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Petitioner: COMMISSIONER OF WEALTH TAX VS Respondent: VIKRAM SWARUP
Court Name: Calcutta High Court Judge(s): Ajit K. Sengupta, Shyamal Kumar Sen Title: COMMISSIONER OF WEALTH TAX vs VIKRAM SWARUP Case No.: Matter No,1795 of 1989 Date of Judgment:1991-10-09 Reported As: 1994 PTD 248 Result: Reference answered
JUDGMENT
JUDGMENT SHYAMAL KUMAR SEN, J.---In these references made at the instance of the Revenues the following question of law has been referred to this Court by the Income Tax Appellate Tribunal under section 27(1) of the Wealth Tax Act, 1957: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the direction of the Commissioner of Wealth Tax (Appeals) for deduction of liabilities towards provision for income-tax, proposed dividend and gratuity from the value of the assets of the company for the purpose of determination of the value of the unquoted shares of Messrs Paharpur Cooling Towers (Pvt.) Ltd. On the break-up value method in accordance with rule 1-D of the Wealth-tax Rules, 1957, though the directions of the learned Commissioner of Wealth-tax (Appeals) were in contravention of the express provisions of sub-clauses (b), (e) and (f) of clause (ii) of Explanation II to rule 1-D of the Wealth Tax Rules, 1957?" Before going to the merits of the controversy, we reframe the aforesaid question as follows: "Wether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the direction of the Commissioner of Wealth Tax (Appeals) for deduction of liabilities towards provision for income-tax, proposed dividend and gratuity from the value. Of the assets of the company for the purpose of determination of the value of unquoted shares of Messrs Paharpur Cooling Towers (Pvt.) Ltd. On the break-up value method in accordance with rule 1-D of the Wealth-tax Rules, 1957?" The facts, inter alia, relating to these references are as under: These references relate to the assessment years 1979-80 and 1980-81, for which the relevant valuation dates were March 31, 1979, and March 31, 1980, respectively. The assessee held certain
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shares of Paharpur Cooling Towers (Pvt.) Ltd., which are unquoted. The assessee disclosed the market value of the shares held by him for the purpose of charge to wealth tax based on the average maintainable profits and its earnings. The Wealth Tax Officer, however, held that, for the purpose of valuation of unquoted equity shares under the Wealth Tax Act, 1957, rule 1-D of the Wealth Tax Rules, 1957, was mandatory and, accordingly, he valued the aforesaid shares on the break-up value method as envisaged under rule 1-D of the said Rules. While arriving at the value of the shares of Paharpur Cooling Towers (Pvt.) Ltd., based on its balance-sheets drawn up as at October 31, 1978, and October 31, 1980, corresponding to the assessment years 1979-80 and 1981-82, the Wealth-tax Officer followed the computation made by him in the case of Mahendra Kumar and Sons (Hindu undivided family) and did not allow deduction in respect of full liabilities towards provision for income-tax, proposed dividend and gratuity as appearing in the balance-sheets of the said company drawn up in accordance with Schedule VI of the Companies Act, 1956. On further appeal by the assessee, the Commissioner of Wealth-tax (Appeals) held, following his earlier order in the case of Mahendra Swarup for the assessment years 1979-80 and 1981-82, that the entire provision for taxation including provision for proposed dividend and provision for gratuity as appearing in the balance-sheet of the said company drawn up as at October 31, 1978, and October 31, 1979, were required to be deducted and taken into account in determining the market value of the said shares based on its break-up value as envisaged in rule 1-D of the Wealth Tax Rules, 1957. On appeals by the Revenue, the said order of the Commissioner of Wealth Tax (Appeals) was confirmed by the Income-tax Appellate Tribunal. It has been contended on behalf of the Revenue that, in view of the specific provisions of clause (ii) (b) and (e) of Explanation II to rule 1-D of the Wealth Tax Rules, 1957, the liabilities towards income- tax and proposed dividend and gratuity are not deductible from the assets of the company for purpose of valuation of unquoted equity shares of the company in accordance with the provision of rule 1-D. It has been submitted on behalf of the assessee, on the other hand, that rule 1-D of the Wealth Tax Rules, 1957, deals with the manner of determining the market value of an unquoted equity share of any company other than an investment company or a managing agency company. The said rule, inter alia, provides that 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 the balance-sheet. The net amount so arrived at divided by the total 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 80 per cent. Of the break-up value so determined. It has further been submitted that, according to the clear provisions of rule 1-D, the balance-sheet of a company drawn up in provisions of the Companies Act, 1956, shall be treated as sacrosanct and from the value of all assets shown in that balance-sheet, the value of all liabilities as shown in the balance-sheet shall be deducted for determining the break-up value, which is the first step in determining the market value in accordance with that rule. It has also been submitted that Explanation II of the said rule provides for certain adjustments to be made in respect of the assets. And liabilities shown in the balance-sheet of the relevant company. These are the only adjustments which are permitted by the said rule. No adjustment other than those which are specifically laid down in Explanation II can be permitted. Rule 1-D of the Wealth Tax Rules, 1957, and also Explanation II (ii) (e) of the said rule are set out hereinbelow: "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:
