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Commissioner of Wealth-tax Vs. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. (No. 2) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Civil Case No. 309 of 1968
Judge
Reported in[1981]131ITR148(MP)
ActsWealth Tax Act - Sections 7(2)
AppellantCommissioner of Wealth-tax
RespondentGwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. (No. 2)
Cases ReferredKesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth
Excerpt:
- - [1963]49itr832(bom) .we may observe that this argument will not hold good. 543): having heard the counsel, we are clearly of the opinion that the reference should be answered in favour of the assessee. it was also open to the wealth-tax officer to reject the figure given by the assessee and to substitute in its place another figure, if he was, for sufficient reasons, satisfied that the figure given by the assessee, was wrong. here again the high court ignoring the ratio of the decision of this court in kesoram industries' case [1966]59itr767(sc) as well as the other decisions of this court, held that the evidence afforded by the balance-sheet cannot be considered as primary evidence or prima facie evidence of the value of the assets of business......corollary, that section 7(2)(a) gives the wealth-tax authorities the power to adopt the balance-sheet value of the assets as the net value of the business as a whole, but this valuation is not sacrosanct. they are at liberty to make adjustments therein if, in their opinion, the balance-sheet value does not represent the real or the correct value of the assets. that is a conclusion which logically flows from the very language of the section itself. ' 5. therefore, in the case of him mills ltd. v. cwt (m.c.c. no. 322 of 1968--6-4-73), a division bench of this court expressed the view that the view as expressed in cwt v. swadeshi cotton and flour mitts ltd. : [1968]69itr539(mp) , was based on the pronouncement of their lordships of the supreme court in kesoram industries and cotton mills.....
Judgment:

P.K. Tare, C.J.

1. In this reference under Section 27(1) of the W.T. Act, 1957, the Income-tax Appellate Tribunal, Bombay Bench-A, has referred the following two questions for our opinion :

' (1) Whether, on the facts and in the circumstances of the case, for purposes of arriving at the value of assets under Section 7(2) of the Wealth-tax Act, the Appellate Tribunal was justified in giving directions to allow the depreciation as per income-tax records when the actual amount written off in the books was less

(2) Whether the Appellate Tribunal was justified in giving allowance in respect of additional depreciation in arriving at the value of the assets under Section 7(2) of the Wealth-tax Act '

2. This reference a/rises on the following facts: The assessment order for valuing the respondent's assets for the assessment year 1957-58, to be valued on March 31, 1957, was passed by the WTO on September 25, 1958 (vide petitioner's annex. ' B '). The respondent is a limited company manufacturing and selling staple fibre yarn and cloth. In the balance-sheet of the company an ad interim provision for depreciation was made to the extent of Rs. 1,32,00,000 as shown in the balance-sheet. But at the time of assessment, the respondent claimed the depreciation to the extent of Rs. 2,83,49,526. However, the WTO allowed the depreciation to the extent of Rs. 50,51,515. On an appeal to the AAC, he, by order, dated January 22, 1959 (petitioner's annex. ' C '), allowed the depreciation tothe extent of Rs. 1,32,00,000, as shown in the balance-sheet of the respondent's accounts for the relevant year. Against the order of the AAC, the department and the assessee both filed appeals before the Income-tax Appellate Tribunal and as per order, dated January 16, 1964 (petitioner's annex. ' D '), the Appellate Tribunal, relying on a decision of the Bombay High Court in CWT v. Indian Standard Metal Company Ltd. [1963] 49 ITR 832, dismissed the appeal filed by the department and partly allowed the appeal filed by the assessee holding that the assessee was entitled to depreciation to the extent that the respondent would be entitled under the Indian I.T. Act, 1922, for the purpose of arriving at a valuation as per Section 7(2) of the W.T. Act, 1957. The department, therefore, moved the Income-tax Appellate Tribunal for making a reference to this court under Section 27(1) of the W.T. Act, 1957, and hence this reference.

3. The learned counsel for the Commissioner firstly urged that as the matter was decided by the Bombay Bench of the Income-tax Appellate Tribunal, the Tribunal was justified in following the view of the Bombay High Court as expressed in CWT v. Indian Standard Metal Company Ltd. : [1963]49ITR832(Bom) . We may observe that this argument will not hold good. It may be that the Income-tax Appellate Tribunal, Bombay Bench, may be deciding the matter, but as the matter necessarily relates to a question arising with reference to an assessee taxable in the State of Madhya Pradesh, it is the decision of the Madhya Pradesh High Court, if any, that ought to be followed by the Income-tax Appellate Tribunal. However, at the time, the Income-tax Appellate Tribunal decided the appeals filed by both the parties, the decision of this court was not there. Presently, we shall refer to it. Probably the decision of the Bombay High Court in CWT v. Indian Standard Metal Company Ltd. : [1963]49ITR832(Bom) , was before the Appellate Tribunal, which was taken as the guiding factor. However, as we have taken a view different from the one taken by the Bombay High Court in the said case, we are of opinion that the first question ought to be disposed of in accordance with the opinion expressed by a Division Bench of this court in Hira Mills Ltd. v. CWT (Misc. Civil Case No. 322 of 1968, dated 6-4-1973).

