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Petitioner: KESORAM COTTON MILLS LTD. VS Respondent: COMMISSIONER OF WEALTH-TAX, CALCUTTAHonorable Justice G. K. MITTER
1968 P T D 555
1968 P T D 555
[Calcutta India]
Before G. K. Mitter and C. N. Laik, JJ
KESORAM COTTON MILLS LTD.
Versus
COMMISSIONER OF WEALTH‑TAX, CALCUTTA
Matter No. 178 of 1960, decided on 14th May 1962.
Wealth‑tax‑Value of assets‑Balance‑sheet‑Assets re‑valued at higher figure Adjustment whether necessary --Net‑wealth-- Deductions‑Proposed dividends Provision for taxation‑Whether allowable deductions‑Wealth‑tax Act, 1957, Ss. 2 (m) & 7.
In 1950 the assessee had revalued its fixed assets and had added, without reservation or qualification, a sum of Rs. 1,45,87,000 to the value at cost, a corresponding balancing figure being shown under "Reserve and Surplus". The assets as so revalued were shown in its balance‑sheet on March 31, 1957, at Rs. 2,60,52,357. For the purposes of wealth‑tax the department took the value of the fixed assets as given by the assessee in its balance‑sheet whereas the assessee contended that the sum of Rs. 1,45,87,000 ought to be deducted from that value. On a reference:
Held, that in the absence of any grounds to show that the assessee's valuation of the assets was not correct the wealth‑tax authorities were entitled to accept the valuation made by the assessee itself as the net value. The sum of Rs. 1,45,87,000 was not to be deducted.
The assessee had shown in its balance‑sheet for the year ending March 31, 1957, certain amounts against proposed dividends and provision for payment of income‑tax and super tax. The question was whether those amounts were deductible in ascertain ing its net wealth on March 31,1957, which was the valuation date, for the purposes of wealth‑tax :
Held, (i) that a dividend proposed by the directors did not become a debt until it was declared by the company in a general meeting. The amount shown by the assessee against the proposed dividends in its balance‑sheet was not a "debt owed" on the valuation date and was not deductible from the total assets in computing the net wealth of the assessee.
(ii) That although the assessee was liable to pay income‑tax on the valuation date the actual amount of the liability was not ascertained until some time thereafter by the passing of the Finance Act and the determination made by the income‑tax authorities. No debt towards income‑tax and super tax was owed by the assessee on the valuation date. Provision for payment of income‑tax and super tax made in the assessee's balance‑sheet was not a debt owed on the valuation date within the meaning of section 2 (m) of the Wealth‑tax Act, 1957, and was not deductible in computing the net wealth.
All liabilities are not debts and for the purposes of section 2 (m) it is only liabilities which have ripened into "debts owing" that can be taken into account. To merit deduction under section 2 (m) the liability must not only be a debt but one solvendum in praesenti. A debt accruing is not within the section:
[Case‑law referred]
STATEMENT OF CASE
By this application presented on 28th March 1960, the assessee requires the Appellate Tribunal to refer to the High Court certain, questions of law which are said to arise out of the order of the Appellate Tribunal in W. T. A. No. 31 of 1958‑59 dated 23rd September 1959/5th February 1960. Inasmuch as, in our opinion, questions of law do arise out of the aforesaid order, we hereby draw up an agreed statement of the case and refer it to the High Court under section 27 of the Wealth‑tax Act.
