing. In support of this argument, learned counsel for the objector has relied on A. A. Venkata Seshamma Vs. A. Appa Rao and Another, , (Modalvalasam) Latchan Naidu and Another Vs. Rama Krishna Ranga Rao Bahadur Bobbili Samasthanam, , Mandera Mukherjee Vs. Sachindra Chandra Mukherjee and Others, , Sardar Singh v. Chandan [1982] 84 PLR 473, Maroli Achuthan Vs. Kunhipathumma, and S.L. Kapoor Vs. Jagmohan and Others, . Reliance has been particularly placed on the provisions of Order XXVI, rule 18 of the Code of Civil Procedure.

Before dealing with the objection, I must refer to the order of appointment of the valuers. The order dated September 4, 1990, is clear. V. Shankar Aiyar and Co. were appointed as chartered accountants for the purpose of valuation of the shares and assets of the company. The appointment thus cannot be termed as local Commissioner under Order XXVI of the Code of Civil procedure.

The valuers were required to value the shares of the company which is a specialised job and that is why a chartered accountant was selected to carry it out. So far as the suit was concerned, it was already over and strictly the provisions of Order XXVI of the Civil Procedure Code, were not attracted. As already pointed out the valuation of shares was required in order to give effect to the settlement which in turn required that the NN group had to be paid 30.14 per cent. share in the assets of the company as per the share valuation. As noticed by the valuers in para 3.2 of the report certain records of the company were only required for this job. These could be produced by the company alone. The share valuation had to be done on the basis of records of the company (mainly audited statutory records) and as per the settled legal principles. Therefore, it was not essential that material be invited from the parties nor were oral hearings envisaged. Whatever information was required by the valuers could be supplied by the company alone. The valuers did not hear any of the parties. The nature of the job entrusted to the valuers was such that it could be carried out with reference to records maintained by the company alone. It was not a case of examination of any witnesses or any local spot inspection. As noticed by the valuers, the company furnished balance-sheets for the years ending September 30, 1985, September 30, 1986, September 30, 1987, and September 30, 1988, besides the valuation reports of Ray and Ray, chartered accountants. The allegation that the valuers received material behind the back of the objector is totally misconceived.

There are certain other important factors to be noticed. Firstly, the order regarding appointment of the valuers was made on August 30, 1990, and the report of the valuers is dated November 12, 1990. During all this period, when the matter remained pending before the valuers, if any party was aggrieved that the valuers was not giving any opportunity to the parties by calling them or associating them, it was always open to such a party to approach this court for suitable directions to the valuers. Secondly, at the time of passing of the order by court, if any opportunity to appear before the valuers or for making representations before them is desired, normally the parties ensure that such measures are recorded in the order itself. No such opportunity was sought.

It is also worth mentioning that actually Justice Khanna, when the matter was pending before him gave opportunity to the parties for inspection of records as also for suggesting valuation of the properties. While the MN group offered inspection as well as gave the report of Ray and Ray, chartered accountants, regarding valuation of shares and properties, the NN group neither showed any interest in inspection of records nor gave any counter suggestions regarding valuation of properties. Even during the course of protracted hearing in this court, except criticism of the report, there was no concrete suggestion forthcoming from the side of the objector as to what should be the value of the properties. The objector appears to have been sitting on the fence. He did not want to commit to any position so that he could raise whatever arguments/objections would suit him at the appropriate stage. The authorities cited on behalf of the objector in this connection which I have noted hereinbefore pertain to proceedings before the local Commissioner and have no relevance to the present case in view of the nature of the assignment in this case.

According to Justice Khanna''s report, the value of assets of the company is Rs. 3.65 crores. In this, Justice Khanna has included a sum of Rs. 50 lakhs on account of goodwill and value of the rented properties of the company. If this item of Rs. 50 lakhs is excluded the value of the assets according to Justice Khanna will come to Rs. 3.15 crores. According to V. Sankar Aiyar and Co., this value is Rs. 3.08 crores. This shows that there is no marked difference between the two valuations. For all these reasons I do not find any substance in this objection and the same is hereby rejected.

