Commissioner of Wealth-tax vs (Miss) Sripriya Mahesh

R. Jayasimha Babu, J.—As to whether tax liability which had been assessed under an order of assessment, but which has been set aside in

appeal was not to be regarded as a liability which could be deducted for the purpose of determining the break-up value of the shares of the

company in terms of Rule 1D of the Wealth-tax Rules, 1957, is the question that has been referred to us, at the instance of the Revenue.

The assessee is a shareholder in Southern Roadways Limited and that company had been assessed to tax in a sum of Rs. 48,15,668. The

company''s claim that it was not liable under sections 41(2) and 45 of the Income Tax Act, 1961, was rejected by the assessing authority. The

claim had been rejected under those provisions by the Income Tax Officer on the ground that the compensation received by the company for loss

of route permits was assessable to tax. These route permits were lost to the company by reason of the take over by the Government of Tamil

Nadu with effect from January 17, 1972, of the routes on which the company was running buses. The take over was effected under the Tamil

Nadu Fleet Operators Stage Carriages (Acquisition) Act, 1971.

The assessee questioned the order of the Income Tax Officer disallowing the depreciation and charging terminal profits u/s 41(2) and capital

gains u/s 45 of the Income Tax Act, 1961, arising out of the compensation received for loss of route permits, after paying the tax that was

demanded. In appeal, the assessee succeeded, as a result of which the amount paid by the company was refunded to it on August 30, 1977. That

amount was kept by the company in a term deposit with the State Bank of India. In the balance-sheet of the company, the amount of the term

deposit was taken as part of its assets. Under the heading liabilities after setting out the provisions for taxation this amount was fairly shown as

contingency per contra"". The Revenue being aggrieved by the decision of the Appellate Assistant Commissioner, preferred an appeal to the

Tribunal. The Tribunal accepted the appeal and set aside the order of the Appellate Assistant Commissioner. Consequently, the assessee became

liable to repay the amount which was deposited as term deposit. That judgment of the Tribunal was rendered after the closure of the assessment

year 1980-81, In the order of the Tribunal for the assessment years 1978-79 to 1980-81, under the Wealth-tax Act, a copy of which was placed

before us and the contents of which are not disputed before us, it is stated that after the order of the Tribunal upholding the levy u/s 41(2) and

Section 45 of the Act, the amount has been paid by the assessee.

The order of the Tribunal upholding the assessment to tax under sections 41(2) and 45 of the Act, it is submitted by counsel at the Bar, has been

upheld by this court in T. C. No. 635 of 1983-- Southern Roadways Ltd. Vs. Commissioner of Income Tax, decided on April 19, 1996.

The reference before us arises out of the assessment of the respondent to wealth-tax for the year 1980-81 and the question is as to whether the

tax liability of Rs. 48,15,668 is to be deducted from the total assets for the purpose of determining the break-up value of the shares of Southern

Roadways Private Limited under Rule 1D of the Wealth-tax Rules, 1957. The Income Tax Officer and the Appellate Assistant Commissioner held

that the amount is not deductible as in their view, the balance-sheet only disclosed that this amount had been provided as a contingency and as on

the valuation date, there was no liability outstanding in that sum, by reason of the fact that the Appellate Assistant Commissioner had set aside the

assessment that had been made by the Income Tax Officer on the company and the Tribunal had not decided the Revenue''s appeal as on the

valuation date.

On further appeal by the assessee, the Tribunal has set aside the orders of the Appellate Assistant Commissioner and the Income Tax Officer so

far as the deductibility of the sum is concerned for the purpose of determining the break-up value of the shares of the company. The correctness of

that view is called in question by the Revenue in this reference.

Learned counsel for the Revenue submitted that contingent liabilities cannot be deducted for the purpose of determining the break-up value of

the shares under Rule 1D of the Wealth-tax Rules, that as on the valuation date there was no liability on the company for payment of the sum as the

Income Tax Officer''s order had been set aside by the Appellate Assistant Commissioner and though the Revenue had filed an appeal to the

