1. This is a reference under Section 27(1) of the Wealth-tax Act, 1957 (Act No. XXVII of 1957) (hereinafter called the Act) by the Income-tax Appellate Tribunal, Delhi Bench 'A' (hereinafter called the Tribunal), referring the following question to this Court for opinion:--
'Whether in the facts and circumstances of the case, adjustment for depreciation due under the Income-tax Act for the preceding years but not debited to the block account in the balance sheet is in law justified for computing the net wealth of the assessee?'
2. This reference relates to the assessment years 1957 58, 1958-59 and 1959-60. The statement of the case submitted by the Tribunal shows that the assessee is a limited company carrying on the business of manufacture of sugar. For its business, accounts are maintained by the assessee regularly. In accordance with the provisions of Section 7(2) of the Act, the Wealth Tax Officer determined the net value of the wealth as a whole, having regard to the balance-sheet of the business as on the valuation date. It was claimed by the assessee that adjustment be made in respect of depreciation on the fixed assets. It was pointed out that all along upto the year ending on 30-6-1955, the assets of the business were shown in the balance-sheet as at cost. For the balance-sheet drawn on 30-6-1956, the value of the assets was shown at cost, less depreciation written off for the year ending 30-6-1956. A note to the effect that 'the depreciation on the fixed assets up to the previous year ended 30th June 1955, comes to Rs. 16,73,955 against which a sum of Rupees 1,25,000 only has been provided as a reserve in the previous year due to losses' was appended to the balance sheet. It was claimed that adjustment in respect of the depreciation as due on the assets for the preceding years should be made while determining the net value of the assets on the basis of the balance-sheet. The Wealth Tax Officer and on appeal by the assessee to the Appellate Assistant Commissioner of the Wealth Tax, refused to make any adjustment for the depreciation due in respect of the assessment years prior to the year ending on the valuation date. When the matter went up in appeal before the Tribunal, it was held that for a proper valuation of the assets incorporated in the balance sheet, it was only proper that adjustments should be made in respect of the depreciation due on the assets under the Income Tax Act for the various preceding years. The Tribunal directed the Wealth Tax Officer to recompute the net wealth of the assessee after making adjustment for depreciation due under the Income-tax Act for the preceding years but not taken into account while drawing up the balance-sheet. This common question referred to us arose in all the three assessment years 1957-58. 1958-59 and 1959-60, so this question of law as mentioned above has, been referred to this Court.
3. Under Section 3 of the Act, tax is to be charged in respect of the net wealth of the assessee. The valuation of the net wealth is to be made as provided under Section 7 of the Act which runs as follows:
7. Value of assets how to be determined
'(1) The value of any asset, other than cash, for the purpose of this Act, shall be estimated to be the price which in the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date.
(2) Notwithstanding anything contained in Sub-section (1).-
(a) Where the assessee is carrying on a business for which accounts are maintained by him regularly, the wealth-tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as the circumstances of the case may require,
4. Under Section 7(1), the value of any asset will be deemed to be the value which the asset would fetch if sold in the open market on the valuation date. This value is to be determined by the Wealth tax Officer. In order to avoid all complexities involved in determining the value of an asset of an assessee who owns considerable number of properties--big and small--under Section 7(1) another method has been provided under Section 7(2) in the case of an assessee carrying on business and maintaining accounts regularly. Under it, the Wealth-tax Officer may instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as the circumstances of the case may require.