Valuation of properties not done independently :

While dealing with objection No. 2 above necessary facts have already been stated. It is apparent from the report of V. Sankar Aiyar and Co. that they have accepted the valuation of the properties as done by Sakhuja Mallick and Associates regarding the two Delhi properties and that of A. K. De regarding the Calcutta property and of C. D. Vaidya and Co. regarding the Bombay property. These valuations have been carried out near about the crucial date in the present case and were accepted by Ray and Ray, chartered accountants, who had also done valuation of the shares of the company by valuing the assets of the company. Justice Khanna had made reference to the report of Ray and Ray in this behalf in his report. In spite of opportunity, no contrary version was placed before Justice Khanna by the objectors nor any contrary version has been placed before this court during the course of hearing. In fact counsel for the objector indirectly agreed that the total market value of the properties was broadly correct. Learned counsel for the objector also submitted during the course of hearing that the valuation figures of Justice Khanna, V. Sankar Aiyar and Co. and Ray and Ray, chartered accountants, were before the court and he left it to the court to arrive at a reasonable figure rather than refer the matter back to the valuers. Having regard to the three figures on record, I approve the valuation of V. Sankar Aiyar and Co. as correct. In the background of the facts stated above the objection has no substance. The same is hereby rejected.

The share valuation is a judicial function which could not be delegated :

This objection is not open in view of the orders dated August 9, 1990, and September 4, 1990. On August 9, 1990, the court specifically observed that valuation of shares should be done by professional valuers. This order was never challenged, rather it was acted upon. The same has become final and the matter cannot be permitted to be reopened. I do not agree that share valuation is a purely judicial function and could not be entrusted to an expert.

Even otherwise, I do not find any substance in this objection. The chartered accountant is the most suitable person for the job. He is supposed to be conversant with sound principles of accountancy coupled with judicial pronouncements, if any, in this connection. He is an expert in the field. Very often the courts have relied upon the expertise of chartered accountants in such matters. The argument that the function entrusted to an expert was a judicial function and as such could not be delegated is totally misconceived. In modern times we have a complex financial structure. Most of the times it is the chartered accountants who are acting as experts in this area and advise and guide their clients in such matters. The valuation of shares cannot be called a purely judicial function. The objection is misconceived and has to be rejected.

Value of goodwill and tenancy rights not taken into account :

As already noticed Justice Khanna in his report had valued these items at Rs. 50 lakhs while V. Sankar Aiyar and Co. did not include any valuation on this account in the value of assets. In the impugned report the valuers have given sound reasons for non-inclusion of goodwill and tenancy rights as an item of assets. So far as the question of goodwill is concerned, admittedly the company was doing only agency business. According to the objector''s own admission in the company petition as contained in para. 33 thereof, as a consequence of termination of TSU agency, the company ceased to be a viable unit. Winding up of the company was sought by the NN group on this ground. It is further stated in the said para. 33 that the income from TSU was roughly about 70 per cent. of the company''s income. When 70 per cent. of the income of the company is gone, the entire substratum of the company is gone. Existing expenditures make the company totally unviable and uneconomical. It is also said that after the TSU agency goes the business of the company cannot be carried on except at a loss. (The substratum of the company has thus been lost). After making such allegations it does not lie in the mouth of the objector to say that the company has goodwill. The objector has tried to rely on replies on behalf of the company to these averments. The objector cannot be allowed to approbate and reprobate. The objector has to be held bound by his own averments in the pleadings rather than rely on the adversaries'' replies to meet his averments.

In this connection, learned counsel for the plaintiff has relied on Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, , wherein it was held that goodwill of a going concern does not have money value even if transferred and so will not attract capital gains tax.

Apart from this legal position the reasons given by the valuers appear to be sound for non-inclusion of value of goodwill as an asset of the company. Similarly, I find myself in agreement with the reasons stated in the valuers'' report that the value of tenancy rights need not be included in the value of assets of the company. An additional factor in this connection is the order of the court dated August 9, 1990, wherein it is stated that immovable properties "owned" by the company had alone to be considered for purposes of valuation of shares. Tenancy premises are not owned by the company.