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Number of accounting years ending on the Valuation date or in a case where the accounting year does not end on the valuation date, the number of accounting years ending on a date immediately preceding the valuation date, for which no dividend has been paidMarket value (1) (2) Three years82-1/2 percent of the break- up value of such share Four years 80 do Five years 77-1/2 do Six years and above 75 doThe value of all the liabilties 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 per cent of the break-up value so determined: Provided that where, in respect of an equity share, no dividend has been paid by such company continuously for not less than three accounting years ending on the valuation date, or in a case where the accounting year of that company does not end on the valuation date, for not less than three continuous accounting years ending on a date immediately before the valuation date the market value of such share shall be as indicated in the Table below: THE TABLE
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 under section 18-A of the Indian Income Tax Act, 1922 (11 of 1922), or under section 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 deperciation; (d) credit balance of the profit and loss account;
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(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 law applicable thereto; (f) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares." It has also been contended on behalf of the assessee that the main controversy in this case is whether any adjustment is called for in this case in the "provision for taxation" as appearing in the balance-sheets of the said company drawn as at October 31, 1978, and October 31, 1980. It is nobody's case that the provision made by the said company is in excess over the tax payable by it with reference to the book profits in accordance with the law applicable thereto. The Tribunal has not given any finding that the said company made any excess provision in this case. The controversy centres round the question whether, from the provision for gross tax payable with reference to the book profits as appearing in the balance-sheet of the said company, any deduction should be made by way of advance tax and/or taxes deducted at source which are appearing on the assets side of the balance-sheet. It is not the case of the Department that any deduction should be made in respect of taxes deducted at source. It has been further contended by the Department that advance tax paid by the said company, as appearing on the assets side, should be deducted from the gross tax payable on the book profits as appearing on the liabilities side. Both the Commissioner of Wealth Tax (Appeals) as well as the Tribunal, however, did not accept the said contention of the Department, with regard to the expression used in Explanation II(ii)(e) which is "the tax payable with reference to the book profits in accordance with the law applicable thereto". According to the learned Advocate for the assessee, the aforesaid provision of sub-clause (e) clearly requires determination of the book profits and the rate of tax applicable on such book profits for the relevant assessm ent year. Once the rate of tax as applicable is found out for the relevant assessm ent year and the same is applied to the book profits, the tax payable would automatically come out. There is no scope for granting any further deduction from the tax payable so calculated either in respect of advance tax and/or in respect of taxes deducted at source. In fact, sub-clause (e) makes it very clear that advance tax is to be totally ignored since it uses the words "other than the amount referred to in clause (i)(a)" which deals with the amount of advance tax paid under section 210 of the Income Tax Act, 1961. Mr. Poddar, learned Advocate for the assessee further contended that it is clear from the express words that it is not the intention of the Legislature that advance tax should be deducted from the gross tax payable with reference to the book profits. Had it been so, the rule would have used the expression."as reduced by". It has been suggested that, from the corresponding provisions of section 139(8)(a) of the Income Tax Act, 1961, the same would be clear. The words used therein are to the following effect "the tax payable on the total income as determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source". It has also been contended that, whenever it is the intention of the Legislature that the advance tax paid and taxes deducted at source should be reduced from the tax payable, the same has been specifically provided in the statute and the expression "reduced by" has been used in the relevant portion of the statute. On the other hand, rule 1-D does not intend to require deduction of either advance tax paid and/or taxes deducted at source. The same has not been specifically provided in the rule in the instant case and, therefore, it uses the words "other than the amount referred to in clause (i)(a)", which is nothing but the amount paid as advance tax under section 210 of the Income Tax Act, 1961. It has been submitted that the expression used in the law is "tax payable" and not "tax due". The tax due on book profits can be worked out after deducting from the gross tax payable the amount of
