Commissioner of Wealth Tax vs Vasantlal D. Mehta

T.D. Sugla J.

This is reference at the instance of the Department. The Tribunal has referred three questions of law to this court for opinion u/s 27(1) of the Wealth-tax Act, 1957. The questions read thus :

"1. Whether the case of an assessee carrying on a profession, as distinct from carrying on a business, is covered by section 7(2)(a) of the Wealth-tax Act, 1957 ?

Whether, on the facts and in the circumstances of the case, on the cash system of accounting followed by the assessee, his share in the fees outstanding on the valuation date in the vase of the firms in which he was a partner could be included in his net wealth as on the relevant valuation date ?

If the answer to question No. 2 is in the affirmative, whether the value of the debts to be deducted from the value of the assets in order to arrive at the net wealth of the assessee as on the relevant valuation date should also be taken on accrual basis instead of on cash basis ?"

The assessee is a solicitor. He has been carrying on the profession as solicitor himself and also as partner in a number of solicitor firms at Bombay. The proceedings relate to his wealth-tax assessment for the assessment years 1967-68 and 1968-69, the relevant, valuation dates being March 31, 1967, and March 31, 1968, respectively. The assessee as well as the solicitor firms in which the assessee was a partner maintained accounts on cash basis under which outstanding fees receivable but not actually received are not credited in the books and consequently do not appear as assets in the balance-sheet. The Wealth-tax Officer took the view that such outstanding fees represented "assets" within the meaning of section 2(e) of the Wealth-tax Act, 1957, and were includible in the net wealth. Estimating the outstanding fees in the case of the assessee as also in the case of the said firms, he computed the assessee''s share in the outstanding fees on the two valuation dates at Rs. 75,000 on ad hoc basis and included the said amount in the assessee''s net wealth. The Appellate Assistant Commissioner deleted the outstanding fees from the net wealth following the Tribunal''s decision in the case of V. M. Shah (copy of which is annexed to the statement of the case).

The Department filed appeals before the Tribunal. Following its order in V. M. Shah''s case the Tribunal held :

"1. That the case of an assessee carrying on a profession (as is so in the present case) does not fall u/s 7(2)(a), rules 2A to 2C of the Wealth-tax Rules, 1957, therefore, manifestly do not apply to such a case and it is, therefore, not open to the Wealth-tax Officer to make adjustments in the value of the assets not disclosed in the balance-sheets by recourse to rule 2C;

That where cash system of accounting is adopted (as is so in the present case), it is not open to the Wealth-tax Officer to make an adjustment in the net wealth of the firm as disclosed in its balance sheet, which has the effect of substituting one form of balance-sheet or which has the effect of substituting one system of accounting for another;

That it would be inconsistent to include all the assets including outstanding fees on accrual basis but to take into account liabilities only on cash basis; and that if outstanding fees are to be included on accrual basis, then it would be necessary to take into account all the liabilities also on accrual basis."