Tube Investments of India Ltd. vs Commissioner of Wealth-tax

Veeraswami, Offg. C.J.

These are references u/s 27(1) of the Wealth-tax Act. The assessees are different, but because common points arise they have been heard

together. In Tax Case No. 49 of 1964, the questions for decision are :

Whether the assessee was entitled to a deduction in the computation of the net wealth in the assessment for the year 1957-58 of a sum of Rs.

34,15,086 as a deduction u/s 7(2) of the Wealth-tax Act, being the difference between the book value and the written down value of the buildings,

plant and machinery, as on the valuation date June 30, 1956 ?

Whether the assessee was entitled to a deduction of Rs. 8,07,852, being the liability for payment of tax ?

In the other reference the questions are :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessees were not entitled to a

deduction in the computation of their net wealth for the assessment for 1958-59 of a sum of Rs. 38,42,337 as a deduction u/s 7(2) of the Wealth-

tax Act, being the difference between the book value and the written down value of the buildings, plant and machinery as on the valuation date,

June 30, 1957, and of Rs. 23,11,939 in respect of the valuation date, June 30, 1958 ?

Whether, on the facts and in the circumstances of the case, the assessees were not entitled to a deduction of Rs. 1,19,748 being the liability on

account of the wealth-tax payable for the assessments of 1957-58 and 1958-59 and of Rs. 76,505 in respect of the valuation date, June 30, 1958

?

The second question in each of these references is now covered by authority, in the first by Kesoram Industries and Cotton Mills Ltd. Vs.

Commissioner of Wealth Tax, (Central) Calcutta, and in the second by H.H. Setu Parvati Bayi Vs. Commissioner of Wealth Tax, Kerala, , which

is also in favour of the assessee. These questions are, therefore, answered in favour of the assessee.

In each case, the assessee is a public limited company incorporated under the Indian Companies Act, 1913. In the first of them, the assessee

exhibited in its balance-sheet, relevant to the valuation date, June 30, 1956, a sum of Rs. 79,89,689 as the value of its assets. The written down

value of the assets as on that date for purposes of Income Tax assessment was Rs. 45,74,603. The assessee adopted the written down value in its

return for wealth-tax and claimed, so to speak, a deduction of the difference between the written value and the book value of the assets. The

Wealth-tax Officer declined to allow the claim and considered that the valuation being u/s 7(2)(a) of the Wealth-tax Act, 1957, he could only

adopt the valuation shown in the books and the balance-sheet as on June 30, 1956, and that the assessee would not be entitled to any adjustment.

The assessee failed in its appeal. The Tribunal, in dealing with the claim, expressed its view :

When a global valuation is adopted and the balance-sheet as on the valuation date is taken as the basis it does not appear to us to be correct to

insist that the Wealth-tax Officer should make an adjustment in regard to depreciable assets. When once he departs from global valuation to

individual valuation of the assets, then it will be open to him to adopt the market value of each item and also make the necessary adjustment for

depreciation and adjustment cannot be restricted to one aspect only. In our opinion, the assessee is bound by the valuation placed by itself in the

balance-sheet prepared by it and certified by its statutory auditors.

In the other reference, the facts are similar except for the figures. The assessees there claimed deduction of the difference between Rs.

89,59,037 and Rs. 51,13,700, the value shown in the balance-sheet based on the book value and the written down value respectively of the assets

as on June 30, 1957, the date of valuation. In this case too the assets consisted mostly of buildings, plant and machinery. The balance-sheets

themselves did not ex facie set out the written down value of the assets.

We may at once say that we are unable to accept the view the Tribunal has taken in these cases. The revenue as well as the Tribunal apparently

proceeded on the basis that in valuing assets on a global basis u/s 7(2)(a), the balance-sheet should invariably be adhered to, no individual assets

could be separately valued for any reason and that no adjustment on that basis could possibly be made. That assumption is, in our opinion, clearly

wrong.

