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Wealth-tax Officer Vs. C.J. Sheth - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1983)4ITD706(Mum.)
AppellantWealth-tax Officer
RespondentC.J. Sheth
Excerpt:
1. the point at issue centres around the scope of explanation ii(ii)(e) to rule 1d of the wealth-tax rules, 1957 ('the act'), which has been framed for computing the market value of unquoted equity shares of companies, other than investment companies, and managing agency companies. the appeal before us, which is by the revenue and in which the issue referred to emanates out of the assessment made in the case of shri c.j. sheth, individual, for the assessment year 1977-78. in this appeal, the computation of the market value of the shares of two companies are involved, i.e., (a) c.a. galikotwala & co. (p.) ltd.; and (b) advance paints (p.) ltd. to zero down on the controversy, we would set out, and discuss, the relevant statutory provisions, with reference to the figures relating to.....
Judgment:
1. The point at issue centres around the scope of Explanation II(ii)(e) to Rule 1D of the Wealth-tax Rules, 1957 ('the Act'), which has been framed for computing the market value of unquoted equity shares of companies, other than investment companies, and managing agency companies. The appeal before us, which is by the revenue and in which the issue referred to emanates out of the assessment made in the case of Shri C.J. Sheth, individual, for the assessment year 1977-78. In this appeal, the computation of the market value of the shares of two companies are involved, i.e., (a) C.A. Galikotwala & Co. (P.) Ltd.; and (b) Advance Paints (P.) Ltd. To zero down on the controversy, we would set out, and discuss, the relevant statutory provisions, with reference to the figures relating to the balance sheet and profit and loss account of Advance Paints (P.) Ltd., which would be fully illustrative.

2. Where equity shares of a company are not quoted on a stock exchange, one of the methods for determining the market value is the break-up value method. This involves the determination of the 'net worth' of the company, represented by, the excess of the value of assets, over the liabilities as appearing in the balance sheet. Rule 1D prescribes the manner in which the value of 'assets' and of 'liabilities' is to be computed. The rule provides that certain amounts exhibited as 'assets' in the balance sheet shall not be treated as 'assets', and the rule further provides, that certain amounts shown as 'liabilities' in the balance sheet are not to be treated as such. In view of the latter provisions, the result would be that a part, or whole, of certain amounts that are classified in the balance sheet as 'liabilities' may not fall to be deducted from the aggregate value of 'assets' in arriving at the 'net worth'. The two Explanations to Rule 1D which are relevant read as under: Explanation I: 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); (b) any amount shown in the balance sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset; (ii) the following amount shown as liabilities in the balance sheet shall not be treated as liabilities, namely:-- (b) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the valuation date at a general body meeting of the company; (c) reserves, by whatever name called, other than those set apart towards depreciation; (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; (f) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.

Thus, Clause (i)(a) to Explanation II provides that the amount paid as advance tax and exhibited as an asset in the balance sheet is to be excluded from the total value of assets. So also, provision for taxation, as exhibited on the liabilities side will not straightaway qualify for deduction as a liability, but only such amount will qualify as a deduction, after adjustment, as provided in Clause (ii)(e) of Explanation II. This clause contains in paranthesis the words '(other than the amount referred to in Clause (i)(a))'. In due course we will decide on the import of these words.

3. In the balance sheet of Advance Paints (P.) Ltd. as on 31-12-1976, i.e., the balance sheet drawn up on the date immediately preceding the valuation date, which is 31-3-1977 and which is the relevant balance sheet for the assessment year 1977-78, the total of the asset-side is shown at Rs. 17,20,162 (hereinafter rounded off to Rs. 17.20 lakhs).

