JAGANMOHAN REDDY, J. - The Income-tax Appellate Tribunal under the Wealth-tax Act has referred the following question of law for our consideration under section 27(1) of the Wealth-tax Act, 1957, hereinafter referred to as 'the Act' :
'Whether the Appellate Tribunal was correct in law in allowing a deduction from the net value of the assets of the business as a whole as determined by the Wealth-tax Officer under section 7(2)(a) of the Wealth-tax Act on the basis of the balance-sheet as on the valuation date, an amount equal to the difference between the depreciation already provided by the company itself in its books and the aggregate sum of normal depreciation and extra shift allowance that had been allowed up to the chargeable accounting period ?'
The period of which the assessment had been levied is the assessment year 1957-58 for which the valuation date is 30th of September, 1958.
The facts as set out in the statement of the case are as follows : The assessee is a public limited company and for the year of assessment it returned a total wealth of Rs. 24,16,488 and claimed a deduction of Rs. 18,14,564 towards the difference between the depreciation allowed under the Income-tax Act and the depreciation deduction by the assessee from the value of its assets according to the method of accounting followed by it. The Wealth-tax Officer did not admit the claim of the assessee to deduct the aforesaid amount towards depreciation but what he adopted is what is known as the global valuation method under section 7(2)(a) of the Act by determining the net value of assets of the company as shown in the balance-sheet. The assessees contention was that apart from the depreciation which has been deducted in computing the net asset for the purpose of the balance-sheet, it is entitle to a further deduction which is the balance of the amount remaining after the deduction of the depreciation from the total amount of the depreciation allowed by the income-tax authorities for the purpose of the written down value. This contention was rejected. The assessee appealed and the Appellate Assistant Commissioner also agreed with the Wealth-tax Officer. The Appellate Tribunal, however, thought that under section 7(2)(a) of the Act, in the case of a business for which accounts are maintained by the assessee regularly, the Wealth-tax Officer has been given the discretion, instead of determining separately the value of each asset held by the assessee in such business, to compute 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 warrant. It view of this, the Tribunal directed that, in computing the net value of the assets for wealth-tax purposes, the Wealth-tax Officer should deduct the aggregate sum of normal depreciation inclusive of the aggregate sum of allowances for extra shift that had been allowed up to the chargeable accounting period from the book vale of the assets. It is with respect to this direction that the reference has been made.
In order to understand the next scope of the reference, we have looked into the balance-sheet, which has been handed over to us from which we find that the asset of the company have already been subjected to depreciation of about Rs. 15,42,000 which includes plant and machinery, factory buildings, etc. What the assessee now claims is a further sum of Rs. 18,14,564 on the ground that this is the difference between the total depreciation deducted in the balance-sheet for the purposes of arriving at the net value of the assets and the depreciation allowed under the Income-tax Act, that, if the depreciation allowed under the Income-tax Act, is Rs. 34,56,564 up to the valuation date, deducting Rs. 15,42,000, a further claim towards depreciation of Rs. 18,14,564 is being made by the assessee. We may, at the outset, state that we are not concerned really it the actual amount of depreciation but only with the principle of evaluating the net value of the assets on the valuation date.
Section 7 of the Act, under which the assets of the company are being valued, as as follows :
'7. (1) 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 the each asset held by the assessee in such business, determine the net value of 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 appear from a reading of sub-section (1) and sub-section 2(a) that the Wealth-tax Officer has a discretion either to value each of the assets of the company or take the net value of the assets as a whole having regards to the balance-sheet of such business subject of to such adjustments as he may consider necessary. If he follows the first of the methods, viz., by valuing each of the assets, he will have to determine the market value of that asset on the valuation date. If he follows the second of the methods, he will have to take the net value of the assets given in the balance-sheet and make such adjustment as the circumstance of the case may require. In doing so, the Wealth-tax Officer has to take into consideration the contentions and objections, if any, of the assessee in respect of the proposed adjustment. It may be observed that there is nothing made on the basis of allowances and deductions given under the Income-tax Act or under any other Act. The main object of section 7, as it appears to us, is to evaluate the assets as on the valuation date and that evaluation should be on the basis of the market value.