Section 3 of the Act charges wealth-tax in respect of the net wealth on the valuation date of every individual, Hindu undivided family and

company at the rate or rates specified in the Schedule. Net wealth has been defined to mean, in substance, the value of the assets, less debts

entitled to deduction. Section 7, which occurs in the same Chapter as the charging section, prescribes the mode of valuing assets. The mode is

two-fold, one is valuation of individual assets, separately on the basis of the estimate of the price which each asset would fetch if sold in the open

market, and the other is what is known as the global method. The global method is adopted as a matter of convenience and, in view of Section

211 of the Companies Act which prescribes that a balance-sheet shall give a true and fair view of the state of the affairs of the company, the

balance-sheet is taken as the basis of valuation in this method, instead of valuing each asset separately. Sub-section (2)(a) enjoins the Wealth-tax

Officer, where he adopts to proceed on that basis, to determine the net value of the assets of the business as a whole, having regard to the

balance-sheet of the business as on the valuation date and making such adjustments therein as may be prescribed. We had occasion in The Loyal

Textile Mills Ltd., Kovilpatti Vs. Commissioner of Wealth Tax, Madras, to consider and point out the scope of this provision. What the Wealth-

tax Officer is called upon to do under this provision is to determine the net value of the assets and this valuation should be made in respect of the

business as a whole and, in doing so, he must have regard to the balance-sheet. Prior to April 1, 1965, in arriving at a valuation on a global basis,

the Wealth-tax Officer was permitted to make such adjustments in the valuation of the assets as the case might require. But the sub-section was

amended with effect from April 1, 1965, by Act 46 of 1964 by the insertion of the words ""may be prescribed"" in the place of "" the circumstances

of the case may require."" Under the amended provision, if the Wealth-tax Officer found that he could not merely proceed on what has been

exhibited in the balance-sheet as the valuation of assets and felt circumstances existed to depart from it, he could certainly exercise his discretion

and make the necessary adjustments as justified by such circumstances. Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth

Tax, (Central) Calcutta, was a case of value of assets being shown in the balance-sheet on an appreciated value on revaluation. The revenue

adopted the book value as given in the balance-sheet, rejecting the contention for the assessee that the increase in the value of assets upon

revaluation should be ignored. The majority opinion of the Supreme Court held that the Wealth-tax Officer was justified, in the circumstances, in

accepting the value of the assets at the figures shown by the assessee itself in the balance-sheet. At the same time, the learned judges of the

majority pointed out that it was open to the assessee to convince the authority that the figure in the balance-sheet was inflated for acceptable

reasons. Since factually the assessee did not make any such attempt, the result was the figure in the balance-sheet as to the valuation of the assets

on global basis prevailed. Shah J., who delivered the minority judgment, concurred with that opinion and pointed out (at page 792) :

The legislature has, therefore, provided in Sub-section (2)(a) that where the assessee is carrying on a business for which accounts are maintained

by him regularly, the Wealth-tax Officer may determine the net value of the assets of the business as a whole, having regard to the balance-sheet of

such business as on the valuation date and make such adjustments therein as the circumstances of the case may require. But the power conferred

upon the tax officer by Section 7(2) is to arrive at a valuation of the assets, and not to arrive at the net wealth of the assessee.

Section 7(2) merely provided machinery in certain special cases for valuation of assets, and it is from the aggregate valuation of assets that the net

wealth chargeable to tax may be ascertained. The power conferred upon the tax officer to make adjustments as the circumstances of the case may

require is also for the purpose of arriving at the true value of the assets of the business. Sub-section (2)(a) of Section 7 contemplates the

determination of the net value of the assets having regard to the balance-sheet and after making such adjustments as the circumstances of the case

may require. It does not contemplate determination of the net wealth, because net wealth can only be determined from the net value of the assets

by making appropriate deductions for debts owed by the assessee.

The Supreme Court, therefore, was of the view that while the Wealth-tax Officer should have regard to the balance-sheet in valuing the assets

on the global basis, he need not necessarily take the balance-sheet as conclusive in every respect. Circumstances may be present which may

requite an adjustment. In that case the Wealth-tax Officer is obliged to make such adjustments and cannot fail to do so on the view that the

balance-sheet is conclusive. But it is for the assessee obviously to show that the balance-sheet does not represent the real or true value of the

assets and the value is something different. If such circumstances are not established, clearly the Wealth-tax Officer will be well within his right to

adopt the value exhibited in the balance-sheet.

