1. The question referred to thisCourt under Section 27(1) of the Wealth Tax Act is as follows:
'Whether on the facts and in the circumstances of the case, the amounts appearing inthe Company's balance sheets as on 31-3-1957 and 31-3-1958 after 31-3-1958 as liabilities for taxes in respect of which the assessments were still pending and dividends which were proposed but not declared were deductible in determining the net wealth of the company for the assessment years 1957-58 and 1958-59?'
2. The question really comprises two distinct and separate matters. The first part concerns an amount of Rs. 13,26,251 which the Company estimated to be due on account of taxes in respect of a period upto March 31, 1957 for which the assessment had not been completed, and another sum of Rs. 11,19,126 being an estimated amount of income tax for the year ending March 31, 1958. The second part of the question concerns an amount of Rs. 12,00,000 representing the dividends proposed by the Directors for the said two years, which had however not been actually declared on or before the relevant valuation dates.
3. On both the heads it was contended before the Tribunal that the liability for taxation as also the provision for dividends were properly deductible from the total value of the assets for the purpose of computing the Company's not wealth. Alternatively it was argued that since the net value of the assets of the business was being determined under Sub-section (2) of Section 7 of the Wealth Tax Act deduction of liabilities which were not converted into debts was also permissible while determining the net value of the assets as a whole. The Tribunal rejected both the contentions.
4. Under Section 3 of the Wealth Tax Act, the tax is to be charged for even financial year commencing on and from the 1st day or April, 1957 in respect of the net wealth on the corresponding valuation date of every individual etc. 'Net wealth' has been defined in Section 2(m) to mean the aggregate value computed in accordance with the provisions of the 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, which is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than those specifically mentioned. The computation is to be done under Section 7. Under Sub-section (1) of this section the value of any asset other than cash lias to be estimated at the price which in the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date. Where the assessee carries on a business for which accounts are maintained by him regularly, Sub-section (2) clause (a) of Section 7 gives the Wealth Tax Officer an option of determining 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 necessary adjustments therein instead of determining separately the value of each asset held by the assessee in such business. It was argued before us that if resort was made to Sub-section (2) the Wealth Tax Officer must proceed on the value of the assets as shown in the balance sheet and deduct therefrom the liabilities shown therein whether they were 'debts owed' within themeaning of Section 2(m) or not. It was said that Sub-section (2). (a) of Section 7 was aimed at the acceptance of the 'global valuation' of the business which was to be found out by the adoption of the compendious valuation of the assets as shown in the balance sheet and deducting therefrom such liabilities, as are properly indicated in the balance sheet under the relevant provisions of the Indian Companies Act or the rules framed under the Wealth Tax Act. The substance of the argument was this that to know the value of the assets of the business as a whole you must consider the amount which a prospective buyer of the business would be likely to offer in view of the liabilities shown in the balance sheet. I find myself unable to accept this argument. The computation of the net value of the assets of the business as a whole cannot be made in disregard of the provisions of Section 2(m). It would not be right for the Wealth Tax Officer to deduct from the net valuation of the assets anything which had not matured into a 'debt owea under Section 2(m) merely because he was adopting the 'global valuation'. Section 7(2)(a) does not enjoin upon the Wealth Tax Officer even to accept the value of the assets of the business as shown in the balance sheet. For instance, in the case of an assessee who owns large blocks of land in urban areas the value whereof lias appreciated considerably more than the cost as shown in the balance sheet he can make additions to the balance sheet figures in respect of the valuation of such land. On the other hand, if the fact be that the market value of the land shown at cost has gone down considerably there is nothing in the Section to prevent the assessee from asking for a diminution in the value of the land on this ground and the Wealth Tax Officer would not be justified in turning down such a contention. The same consideration will apply to the fixed assets such as plant and machinery. If no depreciation of the value of the plant and machinery has been shown in the balance sheet the assessee may yet ask for an allowance in that respect. As Section 7(2)(a) does not entitle the assessee to deduct any liability which is not a 'debt owed' the rules framed by the Central Board of Revenue under Section 46 of the Act cannot enlarge either the scope of the assets to be taken into consideration under the different sections of the Act or the liabilities which are not; 'debts owed' and as such are not deductible under the Act.
5. Our attention was drawn to form 'B' which is to be found in the Wealth Tax Rules of 1957 being the form of retain far companies of net wealth under Sub-sections (1) and (2) of Section 14 of the Wealth Tax Act. Annexure III thereof is headed 'Statement of debts located in India owing by the company.' This again is sub-divided in four sections, the first being secured loans, the second 'unsecured loans', the third 'current liabilities' and the forth, ascertained liabilities treated as contingent liabilities'. It was argued that the Act read with the rules went to show that 'debts owed' were equated with liabilities. I find myself unable to accept this contention. All debts are liabilities but all liabilities are not debts and if the legislature meant to give the assessee the benefit of allliabilities ft need not have taken the trouble of defining net wealth as it has clone in Section 2(m). It would have been enough to mention liabilities in place of 'debts owed'. It seems to me that the Legislature did not intend that any and every liability of the assessee was to be taken into consideration but only those which had matured into debts and which the assessee owed to others on the valuation date.
6. It now remains to note several decisions cited at the Bar. In Gift Tax Officer, Calcutta v. Kastur Chand Jain : 53ITR411(Cal) the question which the Court had to consider related to the valuation for the purpose of the Gift Tax Act of certain shares in a private limited company transfer whereof was restricted by the articles of association. The Court had to interpret Rule 10(2) of the Gift Tax Rules of 1958 under which
'the value of the shares, if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch if on the date of gift they could be sold in the open market on the terms of the purchaser being entitled to be registered as holder subject to the articles, but the fact that a special buyer would for his own special reasons give a higher price than the price in the open market shall be disregarded.'
