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Cases related valuation of a going concern

Cases related valuation of a going concern
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  Cases related valuation of a going concern   Commissioner of Gift Tax, Bombay v. Smt. Kusumben D.Mahadevia, 1980 AIR SC 769-  Includedjudgment of CWT v. Mahadeo Jalan  inwhich valuation of company was discussed at length. The apex court observed inCWT v. Mahadeo Jalan case, quoted in Commissioner of Gift Tax, Bomboay v. SmtKusumben D. Mahadevia. 1) PublicLimited Co. (Shares quoted on stock exchange and there are dealings in them)-The  prevailing price on valuation date is the value of shares. 2) PublicLimited Co. (Shares not quoted on a stock exchange) and Private Limited Co.  –   Referenceto dividends, reflecting profit earning capacity on a reasonable commercialbasis. In case they don’t reflect profit earning capacity, then amount of yield(Profits c ompany has been making or should be making will ordinarily determinethe value). Dividendand earning method (yield method) are not mutually exclusive. Both should helpin ascertaining the profit earning capacity.  Note  –   If the two figures differ (figures resultant of theses two methods), anintermediate figure may have to be computed, by adjustment of unreasonableexpenses and adoption of reasonable  proportion of profits. 3) Incases of private limited company expenses incurred out of all proportion tocommercial venture, shall be added back to the profits of the company, whilstcomputing yield. In such companies the restriction on share transfer shall alsobe taken into account. 4) Incases where both the methods break down due to company’s inability to e arnprofits and declare dividends (set back being temporary)  –   perhaps possible totake estimated value of shares  before set back & discounted by a percentageof fall in price of quoted shares of companies which have suffered similarreverses.   5) Wherethe company is ripe for winding up then break up value method determines whatwould be realized. Mentionof  Attorney General of Ceylon v. Mackie-Valuation by reference to assets would be  justified where there is fluctuationof profits & uncertainty of conditions at the date of valuation ofprospective profits and dividends. (Haven’t read this judgment but a case whereit gets difficult to ascertain has been discussed later by me in case of Hindustan Lever).  What was held in this case- Case of a private limited company, hence profit earning method applied.  Note- Where dividends do not reflect the profit earning capacity as only small proportions aredistributed and large chunks kept as reserves, valuation may be made by yield method as specified earlier. Basic concept of profit earning method- Profits (has been making and capable of making in future) = Average maintainable profits. Where P&L Account show profits  –   may have suffered diminution (unreasonable expenses or directors receiving profits as remuneration not dividend or others) - these must be adjusted. 6) In case of Investment companies, whilst valuing shares, asset backing would be a relevant factor. This does not mean break up or factor method would be applied. Criticized combination of two methods (my interpretation  –   he criticized it but for want of  judicialrecognition and any substantial reason to do the same, so the Hindustan Lever comes as a savior again). 7) In only exceptional circumstances or cases of liquidation break up or factor method shall  be resorted to.  No straight jacket formula but surely not in absence of well settled principles.*   Hindustan Lever Employees Union v. Hindustan Lever Ltd.-  The combination of three principles was recognized namely- 1) Yield 2) Asset value 3) Market Value Giving appropriate method is important. Relevant circumstances- TOMCO earning low profits as exports dried as USSR was gone. HLL had been earning profits very high. Difficult to ascertain the correct value of shares of TOMCO as they had low profits in past, present and future  –   Share prices too low  –   but book value placed TOMCO a lot higher. Stated excerpt of Weinberg & Blank’s book –   Takeover and mergers (as it dealt the case  properly)  –   1) The stock market price of both companies. 2) Dividends paid on shares 3) Relative growth prospects 4) Ratio of after tax earnings to dividend 5) In case of equity shares, the relative gearing(Borrowing/Equity) of the shares of the two company. 6) Value of net assets 7) Voting strength in merged company 8) Past history earnings and prices of shares. In an argument by appellant- combination of two methods condemned in earlier case- It was held that situation was a bit different. Municipal Comm., Patiala v. model Town Residents Association-    It involved valuing of self occupied commercial property. It was held that Value is a function of  price, economy, and is a subjective exercise, involving an element of guess work. In this case Net Asset Method, Multiple Based Method and Discounted Cash Flow Method were used to calculate FMV (Fair Market Value). GL Sultania v.The SEBI-  Regulations (Take Over Code) 20(5)- prescribes certain parameters that must be considered in arriving at a value. However, they are by no means exhaustive. The other methods may also be taken into account, and given proper weight age in computing. As per the normal accounting  practices, value of share of a going concern only individual financial statements are considered  because parent is entitled dividend only & has no right in assets of subsidiary or associate companies.  M/s SCCambatta & Co. Pvt. Ltd. v. Commissioner of Excess Profits Tax-   Goodwill depends upon location, the standing of business and lack of competition, honesty of workers etc.    Bharat Hari Singhania v. CWT-   Wealth Tax and Gift tax prescribe only break up value, therefore, inspite of the fact there are other recognized methods, only the statutorily chosen method shall be taken. Mecamidi S.A. vs. Flovel Mecamidi Energy (P.) Ltd. and Others (05.09.2011 - CLB)-  The shares were valued by KPMG, France by discounted cash flow method  –   this method has  been internationally recognized and accepted by RBI (FEMA and notifications and circulars). However the petitioner was bound by principle of waiver, estoppels etc., henceforth must pay in accordance to the valuation report prepared by S Rawla (which projects the company in sad state of affairs), considering the petitioner had already accepted the report. Lee v. Showmen’s Guild-    Task of the auditor is to act as an auditor and not arbitrator; and certify the fair value of shares in his opinion. Court shall interfere only where valuation was made under a mistake, fraud, or miscarriage  –   Added figures wrongly or taken something into account which should not have  been taken, or conversely; or interpreted the agreement wrongly, the court shall interfere.
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