K. SHIVASHANKAR BHAT, J. ( 1 ) THE appeal is by three of the respondents in the company petition where by the present respondents 1 and 2 had approached the court under sections 397,398 and 433 (f) of the Companies Act, 1956 ('the act' for short ). The parties will be referred hereinafter with reference to their rankings in the company petition. The reliefs sought by the petitioners are:"a. Declaring that minutes as recorded in the meeting of the board of directors purported to have been held on 14-11-1987, 28-11-1987,13-2-1988 are illegal, improper and be deleted from the minutes book of the meeting of the board of directors; b. Declaring that no meeting was held pursuant to the meeting notices dated 19-3-1988,14-5-1988 and 26-7-1988 on 28-3-1988, 25-5-1988 and 6-3- 1988 or any other date and even if any such meeting was held that the same is non-est in the eye of law; c. Declaring that petitioners continue to be directors of the 1st respondent- company; d. Declaring that the purported co-option of the 4th respondent as a director of the 1st respondent is illegal and non-est in the eye of law; e. Declaring the fifth respondent not to take on record the form No. 32 filed by respondent No. 2 on 19-8-1988 purporting to notify the 5th respondent that petitioners 1 and 2 had vacated their office as directors of the 1st respondent-company pursuant to Section 283 (1) (g) of the Companies Act and that the 4th respondent had been co-opted as a director of the 1st respondent-company. F. Issuing an order permanent injunction restraining respondents 2 and 3 from interfering with the rights of petitioner to act as directors of the 1st respondent-company; g. Issuing an order of permanent injunction against the 4th respondent from acting as director of the 1st respondent-company. H. Directing respondents 2 and 3 to purchase shares of petitioners in the. 1st respondent-company at a value of Rs. 1,000/- per share or directing respondents 2 and 3 to sell their shareholding of the 1st respondent-company to petitioners at the same value of Rs. 1,000/- per share. H. Directing respondents 2 and 3 to purchase shares of petitioners in the. 1st respondent-company at a value of Rs. 1,000/- per share or directing respondents 2 and 3 to sell their shareholding of the 1st respondent-company to petitioners at the same value of Rs. 1,000/- per share. I. If this Hon'ble court is pleased to hold that the facts and circumstances, do not warrant any feasible order under sections 397, 398 read with Section 402 of the Companies Act, alternatively, it is prayed that this Hon'ble court may be pleased to order that the 1st respondent-company, M/s. Rakhra sports private limited, No. 6, commercial street, Bangalore-560 001, be wound up on the ground that it is just and equitable to do so under Section 433 (f) of the Companies Act, 1956; j. Grant such other order or orders as this Hon'ble court may deem fit to grant on the facts and circumstances of the case including award of cost". ( 2 ) THE learned company judge has valued each share at Rs. 930. 85 ps. And directed the respondents 2 and 3 to buy the shares of the petitioners at the said rate, failing which petitioners were permitted to purchase the shares of respondents 2 and 3 at the same rate. ( 3 ) THE first respondent-company was in corporated in the year 1983. There is nodispute in the instant case that, earlier, petitioners and respondents 2 and 3 were carrying on the business as partners; earlier thereto the business seems to have been carried on by the two brothers c. l. rakhra and b. l. rakhra; still earlier, it seems the business was started only by c. l. rakhra in the year 1932. There is also no dispute that the nominal share capital of the company in question is Rs. 5 lakhs divided into 5,000 equity shares of Rs. 100/- each. The issued and subscribed share capital is Rs. 2,50,000/- of 2,500 equity shares of rs. 100/- each. The petitioners own 50% of this issued shares while the other 50% is owned by respondents 2 and 3. ( 4 ) PETITIONERS aver that the business called rakhra sports company was startedby c. l. rakhra and his brother b. l. rakhra in the year 1932. 2,50,000/- of 2,500 equity shares of rs. 100/- each. The petitioners own 50% of this issued shares while the other 50% is owned by respondents 2 and 3. ( 4 ) PETITIONERS aver that the business called rakhra sports company was startedby c. l. rakhra and his brother b. l. rakhra in the year 1932. Respondents-2 and 3 are the sons of c. l. rakhra, while the first petitioner is the son of b. l. rakhra, and second petitioner is the daughter-in-law of b. l. rakhra, being the wife of ved prakash rakhra, a son of b. l. rakhra. There was a partnership between the two brothers aforesaid and after the death of c. l. rakhra the second respondent was inducted as a partner in his place. Similarly on the demise of b. l. rakhra, the second petitioner was inducted as a partner. The firm has been dealing in sports goods and is located in commercial street, Bangalore. For a few number of years there were four partners i. e. , to say the two petitioners and respondents 2 and 3. They decided to convert the firm into a private limited company. Consequently the company in question was incorporated on 2-12-1983. The main objects to be pursued by the company on its incorporation, as stated in the memorandum of association includes: "to take over as a going concern, the partnership firm "rakhra sports company" situated at No. 6, commercial street, Bangalore-560 001, as at the close of the date of 30-11-1983, from the vendors, with all its assets and liabilities at book value, as reflected in its balance sheet drawn as on that dale, and to pay the vendors thereof by allotment of equity shares treated as fully paid up in the company". The erstwhile partners became the directors of the company. The articles of association states that the members of the company shall be of two family groups, "family group-a" shall consist of krishnakumar rakhra (second respondent), etc. , and "family group-b" shall consist of the first petitioner, etc. The idea is to, clearly, maintain the distinction between the members belonging to the branch of c. l. rakhra and the branch of b. l. rakhra. , and "family group-b" shall consist of the first petitioner, etc. The idea is to, clearly, maintain the distinction between the members belonging to the branch of c. l. rakhra and the branch of b. l. rakhra. According to the petitioners, the first directors shall be permanent directors and there is no dispute that the quorum for a meeting of the board of directors shall be three directors which ensures that at least one member belonging to each group will be present at the board meeting. The banking arrangements also indicate that each group will have a say in the matter of issuing cheques or in the borrowings. The petitioners further state that in February 1985 the company acquired an additional premises on lease which is situated in bishop cotton school's complex, residency road, Bangalore (hereinafter referred as "cotton complex" ). The new business is done in the new leasehold premises under the style of "rakhra's super sports". An advance of Rs. 43,890/- was paid towards the lease and the monthly rent was Rs. 4,389/ -. The business commenced in cotton complex with effect from 5-1-1986. The averments in the company petition further show that there was a dispute between the parties subsequently in the year 1987 as to whether the new business at cotton complex should be continued or not in view of the loss incurred in the said business. The petitioners seem to have suggested the continuation of the business or to handover the leasehold to the first petitioner wherein he would start a new business of his own. The petitioners asserts that the new business was not in sports goods and therefore the question of any competition with the company's business would not arise. The petitioners further assert that certain meetings of the board were held without due notice to the petitioners and that minutes of the said meetings were wrongly recorded in the minutes book. Subsequently respondents 2 and 3 filed form 32 declaration before the registrar of companies stating that the fourth respondent was co-opted as a director consequent upon the vacancies caused by the failure of the petitioners to attend three consecutive meetings. The petitioners assert that there was a total loss of mutual trust which was the very essence of the understanding between the parties in the matter of business of the first respondent-company. The petitioners assert that there was a total loss of mutual trust which was the very essence of the understanding between the parties in the matter of business of the first respondent-company. Certain instances are given in the company petition in this regard. It is unnecessary to detail the averments in the company petition in view of certain events happened in the course of this litigation. The second respondent as the chairman of the company had a casting vote and this mattered much when the two groups fell apart. The petitioners, however, assert that there was a complete deadlock in the management of the company and the business of the company could not be carried on since the quorum for a valid board meeting was absent. The "mutual trust" also has been lost. The petitioners also state that the winding up of the company would unfairly prejudice the rights of the parties, though respondents 2 and 3 are conducting the affairs of the company in a manner prejudicial to the interest of the company. The exclusion of the petitioners from the management and the control of the company and induction of fourth respondent as a director, who is a total stranger to the family, are all instances warranting invocation of Provisions of Section 398 of the act. The petitioners, also, alternatively, pray for the winding up of the company in case an appropriate order under sections 397 and 398 cannot be made. ( 5 ) RESPONDENTS in their objection statement assert that the business was initially started by c. l. rakhra in or about the year 1932 as his proprietary concern and in the year 1946, b. l. rakhra came to Bangalore as a refugee from pakistan and thereafter he was taken as a partner "out of sheer pity". The third respondent joined the business as a partner in the year 1957-58 and the first petitioner became a partner in the year 1960. C. l. rakhra died in the year 1975. In the year 1977 the second respondent who was serving in Indian airforce retired and joined the firm as a partner. After the death of b. l. rakhra his daughter-in-law, the second petitioner, was taken as a partner. In the year 1983 the company came into existence by incorporation. C. l. rakhra died in the year 1975. In the year 1977 the second respondent who was serving in Indian airforce retired and joined the firm as a partner. After the death of b. l. rakhra his daughter-in-law, the second petitioner, was taken as a partner. In the year 1983 the company came into existence by incorporation. It is found in the objection statement of these respondents 2 and 3 that the second respondent had a casting vote as a chairman of the company. They further assert that petitioners attended some of them meetings, drew sitting fees, but later asserted that they did not attend the meetings and on the same day of drawing the sitting fee, they were returned. They denied the allegation that petitioners are sought to be excluded from the management and that there can be no deadlock in the affairs of the company because the second respondent as the chairman had the casting vote and therefore the board of directors as well as the general body meeting could decide, effectively, any question coining up before them. ( 6 ) THERE is no dispute that the parties tried to resolve their dispute by resort to the sale or purchase of the shares belonging to the other group. For this purpose the company's auditor was requested to evaluate the share value. ( 7 ) IN this connection articles 4 and 5 of articles of association are relevant which are reproduced below:"4. No member shall transfer his/her shares, save with the previous sanction of the directors, and the directors may refuse to recognise any transfer for which reasons they need not state. 5. Any shareholder desiring to transfer his share shall apply to the directors in the prescribed form and notifying the number of shares, share value and the name of the proposed transferee. In case of disputes regarding the fair value of shares, it shall be decided or fixed by the company's auditor. The value so fixed shall be deemed to be the fair value. A member who wants to transfer his/her shares by way of sale to any person who is not a member of the company can do so only when the existing members are not willing to purchase the same. The value so fixed shall be deemed to be the fair value. A member who wants to transfer his/her shares by way of sale to any person who is not a member of the company can do so only when the existing members are not willing to purchase the same. On receipt of the intimation from a member of his/her intended transfer, the board in turn shall ascertain from the existing members whether any of them is interested in the purchase of those shares. The board shall for this purpose, offer the shares for sale to the members of the transferor's immediate family other than the transferor member, in an equitable manner and in proportion to their existing shareholdings, by giving a month's time for the members to accept the offer in full or in part. If none of them or some only are interested in the offer and all or some the shares remain unaccepted, the board shall forthwith intimate that fact to the transferor member who can afterwards transfer these unaccepted shares to any person in the immediate family group of other members representing "b" family". ( 8 ) M/s. Ramaswamy and company admittedly is the auditor of the company. It seems, the company's auditor was requested by both groups to take the assistance of another auditor by name 'shah' to fix the value of shares. The record discloses that, according to M/s. Ramaswamy and company, each share was valued at Rs. 326/- as per the said auditor's letter dated 27-4-1988. However the other auditor shah seems to have valued each share at Rs. 1,000/ -. At this juncture it is necessary to refer to the events that happened by virtue of the orders of the court, after filing of this company petition. ( 9 ) THE company petition was filed in August 1988. Thereafter, the matter camebe fore the learned company judge on various dates regarding interim orders. On 16-9-1988 the learned company judge (bopanna, j.) Heard the learned counsel for the parties about the interim arrangement and on that date the parties seem to have agreed upon a formula to settle the dispute inter se. The learned company judge in his order dated 16-9-1988 stated that:". . . . . on the material placed, it appears to me that this dispute is amenable to an amicable settlement out of court. The learned company judge in his order dated 16-9-1988 stated that:". . . . . on the material placed, it appears to me that this dispute is amenable to an amicable settlement out of court. It was suggested by this court whether the claim of the petitioners could be settled on payment of the present market value of the shares held by them as the parties were thinking on these lines as is evident from two valuation reports furnished by the respective groups. According to the petitioners, the value of the equity shares in the first respondent company would be in the region of Rs. 1,000/- per share. According to the 2nd respondents' group, in terms of the report furnished by their auditor, it is about Rs. 326. 