This includes an item described as 'advance tax' of Rs. 2,10,874 (hereinafter rounded off to Rs. 2.11 lakhs). In computing the value of the shares, the WTO in terms of Explanation II(i)(a) excluded the amount of Rs. 2.11 lakhs from the total value of assets of Rs. 17.20 lakhs and the value of assets was arrived at Rs. 15.09 lakhs. The profits for the year according to the profit and loss account came to Rs. 4.17 lakhs. Exhibited as a liability in the aforesaid balance sheet was provision for taxation of Rs. 2.52 lakhs. The WTO purporting to apply the provisions of Explanation II(ii)(e) to Rule 1D, excluded from the amount of provision for taxation appearing on the liability side of Rs. 2.52 lakhs, the amount of advance tax of Rs. 2.11 lakhs. In other words, he computed the deductible liabilities on account of provision for taxation at only Rs. 41,000. The net worth consequently stood increased by Rs. 2.11 lakhs and the assessee was aggrieved by this adjustment made by the WTO.4. The assessee preferred an appeal to the AAC, who followed the decision of the Tribunal, for the assessment year 1975-76, in the assessee's own case, i.e., the order dated 30-9-1977, in WT Appeal No.618 (Bom.) of 1976-77, and held that the provision for taxation to be treated as a liability should be the full amount of Rs. 2.52 lakhs and should not be reduced by the advance tax paid of Rs. 2.11 lakhs. The Tribunal in its order for the assessment year 1975-76 had in its turn relied on the earlier order of the Tribunal, in IT Appeal Nos. 143 & 144 (Bom ) of 1971-72, dated 6-1-1973. Thus, according to the decision of the AAC, following earlier decisions of the Tribunal, Explanation II(ii)(e) did not enable adjustment from the figure exhibited as provision for taxation on the liability side of the balance sheet of the amount shown on the asset side as payment of advance tax, which amount in terms of Explanation II(i)(a) was not to be treated as an asset.

5. The revenue appealed to the Tribunal and the Members of the Bench, before whom the appeal was listed originally, were of the view that though there was a decision of the Gujarat High Court, in the case of CWT v. Ashok K. Parikh [1981] 129 ITR 46, which supported the view taken by the AAC, the decisions of the AAG and the Tribunal required reconsideration. This was because according to the Bench the issue regarding the valuation of shares had also come up for consideration by the Supreme Court, in CWT v. Sardar Ajaib Singh [1971] 82 ITR 842, and in the light of such decision and the later decision of the Supreme Court in gift-tax proceedings, in the case of CGT v. Sardar Ajaib Singh [1972] 83 ITR 221, the matter merited reconsideration. A reference was made to the President, who constituted a Special Bench, and thus this Bench has come to be seized of the matter.

6. On behalf of the revenue, the case has been argued by Shri R.J.Joshi, the standing counsel, and on behalf of the assessee, Shri V.H.Patil appeared. There are interveners in this case and on behalf of Shri S.R. Sable, HUF [WT Appeal Nos. 86, 87 & 88 of Pune 1981], Shri S.E. Dastur appeared. The other cases, on behalf of which there were interveners, are those of Anuradha R. Mafatlal [WT Appeal Nos. 1253 & 1254 (Bom.) of 1981] and Nirmal Bhigilal, HUF [WT Appeal No. 1189 (Bom.) of 1981], in which cases Shri B.A. Palkhivala appeared.

7. Opening the case for the revenue, Shri Joshi submitted that while Section 211 of the Companies Act, which prescribes the form and contents of the balance sheet, did not specifically indicate the manner of exhibiting the payments made on account of advance tax, it was well recognised, as a practice in accountancy, that the advance tax paid was to be exhibited, as an asset on the asset side of the balance sheet. He stated the practice had received judicial recognition and finds mention in the decision of the Gujarat High Court in CIT v. Rohit Mills Ltd. [1965] 58 ITR 854, where at pages 866 and 867, there are the following observations: . . .The system of accounting adopted by the assessee-company in the instant case was to treat all payments of advance and other taxes during the relevant assessment years, as advances until the assessments were finalised. The system so adopted by the assessee-company has, to a certain extent, justification inasmuch as an assessee is not likely to anticipate with full certainty as to what precise amount he would be assessed finally, as there are likely to be some items in his return of a debatable character.

Until, therefore, an assessment is finalised, it would be correct on his part to treat the amounts paid by way of provisional and advance taxes as advances and not to debit them in 'the reserve fund account' created by him for tax purposes. This conclusion is to a certain extent supported by a passage in Spicer and Pegler's Practical Auditing, Indian Edition by S.V. Ghatalia, 1962 edition at page 384, where it is stated that a company under the Income-tax Act would meet its tax liability: (i) by advance payment of tax; (ii) by payment of tax on provisional assessment under Section 141;(iii) by deduction of tax at source), and (iv on the completion of the regular assessments. Until the assessment was completed, the tax paid by the company except on regular assessment would stand debited to the respective accounts as the case may be, and the said accounts should appear in the balance sheet on the assets side. On completion of the assessment, the amount already paid by the company would be set off against the provision for tax. If on final assessment the company is entitled to a refund, the amount of refund would be shown on the assets side of the balance sheet. There is thus authority for the proposition that payments made for taxes, until the assessment is finalised, must be shown as advances and made from the common fund and such payments, therefore, are not debitable to the reserve.

