BANERJEE J. - In this reference, under section 27 (1) of the Wealth-Tax Act, we are concerned with three assessment years, namely, 1957-58, 1958-59 and 1959-60. The relevant valuation dates are March 31, 1957, March 31, 1958, and March 31, 1959.
The assessee is a limited company and owns certain depreciable assets, to wit, buildings, plant and machinery. For the assessment years 1957-58 to 1959-60, the assessee-company respectively claimed deduction of Rs. 12,27,992, Rs. 11,95,070 and Rs. 9,37,339 from the book value of its depreciable assets.
The claim for deduction was made on the theory that depreciation had not been provided in the books according to the rates as in the Income-tax Act but at rates less than that. The Wealth-tax Officer repelled the claim with the following observation :
'I am of opinion that the assessee is not entitled to make this type of adjustment. Under section 7 (2) (a) of the wealth-tax Act, the choice between valuing separately each asset of the assessee or determining the value of the assets of the business as a whole is with the Wealth-tax Officer. To avoid difficulties involved in the valuing of each and every item of asset of the assessee separately it is decided to adopt as a general rule the global method of valuation of the asset as per balance-sheet while this method is adopted. The assessee cannot have the benefit both ways. In the circumstances the deduction claimed is not allowed.'
The assessee appealed before the Appellate Assistant Commissioner for all the three years and contended that the Wealth-tax Officer should have taken the value of the depreciable assets, on the valuation date, at the rate computed for income-tax purposes and not at the balance-sheet value, because there should be some uniform basis under the Wealth-tax and Income-tax Acts. The Appellate Assistant Commissioner repelled the contention and confirmed the order of assessment for the years 1957-58 and 1958-59 with the following observation :
'There is no provision at all in the Wealth-tax Act that W. D. V. of depreciable assets should be taken for purposes of computing the net wealth. Under section 7, it is either the open market value of the assets or the net value of the assets as a whole having regard to the balance-sheet as on the valuation date that have to be taken for computing the net wealth. The W. D. V. is not the market value and indeed may differ very widely there from. It is not also open to the Appellant to have the W. D. V. of the depreciable assets substituted for the balance-sheet value of when the net value of all the assets of the business as a whole having regard to the balance-sheet, is to be computed. The contention raised by the appellant is without any force and dismissed.'
For the year 1959-60, he repelled the same argument of the assessee, with the following further observation :
'While computing the wealth under section 7 (2) of the Act, the Wealth-tax Officer is not bound to go into details of the valuation of the assets in the balance-sheet and find out whether each and every asset has been properly valued. If this is the case, then the Wealth-tax Officer need not take the value of the balance-sheet assets but the W. D. V. computed for income-tax purposes. If any assessee does not provide for depreciation in its accounts, then it means that in the opinion of the company the assets do not suffer any depreciation. Therefore, the market value in the opinion of the company is the same as the balance-sheet value. In such a case, the Wealth-tax Officer need not go out of his way and find out the value on the basis of records. It was found that from the assessment years 1949-50 to 1959-60, the depreciation as per income-tax assessment is very much less than the depreciation actually provided in the accounts by the appellant. It was noticed that on 31st March, 1948, the W. D. V. of the assets as per income-tax records was 18,91,000 whereas according to the books of accounts it was Rs. 33,69,000. This shows that for the period from 1948 to 1958, the appellant has been showing in the balance-sheet the value of the fixed assets at a figure higher than shown by the income-tax assessment records. This means that in the opinion of the appellant -and these accounts were audited by chartered accountants and passed by the shareholders - that the assets were worth more than the value shown by the income-tax assessment records. If this was so, then all of a sudden in March, 1959, the assets cannot be considered as being of a value lower than the value shown in the balance-sheet. It was also learnt that the present managing agents, namely, Birla Brothers Ltd., purchased the shares of the appellant company on the basis of the balance-sheet in March, 1948. Therefore, this also goes to show that the value of the assets was as shown in the balance-sheet and not as shown in the W. D. V. of income-tax records.'
