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Commissioner of Wealth-tax, Bombay Vs. Raghuvanshi Mills Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberWealth-tax Reference No. 8 of 1966
Judge
Reported in[1976]104ITR544(Bom)
ActsWealth Tax Act, 1957 - Sections 2, 3, 7, 7(1) and 7(2)
AppellantCommissioner of Wealth-tax, Bombay
RespondentRaghuvanshi Mills Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateD. Vyas, Adv.
Excerpt:
.....of wealth tax act, 1957 - valuation of assets for purpose of wealth tax - valuation of assets in balance sheet without deducting depreciation provided under income tax act - such valuation of assets given in balance sheet not to be taken into account for purpose of computing wealth tax - assessee entitled to deduct depreciation permissible under income tax act while computing value of its assets - property insured for amount higher than actual value - value of assets cannot be based on amount of insurance policy as no evidence to prove that such amount is real value of assets. (ii) provision - section 2 (m) of wealth tax act, 1957 - provision made for payment of wealth tax - amount of tax payable will be crystallized on date of valuation of assets - such provision deductible as debt..........of the fixed block of assets. for both these years the wealth-tax officer adopted the balance-sheet values of these assets rejecting the assessee's contention that the value should have been taken according to the depreciation to be provided in accordance with the indian income-tax act. the balance-sheet figures of the fixed assets were higher than the written down values of the assets in accordance with the provisions of the indian income-tax act. that was because the assessee had provided for depreciation at rates lower than those allowed under rule 8 of the income-tax act. in an appeal by the assessee for the assessment year 1957-58 the appellate assistant commissioner accepted the contention of the assessee while for the assessment year 1958-59, the appellate assistant.....
Judgment:

Kantawala, C.J.

1. At the instance of the revenue this reference has been made for determination of the questions for the wealth-tax assessments of 1957-58 and 1958-59, for which the relevant valuation dates are March 31, 1957, and March 31, 1958. The assessee is a limited company carrying on business of manufacture and sale of textile goods. The first question relates to the valuation of the fixed block of assets. For both these years the Wealth-tax Officer adopted the balance-sheet values of these assets rejecting the assessee's contention that the value should have been taken according to the depreciation to be provided in accordance with the Indian Income-tax Act. The balance-sheet figures of the fixed assets were higher than the written down values of the assets in accordance with the provisions of the Indian Income-tax Act. That was because the assessee had provided for depreciation at rates lower than those allowed under rule 8 of the Income-tax Act. In an appeal by the assessee for the assessment year 1957-58 the Appellate Assistant Commissioner accepted the contention of the assessee while for the assessment year 1958-59, the Appellate Assistant Commissioner rejected such contention. Thus, both the department and the assessee had to prefer appeals for the respective years and the department's appeal was rejected by the Tribunal and the assessee's appeal was accepted. The Tribunal took the view that in both these assessment years wealth-tax assessments had been made in accordance with the global method of valuation prescribed in section 7(2)(a) of the Wealth-tax Act, 1957 (hereinafter referred to as 'the Act'). The Tribunal followed the principle laid down by this High Court in the case of Commissioner of Wealth-tax v. Indian Standard Metal Co., Ltd. It was contended on behalf of the department before the Tribunal that, apart from the figures given in income-tax records, the assessee had produced no other evidence to establish that the market value of the fixed assets would be more correctly represented by the income-tax depreciation record than the balance-sheet figures. The department also relied upon a statement in the directors report for the year 1956-57, where the assets of the company were shown to have been insured against fire and riot risks for a sum of Rs. 1,45,00,000 even though the total value of the assets shown in the balance-sheet as on March 31,1957, was only Rs. 89,09,186. The Tribunal felt that there was no reason to hold that the assessee-company's machinery did not depreciate according to the rates laid down in the Income-tax Act. The Tribunal observed :

'The rates of depreciation allowed by the department for textile machinery in the Income-tax Depreciation Schedule have been evolved after careful consideration and must be regarded as the fruit of experience after considering the position of textile mills in various parts of the country over a series of years. We are unable to hold in this particular assessee's case that machinery did not depreciate according to the rates which have been accepted in the generality of cases of textile mills.'