The division bench hearing the reference observed that under this rule the valuation of shares of a private company giving no controlling interest in the company may properly be made by reference to the break-up value of the company's assets' as shown in its latest balance sheet. The Court held that the Gift Tax Officer had made a fundamental error in taxing 'the artificial wealth of the company' computed under Section 2(m) of the Wealth Tax Act of 1957 as the basis of the valuation and said
'in valuing the shares on the basis of the value of the total assets of the Company, the Gift Tax Officer must take into account the net value of its assets ascertained by deducting from the value of its gross assets, all its debts and liabilities and making all fair and reasonable allowances for its uncertain and contingent liabilities. The value of the Company's gross assets cannot be an index of the value of its share and a valuation of the shares based on the value of the gross assets without taking into account all the debts and the liabilities is worthless.'
The same consideration cannot apply to computation of the value of the assets of the business as a whole for the purpose of Section 7(2)(a) of the Wealth Tax Act. In Kastur Chand Jain's case : 53ITR411(Cal) the Court pointed out that if there could be no open market a reasonable method of valuing the shares would be to proceed on the basis that someone would buy them after valuing the assets of the Company as a whole taking into the account the debts and liabilities owed by it. I see no reason why the same consideration should apply to computation under Section 7(2)(a) of the Wealth Tax Act. As was pointed out in Kastur Chand Jain's case : 53ITR411(Cal) the definition of net wealth under Section 2(m) is an artificial one and there seems to beno reason why the provis'ons of the Gift Tax Act and the rules thereunder should govern the principles of computation of net wealth under the Wealth Tax Act.
7. In Commr. of Wealth Tax, Gujarat v. Raipur . : 52ITR482(Guj) the learned Judges of the Gujarat High Court had to construe Section 7(2)(a). It was urged before the Gujarat High Court that the words 'net value of the assets of the business as a whole' have a distinct meaning in accountancy and that those words implied that one has to value the assets of the business as a whole after deducting the liabilities of the business. It was also argued that the words 'as a whole' did not govern assets but governed business. According to the Gujarat High Court there is considerable force in the argument advanced on behalf of the respondent in this connection. The words 'net value of the assets of the business as a whole' also appear in Clause (b) of Section 7(2). Clause (b) refers to the business of a Company not resident in India and which does not maintain a separate balance sheet drawn up in respect of the affairs of such business in India. In such a case, it is provided that the Wealth Tax Officer may take the not value of the assets of the business in India to be 'that proportion of the net value of the assets of the business as a whole wherever carried on.' The words 'as a whole' in this context must be held to govern business arid not to govern assets. With great respect I find myself unable to agree. In computing the net wealth its definition given in Section 2(m) cannot be lost sight of. Section 7 merely prescribes the procedure to work out the principle laid down in Section 2(m). Under Sub-section (1) of Section 7 the Wealth Tax Officer may proceed to value each item of the assets held by assessee and deduct therefrom the value of debts owed. Section 7(2)(a) is a labour saving device. By resorting to it the Wealth Tax Officer is saved from the laborious process of valuing each item of the assets of the business separately. He is given liberty to take the value of the assets of the business as a whole and make such adjustment therein as he thinks proper. He is still under an obligation to deduct the value of the debts owed and I see no reason which would justify the deduction of all liabilities merely because they were shown in the balance sheet. The balance-sheet is to be referred only for the purpose of computation of the value of the assets of the business.
8. In Commr. of Wealth Tax, Bombay v. Standard Mills Co., Ltd. : 50ITR267(Bom) the same argument which was put up before the Gujarat High Court in the last mentioned case was advanced before the Bombay High Court as to the interpretation of Section 7(2)(a). It was observed by the Bombay High Court (p, 292):
'We find it difficult to accept Mr. Palkhivala's contention that Section 7(2)(a) is a complete code for ascertainment of the net wealth of the assessee. On the other hand, in our opinion, on a fair reading of Sub-sections (1) and (2) of Section 7 they provide only the mode of valuing the assets. The primary mode as willbe seen, from Sub-section (1) of Section 7 is to make an estimate as to the price at which the asset would be sold and that would be the value of the asset. Sub-section (2), however, gives an option to the Wealth Tax Officer not to follow this method of valuing each asset by estimating its market price in case whore the assessee is carrying on a business and the Wealth Tax Officer has to value the assets of the business belonging to the assessee. It provides that instead of valuing each asset separately, he may value the assets of the business as a whole in a bulk and ascertainment of that value should be having regard to the balance sheet of the business. There would naturally be items in the balance-sheet which would show the assets as well as the liabilities. The Wealth Tax Officer has been given power to make necessary adjustments in the balance-sheet as the circumstances of the case may require. If is difficult to read any restriction on this power of the Wealth Tax Officer as is contended by Mr. Palkhivala. The expression 'net value' also does not carry the matter any further. The word 'net' means clear of all charges and deductions, but what kind of deductions again is a question'.
With respect, T agree.
9. For the reasons given in Kesoram Cotton Mills Ltd. Calcutta v. Commr. of Wealth Tax. Calcutta : 48ITR31(Cal) and in the light of the above discussion the answer to the question posed must be in the negative and against the assessee who will pay the costs of this reference.
10. I agree.