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advance tax and the taxes deducted at source. But, when the statute requires the working of only "tax payable" and not "tax due", one has to work out the gross tax payable with reference to the book profits by applying the rate of tax applicable for the relevant assessment year as laid down in the relevant Finance Act. The advance tax as well as taxes deducted at source are given credit for only on the making of the regular assessm ent and against the tax payable on the total income as determined on regular assessm ent. This is never deducted from the tax payable on book profits. The learned Advocate for the assessee further submitted that it is a well-settled canon of construction of the statute and/or the rules made thereunder that no words used therein can be held to be otiose; nor can any word be added by the authorities and/or the Courts. If the contention of the Revenue is accepted, it would amount to saying that the words "other than the amount referred to in clause (ii)(e) are otiose and have no meaning". The contention of the Revenue can only be accepted if certain words like "as reduced by the advance tax paid and/or taxes deducted at source" are added at the end of sub-clause (a). This obviously cannot be done either by the authorities and/or by the Court. This is the work of the Legislature and/or the rule- making authority. The words used in the rule have to be construed plainly. A plain and grammatical construction of the rule makes it very clear that adjustment is to be made in the provision for taxation appearing on the liabilities side of the balance-sheet only if such provision is found to be in excess over the tax payable with reference to the book profits in accordance with the law applicable thereto. This is admittedly, not the case here. The learned Advocate for the assessee in this connection cited the following cases in support of his contention. CWT v. Ashok K. Parikh (1981) 129 ITR 46 (Guj.); CWT v. Arvindbhai Chinubhai (1982) 133 ITR 800 (Guj.); CWT v. Pratap Bhogilal (1987) 167 ITR 501 (Born.); L.G. Balakrishnan v. CWT (1988) 173 ITR 266 (Mad.) and WTO v. C.J. Sheth (1983) 4 ITD 706 (Bom.) (SB); He has also referred to the following cases which have been decided in favour of the Revenue. (1) Ashok Kumar Oswa l (Minor) v. CWT (1984) 148 ITR 620 (P&H); (2) CWT v. N. Krishnan (1986) 162 ITR 309 (Kar.); (3) CIT v. M. Lakshmaiah (1988) 174 ITR 4 (AP) and (4) CWT v. Latha D. Pai (1989) 179 ITR 249 (Kar.). We have considered the respective submissions of the parties and the cases cited from the Bar. It has not been disputed before us that the valuation of unquoted shares of Messrs Paharpur Cooling Tower (Pvt.J Ltd. Has to be determined in accordance with the provisions of rule 1-D of the Wealth Tax Rules, 1957. It has to be considered, however, whether it is necessary, while computing the value of the aforesaid shares under rule 1-D, to allow deductions for liabilities towards income-tax, proposed dividend and gratuity from the assets of the said company. In the case CWT v. Ashok K. Parikh (1981) 129 ITR 46 (Guj), it was held that rule 1-D of the Wealth Tax Rules, 1957, makes it clear that, in order to arrive at the break-up value of the shares of a company, first the balance-sheet as drawn up by the company itself has to be looked at and all the liabilities as shown in the balance-sheet are to be deducted from all the assets shown in the balance-sheet and the net wealth of the company is to be ascertained. Though, ordinarily, an amount paid as advance tax under section on of the 1922 Act or under section 210 of the 1961 Act will be o shown n the assets side of the balance-sheet, for the purpose of arriving at the break-up value, by the artificial rule as laid down in Explanation H, clause (i)(a) to rule 1-D, the amount paid as advance tax under the law relating to income-tax is not to be treated as an asset. When a particular amount, which is shown on the assets side, is not to be treated as an asset, the net wealth of the company will, to that extent, be reduced because, to that extent, the assets will be shown less. Under sub-clause (ii), which deals with what are not to be treated as liabilities under clause (e), it is
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only the amount shown by way of provision on the liabilities side that is dealt with and 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 of the company in accordance with the law applicable thereto, is not to be treated as liabilities. Provision for liabilities means provision for taxation which, according to the ordinary rules of accountancy, will be shown on the liabilities side of the balance-sheet. What clause (e) provides is that only the provisio for taxation which is justifiable in view of the book profits of the company I accordance with the law applicable thereto should be deducted as liabilities. I there is any excess over the amount shown by way of provision over what would be payable with reference to the book profits, that excess provision is not to b treated as liabilities. Sub-clause (e) of clause (ii) of Explanation II deals with provision and not the actual payment made by the company. The words "oche than the amount referred to in clause (i)(a)" refer to the provision for taxatio other than the provision for advance tax; they do not mean the amount paid advance tax under section 18-A of the Indian Income-tax Act, 1922, o section 210 of the Income Tax Act, 1961. While considering the provison for taxation, it must be ascertained that there is no provision for payment advance tax because the provision for advance tax is to be excluded from the scope of sub-clause (e) of clause (ii) by the words "other than the amount referred to in clause (i)(a)". 