2. As regards the insurance of the assets for the amount of Rs. 1,45,00,000 the Tribunal, inter alia, stated that no material was brought forward to establish that the assets were so heavily insured because the depreciable assets had gone up in value. On the contrary, a reference was made to the statement made in the directors report that such huge arrears of depreciation have yet to be provided and this was regards as a clear indication by the Tribunal that the company itself did not deliberately value the assets over the normal written down value. Thus, the contention of the assessee was accepted by the Tribunal. On these facts the question referred in :

'Whether, on the facts and in the circumstances of the case, in computing the net wealth of the assessee as on March 31, 1957, and March 31, 1958, the value of the fixed assets is to be taken according to the balance-sheet values and not according to the depreciation record of the income-tax assessments ?'

3. As regards this question Mr. Joshi has primarily raised two contentions. First he stated that in the balance-sheet there is a note made by the auditor to the effect that the depreciation provided for the year ending March 31, 1958, was adequate and he submitted that there is no reason, therefore, for the Tribunal to disregard this statement and permit depreciation in accordance with the rule prescribed under the Indian Income-tax Act. Secondly he pointed out that for the purpose of insurance against fire and riot risks the fixed assets of the company were insured for Rs. 1,45,00,000 and, therefore, the Tribunal was in error in casting the burden upon the department to show that this was an exaggerated value. In fact, his submission was that the burden really lay upon the assessee to show that it is a fixed block of assets insured for an amount which is more than the market value thereof. Mr Joshi also referred to two decisions of the Supreme Court in the case of Commissioner of Wealth-tax v. Aluminium Corporation of India Ltd. and Commissioner of Wealth-tax v. Aluminium Corporation of India Ltd. and submitted that the book value of the assets in the balance-sheet was to be taken into account under the global method of valuation under section 7(2)(a) of the Act and it was permissible to make such adjustment in the valuation as given in the balance-sheet as the circumstances of the case required it to be done.

4. The assessee-company is a textile mill and the machinery employed in the mill was nearly more than 15 to 20 years old. Its condition was such that in recent years large additions had to be made to make the mill workable. Section 7 of the Act provides for determination of the value of the assets for the purposes of the Act. The relevant part thereof is as under :

'7. (1) Subject to any rules made in this behalf, the value of any asset, 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 sub-section (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 valuation date and making such adjustments therein as may be prescribed....'

