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Smt. Kamlavati V. Mehra Vs. Fifth Wealth-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1984)7ITD571(Mum.)
AppellantSmt. Kamlavati V. Mehra
RespondentFifth Wealth-tax Officer
Excerpt:
.....in law and on the facts of the case in considering the proposed dividend of rs. 7,00,000 as per balance sheet of subhash silk mills (p.) ltd. as reserves while valuing the shares of the aforesaid company as per rule 1d of the wealth-tax rules, 1957.2. the way the ground of appeal is worded, the answer appears to be obvious, that is against the assessee. in other words, the proposed dividend as per balance sheet of the company cannot be treated as a liability for the purpose of valuation of the shares of the company under rule 1d of the wealth-tax rules, 1957. however, on the facts of the asses-see's case, we find that an interesting question arises for consideration.3. the assessee, smt. kamlavati v. mehra, had substantial shareholding (3,150 equity shares) in subhash silk mills (p.).....
Judgment:
1. The only ground on which the order of the AAC is challenged in this wealih-tax appeal is as follows: The learned wealth-tax authorities have erred in law and on the facts of the case in considering the proposed dividend of Rs. 7,00,000 as per balance sheet of Subhash Silk Mills (P.) Ltd. as reserves while valuing the shares of the aforesaid company as per Rule 1D of the Wealth-tax Rules, 1957.

2. The way the ground of appeal is worded, the answer appears to be obvious, that is against the assessee. In other words, the proposed dividend as per balance sheet of the company cannot be treated as a liability for the purpose of valuation of the shares of the company under Rule 1D of the Wealth-tax Rules, 1957. However, on the facts of the asses-see's case, we find that an interesting question arises for consideration.

3. The assessee, Smt. Kamlavati V. Mehra, had substantial shareholding (3,150 equity shares) in Subhash Silk Mills (P.) Ltd. as on 31-3-1977 which was the valuation date relevant for the assessment year 1977-78 in the assessee's case. The assessee, who did not dispute that the aforesaid unquoted shares have to be valued in accordance with Rule 1D for the purpose of wealth-tax assessment in her case, submitted a valuation at Rs. 164.73 per share based on the balance sheet of the aforesaid company as on 30-6-1976, being the last available balance sheet of the company prior to the assessee's valuation date. In arriving at the aforesaid value of the shares, the assessee had treated as a 'liability' the proposed dividend of Rs. 7,00,000 as indicated in the balance sheet. The WTO omitted the said amount from the 'liabilities' of the company in determining the value of the shares in question which, according to him, came to Rs. 276 per share under Rule 1D.4. In appeal before the AAC, it was contended on behalf of the assessee that the amount of Rs. 7,00,000 which was shown as proposed dividend in the balance sheet of the company as on 30-6-1976 was declared at the annual general meeting of the company held on 21-12-1976 and was duly approved by the shareholders ; that as a matter of fact the dividend was actually paid/distributed to the shareholders on 11-1-1977. It was urged that, thus, the amount which was a proposed dividend as on 30-6-1976 had become a 'liability' of the company on 21-12-1976 and as such ought to have been allowed as 'liability' in determining the value of the shares in question under Rule 1D. The AAC rejected this contention on the following reasoning : Since for the purpose of Rule 1D, the last balance sheet of the company is taken into consideration, we have to find out whether on the date of last balance sheet, i.e., 30-6-1976 any dividend has been declared and liability has accrued to the Company. Since no dividend has been declared by the date, the contention of the appellant that for determining the break up value as per Rule 1D the proposed dividend should have been allowed, cannot be entertained.

5. On behalf of the assessee, Shri S.M. Kapoor contended that in rejecting the assessee's claim for treating the dividend in question as a liability, the AAC had overlooked the relevant provisions of law. In this regard, he drew our attention to Clause (ii)(b) of Explanation II to Rule 1D (as it stood prior to its amendment with effect from 1-4-1982). The relevant clause reads us under : (ii) the following amounts shown as liabilities in the balance sheet shall not be treated as liabilities, (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 ; Shri Kapoor argued that in the instant case the dividends having been declared before the valuation date at the annual general body meeting of the company, these shall be accepted from the category of amounts set apart for payment of dividend which cannot be treated as 'liabilities' in view of Explanation II(ii)(b). In support of this proposition, Shri Kapoor cited the decisions of the Bombay High Court in CIT v. Bharat Bijlee Ltd. [1977] 107 ITR 30 and CIT v. Indian Smelting & Refining Co. Ltd. [1977] 107 ITR 793 and the decision of Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT[1981] 132 ITR Shri Kapoor also referred to Circular No. 6 (WT) of 1968 : F.No.2/2/65-WT, dated 13-8-1968 of the CBR (as it was then) (reproduced in the publication The Three New Taxes by Sampat Iyengar, 5th edition, page 1180), where the determination of the value of unquoted equity shares under Rule 1D has been explained by the Board. Shri Roy Alphonso, the learned departmental representative, on his part, strongly relied on the reasoning of the AAC that once the balance sheet of the company on a particular date was adopted under Explanation I to Rule 1D for the purpose of valuation of the shares of the said company under that rule, the determination of value had to be strictly on the basis of such balance sheet and the subsequent events cannot be taken into account as they could not relate back, under the law, to the date of the balance sheet. He added that if subsequent events were taken into account, there would be different valuation of the same shares for the same assessment year in the case of different assessees who were shareholders of the company but have different valuation dates.

