1. The grounds of appeal raised by the assessee in all these appeals are common. They were, therefore, heard together and are disposed of by a combined order for the sake of convenience.
2. The short controversy raised in these appeals is in regard to the interpretation of Rule 1D of the Wealth-tax Rules, 1957 ('the Rules'), and whether while working out the value of the shares in terms of Rule 1D, i.e., in accordance with break-up value method, taxation liability not provided for in the accounts by the company, should also be taken into consideration and treated as debt on the valuation date.
3. The assessee held 540 shares, inter alia, of S.S. Jaiswal (P.) Ltd. The valuation date of the assessee is 31st March of every year. The company, viz., S.S. Jaiswal (P.) Ltd., in which the assessee held the aforementioned number of shares, also closes its accounts on the 31st March every year. In respect of the valuation dates 31-3-1973 and 31-3-1974, the assessee's valuer worked out the value of the aforementioned shares at Rs. 461.05 and Rs. 726.40 per share, respectively. The WTO, however, has adopted the valuation at Rs. 750 and Rs. 1,600 per share, respectively. Details of working of the aforesaid valuations have not been given by the WTO along with his assessment orders. But, as can be understood from the grounds of appeal and the arguments put forward by the assessee's learned counsel, the dispute with regard to the valuation centres round only one point, viz., whether or not the provision for taxation for the accounting years ending 31-3-1973 and 31-3-1974, not provided for by the said company in its accounts, should be taken into account for the purpose of valuation. From the auditors' Note No. 7, given on the face of the balance sheet for accounting year 31-3-1975, it appears that the estimated aggregate amount of taxation not provided for by the company for the aforesaid assessment year was Rs. 13,20,000. According to the said auditors, to the extent of such non-provision for the year, the profits of the company for the financial year under report have been overstated and to the extent of such non-provision, the general reserve and provisions of the company appearing in the balance sheet as at 31-3-1973 are overstated and understated, respectively.
4. In respect of the accounting period ending 31-3-1974, similar note has been given by the auditors being Note No. 2. It reads as follows : The company has not provided for taxation in respect of its profits and the estimated aggregate amount of taxation not so provided for is Rs. 45,29,000 (including surtaxRs. 5,66,000). To the extent of such non-provision for the year, the profits of the company for the financial year under report have been overstated and to the extent of such non-provision, the general reserve and current liabilities and provisions of the company appearing in the balance sheet as at 31st March 1974, are overstated and understated, respectively.
5. According to the assessee's learned counsel, aforesaid provision for taxation, amounting to Rs. 13,20,000 for the valuation date 31-3-1973 and Rs. 45,29,000 for the valuation date 31-3-1974, should be taken into account for the purpose of valuing the shares of the company, S.S.Jaiswal (P.) Ltd. The assessee's valuer has taken the aforesaid liabilities into account and has thereby worked out the valuation for 31-3-1973 at Rs. 461.05 per share and for 31-3-1974 at Rs. 726.40 per share, as noted above. The contention of the assessee's learned counsel is that the notes of the auditors should be taken as part of the balance sheet, as they indeed are, and even though in the balance sheet proper the provision has not been made, the same should be taken into account as the auditors have brought out the taxation liability and, undoubtedly, the said taxation liability is a debt owed by the said company on the valuation dates in question and, therefore, there is no question of the said figures not being taken into account on the ground that no provision for the same has been made in the balance sheet. The balance sheet does not only mean the figures appearing in the main body of the balance sheet but such other information as is given in the notes by the auditors as part of the audit report also forms part of the balance sheet and the correct way of reading the balance sheet, according to the learned counsel, was to modify the figures of balance sheet by the notes of the auditors and such modified figures should form the basis of computation of the valuation of the shares, according to the break-up value method.
6. It is also urged by the assessee's learned counsel that Rule 1D was not mandatory and that it was merely directory and that it broadly indicated the principles to be followed for working out the valuation and even according to the method indicated by it, the provision for taxation had to be treated as liability of the company and should be deducted from the aggregate value of assets to arrive at the value of the shares of the said company. The said rule, according to the learned counsel, did not say that a liability not provided for in the accounts should be ignored. What it says is that a liability provided for in the accounts should be taken into account. The aforesaid positive direction could not be read as laying down the negative of it as a rule, viz., if the liability is not provided for, it should not be deducted from the aggregate value of assets to find out the break-up value of the shares.
7. On behalf of the revenue, the order of the learned AAC is stoutly supported and it is urged that a reading of Rule 1D would make it clear that the valuation of the shares has to be made on the basis of the balance sheet of the company and if a figure was not included in the balance sheet, it could not be taken into account, howsoever real the figure might be.