Standard Mills Co. Ltd. Vs. Commissioner of Wealth-tax, Bombay City, was not concerned with the precise point that we are asked to consider.

But, in the course of the judgment, the Supreme Court adverted to Section 7(2)(a) and accepted the view as to its scope as expressed in Kesoram

Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, .

In Commissioner of Wealth Tax, Bombay City Vs. Indian Standard Metal Company Ltd., . the Bombay High Court accepted the view of the

Tribunal and held that the amount of depreciation allowed by the Income Tax authorities minus the initial depreciation should be deducted from the

book value shown in the balance-sheet. In taking that view the learned judges also observed :

It is no doubt true that it cannot be an invariable rule that simply because depreciation has been allowed under the Indian Income Tax Act, the

same has got to be allowed in determining the net value of the assets on the date of valuation. It must depend upon the facts and circumstances of

each case as to whether it should properly be allowed or not in arriving at the net value of the assets.

With respect, we are of the same view. Normally, if the assessee exhibits the book value in the balance-sheet and does not show in it the

written down value of the assets relevant for purposes of Income Tax, the Wealth-tax Officer, if there is nothing more, has to act on the balance-

sheet and determine the value of the assets on that basis. It is only where proper materials are placed before the Wealth-tax Officer to establish

circumstances which call for adjustment that he is obliged to consider the same.

Strong reliance has been placed upon The Loyal Textile Mills Ltd., Kovilpatti Vs. Commissioner of Wealth Tax, Madras, for the assessee and

it is contended that, although in these cases the balance-sheet did not exhibit the written down value for purposes of Income Tax, nevertheless,

once the Wealth-tax Officer''s attention is drawn to it, he is bound to consider the same. We do not think that the authority relied on supports the

proposition. All that is pointed out in that case was that, since the written down value had been put down in the balance-sheet, though separately in

it, the Wealth-tax Officer could not ignore it, and, without any further enquiry, insist upon proceeding on the book value of the assets given in the

balance-sheet. We are prepared, of course, to accept that if, in addition to the Wealth-tax Officer''s attention being drawn to the written down

value of assets for purposes of Income Tax, other materials are placed, which would convince the Wealth-tax Officer that adjustments ought to be

made, he would not be at liberty to brush aside such material and still proceed only on the basis of the book value of the assets shown in the

balance-sheet.

Mr. V. Balasubrahmanyan, for the revenue, contended that the idea of deduction of depreciation allowed for purposes of Income Tax is really

not germane for determination of the valuation of the assets for wealth-tax purposes, He contended that such depreciation is often unrelated to the

real value of assets, and, in fact, does not enter into the determination of the market price because, according to him, the market price by itself will

take care of such depreciation. We recognise there is force in the argument, but, as pointed out by the Calcutta High Court in COMMISSIONER

OF WEALTH-TAX, CALCUTTA Vs. TUNGABHADRA INDUSTRIES LTD., the depreciation allowed for Income Tax purposes on plant

and machinery though empiric, affords a rough and ready method of reckoning the loss in value. In that sense we think that depreciation allowed

for purposes of Income Tax may be one of the factors which the Wealth-tax Officer may well take into account in making adjustments, provided

he is satisfied that it has a bearing on the valuation on the global basis. After taking all the circumstances into account, he may possibly come to the

conclusion that, notwithstanding the depreciation allowed for purposes of Income Tax, the valuation of the assets given in the balance-sheet

represents the true state of affairs and that being the case, no adjustment is called for.

But, in these cases, as we pointed out earlier, the revenue as well as the Tribunal proceeded on the wrong basis that, once the global method

u/s 7(2)(a) is adopted, the balance-sheet could not be departed from and individual assets cannot at all be separately valued for any reason. We

are of the view, therefore, that the Wealth-tax Officer should give an opportunity to the assessee to convince him why the figures of valuation oi the

assets, as in the balance-sheet, should not be adopted but adjustments thereto are called for, and, in what manner and to what extent. It follows

that the Tribunal has to dispose of the appeals afresh, and, if it thinks fit, it will be at liberty to remit the matters to the Wealth-tax Officer.

On that view we answer the first question in each of these references in favour of the assessee with costs. Counsel''s fee Rs. 250 in each.