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Bithal Das Vs. Commissioner of Wealth-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberWealth-tax Reference No. 170 of 1978
Judge
Reported in(1982)29CTR(All)288; [1983]141ITR228(All); [1982]10TAXMAN51(All)
ActsWealth Tax Act, 1957 - Sections 2
AppellantBithal Das
RespondentCommissioner of Wealth-tax
Appellant AdvocateR.K. Gulati, Adv.
Respondent AdvocateM. Katju, Adv.
Cases ReferredHindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt
Excerpt:
.....and on account of the fact that every year the assessee had been able to recover some of the arrears of rent, held that the arrears of rent had not become irrecoverable or bad debts. further, the tribunal confirmed the findings of the authorities below that the arrears of rent had not become bad or irrecoverable debts and the fact that the assessee was following the cash system of accounting for wealth-tax purposes would have no effect. cit [1957]32itr535(bom) ,property' is a term of the widest import, and subject to any limitation or qualification which the context might require, it signifies every possible interest which a person can acquire, hold and enjoy. it has, thus, been laid down that the word 'property' in its normal and accepted meaning is a term of the widest import and..........value of the assets, it is open to him to make such adjustments in regard to the value of the different assets shown in the balance-sheet as he might consider necessary in the circumstances of the case.'15. similar view was taken by the supreme court in cwt v. thungabhadra industries ltd. : [1970]75itr196(sc) . it was laid down that (p. 199) 'under sub-section (1) of section 7 of the act the wealth-tax officer is authorised to estimate for the purpose of determining the value of any assets, the price which it would fetch, if sold in the open market on the valuation date. but this rule in the case of a running business may often be inconvenient and may not yield a true estimate of the net value of the total assets of the business. the legislature has, therefore, provided in sub-section.....
Judgment:

Rastogi, J.

1. At the instance of the assessee, Sri Bithal Das, an HUF, and as directed by this court, the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, hereafter referred to as 'the Tribunal', has drawn up a statement of the case and referred the following two questions for the opinion of this court:

'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding the taxability of arrears of rent ?

2. Whether, on the facts and in the circumstances of the case, the arrears of rent could legally be included in the total wealth on the basis of accrual when the assessee is following the cash system of accounting ?'

2. The facts stated in brief are that for the assessment years 1969-70 to 1971-72, the assessee had returned its total wealth at Rs. 10,58,100, Rs. 10,58,100 and Rs. 9,48,400, respectively. This did not include arrears of rent in respect of a house property situated at Calcutta and which had been in the tenancy of Smt. Lakhpatia Devi. The monthly rent of that property was Rs. 600 and the arrears due in respect thereof as on the relevant valuation dates amounted to Rs. 28,000, 36,200 and Rs. 47,600. The WTO called upon the assessee to explain the reason for not disclosing the aforesaid assets in its total wealth. The reason given by the assessee was that since the aforesaid dues had become bad and it was doubtful that they would be realized, the assessee had not disclosed them. Apart from that, it was claimed that the assessee was maintaining its accounts oncash basis. The WTO did not accept this contention and on account of the fact that every year the assessee had been able to recover some of the arrears of rent, held that the arrears of rent had not become irrecoverable or bad debts. Accordingly, he added the aforesaid amounts in the assessments for these years, respectively. These three orders were passed on one and the same date, i. e., February 12, 1974.

3. Aggrieved, the assessee preferred appeals before the AAC who disposed of the same by a common order. It was contended before him on behalf of the assessee that since the assessee maintained its accounts on cash basis, the arrears of rent in respect of the house property could not be included in its total wealth for the years under consideration. The AAC did not accept this contention because he found that the assessee had filed a suit for the recovery of arrears of rent and for ejectment and damages in the Court of Small Causes, Calcutta, and the matter is pending in the Calcutta High Court. The assessee had not given up its right or title to those arrears. He distinguished the decision of the Orissa High Court in CWT v. Vysyaraju Badreenarayanamoorthy Raju : [1971]79ITR330(Orissa) and of this court in Sahu Dharmata Saran v. CWT : [1971]80ITR194(All) , on the ground that the subject-matter of dispute in those cases represented a debit in regard to business debts. He also observed that the assessee had not produced any balance-sheet before him nor was the same available on record. The disputed debts were outstanding and they were not business debts and, hence, were liable to be included in the total wealth of the assessee.