80 per equity share. The differential gap in this valuation could be resolved only by getting the share valued by a third valuer, who is not connected either with the petitioner or with the 2nd respondents' group. But pending such adjudication by the third valuer, the petitioners had offered to pay before this court a sum of Rs. 1,000/- per share forthwith and settle the claims of the second respondents' group; but the 2nd respondents' group is not prepared to accept that offer though the valuation of the petitioners' valuer is on the higher side. But they made a counter offer that they would purchase the petitioners' share by making a down payment of Rs. 600/- per share and thereafterwards seek the correct valuation of the share by a third valuer. They have also sought for time till 30th of september, 1988 to make this payment. As a preliminary step to effect a settlement between the parties it is ordered that 2nd respondent's group shall pay the petitioners tentetively a sum of Rs. 600/- per share and that amount shall be received by the petitioners in part satisfaction of their claim in this company petition. After such payment, the valuation of the shares shall be made by a reputed firm of auditors acceptable to both the parties. The choice of the firm is left to the parties and they shall make appropriate submissions in this respect on the next date of hearing. After such payment, the valuation of the shares shall be made by a reputed firm of auditors acceptable to both the parties. The choice of the firm is left to the parties and they shall make appropriate submissions in this respect on the next date of hearing. However, it is contended by the learned counsel for the respondents that this payment should be without reference to claim of the petitioner to the leasehold right of the premises that the company had obtained in cotton complex, situated on residency road, Bangalore. Whether this condition should be imposed on the petitioner will be considered by this court in exercise of its powers under the Provisions of Section 402 of the Companies Act. Paymentof Rs. 600/- per share would be subject to the order of this court on this aspect of the case at the time of recording the final compromise between the parties". on 30-9-1988 the matter again came up before the same learned company judge, on which date a sum of Rs. 7,50,000/- was paid to the petitioners by respondents nos. 2 and 3 (respondents 2 and 3 and their group will be referred hereinafter as the "contesting respondents" for the sake of convenience ). In the order the learned company judge, it is stated, that these payments are subject to adjustment against the valuation of shares to be made by the auditors to be appointed by the court. A list of auditors had been furnished by the respective groups, out of whom the learned company judge selected, M/s. Brahmiah and company (suggested by the contesting respondents group) and M/s. B. k. ramadyani and company (suggested by the petitioners), for making the necessary valuation and the auditors were to make the valuation independently of each other. Thereafter the learned company judge observed:". . . . The reports of these auditors will be subject to the final order of this court on the question of valuation. Payments made today aggregating to Rs. 7,50,000/- will also be subject to the final valuation to be made on the basis of the auditor's report". the learned company judge further stated that:"learned counsel for the petitioners submitted that necessary instructions have to be issued to the auditors regarding valuation of the shares in question. Payments made today aggregating to Rs. 7,50,000/- will also be subject to the final valuation to be made on the basis of the auditor's report". the learned company judge further stated that:"learned counsel for the petitioners submitted that necessary instructions have to be issued to the auditors regarding valuation of the shares in question. I think the proper course to adopt is to direct both the parties to file their respective memo of instructions to the auditors not on the mode of valuation but on the assets of the company to be taken into consideration for the purpose of valuation". it is not necessary to refer to other directions in this order. ( 10 ) THERE after the two valuers gave their respective opinions. The report of brahmiah and company is dated 31-10-1988. The principles applied are generally stated by the auditors in the report such as the restrictions imposed by articles of association regarding the transfer of the share, provision for resolving the dispute regarding fair value of share by the company's auditors, etc. Thereafter "valuation according to profitability method" was given. For this purpose the profit to be adopted for valuation was estimated as follows: Accounting year Turnover Gross profit Expenses debited to P&l Account Profit before tax 1984-85 24,26,552 4,11,216 3,72,115 39,101 1985-86 26,89,035 4,52,978 4,22,972 30,004 1986-87 29,69,425 4,75,400 4,97,186 Loss 21,786 1987-88 34,49,798 7,75,389 5,04,152 2,71,237 Total for 1986-87 and 64,19,223 12,50,789 10,01,338 2,49,451" 1987-88 the increased turnover during the year 1987-88 was found to be due to the large orders received in the previous year, amounting to Rs. 3,69,768/- and 'one time' orders for Rs. 61,248/- with higher margin of profit. Therefore the auditors say:". . . . . hence, it may not be correct to adopt the turnover and gross profit of 1987-88 as a representative year. Instead it will be fair to take the average of the turnover and gross profit for the 2 years, 1986-87 and 1987-88". the auditors point out that all the directors are whole time directors, in respect of remuneration by way of salary, sitting fee and medical expenses. Therefore for purpose of taking the profit for valuation purpose, 1/3rd of the remuneration paid to the directors was excluded again which came to Rs. 44,213/ -. Thereafterthe report reads thus: "c) The profit of the Company adopted for valuation of shares is as follows: Rs. Therefore for purpose of taking the profit for valuation purpose, 1/3rd of the remuneration paid to the directors was excluded again which came to Rs. 44,213/ -. Thereafterthe report reads thus: "c) The profit of the Company adopted for valuation of shares is as follows: Rs. Turnover (average for 1986-87 and 1987-88 as above) 6,25,394 Less: Actual expenses (average for 1986-87 and 1987-88 as above) 5,00,669 1,24,725 Less: Income-tax at 63% 78,576 46,149 Add: 1/3rd of payments to directors 44,213 90,362 a safe investment in deposits with scheduled banks fetches 11%. On capitalisation at 11% of profit Rs. 90,362 the value of one share will be 90,362 100 11 x250q-328 the said auditors thereafter proceeded to apply the "intrinsic value method" and observed as follows: "intrinsic value method: the assets comprise of current assets and office furniture and fittings which are subject to depreciation. Hence as per wealth tax valuation rules the book value of assets are adopted. However the value shown against "miscellaneous expenditure" is excluded. The intrinsic value of each share of the company is as follows: Value of assets per Balance Sheet (Excluding the balance of 'miscellaneous expenditure' Rs. 5,207) 9,33,018 Less: Value of Liabilities per Balance Sheet 5,92,980 Net worth of the Company 3,40,038 3,40,038/2,500=rs. 136" the auditors note that the business premises are in a good business locality and could be passed on to a third party at the prevailing trade practice, for a consideration of Rs. 30 lakhs. However, the company was a going concern and possibility of earning 'pagari' or premium did not arise and hence not considered. The leasehold rights were not valued on the ground that there was a stipulation against sub-leasing the premises and that "the present profit earned, it is partly due to the lower rentals, but for which the profit would have been lower, and the value of share under profitability method reduced". The current assets such as office furniture, equipments, one car and two scooters were valued as per the book value. Regarding goodwill the auditors say that it should be considered. However, the exact value of the goodwill is not forthcoming in the report. This auditor conclude that the value of each share is Rs. 328/- as on 31-3-1988 as per the profitability method as already stated. Regarding goodwill the auditors say that it should be considered. However, the exact value of the goodwill is not forthcoming in the report. This auditor conclude that the value of each share is Rs. 328/- as on 31-3-1988 as per the profitability method as already stated. Though, this auditor refers to the current assets and the goodwill, no reference is made to them in terms of value. Similarly the value of the leasehold rights, also is not forthcoming. The gross profit for the four years at Rs. 12,50,789/- is divided by two to arrive at the average for two years at Rs. 6,25,394/ -. From this the actual expenses of Rs. 5,00,669/- is deducted and then income-tax of 63% is further deducted. ( 11 ) THE other auditor M/s. Ramadhyani and company gave their report on 16th november, 1988. After discussing the various methodo logies, they proceeded to give the valuation, first on maintainable profits basis. They observed that the profitability trends during 1988-89 is the same as that was prevailing during the previous year and that the high incidence of profit during 1987-88 was due to execution of large one time orders which are not likely to be repeated in future years. They also noticed that in case lease at cotton complex is terminated there will be a reduction in the overheads by about Rs. 60,000/ -. The auditors thereafter proceeded to give weightage of 3 to the profits of the year 1987-88, while for the previous two years after giving the average profits weightage of 1 was given. In this process weightage average was arrived at as Rs. 2,07,372/ -. A sum of Rs. 50,000/- was added out of the total remuneration payable to the directors. This Rs. 50,000/- was added to arrive at the maintainable profits. The report thereafter states thus: "4. 11. In the above circumstances, the maintainable profits are calculated as under: a. Weighted average profits as per paragraph 4. 8 above 2,07,372 b. Add remuneration to directors (refer para 4. 10 above) 50,000 2,50,372 c. Income tax there on at 63% (including surcharge) of the profits as per para 4. 8 above. We understand that no portion of remuneration paid to directors have not been disallowed in the Income tax assessments of the Company 1,30,644 d. Maintainable profits of the Co. after tax 1,26,728". 10 above) 50,000 2,50,372 c. Income tax there on at 63% (including surcharge) of the profits as per para 4. 8 above. We understand that no portion of remuneration paid to directors have not been disallowed in the Income tax assessments of the Company 1,30,644 d. Maintainable profits of the Co. after tax 1,26,728". these auditors stated that a fair rate of capitalisation ought to be 15% and thus arrived at the value of an equity share at Rs. 338/ -. Thereafter break up value method was applied. For this purpose goodwill as well as the value of the leasehold interest were valued. While the value of the leasehold interest was Rs. 1. 43 lakhs, the value of the goodwill was arrived at as Rs. 3 lakhs. Ultimately the break up method value was given as follows: "5. 6. In the above circumstances, the value of an equity share of the Company on the break up value method is worked out as under: Rs. a. Net worth as per para 5. 1 above 3,45,245 b. Value of lease hold rights as per paragraph 5. 4 above 12,60,000 c. Value of goodwill of the Company as per paragraph 5. 4 above 3,00,000 19,05,245 d. Less value of accrued gratuity liability (not provided in the books) as per 5,000 paragraph 5. 5 above 19,00,245 Number of equity share 2,500 Break up value per share 760". the auditors proceeded further to evolve another formula of their own by giving weightage of 2 to the maintainable profits resulting in Rs. 676/- and weightage of 1 to the break up value method leading to the figure Rs. 760/- and the total profit of Rs. 1,436/- was divided by the total weightage of 3 which gave the weighted average as Rs. 479/ -. Thereafter the auditors proceeded to refer to some observations of Justice williams regarding the controlling interest and its valuation. A few other factors like "telephone connections" "pending orders", benefits arising out of long association", were referred, and they concluded: "taking these factors into account, we are marking up the value of an equity share arrived at as per paragraph 6. 3 above by 50%. Such enhanced value will workout to Rs. 719/- per share". The report of M/s. C. k. s. rao and associates, consulting engineer and architect, is enclosed to the report of M/s. B. k. ramadhyani and company. 