Per Shri B. V. Venkataramaiah, Accountant Member - In these departmental appeals a common point is involved.
2. The assessee own shares in the private limited company of V. M.Salgaocar & Bros. (P.) Ltd. The assessee worked out the break up value of the share in the above company at Rs. 233. In working out the above break up value purportedly in accordance with rule 1D of the Wealth-tax Rules, 1957 (the Rules), a sum of Rs. 86,04,384, being provision for customs duty on ship S. S. Sanjeevani, had been deducted as a liability from the value of assets of the company. As the levy of customs duty had been challenged by the company and the Judicial Commissioner of Goa had also decided the issue in favour of the assessee, the WTO declined to consider the aforesaid sum of Rs. 86,04,348 as a liability deductible from the assets of the company. He held that there was no scope under rule 1D to deduct any liability which was not ascertained.
He, accordingly, computed the value of the share at Rs. 397 and as the company had not declared dividends for the past five years, 75 per cent of Rs. 397 was taken as the market value of each share. This worked out to Rs. 298.
3. The Commissioner (Appeals) held that the liability for payment of customs duty amounting to Rs. 86,04,348 was a determined and known liability. It was not a contingent liability, the deduction of which alone was prohibited under Explanation II (ii) (f) to rule 1D. He upheld the market value of the shares returned by the assessees. The revenue is in appeal.
4. The learned departmental representative submitted that the company had purchased the ship S. S. Sanjeevani from Japan. It came as an ocean-going steamer from Calcutta to Goa carrying Ambassador Cars.
Later it was used as an inland steamer. As customs duty was leviable on import of inland transport, the customs authorities asked V. M.Salgaocar & Bros. (P.) Ltd. to file a bill of entry. This was opposed by the company on the ground that no duty was leviable on the import of the ship. The assessees stand was also confirmed by the Judicial Commissioner of Goa. In these circumstances, he urged that the provision made by the company in its balance sheet for payment of customs duty was only in respect of a contingent liability which would arise only when the customs authorities levied the duty by an appropriate order. The event giving rise to the levy of duty had not occurred at all. The assessees liability to pay duty was contingent on the passing of an order by the customs authorities. The customs duty payable, if any, on S. S. Sanjeevani was, therefore, a contingent liability, the deduction of which was prohibited under Explanation II (ii) (f) in arriving at the break up value of the shares of V. M.Salgaocar & Bros. (P.) Ltd. He submitted that the order of the Commissioner (Appeals) was clearly wrong and should be reversed.
The learned counsel for the assessee submitted that it was wrong to describe the sum of Rs. 86,04,384 as a contingent liability. According to the customs authorities view, the liability to pay duty had arisen.
This was disputed by the assessee. The matter had not become final. A disputed liability is not a contingent liability and was not hit by Explanation II (ii) (f). The value of the asset, viz., the ship, included the customs duty payable. He urged that in fairness if the liability was being disallowed, the value of the assets shown in the balance sheet should also be decreased by Rs. 86,04,384. The break up value worked out after making adjustments to the balance sheet would be the same as that returned by the assessees. It was also submitted that an outside buyer will take into account the liabilities of the company in forming an opinion about the intrinsic worth of the shares. He pleaded that the order of the Commissioner (Appeals) should be upheld.In reply, the learned departmental representative submitted that after the incorporation of rule 1D, the value of shares has to be determined only in accordance with that rule and an outsiders impression about the intrinsic worth of the shares was not relevant at all, to the issue on hand.
"The market vale of an unquoted equity shares 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 such 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 : Provided that where, in respect of any equity share, no dividend has been paid by such company continuously for not less than three accounting years ending on the valuation date or in a case where the accounting year of that company does not end on the valuation date, for not less than three continuous accounting years ending on a date immediately before the valuation date the market value of such share shall be as indicated in the Table below : Number of accounting years ending on the valuation date or in a case where the accounting year does not end on the valuation date, the number of accounting years ending on a date immediately preceding the valuation date, for which no dividend has been paid 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 amounts 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." Following the rules literally, the break-up value is to be determined by deduction the liabilities from the value of the assets as shown in the balance sheet of the company and dividing the result by the number of paid-up shares. The adjustments to the value of assets and liabilities are to be made in accordance with the two Explanations. It would, thus, appear at first sight, that the balance sheet figures are not to be disturbed except to the extent permitted under the Explanations. Assuming that no variations are permitted, we have to take the value of the assets as shown in the balance sheet as reduced by the liabilities. Therefore, the first point to be examined is whether the sum of Rs. 86,04,384 is a contingent liability. A contingent liability is a liability which arises on the happening of an event. In the present case, we have to examine whether the liability is contingent on the completion of assessment for duty by the customs authorities. It is now well settled that a legal liability occurs or arises as stipulated in the particular statute and does not depend upon the completion of assessment or service of notice assessment on the party-Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363 (SC). The dispute raised by the assessees regarding payment of duty will hardly affect the liability. If there was no liability at all under the Act, there was not obligation on the part of the assessee to pay any duty.
