M. S. H. QURAISHI, J.-This order will dispose of Civil Petition No. 747 of 1982 filed by the Federal Government of Pakistan and two others and Civil Petition No. 756 of 1982 filed by the promoter--- shareholders, which both arise from the order dated 15-6-1982 of an I. C. A. Bench of the Lahore High Court.
2. The question that falls for consideration in the first mentioned petition is whether the entire depreciation worked out cumulatively has to be taken into account in computing the "Break Up Value" in the matter of payment of compensation to the shareholders of a taken over establishment. The question arises in the following circumstances.
3. The establishment of the Model Steel Mills Limited was taken over under the Economic Reforms Order, 1972 (P. O. No. 1 of 1972). By an amendment made on 15-9-1973 by Act LXIV of 1973, the Federal Govern--ment was empowered under section 7-B to acquire shares of the said com--pany and to pay compensation under section 7-C for the shares so acquired. The method for working out compensation is given in para. 1 of the Second Schedule to the amending Act LXIV of 1973, according to which where the shares of the company were not quoted on the stock exchange, the compensation was to be worked out at the "Break Up Value". Para. 4(a) of the Second Schedule defines "Break Up Value" to mean "the value of the shares of a company as determined by the auditors of such company on the basis of its latest audited Annual Balance Sheet, in accordance with clause (c) of rule 8 of the Wealth Tax Rules". The relevant clause, which is in fact clause 8(2)
(c) of the said Rules, reads "The total wealth of the company shall first be determined. This shall be done by adding to the paid up capital, the debentures, reserves and the balance as per Profit and Loss Account, the provision for liabilities in the balance-sheet being carefully scruti--nised with a view to excluding therefrom items which should really form part of the reserves. From the total so arrived at, the paid-up value of the preference shares and the debentures shall be deducted. The resulting balance shall be divided by the amount of the paid-up ordinary share capital to arrive at the value of each rupee of paid up capital. The value of shares held by the assessee shall then be determined by multiplying the sum so arrived at by the paid up value of such shares."
The auditors had, in their report, worked out the "Break Up Value" of the shares as follows: RupeesRupees "Issued Capital consisting of 1,90,000 Ordinary shares of 10 each19,00,000 Add: Reserve under section 15-BB of Income-tax Act20,01,305 Depreciation provided in the accounts17,70,37637,71,681 56,71,681 Less: Profit & Loss Account Deficit Balance13,62,366 Depreciation Allowable under rule 8 of the36,76,17350,38,539 Wealth Tax Rules Break up value of one6,33,142 ordinary share of 10 is 6,33,142 =Rs. 3.33--- 1,90,000 This determination, which was accepted by the Federal Government, was objected to by the respondents-shareholders who made a representation in that regard but failing to secure any relief, filed a writ petition. Their case was that no depreciation had been provided for prior to 1969 as the company which was enjoying tax holiday under section 15-BB of the Income-tax Act, had no need to do so and that it was only from the year 1969-70 onward that they started providing for depreciation which had mounted to Rs. 17,70,376 by 1971/72, but that the auditors had worked out the figure- of Rs. 36,76,173 as depreciation allowable from the very inception of the Mills, that is, from 1964-65, and had deducted the amount in the calculation of the "Break Up Value" which they could not do under the method of computation provided for the purpose under rule 8(2) (c) of the Wealth Tax Rules. The contention prevailed and consequently the learned Single Judge held that the computation was to be made as follows: PlusMinus "(i) Paid up capital19,00,000
(ii) Debentures
(iii) Reserves20,01,305 (iv)Profit and LossRupeesRupees Account balance (deficit).13,62,336 39,01,305 minus 13,62,336 =Rs. 25,01,969"
With this the Division Bench agreed and accordingly dismissed the petitioners' Intro-Court Appeal front which C. P. S. L. A. No. 747 of 1982 arises.