3 above by 50%. Such enhanced value will workout to Rs. 719/- per share". The report of M/s. C. k. s. rao and associates, consulting engineer and architect, is enclosed to the report of M/s. B. k. ramadhyani and company. ( 12 ) THE petition came before the learned company judge on 7th july, 1989. The learned judge opined that the contesting parties have not arrived at any settlement and that this court is not bound in law or otherwise to take up the task of the valuer and fix it;"therefore, that approach should be given up in so far as it relates to valuation. The orders made on 16-9-1988 and 30-9-1988 are recalled. The payment made subject to the stipulation contained in the order of 30-9-1988 shall be returned to the respondent i. e. , a sum of Rs. 7,50,000/-". the company petition was ordered to be brought up for enquiry thereafter. ( 13 ) THE above order was challenged in appeal in o. s. a. No. 15/1989. The division bench reversed the order of the learned company judge dated 7-7-1989. The judgment of the appellate bench is dated 16th august, 1989. The relevant observations of the appellate bench are as follows:". . . On giving our thoughtful consideration to the entire matter, we find that those two orders, passed in the presence of the parties and with their consent, could not be recalled just because the parties were not willing to purchase the shares of others at the price quoted by each one of them. By virtue of the earlier orders, independent valuers had been appointed to determine the value of the shares. They have also submitted their report. No new fact has come into existence which would warrant for recalling the earlier orders. In this view of the matter, we find that the impugned order of the learned company judge cannot legally be sustained. Consequently, we allow this appeal and set-aside the order of the learned company judge dated 7th july, 1989". ( 14 ) THE resultant position is that the earlier two orders made by the learned company judge are to be given effect to on the basis that they are consent orders and the parties are bound by the terms stated in the said orders. After the above o. s. a. was disposed of, the present order under appeal came to be made. After the above o. s. a. was disposed of, the present order under appeal came to be made. ( 15 ) THE learned company judge proceeded to discuss the question raised be fore him, by observing, at para 60 of his order:"this is not a case where the petitioners are selling the shares to the respondents and the respondents are purchasing the shares only to invest. If in the case of investment thus the investot has to see what would be the dividend which the share will fetch. In such an event the dividend will be declared only out of net-profit after deduction of the income-tax. Mr. Raghavan, is right in contending that in the matter of adoption of profitability method income-tax should not be deducted as has been done by the company's auditor M/s. Ramaswamy and co. , for this is a case in which the value of the share of the company to be determined as if the company under 'notional liquidation', but in reality it may not". thereafter, at para 70, it was held:"it is an undisputed fact that the court has passed orders on 16-9-1988 and 30-9-1988 and directed the petitioners to sell their shares to respondents 2 and 3 and by consent of parties two valuers have been appointed to value the shares. This has been done without going into the question who is the oppressor and who is oppressed among those two groups. It is also an undisputed fact that the petitioners as well as respondents 2 and 3 are having equal shares 50 per cent each. The two valuers have adopted two different methods for valuing the shares of the company which has not been found favour with both the petitioners and respondents 2 and 3. To my in ind, the methods adopted by the valuers to arrive at the valuation of the shares of the company are not totally wrong or incorrect. In fact, certain required factors have not been taken into consideration. The two valuers ought to have, while adopting the methods of valuation of shares viz. , profitability method and asset method, viewed from the angle, the company was under 'notional liquidation' and the purchaser-respondent would get 100 per cent control of the company which is a 'valuable commodity'. In fact, certain required factors have not been taken into consideration. The two valuers ought to have, while adopting the methods of valuation of shares viz. , profitability method and asset method, viewed from the angle, the company was under 'notional liquidation' and the purchaser-respondent would get 100 per cent control of the company which is a 'valuable commodity'. Had the valuers taken into consideration all items including the factors that one of the groups purchasers get cent per cent controlling interest in the company, they would have arrived at a quite different value of the share which would be somewhat fair value. It is true in a matter like this it is difficult to arrive at a mathematical precision in valuation of shares. Since the two valuers have taken both profitability and asset methods (break-up method) and arrive at two different figures as to the valuation of share which are not accepted by cither party, except taking such figures from the valuation report they have claimed Rs. 1,200/- (petitioner) and Rs. 326/- (respondents) as the correct valuation of the share. To resolve this dispute, this court will have to scan through the valuation report and adjust the equities between the parties by fixing the fair price of the shares". the conclusion was arrived at para 73 also requires reproduction:"both the valuers have adopted the profitability method. M/s. Ramadhyani and co. Has taken the maintainable profit of Rs. 2,51,585/- without adding back of Rs. 60,000/- being the closer of M/s. Rakhra sports pvt. Ltd. , at bishop cottons; and if capitalised the said maintainable profit at 11% the value of the share will be at 914-85 rupees per shares. This is clearly shown at the working-sheet referred to above. Taking maintainable profit at Rs. 1,25,751/- as determined by M/s. Brahmiah and co. , adding thereto both Rs. 44,213 (excess remuneration) and Rs. 60,000/- (savings of loss of M/s. Rakhra sports ltd. ,) capitalising it at 11% the value of the shares will be Rs. 832. 50 ps. As shown in the chart referred to above. In these two methods factors as to the purchaser of share getting cent per cent control of the company has not been taken into consideration. If that is added then in both the valuation of the share referred to above would be higher than what have been indicated in their respective valuation reports. In these two methods factors as to the purchaser of share getting cent per cent control of the company has not been taken into consideration. If that is added then in both the valuation of the share referred to above would be higher than what have been indicated in their respective valuation reports. To my mind it appears, the valuation of share at Rs. 914. 85 per share as indicated above based on the maintainable profit as per M/s. Ramadhyani and company at Rs. 2,51,585/- and capitalising 11 % would be fair value by adding to it another sum of Rs. 16/- because of special circumstances of this case viz. , that complete control of the company is being given to respondents 2 and 3 a' group of the share-holders i. e. , the fair share value would be fixed at Rs. 930/- per share". ( 16 ) THE learned counsel for the appellants and the respondents have reiterated their contentions. While Mr. Udaya holla emphasised the principles stated by the Supreme Court in mahadeo jalan 's case, AIR 1973 SC 1023 as governing the valuation of shares, Mr. Raghavan contended that the court should apply various methodologies to evaluate the respective interests and the highest value should be paid to the interest of the outgoing shareholders. ( 17 ) THERE can be no doubt that the 1st respondent-company is in the nature ofa "quasi-partnership"; though initially started as a proprietary concern, the business was continued for a long period, by the partners (who were direct brothers and the members of their family); this firm was converted into a private limited company subsequently. The 'articles of association' of the company restricts the transfer of shares, to prevent the shares from going outside the family members; the shareholders are grouped as 'a' and 'b' to represent the respective branches of the two brothers. 17. 2. Having regard to the decision of the court of appeal in in re yenidje tobacco company limited, (1916)2 ch. 426 and of the house of lords in Ebrahimi v Westbourne Galleries ltd. 17. 2. Having regard to the decision of the court of appeal in in re yenidje tobacco company limited, (1916)2 ch. 426 and of the house of lords in Ebrahimi v Westbourne Galleries ltd. And others, (1973) AC 360, a company of the like before us (the 1st respondent) could be called as a quasi-partnership and therefore, when a set of shareholders seek to go out of the company or are to be sent out of the company, the court's power to apply the just and equitable consideration (under sections 397, 398 and 402) of the Companies Act, is quite wide; since, considerations governing Section 433 (f) could equally be attracted to the situation. In fact yenidje tobacco company's (1916)2 ch. 426 case, court of appeal pointed out that when there are only two persons interested (in the instant case before us, it is 'two groups') and a deadlock is created, it is just and equitable that the company should be wound up. At page 432, one learned judge observed:"it has been urged upon us that, although it is admitted that the 'just and equitable' clause is not to be limited to cases ejusdem generis, it has nevertheless been held according to the authorities not to apply except where the substratum of the company has gone or where there is a complete deadlock. Those are the two instances which are given, but I should be very sorry, so far as my individual opinion goes, to hold that they are strictly the limits of the 'just and equitable' clause as found in the Companies Act. I think that in a case like this we are bound to say that circumstances which would justify the winding up of a partnership between these two by action are circumstances which should include the court to exercise its jurisdiction under the just and equitable clause and to wind up the company. Astbury, j. , dealt with this clause, as it seems to me, in a most satisfactory way, and at the end of his judgment he says that he tried to suggest a solution; he suggested that the two should continue or try to continue for six months to see if they could get on better or that they should appoint one or more additional directors to assist them in the business; but this neither would do. If ever there was a case of deadlock, I think it exists here; but, whether it exists or not, I think the circumstances are such that we ought to apply, if necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been contemplated by the parties when the company was formed and which ought to be terminated as. soon as possible. We are told that we ought not to do it because the company is prosperous, making large profits, rather larger profits than before the disputes, became so acute. I think one's knowledge of what once is in the straits sufficient to account for that, having regard to the number of cigarettes that are sold, and we can take judicial notice of that in judging whether the business is much larger than it was before. Whether such profit would be made in circumstances like this or not, it does not seem to me to remove the difficulty which exists. It is contrary to the good faith and essence of agreement between the parties that the state of things which we find here should be allowed to continue". at page 435 another learned judge pointed out: "i am prepared to say that in a case like the present, where there are only two persons interested, where there are no shareholders other than those who, where there are no means of overruling by the action of a general meeting of shareholders the trouble which is occasioned by the quarrels of the two directors and shareholders, the company ought to be wound up if there exists such a ground as would be sufficient for the dissolution of a private partnership at the suit of one of the partners against the other. Such ground exists in the present case. I think, therefore, that it is just and equitable that the company should be wound up. 17. 3. This approach was approved by the Supreme Court in Hind overseas private ltd. V Ragunath prasad jhunjunwala and another, AIR 1976 SC 565 ; however, on facts, it was held by the Supreme Court that company before the court was not in the nature of a quasi-partnership. 17. 3. This approach was approved by the Supreme Court in Hind overseas private ltd. V Ragunath prasad jhunjunwala and another, AIR 1976 SC 565 ; however, on facts, it was held by the Supreme Court that company before the court was not in the nature of a quasi-partnership. The Supreme Court held, at p. 571:"in ebrahimi's case, 1973 AC 360 (supra) the company which was first formed by the two erstwhile partners, ebrahimi and nazir, was joined by nazir's son, george nazir, as the third director and each of the two original shareholders transferred to him 100 shares so that at all material times ebrahimi held 400 shares, nazir 400 shares and george nazir 200 shares. The nazir's father and son thus had a majority of the votes in general meeting. Until the dispute all the three remained directors. Later on an ordinary resolution was passed by the company in general meeting by the votes of nazir and george nazir removing ebrahimi from the office of director. That led to the petition for winding up before the court. The following features arc found in ebrahimi's case, 1973 AC 360: (1) there was a prior partnership between the only two members who later on formed the company. (2) both the shareholders were directors sharing the profits equally as remuneration and no dividends were declared. (3) one of the shareholders' son acquired shares from his father and from the second shareholder, ebrahimi, and joined the company as the third shareholder director with 200 shares (100 from each ). (4) after that there was a complete ouster of ebrahimi from the management by the votes of the other two directors, father and son. (5) although ebrahimi was a partner, nazir had made it perfectly clear that he did not regard ebrahimi as a partner but regarded him as a an employee in repudiation of ebrahimi's status as well as of the relationship. (6) ebrahimi though ceasing to be a director lost h'is right to share in the profits through directors' remunerations retaining the chance of receiving the dividends as a minority shareholder. (6) ebrahimi though ceasing to be a director lost h'is right to share in the profits through directors' remunerations retaining the chance of receiving the dividends as a minority shareholder. Bearing in mind the above features in the case, the house of lords allowed the petition for winding up by reversing the judgment of the court of appeal and restoring the order of plowman, j. None of the parties questions the principles as such adumbrated by the house of lords in. Ebrahimi's case, 1973 AC 360 (supra) or even those in the earlier yenidje's case (1916)2 ch. 426 (supra) and indeed these are sound principles depending upon the nature, composition and character of the company. The