The tenancy rights are also not reflected in the balance-sheets of the company. Normally there are restrictions on transfer of tenancy rights. Therefore, the tenancy rights were rightly not taken into consideration by the valuers while evaluating the assets of the company.

Value of the Udyog Nagar plot taken at a very low figure.

The property has been valued at Rs. 40,000. There may be something to say in favor of the objector that the value of this property is more. However, the objector has not suggested any value. Even during the course of hearing not even an approximate figure has been suggested as the value of the property. It appears that this is not going to have any significant impact on the value of shares and that is why no figure as such was suggested. I do not consider it to be just or fair to set aside the report on this ground alone and drive the parties to a fresh round of litigation. Moreover, I have already expressed my view that the overall valuation of the assets of the company by V. Sankar Aiyar and Co. appears to be correct.

Method of share valuation followed by the valuers and deduction on account of capital gains tax :

Parties agreed before the court on August 9, 1990, that valuation of the shares of the business of Kidarsons Industries Pvt. Ltd. and the immovable properties owned by the company had to be done. The court felt that this should be done by professional valuers. Therefore, vide order dated September 4, 1990, V. Sankar Aiyar and Co. were appointed as chartered accountants for purposes of valuation of shares and assets of the company.

Another clear direction in the said order was that the shares were to be valued according to the valuation of the assets and liabilities of the company. This does not leave scope for much of a discretion on the part of the valuers as to which method of share valuation had to be adopted. There are two well recognised and judicially accepted methods of share valuation. They are :

(a) Yield method, which is normally adopted in the case of a going concern;

(b) Break-up value method, which is normally adopted in the case of liquidation of a company.

Reference has been made to two decisions of the Supreme Court in Commissioner of Wealth Tax Vs. Mahadeo Jalan and Mahabir Prasad Jalan and Others etc., ; Commissioner of Gift Tax, Bombay Vs. Smt. Kusumben D. Mahadevia, .

In Commissioner of Wealth Tax Vs. Mahadeo Jalan and Mahabir Prasad Jalan and Others etc., , it has been observed (headnote) :

"Where for the purpose of wealth-tax the shares held by an assessed in a company are to be valued u/s 7of the Wealth-tax Act, 1957, though ultimately the facts and circumstances of the case, the nature of the business of the company, the prospects of profitability and such other considerations will be taken into account, the following principles are normally applicable :

(1) Where the shares are of a public company and 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 of a public company which are not quoted on a stock exchange or of a private company, their value is determined by reference to the dividends, if any, reflecting the profit earning capacity on a reasonable commercial basis. But if the profits are not reflected in the dividends which are declared and a low earning yield is shown by the company, which is unrealistic on a consideration of the financial affairs disclosed for the relevant year, the Wealth-tax Officer can, on an examination of the balance-sheet, ascertain the profit-earning capacity of the concern and, on the basis of the potential yield, fix the valuation. In other words, the profits which the company has been making and should be making will ordinarily determine the value. The dividend and earning method or yield method are not mutually exclusive; both should help in ascertaining the profit-earning capacity. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of the profits."

It follows from the above that in the yield method the profits made by a company are taken into consideration for arriving at the value of the shares whereas the break-up value method is adopted when the company is ripe for winding up. The idea behind the break up value method is to find out what would be realised by selling the assets. Generally the view has been taken that the break-up value method would not be appropriate to follow when the company is a going concern.

Relying on the aforesaid two judgments of the Supreme Court, learned counsel for the plaintiff urged that the yield method should have been followed. By the yield method, he submits, the value of the shares would have been much less as compared to the value of the shares of the company determined by the valuers in the present case. In this connection, he also referred to para. 13 of the report of Justice Khanna wherein it is noticed that as per the report of Ray and Ray, chartered accountants, on the basis of the yield method the value of shares of the company comes to Rs. 200 per share. Secondly, counsel for the plaintiff argues that valuation of shares ought to have been done as per the articles of association of the company. For this he relied on V.B. Rangaraj Vs. V.B. Gopalakrishnan and others, . According to counsel for the plaintiff, on this basis the valuation of shares would be still less.