...

He also stressed that the manner of exhibiting advance tax as an asset in the balance sheet has also been statutorily recognised in framing Rule 1D of the Wealth-tax Rules. The submission of the learned Counsel was that advance tax is not a mere deposit, but that it was a tax payment. He relied on the two decisions of the Supreme Court in the case of CGT v. Sardar Ajaib Singh (supra) to submit that while to arrive at the net worth of the company for computing the break-up value of the shares, provision for taxation was to be deducted, it had invariably to be examined whether the amount shown as a provision, on the liabilities side, was excessive or not, with reference to the advance tax, already paid. The argument made was that the provisions of Explanation II(ii)(e) clearly directed an adjustment of the advance tax paid, and the amount of provision for taxation which could be treated as a liability would be only the difference between the amount exhibited as provision for taxation on the liabilities side of the balance sheet and the advance tax paid which figured as an asset, to the extent such amount did not exceed the tax on the basis of the book profits. In this regard, he stated that by a Notification No. SO 674(E) No. 4194/F. No. 155(84) 1979 TPL, dated 29-8-1981 it had been proposed to make certain amendments in the Rules to provide in the proposed Explanation to the rule that: . . .liabilities include all debts owed by a company, but does not include any amount representing provision for taxation to the extent it exceeds the amount representing the difference between the tax payable with reference to the book profits of the company and the amount of advance tax paid during the financial year immediately preceding the assessment year relevant to the accounting year.

According to the submissions, the proposed amendment was only clarificatory of the position, existed.

8. Finally, the learned Counsel referred to the decision of the Supreme Court in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 and submitted that the expression "tax payable" as occurring in Explanation II(ii)(e) has to be interpreted as the gross tax computed less taxes already paid, which in the present case would be advance tax paid. He emphasised that the ambit of the concept of the expression 'tax payable' did not come up for consideration by the Gujarat High Court, in the decisions of Ashok K. Parikh (supra) and CWT v. Arvindbhai Chinubhai [1982] 133 ITR 800 and, therefore, a reconsideration was justified. The learned Counsel finally referred to the definition of 'tax', as occurring in Section 2(43) of the Income-tax Act, 1961, and submitted that there was a vital difference between tax 'chargeable' and tax 'payable', which had been well recognised by the Legislature.

9. On behalf of the assessee, Shri V.H. Patil submitted that there were certain well accepted basic rules of interpretation of provisions relating to taxation. Such provisions had to be strictly construed and nothing was to be added or subtracted to what stood explicitly stated.

Secondly, he submitted that if there was a decision of only one High Court, that decision should be followed, and the final contention was that if two interpretations were possible, the interpretation which was beneficial to the assessee alone should be adopted. According to him, Rule 1D was introduced with effect from 6-10-1967 and came into effect from the assessment year 1968-69 onwards. He stated that in framing the rule, it was accepted that advance tax paid would stand exhibited as an asset in the balance sheet and that such asset was to be ignored. As far as the liabilities side was concerned, he submitted that the Gujarat High Court had given a categorical finding that the words in Explanation II(ii)(e) in parenthesis, i.e., '[other than the amount referred to in Clause (i)(a)]'. would only refer to provision for payment of advance tax and not advance tax actually paid and, therefore, he submitted that the question of adjustment of advance tax actually paid with reference to the amount exhibited on the liabilities side as provision for taxation would not arise in terms of Rule 1D.Referring to the decisions of the Supreme Court, in the case of Sardar Ajaib Singh (supra), he submitted that those decisions did not deal with the cases, where computation of break-up value was made in accordance with any statutory rules. On the facts of those cases, he further submitted that there was no liability exhibited in the balance sheet as provision for tax payable. Therefore, according to him, there was no principle laid down in those decisions, which would have a bearing on the issue before us.

