Per Shri A. Krishnamurthy, Judicial Member - The appeal by the department relates to the wealth-tax assessment for the year 1975-76 of the assessee, Shri M. Ramaswamy. The objections raised by the department pertain to the determination of the value of certain shares held by the assessee in different companies. The company in which the assessee held shares, which were valued according to the method stated in rule 1D of the Wealth-tax Rules, 1957, are Rukmani Mills Ltd., Pudukottai Co. (P.) Ltd. and Pudukottai Corpn. Ltd. The AAC found that there were certain amounts in the balance sheet shown as provision for bad debts which were deducted from the amounts shown under the head Unsecured loans as assets in the relevant balance sheets of the companies. He held that such provision for bad debts should be excluded or deducted in determining the net worth of the shares and not included as was done by the WTO. Aggrieved by his order, the department is in appeal.
2. Before we proceed to deal with the dispute, it is necessary to point out that there is a mistake in the statement of facts by the AAC, in regard to the provision for bad debts. It is only in the case of the company Rukmani Mills Ltd. that from the amount of unsecured loans under the head Loans and advances of Rs. 26,77,829.42 that an amount of Rs. 11,33,190.09 as provision for bad debts has been deducted and the net balance shown at Rs. 15,44,639.33. In the balance sheet of Pudukottai co. (P.) Ltd. the amount of Rs. 2,26,411.17 referred to by him in his order is not a provision for bad and doubtful debt from loans or other advances, but represents the provision in respect of shares held by the company as investments which are doubtful of realisation. Under the head Loan and advances certain amount is shown to be considered as doubtful and the entire amount is deducted as provision made. Similarly, there is an amount shown as doubtful in respect of dues from customers on account of bills and the entire amount is shown as provision. But the only item that appears to have been dispute before the AAC is the amount deducted as provision for shares or investments doubtful of realisation as stated above. With regard to Pudukottai Corpn. Ltd. the amount of Rs. 2,96,683.28 considered by the AAC is not a provision in respect of loans or advances or other amounts due, but a provision in respect of investments doubtful of realisation. In this company also, certain amounts are shown as unsecured loans or amounts due from customers doubtful of realisation and excluded from the assets. The dispute, however, before the AAC appears to have been only with regard to the amount shown as doubtful of realisation in respect of shares or investments. With this clarification on facts, we shall now proceed to consider the objections of the department and the contentions of the assessee.
3. In the grounds, the first objection stated is that the AAC erred in directing exclusion of provision for bad debts in computing the break-up value of shares in companies failing to note that the amount in question had already been taken into consideration by the WTO. This ground is not clear to us and is evidently misconceived because while in respect of Rukmani Mills Ltd.s shares the provision for bad debts have been directed to be deducted. In the other two companies cases, we have already stated, what is directed to be excluded are the provisions in respect of shares or investments doubtful of realisation. In ground No. 3, the objection raised is that the AAC erred in directing that the provision for bad debt should be excluded in computing the break-up value of the shares under rule 1D. This also is not quite clear to us on the fact of the earlier objection mentioned above where it is stated that the WTO has already taken into consideration the provision for bad debt.
4. However, at the time of hearing of the appeal the learned departmental representative advanced the contention of the department to be that in the first place for determination of the shares of companies which are not quoted in the stock exchange rule 1D is mandatory and according to the rule, there is no scope for deducting any liability falling under clause (ii) of Explanation II to the said rule, according to which any amount shown as liability in the balance sheet under the items enumerated therein will not be eligible for deduction as a liability. Sub-clause (c) thereof mentions reserves by whatever name called other than those set apart towards depreciation. In this connection reliance is also placed in the grounds of appeal on the decisions in CWT v. Padampat Singhania : 117ITR443(All) and Bharat Hari Singhania v. CWT : 119ITR258(All) In Padampat Singhanias case (supra) it has been that after framing of the rules the unquoted shares have to be valued in accordance with the said Rules and though it was open to the authorities under the Wealth-tax Act, 1957 to estimate the market value of unquoted shares according to the method they found more suitable prior to the framing of the Rules, after the framing of such Rules, the method prescribed under rule 1D should be applied. The reference to Bharat Hari Singhanias case (supra) in the ground is evidently a mistake as no decision concerning this question is seen reported on that page in that volume of ITR. The learned departmental representative at the time of hearing also pointed out that the decision of the Bombay High Court in the case of Smt. Kusumben D. Mahadevia v. CWT : 124ITR799(Bom) takes the view that the method prescribed under rule 1D for valuing unquoted shares is only directory and not mandatory. The assessees learned representative relied on the order of the AAC.
5. We consider that there is no merit in the departments objections. The question before us is not whether rule 1D is mandatory or directory. It is as to whether in valuing the shares of the said companies under rule 1D the amounts directed to be excluded by the AAC should be included in computing the net worth of the shares. All that rule 1D provides is that values of all liabilities shown in the balance sheet of any company shall be deducted from the value of all assets shown in the balance sheet and net amount so arrived at shall be divided by the total amount of paid-up equity share capital and the resultant amount multiplied by the paid-up value of each equity share is regarded as the break-up value subject to certain adjustments. The rule does not provide for determination of the value of the assets. The claim made by the assessee for reduction of the amounts in this case is not any deduction of a liability, but a reduction to be made in taking the value of a particular asset, i.e., its realisable or market value. The rule when it states that the liability shall be deducted from the value of all assets shown in the balance sheet it does not indicate as to at what value the assets are to be included. Strictly construed the rule apparently takes note of only the assets as shown in the balance sheet and we have already seen with reference to the figures adverted to earlier in the balance sheet of the companies concerned that the amounts direct by the AAC to be excluded to do not form part of the value of any assets at all (Sic.). What is shown as asset in the balance sheet is the net amount after deducting the provisions for unrealisable part of the same. Liability in the ordinary sense and as contemplated in the rule, according to us, is a liability for any outstanding expenditure or other such items and does not contemplate a fall or reduction in the realisable value of any asset including loans or advances made to other persons. So, there is no question of the assessee claiming any liability which he is not entitled to. As we have already noticed, according to the strict construction of the rule, what is to be included as the value of the assets is the aggregate of the assets shown and included in the balance sheet and the amounts considered doubtful of realisation in respect of any assets and deducted in arriving at the total value of the assets does not form part of the assets. Apart from this, even if the WTO feels that it is not established that the amounts shown as not realisable are not really so by any evidence or material which he could have investigated and ascertained before rejecting the assessees claim, what we have to consider is whether a purchaser in the open market will reckon on these amounts as part of the assets of the companies in offering a price for the shares. A prudent purchase will certainly not take into account amounts shown as of doubtful recovery or not realisable in determining the price to be offered for the same and would exclude such amounts. Moreover, it is seen from the order of the AAC that the provision of unrealisable debts was made because they were due from sick mills and also from companies whose finances were in the red. Whatever be the position, as we have already noticed, a prudent purchaser would not take into account the amount shown as doubtful of recovery or unrealisable and exclude them from the total value of the assets in fixing the price of shares even under rule 1D. We, therefore, find no merit in the departments objections which are, accordingly, rejected. The appeal is dismissed.