(1) This is a reference under Section 27(1) of the Wealth Tax Act, 1957, of two questions; (a) whether, in computing the net wealth, the assessee is entitled to deduction of the sum of Rs. 6,66,931, the arrears of depreciation in each of the two years; and (b) whether the assessee is entitled to deduction of the sum of Rs. 4,70,220, being the income-tax liability in computing the net wealth in respect of 1957-58. The reference covers the assessment years, 1957-58 and 1958-59.
(2) The assessee is a public limited company, which acquired the assets of E. D. Sasson any Co., Ltd., Bombay, for Rs. 40.65 lakhs in about June 1946. As on 30-6-1955, the full depreciation for the earlier years was not provided for. but the balance sheet as on 30-6-1956 contained a note that arrears of depreciation up to the end of 30-6-1954 had not been provided and amounted to Rs. 10,58,833. The break-up of the arrears of depreciation showed, for normal depreciation plus shift allowance Rs. 7,46,125, extra depreciation Rs. 70,689 and initial depreciation Rs. 1,11,814, making a total of Rs. 9,28,628.
(3) The Wealth-tax Officer assessed the value of the wealth for the two years under Section 7(2)(c) of the Wealth Tax Act, having regard to the balance sheet for each of those years. He found that depreciation had been short provided for except in the year ended 30-6-1950 as to the extent of Rs. 79,196. This amount he allowed in the computation of the net wealth at a global valuation basis. The Appellate Assistant Commissioner took a different view and held that the assets of the assessee having been valued for purposes of security offered to the Indian Industrial Finance Corporation in 1956, which was done after making allowance from the original cost for the normal and extra depreciation admissible under the Income-tax Act, as well as the ordinary and extra shift allowance admissible for depreciation is provided in that Act. He allowed Rs. 6,66,931 in addition to Rs. 79,194, already allowed by the Wealth-tax Officer.
(4) There was an appeal by the department to the Tribunal which it allowed stating--
'It is clear from the statement made in the balance sheet that the assets have not been valued as per the depreciation claimed and allowed. It has been held in the case of Kesoram Cotton Mills, Ltd., Calcutta v. Commr. of Wealth-tax, Calcutta : 48ITR31(Cal) , that if the assessee enhances the value by allowing the depreciation by bringing the figures up to date in the books of the balance sheets, having regard to the depreciation allowed.'
On that reasoning it held that the allowance made by the Appellate Assistant Commissioner was not correct. The Tribunal also accepted the contention for the revenue that the allowance of Rs. 4,70,220 being the income-tax liability of the assessee in the first of the two years was inadmissible. In doing so, it thought that it was fortified by authority. Commissioner of Wealth-tax, Madras v. Pierce Leslie and Co., Ltd., Kozhikode : 48ITR1005(Mad) .
(5) The second question referred to us is now settled by authority in favour of the assessee. Mr. Balasubramaniam, for Revenue, has conceded this in view of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, Calcutta : 59ITR767(SC) .
(6) On the first question the relevant provisions of the Wealth Tax Act, 1957, are these. Section 3 is the charging section. It says that there shall be charged for every assessment year tax in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule. 'Net Wealth' is defined by Section 2(m) as 'the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under the Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date'. Section 7 prescribes the procedure for valuation of assets. Sub-section (1) is to the effect that the value of the assets other than cash, for the purpose of the 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.
In other words, the value of the estate is the market value of the asset on the date of the valuation. But such market value is allowed to be estimated to be the price the asset will fetch if sold in open market on the relevant date. Sub-section (2) provides for a different mode of ascertaining the value of the assets. Instead of determining separately the value of each asset, it permits the Wealth-tax Officer to determine the net value of the assets of the business as a whole. But he should do so having regard to the balance sheet of such business as on the valuation date. Further, in making such determination, he has to make such adjustments in the balance sheet as the circumstances of the case may require. Clause (a) of sub-section (2) was amended by Act 46 of 1964 which we need not notice for present purposes.