10. Coming to the aspect of the scope of the term 'tax payable', he stated that the decision in the case of Vegetable Products (supra) proceeded on the facts of the case and with reference to such facts, the interpretation most beneficial to the assessee was accepted by the Court. His contention was that the tax payable has to be computed in respect of the income of a previous year. It was only after such computation was made, when one comes to the point of payment, that the law permitted a set off against the tax payable, by giving credit for amounts paid as advance tax. His submission was that the two concepts of tax payable, and advance tax paid, were entirely different and there was no warrant for arriving at the tax payable in terms of Rule 1D to set off any amount, which may have been paid as advance tax. Finally, he stressed that the two decisions which are in favour of the assessee, being of the Gujarat High Court in Ashok K. Parikh's case (supra), and Arvindbhai Chinubhai's case (supra) should be followed.

11. Apprearing on behalf of one of the interveners, Shri B. A.Palkhivala sought to formulate his propositions in three parts. First he stated that in the case of Sardar Ajaib Singh (supra), the Supreme Court had not laid down any legal principle. The Tribunal had decided the issue on certain facts and the Supreme Court had only pointed out that such facts were not disputed and so they did not interfere with the conclusion of the Tribunal. The decision in the case of Sardar Ajaib Singh (supra), he emphasised, should not, therefore, be considered as enunciating any legal principle. He then stated that the judgments of the Gujarat High Court, already referred to, in the cases of Ashok K. Parikh (supra) and Arvindbhai Chinubhai (supra) were the only judgments on the point of interpretation of Explanation II(ii)(e) and even if some arguments may not have been advanced, or considered, by the court the conclusion in the judgments should not and could not be disregarded. He then contended that Explanation II(ii)(e) in certain contingencies even clearly went against the assessee is that certain provisions such as payment of dividends, etc., were not to be considered as liability. He, therefore, sought to emphasise that these were certain special rules which had to be strictly followed.

12. Coming to the words in paranthesis in Explanation II(ii(e), i.e., '[other than the amount referred to in Clause (i)(a)]', according to the learned Counsel, they would become applicable only where ex facie there was an excess of the provision for taxation as exhibited in the balance sheet with reference to the tax computed on the basis of book profits. Then alone, the question of giving effect to the words in paranthesis, he stated, could arise, and not otherwise. Elaborating on the second point of his argument, he stated that the expression '[other than the amount referred to in Clause (i)(a)]' had been judicially pronounced upon by the Gujarat High Court and it was held by the Court that the amount could not be referred to payments of advance tax actually made, but would only represent any provision made for the payment of advance tax. Alternatively, he stated that the term 'other than' occurring in the aforesaid clause in Explanation II could not be interpreted to mean 'reduced by. He went on to clarify that the term 'other than' had been used in the course of the Explanation with reference to other items also such as, reserves [item (c) to Explanation II(ii)] and contingent liabilities [item (f) to Explanation II(ii)] and the term 'other than' only meant that certain items did not fall for consideration and it had to be left untouched in dealing with the type of liabilities referred to in the said clauses. Consistent with this manner of usage and the interpretation to be placed thereon, he stated that the words in parenthesis in Explanation II(ii)(e) only indicated that the amounts representing provision for payment of advance tax, which may be included in the amount exhibited as provision for taxation, were to be left untouched, i.e., that such amounts would continue to qualify for deduction as liabilities and should not be taken into consideration for determining whether the provision for taxation was in excess over the tax on book profits or not.

13. Adverting to the concept of the term 'tax payable', Shri B.A.Palkhivala submitted that this referred to only the computation of the total tax and did not relate to the 'arithmetic' of the manner in which the tax so computed had to be adjusted to arrive at the net tax, which had to be paid to liquidate tax liabilities. He stated that the term 'tax payable' had been used in different provisions of the Income-tax Act with different meanings. In particular, he invited our attention to the provisions of Section 139(8)(a) of the Income-tax Act, 1961, where though the term tax payable on total income had been used, it was expressly stated that such amount was to be reduced by the advance tax, if any, paid and any tax deducted at source. Thus, he stated that while the provisions of Section 139(8) specifically provide for exclusion of advance tax from the 'tax payable' determined on the regular assessment, in Section 271(1) of the Income-tax Act, 1961 as it then stood, the term 'tax, if any, payable by him' called for being interpreted judicially to make it clear that the concept of the term 'tax payable' implied deduction of advance tax and tax deducted at source, from the gross tax determined. Therefore, he emphasised that there was no uniform or universal meaning that could be attributed to the term 'tax payable' and the use of term per se did not imply that advance tax paid had to be deducted from the figure of gross tax computed with reference to book profits. He finally stated that the Supreme Court, in the case of Vegetable Products (supra), was interpreting the concept of the term 'tax payable' with reference to imposition of penalty and, therefore, the arithmetic of arriving at the net amount of tax payable came in for consideration. According to the learned Counsel, the requirement in Explanation II(ii)(e) that the tax payable was to be computed with reference to the book profits in accordance with the law applicable thereto only implied that classification of income had to be made under the different heads, and statutory adjustments made and deductions allowed in arriving at the net income under each such head and thereafter tax computed with reference to the total income so arrived at. The provisions relating to set off of taxes already paid for determining the artithmetical net amount payable, did not come in for consideration at that stage.