4. The respondents shareholders also filed an Intro-Court Appeal urging that as the High Court had struck down the deduction of depreciation of Rs. 36,76,173 the total "Break Up Value" would come to 43,09,315 and that another sum of Rs. 4,24,551 although debited to the profit and loss account,; had been a provision against bad and doubtful debts but that there being no determination as to the existence of any bad and doubtful debts, the same should have been added to the total "Break Up Value". Thirdly, interest should have been allowed at the sate of 1 % above the bank rate with six monthly rests. The contentions were, however, not pressed, with the result that their appeal, too, was dismissed by the same order of the Division Bench. The other Petition (No. 756 of 1982) is by them.
5. The Second Schedule to Act LXIV of 1973 speaks of and defines various methods for working out compensation in different circumstances. These are (1) "Break Up Value", (2) market value, (3) not worth value and (4) time value. In the present case, we are concerned with the "Break Up Value" method. Under this method, the total wealth of the company has to be first determined by adding
(1) the paid up capital, (2) the debentures (3) reserves, and (4) the balance as per profit and loss, account. The rule requires that before adding the reserves, the balance sheet should be first carefully scrutinised with a view to excluding there--from items which should really have formed part of the reserves. Except for this scrutiny, there is no provision for taking into consideration an other factor which does not ordinarily fall under any one of the above---said four items. The reasons given by the auditors for introducing the accumulated figure of depreciation are "From the above references it is an established fact that the deprecia--petition on the fixed assets has to be charged against the revenue of the company for any particular- year and in order to ascertain true and correct state of affairs of the company at any terminal date and also to determine the balance of Profit and Loss Account.
Considering this ambiguity and in the absence of any standard rates we have applied the rates for purpose of working out the break UP of ordinary shares as permissible for calculation of depreciation of fixed asset as described under rule 9 of the Income-tax Act, 1922 (reference of which is given in rule 8 of Wealth-tax Act) which arc equitable, just and uniform.
Taking into account all the facts as mentioned above, depreciation is a definite charge against the revenue of the company and under these circumstances balance of profit and loss account has to be reworked out in order to add/deduct the same to/from the paid up capital."
The learned Deputy Attorney-General has stressed, by reference to section 132 of the Companies Act, that the profit and loss account was required to include "the total amount written off for depreciation". He, therefore, argued that the auditors were justified in taking into account the accumulated depreciation up to the latest audited report. The latest profit and loss account, that is, for the year ending 31-8-1972, does show and include depreciation of Rs. 6,05,409 for that year.
The question, therefore, is not whether depreciation for the year of the latest audited report is to taken into account but whether depreciation for the previous years also has to be brought in for the purpose. The High Court came to the view that although "the auditors were entitled to point out in their report the shortfall in the provision for the depreciation "but that the same "has nothing to do with the determination of "Break Up Value".
Elaborating, it held "Moreover, if the auditors were to go behind the Profit and Loss Account and deduct depreciation not claimed nor available as the company enjoyed tax holiday during the relevant period, it would also be open to the company to say that its asset, like land, which obviously had increased in value during the period, should be assessed at higher value. The Legislature in its wisdom has left out all these exercises and laid down uniform formula for determining the Break Up Value of shares of a company by providing specific items to be added up."
6. A careful examination of the provision of rule 8(2) (c) supports the view taken by the High Court.
It appears that the auditors were concerned about "the depreciation on the fixed assets", which according to them had to be charged against the revenue of the company. But that consideration has not been made relevant to the formula provided b law for working out the Break Up Value. We, therefore, find no substance in the argument of the learned Deputy Attorney-General.
7. As regards the other petition of the propmoters-shareholders, we find that the only point raised by them before the I. C. A. Bench was of interest and that too had not been pressed. Even before us, their counsel conceded that he would not press the petition if the petition of the Federal Government were dismissed.
8. Both petitions, therefore, fail and are accordingly dismissed.
M. Z. M.