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 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. 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. Sub-clause (a) of clause (i) of Explanation H is intended to give a benefit to the holders of shares of those companies which have been prompt in making payment of their advance tax under the provisions of the law relating to income-tax. Having granted that benefit to such companies, the rule-making power wants to indicate in sub- clause (e) of clause (ii) of Explanation II that the excess provision to the extent of the excess when making the provision for liabilities for taxation, other than the provision for advance tax, is to be disregarded and only the provision on the liabilities side by way of provision for taxation to the extent of the tax payable with reference to the book profits in accordance with the law applicable thereto is to be treated as part of the liabilities of the company. Because of the words "other than the amount-referred to in clause (i)(a)" occurring in parenthesis in sub-clause (e) of clause (ii), if any advance tax is already paid, that has not to be brought back. Sub-clause (e) of clause (ii) and sub-clause (a) of clause (i) of the rule operate in two different fields altogether. Clause (i)(a) operates in the field of actual payment of advance tax. Clause (ii)(a) operates in the field of excess provision for taxation other than the provision for taxation regarding advance tax. Therefore, for the purpose of computation of the market value of the shares of a company, the advance tax paid under section 210 of the Income Tax Act, 1961,, and shown on the assets side of the balance-sheet of the company cannot be deducted from the tax payable, in determining whether the provision for taxation is in excess over the tax payable with reference to the book profits in accordance with the law applicable thereto within the meaning of clause (ii)(e) of Explanation II to rule 1-D of the Wealth Tax Rules, 1957. In the case of CWT v. Arvindbhai Chinubhai (1982) 133 ITR 800, their Lordships of the Gujarat High Court followed their earlier decision in the case of Ashok K. Parikh (1981) 129 1TR 46.
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In the case of CWT v. Pratap Bhogilal (1987) 167 ITR 501 (Bom.), the question for determination was "whether, on the facts and in the circumstances of the case, the liabilities as shown in the balance- sheet of Batliboi and Co. (Pvt.) Ltd., as at March 31, 1969, should be further reduced by the sum of Rs,66,95.020 aforesaid while determining the market value of unquoted equity shares of the company in terms of rule 1-D of the Wealth Tax Rules, 1957"? The assessee, inter alia, held shares of Messrs Batliboi and Co. (Pvt.) Ltd. (for short, "the company"). The shares were not quoted at any stock exchange and were required to be valued in accordance with the provisions of rule 1-D of the Wealth Tax Rules, 1957. For the purpose of valuing the shares for the involved assessm ent year 1970-71, the pertinent balance-sheet of the company is that as on March 31, 1969. The assets side of the balance-sheet of the company, inter alia, disclosed an asset in the sum of Rs,66,95,020 representing advance tax paid by the company. On the liabilities side, there appeared a liability in the sum of Rs,1,19,17,163 representing provision for taxation. There was no dispute that for the purpose of valuing the shares of the company, the sum of Rs,66,95.020, representing advance tax paid appearing as an asset in the balance-sheet is to be ignored in terms of Explanation II(i)(a) to rule 1-D of the Wealth Tax Rules, 1957. The dispute was regarding the liability representing provision for taxation. According to the Revenue, the provision for taxation in excess of the actual liability for taxation is to be excluded from the liabilities. The case of the assessee, on the other hand, is that the excess of provision over the tax payable with reference to the book profits only requires to be ignored in terms of Explanation II (ii)(e) to rule 1-D and that there is no scope for reducing the provision for tax payable with reference to book profits by the amount of Rs,66,95,020 paid as advance tax. The Bombay High Court referred to rule 1-D and the Explanation thereto set out in the judgment. It was, inter alia, held by the Division Bench of the Bombay High Court that, broadly speaking, the value of the equity shares is computed by dividing the surplus of assets over the liabilities by the number of fully paid-up equity shares. However, for this purpose, certain assets are not to be treated as assets and similarly certain liabilities are not to be treated as liabilities. That the above computation is artificial is evident from the fact that there is no provision in the Rules for inclusion of any liability in the liabilities, however real the same might be, if not provided…
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