Mr. Rama Rao contends that the principle of the market value of the assets is given go-by where the Wealth-tax Officer has recourse to them method indicated in section 7(2)(a). But we are unable to accept that contention. In the case of limited companies, it is well-known that the values of the assets and liabilities are given at the end of the year of accounting and representing generally the correct value of the assets as on that date. Section 211 of the Indian Companies Act of 1956 enjoins that every balance-sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and the same must be in the form set out in Part 1 of Schedule VI, or as near thereto as possible. For this reason, section 7(2)(a) has taken the global valuation as given in the balance-sheet as an alternative. Where, however, the Wealth-tax Officer finds that the balance-sheet does not represent the true state of affairs and it is difficult even after making adjustments to arrive at the correct valuation of the assets of the company, he may adopt the method laid down in section 7(1) by valuing each one of the assets according to its market value. In this case, the balance-sheet has been taken as representing the correct state of affairs and the Wealth-tax Officer therefore adopted the method in section 7(2)(a) but refused to make any adjustment as suggested by the assessee. It does not appear from the order of the Appellate Tribunal on what basis it has adopted the depreciation allowed under the Income-tax Act as a basis for the deduction of further depreciation to arrive at the net value of the assets. It appears to us clear that the allowances permitted under the Income-tax Act are notional allowances, varying from time to time according to the exigencies of the revenue, and the interests and promotion of the industry by the Finance Acts. They do not represent the market value of the asset at the end of the each year. It may be that if this notional depreciation is allowed for over a number of years, the assets may have absolutely no value for income-tax purpose or its value may be zero. None the less that will not represent the real state of affairs. The asset has a value and it is a business asset. For the purposes of the Wealth-tax, what has to be determined is what is the real value of that asset. In other words, what price it would fetch, if sold, in the market. That would be the value of the asset on the valuation date. It could not be the intention of the legislature to vest a discretion in the Wealth-tax Officer to choose the market value or the value less the income-tax depreciation which may be either the market value of less than the market value : but that would be the result if the interpretation sought to be placed is accepted. For these reasons, we cannot accept the contention that the written down value of the asset under the Income-tax Act at the end of any particular year in every case is the real value of that asset for the purpose of the Wealth-tax Act. In fact, this is the view uniformly held by the several courts in India, whose decision have been brought to our notice.
In Kesoram Cotton Mills Ltd. v. Commissioner of Wealth-tax a Bench of the Calcutta High Court consisting of G. K. Mitter and C. N. Laik JJ. observed at page 38 that in the absence of any ground to show that the companys valuation of the assets was not correct, the wealth-tax authorities are entitled to accept the valuation made by the assessee themselves. In Kothari Textiles Ltd. v. Commissioner of Wealth-tax, a Bench of the Madras High Court held that it is open to the Wealth-tax Officer under section 7(2) of the Act to examine the balance-sheet and determine whether any amount shown there in as a liability is in fact a liability on the valuation date and to make an appropriate adjustment where he finds that it is not such a liability. In Commissioner of Wealth-tax v. Raipur . a Bench of the Gujarat High Court observed at page 520 :
'When we turn to the provision of section 7(1) what is required to be done by the Wealth-tax Officer is that he should estimate the value of an asset other than cash by estimating the price which in his opinion the asset would fetch if sold in the open market on the valuation date. The written down value of an asset could not in every case be said to be the value which an asset would fetch if sold in the open market on the valuation date. A written down value may be more approximate to the price which an asset would fetch if sole in the open market if, between the date of its acquisition or purchase and the valuation date, no fluctuations have taken place in the price of that asset, i.e., if a similar new asset could be purchased on the valuation date at the same price at which it was purchased when that asset was acquired. In a case where assets have appreciated in value, the written down value cannot be considered to represent the price which the asset would fetch if sold in the open market on the valuation date. A written down value is arrived at after providing for normal depreciation at the rate permissible for the purpose under the provisions of section 10 of the Income-tax Act. When permitting such depreciation, the income-tax a authorities, as far as possible, try to give a deduction for depreciation which would approximate with the depreciation which an asset was likely to suffer by reason of use or by lapse of time, other conditions remaining equal. Where the conditions change, it would not be possible to say that he written down value represents the price of that asset in the open market. There are numerous asses prices of which have either increased or decreased and it cannot invariably be the rule that the written down value should be the value which the Wealth-tax Officer is under obligation to take in determining the value of the asset.'