principles, good as they are, their application in a given case or in all cases, generally, creates problems and difficulties". the facts of the instant case can lead to only one conclusion that the business concern of the parties hereto was being carried on, in reality, by the parties as partners, in the garb of an. Incorporated company. ( 18 ) THOUGH Mr. Holla would like us to hold that there cannot be any deadlock in the management of the company, in view of the casting vote of the chairman, we cannot do so. The management of a company and its effectiveness are not to -be considered theoretically; if Mr. Holla's submission is accepted, it will be ousting a group of shareholders, who actually, has, a 50% interest in the entire company. ( 19 ) HERE, this theory of voting power need not detain us any further in view of the two orders of the learned company judge dated 16-8-1988 and 30-9-1988, the contesting parties are precluded from contending otherwise, than that one of the groups (petitioners) has to be paid by the other group (contesting respondents) so that the other group may continue to control the company thereafter. The only question to be considered in this appeal, is whether the shares were fairly valued by the learned company judge and if not, what value should be given to those shares. A few more facts to be referred: ( 20 ) BEFORE the petitioners filed the company petition, the parties had joint lyre quested company's auditor M/s. Ramaswamy and co. , to value the shares. In this connection, M/s. Ramaswamy and co. A few more facts to be referred: ( 20 ) BEFORE the petitioners filed the company petition, the parties had joint lyre quested company's auditor M/s. Ramaswamy and co. , to value the shares. In this connection, M/s. Ramaswamy and co. , was asked to discuss the matter with another auditor referred as shah. Obviously, there was disagreement as to the value amongst those two chartered accountants. V. s. ramaswamy stated in his letter dated 27-4-1988 that he valued in shares of the company as a going concern. In his report he admits that goodwill of the company has to be taken note of for valuing the shares of the company as a going concern. By applying the so-called 'accountancy principles', the goodwill was valued at rs, 2,94,000/ -. This is based on the average of the net profit for five years, multiplied by 31/2 to arrive at the goodwill. The estimated net profit of Rs. 84,000/- was again capitalised by applying the multiple of 10 to apply the "capitalisation method". The resultant figure of Rs. 8,40,000/- was again considered while proceeding to value the goodwill, as follows: "value of goodwill = total value less net asset of the business. = Rs. 8,40,000 ( -) Rs. 5,00,000, paid up capital + estimated profit for the year ended 31-3-1988 = Rs. 3,40,000/-". Average value of goodwill =2,94,000. 3,40. 000 =rs3)17)ooqa valuation of goodwill as per pugri system was considered by him as not proper as the company is not starting a new business. Therefore, he concludes: "in my considered view the fair value of the shares will be paid up capital + expected profit in 1987-88 + goodwill 2,50,000 + 2,50,000 + 3,17,000 = 8,17,000. 817 000 value per equity shares = 8,17,000/2,500=rs. 326. ' thus there was an amalgam of various elements which, are normally considered separately to evaluate the value, under different methods. In other words, the method adopted by M/s. Ramaswamy and co. , is the amalgamation of the methods followed under 'super profit method', and "asset method", by simplifying those methods. Shah, in his letter dated 18-5-1988 addressed to the first petitioners disagreed with the above valuation made by ramaswamy and company; shah suggested, to follow either of the two methods (i) yield method, or (ii) intrinsic value method. , is the amalgamation of the methods followed under 'super profit method', and "asset method", by simplifying those methods. Shah, in his letter dated 18-5-1988 addressed to the first petitioners disagreed with the above valuation made by ramaswamy and company; shah suggested, to follow either of the two methods (i) yield method, or (ii) intrinsic value method. Under 'yield method' he considered the exceptionally high profit earned by the company during the year ending 31-3-1988, as indicative of the future trend and stated that "at least Rs. 2,50,000/- should be adopted as the reasonable profit for the year"; capitalising this by 10, he arrived at the company's worth (with issued shares of 2,500), as Rs. 25,00,000/-; therefore each share was valued at Rs. 1,000/ -. Under the 'intrinsic method', he pointed out that, the balance sheet of the company would not disclose the value of leasehold rights of the premises and that the value of existing business connections also should not be ignored. The leasehold interest in the premises at commercial street was valued at Rs. 30,00,000/- and then without further details, he reiterated his valuation of the share at Rs. 1,000/ -. ( 21 ) THE two extreme valuation one by ramaswamy and co. (at Rs. 326. 80) and the other by shah (at Rs. 1,000), naturally gave scope for the extreme rivalry between the two sets of parties. The further two reports of M/s. Brahmiah and co. , and m. s. ramadhyani and co. , in no way contributed to soften the hard stand taken by the parties. ( 22 ) DURING the pendency of the proceedings before the company's court, petitioners started their own business concern. The contesting respondents were apprehensive of the new venture of the petitioners because, the latter was also using the business name of "rakhra stores". Therefore, the contesting respondents moved the court by filing company application 900 of 1990, to restrain the petitioners from using the words "rakhra stores" in their business concern. This application was allowed by an order dated 8th june, 1990. The submission of the applicants that, the company's name had a 'goodwill' and that by virtue of two orders of the court dated 16-9-1988 and 30-9-1988, respondents were to run the company's business, and therefore, petitioners shall not use the name of the company, in their business concern called 'rakhra sports and agencies', was accepted. The submission of the applicants that, the company's name had a 'goodwill' and that by virtue of two orders of the court dated 16-9-1988 and 30-9-1988, respondents were to run the company's business, and therefore, petitioners shall not use the name of the company, in their business concern called 'rakhra sports and agencies', was accepted. The court held: "one of the questions involved pertain to the right to take over the company, by any one group of shareholders, in case, winding up of the company, is not just and equitable. Already, the court has proceeded on this line, by directing the applicants to pay Rs. 71/2 lakhs to the present respondents 1 and 2 and what balance should be payable is pending consideration. A perusal of the reports of the two auditors shows that goodwill of the company is a relevant factor while valuing these shares. In fact, both sets of parties do not dispute this fact. Present respondents 1 and 2 in their main petition at para 34 (h) have sought as one of the reliefs, the purchase of the shares of the applicants at Rs. 1,000/- per share, or that the present applicants should be directed to sell their shares to the former at the same rate. The company as a going concern has its name as a substantial element in its goodwill cannot be denied and is not denied. In the submissions of the petitioners (i. e. , present respondents 1 and 2) dated 1-12-1988, on the valuation reports made by the auditors, these respondents stated the valuation made by M/s. Brahmiah and co. , is attacked as it has failed to take note of the goodwill in its proper perspective. If the company is not to be wound up, its existing goodwill including its trade name has to be preserved. If the trade name can be freely used by the parties without reference to the company and by those who are not likely to continue to do business in the company's business, the damage or injury likely to be caused to the company cannot be ignored. Again court proceeded to say, "it is an admitted case that the company in question is a family concern, more in the nature of a partnership; in fact, earlier it was a partnership firm. Again court proceeded to say, "it is an admitted case that the company in question is a family concern, more in the nature of a partnership; in fact, earlier it was a partnership firm. As per Section 53 of the Indian Partnership Act, 1932, after a firm is dissolved (only in the absence of a contract to the contrary between the partners) every partner may restrain any other partner from carrying on a similar business in the firm name or using any of the property of the firm for his own benefit, until the affairs of the company have been finally wound up; but this does not affect the partner who brought the goodwill. As per Section 14 properties of the firm includes goodwill of the business. Contract between parties as to who should get the goodwill and hence it can be used on dissolution, is permissible and its term enforceable. Goodwill is an intangible asset, being the whole advantage of the reputation and connections formed with the customers together with the circumstances which take the connection durable. It is attributable to the ability of the concern to earn profits because of its reputation, location and other features (vide law of partnership in india, by desai, fifth edition page 97 ). Assuming that rakhra is a family name, the trade name "rakhra sports" having attained certain advantages and reputation, would certainly contribute to the value of the goodwill of the first applicant company. Even if the company is treated as a partnership, its trade stage has a special significance to its partners and should be protected for the benefit of those who are to carry on the partnership business, as against those who are likely to go out of the concern. Those who are out of the firm should not be allowed to exploit the trade name of the company for their own benefits and they cannot be permitted to carry on under a similar name which may erode and dilute the goodwill of the company. It is immaterial that the company has no registered 'trade mark' right in the name of 'rakhra sports', and it is also immaterial that company does not produce any goods. It is carrying on business and is shown to have acquired a reputation with a trade name of 'rakhra sports'. It is immaterial that the company has no registered 'trade mark' right in the name of 'rakhra sports', and it is also immaterial that company does not produce any goods. It is carrying on business and is shown to have acquired a reputation with a trade name of 'rakhra sports'. It was concluded,"since the first respondent and his group are venuing afresh into the business, it does not matter to them what name they adopt for their trading purposes; but adoption of a name, resembling that of the 1st applicant company, certainly would injure the applicants' interests". ( 23 ) ABOVE order brings out clearly that, even according to the contesting respondents (who are the appellants before us) the company's name is part of its 'goodwill' and is quite valuable to them and therefore, cannot be given up by them. ( 24 ) MR. Raghavan, the learned counsel for the petitioners pointed out that, petitioners offered to buy the shares of the respondents at Rs. 1,050/- per share and that the entire offer made in the "submissions of the petitioners on the valuation reports filed by M/s. Brahmiah and co. And M/s. B. k. ramadhyani and co. " dated 1-12-1988 still holds good. The offer stated in para 21 of the above submissions, reads:"notwithstanding what is stated above, petitioners reiterate: (1) their offer to purchase the shares of respondents 2 and 3 in the first respondent-company at a value of Rs. 1,050/- per share and are willing to let the respondents 2 and 3 to have the benefit of premises of the first respondent at cotton's complex. (2) if it is the case of the respondents that the premises at commercial street, has no value, petitioners are willing to sell their shares at the face value that is Rs. 100/- per share and in turn take possession of the shop premises at commercial street and two godowns premises at golar lane, 1st cross, commercial street, Bangalore. (3) the petitioners are also prepared to accept Rs. 100/- less, that is, Rs. 950/- per share and the leasehold rights of cotton's complex premises". can it be said that petitioners having offered the highest price should be allowed to purchase the shares of the respondents because, by such a sale of respondents' share, the latter would not suffer any fiscal injury? 100/- less, that is, Rs. 950/- per share and the leasehold rights of cotton's complex premises". can it be said that petitioners having offered the highest price should be allowed to purchase the shares of the respondents because, by such a sale of respondents' share, the latter would not suffer any fiscal injury? The two orders of the learned company judge made in September 1988 (referred already by us) proceeds on the assumption that, in spite of the higher offer of the petitioners, respondents are to be allowed to purchase the shares of the petitioners at a 'fair value'; the question of bidding for the shares by the rival groups, by necessary implication, was ruled out and parties consented to that situation. Therefore, what remains, is, to find out the fair value of the shares of the petitioners to be sold to the respondents. ( 25 ) THE learned company judge treated the company as in notional liquidation, but, ultimately valued the shares, by capitalising the gross profit. ( 26 ) MR. Udaya holla, strongly relied on the two decisions of the Supreme Court; where in, for purposes of wealth tax and gift tax Act, equity shares had to be valued and the value had to be the "market value". The methodology applied in those cases is the only relevant mode to arrive at the market value, said the learned counsel; according to the learned counsel there is no difference between the 'fair value' and the 'market value'. 26. 