4. Still aggrieved, the assessee took up the matter in further appeal before the Tribunal. The very same submissions were reiterated on behalf of the assessee before the Tribunal and apart from that it was also contended that the assessee had paid corporation tax in respect of the aforesaid property and the same should have been allowed as deduction before arriving at the market value. The Tribunal did not entertain this contention because it was raised for the first time before it. Further, the Tribunal confirmed the findings of the authorities below that the arrears of rent had not become bad or irrecoverable debts and the fact that the assessee was following the cash system of accounting for wealth-tax purposes would have no effect. However, it agreed with the assessee that the entire amount of arrears of rent could not be included in the total wealth of the assessee for these years. Keeping in view that a litigation was going on and it was doubtful as to when and to what extent the assessee would realise the arrears, the entire amount could not be treated as the wealth of the assessee. Only the market value of such assets could be included, and, in the opinion of the Tribunal, it would be fair and reasonable to estimate the same at 60 per cent, for each of these years. To that extent,therefore, relief was allowed to the assessee. Now, at the instance of the assessee the questions mentioned above have been referred to this court.

5. It was submitted before us on behalf of the assessee by its learned counsel, Sri R. K. Gulati, that in view of the admitted fact that the assessee maintains its accounts on cash basis, the arrears of rent could not be included in its total wealth on the basis of accrual, it would not be necessary to enter into question No. 1 and reliance was placed on the decision of the Orissa High Court in the case of Vysyaraju : [1971]79ITR330(Orissa) and that of the Karnataka High Court in A. T. Mirji v. CWT : [1980]126ITR93(KAR) . We do not agree because we have first to examine the nature of the arrears of rent and then to see as to whether they can be included in the total wealth of the assessee. It is, of course, not disputed that the assessee maintains its accounts on cash basis but, at the same time, as observed by the AAC, the assessee did not produce any balance-sheet before him nor any balance-sheet was available on the record. It is also not in dispute that the assessee had filed a suit for the ejectment of the (tenant, recovery of rent and mesne profits in respect of this property in the 10th Court of the Subordinate Judge, Alipore. That suit was decreed on December 1, 1967, for recovery of possession, for recovery of Rs. 80 as arrears of rent and mesne profits at the rate of Rs. 600 per month from December 5, 1965, till the recovery of possession. The amount of mesne profits was to be determined in subsequent proceedings on an application filed by the plaintiffs on payment of proper court fee. A copy of this judgment has been filed with an affidavit before this court. The matter is now pending in appeal before the Calcutta High Court.

6. Section 3 of the W.T. Act, hereafter referred to as 'the Act', is the charging section. It provides that for every assessment year commencing on and from the first day of April, 1957, wealth-tax is leviable in respect of the net wealth of an individual, Hindu undivided family and company as on the corresponding valuation date. Section 4 provides as to what are the assets which should be considered as belonging to an individual. 'Net wealth' has been defined in Section 2(m) to mean the amount which represents the aggregate value of the assets of the assessee on the valuation date after deducting the aggregate value of all the debts owed by him on the valuation date other than the debts and liabilities specified in the Act. Section 2(e) defines the expression 'assets' to include property of every description, movable or immovable, but does not include certain categories of properties with which we are not concerned. The meaning of the word 'property' has not been defined in the Act. As held by the Supreme Court in J. K. Trust v. CIT : [1957]32ITR535(Bom) , 'property' is a term of the widest import, and subject to any limitation or qualification which the context might require, it signifies every possible interest which a person can acquire, hold and enjoy. The question for consideration in that case was whether for the purposes of Section 4(3)(i) of the Indian I.T. Act, 1922, the office of managing agency, which was an office of profit, was 'property' which could be held on trust, and it was held that the managing agency of a company is business and is 'property' for the purposes of Section 4(3)(i). It was observed that there was nothing in Section 4(3)(i) of the Indian I.T. Act, 1922, which restricted in any manner the normal and accepted meaning of the word 'property' and excluded business from its connotation. It has, thus, been laid down that the word 'property' in its normal and accepted meaning is a term of the widest import and unless there is any limitation or qualification placed contextually, it would signify every possible interest which a person can acquire, hold and enjoy. This proposition was reiterated by the court in Ahmed G.H. Ariff v. CWT : [1970]76ITR471(SC) of the report it has been further said : 'the meaning of the word 'property' has come up for examination before this court in a number of cases'. It was observed in Commissioner, Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt : [1954]1SCR1005 , that 'there was no reason why that word should not be given a liberal and wide connotation and should not be extended to those well-recognised types of interests which had the insignia or characteristic of proprietary right'.