5. All the revenue authorities in the case adopted this second method in the case of the assessee. It was contended by the assessee all along that its balance-sheet showed the value of the assets at cost and did not take notice of the depreciation. The Wealth Tax Officer took the view that the assessee had not written off any depreciation in his books of account and that the general statement of counsel for the assessee that machinery had depreciated could not be accepted, that in these circumstances, the claim of the assessee was not correct and the book value should be taken as the market value. The Appellate Assistant Commissioner of Wealth-Tax dismissed the appeals of the assessee on the ground that earlier assessments had been set aside with the direction that the Wealth-Tax Office should give the appellant an opportunity of proving that the market value of the assets was less than their book value and such an opportunity was given by that Officer, but the appellants could not adduce any specific and acceptable evidence in this behalf apart from their general assertion that the relevant assets viz.. plant and machinery were more than 50 years old and had changed several hands, that the machinery was worked by steam where as the new plants for manufacture of sugar were electric powered but the Wealth-tax Officer in the reassessment under appeal had taken the view that because of import restriction, the value of machinery had been on the increase in the recent years. He concluded by making the following observation:--'In absence of any specific evidence to indicate that the market value was lower than the book value, the Wealth Tax Officer, to my mind, was justified in going to the book value, this book value, as already stated above took into account charged depreciation of Rs. 1,51.557/- for the year but not reserve of Rs.1,25.000/- or unahsorbed depreciation of earlier years
This view seems to be in order and it is upheld.
6. The Tribunal, however, did not accept this view and granted relief to the assessee by making the following observation:--
'The Revenue authorities have refused to make any adjustment for the depreciation due in respect of the assessment years prior to the year ending on the valuation date. For a proper valuation of the value of assets incorporated in the balance sheet, it Is only proper that adjustments should be made in respect of the depreciation due on the assets under the Income-tax Act for the various years. Accordingly the assessee's contention that for working out the valuation of the fixed assets adjustments must be made for the depreciation due on these assets in the preceding years but not accounted for in the balance-sheet, must be upheld.
7. It is thus clear from the order of the Tribunal as well as of the Appellate Assistant Commissioner and the Wealth Tax Officer that these authorities proceeded to determine the value of the assets of the assessee not under Section 7(1) but under Section 7(2) of the Act. The balance-sheet showed the assets at cost, but a note had been appended earlier that depreciation had not been taken into account. The Tribunal took the view that for this reason adjustment must be made in the balance-sheet in computing the value of the assets of the assessee. In the circumstances of the case, the Tribunal took the view that depreciation is to be calculated as provided under the Indian Income-tax Act for the various years and granted relief to the assessee.
8. It is clear from the provisions of Section 7 that while valuing the assets of the assessee, any of the two alternative methods provided in Sections 7(1) and 7(2) may be adopted by the Revenue Authorities. It is contended by Mr. Sumer chand Bhandari appearing on behalf of the Department that while adopting the method provided in Section 7(2} it must be kept in mind that the value of the assets as determined by this method is as near as possible as to the value of the assets if sold in the open market. It is further contended that as the assessee must be taken to have known full well what was the value of his assets on the date of valuation, the valuation shown in his balance-sheet must have been accepted and as the assessee did not make any adjustment on account of depreciation, it must be taken that as a whole the assets remained at cost price as shown in the balance-sheet and had not depreciated. But under Section 7(2) it was open to the Tribunal to make adjustment as the circumstances of the case required and the Tribunal took the view that in the circumstances of the case, depreciation should be allowed. It may have done so for the various reasons that had been urged by the assessee before the Appellate Assistant Commissioner that the machinery was purchased secondhand long back, that it had gone old on account of use and that it was in no way modern as it was to be operated by steam. It cannot be contended as a matter of law that the Tribunal was not justified in making any adjustment on account of depreciation. Mr. Bhandari has, however, contended that even if any allowance was to be made for depreciation, it should have been allowed to the extent allowable under the provisions of the Indian Income-tax Act, because the written down value as calculated under the provisions of that Act merely represents the notional value and may be for different from the market value. Sometimes this may be true, but it cannot be said to be always so. As pointed out by their Lordships of the Calcutta High Court in Commissioner of Wealth-tax, Calcutta v. Tungbhadra Industries Ltd. : 60ITR447(Cal) ,' written down value of an asset would give a fair idea of the proper value unless there are abnormal circumstances. In this connection, we may quote the following observations of their Lordships:
'While we agree that the written down value may not in all cases represent the real value of the assets, in normal cases it will give the Wealth-tax Officer a fair idea of its proper value unless the plant and machinery are of a rare type or are of a quality which is not generally available in India and for which there is n keen demand. No such uncommon feature is to be found hi the case before us.'