2. Mr. Udaya holla submitted that the fair value can only be the market value and that under Section 7 of the wealth tax Act, asset is valued on the basis of its market value; valuation of shares, as assets, was considered by the Supreme Court in Commissioner of Wealth Tax v Mahadeo Jalan, etc. , AIR 1973 SC 1023 and the principle enunciated therein, has to be followed in all cases of valuation. The shares valued in the said case, were the shares in private limited companies. The Supreme Court said, at page 1025:"in valuing shares of a limited company certain factors have to be taken into consideration. Firstly, a share is not a sum of money but is an interest measured by a sum of money and made up of various rights contained in the articles of association". The Supreme Court said, at page 1025:"in valuing shares of a limited company certain factors have to be taken into consideration. Firstly, a share is not a sum of money but is an interest measured by a sum of money and made up of various rights contained in the articles of association". while considering the various factors likely to influence an investor in shares, the court held at page 1026 that, "where a purchaser or seller is considering the various factors for purchase or sale of shares in a company, the dominant factor determining the price he will pay or receive as the case may be is the yield". However, there may be instances where profits of the company are not reflected in the dividends; as to this situation, Supreme Court observed, at page 1027:"if profits are not reflected in the dividends which are declared and a low-earning yield for the shares is shown by the company which is unrealistic on a consideration of the financial affairs disclosed for that 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 which the shares would earn, fix the valuation". green on death duties is quoted in this regard, which reads:"not infrequently the dividends represent only a small proportion of the company's profits and large sums are systematically accumulated in the form of reserves. It is important to remember in this connection that the interests of shareholders in unquoted companies often differ from those of investors in quoted shares, especially as respects dividend policy. Where the shares are held by a few individuals (particularly members of a single family), it will not necessarily be to their advantage to have the great possible amount paid out to them as dividends. Retention of the profits by the company may suit them better than the receipt of taxable dividends. A purchase of shares in a company which distributes only a small fraction of its profits is unlikely to prove attractive to an investor in search of current income, but the open market is by no means confine to such investors. Retention of the profits by the company may suit them better than the receipt of taxable dividends. A purchase of shares in a company which distributes only a small fraction of its profits is unlikely to prove attractive to an investor in search of current income, but the open market is by no means confine to such investors. It includes, for instance, the investing members of the company to whom the shares may be more valuable than to others and who may wish to exclude outsiders, and surtax payers whose goal is capital appreciation rather than current income. "again at page 409 it is observed:"a valuation by reference to earnings is opposite as respects unquoted shares whenever the dividend alone does not truly represent the profitability of the company. . . . the "dividend" and "earnings" methods of valuation are not mutually exclusive and both may be used in conjunction. Where the value brought out by one differs widely from that shown by the other, an intermediate figure may be appropriate. Where a company is engaged in a profitable business, but the shareholders are also directors and prefer to lake what they need from the company in the form of remuneration rather than dividends, the profits distributed by way of remuneration must be taken into account in the valuation. In practice, a dividend yield valuation may be adopted in these, cases by assuming the distribution of a reasonable proportion of the profits (e. g. the average distribution of the comparable companies) as dividend: alternatively the value may be estimated by reference to earnings. In either case, the profits will be adjusted to include remuneration paid in excess of a normal management charge". further, the court observed that, when the company is ripe for liquidation or has been consistently incurring losses, the valuation may well be the break-up value of the shares. Thereafter, the court held:"the general principle of valuation in a going concern is the yield on the basis of average maintainable profits, subject to adjustment, etc. , which the circumstances of any particular case may call for". Thereafter, the court held:"the general principle of valuation in a going concern is the yield on the basis of average maintainable profits, subject to adjustment, etc. , which the circumstances of any particular case may call for". six factors were stated in page 1029 and thereafter the Supreme Court said:"in setting out the above principles, we have not tried to lay down any hard and fast Rule because ultimately the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case. But one exceptional circumstance to which we have referred, cannot be determined on the hypothesis that because in a private limited company one holder can bring it into liquidation, it should be valued as on liquidation by the break-up method. The yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or whether the company is ripe for liquidation but nonetheless is one of the methods". 26. 3. Entire discussion was in the context of Section 7 of the wealth tax act and the question framed by the Supreme Court is found at page 1029 (at the end of para 13 ). Though the decision is under the wealth tax Act, guidance is amply found in the judgment to identify the normal, general principle governing the valuation of unquoted equity shares. The dominant factor is always the yield method. 26. 4. This decision was followed in Commissioner of Gift Tax v Smt. Kusumben, AIR 1980 SC 769 , the valuation of ordinary shares, in an investment company came up for consideration. The actual question before the court was, whether any question of law arose out of the orders of the tribunal requiring reference to the high court. After referring to the earlier decision rendered in mahadeo jalan's case, court observed, at page 772:"---but where the shares in a public limited company are not quoted on the stock exchange or the shares are. In a private limited company the proper method of valuation to be adopted would be the profit earning method. After referring to the earlier decision rendered in mahadeo jalan's case, court observed, at page 772:"---but where the shares in a public limited company are not quoted on the stock exchange or the shares are. In a private limited company the proper method of valuation to be adopted would be the profit earning method. This method may be applied by taking the dividends as reflecting the profit earning capacity of the company on reasonable commercial basis but if it is found that the dividends do not correctly reflect the profit earning capacity because only a small proportion of the profits is distributed by way of dividends and a large amount of profits is systematically accumulated in the form of reserves, the dividend method of valuation may be made by reference to the profits. The profit-earning method takes into account the profits which the company has been making and should be capable of making and the valuation, according to this method is based on the average maintainable profits". court rejected the revenue's contention that combination of two methods (break-up and average maintainable profit methods) has no sanction of any judicial or other authority. There is another observation, at page 772;". . . . . the profit-earning capacity of the company would ordinarily determine the value of the shares. That is why in mahadeo jalan 's case the court quoted with approval the following observations of williams, j. In Mc. Cathie v Federal Commissioner of Taxation, 69 com. Wlr1". . . the real value of shares which a deceased person holds in a company has been making and should be capable of making, having regard to the nature of its business, than upon the amounts which the shares would be likely to realise upon a liquidation", and stated in no uncertain terms that "the general principle of valuation in a going concern is the yield on the basis of average maintainable profits, subject to adjustment etc. , which the circumstances of any particular case may fall for". , which the circumstances of any particular case may fall for". The break-up method would not be appropriate for valuation of shares of a company which is a going concern because as pointed out by the court in mahadeojalan's case, "among the factors which govern the consideration of the buyer and the seller where the one desires to purchase and the other wishes to sell, the factor of break-up value of a share as on liquidation hardly enters into consideration where the shares are of a going concern". It is only where a company is ripe for winding up or the situation is such that the fluctuations of profits and uncertainty of conditions at the date of valuation prevent any reasonable estimation of the profit earning capacity of the company, that the valuation by the break-up method would be justified. The revenue leaned heavily on the observation in mahadeo jalan's case that the factors likely to determine the valuation of a share include "in special cases such as investment companies, the asset-backing" and urged on the strength of this observation that in the case of an investment company, the asset-backing was a relevant consideration and the break-up method could not, therefore, be considered as totally irrelevant. This contention, we are afraid, is based on a wrong reading of the observation of the court. When the court said that in case of an investment company, the asset-backing is a relevant factor in determination of the value of the shares, what the court meant was that in order to determine the capacity of the company to maintain its profits the asset-backing would be a relevant consideration. The profit-earning capacity of the company which would determine the valuation of the shares would naturally have to take into account not only the profits which the company is actually making but also the profits which the company should be capable of making and in order to arrive at a proper estimation of the latter, the asset-backing would be a relevant factor in case of an investment company. It would not be right to read the observation of the court as suggesting that valuation of the assets would be a relevant factor in determining the valuation of the shares". It would not be right to read the observation of the court as suggesting that valuation of the assets would be a relevant factor in determining the valuation of the shares". this was a case where court was concerned with the shares in an investment company and therefore, naturally, profit earning capacity of the company would be the dominant test. ( 27 ) HOWEVER, we were not assisted by any decision rendered in this country in connection with the sale of shares amongst two groups in a private limited company (which is a quasi-partnership ). ( 28 ) THE principles formulated by american courts are found in vol. 18-a, american jurisprudence (2nd edn.) Page 706/para 836 and 838. It is stated there: "whether it arises under appraisal statutes or in other situation, the process of valuation of dissenters' shares has generally required appraisers and the courts to examine various factors or items of value, the major ones being asset value, market value, and earnings value. But regardless of the method used, the tendency of the courts is to consider all relevant or material factors and elements. However, all three elements do not have to influence the result in every valuation proceeding. It suffices if they are all considered. Compelling the consideration of all of them, including those which may turn out to be unreliable in a particular case, has the salutary effect of assuring more complete justification by the appraiser of the conclusion he reaches. It also provides a more concrete basis for court review. Also, the three elements are not always discrete, definitionally, they may even flow into one another. The underlying theory is one of compensating the owner of the stock for his property right and no one method of valuation should be relied upon exclusively. The task of placing a specific monetary value upon stock is by no means a simple arithmetical process. It often calls for the application of judgment, and courts in many instances rely on the judgment made by experts in the field-the appraisers chosen by the parties". " (2) it is recognised that an appraisal of stock of a dissenting stockholder should take into consideration assets or net-assets value, which depends on the real worth of the corporate assets as determined by physical appraisals, accurate inventories, and realistic allowances for depreciation and obsolescence. " (2) it is recognised that an appraisal of stock of a dissenting stockholder should take into consideration assets or net-assets value, which depends on the real worth of the corporate assets as determined by physical appraisals, accurate inventories, and realistic allowances for depreciation and obsolescence. Asset value represents a judgment as to the fair market value of the assets based on the price that would be agreed on by a willing seller and a willing buyer under ho compulsion to sell or buy. Net asset value is the share which the stock represents in the value of the net assets of the corporation. Such assets include every kind of property and value. Thus, all assets, tangible or intangible, including good will and book value, should be taken into consideration. The courts will also consider the nature of the business and various other special factors". ( 29 ) INSTITUTE of chartered accountants of India has published a booklet called "astudy on share valuation". Mainly, it is concerned with valuation of shares for tax purposes. However, chapter v refers to 'valuation of shares for other purposes' and states, "it can be safely said that for all these purposes, the fair value arrived at on the basis of open market may be accepted, because in normal circumstances the open market price will be the fair value". We may exclaim that the real problem before us is to find out this open market value. Chapter vi deals with "maintainable profits basis", including the concept of projection of the future maintainable profit". There is a statement at page 18 that past average profit should be calculated after deducting tax at current rates, a statement obviously based on the assumption that dividends are declared subject to corporate taxes. As will be seen presently, this approach to the taxation is not adopted by english courts, while estimating the company's worth, based on the average profits. Chapter