On the other hand, learned counsel for the objector, without committing himself as to which method of share valuation ought to have been followed, has tried to make out a case that as per the yield method the value of shares of the company would have been much more than what has been determined by the valuers. This oral submission without any effort to demonstrate how it would be so, does not help. He is probably taking the gross profits alone into consideration.

I think there need not be any controversy as to which method of valuation of shares should have been followed by the valuers in view of the orders dated August 9, 1990, and September 4, 1990. The court had specifically directed the valuers to value the shares of the company on the basis of the value of its assets and liabilities. This did not leave much of a choice to the valuer and the valuer has precisely followed the directions of the court in arriving at the value of shares of the company.

The valuers have for purposes of the report taken into consideration the value of the assets of the company as on July 1, 1988. The valuers have further determined the liabilities of the company whether actual or notional. The fixed assets of the company have been taken at market value as against their book value which was much lower. Similarly the market value of the stock-in-trade has been taken into consideration as against the book value which was much lower. Therefore, the valuers have taken into consideration the liability on account of capital gains tax (notional). The valuers have also taken into consideration the cost of realisation of market value, i.e., expenses in the event of sale or transfer of assets. These items are inherent in market value and cannot be ignored whenever one talks of market value of assets for purpose of valuation of shares of a company.

The main objection on behalf of the objector in this connection is regarding deduction on account of capital gains tax. According to him there is no sale or purchase of any fixed asset or immovable properties of the company. Therefore, the question of payment of capital gains tax does not arise. According to learned counsel no deduction ought to have been made on this account from the market value of the properties. It is true that there is no actual sale or transfer of the immovable assets of the company involved, yet the question remains when the market value of the fixed assets is taken into consideration as against their book value, whether the concept of capital gains tax automatically comes into play or not. According to learned counsel for the objector since there is no sale or transfer of the fixed assets of the company, there is no occasion to take notional liability on account of capital gains tax into consideration. In support of this submission, he has made reference to provisions under the Income Tax Act, particularly sections 45 and 46 of the said Act and has cited certain judgments to the effect that in the case of distribution of assets of a company in liquidation to the shareholders, there is no sale or transfer of the assets of the company and, Therefore, capital gains tax does not become payable by the company. These judgments are CIT v. R. M. Amin [1976] 106 ITR 368 , Commissioner of Income Tax, Madras Vs. Madurai Mills Co. Ltd., and Madurai Mills Company Ltd. Vs. Commissioner of Income Tax, .

The objector has approached the question of capital gains tax from the angle of distribution of assets of a company in liquidation to its members. He has not considered or adverted to the other aspect of the matter which is as stated before, when the market value of the assets is considered as against their book value, does the liability on account of capital gains tax get automatically included or not ? I do not consider it necessary to discuss the aforesaid authorities because I am in agreement with the objector that no actual sale or transfer of the assets of the company is involved. However, I find myself unable to ignore the question of capital gains tax getting impregnated in the market value of the property the moment the same is taken into consideration as against the book value of the assets of the company. Counsel for the plaintiff has strongly urged that the moment the market value of any asset is taken into consideration, the cost of realisation of the market value and the tax liability get attracted and the true market value of the asset will be ascertainable only after deductions on this account. According to learned counsel, these things are an essential element of the market value. The moment one talks of market value of a property these elements cannot be left out or ignored. In other words they are impregnated in the market value. To illustrate, the moment one talks of sale or transfer of a lease hold plot, the charges payable to the superior Lesser for obtaining its permission to transfer are automatically understood as payable. The market value of such a property cannot be considered de hors these charges. The use of the words "market value" would be understood to mean the price plus or minus, as the case may be, such charges. Thus in the context of market value of the properties under consideration, liabilities on account of capital gains tax and cost of realisation of the market value have to be provided for. The market value will be minus such liabilities. The value of assets of the company has been raised from book value to market value. When the objector wants to have the benefit of market value of assets being taken into consideration, he must provide for the basic elements of market value, i.e., the elements which form part of the market value.

In "A Study on Share Valuation" a booklet published by the Institute of Chartered Accountants of India while dealing with the subject of valuation of assets, it has been said :

"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, Therefore, 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."