2. The assessee is a company incorporated under the Indian Companies Act. The subscribed capital of the company at the end of the relevant accounting year was Rs. 2,29,99,125. It disclosed in the balance‑sheet under the head 'of fixed assets as per Schedule "D" annexed to the balance‑sheet, the value of the fixed assets, being Rs. 2,60,52,357. In the said Schedule "D" it was disclosed that the original cost of these assets was Rs. 2,30,32,833. There was a revaluation of the assets during the year ending upon 31st March 1950. On revaluation, an amount of Rs. 1,45,87,000 was added to the value at cost and after certain adjustments, the total amount of Rs.‑2,60,52,357 was arrived at. The balance‑sheet along with the schedules annexed to the same as on 31st March 1957, is made a part of this case as Annexure "A". The assessee undertakes to produce the printed copy of the balance‑sheet before the High Court at the time of hearing. In computing the net wealth of the assessee, the Wealth‑tax Officer took the balance‑sheet figures. It was contended that the value of the fixed assets was increased for balance‑sheet purposes and it should be adjusted to the value at cost and thereby eliminated by the amount of Rs. 1,45,87,000. The Appellate Tribunal held that according to section 7 (1) of the Wealth‑tax Act, the value of any asset, other than cash, for the purposes of this Act, should be estimated to be the price which in the opinion of the Wealth‑tax officer it would fetch if sold in the open market on the valuation date. But, according to section 7 (2), notwithstanding anything contained in sub section (1) (a), where the assessee was carrying on a business for which accounts were maintained by him regularly, the Wealth‑tax Officer might, instead of determining separately the value of such asset held by the assessee in such business, 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 making such adjustment therein as the circumstances of the case might require. The contention of the assessee was that the Wealth -tax Officer should have to make an adjustment even though he based his valuation of the net assets upon the balance‑sheet of the assessee and in making assessment he should consider that the assets should be taken at cost less depreciation. The Appellate Tribunal held that in the year ending upon 31st March. 1950, the assessee found as a fact that the value of the assets as per account books being the cost price of the assets was not the actual price of those assets and, therefore, it valued these properly and increased the value of the assets by Rs. 1,45,87,000 and as a result of revaluation, there was a surplus, which surplus, was transferred to the account under the head of "reserve and surplus". This state of affairs of the company was placed before the shareholders and passed as such. It continued to be so for years till the assessment year under review and the shareholders knew that the assets as per accounts were valued at the revised figure. The adjustment under section 7 (2) did not contemplate an adjustment of ignoring the revaluation of the assets according to the company itself.
3. In the profit and loss account, a pro4ision was made for proposed dividend although the same had not actually been declared up to the valuation date. The assessee contended that the provision for the dividend should be deducted from the aggregate value of the assets in arriving at the net wealth of the assessee for the purpose of the Wealth‑tax Act. The Appellate Tribunal held that, unless a debt was created by the assessee at the valuation date, the Act did not permit a deduction for such an amount and a provision for a proposed dividend was not a debt owned by the assessee.
4. In the accounts, provision was made for the estimated amount of income‑tax and super tax in respect of the year of account. It was contended on behalf of the assessee‑company that the amount so provided should .be deducted from the aggregate value of the assets in determining the net wealth of the assessee for purposes of wealth‑tax. For the reasons given by the Appellate Tribunal in its order, it held that such a provision was not a debt owed by the assessee on the valuation date and, therefore, the claim could not be accepted. The order of the Tribunal is made' a part of this case and is Annexure "B".
5. From the above facts and circumstances, the following questions of law arise:
"(1) Whether, on the facts and in ‑the circumstances of the case, the Wealth‑tax Officer was justified in taking the value of the assets of the assessee as shown in its balance‑sheet on the relevant valuation date?
(2) Whether, on the facts and in the circumstances of the case; in computing the net wealth of the assessee, the amount of proposed dividend was deductible from its total assets?
(3) Whether, on the facts and circumstances of the case, in computing the net wealth of the assessee, the amount of the provision for payment of income‑tax and super tax in respect of the year of account was a debt owed within the meaning of section 2 (m) of the Wealth‑tax Act, 1957, and as such deductible in computing the net wealth of the assessee?"
S. Mitra, Dr. D. Pal and R. K. Chaudhury for the Assessee.
E. R. Meyer with B. L. Pal for the Commissioner.
JUDGMENT
G. K. MITTER, J. ‑‑This is a reference under section 27 (1) of the Wealth‑tax Act of 1957 for determination of the following:
"(1) Whether, on the facts and in the circumstances of the case, the Wealth‑tax Officer was justified in taking the value of the assets of the assessee as shown in its balance‑sheet on the relevant valuation date?