4. In the Bombay case while computing the value of the assets of a business for the purposes of assessment of wealth-tax, the learned judges of the Bombay High Court laid down that the WTO would be entitled to follow either of the two methods mentioned in Section 7 of the Act, namely, 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 andmake such adjustments as he considers necessary. In valuing the assets of the assessee's business for purposes of wealth-tax, the WTO 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 AAC held that the amount of depreciation which had been allowed by the I.T. authorities should be deducted from the book value shown in the balance-sheet. The Tribunal had agreed with that view. The learned judges of the Bombay High Court held that the assessee was entitled to claim deduction of the amount of accumulated depreciation allowance in its fixed assets, not written off in the books, but allowed by the department in the I.T. assessments, for the purpose of computing the net wealth under Section 7 of the W.T. Act. The learned judges also further held 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. The learned judges further held that it could not be laid down as an invariable rule of law that simply because depreciation had been allowed under the I.T. Act, the same must be allowed in determining the net value of the assets for purposes of wealth-tax and whether such depreciation should be deducted or not must depend on the facts and circumstances of each case. With respect to the said view expressed by the learned judges of the Bombay High Court, a Division Bench of this court in Him Mitts Ltd. v. CWT (M.C.C. No. 322 of 1968--6-4-73) has taken a slightly different view, based on an earlier decision of this court in CWT v. Swadeshi Cotton and Flour Mills Ltd. : [1968]69ITR539(MP) . In CWT v. Swadeshi Cotton and Flour Mills Ltd., a Division Bench of this court observed as follows (p. 543):

' Having heard the counsel, we are clearly of the opinion that the reference should be answered in favour of the assessee. In view of the recent pronouncement of their Lordships of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax : [1966]59ITR767(SC) , it can no longer be contended that, when a global valuation is made under Section 7(2)(a) of the Act, the valuation as given in the balance-sheet is conclusive of the matter. On the contrary, the Wealth-tax Officer is bound to consider on the material placed before him whether the figure shown in the balance-sheet was inflated for acceptable reasons in ascertaining the true value of the assets. Their Lordships, in that case, have stated:

'It was open to the assessee to convince the authorities that the said figure was inflated for acceptable reasons ; but it did not make any suchattempt. It was also open to the Wealth-tax Officer to reject the figure given by the assessee and to substitute in its place another figure, if he was, for sufficient reasons, satisfied that the figure given by the assessee, was wrong.' It follows, as a necessary corollary, that Section 7(2)(a) gives the wealth-tax authorities the power to adopt the balance-sheet value of the assets as the net value of the business as a whole, but this valuation is not sacrosanct. They are at liberty to make adjustments therein if, in their opinion, the balance-sheet value does not represent the real or the correct value of the assets. That is a conclusion which logically flows from the very language of the section itself. '

5. Therefore, in the case of Him Mills Ltd. v. CWT (M.C.C. No. 322 of 1968--6-4-73), a Division Bench of this court expressed the view that the view as expressed in CWT v. Swadeshi Cotton and Flour Mitts Ltd. : [1968]69ITR539(MP) , was based on the pronouncement of their Lordships of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT : [1966]59ITR767(SC) . In that view, it was laid down in that case that the balance-sheet value need not be conclusive and the correct market value can be found out by the taxing authorities even apart from the balance-sheet value and it was also held that on such faulty reasoning, as was adopted by the learned Members of the Tribunal, the mandatory provision of Section 7(2)(a) of the Act could not be given a go-by so as to deny to the assessee the deduction for depreciation that he might be entitled to under the Act. In that case, the learned counsel for the department relied on the pronouncement of their Lordships of the Supreme Court in CWT v. Tungabhadra Industries Ltd. : [1970]75ITR196(SC) . With reference to that, the Division Bench laid down that the pronouncement of their Lordships of the Supreme Court would not at all support the contention raised on behalf of the department or the line of reasoning adopted by the learned Members of the Income-tax Appellate Tribunal. In that view, the reference in that case was answered by giving certain directions to the Appellate Tribunal in the matter of arriving at the valuation as per Section 7(2)(a) of the W.T. Act, 1957.

6. We may further advert to the pronouncement of their Lordships of the Supreme Court in CWT v. Aluminium Corporation of India Ltd. : [1972]85ITR167(SC) , wherein their Lordships made the following observations (p. 172):

' Now, turning to the second question referred to the High Court, we agree with the High Court that the valuation of the assets shown in the balance-sheet is not conclusive. Wealth-tax is levied on the value of the assets of the assessee on the valuation date. Section 7(2) of the Wealth-tax Act merely requires the Wealth-tax Officer to have regard to the balance-sheet. It is open to the assessee to satisfy the authorities underthe Wealth-tax Act that the valuation shown in the balance-sheet is not correct. But in the absence of such a proof, the Wealth-tax Officer will be justified in proceeding on the basis that the value shown in the balance-sheet is correct because no one can know the value of the assets of a business more than those who are in charge of the business. In other words, the value of the assets shown in the balance-sheet can justifiably be made the primary basis of valuation for the purpose of the Wealth-tax Act. In other words, it can be taken as prima facie evidence of the value of the assets. Here again the High Court ignoring the ratio of the decision of this court in Kesoram Industries' case : [1966]59ITR767(SC) as well as the other decisions of this court, held that the evidence afforded by the balance-sheet cannot be considered as primary evidence or prima facie evidence of the value of the assets of business. To say the least, the learned Chief Justice indulged in an unnecessary mental exercise forgetting the fact that the law as interpreted by this court is binding on all courts and Tribunals.'