Therefore, even when there is no actual sale or transfer of assets of a company, for purposes of arriving at the market value of its assets such notional deductions have to be made.

For all these reasons, I find nothing wrong in the deductions made by the valuers on account of liability towards capital gains tax and realisation charges of the assets, though notional. All the objections in this connection are rejected.

Deduction on account of restriction on transfer of shares :

The company is admittedly a private limited company which contains restriction on transfer of shares in its articles of association. Its shares are not quoted in the market. Therefore, a deduction at the rate of 20 per cent. has been made by the valuers from the value of the shares. This deduction is well recognised in law and in the rules regarding share valuation. Learned counsel for the objector has submitted that no purchase of shares is involved, Therefore, this deduction is totally uncalled for. This argument again misses the real point. As in the case of liability on account of capital gains tax, here also we are not dealing with a case of actual sale or purchase of shares. What is sought is to find out the value of the shares of the company. For a normal situation such considerations come into play and Therefore, the deduction cannot be objected to. The objection is untenable and is hereby rejected.

Interpretation of clause 14 of the settlement :

On the basis of this clause it is submitted on behalf of the objector that the portions of the Golf Links property presently in occupation of Narender Nath have, in any event, to remain with him as owner/deemed owner and he cannot be asked to leave the same. It is further submitted that the valuers should have ascertained the value of the said portion independently so that the same could be adjusted against the value of shares of the NN group. On a plain reading of this clause the submission on behalf of the objector may be possible. However, if the effect of such a construction of clause 14 could be to scuttle the entire settlement or if literal implementation of the said clause would mean that the settlement cannot be effectuated at all, the court will have to find out if within the frame work of the settlement, it is possible to implement the same. Clause 20 of the settlement gives such powers to the court because under the said clause the implementation and execution of the settlement and any orders or decisions etc. therein has to be done by the court. Clause 14 has to be considered along with other relevant clauses so that the settlement can be implemented as far as possible maintaining its spirit and content. Clause 2 of the settlement is another relevant clause in this behalf. Under clause 2 the price of the shares of the NN group has to be paid in specie by the company by transferring to it 30.14 per cent. of the assets of the company. Marginal amount not exceeding rupees five lakhs may be paid by the company to Narender Nath and/or his nominees as the case may be, in cash, if found necessary. Similarly, Narender Nath may make similar compensatory equalisation payment to the company.

It is true that the valuer has not separately assessed the value of portion of the Golf Links property occupied by Narender Nath. The case of the objector is that Narender Nath is in occupation of three bed rooms in the Golf Links property besides his right to use the common areas in the house like kitchen, drawing and dining room, etc. The property is admittedly constructed as one bungalow. The parties are enjoying certain areas in the property as common areas. It is practically not possible to value separately the portions occupied by Narender Nath. The interim applications pending in the case suggest that there is controversy between the parties about occupation of certain areas in the property. The parties also claim to be in joint possession and enjoyment of certain portions of the property. The plaintiff had moved an application being I.A. No. 1506 of 1991, for directions regarding the Golf Links property. In the said application it has been averred that the total living space including servants'' quarters is 6,630 square feet in this property. Out of this the plaintiff company is in possession of 1,028 square feet. Mohinder Nath is in possession of 1430 square feet including the room occupied by the mother and the kitchen, Virender Nath is occupying a covered area of 1,104 square feet, while Rajinder Nath has in his possession 1,343 square feet, Narender Nath has 1725 square feet covered area. The total covered area of the property is 8384 square feet. Out of this, an area of 1,754 square feet comprises stair cases, projections and garages etc. which are in common use. The reply to this para of I.A. No. 1506 of 1991, by Narender Nath is that he did not have enough time to check the figures. In an affidavit dated February 11, 1991, filed by Narender Nath he has tried to show that he is in occupation of a larger area in this property than what has been alleged by the plaintiff. When there is so much divergence between the parties even on the question of possession of covered area, assessment of value of the portions claimed to be occupied by Narender Nath is practically impossible.

Secondly, sub-division of the property on the basis of occupation of its portions by Narender Nath is legally not possible. On final implementation of the settlement each group has to become exclusive owner in law of the portion falling to it. The Golf Links property is a lease-hold property. The lease deed does not permit sub-division of the properties. Therefore, there cannot be two separate owners of separate portions of the same property.