(2) Whether, on the facts and in the circumstances of the case, in computing the net wealth of the assessee the amount of proposed dividend was deductible from the total assets?
(3) Whether, on the facts and circumstances of the case, in computing the net wealth of the assessee, the, amount of the provision for payment of income‑tax and super tax in respect of the year of account was a debt owed within the meaning of section 2 (m) of the Wealth‑tax Act, 1957, and as such deductible in computing the net wealth of the assessee?"
The facts are as follows:
The assessee is a company incorporated under the Indian Companies Act. Its subscribed capital at the end of the relevant accounting year was Rs. 2,29,99,125. In Schedule "D" annexed to the balance‑sheet its fixed assets were shown as being worth Rs. 2,60,52,357, the original cost of the same being Rs. 2,30,32,833. The assets had been revalued during the year ending on March 31, 1950, when a sum of Rs. 1,45,87,000 was added to the value at cost. On the valuation date the figure of Rs. 2,60,52,357 was arrived at after making certain adjustments. The first question relates to this revaluation. The contention of the assessee is that the increase of Rs. 1,45,87,000 ought to be ignored altogether in computation of the net wealth under the Act. This amount has been shown in Schedule "E" to the balance‑sheet as capital reserve not available for dividend. In the profit and loss account a sum of Rs. 15,29,855 has been shown as the amount of dividend proposed to be distributed for the year ending of March 31, 1957. This dividend was declared by the company at the general meeting held on November 27, 1957. As the declaration was made after the accounting year the wealth-tax authorities rejected the assessee's contention that‑ the amount of the net wealth should be computed after giving a deduction for the above. Provision was also made in the balance‑sheet for income‑tax and super tax payable by the company for the year' of account and a claim for deduction of the same in computation of the net wealth was raised. This too was not accepted by the wealth‑tax authorities on the ground that there was no debt owed by the assessee on the valuation date:
Before going into the merits of the case it is necessary to note the ‑relevant provision of the Wealth‑tax Act. Section 2 (m) of the Act defines "net wealth" as the amount by which the aggregate value computed in accordance with the provisions of the Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under the Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than certain debts not relevant for the purpose of this reference. Under section 2 (q) "valuation date" in relation to any year for which an assessment is to be made under the Act, means the last date of the previous year as defined in clause (ii) of section 2 of the Income‑tax Act if an assessment were to be made under that Act for that year. Section 3, the charging section, provides that a tax in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company shall be charged for every financial year commencing on and from the first day of April 1957, at the rate or rates specified in the schedule. Section 7 lays down how the value of the assets are to be determined for the purpose of the Wealth‑tax Act. The relevant provision thereof is as follows:
(1) The value of any assets, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth‑tax Officer it would fetch if sold in the open market on the valuation date.
(2) Notwithstanding anything contained in subsection (1),‑
(a) where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth‑tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, 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 making such adjustments therein as the circumstances of the case may require.
It would therefore appear that under subsection (1) of section 7 the Wealth‑tax Officer is called upon to value the assets on the estimate of what the same would fetch if sold in the open market on the valuation date. Where the assessee carries on business for which accounts are regularly maintained, the Wealth‑tax Officer may, instead of valuing each asset separately, determine the net value of the assets of the business as a whole having regard to the balance‑sheet of such business making necessary adjustments therein. In this case we are not concerned with the question as to whether the word "may" in clause (a) of subsection (2) means "shall". The wealth‑tax authorities have proceeded on the valuation of the assets given in the balance‑sheet and the question is whether they were justified in ignoring the claim for deductions made by the assessee. Under section 211 of the Companies Act of 1956, every balance‑sheet of a company must give a true and fair view of the state of its affairs as at the end of the financial year and the same must be in the form set out in Part I of Schedule VI or as near there to as possible. Column 3 of Part I of Schedule VI is headed "fixed assets". There under, distinction has to be made as far as possible between expenditure upon goodwill, land, buildings, leaseholds, railway siding, plant and machinery, furniture and fittings, development of property, patent, trade mark and dealings, livestock and vehicle, etc. Under column 4 it is obligatory on a company to show under each head the original cost and the additions thereto and deduction therefrom made during the year and the total depreciation written off or provided up to the end of the year. Further, where sums have been written off on a reduction of capital or revaluation of assets every balance‑sheet (after the first balance‑sheet) subsequent to the reduction or revaluation, shall show the reduced figures along with the date of the reduction, in place of the original cost. Similarly, where sums have been added by writing up the assets, every balance- sheet subsequent to such writing‑up shall show the increased figures with the date of the increase in place of the original cost. Each balance‑sheet for the first five years subsequent to the date of writing‑up shall also show the amount of the increase made.