8. We have given careful consideration to the facts of the case and the rival submissions. The argument of the learned counsel for the assessee that Rule 1D was not mandatory but only directory, does not arise from the grounds of appeal nor is it germane to the decision of the grounds of appeal raised by the assessee. The dispute raised by the assessee either before us or before the lower authorities was not as to whether break-up value method, as indicated by Rule 1D, should or should not be adopted for valuing the shares of the aforementioned company, but as to how the said break-up value should be determined. The assessee's valuer had himself worked out the value of the shares in accordance with the principles enunciated in Rule 1D and the assessee's grievance before us, as it was before the learned AAC, is that the valuation worked out by the WTO in terms of rule 1D was incorrect and that the correct valuation of the said shares on the basis of break-up value method would be, what the valuer of the assessee had worked out. The question that Rule 1D was not mandatory but was directory in the light of the ratio of the decision of the Hon'ble Bombay High Court in the case of Smt. Kusumben D. Mahadevia v. N.C. Upadhya  124 ITR 799 does not, therefore, arise for determination in the present appeals and is not necessary for the disposal of the appeals presently under consideration. We will, therefore, express no opinion on this general issue and leave it to be determined in an appropriate case as and when it arises for determination.
9. The real controversy as noted earlier is whether while working out the valuation in terms of Rule 1D, the liabilities for income-tax and surtax not provided for by the company, S.S. Jaiswal (P.) Ltd., should be taken note of while working out the value of the shares of the said company on breakup value method. It is not disputed by the revenue that in principle, the said liability for taxation on the respective valuation dates is a debt owed by the said company and that it should, therefore, be deducted from the aggregate value of assets for finding out the actual break-up value of the shares. It is also not disputed by the revenue that, not only according to the general principle of break-up value method, the aforesaid provision for taxation should be deducted, but that was a specific provision built in into Rule 1D, in terms of Sub-clause (e) of Clause (i) of Explanation II to the said Rule 1D, whereby the taxation provision on the book profits of the company has to be treated as liability and if there is any excess provision, such excess alone has not to be treated as a liability. In view of this, it is not in controversy that if the liability for taxation on book profits had been provided for by the assessee-company in the accounts, the same would have been deducted by the WTO, while working out the value of the shares. Similarly, if Rule 1D was not there and the valuation had to be arrived at in accordance with the principles given by the CBDT in its Circular No. 3(WT), dated 28-9-1957, the deduction for provision of taxation on book profit, as it appears to us, would have been allowed as a deduction from the aggregate value of assets to find out the break-up value of the shares.
The moot question, therefore, which arises for consideration, is whether the said liability, though real and admittedly deductible from the net value of assets in accordance with the principles of break-up value method, should not be deducted from the value of the shares only because the directors, while finalising the balance sheet of the company, did not provide for the taxation liability in the balance sheet. After carefully considering the facts of the case, we are of the opinion that if deduction for taxation liability is not made, as suggested by the revenue, a distorted value of the shares would be arrived at, which would not be in accordance with the essential principles of Rule 1D. What has to be found out is the real break-up value of the shares, and in order to find out this, it is impossible to visualise the situation, where a considerable debt by way of taxation, which is incurred by the company on the last day of the accounting year, would not be deducted. Rule 1D never intended to give such a distorted picture. The best thing, therefore, is to interpret it in such a manner as will avoid such a distorted view of reality. In these circumstances, we feel that there is merit in the contention of the learned counsel for the assessee that the balance sheet of the company has to be read in its entirety and that it would not be proper to read only the figures part of it to the exclusion of the comments of the auditors. Any intending purchaser of the shares would look, not only at the figures mentioned in the balance sheet but also at the notes given by the auditors and if all the facts are taken into account, in our opinion, no manner of doubt would be left in the mind of the intending purchaser that the real break-up value of the shares, in his opinion, would not be what would be arrived at by deducting the aggregate of liabilities as per balance sheet from the aggregate of assets as per the balance sheet. In order to find out the real picture, the item of debt in the form of taxation liability, which has not been provided for in the accounts, but which has been highlighted by the auditors by way of their note, would also be taken into consideration to ascertain the break-up value of the shares. The role of the auditors' note is to give a real picture of the company's affairs. Rule 1D, no doubt, makes the balance sheet as the basis for working out the break-up value of the shares, but it nowhere stipulates that if the liability, like the one under consideration, has not been provided for in the directors' report but is highlighted by the auditors in their note, which becomes part of the balance sheet itself, because the note appears on the face of the balance sheet, the said liability should not be taken into account. In fact, Rule 1D is silent about this and there is no prohibition against it in the said rule. If, at all, the principles enunciated in the said rule clearly indicate that liability for taxation on book profits should be regarded as a liability, which has to be deducted from the aggregate value of the assets for finding out the break-up value. Not doing so, would, in our opinion, be going against the principle of Rule 1D and would be a misapplication of the said rule to the given facts in the present case. As such, we accept the assessee's submissions in this regard and direct that the liability for taxation on book profit should be worked out by the WTO and should be deducted from the aggregate value of the assets in respect of the two valuation dates referred to above, namely, 31-3-1973 and 31-3-1974, and after deducting the said liability, the value of the shares should be recomputed.
10. It was conceded by the assessee's learned counsel that the aforementioned controversy does not arise in respect of the assessment years 1975-76, 1976-77 and 1977-78, because in the balance sheet for 1975-76, the liability for taxation on book profits, which had not been provided for earlier in the accounting period, ended on 31-3-1973 and 31-3-1974, was provided for and that the WTO had taken that into account. In view of this, the appeals for the assessment years 1975-76 to 1977-78 have no merit and are hereby dismissed, whereas the appeals for the assessment years 1973-74 and 1974-75 have merit and are, therefore, hereby allowed.