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Smt. Kamal K. Parikh Vs. Wealth-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1982)1ITD597(Ahd.)
AppellantSmt. Kamal K. Parikh
RespondentWealth-tax Officer
Excerpt:
.....such share shall be 85 per cent of the break-up value so determined .... 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. (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 18a of the indian income-tax act, 1922 (11 of 1922), or under section 210 of the income-tax act, 1961 (43 of 1961) ..." (ii) the following amounts shown as liabilities in the balance-sheet shall not.....
Judgment:
1. These appeals are by the assessees, namely, Smt. Kamal K. Parikh, Shri Ashok K. Parikh and Shri Arun K. in respect of the assessment years 1976-77 and 1977-78. The point in issue in all the appeals is the same. So all the appeals were heard together and for the sake of convenience are being disposed of by a common order.

2. Smt. Kamal K. Parikh, Shri Ashok K. Parikh and Shri Arun K. Parikh (assessees) held certain shares of Mehta Parikh & Co. (P.) Ltd. on the valuation dates, relevant to assessment years 1976-77 and 1977-78. The said shares were valued by the assessees at Re. 1 per share as according to the assessees the liabilities of the company were more than the assets as per the balance sheet of the said company. The WTO accepted such valuation.

3. The learned Commissioner after going through the records found that the WTO while working out the break-up value of the shares considered the provision of taxation for calculation without deducting the advance tax already paid before the relevant valuation dates. Thus, according to the learned Commissioner, the WTO did not strictly adhere to Rule 1D of the Wealth-tax Rules, 1957, while determining the value of the shares of Mehta Parikh & Co.(P.) Ltd. inasmuch as the advance tax paid before the relevant valuation dates should have been deducted from the provision for taxation while working out the break-up value of shares of the the said company. According to the learned Commissioner, if Rule 1D is correctly applied for valuing the said shares at the relevant dates, the correct value of shares of Mehta Parikh & Co. (P.) Ltd. comes to Rs. 2,654 and Rs. 3,005 per share in respect of the assessment years 1976-77 and 1977-78, respectively. Thus, according to the learned Commissioner there was undervaluation of the shares and as a result of it there was an error in the assessments. He was of the opinion that the orders passed by the WTO on 7-10-1978 in respect of the assessment years 1976-77 and 1977-78 in the cases of all the three assessees were erroneous and prejudicial to the interest of the revenue.

4. The learned Commissioner, accordingly, issued notices under Section 2.5(2) of the Wealth-tax Act, 1957 to the assessees to show cause as to why the proposed action under Section 25(2) may not be taken.

5. On behalf of the assessees it was submitted that a similar issue went before the Tribunal in the case of Shri Ashok K. Parikh for the assessment years 1965-66 to 1971-72 and the Tribunal decided that the valuation of the shares made by the assessee under Rule 1D was quite correct.

6. The learned Commissioner was aware that there was a decision of the Tribunal in the case of Shri Ashok K. Parikh in respect of the assessment years 1965-66 to 1971-72, but he was of the view that the department has not accepted the said finding of the Tribunal and the matter is pending before the Hon'ble Gujarat High Court.

7. According to the learned Commissioner, it was common ground that the shares of Mehta Parikh & Co. (P.) Ltd. were not quoted in the stock exchange and as such these shares are to be valued as per Rule 1D.According to him, Rule 1D prescribes certain methods for valuation of unquoted shares. As per Explanation II(ii)(e) to Rule 1D, as amended by the Wealth-tax (Amendment) Rules, 1967, with effect from 6-10-1967, any amount paid as advance tax shall not be treated as liabilities. Before amendment to Rule 1D, it did not contemplate and adjustment for advance tax paid. On a normal and natural interpretation, the words "tax payable" would have to be amount of tax actually due on the income as per books less taxes paid or tax deducted, advance tax, etc. In determining whether the provision for taxation was in excess over the tax payable, one has to consider not only the gross tax payable with reference to the book profits but first it was to be adjusted by advance tax and taxes deducted at source. Thus, according to him, the provision to be considered is excluding the advance tax payment. Hence, the tax payable with reference to the book profits should also be considered by excluding the advance tax. So in view of the Wealth-tax (Amendment) Rules, 1967, the tax provision deductible is to be reduced by advance tax paid as otherwise it results in enhanced deduction.

Thus, the learned Commissioner was of the opinion that according to Rule 1D the correct value of shares of Mehta Parikh & Co. (P.) Ltd. comes to Rs. 2,654 and Rs. 3,005 per share in respect of the assessment years 1975-76 and 1977-78, respectively. Thus, he was of the view that the assessment orders dated 7-10-1978 passed by the WTO in respect of the assessment years 1975-76 and 1977-78 were erroneous and prejudicial to the interest of the revenue. He, accordingly, set aside the assessment orders and directed the WTO to re-do the assessments for both the years pertaining to all the three assessees in accordance with law.

8. Against the orders of the Commissioner the assessees are in appeal before the Tribunal. The assessees have taken additional grounds but at the time of argument they were not pressed.