So far as the first question is concerned, there is little room for controversy. Under section 7(1) of the Act the Wealth‑tax Officer is to estimate the market value of the property but in the case of an assessee carrying on business the net value of the assets nay .be determined as a whole having regard to the balance‑sheet of the business with proper adjustments. If the balance‑sheet of the assessee shows the value of the assets to be X there is no reason why X should not be taken to be the net value for the purpose of the Wealth‑tax Act unless there is any compelling reason for any deduction. When the company revalu ed its fixed assets in 1950, at a figure exceeding the book value thereof by Rs. 1,45,87,000, it must be because it was felt that the book value did not represent the correct value of the assets. The increase in valuation was subject to no reservation or qualifi cation. As the value of the assets was increased a corresponding balancing figure had to be introduced under "reserve and surplus". This was done by showing a capital surplus of Rs. 1,45,87,000, i.e., the exact figure which represented the increase in the value of the assets. This, however, does not mean that if the value of the assets of the company had to be determined on a date subsequent to the revaluation the figure of Rs. 1,45,87,000 should be deducted from the revalued assets. This would result in the value of the assets being taken on the basis of the cost thereof less depreciation. This method ought not to be adopted in a case where the company itself felt that its assets were worth much more than the actual cost thereof. It is not necessary to speculate as to what would have happened if there had been no revaluation of the assets in 1950 and whether the wealth‑tax authorities would be justified in making a valuation of the assets themselves if they felt that the balance‑sheet did not give a true and correct‑figure of the value of the assets. It was argued on behalf of the assessee that section 7(2) of the Act shows that the entire balance‑sheet of the company must be taken into consideration to find out the net value of the assets of the business and in this case, where a capital reserve of Rs. 1,45,87,000 had been created against the in crease in, the value of the assets, the same should be deducted from the increased value, as an adjustment to be made under clause (a) of subsection (2) of section 7. I find myself unable to accept this. The value of the assets was not properly represented by the book value borne in the books of the company in the year 1950 and that is why the company found it necessary to revalue the same. A reserve or, surplus had to be shown as against this increase; otherwise the figures on the right hand side and the left hand side would not have tallied but this does not mean that in determining the net value of the assets the increase ought to be ignored. If for any reason the value of the plant and ‑machinery of the company had gone down between the years 1950 and 1957 by reason of a general fall in the market value thereof, or by reason of damage caused by fire or accident, it would be obligatory on the company to revalue the fixed assets but in the absence of such revaluation arid in. the absence of any ground to show that the company's valuation of the assets was not correct the wealth‑tax authorities are entitled to accept the valuation made by the assessees themselves.
The second question too is a simple one. No doubt the dir ectors of the company had proposed to declare a dividend for the year ending on March 31, 1957, but in order that the amount of the proposed dividend should be deducted from the value of the assets it is necessary that the same should be a "debt owed" by the assessee on the valuation date. A dividend proposed, by the directors does not become a debt until it is declared by the com pany in a general meeting. It would be open to the company to override the suggestions of the directors and determine that the dividend ought not to be declared in view of the financial position of the company or it may be that in between the proposal by the directors and the date of the general meeting the company's posi tion may have altered to such an extent as to necessitate the preservation of the liquid cash for meeting the expenses of the company. These are contingencies which normally do not happen. In any event, it was not open to any shareholder to say that the company was indebted to him in a certain amount as dividend before the declaration of the same at the general meeting. No shareholder can sue a company for payment of a dividend unless it is sanctioned at a general meeting.
