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Judgment
This Judgment has been overruled by : Commissioner of Wealth-tax Vs. T.S. Santhanam and Others, (2001) 248 ITR 575
M.N. Chandurkar, C.J.—The common question which has been referred to this court for our opinion in these several references reads as
follows :
Whether it has been rightly held by the Tribunal that the advance tax paid is to be deducted from the tax on the book profits to arrive at the
quantum of tax payable with reference to book profits in accordance with law applicable thereto'' referred to in sub-clause (ii) (e) of Explanation II
to rule 1D of the Wealth-tax Rules, 1957 ?
The answer to the question, of course, depends on a proper construction of rule 1D, Explanation II, clause (e) of the Rules. The Tribunal, which
delivered the main order in respect of three assessees, has given by way of illustration, figures relevant for working out of the break-up value in
respect of their shares is M/s. Cyclon Products (Private) Limited, Coimbatore, as adopted by the Wealth-tax Officer as follows :
31-3-1968
Rs. Rs.
Total assets 2,50,697
Less : I.T.- Advance tax 13,000
Prepaid expenses 1,431
_______ 14,431
----------
Net assets 2,36,266
----------
Rs. Rs. Rs. Rs.
Total liabilities 2,50,697
Less : Paid-up capital 50,000
Less :
Development rebate
reserve 8,360
Credit balance in profit
and loss account 7,324
Tax on Rs. 27,26O 17,719
Less :
Advance tax 13,000
----------
4,719
Provision 14,432
---------- 9,713
--------- 25,397
---------- 24,603
--------
2,26,094
--------
2,26,094 x 100
Break-up value = ----------------
50,000
= Rs. 452
of which 85% = Rs. 384.
The above calculation shows that the Wealth-tax Officer had excluded the amount of Rs. 13,000 paid as advance tax from the total assets of
the company. The tax payable on the basis of book profits of the amount of Rs. 27,260 came to Rs. 17,719. The Wealth-tax Officer deducted the
amount of advance tax of Rs. 13,000 paid from this amount and arrived at the figure of Rs. 4,719. He found that in the balance-sheet, the
provision for taxation was made at Rs. 14,432. The actual tax payable, according to him, now being Rs. 4,719, he treated the balance amount of
Rs. 9,713 as an excess provision. It is here that the working of clause (e) of Explanation II to rule 1D of the Wealth-tax Rules, 1957, becomes
relevant.
The assessee filed appeals to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner gave certain directions to the
Wealth-tax Officer. The assessee was not satisfied with these directions given by the Appellate Assistant Commissioner. The assessee, therefore,
filed appeals before the Tribunal.
The Tribunal has taken its view, relying on a decision of the Supreme Court in The Commissioner of Income Tax, West Bengal 1, Calcutta Vs.
Vegetables Products Ltd., , in which the Supreme Court, while construing the words ""tax payable"" used in section 271(1)(a)(i), held that the tax
payable is the amount for which a demand notice is issued u/s 156 and in determining the tax payable, the tax already paid has to be deducted.
What the Wealth-tax Officer has done is that to arrive at the figure of tax payable, he had deducted the advance tax paid from the amount of tax
chargeable on the book profits. The Tribunal took the view that the tax payable contemplated by clause (e) of Explanation II is the amount, after
the deduction of the advance tax amount in relation to which the provision has to be looked into. It was pointed out by the Tribunal that the tax on
current profits would only be on the basis of an approximate figure and is shown as a provision for taxation, because the advance tax, if any, paid
in respect of those profits, would remain to be adjusted till the final determination of the tax payable is made and the demand notice u/s 156 is
issued, which will only be after the date to which the balance-sheet relates. According to the Tribunal, for the purpose of computing whether there
is excess provision made by the company, it has to be seen with reference to what normally it would have provided if advance tax was deducted
from the provision. Thus, the Tribunal found that the method of computation adopted by the Wealth-tax Officer was correct.
This view of the Tribunal that, while working out the provision in clause (e) of Explanation II to rule 1D, the tax payable can be ascertained only
after deducting the amount of advance tax paid from the tax which becomes payable on the book profits, is put in issue in the question before us.
Before referring to the arguments on behalf of the assessee challenging the view of the Tribunal and that of learned counsel appearing on behalf
of the Revenue, it is necessary to reproduce the relevant part of rule 1D which sets out the procedure for ascertaining the market value of unquoted
equity shares of companies other than investment companies and managing agency companies. The substantive rule 1D reads as follows :
1D. The market value of an unquoted equity share of any company, other than an investment company or a managing agency company, shall be
determined as follows :
The value of all the liabilities as shown in the balance-sheet of such company shall be deducted from the value of all its assets shown in that
balance-sheet. The net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown in the balance-sheet.
