2006 PLP 76 (CLD)

In the case of winding-up of a company, liquidation of its assets and ultimate dissolution of company, its share would carry no value with reference to paid-up capital or subscribed capital. The reason is that on dissolution of the company, its assets and capital are also liquidated either by adjustment or distribution or in the final accounts. A share being a unit of the capital also erodes with reference to the capital of company. On dissolution, the company is taken off the register of incorporated companies. The company, thus, ceases to exist and so do its share units. The shares of a dissolved company as such cannot be held to be an "asset" owned by its former shareholders. Sirdar Ahmed Jamal Sukhera for Appellant. Date of hearing: 17th February, 2005. The Commissioner of Income Tax and Wealth Tax through this appeal has sought decision purportedly on the following question of law which are claimed to have arisen between the parties:-- (1) "Whether on the facts and circumstances of the case, learned Income Tax Appellate Tribunal was justified to hold that share value of a limited company gone into liquidation is to be adopted as NIL instead of face value or break-up value as provided in statute. (2) Whether share of a limited company ceases to be an asset owned by share-holder of any value, once the company has gone into liquidation."

2. The respondent assessee declared nil value for the share held by him of an incorporated company which was ordered to be wound up by this Court and a liquidator thereto was appointed through the judgment, dated 16-11-1998. And that pursuant to the commencement of the liquidation proceedings, the assets of the company on being taken over by the official liquidator were sold through auction which was approved by this Court through order, dated 16-11-2000. The assets of the company having been transferred in the liquidation proceedings to the auction-purchaser, the shares were claimed to carry nil value. The Assessing Officer disagreeing with the respondent? assessee adopted the face value purportedly in terms of rule 8(2)(c)(i) and rule 8(2)(c)(ii) of the Wealth Tax Rules, 1963. The respondent's appeal before the Commissioner of Income Tax/Wealth Tax (Appeals), Zone-I, Lahore was also rejected per order, dated 24-1-2002. The respondent appealed there against before the learned Tribunal. This appeal succeeded. The learned Tribunal through order, dated 6-9-2002 concluded that the company having gone into liquidation and its assets having been transferred to meet the outstanding liabilities, cannot be presumed to have shares bearing face value. The orders of the Commissioner of Income Tax and the Assessing Officer were thus vacated and the Assessing Officer was directed to accept the value of shares declared by the assessee. Hence, the present appeal.

3. We have heard the learned counsel for the appellant revenue. The applicable provisions are contained in rules 8(2)(c)(i) and 8(2)(c)(ii) of the Wealth Tax Rules, 1963 which respectively provide for the manner of adoption of the value of the shares and also the mode of calculation of the share value. Rule 8(2)(c)(i) provides that for the shares of an incorporated company not quoted at the stock exchange, out of the 'face value' or the 'break-up value' of the share, whichever was higher, was to be adopted as the share value. Under rule 8(2)(c)(i) the methodology for determination of the break-up value was given. The total wealth of the company was to be computed by adding to the paid-up capital, the debentures, reserves and the balance as per the Profit and Loss Account and liabilities were to be accounted for by excluding items forming part of the reserves. And that from the total so arrived at, the paid-up value of the preference shares and the debentures was deductible and the resulting balance to be divided by the amount of paid-up ordinary share capital value of the shares held by an assessee.

4. The above rule 8(2)(c)(ii) thus mandates that the total wealth of the company was determinable with reference to its paid-up capital; debentures, reserves, the Profit and Loss Account and the liabilities etc. In case of the excess of liabilities from the paid-up capital, the debentures, the reserves and the balances of Profit and Loss Account, the result will be obvious. The break up value of the share of the company will be negative irrespective of the 'face value' rule 8(2)(c)(i), however, mandates adoption of 'face value' as against the 'break-up value' if the face value is higher.

5. In the case of the winding up of a company, liquidation of its assets and the ultimate dissolution of the company, however, the share obviously would carry no value with reference to the paid-up capital or the subscribed capital. The reason is that on the dissolution of the company, its assets and the capital are also liquidated either by adjustment or distribution or as in the final accounts. A share being a unit of the capital also erodes with reference to the capital of the company. On dissolution the company is taken off the register of the incorporated companies. The company thus ceases to exist and so do its share units. The share of a dissolved company as such cannot be held to be an 'asset' owned by its former share-holders.

6. The questions of law are thus answered in affirmative.

7. This appeal is dismissed. S.A.K./C-134/L?????????????????????????????????????????????????????????????????????????????????? Appeal dismissed.