9. According to the learned counsel for the assessees the orders passed by the learned Commissioner are bad in law. The learned Commissioner was not correct in not following the Tribunal's order referred to above passed in the case of Shri Ashok K. Parikh in respect of the assessment years 1965-66 to 1971-72. According to the learned counsel for the assessees, the assessees correctly valued the shares at Re. 1 per share as according to them the liabilities of the company were more than the assets as per the balance sheet of the said company. While working out the break-up value of the shares the provision for taxation was considered for calculating without deducting the advance tax already paid before the relevant valuation dates. It was perfectly in accordance with Rule 1D. Reliance was also placed on the ratio of decision in the case of CWT v. Ashok K. Parikh [1981] 129 ITR 46 (Guj.).

10. The learned departmental representative supported the order of the learned Commissioner. The learned departmental representative contended that Rule 1D prescribes certain method for valuation of unquoted shares. If the said rule is properly applied for valuing the shares in question, it would be clear that the learned Commissioner was quite correct in valuing the shares of Mehta Parikh & Co. (P) Ltd., at Rs. 2,654 and Rs. 3,005 per share in respect of the assessment years 1975-76 and 1977-78, respectively.

11. We have heard the parties, considered the submissions and perused the entire material on record. The facts of the case are not in dispute. The assessees held shares of Mehta Parikh & Co. (P.) Ltd. For wealth-tax purpose the market value of these shares had to be included in their wealth as on the respective valuation dates. The shares were not quoted in the stock exchange. So the WTO was required to determine the market value of these shares on the basis of the break-up value as provided under Rule 1D. Rule 1D provides for arriving at the market value of unquoted shares of the companies other than investment companies and managing agency companies. The rule provides as follows : 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 :- The value of all the liabilities as shown in the balance-sheet of the 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 ....

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.

(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 18A of the Indian Income-tax Act, 1922 (11 of 1922), or under Section 210 of the Income-tax Act, 1961 (43 of 1961) ..." (ii) the following amounts shown as liabilities in the balance-sheet shall not be treated as liabilities, namely :- (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 the law applicable thereto ....

12. If we read carefully the main portion of Rule 1D, it would be clear that in order to arrive at the break-up value of the shares of any 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, thus, what is known as the net worth of the company, is to be ascertained. Explanation II to Rule 1D lays down certain rules of interpretation and though, ordinarily, an amount paid as advance tax under Section 210 of the Income-tax Act, 1961 will be shown on the assets side of the balance sheet, for the purpose of arriving at the break-up value, by the artificial rule laid down in Explanation II, Clause (i)(a), the amount paid as advance tax in this manner under the law relating to income-tax is not to be treated as an asset.

13. From the aforesaid discussion it would be clear that when a particular amount which is shown on the assets side is not to be treated as an asset, the net worth of the company will, to that extent, be reduced because to that extent the assets will be shown less. On the other hand, when it comes to Sub-clause (ii), which deals with what are not to be treated as liabilities under Clause (e), it is only the amount shown by way of provision on the liabilities side that is dealt with and Clause (e) makes it clear that any amount representing provision for taxation and the words in parenthesis, namely, "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.

14. According to us, the provision for tax liabilities means provision for taxation which would, under the ordinary rules of accountancy, be shown on the liabilities side of the balance sheet. What Clause (e) provides is that only the provision for taxation which is justifiable in view of the book profits of the company in accordance with the law applicable thereto should be deducted as liabilities. Therefore, what Sub-clause (e) of Clause (ii) requires the WTO 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 amount of tax payable in accordance with the law applicable thereto. Having thus ascertained the amount of tax payable with reference to the book profits, the WTO has then to see whether the provision for taxation on the liabilities side of the balance sheet is in excesss of the said 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. It is equally clear that 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 If. Thus, it is clear that to the extent to which the liabilities are reduced, the net wealth would go up.

15. In our opinion, Sub-clause (a) of Clause (i) of Explanation II is intended to give a benefit to the holders of shares of those companies, who have been prompt in making payment of their advance tax under the provisions of the law relating to income-tax.

16. We may also point out that under the operative part of Rule 1D, the main provision, the balance sheet of the company is ordinarily to be taken on its face value for the purpose of arriving at the break-upvalue of shares on the basis of net worth. If there is any undue provision for taxation made and thus there is an inflated figure of liabilities shown by making an excess provision for taxation on the liabilities side, to the extent of the excess that provision is to be disregarded by the operation of Sub-clause (e) of Clause (ii) of Explanation II.17. Looking to the aforesaid facts and the provision of Rule 1D, as discussed above, it would be clear that the Commissioner was not justified in seeking to add back the amount of advance tax paid under the provisions of the Income-tax Act by Mehta Parikh & Co. (P.) Ltd. for arriving at the market value of the shares on the basis of the break-up value of the shares of the company. On the other hand, the WTO was right in coming to the conclusion that in determining the break-up value of the shares, the amount of advance tax paid by the company in the relevant year and shown on the asset side of the balance sheet is not to 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.

18. Thus, we are of the view that the orders passed by the WTO were not erroneous and prejudicial to the interest of the revenue. In support of our conclusion we are also fortified by the ratio of decision in the case of Ashok K. Parikh (supra).

19. Thus, the orders passed by the Commissioner are incorrect and deserve to be cancelled.


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