The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market
value of each such share shall be 85% of the break-up value determined.
The proviso is not material for our purpose and is not reproduced. Explanations I and II, in so far as they are relevant, read as follows :
Explanation I. - For the purposes of this rule, ''balance-sheet'' in relation to any company, means the balance-sheet of such company as drawn up
on the valuation date and where there is no such balance-sheet, the balance-sheet drawn up on a date immediately preceding the valuation date
and in the absence of both, the balance-sheet drawn up on a date immediately after the valuation date.
Explanation II. - For the purposes of this rule -
(i) the following amounts shown as assets in the balance-sheet shall not be treated as assets, namely : -
(a) any amount paid as advance tax u/s 18A of the Indian Income Tax Act, 1922 (11 of 1922), or u/s 210 of the Income Tax Act, 1961 (43 of
1961);
(b) any amount shown in the balance-sheet including the debit balance of the profit and loss account or the profit and loss appropriation account
which does not represent the value of any asset;
(ii) the following amounts shown as liabilities in the balance-sheet shall not be treated as liabilities, namely : -
(a) the paid-up capital in respect of equity shares;
(b) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the
valuation date at a general body meeting of the company;
(c) reserves, by whatever name called, other than those set apart towards depreciation;
(d) credit balance of the profit and loss account;
(e) any amount representing provision for taxation (other than the amount referred to in clause (i) (a)) to the extent of the excess over the tax
payable with reference to the book profits in accordance with the law applicable thereto;
(f) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.
The contention on behalf of the assessee is that the rule expressly provides that the amount which has been paid as advance tax, which, in the
balance-sheet, is shown as assets of the company, shall not be treated as assets for the purpose of determining the market value of the unquoted
equity shares. Thus, according to learned counsel, so far as the liabilities are concerned, clause (ii) of Explanation II enumerates certain amounts
with are shown as liabilities as such in the balance-sheet, but have been expressly provided as not to be treated as liabilities for the purpose of
computation contemplated by rule 1D. Referring to clause (e) in Explanation II, the argument of learned counsel for the assessee is that what is
contemplated by that clause is that ""tax payable on the basis of the book profits"" has to be worked out and if the provision for taxation is in excess
of the tax so computed on the basis of the book profits, then that excess provision is not to be treated as a liability. Referring to the bracketed
words in clause (e), it is argued that the words ""other than the amount referred to in clause (i) (a) "" cannot be construed as enabling the tax
authorities to take away the benefit which has been expressly conferred by the rule by clause (i) (a) of the Explanation by permitting the Revenue to
deduct the amount of advance tax from the tax which is payable with reference to the book profits. In other words, the contention is that in so far
as clause (e) is concerned, when it refers to the extent of excess over the tax payable with reference to the book profits, the excess has to be found
out with reference to the provision of tax made in the balance-sheet without deducting the amount of advance tax. Learned counsel has fairly
brought to our notice the divergence of views with regard to the construction of clause (e) in different High Courts. The High Court of Gujarat and
the High Court of Bombay had accepted the view which is canvassed on behalf of the assessee. The High Court of Punjab and Haryana and the
High Court of Karnataka have approved the view taken by the Tribunal and supported by learned counsel for the Revenue.
Learned counsel for the Revenue has, however, argued that if the amount of advance tax is reckoned for calculating the assets in the sense that
it is not treated as an asset, then it is just and proper that in so far as liabilities are concerned also, the advance amount has to be reckoned and
when the tax payable has to be determined, it must be determined only after taking into account the advance tax paid. In other words, according to
learned counsel, the tax payable must be so construed as to mean the tax actually payable after giving credit to the advance tax. The excess,
according to learned counsel for the Revenue, has to be worked out on the difference between the amount so computed and the provision for tax
made in the balance-sheet. This difference was not intended, according to learned counsel for the Revenue, to be treated as a liability for the
purpose of ascertaining the market value of the unquoted share.