Thirdly, there is so much acrimony between the parties, that as per the case of both the parties, it is practically impossible for them to live together in the same house. Justice Khanna has adverted to this aspect in his report and has observed in para. 15 thereof that it is impossible for all the members of the family to live in one house. He has also observed that it is not possible nor desirable that all the family members should live in the same house. There have been various incidents when violence has been used and bad and undesirable incidents are reported to be taking place daily. In the same para, Justice Khanna has noted that he had put a proposal to the parties if partition of the house could be possible vertically. The proposal was rejected by both the parties. Therefore, the only possibility regarding the Golf Links house is that it should go to one group or the other. In this connection, the stand of Narender Nath is totally untenable. He accepts that relations between the two groups are so strained that it is impossible to live in the same house. The Golf Links house is so constructed that Narender Nath cannot exclusively enjoy the portions occupied by him without sharing certain common areas with the members of the other group. He also wants to retain the Golf Links house. Therefore, he is using clause 14 of the settlement to oust the others from the said property. He says because of clause 14 he cannot be asked to leave the Golf Links house. Others have to leave it. He offers to pay the difference forgetting clause 2 of the settlement wherein the difference cannot be more than Rs. 5 lakhs, plus or minus. If the other group is to be asked to leave the Golf Links house, the difference in the value of this house and the value of shares of the NN group will be too much and any such move will destroy the basis of the settlement.

The market value of the Golf Links property, whether I take Justice Khanna''s figures or I take Aiyar''s figures, is so much that it cannot be exclusively allotted to Narender Nath even if the shares of the company are valued as per the suggestion of Narender Nath. Therefore, in any event, the Golf Links property cannot be exclusively allotted to Narender Nath.

Approaching this problem from another angle, let me assume that the portion in exclusive occupation of Narender Nath is to be retained by him in any event and its value is to be adjusted in the value of the NN group''s shares. I will take the lower figures of the Golf Links property from out of Justice Khanna and V. Sankar Aiyar and Co. valuations (because the lower value will be more suitable to the NN group for this purpose). The figure is 1.82 crores. Narender Nath has a covered area of 1725 square feet in his exclusive possession as against total covered area of 6630 square feet as per figures given in I.A. No. 1506 of 1991, by the plaintiff. This covered area is about one-fourth of the total covered area. One-fourth of the total value of the property comes to Rs. 45.50 lakhs. The total value of the shares of the NN group is about Rs. 40.78 lakhs. This shows that still this is unworkable. The value of the portion occupied by Narender Nath comes to much more than what he is entitled to. Clause 14 of settlement has to be read in harmony with the other clauses of the settlement so as to implement the settlement rather than throw it over-board and leave the parties to start the litigation from square one. Clause 2 of the settlement requires payment of price of the value of the shares of the NN group in specie. This can be done by allocating and transferring any property of the company which may be nearest in terms of value of the shares of the NN group with a sum of Rs. 5 lakhs plus or minus as an equalisation amount. Clause 2, Therefore, leaves it to the court to allocate any property of the company which is near to the value of shares of the NN groups to the said group. Clause 2 in fact suggests that any property may ultimately fall to the NN groups. Mention of the equalisation amount in the said clause supports this view. In view of this provision in clause 2 of the settlement and in view of the difficulties expressed above in allocation of the Golf Links property to the NN group. Clause 14 of the settlement cannot be read in the manner suggested by the objector.

On the recording of the settlement, Narender Nath ceased to be a director of the company. The Golf Links property is owned by the company and, Therefore, a question could have arisen about the right of Narender Nath to continue to occupy portions in the said property which were under his occupation. It may be that in order to clothe Narender Nath with a right to continue in possession of the portions in the Golf Links property which were in his possession, till the settlement is finally implemented, it has been stated in clause 14 that he will continue to reside therein as deemed owner/owner. The language of clause 14 of the settlement cannot be permitted to be used to thwart the entire settlement, particularly on the interpretation thereof suggested by the objector. The use of the words "in the mean time" in clause 14 clearly suggests that clause 14 was intended to be a transitory provision, i.e., till the settlement was to be implemented. Clause 2 of the settlement is the basic clause which has to prevail. Clause 14 which comes much after clause 2 has to be interpreted in the circumstances as really an interim arrangement because the parties who are residing in the Gold Links house and till the settlement was to be fully implemented, were not to be disturbed.