Finally he stated that if two interpretations were possible the one which would lessen the burden on the assessee should be preferred and hence the conclusion of the Gujarat Court had to be followed.

14. Shri S.E. Dastur, in his turn, referred to the second question, which the Gujarat High Court was called upon to answer in the case of Arvindbhai Chinubhai (supra) which was as follows: (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the purposes of computation of the market value of the shares of Bipin Silk Mills (P.) Ltd., the advance tax paid under Section 210 of the Income-tax Act, 1961, and shown on the assets side of the balance sheet of the said company cannot 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 within the meaning of Clause (ii)(e) of Explanation II to Rule 1D of the Wealth-tax Rules, 1957 He stated that the express issue for which the question required an answer was whether the advance tax paid under Section 210 of the Income-tax Act, 1961, and shown on the assets side of the balance sheet was to be deducted, or not, from the tax payable. He, therefore, submitted that this issue had been expressly considered and pronounced upon by the Gujaral High Court, and the conclusion was that the amount of advance tax was not to be deducted. The learned Counsel placed reliance on the decision of the Bombay High Court, in the case of CIT v. Chimanlal J. Dalai & Co. [1965] 57 ITR 285 and submitted that even where a High Court doubted the correctness of the decision of another High Court, for the sake of uniformity, the earlier decision was to be followed. So also, he stated that even if the provisions of Explanation II(ii) may, if it may be said so, for the sake of argument, justify examination fromany other angle, the decision of the Gujarat High Court already having been rendered, the Tribunal should not embark on any such enquiry. On the point of interpretation of the term 'tax payable', the learned Counsel stressed that the tax payable was to be computed with reference to the book profits. What the Supreme Court was considering in the case of Vegetable Products (supra) was what was the quantum of tax payable with reference to the tax assessed, and, therefore, he submitted that the question of set-off of advance tax paid arose which question of set off did not come in at the point of computation of the tax payable with reference to book profits, in accordance with law. The term, 'in accordance with law', according to the counsel, could not take within its purview any adjustments for determining the amount that had actually to be finally paid.