(7) The valuation, as we said, of the assessee's assets has been made under S. 7(2)(a). The contention for the assessee is that, while the Wealth-tax Officer determined the net value of the assets as a whole with reference to the balance sheet of the company, he failed to make due adjustments therein for arrears of unprovided-for depreciation for the period prior to 30-6-1954. We think the contention is well founded. What the Wealth-tax Officer is called upon to determine for purposes of the Wealth Tax Act is the net wealth and the value of the assets has to be determined in the manner provided by Section 7. When he chooses to adopt the method provided for by Section 7(2)(a), he has necessarily to go by the balance sheet. A balance sheet of a company is drawn up in accordance with the provisions of the Companies Act, and as mentioned in : 59ITR767(SC) , every balance sheet of a company under Section 211 of the Indian Companies Act, 1956, shall give a true and fair view of the state of affairs of the company as at the end of the financial year.
The Wealth-tax Officer may, therefore, be justified in assuming that the value of the assets as given in the balance sheet as on the valuation date represents the true value. Even so, if for any justifiable reason certain adjustments in the balance sheet would be necessary in order to arrive at the true value of the assets, it would then be obligatory on him to make the required adjustments. Where, however, he finds that on account of certain circumstances a balance sheet is defective, still if he adopts the global method of valuation, he has to have regard to the balance sheet, in which case he will make such adjustments as the circumstances of the case may require in such balance sheet. Where allowances of depreciation is admissible, the written-down value of the assets as given in the balance sheet may of course be taken to represent the true and proper value.
Where, however, depreciation allowance is not permissible, the book value of the assets as appearing in the balance sheet of the company will again be normally taken as the proper value of the assets. In the process of arriving at the value of the assets under Section 7(2)(a), the Wealth-tax Officer is not, however, necessarily and always bound by the figures in the balance sheet. But when he departs from the figures given therein, it is obvious that he has got to indicate why he does so. In that case, he will have to make necessary and reasonable adjustments in the balance sheet and arrive at the true value of the assets as a whole. The Calcutta High Court held in Commissioner of Wealth-tax v. Tungabadra Industries, Ltd., (1966) 60 ITR 446:
'Though Section 7(2)(a) gives the Wealth-tax Officer power to adopt the balance sheet value of the assets as the net value of the business as a whole, he can make adjustments thereto if, in his opinion, the balance sheet value does not represent the real value of the assets'.
With respect, we share this view.
(8) The plaint of the assessee, however, is that though the balance sheets contained a not showing that the arrears of depreciation prior to 30-6-1954 had not been provided for, the Wealth-tax Officer ignored this fact and adopted the value of the assets without making allowance for it. it is true that if an assessee chooses to inflate the value of his assets and show the same in the balance sheet, he will be bound by it; : 59ITR767(SC) . But where the balance sheet gives the value of the assets as on a valuation date and shows also, though separately, that the value so given has not taken into account the arrears of admissible depreciation, we think that the Wealth-tax Officer has a duty to make necessary adjustments towards such depreciation. He cannot in that case, without giving justifying reasons, properly take only the figures as to the value of the assets as given in the balance sheet, ignoring the statement therein that arrears of depreciation had not been provided for in the earlier period.
We do not suggest that he is bound to the figures in the balance sheet either as to the value of the assets or as to the quantum of the arrears of admissible depreciation. The point is that what he has got to determine being the value of the assets as on the valuation date, once his attention is drawn to the fact that depreciation has not been taken into account in the valuation of assets as given in the balance sheet, he has to apply his mind to the question of depreciation and make necessary adjustments therefor in arriving at the true value. If on doing so, he comes to the conclusion on proper reasons that there has been or could have been no admissible depreciation during the relative period, he would well be entitled to proceed on that basis. In this cases, the Tribunal noted the fact that there were the arrears of depreciation not provided for but still observed that because the assessee had not chosen to show the real value after deducting depreciation and bringing the figures up to date in the books, therefore, the value given in the balance sheet without reference to the arrears of admissible depreciation should be taken to be the true value.
We cannot accept this view. In our opinion, the Tribunal should have taken into account the arrears of admissible depreciation and made suitable and just adjustments for it in determining the value of the assets as a whole. The Wealth-tax Officer in the course of his order mentioned that probably there might have been appreciation in the value of the particular kind of assets. He had certainly jurisdiction to take that view. But such a view could only be justified on the basis of material on record. We can, however, find no such basis as the record stands before us. In our opinion, therefore, the first question too should be answered in favour of the assessee. The result of this will be the Tribunal will have to dispose of the appeal afresh in the light of this judgment. The assessee will be entitled to his costs. Counsel's fee Rs. 250.
(9) Answered accordingly.