Under these circumstances it will not be correct to class the liability under consideration as a contingent liability. Either there is a liability under the Customs Act or not at all. In that event, we have also to consider whether the assessees will be entitled to deduct the liability even if ultimately it is held that no liability to pay duty arose under the Customs Act. We have no doubt held in our order in IT Appeal Nos. 548 and 549(PN) of 1980 dated 8-6-1983 that there was no liability on the part of the assessee to pay customs duty. The Tribunal held as follows : "We have given careful consideration to the facts of the case and the arguments advanced by both sides. With regard to the assessment year 1972-73 we have to examine whether there was any mistake apparent from record. The Income-tax Officer in his order under section 154 has stated that since the assessee has disputed the claim, the capitalisation of the said amount for purpose of depreciation and development rebate is not correct. The point before us is whether the conclusion of the Income-tax Officer could be justified on the facts.
It would be open for us to support his finding if there are facts on record which would justify rectification. Even if we assume that the basis reasoning of the Income-tax Officer in coming to the conclusion that there was a mistake apparent from record is wrong, still if there are facts on record which point out the existence of a mistake, his action could be upheld. Section 46 of the Customs Act reads as follows : In the Commentaries on Customs Act by T. P. Mukerjee, 3rd Edition, it is stated that the bill of entry does not create liability and the assessment is not conditional on its delivery. It is stated that the liability for customs duty arises under section 12 of the Customs Act in respect of goods specified in the Indian Tariff Act or any other law for the time being in force, the moment goods are imported into India (it includes territorial waters of India). Apparently we have to see whether any liability arises under section 12 of the Customs Act. It is the assessees case that S. S. Sanjeevani is an ocean-going steamer. It came from Japan to Calcutta carrying cargo and from Calcutta to Goa carrying Ambassador Cars. There is no customs duty on ocean-going vessels. This is the claim of the assessee. If so, there can be no liability for import duty which is a fact confirmed by the order of the Judicial Commissioner of Goa, Daman and Diu. Hence, if under the Customs Act there is no liability the allowance of the claim by the Income-tax Officer in the original assessment is a mistake apparent from record. The Income-tax Officer is therefore, not debarred from invoking section 154 of the Income-tax Act. The case would have been different if the duty had been levied by the customs authorities and the assessee had disputed the same. In that case one could have said that the matter was under dispute. All along the assessees claim has been that the ship is exempt from import duty. The duty cannot also be levied having regard to the fact that the customs authorities are not in a position to enforce the assessee to file a bill of entry under section 46 of the Customs Act and levy duty under section 17 of the Act. We, therefore, hold that the Income-tax Officer was justified in rectifying the assessment withdrawing the assessees claim to capitalise the provision for payment of import duty on S. S. Sanjeevani. The assessees appeal for 1972-73 is dismissed." The revenue no doubt is correct in urging that the price that an outsider is prepared to pay for the shares is not a relevant factor after promulgation of rule 1D. Once it is held that a particular liability is not a contingent liability its deduction in arriving at the net wealth of the company automatically follows. In such an event, since no adjustments are made to the balance sheet, the working of the break-up value would conform to what the assessee has worked out. But if there is no liability at all, we have consider the question whether any adjustment could be made to the balance sheet figures. This issue is important because in the balance sheet of the company right from 31-3-1973 the assessee has shown the cost of the ship S. S. Sanjeevani as including the customs duty of Rs. 86,04,384. Therefore, if there is no liability to pay customs duty of Rs. 86,04,384, the value of the asset would automatically go down by the same amount. We do not find anything in rule 1D which prohibits adjustments of an obvious nature.
If adjustment to the balance sheet could be made by disallowing the liability of Rs. 86,04,384 as a non-existent liability, on the same reasoning a corresponding adjustment to the value of the asset as indicated in the balance sheet can also be made. Hence, in conformity with our decision in IT Appeal Nos. 548 and 549(PN) of 1980, we have to hold that there was no liability on the part of the assessee to pay customs duty of Rs. 86,04,384 and also hold that the value of the corresponding asset, S. S. Sanjeevani, was Rs. 3,03,37,857 minus Rs. 86,04,384. Working out the break-up value of the shares in conformity with the above adjustment to the balance sheet would bring it on par with the value worked out by the assessees. In the result, it is not necessary to modify the order of the Commissioner (Appeals).