vii of the booklet deals with "assets-basis". The importance of goodwill as an intangible asset of a business enterprise has been noted. Chapter ix provides for special consideration, such as the acquisition of a controlling interest. The pre-emptive clauses in a private company are referred as affecting the valuation. ( 30 ) IN R. C. Coper, etc. Chapter vii of the booklet deals with "assets-basis". The importance of goodwill as an intangible asset of a business enterprise has been noted. Chapter ix provides for special consideration, such as the acquisition of a controlling interest. The pre-emptive clauses in a private company are referred as affecting the valuation. ( 30 ) IN R. C. Coper, etc. , V Union of India, AIR 1970 SC 564 a few observations were made regarding the valuation of'good-will' and of, the unexpired period of leases, in a going concern. At page 611, the Supreme Court, observed:"the undertaking of a banking company taken over as a going concern would ordinarily include the goodwill and the value of the unexpired period of long-term leases in the prevailing conditions in urban areas. But goodwill of the banks is not one of the items in the assets in the schedule, and in clause (f) though provision is made for including a part of the premium paid in respect of leasehold properties proportionate to the unexpired period, no value of the leasehold interest for the unexpired period is given. Goodwill of a business is an intangible asset: it is the whole advantage of the reputation and connections formed with the customers together with the circumstances making the connection durable. It is that component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years or in excess of normal amounts because of its reputation location and other features: Trego v Hunt, 1896 AC 7. Goodwill of an undertaking therefore is the value of the attraction to customers arising from the name, and reputation for skill, integrity, efficient business management, or efficient service. Business of banking thrives on its reputation for probity of its dealings, efficiency of the service it provides, courtesy and promptness of the staff, and above all the confidence it inspires among the customers for the safety of the funds entrusted. The reserve bank, it is true, exercises stringent control over the transactions which banks carry on in india. Existence of these powers and exercise thereof may and do ensure to a cerain extent the safety of the funds entrusted to the banks. But the. Business which a bank attracts still depends upon the confidence which the depositor reposes in the management. Existence of these powers and exercise thereof may and do ensure to a cerain extent the safety of the funds entrusted to the banks. But the. Business which a bank attracts still depends upon the confidence which the depositor reposes in the management. A bank is not like a grocer's shop: a customer docs not extend his patronage to a bank merely because it has a branch easily accessible to him. Outside the public sector, there are 50 India scheduled banks, 13 foreign banks, besides 16 non-scheduled banks. The deposits in the banks not taken over under the act range between Rs. 400 crores and a few lakhs of rupees. Deposits attracted by the major private commercial banks are attributable largely to the personal goodwill of the management. The regulatory Provisions of the banking Companies Act and the control which the reserve bank exercises over the banks may to a certain extent reduce the chance of the resources of the banks being misused, but a banking company for its business still largely depends upon the reputation of its management. We are unable to agree with the contention raised in the union's affidavit that a banking establishment has no goodwill, nor are we able to accept the plea raised by the attorney-general that the value of the goodwill of a bank is insignificant and it may be ignored in valuing the undertaking as a going concern. Under clause (f) of schedule ii provision is made for valuing a proportionate part of the premium paid in respect of all leasehold properties to the unexpired duration of the leases, but there is no provision made for payment of compensation for the unexpired period of the leases. Having regard to the present day conditions it is clear that with rent control on leases operating in various states the unexpired period of leases has also a substantial value. The value determined by excluding important components of the undertaking, such as the goodwill and value of the unexpired period of leases, will not, in our judgment, he compensation for the undertaking". ( 31 ) LET us turn our attention to the principles applied by the courts in england under similar situations. ( 32 ) 1 in re. Bird precision bellows ltd. , (1984)3 all. E. r. 444 the court had anoccasion to consider the problem of valuing the shares, under similar circumstances. ( 31 ) LET us turn our attention to the principles applied by the courts in england under similar situations. ( 32 ) 1 in re. Bird precision bellows ltd. , (1984)3 all. E. r. 444 the court had anoccasion to consider the problem of valuing the shares, under similar circumstances. Court found that the company was in the nature of a quasi-partnership; though petitioners approached the court with an allegation of oppression by the majority shareholders, their shares are not to be valued either at a premium or at a discount and that a fair value should be fixed by the court, for the sale of their shares, to the respondents. The learned judge held that on this question of 'discount' or 'premium' there is no Rule of universal application; on the other hand the general Rule is to adopt a fair basis of valuation. At page 450, the learned judge observed: "in summary, there is in my judgment no Rule of universal application. On the other hand, there is a general Rule in a case where the company is at the material time a quasi-partnership and the purchase order is made in respect of the shares of a quasi-partner. Although I have taken the case where there has in fact been unfairly prejudicial conduct on the part of the majority as being the state of affairs most likely to result in a purchase Order, I am of the opinion that the same consequences ought usually to follow in a case like the present where there has been an agreement for the price to be determined by the court without any admission as to such conduct. It seems clear to me that, even without such conduct, that is in general the fair basis of a valuation in a quasi-partnership case, and that it should be applied in this case unless the respondents have established that the petitioners acted in such a way as to deserve their exclusion from the company". Each party had nominated his valuer. The learned judge said at page 456: "there was a certain amount of common ground between the two valuers. Firstly, they agreed that a dividend basis of valuation, being the one which is usually only relevant in a case of a company with a record of paying significant dividends was inappropriate in this case. Each party had nominated his valuer. The learned judge said at page 456: "there was a certain amount of common ground between the two valuers. Firstly, they agreed that a dividend basis of valuation, being the one which is usually only relevant in a case of a company with a record of paying significant dividends was inappropriate in this case. Secondly they agreed that the appropriate basis was one which involved looking both at the earnings of the business and at the value of its net tangible asset. The latter ignores goodwill, which is the measure of profits, which the business can earn over and above a normal return on its net asset value. Mr. Milburn did not make an independent valuation on a net tangible asset basis but relied on. the company's draft balance sheet as at 31st august, 1981. However, he was broadly contend to accept Mr. Foster's figure of 412,000. I think that there may have been a slight, but probably unimportant difference of emphasis between them on the function and utility of the net tangible asset value in relations to the earnings value. They both agreed, in view of the good trading record of the company, the net tangible asset valuation should be made on a going concern basis and not on a break-up basis. As described by Mr. Milburn, the first step in an earnings valuation is to establish the maintainable level of proflt before tax. Second step is to apply to that figure a multiple which is known as the 'profit to earning ratio' or 'p/e ratio' (for short) and which represents the yield which a purchaser on a willing buyer-willing seller basis could except on his investment. Mr. Foster agreed that these were the two steps in the exercise, but there were fundamental disagreements between him and Mr. Milburn as to the correct figures to be assigned to the maintainable level of profit and the multiple respectively". Thereafter company's maintainable level of profit before tax was given. It was further noticed that during the year 1981, the cash flow forecast was extremely optimistic. But there was a difference of opinion as to the estimate for the year 1981-82. the learned judge accepted the estimate of Mr. Bird and Mr. Foster on this aspect. Thereafter company's maintainable level of profit before tax was given. It was further noticed that during the year 1981, the cash flow forecast was extremely optimistic. But there was a difference of opinion as to the estimate for the year 1981-82. the learned judge accepted the estimate of Mr. Bird and Mr. Foster on this aspect. The next difference of opinion between the two valuers was with regard to the multiple to be applied to the estimated profit for 1981-82. The other valuer, i. e. , Mr. Foster maintained that it was wrong to take only the estimated figure for 1981-82, but opined that an average of the figure for 1981-82 and the actual figures for the preceding two years should be taken, to which the estimate of the average excessive director's emoluments to be added. To this a multiple of 3 was applied; the result was the "earnings-based valuation". The valuation based on the "net tangible asset value" was also given which was slightly lower than the former figure. The learned judge said at page 458: "in my view the basic approach of Mr. Foster to the question of maintainable level of profits is to be preferred to that of Mr. Milburn. In other words, I think that a purchaser would be more likely to take an average of three years actual and anticipated profits rather than to rely only on the most recent figure, particularly since it could only be an estimate and the company was still a young one. " to the said figure, an appropriate multiple was applied, on a consideration of the company's progress during the further previous years. The court said, "although I have assumed that a willing purchaser would take an average of the actual or anticipated profits for the three most recent years, he would undoubtedly have looked further back in order to see the earlier record of the company. If he had done that, he would have seen that from 1977-78 onwards, i. e. , from only two years after its birth, the company had been making a profit which with one slight set-back in the following year, had steadily increased from 80,000 to 175,000. I think he would have thought that those figures showed that this was a well run and soundly based company. I think he would have thought that those figures showed that this was a well run and soundly based company. Even in times of great recession n the industry, he would in my view not have expected a yield of as much as 33% on this investment and would therefore have been prepared to apply a multiple of more than 3. I think that he would have been well satisfied with a yield of something over 25%. In my judgment the correct multiple in this case is 3. 75, which reflects a yield of 26. 66%. If that is applied to a net maintainable profit of 1,46,000 it produces a valuation on an earnings basis of 547,000". Thereafter, the learned judge proceeded to say, "the final step is for me to compare that figure with the net tangible asset value of 4,12,000. Here, if there was any significant difference of approach, which I do not think there was, I prefer that of Mr. Milburn. He said that a purchaser would look at the net tangible asset value in order to see whether it gave him comfort or caused him concern when compared with the earnings valuation. In this case he said that the net tangible asset value would give the purchaser comfort and it is to be remembered that he said that in relation to a higher earnings valuation that I have adopted. I accept that evidence. Adapting Mr. Milburn's phraseology to my figures, I think it clear that a purchaser would think that the assets were well capable of turning over a profit of around 35%. I value the shares of the company as a whole at 5,47,000. I determine the price at which the respondents are jointly and severally to purchase the shares of the petitioners at 18. 25 each". 32. 2. Above decision of the chancery division is a good guidance for us. The court has to apply both the methods and compare them, before arriving at a fair value. However, in the above case, there was unanimity regarding the net tangible assets and as to its valuation. The difference pertained to the earnings-based valuation. 25 each". 32. 2. Above decision of the chancery division is a good guidance for us. The court has to apply both the methods and compare them, before arriving at a fair value. However, in the above case, there was unanimity regarding the net tangible assets and as to its valuation. The difference pertained to the earnings-based valuation. On this question, court preferred to consider the average profits of the last 3 years (including the estimated profits of the latest year, though the year had not come to an end) and thereafter, to apply the multiple, looked further back in order to see the earlier record of the company. Under the condition of that country, the expected gross profit was estimated roughly as 25% and hence a multiple of 3. 