7. The learned standing counsel has also invited our attention to another decision of the Supreme Court in Pandit Lakshmi Kant Jha v. CWT : [1973]90ITR97(SC) , where one of the questions for consideration was: whether any part of the amount of Rs. 36,87,419 fixed as compensation payable to the assessee under the Bihar Land Reforms Act is liable for inclusion in the total wealth of the assessee After a perusal of the different provisions of the Bihar Land Reforms Act it was found that as soon as the estate or tenure of a proprietor or tenure-holder vests in the State, he becomes entitled to receive compensation. The fact that the payment of compensation in terms of the provisions of the Act may be deferred and be spread over a number of years does not affect the right of the proprietor or tenure-holder to the compensation. It was held that the assessee was vested with a right to get compensation immediately his land was vested in the State. Referring to the definition of 'assets' as given in Section 2(e) of the Act and the decision of the Supreme court in Ahmed G.H. Ariff : [1970]76ITR471(SC) , the court observed (p. 107 of 90 ITR):

'The definition of the 'assets' as given in Section 2(e) of the Act, though not exhaustive, shows its wide amplitude and we see no reason as to why the right to receive compensation cannot be included amongst the assets of an assessee.'

8. At p. 108, it has been further observed :

'Assuming for the sake of argument that the amount of compensation payable to the assessee had not been determined by the compensation officer by the valuation date, that fact would not justify the exclusion of the compensation payable from the assets of the assessee. The right to receive compensation became vested in the assessee the moment he was divested of his estate and the same got vested in the State in pursuance of the provisions of the Bihar Land Reforms Act. As the estate of the assessee which vested in the State was known and as the formula fixing the amount of compensation was prescribed by the statute, the amount of compensation was to all intents and purposes a matter of calculation. The fact that the necessary calculation had not been made and the amount of compensation had consequently not been quantified by the valuation date would not take compensation payable to the assessee out of the definition of assets or make it cease to be property.'

9. If we apply these principles to the facts of this case it would be seen that in regard to arrears of rent and damages it was not merely a claim of the assessee but it had fructified into a decree passed by the court of competent jurisdiction. That decree was passed on December 1, 1967, and the assessee was to receive mesne profits at the rate of Rs. 600 per month from December 5, 1965. The relevant valuation dates for the years under consideration were September 29, 1968, October 18, 1969, and October 8, 1970, respectively. Therefore, by the relevant valuation dates the amount of mesne profits, to which the assessee was entitled, was clearly known and its calculation on the execution side on the payment of court fee was only a matter of clerical formality. The arrears, therefore, could not but be included amongst the assets of the assessee. There is yet another aspect from which the nature of these arrears can be determined. As laid down by the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT : [1966]59ITR767(SC) ,' a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation : debitum in praesenti, solvendum in futuro'. In other words, if there is a debt, the fact that the amount is to be ascertained does not make it any the less a debt if the liability is ascertained and what remains is only the quantification of the amount. Apart from this, a debt due to an assessee cannot be excluded from the computation of his net wealth because it is an item of asset and not an item of liability in his hands.

10. It was, however, contended by Sri Gulati that the mere passing of the decree did not perfect the assessee's right to mesne profits and he cited a decision of the Bombay High Court in CIT v. Associated Commercial Corporation : [1963]48ITR1(Bom) . We do not agree with this contention and this decision also does not support it. What has been laiddown in that case is that the scheme of the I.T. Act shows that only those sums were taxable which accrued as income, i. e , they must have actually accrued or arisen. No amount can be said to accrue unless it was actually due. A claim to an amount is not tantamount to the claim being due or having accrued. We do not think that in the present case this situation obtains. The assessee's right to mesne profits is not merely a claim to an amount. In the first instance it arose under a legal obligation after the determination of the tenancy and then it has been accepted and made a part of the decree by a court of competent jurisdiction. Sri Gulati then submitted that because of the fact that an appeal is pending in the High Court the assessee's right is not indefeasible and he has relied on a decision of the Andhra Pradesh High Court in CIT v. Smt. Sankari Manickyamma : [1976]105ITR172(AP) . We find no merit in this submission either because there is nothing on record to show that the execution of the decree has been stayed by the High Court. Even if for the time being it be assumed that the execution of the decree has been stayed, it would be that the assessee's right to receive the disputed amount has been postponed till the disposal of the appeal. None the less it is an asset. In Smt. Sankari Manickyamma's case : [1976]105ITR172(AP) the question was whether the interest awarded on enhanced compensation should be taxed in the same year or should be spread over the years for which the interest is awarded The contention of the assessee was repelled and it was held that the interest on the enhanced compensation accrued to the assessee only when the compromise decree was passed by the High Court on May 9, 1963, since awarding interest on enhanced compensation is in the discretion of the court. Hence, the ITO was justified in including the amount in the previous year relevant to the assessment year 1964-65, We fail to understand as to how this decision is of any help to the assessee.