Again at page 521, the Bench observed in relation to section 7(2) :
'It is urged that this power has to be exercised in order that the price of assets as shown in the balance-sheet may equate with the written down value of such assets as appearing in this records of the income-tax department. There is no warrant for such a conclusion. The written down value may be far from the real value of the asset on the valuation date. There cannot be any hard and fast rule in this matter and the Wealth-tax Officer is under no obligation to consider the written down value as the proper value of an asset. What the legislature has provided is that when individual assets have to be valued, the Wealth-tax Officer is under an obligation to estimate price at which the asset could be sold in the open market on the valuation date and, when acting under section 7(2), a discretion has been given to him to make adjustments in the valuation as given in the balance-sheet as the circumstances of the case may require'.
This view was reiterated by another Bench of the same High Court in Commissioner of Wealth-tax v. New Raipur Mills.
In Commissioner of Wealth-tax v. Mysore Commercial Union Ltd. a Bench of the Mysore High Court also held that the view that when a global valuation is made section 7(2), the valuation given in the balance-sheet is conclusive of the matter and the Tribunal had no competence to travel outside the balance-sheet for finding out the true value of the assets is not correct. They further held that section 7(2)(a) is an alternative to section 7(1) and if the Wealth-tax Officer proceeds to make the valuation on the global valuation basis under section 7(2) he must take the balance-sheet of the business as the basis for making the valuation and make such adjustment as he considers necessary. In Commissioner of Wealth-tax v. Tungabhadra Industries, the Calcutta High Court, after referring to Kesoram Cotton Mills Ltd. v. Commissioner of Wealth-tax, Commissioner of Wealth-tax Indian Standard Metal Co. Ltd. and Commissioner of Wealth-tax v. Raipur . held similarly that section 7(2)(a) of the Wealth-tax Act, 1957, gives the Wealth-tax Officer power to adopt the balance-sheet value of the assets as the net value of a business as a whole, but this valuation is not sacrosanct and that the officer is at liberty to make adjustments thereto if, in his opinion, the balance-sheet value does not represent the real value of the assets. It was further observed that even though the written down value may not in all cases represent the real value of the assets, in normal cases, it will give the Wealth-tax Officer a fair idea of its proper value unless the plant and machinery are of a rare type or are of a quality which is not generally available in India for the which there is a great demand. No such uncommon feature was found in that case. On the fact of that case, they accepted the written down value because no special circumstances existed which would show that the written down value did not represent the real value.
A review of these cases leaves no doubt that where the Wealth-tax Officer adopts and global valuation, he has to take the balance-sheet as the basis and make such adjustments as may be necessary. This does not, however, mean that apart from the values given in the balance-sheet, the power given to him to make the necessary adjustment must, as a matter of course, compel him to adopt the written down value or the depreciation allowed under the Income-tax Act. The written down value of an asset on the valuation date is one thing and the total depreciation allowed in a number of years for the purpose of arriving at the written down value under the Income-tax Act is another. In this case, the balance-sheet itself would show that a depreciation allowance of nearly Rs. 15 1/2 lakhs has been allowed before arriving at the newt valuation of the assets. It is apparent, therefore, that after the deduction, the net value of the asset represents the market value of the assets as estimated by the assessee itself, and unless circumstances justify, the assessee cannot claim further depreciation as it is seeking to claim this case. No doubt, it will be open to it to show that the depreciation deducted for the purpose of arriving at the net valuation on the valuation date in the balance-sheet is not correct or that some further depreciation ought to have been allowed by reason of any mistake committed or by reason of any omission or otherwise. In this case, the assessee says that it has not deducted the depreciation attributable to double-shift. If it can establish this, certainly it will be entitled to have the asset re-valued of the purpose of computing the new value of the asset on that ground. It is open to the Wealth-tax Officer, where such material is place before him, to consider the same and given such relief as the assessee is entitled. But, apart from that, as a matter of law or of right, it cannot claim deduction of an amount equal to the difference between the depreciation already provided by the company itself in its books and the aggregate sum of normal depreciation and extra shift allowance that he is entitled to under the Income-tax Act and which had been allowed up to the chargeable accounting period under the said Act.
Our answer therefore to this question is in the negative subject to the right of the assessee to contended that the depreciation deducted in the balance-sheet requires revision. The reference is answered in favour of the department with costs. Advocates fee Rs. 250.