75 was chosen. The gross profit which is to be the basis for applying the multiple and to consider the expected return on investment, is a pre-tax profit and not a profit after paying the income tax. However, the court had no occasion to consider the impact of the 'goodwill' (probably, because, it was a young company started in or about the year 1975 ). ( 33 ) THE decision was affirmed by the court of appeal; the decision is reported in 1985 (3) all. E. r. 523, re. Bird precision bellows ltd. There, the appellants contended that, " (i) that under Section 75 (4) (d) the court was not entitled to consider the merits of the case when fixing the value of the shares, (ii) that the court was limited to fixing the market price of the shares, i. e. , according to the proportionate size of the shareholding in relation to the whole of the issued share capital but taking into account whether the share holding formed a majority or minority holding, (iii) that the court could not, e. g. , by deciding that there should be no discount for the fact that the shares were a minority holding, fix a price which had the effect of reducing or increasing the ordinary open market value of the shares and (iv) that it was in implied term of the concerned order that the shares were to be purchased at the ordinary open market value for a minority holding, i. e. , at discount". Court of appeal held that under Section 75 (4) (comparable to Section 402 (b) and (c) of our Companies Act), the court had a very wide discretion to give an appropriate relief which the court considered as fair and equitable and that the court had an unfettered discretion to fix a purchase price for the petitioner's shares which was fair in all the circumstances; furthermore, under the consent Order, the parties had intended that the purchase price for the shares should be fixed by the court in the exercise of its discretion under Section 75. Court of appeal, after referring to a passage in the decision of house of lords, in ebrahimi's case, 1972 (2) all. E. r. 492 : 1973 AC 360, pointed out that the real dispute between the parties was on the question of "proper price" payable to the petitioners. Oliver, l. j. observed, at page 529. "in my judgment the 'proper' price is the price which the court in its discretion determines to be proper having regard to all the circumstances of the case". At page 531, the learned judge quoted the observations of lord denning made in Scottish co-operative Wholesale Societies ltd. V Meyer, (1958)3 ALL. E. r. 66 at 89 : 1959 AC 324, at 369. "one of the most useful orders mentioned in the Section - which will enable the court to do Justice to the injured shareholders is to order the oppressor to buy their shares at a fair price; and a fair price would be I think, the value which the shares would have had at the date of the petition, if there had been no oppression, once the oppressor has bought the shares, the company can survive. It can continue to operate. That is a matter for him. It is, no doubt, true that an order of this kind gives to the oppressed shareholder what is, in effect, money compensation for the injury done to them; but I see no objection to this. The Section gives a large discretion to the court, and it is well exercised in making an oppressor make compensation to those who have suffered at his hands". As to this observation, and another earlier decision, oliver l. j. , said in connection with the respondents arguments, ". . . . . The Section gives a large discretion to the court, and it is well exercised in making an oppressor make compensation to those who have suffered at his hands". As to this observation, and another earlier decision, oliver l. j. , said in connection with the respondents arguments, ". . . . . they seem to me to be entirely against them because, as it seems to me, they indicate as clearly as can be the wide discretion which the court has in directing the basis on which shares should be valued for the purpose of a purchase ordered under this section. It may be true that it can be compensatory, but what the court is required to do, in the exercise of its very wide discretion, is to do what is just and equitable between the parties". The learned judge, further said that since it was a quasi-partnership case, "it would be appropriate that the shares of the company should be valued as a whole and that the petitioners should then simply be paid the proportionate part of that value which was represented by their shareholding, without there being made a discount for the fact that this was a minority shareholding". The court also referred to the pre-emptive clause in the articles of association, which required that the seller of the shares had to first offer the shares to the other sharers and in case there was a dispute, the fair value was to be certified by the auditors. The court, after referring to Dean v Prince, 1954 ch. 409, quoted a passage from it to say that in such a situation, the right way to see what the entire shares of the company were worth, would be to see what the business itself was worth. ( 34 ) 1. In Buckingham v Francis and others, (1986)2 all. E. r. 738, buckingham's 20 shares were to be valued, arising out of a dispute between him and others, who held only 30 shares. Business of the company was, mainly, to supply the printing industry in east anglia, materials and equipments. There was no dispute that the value must be ascertained on a quasi-partnership basis, "that is to say the worth of the company as a whole must be calculated". At page 739, the court stated: ". . . . . Business of the company was, mainly, to supply the printing industry in east anglia, materials and equipments. There was no dispute that the value must be ascertained on a quasi-partnership basis, "that is to say the worth of the company as a whole must be calculated". At page 739, the court stated: ". . . . . there is common ground in the following respects: (1) the value must be ascertained on a quasi-partnership basis, that is to say the worth of the company as a whole must be calculated, and then an appropriate proportion (two-fifth's) attributed to Mr. Buckingham's 20 shares. No regard need be had to the question whether they were a majority interest or a minority interest, or neither. (2) it is the value of the company as a going concern which must be assessed not the break-up value of its assets in liquidation. However, the break-up value can be used as a long-stop, if the value as a going concern was less. (3) the break-up value of this company was very small or nothing at all. (that cannot perhaps be described as a common ground; but it is clearly established on the evidence ). The company's assets consisted largely of slock and debtors, which could be expressed to realise in a liquidation less than their balance sheet value, and very little more than the amount required to satisfy the company's creditors". The net assets figure, undiscounted, was 39,000. The figures for 'sales', 'gross profit', 'overheads and profit before taxation' from the time when the company started trading, till 31st december, 1981, were, then referred. The court noticed that the profit before tax, having risen sharply to start with, showed an even steeper downward trend. One of the valuer adopted an asset value, which, the court found to be actually an "earnings value" in disguise. To the net asset value, value of goodwill (based on future profits) was added. At page 741, the court quoted 'accounts digest', which referred to this method; the excerpt reads: "super profits approach. The super profits approach has a long and ancient pedigree and appears in one form or another in most texts. To the net asset value, value of goodwill (based on future profits) was added. At page 741, the court quoted 'accounts digest', which referred to this method; the excerpt reads: "super profits approach. The super profits approach has a long and ancient pedigree and appears in one form or another in most texts. Idea behind it is that there is a normal rate of return that can be earned on assets of a certain type but over a number of years it may be possible to earn profits in excess of this normal level. This method assumes that the purchaser will buy, in addition to the normalised value of the assets, a number of years' super profits. The procedure is to estimate the value of the net assets on a going concern basis and to add to this the value of the super profits. The annual super profits are calculated by deducting from maintainable profits a sum which is equivalent to the normal rate of return on net assets. These super profits are then multiplied by a factor representing the number of years' purchase. The value of the super profits is entered in the accounts as goodwill. The super profits method has the theoretical attraction that it recognises the transitory nature of above average performance. In practice, it has serious short comings. The pre-occupation with net asset value, which in practice is based on balance sheet amounts, is unhealthy. Few businessmen would admit that their company's growth rates for a temporary phenomenon, nor would most of them recognise the concept of super profits. The going rate of return on net assets must be a highly subjective assessment, as must also been the amount and duration of super profits. How is one to know the going rate for the purchase of super profits? This valuation basis leads to highly esoteric arguments divorced from reality". This method was not accepted by the court; the learned judge said, "the objection to this method, apart from its complication, is that in the present case I can see no basis for adopting a figure of 10% as the normal level of profits for this company, or even for this industry. And, if one does adopt the normal level of profits, it is speculative as to how long and by how much it would be exceeded. And, if one does adopt the normal level of profits, it is speculative as to how long and by how much it would be exceeded. The prognosis that the annual average for the past three and a quarter years would be repeated in the future, and that a buyer of the company would be prepared to pay five years' purchase for that prospect, is unsupported by evidence. Nor can I see much sense in basing even part of the valuation on the book value of the net assets. They would have realised far less in liquidation; and when a company such as this one is valued as going concern it is earnings and not assets that are significant. I reject this method of calculation". The other valuer, burns, produced a valuation based solely on earnings. This approach, in principle, was held to be correct; however, as to this methodology, following comments were made; ". . . . In my judgment the approach of Mr. Burns is in principle correct. The value of the company was the capitalised sum representing future profits. But there are two unknowns; what the future profits would be, and what price/earnings ratio would commend itself to a purchaser as appropriate for capitalisation. It is possible to make an allowance for risks in calculating either figure. What one must guard against is making allowance for the same risks twice over, i. e. , in the assessment of future profits and also in the choice of a price/earnings ratio. In order to avoid that, the assessment of future profits can be made on a best guess basis, allowing for risks but without either undue caution or exaggeration, and a price/earnings ratio can then be chosen on the basis that the figure for future profits is the probable answer. That seems to me the best method for the present case; in other cases the converse method could be adopted, and the allowance for risk could be incorporated in the ratio rather than the profit figure, or part of it in one and part in the other". The future maintainable profits was estimated by the court as 6,000 per annum, and thereafter court proceeded to consider the figure of the multiplier on a "pre-tax basis and not post-tax". The future maintainable profits was estimated by the court as 6,000 per annum, and thereafter court proceeded to consider the figure of the multiplier on a "pre-tax basis and not post-tax". Court opined that the purchaser of the company would be content with a yield of 25% and therefore multiplier of 4 was arrived at. However, staughton, j. , made the following observations at page 743: "frankly I doubt whether businessmen are ruled by accountants when deciding how much to pay for a private company. They no doubt seek the advice of accountants before hand, and are told what likely price-earnings ratio would emerge from various different figures as the purchase price. And afterwords they are told, no doubt, what is the likely price/earnings ratio on the purchase price which they have decided to pay. But I wonder whether, in crucial stage between, when they are deciding on a price, business acumen or hunch does not play a far larger part than the calculation of accountants". This case illustrates, that under certain circumstances "maintainable future profits" method would be the most appropriate method. This was a company which had no substantial assets, to apply the 'break-up value' method. 34. 2. The decision also shows that the estimated profit is to be a pre-tax profit, to which an appropriate multiplier is to be applied. 34. 3. The decision of the chancery division in re. Bird precision bellows ltd's. Case also shows that, "maintainable level of profit" method has a dominant role to play in the evaluation of the company's worth. However, to consider the appropriate multiplier, company's history and past performance also should be taken note of. 34. 4. The net tangible asset value should be kept in mind and be compared with the other value, arrived at by the application of the "maintainable level of profit" method and if both the figures substantially compare with each other, then the latter figure could be accepted as representing the company's worth. In both the above cases, goodwill as an intangible asset was not considered, obviously, because, it was not present. ( 35 ) 1. Methodology for valuation of a company's worth should vary with the company's features. In both the above cases, goodwill as an intangible asset was not considered, obviously, because, it was not present. ( 35 ) 1. Methodology for valuation of a company's worth should vary with the company's features. If it is a quasi-partnership of a recent origin and therefore a young business concern, the company may not possess a significant goodwill; on the other hand, if it is an old business establishment, which, in the course of time became a private limited company (though, in fact, a quasi-partnerhip), and has earned a goodwill, the advantage of such a goodwill should not be ignored, while evaluating the company's worth; otherwise, it will result in ignoring the commercial realities. Worth of a company as a going concern would, and should, normally, include its tangible and intangible assets which are being commercially exploited. 35. 2. When two groups who have been working together for decades, fall apart, and seek separation, each group is entitled to have a proportionate worth of the business built by all of them together. 35. 