6. These arguments were countered by Shri Kapoor in his renjoinder by pointing out that, although for the purpose of Rule 1D, the balance sheet of the company drawn up on a date immediately preceding the valuation date of the assessee had to be adopted where there was no balance sheet drawn up on the valuation date itself and in the absence of both, a balance sheet drawn up on a date immediately after the valuation date could be adopted. Explanation II to Rule 1D does provide for certain adjustments in respect of assets and liabilities as appearing in the balance sheet so adopted ; that, in particular, Clause (ii)(b) of Explanation II enjoins that the amount set apart for payment of dividend on preference shares and equity shares shall not be treated as 'liabilities' unless such dividends have been declared before the valuation date at a general body meeting of the company. That, in other words, the rule, as explained in Explanation II, requires that cognizance be taken of events which occur after the date of the balance sheet but before the valuation date of the assessee. He added that the consequence of application of Clause (ii)(b) of Explanation II would probably be that there will be variation in the valuation of the same shares for the same assessment year in the case of different assessees.

7. We have carefully considered the submissions and arguments on both sides in the light of the judicial decisions cited before us as well as the language of the relevant provisions of the law and we have come to the following conclusion : It is now well settled that a shareholder's right to dividend arises upon its declaration (vide the Supreme Court decision in Pumhottamdas Thakurdas v. CIT [1963] 48 ITR 206. Thus, before dividend is declared at the annual general meeting by the shareholders, there is not even a contingent liability and there is no question of liability arising which can be antedated or related back to the last day of the closing year. The liability for payment of dividend will only arise if the shareholders at an annual general meeting pass a resolution declaring such dividend and the liability is only prospective and will not relate back to any other date. This principle has been clearly enunciated by their Lordships of the Bombay High Court in Indian Smelting & Refining Co. Ltd.'s case (supra). It is only in this context that Shri Kapoor, the learned chartered accountant, was justified in citing the aforesaid decision of the Bombay High Court. The decision of the Bombay High Court in Bharat Bijlee Ltd.'s case (supra) is on a different issue concerning the computation of capital for the Companies (Profits) Surtax Act, 1964. Same is the case with the decision of the Supreme Couri in Vazir Sultan Tobacco Co. Ltd.'s case (supra) where their Lordships of the Supreme Court have expressed the opinion that the appropriations made by the directors for proposed dividends in the case of the concerned assessee-companies do not constitute 'reserves' and the concerned amounts so set apart would have to be ignored or excluded from capital compulation. For the purpose of the present appeal, suffice it to say that the principle enunciated by the Supreme Court in the case of Purshottamdas Thakurdas (supra) and explained by the Bombay High Court in the case of Indian Smelting & Refining Co. Ltd. (supra) is followed in Explanation II(ii)(b) of Rule 1D inasmuch as the said clause clearly envisages exclusion from the purview of 'liabilities' of the proposed dividends as appearing in the balance sheet of the company, but on the other hand, it enjoins that the factum of the dividend having been declared prior to the valuation date of the assessee should be taken into account in applying Rule 1D. The season for this is not far to seek ; for, the wealth-tax law requires that the 'market value' of the asset on the 'valuation date' shall be determined for the purpose of wealth-tax assessment and Rule 1D reckons such market value under the break up value method. It is a truism that a prospective purchaser (as on the valuation date of the assessee) would certainly take into account the fact that dividends have already been declared. ln the instant case, especially, not only were the dividends declared (on 21-12-1976) but they were actually paid out to the shareholders on 11-1-1977, whereas the valuation date of the assessee is 31-3-1977. Consequently, the exclusion envisaged in Clause (ii)(b) of Explanation II shall not operate in the case of the dividends of the company in question, namely, Subhash Silk Mills (P.) Ltd. and, therefore, in determining the value of the shares of the said company under Rule 1D, in the case of the assessee for the assessment year 1977-78, the amount of dividends already declared will have to be deducted. It may be argued that, as on the valuation date, no 'liability' as such was subsisting, the dividends having already been paid out to the shareholders prior to that date. It may, however, be pointed out that the consequence of such payment is that, to that extent, the company's 'assets' (cash) must have gone down, i.e., to the extent of the distribution of the dividend.

Viewed from any angle, the amount of dividends actually declared prior to 31-3-1977 shall have to be deducted in arriving at the value of the shares in question under Rule 1D. We hold accordingly.


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