5. The argument of Mr. Joshi is that there was no reason whatsoever for the Tribunal to discard the valuation adopted for the fixed block of assets in the balance-sheet for the two relevant years. He relied upon the two decisions of the Supreme Court in Commissioner of Wealth-tax v. Aluminium Corporation of India Ltd. and Commissioner of Wealth-tax v. Aluminium Corporation of India Ltd. In Commissioner of Wealth-tax v. Aluminium Corporation of India Ltd. The court was concerned with the valuation of the assets when the company had revalued the same after making certain adjustments. When such was the position, the court held that section 7(2)(a) of the Act contemplates that the book value in the balance-sheet should be taken as the primary basis of valuation and if any adjustment is required the Wealth-tax Officer may make such adjustments in the valuation as given in the balance-sheet as the circumstances of the case require it to be done. In view of the principle therein laid down the matter was remanded for rehearing and determination of the market value in accordance with law. After remand, when the matter was heard by the Supreme Court, the Supreme Court held in Commissioner of Wealth-tax v. Aluminium Corporation of India Ltd. That, in the absence of any evidence to show that the revaluation in the year ending March 31, 1956 was incorrect, the value as shown in the balance-sheet after revaluation afforded a sound basis for valuing the assests, and, therefore, the value as shown in the balance-sheet was not to be substituted by the written down value as per the income-tax records. Even though strong reliance was placed by Mr. Joshi upon these two decisions of the Supreme Court if regard be had to the facts of the present case the ratio of these two decisions cannot be attracted. We are not concerned in the present case with an assessee who had revalued his assests. It is undoubtedly true that for lack of adequate profits in one of the years proper depreciation had not been provided. On the contrary, even in the earlier years for want of sufficient profits full depreciation could not be provided and it had to be carried forward from year to year. Thus, for an old textile mill like the assessee it will not be unreasonable to hold that the fixed block of assets will depreciate in value at least in accordance with the scale provided under the Income-tax Act. Actually the case was rightly considered to have been covered by the decision of this court in the case of Commissioner of Wealth-tax v. Indian Standard Metal Co., Ltd. It is pointed out in this case that in computing the value of the assets of business for the purposes of assessment of wealth-tax, the Wealth-tax Officer is entitled to follow either of the two methods mentioned in section 7 of the Act, viz., he may either determine the market value of the assets under sub-section (1) of section 7 or he may proceed on the global valuation basis of valuing the assets of the business as a whole under sub-section (2) of section 7. If he proceeds to make the valuation on the global valuation basis under sub-section (2). he must take the balance-sheet of the business as the basis for making the valuation and make such adjustments as he considers necessary. In the case, in valuing the assets of the assessee's business for purposes of wealth-tax the Wealth-tax Officer proceeded under sub-section (2) of section 7 and took the book value of the assets shown in the balance-sheet, viz., Rs. 21,56,655, as the value of the assets without deducting the sum of Rs. 8,70,000 which was shown in the balance-sheet as accumulated arrears of depreciation. The Appellate Assistant Commissioner held that the amount of depreciation which had been allowed by the income-tax authorities (minus the initial depreciation) should be deducted from the book value shown in the balance-sheet. The Tribunal agreed with this view. On a reference before the High Court, the High court took the view that, on the facts and in the circumstances of the case, the assessee was entitled to claim deduction of the amount of accumulated depreciation allowance on its fixed assets, not written off in the books but allowed by the department in the Income-tax assessments, for the purposes of computing the net wealth under section 7 of the Act; that the mere fact that in the balance-sheet the fixed assets were shown at the book value and the depreciation had not been accounted for by setting up a depreciation fund and taking the amount to that fund was not a sufficient reason for not deducting the amount of depreciation from the book value. In our opinion the Tribunal was justified in relying upon the principle laid down by this court in India Standard Metal Co., Ltd.'s case. The ratio of the decision of the Supreme Court cannot be attracted because this was not a case where the company had chosen to revalue its assets. On the contrary, in a textile mill having old machinery if the global method of valuation was adopted, then the depreciation as permissible under the Income-tax Act had to be adjusted in order to determine the market value at the relevant valuation date and this is what the Tribunal has done in the present case and we find no reason why the method adopted by the Tribunal cannot be regarded as a correct one. It was however, urged by Mr. Joshi that in the directors report the assets were insured against fire and riot risk for the amount of Rs. 1,45,00,000. Actually, there was no material whatsoever brought on record by either of the parties to indicate on what basis such a valuation was arrived at. Merely because the assets were so valued it will not be proper to come to the conclusion that the amount represented the correct value the assets insured. Notwithstanding the amount for which the property is insured, in case of loss, against the risks insured the insurance company is only liable to pay such damages as are proved to have been suffered by the insured and the mere fact that it has been insured for a particular value is not regarded as the basis for payment of the loss suffered. Thus, in our opinion, the Tribunal was justified in permitting depreciation to be adopted in accordance with the rules under the Income-tax Act. Thus, our answer to question No. 1 above referred to is in the negative, that is, the value of the fixed assets is to be taken according to the depreciation record of the income-tax assessments.

6. The next question relates to provision for wealth-tax liability and the question is as under :-

'Whether, in computing the net wealth of the assessee for the valuation date March 31, 1958, the provision for wealth-tax liability for assessment year 1958-59 could be deducted as a debt owed on the valuation date within the meaning of section (2) of the Wealth-tax Act ?'

7. As this question is covered by the decision of the Supreme Court in the case of H.H. Setu Parvati Bayi v. Commissioner of Wealth-tax, it has to be answered in accordance with the ratio of that case. In that case the Supreme Court held that by virtue of section of the Wealth-tax Act, 1957, the liability to pay wealth-tax becomes crystallised on the valuation date and not on the first day of the assessment year, though the tax is levied and become payable in the relevant assessment year. The wealth-tax liability of an assessee on the valuation date for the assessment year beginning on the 1st of April following is a 'debt owed' within the meaning of section 2(m) of the Act, and should be deducted from the estimated value of the assets as on the valuation date. In view of this decision the question No. 2 referred to us is answered in the affirmative. The revenue shall pay the costs of the assessee.


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