11. Therefore, so far as question No. 1 is concerned, in our opinion, the Tribunal was justified in holding that the arrears of rent relatable to the assessment years under consideration respectively were liable to be included in the assets of the, assessee. As for reducing the market value thereof to 60 per cent., we do not wish to express ourselves since this aspect has not been challenged by the Department.

12. Then we come to question No. 2. Section 7 of the Act provides for the mode to determine the value of assets. In so far as it is relevant for our purpose, it reads :

'7. Value of assets how to he determined.--(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 the valuation date and making such adjustments therein as may be prescribed....'

13. It would be seen that Sub-section (1) refers to the value of 'any assets other than cash', and ordinarily, therefore, the value of any asset other than cash may be determined at the market value of the asset on the valuation date. Sub-section (2) has a different purpose to serve and it makes a special provision for valuation of the business assets. Clause (b) of this sub-section refers to a permissible mode of valuation of assets of business carried on by an assessee for which accounts are maintained by him regularly. It provides that in computing the 'net value of the assets of the business' the WTO may, instead of determining separately the value of each individual asset held by the assessee in such business, adopt the value as mentioned in the balance-sheet of such business, as on the valuation date. This clause authorises the WTO to make such adjustments in the value of any asset or assets as the circumstances of the case may require. As observed by a Bench of our court in Sahu Dhar-mata Saran v. CWT : [1971]80ITR194(All)

'It is not a provision in derogation to the provisions of Sub-section (1) of Section 7. It is an enabling provision.....This provision was, evidently, introduced for facility of computation of the value of the assets pertaining to a business in which the assets are numerous and it would be difficult to determine the value of each individual asset separately by resort to the provisions of Sub-section (1) of Section 7. Sub-section (2) has been introduced as a non obstante clause and not as a proviso carving out an exception to the substantive provision laid down in Sub-section (1).'

14. It was also observed that:

'.....the provisions of Sub-section (1) and Sub-section (2) are notmutually exclusive and that where the assessee carries on a business and maintains regular accounts, it is still open to the Wealth-tax Officer to resort to the method prescribed in Sub-section (1) of Section 7 for the valuation of the assets of the business. Then again, where the Wealth-tax Officer has actually proceeded under Sub-section (2)(a) and adopted the balance-sheet value of the assets, it is open to him to make such adjustments in regard to the value of the different assets shown in the balance-sheet as he might consider necessary in the circumstances of the case.'

15. Similar view was taken by the Supreme Court in CWT v. Thungabhadra Industries Ltd. : [1970]75ITR196(SC) . It was laid down that (p. 199) 'under Sub-section (1) of Section 7 of the Act the Wealth-tax Officer is authorised to estimate for the purpose of determining the value of any assets, the price which it would fetch, if sold in the open market on the valuation date. But this rule in the case of a running business may often be inconvenient and may not yield a true estimate of the net value of the total assets of the business. 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.'

16. We do not find any justification in the submission made in this behalf before us by Shri Gulati that the mention of the words 'net value of the assets of the business' in Sub-section (2)(b) is only illustrative. In our opinion the mode prescribed in Sub-section (2)(b) is confined to the determination of the net value of the assets of the business. In the instant case, the rental income earned by the assessee from property was liable to be taxed under the head 'Property' and not under the head 'Business'. The question that the damages which the assessee would now receive by way of mesne profits, would be taxable under the head 'Other sources' and not 'Property' would not mean that in respect of this asset we may have recourse to Sub-section (2)(b) for determination of the net value thereof and indirectly for the reason that the assessee maintains its accounts on cash basis, hold that the disputed amounts are not liable to be included in the total wealth of the assessee for the years under consideration.