Tribunal the Tribunal had not decided the case as on that date. Counsel submitted that what is material is only the state of affairs that existed as on

the valuation date and any subsequent event was not required to be taken note of for the purpose of deciding the question of the deductibility or

otherwise of any sum for determining the break-up value of the shares. Counsel placed reliance on the decision of the Calcutta High Court in the

case of Commissioner of Wealth Tax (Central) Vs. Mohan Lal Nopany, , which was rendered by that court on September 22, 1969. The court

therein held that the breakup value of the shares to a considerable extent was dependent upon the value which a potential buyer of the shares

would place on the company''s shares having regard to the financial data disclosed in the balance-sheet and such a potential buyer was not likely to

value the shares at a lesser figure only because an appeal was pending before the statutory authorities under the Agricultural Income Tax Act in

which the correctness or otherwise of an assessment order made against the company was in issue. This judgment does not refer to Rule 1D, as

indeed it could not have as that Rule was introduced only in the year 1967. The Calcutta High Court was con- cerned with the reference arising

out of assessment to wealth-tax for the assessment year 1959-60 which year was several years prior to the introduction of Rule 1D of the Wealth-

tax Rules. That decision was rendered prior to the decision of the apex court in the case of The Kedarnath Jute Mfg. Co. Ltd. Vs. The

Commissioner of Income Tax, (Central), Calcutta, and the decision of the apex court in the case of Commissioner of Wealth Tax, Madras Vs.

K.S.N. Bhatt, .

The decision relied upon by learned counsel for the Revenue is, therefore, of no assistance for the purpose of deciding the case which has to be

decided in the light of Rule 1D of the Rules and the decision of the apex co.urt rendered subsequent to the decision of the Calcutta High Court. To

the extent the judgment of the Calcutta High Court is at variance with what has laid down by the apex court in the two decisions referred to earlier,

the judgment of the High Court of Calcutta must be held to have been overruled and it can no longer be regarded as good law.

The point in issue is not res Integra and is covered by the authoritative decision of the apex court referred to earlier in the case of The Kedarnath

Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, That was a case under the Income Tax Act. The court held that the

liability of the assessee under the Sales Tax Act did not cease to be a liability because the assessee had taken proceedings before higher authorities

for getting it reduced or wiped out so long as the contention of the assessee did not prevail. It was also held that the fact that the assessee had

failed to debit the liability in its books of accoXmt did not debar it from claiming the sum as a deduction either u/s 10(1) or u/s 10(2)(xv). The court

has also observed that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not

on the view which the assessee might take of his rights.

The case of Commissioner of Wealth Tax, Madras Vs. K.S.N. Bhatt, , arose under the Wealth-tax Act. The question considered by the court

in that case was whether the liabilities claimed by the assessee, though the existence of the very liability was questioned by the assessee, should be

allowed as a ""debt owed"" in computing the net wealth of the company. The court after considering that question held as under (page 5) :

Now, the quantification of the Income Tax, wealth-tax or gift-tax liability is determined by a corresponding assessment order, and even if the

assessment order is made after the valuation date relevant to the wealth-tax assessment in which the claim to deduction is made, there is a debt

owed by the assessee on the valuation date. The quantification effected by an assessment order may be varied as the Income Tax, wealth-tax and

gift-tax case is carried in appeal to the Appellate Assistant Commissioner or thereafter to the Appellate Tribunal, and indeed even in reference later

to the High Court or subsequent appeal to this court. It is the quantification of the tax liability by the ultimate judicial authority which will determine

the amount of the debt owed by the assessee on the valuation date. So long as such ultimate determination indicates the existence of a positive tax

liability, it must be held that there is a debt owed by the assessee on the valuation date even though such determination may be subsequent in point

of time to the valuation date. If, however, it is found on such ultimate determination that there is no tax liability, it cannot be said that merely

because originally a tax liability had been determined and stood existing on the valuation date there was a debt owed by the assessee.

It is not in dispute that the company had been assessed to tax in the sum of Rs. 48,15,668. That amount had been quantified by the Assessing

Officer. The Tribunal had upheld the assessment and that decision of the Tribunal has been affirmed by this court. The decision of the Tribunal

relates back to the valuation date as does the decision of the High Court on the reference. It is only if and when the Supreme Court reverses the

decision of this court on the assessee''s appeal that the assessee can be said to have no liability for the payment of the sum of Rs. 48,15,668. As

things stand now that sum is a liability which the company has incurred and that sum is required to be deducted from its total assets for the purpose

of determining the value of the shares.

We make it clear that if the apex court were to reverse the decision of this court in Tax Case No. 635 of 1983 ( Southern Roadways Ltd. Vs.

Commissioner of Income Tax, the assessee will not be entitled to deduction of that sum from the total assets of the company for the purpose of

determining the break-up value of the share under Rule 1D of the Wealth-tax Rules.

We do not find any error in the decision of the Tribunal and the question is answered in favour of the assessee and against the Revenue, The

assessee shall be entitled to costs in the sum of Rs. 1,000.