15. We have considered the rival submissions. On behalf of the revenue it was submitted that the practice of exhibiting advance tax paid as an asset in the balance sheet has come to be recognised. This proposition is unexceptionable in view of the decision of the Gujarat High Court in Rohit Mills Ltd. (supra) on which reliance was placed by Shri Joshi on behalf of the revenue. The proposition sought to be further advanced was that it had, therefore, invariably to be examined whether the amount shown as a provision for taxation on the liability side of the balance sheet was excessive, or not, with reference to the book profits, after deducting the advance tax already paid. Where one can proceed untrammelled by the provisions of any statutory rules, the quantum of tax excludible as a liability has to be arrived at purely on the basis of commercial principles. Even in such instances since the break-up of the figure of advance tax exhibited on the asset side may not be available year-wise, a shareholder who has no access to any information over that exhibited in the balance sheet may not be able to readily figure out the exact quantum of advance tax which may call for adjustment. Practical difficulties apart, in cases where there are specific rules on the manner of computation of the net worth the language of the rules have to be given their true meaning and have to be strictly followed. The learned Counsel for the revenue went on to suggest that the wording of Explanation II(ii)(e) clearly directed an adjustment by way of deduction of the advance tax paid from out of the amount exhibited as provision for taxation. To pronounce on this, in the first instance, the words in paranthesis in Explanation II(ii)(e) '[other than the amount referred to in Clause (i)(a)]' call for interpretation. The learned Counsel for the revenue had suggested that the import of the words 'other than' meant that advance tax paid exhibited on the asset side which, according to him, was 'the amount referred to in Clause (i)(a)' had to be deducted from the amount exhibited as provision for taxation. We are unable to subscribe to this proposition, for, as pointed out by Shri V.H. Patil the words '[other than the amount referred to in Clause (i)(a)]' would only refer to provision for payment of advance tax, if any, and not any amount of advance tax which may have actually been paid. In this regard we have to state that there has been a complete dissertation on the scope of these words in the judgment of the Gujarat High Court in Ashok K.Parikh's case (supra) and the Court has held that 'the amount referred to in Clause (i)(a) can refer only to an amount of provision for payment of advance tax and not any advance tax actually paid'. The Court had also come to the conclusion that 'other than' meant that provision for advance tax, if any, included in the total amount exhibited on the liability side of the balance sheet should be totally left out of consideration for reducing liabilities. Their Lordships stated that this was in a manner an incentive for the prompt payment of advance tax by companies. Shri B.A. Palkhivala, appearing for one of the intervenes, had also referred to certain other sub-clauses in Explanation II(ii), i.e., Sub-clauses (c), (f), etc., where the words 'other than' appeared and his submission was also to the effect that the term 'other than' should be interpreted to mean that certain items included in such liabilities fell to be excluded from abatement from the gross liabilities and should be left untouched. Explanation II(ii)(c) states that amounts shown as reserves are not to be treated as liabilities 'other than, those set apart towards depreciation' and Explanation II(ii)(f) states that contingent liabilities would not be considered as liabilities 'other than' arrears of dividends payable in respect of cumulative preference shares. The words 'other than', therefore, in our opinion, clearly imply that the particular type of amount spelt out cannot be excluded in arriving at the deductible liabilities. To put it positively the words 'other than' in Explanation II(ii)(e) cannot imply that the particular amount which it qualifies (whether it be provision for advance tax or even advance tax paid) should be deducted from the provision for taxation exhibited as a liability in the balance sheet.

16. The learned Counsel for the revenue had also referred to the proposed amendment to the rules which according to him brought out the intention, as it always existed. The proposed amendment provides that amounts representing the provision for taxation, to the extent it exceeds the amount representing the difference between the tax payable with reference to the book profits and the amount of advance tax paid during the financial year relevant to the accounting year, is not to be treated as a liability. It cannot be said that this proposed amendment is merely clarificatory of the intention as it already exists. The proposed amendment spells out a definite adjustment which the rule as it now stands does not enjoin. In any event, this amendment which was proposed as far back as August 1981, has not yet been incorporated into the rules.

17. We agree with the learned Counsel for the revenue that though the specific question whether advance tax paid had to be deducted from provision for taxation as exhibited on the liability side of the balance sheet to determine whether there was any excess with reference to the tax on book profits was before the Gujarat High Court in the later case decided by that Court in Arvindbhai Chinubhai'ss case (supra), the answer to the question was rendered by the Court only on the basis of concession [see Arvindbhai Chinubhis case (supra)] and it cannot, therefore, be construed that there was any pronouncement by the Gujarat High Court on the extent and scope of the term 'tax payable' as occurring in Explanation II(ii)(e) of Rule 1D.18. We now come to the main plank of the argument of Shri Joshi, the , learned standing counsel for the revenue, which centres round the interpretation of the term 'tax payable'. According to him the concept admits of only one interpretation, i.e., it signifies the gross tax with reference to book profits less taxes already paid of which advance tax paid is one component. The decision on which reliance was placed on behalf of the revenue for arriving at this interpretation was that of the Supreme Court in Vegetable Products's case (supra). The Court in that case was interpreting the provisions of Section 271(1) of the Income-tax Act, 1961, as it stood at the material time and the Clause (with emphasis supplied) as occurring in the judgment of the Supreme Court Vegetable Product's case (supra) reads as under: (i) in the cases referred to in Clause (a) in addition to the amount of the tax, if any, payable by him a sum equal to two per cent of the tax for every month during which the default continued, but not exceeding in the aggregate fifty per cent of the tax.

