Commissioner of Income Tax vs Udayan L. Gajjar

R.K. Abichandani, J.—The Tribunal has referred the following question for the opinion of this Court under s. 27(1) of the WT Act, 1957 :

"Whether the Tribunal is right in law and on facts in directing the WTO to value the unquoted shares of Pvt. Ltd. companies by holding that the advance tax paid under the IT Act, 1961, and shown on the asset side of the balance sheet of the said companies cannot be deducted from the tax payable, in determining whether the provision for taxation in excess over the tax payable with reference to the book profit in accordance with the law applicable hereto, within the meaning of clause (ii)(e) of Expln. 2 to r. 1D of the WT Rules, 1957 ?"

The relevant assessment year is 1983-84. The assessee had claimed that the unquoted shares of the private limited company be valued as per the provisions of r. 1D of the WT Rules and while doing so, advance tax paid and shown on the asset side of the balance sheet cannot be deducted from the provision made for tax payable. The WTO rejected this claim. The CWT(A) directed the WTO to value the unquoted shares of the private limited company by holding that the advance tax paid under the IT Act, 1961 and shown on the asset side of the balance sheet of the said company, cannot be deducted from the tax payable in determining whether the provision for taxation was in excess over the tax payable with reference to the book profit in accordance with the law applicable thereto within the meaning of clause (ii)(e) of Expln. 2 to r. 1D of the WT Rules, 1957. The Tribunal relying upon the decision of this Court in Commissioner of Wealth Tax, Gujarat-I Vs. Ashok K. Parikh, confirmed the order of the CWT(A). In Ashok K. Parikh (supra), on the basis of which the Tribunal decided the matter, this Court had taken a view, while construing cls. (i)(a) and (ii)(e) of Expln. 2 to r. 1D, that for the purpose of computation of the market value of the equity shares of a company, the advance tax paid under s. 210 of the IT Act, 1961 and shown on the assets side of the balance sheet of the company, cannot be deducted from the tax payable, in determining whether the provision for taxation is in excess over the tax payable with reference to the book profits in accordance with the law applicable thereto within the meaning of clause (ii)(e) of Expln. 2 to r. 1D of the said Rules.

The dispute centres around the treatment to be given to the advance tax paid shown on the assets side of the balance sheet of the company while working out the value of the equity shares on break up value method. At the time of making of reference, this question was pending before the apex Court. Now, we have the benefit of the decision of the apex Court in Bharat Hari Singhania and others Vs. Commissioner of Wealth Tax (Central) and others, . The Hon''ble Supreme Court while construing the provisions of r. 1D of the WT Rules, 1957, held that the said rule was required to be followed in every case where unquoted equity shares of a company (other than an investment company or a managing agency company) have to be valued and that all the authorities under the Act including the Valuation Officer were bound by the said rule. It was further held that while valuing the unquoted equity shares under r. 1D, no deductions on account of capital gains tax which would have been payable in case the shares were sold on the valuation date can be made. Similarly, no other deductions including provision for taxation, provident fund and gratuity are admissible. It was held that r. 1D was exhaustive on the subject.

The Supreme Court while construing the provisions of the said r. 1D r/w Expln. 2(ii)(e) of the said Rule held that truly speaking, the advance tax paid is not really an asset, but, the proforma of balance sheet in Sch. VI to the Companies Act requires it to be shown as such. It was held that what clause (i)(a) of the said Explanation did was to remove the said amount from the list of assets for the purpose of r. 1D. It is then that clause (ii)(e), which speaks of liabilities, says that only that amount which is still remaining to be paid shall be treated as a liability on the valuation date. If in the provision for taxation made in the column of liabilities in the balance sheet, the amount of advance tax already paid is again shown as a liability, it will not be treated as a liability. The advance tax paid had already gone out of the profits and been debited in the account books of the company. It was held that this was the true function of both the sub-clauses. The Supreme Court in the process accepted the view of Andhra Pradesh, Karnataka, Punjab & Haryana High Courts and differed from the view taken by the Gujarat High Court in CWT vs. Ashok K. Parikh (supra).

In view of the decision of the Supreme Court in the case of Bharat Hari Singhania vs. CWT (supra), we hold that the Tribunal was in error in directing the WTO to value the unquoted shares of the private companies by holding that the advance tax paid under the IT Act, 1961 and shown on the asset side of the balance sheet of the said company cannot be deducted from the tax payable in determining whether the provision for taxation is in excess over the tax payable with reference to the book profit. The question referred to this Court is therefore, answered in the negative in favour of the Revenue and against the assessee. The reference stands disposed of accordingly with no order as to costs.