The two conflicting arguments had been considered by different courts. Before we refer to these decisions; although we make it clear that we
are inclined to follow the view taken by the Gujarat and Bombay High Courts, it is necessary to point out that clauses (i) and (ii) of Explanation II
deal with two different items. Clause (i) of Explanation II deals with two amounts which are shown as assets in the balance-sheet; but it is expressly
provided that these amounts are not to be treated as assets for the purpose of working out rule 1D. Clause (ii) of Explanation II deals with
liabilities. Once again, though the amounts referred to in clause (ii) are liabilities which are shown in the balance-sheet, the rule expressly provides
that for the purpose of clauses (i) and (ii), these items shall not be treated as liabilities. In so far as the advance tax is concerned, while it is
expressly shown as assets in the balance-sheet, the rule says that it shall not be treated as an asset. When the rule-making authority made a
provision in clause (e) to provide that certain amount which is in excess of the actual liability by virtue of the provision for taxation being made at a
higher figure than what would be payable on the basis of the book profits, clearly and properly did not want that excess amount to be treated as a
liability, because it is not a liability at all. Some difficulty has been experienced in construing sub-clause (e) because of some inelegant drafting by an
introduction of the bracketed portion. The bracketed portion ""other than the amount referred to in clause (i) (a) "" is preceded by the words ""any
amount representing provision for taxation"". There are two ways of looking at that bracketed portion. One way is the strictly grammatical way and
to construe the word ""other"" in the context of the word preceding the words ""provision for taxation"", which would mean that the words following
the word ""other"" must refer to some provision for taxation. If we adopt strictly the grammatical rule of construction, then the bracketed portion will
have to be read as ""provision for taxation other than the amount which is referred to in clause (i) (a) "". Though clause (i) (a) says that the amount
paid as advance tax shown as assets in the balance-sheet shall not be treated as assets, the fact remains that it is an asset and it cannot be
Construed as a provision as commonly understood either for the purpose of taxation or for the purpose of commercial accounting. Such a
construction, therefore, would not be permissible.
The other construction which seems to be more plausible is to relate the word ""other"" to the word ""amount"" which occurs in the opening part of
the clause. If the rule is so read, then it will read as follows :
Any amount, other than the amount referred to in clause (i) (a), representing provision for taxation to the extent of the excess over the tax payable
with reference to the book profits in accordance with the law applicable thereto.
It is a well-known rule of construction that as far as possible, a statutory provision should not be so construed as to make it nugatory or
ineffective. If clause (e) is read in the manner indicated above, the obvious effect of such construction is that the amount referred to in clause (i) (a)
which is the amount paid as advance tax, is to be left out for the purpose of determination of the excess contemplated by clause (e). Such a
construction alone appears to us to be plausible because it will indicate that while providing that the amount paid as advance tax shall not be
treated as an asset, the rule-making authority also accepted the general principle of commercial accounting on which the balance-sheet is made
when a provision for taxation is made only with reference to the total liability which alone is taken into account for the purpose of arriving at the
picture in the balance-sheet. Sub-clause (e) refers merely to ""tax payable"" which means the total tax payable and not the balance of the tax payable
after deducting the advance tax. If the advance tax is deducted from the amount which would be due on the basis of the book profits so as to
arrive at the figure of the ""tax payable"" as contended by the Revenue, in our view, it would amount to adding words in clause (e) by reading it as
tax payable after giving credit for the amount of advance tax paid"". This, in our view, would not be permissible. When clauses (i) and (ii) of
Explanation II specifically refer to the balance-sheet, we must also assume that the rule-making authority had in mind the normal way of making a
provision for taxation which is made with reference to the total tax liability.
In our view, plainly and clearly, since for purposes of the balance-sheet, the tax has to be computed on the basis of the book profits and a
provision has to be made therefor, what is to be ascertained for the purpose of clause (e) is whether the provision for taxation is in excess of the
tax payable. The words ""tax payable"" clearly refer to, in our view, the total amount of tax payable on the basis of the book profits computed in
accordance with the provisions of the Income Tax Act. In our view, there is no warrant for deducting the amount of advance tax and to give an
artificial meaning to the words ""tax payable"".
In Commissioner of Wealth Tax, Gujarat-I Vs. Ashok K. Parikh, , on a construction of sub-clause (e) of clause (ii) of Explanation II, the court
took the following view (p. 51) : ""Really speaking, the words ''referred to in clause (i) (a)'' mean the amount mentioned in clause (i) (a) and the
entire sub-clause (e) of clause (ii) of Explanation II refers to the provision and not to the payment and, therefore, while considering this question of
provision for taxation and to what extent the provision is in excess of the amount of tax payable as per the book profits in accordance with the law
applicable thereto, what one has to see is not the payment made but the provision made by the company in its balance-sheet on the liabilities side.
While considering the provision for taxation, it must be found out that there is no provision for payment of advance tax because provision for
advance tax is to be excluded from the scope of sub-clause (e) of Therefore, what sub-clause (e) of clause (ii) requires the Wealth-tax Officer to
do is to ascertain first as to what are the book profits shown by the company and in the light of those book profits what would be the tax payable
with reference to those book profits in accordance with the law applicable thereto. Having thus ascertained the amount of the tax payable with
reference to the book profits, the Wealth-tax Officer has then to see whether the provision for taxation on the liabilities side of the balance-sheet is
in excess of the said amount of tax payable with reference to the book profits as already ascertained by him. If there is any excess in the provision
for tax liabilities, then that excess is not to be treated as part of the liabilities of the company while computing the break-up value of the shares of
the company. It is equally clear that so far as provision for advance tax is concerned, that provision has to be disregarded while applying the
provisions of sub-clause (e) of clause (ii) of Explanation II.