9. The Tribunal has in its discretion, in the circumstances of the case before us, taken the view that depreciation is to be computed in accordance with the provisions laid down in the Indian Income-tax Act. The law says that adjustment may be made as the circumstances of the case may require. It was, therefore, in the discretion of the Tribunal to make such adjustment as it deemed proper. Of course, it would have been better if detailed reasons had been given by the Tribunal for computing the depreciation in this manner, but the Tribunal has taken the view that in the circumstances of the case, the proper valuation of the assets was by making the adjustment in respect of depreciation due on the assets according to the provisions of the Indian Income-tax Act. We cannot say that as a matter of law, this exercise of discretion was wrong or erroneous. We do not mean to say that in every case, depreciation of assets as shown in the balance sheet of a company is necessarily liable to be adjusted with reference to the written down value of such assets according to the provisions of Income-tax Act. This is the view taken by the Gujarat High Court in Commissioner of Wealth-Tax, Gujarat v. Raipur . : 52ITR482(Guj) . This case has been referred and followed by the same High Court in : AIR1967Guj12 . These cases lay down the correct law, but this does not mean that in the circumstances of a particular case, if the Tribunal is satisfied, it should not allow depreciation according to the provisions of the Indian Income-tax Act. Mr. Bhandari has referred to Commissioner of Wealth-Tax v. Andhra Sugars Ltd. : 62ITR841(AP) and has urged that the net value of the assets shown in the books of account of the assessee represents the market value of the assets as estimated by the assessee himself and unless circumstances justified, the assessee could not claim a further depreciation. It was further urged that allowances permitted under the Income-tax Act are notional allowances varying from time to time according to the exigencies of the revenue and the interests and promotion of industry by the Finance Acts and they do not represent the true market value at the end of each year. In that case, the asses-see had already made adjustment in his books of account to the tune of Rupees 15,42,000/- for depreciation and he further claimed deduction of Rs. 18,14,564/-towards the difference between the depreciation allowance under the Income-tax Act and the depreciation deducted by the assessee from the value of the assets according to the method of accounting followed by it and the contention raised was that depreciation should always be allowed in accordance with the provisions of the Indian Income-tax Act because the principle of market value of the assets cannot be taken into consideration when the Wealth Tax Officer had taken recourse 10 the method indicated under Section 7(2). After referring several cases of the High Courts, some of which we have already noticed, the concluding part of the judgment is that as a matter of law or of right, the assessee cannot claim deduction of an amount equal to the difference between the depreciation already provided by the company itself in its books and the aggregate sum of normal depreciation and extra shift allowance that he is entitled to under the Income-tax Act. This conclusion is correct. The assessee could not as a matter of law or as a matter of right urge that depreciation should be allowed to him in accordance with the provisions of the Income-tax Act. But it cannot be said that when the Tribunal allowed depreciation on that basis, it necessarily committed an error of law. It always depends on the facts and circumstances of each case what amount of depreciation should be allowed and how adjustment in respect of depreciation is to be made while computing the value of the assets under Section 7(2). It may even be said that when the value of the assets cannot be properly determined by applying the provisions of Section 7(2), the Revenue authorities may take recourse to Section 7(1). But in this case, recourse was not taken to Section 7(1) of the Act and the authorities adhered to the procedure laid down in Section 7(2) and the Tribunal thought it proper in its discretion to allow depreciation at the rate provided under the provisions of the Indian Income Tax Act. In our view, it cannot be said that any mistake of law has been committed by the Tribunal in doing this. All this was a matter purely of discretion which it exercised as it thought proper. Our answer, therefore, to the question referred to us is in the affirmative.