The third question is one of some nicety and depends upon the proper construction of various sections of the Income‑tax Act. It was argued on behalf of the assessee that the liability to pay income‑tax arose as soon as anybody engaged in business and although it might be quantified by the income‑tax authorities after the valuation date the liability continued in existence throughout the accounting year including the said date and as such there was a debt which ought to be taken into account in computing the net wealth of the assessee. This argument is attractive but not entirely sound. Until the close of the year, i.e., the valua tion date which in this case was March 31, 1957, it was not possible to say whether as a result of the whole year's working the assessee would incur any liability to income‑tax for the accounting year. It is not difficult to imagine a case where an assessee goes on making profits from the beginning of the year of account to, say, the 15th March of the next year and in between March 15 and March 31 he suffers losses which not only wipe out his profits but make him a loser in respect of the business on the whole year's working. Even in a case where an assessee suffers no loss during the accounting year and it is possible to compute his income on the valuation date the exact amount of the liability to tax cannot be ascertained on that date because the rate of income‑tax is fixed every year by the Finance Act on a date after April 1. There is no room for doubt that a debt must be for a liquidated sum of money and it can be either owed or accruing. In Sabju Sahib v. Noordin Sahib ((1898) I L R 22 Mad. 139) it was held that unless there was a liability to pay, a liquidated sum of money there was no debt, following the English decision in Johnson v. Diamond ((1855) 11 Exch. 73). In that case it was further held that, where it was not possible to say before the taking of accounts as to what the exact amount of liability would be, there was no debt. This judgment was ap proved of by a Full Bench of the Madras High Court in Doraisami Padayachi v. Vaithilinga Padayachi ((1916) I L R 40 Mad. 31). There it was held that the word "debt" ordinarily meant a sum payable in respect of a money demand recoverable by action. Sabju Sahib's case was relied on by a Bench of this court in Bisseswar Roy v. Durgadas Mehara ((1905) I L R 32 Cal. 418). The question was more elaborately dealt with in the Full Bench case of Banchharam Majumdar v. Adyanath Bhattacharjee ((1909) I L R 36 Cal. 936). There, Jenkins C. J. relied on the definition of debt given by Lord Lindly L. J. in Webb v. Stenton ((1883) 11 Q B D 518) and said that "a debt is a sum of money which is now payable or will become payable in future by reason of present obligation." Mookherjee, J. referred to the case of People v. Arguello ((1869) 37 Calif 529), where the Supreme Court a debt of California had pointed out the difference between which was due and payable and one which was promised be to paid at a future date. To quote the words of the judgment in that case "debts are of two kinds : solvendum in praesenti and solvendum in futuro . . . . A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time." Mookherjee, J. also relied on Sabju Sahib's case.
In Webb v. Stenten the question was whether the income of a judgment‑debtor arising from a fund vested in trustees payable half yearly in February and August could be attached in their hands when it appeared that the last half yearly payment had been made and there was no money in their hands at the time of attach ment. Lindley L. J. observed there (page 527) : "I should say, apart from any authority, that a debt legal or equitable can be attached whether it be a debt owing or accruing ; but it must be a debt, and a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation debitum in praesenti, solvendum in futuro. An accruing debt, therefore, is a debt not yet actually payable, but a debt which is represented by an existing obligation."
To merit deduction in the computation of net wealth the liability must not only be a debt but one solvendum in praesenti.
To consider the question from the point of view of the Income‑tax Act : Under section 3 tax is to be charged for any year at the rate or rates prescribed for that year in accordance with and subject to…
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