The Court interpreted the term 'in addition to the amount of the tax, if any, payable by him' and the term 'the tax'. The Court held that 'the tax, if any, payable by him' would mean the tax demanded by the notice of demand issued under Section 156 and not the tax assessed and, therefore, tax already paid had to be deducted from the gross tax computed, we cannot overlook that the term interpreted was not 'the amount of tax payable by him' but the amount of 'the amount of tax payable by him' but the amount of 'the tax if any payable by him'. Due importance was naturally given to the words 'if any' and it was held this could mean only the net tax, i.e., gross tax payable less taxes already paid. In Rule 1D the words used are only 'tax payable' and, therefore, the interpretation placed by the Supreme Court, apart from its being in a different context, cannot be construed as a final pronouncement on the meaning to be assigned interpreting these words as occurring in the rule.

19. Looked at from another angle Section 219 of the Income-tax Act, 1961, reads as under: 219. Any sum, other than a penalty or interest, paid by or recovered from an assessee as advance tax in pursuance of this Chapter shall be treated as a payment of tax in respect of the income of the period which would be the previous year for an assessment for the assessment year next following the financial year in which it was payable, and credit therefor shall be given to the assessee in the regular assessment: Provided that where, before the completion of the regular assessment, a provisional assessment is made under Section 141A, the credit shall be given also in such provisional assessment.

Here again, the statute enjoins the credit to be given for the advance tax paid when tax is computed on finalisation of the regular assessment. The question of levy of penalty also arises only when an assessment is finalised and at that stage the provisions of Section 219 also come into play. However, in our view, in any exercise of computing tax with reference to book profits on a hypothetical basis neither the statutory mandate nor the principles of interpretation which have received judicial recognition for arriving at the tax, if any, payable on finalisation of an assessment would apply and it cannot be said that advance tax paid has invariably to be deducted. We may mention at this juncture that there are provisions in the Income-tax Act, e.g., Section 139(8), where in spite of using the expression 'tax payable', it is further explicitly provided that the said amount will be reduced by advance tax actually paid and tax deducted at source. Therefore, we come to the conclusion that the term 'tax payable' as occurring in Explanation II(ii) cannot be construed as meaning the gross tax loss advance tax actually paid which stands exhibited on the assets side.

The decisions of the Supreme Court in the case of Sardar Ajaib Singh (supra) also do not contain any pronouncements which require us to come to a different conclusion. In the case of Sardar Ajaib Singh (supra) there were certain findings by the Tribunal that the estimated tax liability on the valuation date should be deducted from the gross value of the assets but no mathematical adjustment was necessary, because, to quote from the judgment of the Supreme Court: . . . [The Tribunal took] the view that if there were any encroachments on the assets of the company for the tax liability, the company certainly would have provided for it in its accounts before presenting the balance sheet and the profit and loss account to the shareholders and the company did not make any provision for the estimated tax liability because it was satisfied that the existing reserve plus the advance payment made under Section 18A coupled with the refund, the company would get under Section 18(5) of the Income-tax Act on the dividend credited to the profit and loss account would be more than enough to cover the tax liability during the years in question. In other words the finding of the Tribunal was that, though the estimated tax liability of the company was liable to be deducted before arriving at the value of the assets of the company on the facts of this case, no provision need be made for the same, as several other assets of the company were also not taken into consideration in arriving at the value of the assets. The Tribunal was of the opinion that the existing reserve of the company, the advance tax paid by the company which was to be adjusted towards the tax liability of the company and the refund to which the company was entitled under Section 18(5) of the Income-tax Act were sufficient to cover the tax liability of the company. This was essentially a finding of fact . . .

The Supreme Court expressly pointed out that this finding of fact by the Tribunal was not challenged by the assessee nor were arguments advanced before the High Court to show that the finding of the Tribunal was vitiated in any manner. The judgment cannot, therefore, be taken as laying down any ratio for interpreting the statutory provisions of Rule 1D which alone we are called upon to interpret in the present case.

20. The result, therefore, is that as far as the balance sheet of Advance Paints (P.) Ltd. is concerned, which is the specific case which we have been examining, we agree with the AAC that advance tax paid of Rs. 2.11 lakhs will not fall to be deducted from the amount of provision for taxation as exhibited on the liability side of Rs. 2,52 lakhs. All that in terms of Explanation II(ii)(e) is required to be done is to examine whether the provision for taxation of Rs. 2.52 lakhs was in excess to the gross tax payable computed in accordance with law with reference to the book profits of Rs. 4.17 lakhs. In other cases computation would be made applying similar principles and the break-up value arrived at thereafter. We, therefore, uphold the finding of the AAC in this regard.


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