3. Though, in the instant case, the evaluation of the shares is done by virtue of the consent orders, the source of the court's power is in Section 402. Under Section 397, the court is empowered to make an order "as it thinks fit"; similar is the power vested in the court under Section 398. Power under Section 402, is a power which may be exercised, without prejudice to the generality of the powers of the court under Section 397 and 398, and therefore, such a power can in no way be of a limited nature. A power to make an order as the court thinks fit, would necessarily, comprise within it, a power to make an order which is just and equitable in the circumstances of the case, because, essentially, this is an unlimited judicial power. 35. 4. Court cannot ignore the realities, while evaluating the worth of a quasi-partnership. Sense of Justice and principles of equity demand that every one concerned should be placed on par, (proportionate to their interest in the business concern ). 35. 5. By confining the attention to the valuation to only one method, court may miss the real worth of the company. Court cannot ignore the realities, while evaluating the worth of a quasi-partnership. Sense of Justice and principles of equity demand that every one concerned should be placed on par, (proportionate to their interest in the business concern ). 35. 5. By confining the attention to the valuation to only one method, court may miss the real worth of the company. ( 36 ) THE english decisions referred above, further, reveal that, in the process of evaluation, question of any premium or discount would not be normally considered, even though, shares are to be valued for the purpose of sale and purchase amongst the rival groups of a quasi-partnership concern; that will be inequitable atleast to one of the groups. ( 37 ) ANOTHER aspect to be clarified here pertains to the relevancy of tax on the gross profit of the company. The "maintainable level of profit" is to be arrived at without reference to tax-liability. Mr. Udaya holla's contention that tax liability should be deducted, may have relevance to evaluate the market value of shares for tax purposes. Here, we are concerned with the worth of the company and the percentage of profit normally expected by a person purchasing the company. Tax liability on the income continues, even after one invests his capital elsewhere. For example, if pre-tax gross profit is Rs. 1,00,000 and the expected return on the investment is 10%, the capital value will be Rs. 10 lakhs. When this ten lakhs rupees is deposited in bank or a safe company, interest earned (assuming it to be 10%), is again taxed. If the gross profit after tax liability is deducted is Rs. 50,000/- then a higher multiple has to be applied to capitalise it; if not, the multiple of 10 would take the capital value to Rs. 5 lakhs and when this is deposited in a bank or a company, the interest earned again gets taxed. The return expected on an investment, is a return of an income; investor does not look at the tax liability as such. To reduce the tax liability, the assessee may have recourse to lawful tax-planning methods. The english cases referred by us establish that, in england, courts do not deduct the tax liability while computing the gross profit while evaluating the company's worth. ( 38 ) ONE more aspect of the problem requires to be considered. To reduce the tax liability, the assessee may have recourse to lawful tax-planning methods. The english cases referred by us establish that, in england, courts do not deduct the tax liability while computing the gross profit while evaluating the company's worth. ( 38 ) ONE more aspect of the problem requires to be considered. In a company dealing in manufactured articles, there may not be much tangible asset, except the stock in trade, deposits if any, vehicles, etc. The main asset of the company may comprise of intangibles like goodwill and the benefits that arise out of the location of the leasehold premises. In such a situation, the tangible asset-valuation method may not depict the clear worth of the company. To take an extreme example, we may consider the case of a company trading as a commission-agent, it does not require any capital investment except, a good premises; the real assets are the business corrections of the company including the goodwill earned if any. In terms of annual profits, the company may be very prosperous. Here the comparison between the asset-value and the 'maintainable level of profit' value can be achieved only by selecting a proper multiple to capitalise the profit the percentage of return expected in such a case will be quite high, because, no tangible investment in terms of money has to be made. ( 39 ) THE company in the instant case is a sound company with a goodwill of its own, earned in the course of its business which was established as early as the year 1932. It is a family concern. Dividends are not declared; the shareholders have been enjoying the fruits of the business by way of remuneration, allowances, and perquisites. The business is located in commercial street which is a prominent commercial centre in Bangalore. The leasehold of the premises itself, is quite valuable. The balance sheet figures of gross-profit, in the circumstances, would not disclose the real profit of the company and sufficient care has to be taken while estimating the maintainable level of profit of the company, without being unduly influenced by those figures stated in the balance sheet. ( 40 ) IN re bird precision bellows ltd. 's case 1984 (3) all. ( 40 ) IN re bird precision bellows ltd. 's case 1984 (3) all. E. r. 444, the court took the average of the gross profits of the latest available profits of the two years and the subsequent year's estimated profit, to arrive at the maintainable level of profits and then added back the excess remuneration drawn by the directors. The company petition was filed in October 1981. Therefore the available gross profits for the years 1980-1981 with the estimated gross profits for 1981-82 were considered, (vide page 457; the basic position of Mr. Foster, one of the valuers ). The court observed that this took into consideration the average of three years actual and anticipated profits (page 458 ). The company, however, was a young company. Thereafter, to consider the multiple, company's past performance was also looked into, so that one could be assured that company was "well run and soundly based company". ( 41 ) 1. By applying the above approach to the instant case, the last two years were 1986-87 and 1987-88; in the middle of year 1988-89, the learned company judge directed the respondents to pay to petitioners Rs. 600/- per share, subject to further valuation. The available figures of gross-profit for these years, are (1) loss of Rs. 21,786/-, (2) profit of Rs. 2,71,237/- and (3) profit of Rs. 1,88,188/ -. The average will be Rs. 1,45,880/ -. 41. 2. This is a company which did not declare any dividend. Both groups were drawing remuneration, allowances, medical benefits, etc. It is not quite safe to rely on the estimate of the gross profits as reflecting the real picture, because, the directors, obviously, were liberal in drawing various sums for their personal benefits, in lieu of the dividends. A sum of Rs. 50,000/- should therefore he added back as excess remuneration as has been suggested by M/s. Ramadhyani and co. (para 4. 10 of ramadhyani's report ). Memo of instructions dated 22-10-1988 filed by the petitioners in the proceedings gives the total remuneration of directors at Rs. 95,000/-, apart from other allowances as Rs. 1,000/-, per month. Therefore the maintainable level of profit will be Rs. 1,95,880/ -. 41. 3. (para 4. 10 of ramadhyani's report ). Memo of instructions dated 22-10-1988 filed by the petitioners in the proceedings gives the total remuneration of directors at Rs. 95,000/-, apart from other allowances as Rs. 1,000/-, per month. Therefore the maintainable level of profit will be Rs. 1,95,880/ -. 41. 3. A reasonably good investor would further probe into the affairs of the company to discover that since the year 1985 (after February 1985), the company opened a branch at cotton complex and has been incurring a loss in the business conducted in that branch; however, the lease of the premises was on a monthly rent of Rs. 4,389/- with an advance of Rs. 43,890/ -. While respondents were anxious to close this business, petitioners opined that this premises can be utilised in a better way. The learned company judge has added to the maintainable level of profits a further sum of Rs. 60,000/- on account of closing this business, so that, company's gross profit would go up. This cannot be termed as an erroneous approach. If however, this sum of Rs. 60,000/- is not added, naturally, the percentage of profit on the investment will be lower, resulting in applying a higher multiple. 41. 4. If Rs. 60,000/- is added, the average profit will be Rs. 2,55,880/- (rounded off to Rs. 2,56,000/- ). The investor's yield was considered as 11%. The company is basically a well run, stable and sound company; therefore, the investor's approach will be an approach to obtain a constant return, which is safe. A return of 12 to 13% therefore can be safely accepted as the expected return and therefore we would select the multiple of 8 to capitalise the profits. The capitalised figure, representing the company's worth will therefore be (rs. 2,56,000 x 8) = Rs. 20,48,000/ -. Value of an equity share would be Rs. 819. 50 ps. 41. 5. While selecting the multiple of 8, we have also noted, that according to M/s. Ramadhyani and co. , the expected return will be 15% (this will take the multiple to 6. 66), but this low multiple, seem to us not acceptable in the circumstances of this case. ( 42 ) 1. Re: assets: company had stock-in-trade,vehicles, reserves, and abundant' goodwill'. The interest in the leasehold premises at commercial street is a very valuable interest. M/s. Ramaswami and co. , valued the goodwill at Rs. 66), but this low multiple, seem to us not acceptable in the circumstances of this case. ( 42 ) 1. Re: assets: company had stock-in-trade,vehicles, reserves, and abundant' goodwill'. The interest in the leasehold premises at commercial street is a very valuable interest. M/s. Ramaswami and co. , valued the goodwill at Rs. 3,17,000/ -. M/s. Brahmiah and co. Has, quite strangely ignored these aspects. M/s. Ramadhyani and co. Has not valued the leasehold at cotton complex, but accepted the value of leasehold interest at commercial street premises at Rs. 12,60,000/ -. Mr. Udaya holla contended that it was unregistered lease and hence the reference to unexpired period of lease should be ignored. We don't think so. The unexpired period is of short duration and the protection afforded by the Karnataka Rent Control Act to a tenant cannot be ignored. Both parties are anxious to have this premises; the bar against subletting is not an insurmountable hurdle to use this premises profitably. However, we reduce the value of this leasehold interest to Rs. 10 lakhs. The book value of other assets at Rs. 3,45,245/- cannot be accepted as reflecting the real figures. The current assets for the year ending 31-3-1989 shown as Rs. 6,01,939/- in the balance sheet, in addition to the other advances. Therefore assets are to be valued as follows: Rs. Current assets 6,02,000 goodwill 3,00,000 leaseholding 10,00,000 total 19,02,000 42. 2. This figure of Rs. 19,02,000/- is slightly higher than the valuation- figure given by M/s. Ramadhyani and co. This capital worth of the company is certainly comparable with the "income capitalised value" of the company's worth of Rs. 20,48,000/ -. ( 43 ) THERE fore the value of an equity share at Rs. 820. 00 (i. e. Rs. 819. 50 ps. Rounded off) seems to us, quite fair and reasonable. ( 44 ) THE valuation has to relate back to 30-9-1988 (the date on which the paymentat Rs. 600/- per share to the petitioners was recorded, subject to further valuation ). Therefore it is just and equitable that petitioners should be paid interest on this balance sum receivable by them. We direct the payment of interest on the balance sum payable by the contesting respondents to the petitioners, at the rate of 10% per annum with effect from 1-10-1988, till the date of payment. Therefore it is just and equitable that petitioners should be paid interest on this balance sum receivable by them. We direct the payment of interest on the balance sum payable by the contesting respondents to the petitioners, at the rate of 10% per annum with effect from 1-10-1988, till the date of payment. ( 45 ) THE petitioners have offered to purchase the shares at Rs. 1,000/- per share. this may be, for reasons best known to them; probably they have been nourishing, great hopes of larger profits during future years or the offer was made, to bring a psychological pressure on the valuers knowing fully well that contesting respondents, would not under any circumstances, give up the business at commercial street, since, the business was initially started by their father b. l. rakhra in the year 1932. Court cannot be influenced by this high offer, of the petitioner, which is not based on any realities affecting the valuation of the company's worth. ( 46 ) 1. In the result we allow this appeal partly. The respondents 2 and 3 shall pay the petitioners for their shares at the rate of Rs. 820/- per equity share; the balance amount payable after deducting the payments made already at Rs. 600/- per share, shall bear an interest at the rate of 10% per annum with effect from 1-10-1988. The order of the learned company judge, is modified to this extent. The contesting respondents are granted six weeks time to deposit into court the amount payable to the petitioners as per this Order, failing which, the petitioners shall proceed to deposit the value of the shares of contesting respondents at the same rate, within six weeks from the date of the expiry of the first six weeks time granted herein to the' contesting respondents; however, question of any interest on the amount to be paid by the petitioners to the said respondents would not arise as these respondents have been running the company all these years; other conditions stated in the order of the learned company judge shall continue to operate, subject to these modifications. 46. 2. 46. 2. In the event of contesting respondents in the company petition fail to pay to the petitioners as per this order and the petitioners proceed to purchase the shares of those respondents, parties are at liberty to move the company court for ap- propriate orders regarding the profits earned by the company during the period of this litigation. Appeal partly allowed. No order as to costs. --- *** --- .