For these reasons, the interpretation put forth on clause 14 of the settlement on behalf of the objector is not acceptable and has to be rejected. The Golf Links house can in no event be given to the NN group.

Finally, I must note an offer of the objector to pay the price of company''s shares at a rate double than what has been determined by the valuers. This is wholly uncalled for and cannot be permitted. This court is to implement and execute the settlement and not to reopen the matter. I am not to hold a fresh bidding for the shares of the company. The question of bidding was considered on June 7, 1988, in court, but was not pursued. On the other hand the parties agreed to adopt another mode for settlement of their disputes. This was also pursued. If the objector finds that the result has gone against him, he cannot be permitted to revert to bidding for shares.

The result of the above discussion is that the objections to the report of V. Sankar Aiyar and Co. on behalf of the NN group are rejected and the report is hereby accepted. The parties are left to bear their own respective costs of these proceedings.

This brings me to the question of implementation of the settlement on the basis of the report of V. Sankar Aiyar and Co. On the basis of the value of shares of the company fixed by the valuers (Rs. 733 per share) the total value of 5564 equity shares belonging to the NN group comes to Rs. 40,78,412. The market value of the defense Colony, New Delhi property has been taken by the valuers as Rs. 36,33,200. This property is thus within the range fixed under clause 2 of the settlement. On transfer of the defense Colony property to Shri Narender Nath or his nominees as per clause 2 of the settlement, the company will have to pay a sum of Rs. 4,45,212 which is the difference between the value of shares belonging to the NN group and the market value of the defense Colony property. This difference is within the range of Rs. 5 lakhs prescribed in clause 2 of the settlement. The defense Colony property, I gather from Justice Khanna''s report, is the house in which the family was previously residing and which has been lying vacant. On the implementation of this compromise the said property will exclusively belong to Narender Nath or his nominees as the case may be. He will hopefully live in peace in the said house which will be exclusively with him in its entirety. The other three brothers and the mother will hopefully live peacefully in the Golf Links house to the exclusion of Narender Nath. This will save both the parties from their daily quarrels and bickering. Both the parties are well placed in life and deserve to live in peace. Accordingly, I direct that the company shall transfer the defense Colony, New Delhi property to Narender Nath and/or his nominees within three months from today. Narender Nath will simultaneously vacate all the portions which are in his occupation in the Golf Links house and hand over vacant and peaceful possession thereof to the plaintiff. The plaintiff company will also pay a sum of Rs. 4,45,212 to Narender Nath within the said period against his handing over possession of the portions of Golf Links property in his occupation to the company.

Till the final implementation of these directions Narender Nath will not encumber in any manner or part with possession of the portions of the Golf Links property which are in his occupation. He will not induct anyone in those portions. Likewise the plaintiff will not encumber in any manner or part with possession of or induct anyone in the defense Colony, New Delhi property. On final implementation of the settlement, Narender Nath and/or his group will cease to have any interest whatsoever in the company Kidarsons Industries Pvt. Ltd. or any of its assets. In that event, the company will also cease to have any interest in the defense Colony, New Delhi property which will become inclusive property of Narender Nath or his nominee.

I.A. Nos. 1490, 2921, 4602, 6157 of 1990, 1332, 1506, 6349, 6890, 6893, 7979, 8028, 8703 and 12012 of 1991 :

These applications were moved by the parties for purposes of interim directions while the matter was pending in court on consideration of the report of the valuers. Now, that the matter has been finally disposed of with directions regarding implementation of the settlement, the applications do not survive. They are dismissed with no order as to costs.

Crl.M. No. 195 of 1991 :

During the course of hearing of the main case, counsel for the applicant did not make any submissions regarding this application nor it was even referred to. It appears that the applicant was not interested in pursuing the same.

The application is accordingly dismissed.