7. Thus, there can be no doubt that the valuation for purposes of Section 7(2) of the Act has to be arrived at in the manner laid down by their Lordships of the Supreme Court in the cases mentioned above. It is true that an assessee might be entitled to depreciation for the purposes of Section 10(2)(vi)(a) of the Indian I.T. Act, 1922, The Bombay High Court expressed the view that such depreciation as is allowed in the assessment proceedings for the purposes of income-tax might be relevant in some types of cases. We may observe that the learned Members of the Income-tax Appellate Tribunal misinterpreted the observations of their Lordships of the Bombay High Court in thinking that what their Lordships laid down was that the depreciation allowable under Section 10(2)(vi)(a) of the Indian I.T. Act, 1922, would automatically have to be allowed for the purpose of arriving at the valuation under Section 7(2) of the W.T. Act, 1957. We may observe that the depreciation allowable under the Indian I.T. Act, 1922, would not at all be material for the purpose of arriving at the valuation under Section 7(2) of the W.T. Act, 1957. It may be that in a rare case if there be no other material and the only material is the depreciation allowed under the Indian I.T. Act, 1922, that might be a relevant factor to be taken into consideration. But, ordinarily, such allowable depreciation under the Indian I.T. Act, 1922, cannot be a relevant consideration, but the valuation must be arrived at in accordance with the requirements of Sub-section (2) of Section 7 of the W.T. Act, 1957. We are certainly in agreement with the view expressed by the Bombay High Court in CWT v. Indian Standard Metal Company Ltd. : [1963]49ITR832(Bom) that the accumulated depreciation also can be allowed to be deducted from the total valuation to be arrived at.

8. In this connection, we might refer to the view as expressed in a Division Bench of this court in Central India Machinery .v. CWT : [1969]72ITR242(MP) , wherein the Division Bench laid down that the Income-tax Appellate Tribunal was right in holding that the initial and additional depreciation permissible under Section 10(2)(vi)(a), (b) and (c) and Section 10(2)(via) of the Indian I.T. Act, 1922, could not be taken into account in determining the net valuation of assets of the assessee under Section 7(2)(a) of the W.T. Act, 1957. The Division Bench followed its earlier view as expressed in CWT v. Swadeshi Cotton and Flour Mitts Ltd. : [1968]69ITR539(MP) . We are certainly in agreement with the view expressed by the Division Bench in the said case and, therefore, we propose to answer the questions posed in this reference on that basis.

9. Looked at from this point of view, there can be no doubt that the amount of Rs. 1,32,00,000, as shown in the balance-sheet of the respondent-assessee was merely provisional depreciation. It could not be conclusive. It was shown for the first year. Before that the respondent had not shown any depreciation in the balance-sheets of previous accounting years. As such, the valuation in the balance-sheet could not be considered to be final or conclusive. Similarly, the figure of Rs. 2,83,49,526, as claimed by the respondent-assessee, would also not be correct as the respondent had in that figure included some items which could not at all be allowed. However, it will be for the Income-tax Appellate Tribunal to arrive at the final figure of valuation by strictly adhering to the provisions of Section 7(2)(a) of the W.T. Act, 1957, which we may reproduce for the sake of convenience and regarding which we may elaborate our view :

' 7. (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.'

10. We may observe that although the valuation as shown in the balance-sheet might be taken as the basis, yet there would be room for making such adjustments therein as may be prescribed and, consequently, the Appellate Tribunal would have to arrive at the correct figure of depreciation any where between the one shown in the balance-sheet and the amount of depreciation will certainly be more than the amount shown in the balance-sheet. But in any case, it will be less than what was unjustifiably claimed by the respondent-assessee at a figure of Rs. 2,83,49,526. While answering this reference it is not for us to say anything more except to give our opinion on the questions referred to us. It would be for the Appellate Tribunal to arrive at the correct figure.

11. As a result of the discussion aforesaid, we answer the two questions as follows:

(1) That, on the facts and in the circumstances of the case, for the purpose of arriving at the value of assets under Section 7(2) of the W.T. Act, the Appellate Tribunal was not justified in giving directions to allow the depreciation as per income-tax records when the actual amount written off in the books was less.

(2) That the Appellate Tribunal was justified in giving allowance in respect of additional depreciation in arriving at the value of the assets under Section 7(2) of the W.T. Act.

12. Let the reference be returned to the Income-tax Appellate Tribunal for passing a further consequential order in accordance with the opinion given by us. However, under the circumstances, we direct that there shall be no order as to costs of this reference.


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