17. A question, of course, arises as to whether the method in which the assessee keeps his accounts is relevant for wealth-tax purposes. The Orissa High Court, of course, in Vysyaraju's case : [1971]79ITR330(Orissa) , taking the view that the W.T. Act is a sister legislation of the I.T. Act, and various provisions have been made in it which incorporates the machinery set up under the I.T. Act for its working and that in the absence of any specific provision in the W.T. Act for a different mode of computation of net wealth, it is difficult to accept that under the W.T. Act in the case of an assessee who maintains its accounts and prepares the balance-sheet on cash basis, accrued income not received would still be taken into account. Without entering into the controversy as to whether or not for the mode of computation of net wealth the method in which the assessee maintains its accounts can be relied upon, that decision is distinguishable. There, the question was regarding the includibility of accrued interest as at thevaluation date in the net wealth of the assessee. The assessee was carrying on business in money-lending. In other words, the determination of the net value of an asset of a business was under consideration and therefore, Sub-section (2)(a) of Section 7 was certainly attracted because there the assessee maintained his accounts on cash basis and had filed a balance-sheet. In the present case it is not disputed that the assessee maintained its accounts on cash basis but it has been found that it did not file any balance-sheet and apart from that it is not the question of determination of the net value of the asset of the business which is involved here.

18. The decision of the Orissa High Court has been followed by the Karnataka High Court in A. T. Mirji : [1980]126ITR93(KAR) . There, the assessee, an individual, was an income-tax practitioner and in his wealth-tax returns for certain years claimed that the bills receivable by him as on the relevant valuation date could not be included in his assets liable to tax. The court extended the scope of Section 7(2) to the case of a 'profession' as well as the view that though there is a difference between a business and a profession, in so far as it relates to the requirements to accept the accounting system for taxation there is no difference between the two. Further, 'profits and gains of business or profession' is treated as one head under item 'D' of Section 14 of the I.T. Act, 1961. Therefore, whether the assessee is carrying on a business or profession, if he has maintained accounts regularly the system of accounting adopted should be normally accepted for computing the value of the assets on the date of valuation. Reference was made to Section 145 of the I.T. Act in this behalf as well.

19. The Calcutta High Court has, however, taken a different view in Dipti Kumar Basu v. CWT [1916] 105 ITR 450. There also it was a case of a solicitors' firm in which the assessee was a partner. The firm maintained its books on cash basis and the question was whether the outstandings due to the firm constituted assets the value of which was required to be included in its net wealth for the purposes of assessing the assessee's interest therein? Their Lordships dissented from the view taken by the Orissa High Court in Vysyaraju's case : [1971]79ITR330(Orissa) and held that the I.T. Act is concerned with the total income of the assessee ; whereas the W.T. Act is concerned with his net wealth. The system of accounting determines the taxability of income under the I.T. Act and the tax is assessed on accrual of income under the mercantile system of accounting, whereas it is assessed on actual receipt under the cash system of book-keeping. Whatever may be the system of accounting, a bad debt is always taken into account in the computation of the net income of the assessee under the I.T. Act and it should also be taken into account in computing the net wealth of the ;assessee under theW.T. Act as the W.T. Act is not concerned with the income of the assessee but is concerned with his net wealth. It is observed (p. 463):

'It is harsh to include a debt due to an assessee in the computation of his net wealth, but, it cannot be helped, for it is an item of asset inhis hands.'

20. We are respectfully inclined to agree with this view and even without expressing ourselves on the question as to whether Sub-section (2)(b) of Section 7 of the Act can be extended to heads other than business, in the case of a bad debt irrespective of the system of accounting, in income-tax assessment it is taken into account in the computation of the net income. In wealth-tax assessment where the question is of determining the net wealth of the assessee, there is no question of not including the debts which do amount to an asset.

21. Our answer to question No. 1, therefore, is in the affirmative, in favour of the Department and against the assessee. We answer question No. 2 by saying that the arrears of rent could be included in the net wealth of the assessee since it is an asset and the system of accounting maintained by the assessee is not at all relevant for this purpose. The Commissioner of Wealth-tax is entitled to costs, which we assess at Rs. 250.


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