The same view has been reiterated in a recent decision of the Bombay High Court in Commissioner of Wealth-tax Vs. Pratap Bhogilal and
another, , where the Division Bench took the view in the following words (p. 505) :
The bracketed portion in the sub-clause is to be read with the first part as (i) bracket starts immediately after the expression ''provision nnfor
taxation'' and (ii) the expression ''to the extent of excess over'' precedes the words ''the tax payable''. Therefore, the bracketed portion will have a
bearing on the first part only. The first part has, it appears to us, two limbs. The first limb, namely, ''any amount representing provision for taxation''
refers to a factual aspect of the balance-sheet and there cannot possibly be any dispute or debate about it. The second limb, i.e., the bracketed
portion which starts with the words ''other than'', to our mind, means and can only mean ''except''. The words ''other than'' are followed by the
words ''the amount referred to in clause (i) (a)'' which is the amount paid as advance tax. The bracketed portion, thus, means other than advance
tax paid. Putting it differently, the first part of the clause would read as any amount representing provision for taxation other than or except the
amount paid as advance tax. Such an interpretation certainly does not support the contention of the Revenue.
The learned judges thus took the view that for the purpose of determining the excess of provision for taxation over the tax payable with
reference to the book profits in terms of Explanation II(ii) (e) to rule ID, the tax payable with reference to the book profits cannot be reduced by
the amount of advance tax paid. Undoubtedly, there are two decisions which support the Revenue. The first decision is of the Punjab and Haryana
High Court in Ashok Kumar Oswal Vs. Commissioner of Wealth-tax, . The learned judges of the said court, while construing the words, ""tax
payable with reference to the book profits"" in sub-clause (e), observed as follows (headnote) :
These words connote the amount of tax due from a company after deducting the advance tax and not the whole of the amount of tax worked out
on the book profits. A provision for taxation is made in the balance-sheet under rules of accountancy and not under any rule of law. The liability of
a company to pay tax is the amount of tax worked out on its profits minus the payment made as advance tax. It cannot be said that the advance tax
paid is not relevant for determining the tax liability of a company. Therefore, under sub-clause (e), out of the provision for taxation, the actual
amount payable after deducting the advance tax will be taken as the liability of the company and not the whole of the tax on the book profits.
The learned judges did not agree with the view taken by the Gujarat High Court.
This decision was followed by the Karnataka High Court in Commissioner of Wealth Tax Vs. N. Krishnan, . The Karnataka High Court has
taken the view that if the advance tax is taken out as an asset, there has to be a corresponding reduction from the tax liability, which appears as a
provision for tax due at a gross figure from which the Government will collect only the net tax after adjusting the advance tax already paid by the
company. The learned judges have, while accepting the contentions of the Revenue, observed as follows (p. 312) :
When the assets side is already reduced under clause (i) (a) by excluding the advance tax from the assets side of the balance-sheet, there cannot
be any other way of interpretation of clause (ii) (e) than to correspondingly reduce the provision for taxes by the amount of advance tax paid. In
our opinion, the provision for tax payable with reference to the book profits in the balance-sheet has to be reduced by the amount of advance tax
paid. What clause (ii) (e) seeks to achieve is not to overload the liabilities side of the balance-sheet with the total tax payable, while the total tax
payable in fact and in law is the gross tax as determined on book profits less the advance tax already paid.
With respect, we are unable to agree with the view taken by the Karnataka High Court. The question of taking an advantage which the
assessee got by not treating the advance tax as an asset being set off by reducing the liabilities to an equal extent is not, in our view, a matter With
which we are concerned. If the rule-making authority has made an artificial provision with regard to the different items in the balance-sheet, then it
is the rule-making authority who should decide which item he did not want to treat as liability and to what extent. In view of the construction which
we have placed on sub-clause (e) of clause (ii) of Explanation II, we are, with respect, unable to agree with the view taken by the Punjab and
Haryana and Karnataka High Courts. We concur with the view taken by the Gujarat and Bombay High Courts.
Accordingly, the question referred in all these cases has to be answered in favour of the assessee and against the Revenue. The question is
accordingly answered in the negative and in favour of the assessee. The assessee will get costs of Rs. 1,000 in these references. Counsel''s fee one
set.