The assessee took a further appeal before the appellate Tribunal, which allowed the appeals, on the following line of reasoning :
'The appellant in this case was not adequately providing for normal wear and fear of the depreciable assets in its accounts. The depreciation provided for by the assessee in its books was much lower than what was allowable as normal depreciation under the Income-tax Act, with the result that the difference amounted to Rs. 12,19,851 for the first year, Rs. 11,79,255 for the second year and Rs. 9,22,724 for the third year. In our opinion, the Appellate Assistant Commissioner was wrong in holding that the net value of the assets of the business as a whole had to be taken exactly as shown in the balance-sheets and no adjustments whatever could be made in respect thereof. Section 7 (2) enjoins on the Wealth-tax Officer to make such adjustments to the balance-sheets and no adjustments to the balance-sheet value as the circumstances of the case may require. In fact, section 7 (2) imposes some obligation on the Wealth-tax Officer to exercise his discretion and to make such adjustments to the balance-sheet as the ends of justice may require. In cases where on account of a defective method of accounting followed by an assessee the value of the assets shown in the balance-sheet has become unrealistic for want of necessary provision therein for normal wear and tear of the assets, it is the duty of the Wealth-tax Officer to make such adjustments as would eliminate the detriment arising to the assessee by reason thereof. We, therefore, direct that the value of the depreciable assets should be included in the net wealth after allowing for normal depreciation as computed for the purposes of income-tax assessments in place of their balance-sheet value ?'
It is necessary for me, at this stage, to refer to sub-sections (1) and (2) (a) of section 7 of the Wealth-tax Act, 1957, which provides for 'value of assets how to be determined' :
'7 (1). The value of any asset, other than cash, for the purposes 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.'
Now, section 7 (2) (a) given to the Wealth-tax Officer power to adopt the balance-sheet value of assets as the net value of the business as a whole, but such valuation is not sacrosanct. He is at liberty to make adjustments thereto, if he is of the opinion that the balance-sheet value does not represent the real or the correct value. Also, an assessee, who has shown the value of his depreciable assets at cost, paid many years ago, is not precluded from asking the Wealth-tax Officer to make proper allowance thereto in respect of depreciation caused by lapse of time and wear and tear. Although this is so, it is no proposition of law that depreciation must be allowed, under the Wealth-tax Act, at the rates allowable under the Income-tax Act, which are somewhat empiric in nature, particularly in respect of plant and machinery.
Under section 2 (m) of the Wealth-tax Act, 'net wealth' means the amount by which 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, is in excess of all the debts owed by the assessee on the valuation date other than those set forth in clauses (i), (ii) and (iii) thereof. The valuation of the assets is to be done under section 7. Two alternative courses are open to the Wealth-tax Officer under that section - he may value any assets, other than cash, estimating the price, which, in his opinion, it would fetch if sold in the open market on the valuation date. Alternatively, he may adopt a rough and ready method and may, in case of an assessee who maintains regular business accounts, to the balance-sheet of such business as on the valuation date, after making such adjustments thereto as the circumstances of the case may requite.
The provisions for making adjustments in the balance-sheet value has a reason behind it. If, for example, an assessee holds large plots of land purchased many years ago in a developing urban area, the balance-sheet value thereof, shown at cost, will not reflect their real value. In such a case, the Wealth-tax Officer may be justified in making such additions to the balance-sheet value as he may think proper, regard being had to the general appreciation of land values in the locality. Then again, for example, if an assessee shows the value of plant and machinery of his business at cost, purchased many years ago, he may be justified in asking the Wealth-tax Officer to make proper allowances thereto for depreciation. But even then the Wealth-tax Officer may turn down the prayer, if he is convinced that such plant and machinery are not readily available in India and may fetch higher price than the written down value, if sold in the open market.
In this context we need refer to the case of Commissioner of Wealth-tax v. Tungabhadra Industries Ltd., in which in assessing the net wealth of the assessee-company, the Wealth-tax Officer proceeded under section 7 (2) (a) of the Act and included in the computation the entire balance-sheet value of the assets without any adjustment. The assessee contended that so far as the fixed assets were concerned, they should be assessed at their written down value and not on the basis of the value as shown in the balance-sheet value of the assets without any adjustment. The assessee contended that so far as the fixed assets were concerned, they should be assessed at their written down value and not on the basis of the value as shown in the balance-sheet. The contention of the assessee was rejected both by the Wealth-tax Officer and the Appellate Assistant Commissioner. On further appeal, the Tribunal found that the assessee was valuing the fixed assets at cost in the balance-sheet and was not providing for depreciation thereof in the balance-sheet. The Tribunal, therefore, held that there was no warrant for the view that in computation, under section 7 (2) of the Act, no adjustment can be made for depreciation. In the aforesaid view, the Tribunal allowed the appeal. On a reference to his court on the question whether the Tribunal was right in directing that the written down value of the fixed assets of the assessee should be adopted as the value thereof, instead of the balance-sheet value, a Bench consisting of G. K. Mitter J. and my learned brother, Masud J., answered the question in the affirmative. Their Lordships observed :
'In our opinion, in normal circumstances and specially when the machinery is old, the written down value gives a fair indication of its real value. In the case before us, the plant and machinery appear to have been set up many years ago and no reason had been shown why the written down value should not be accepted, except that the assessee has not provided for depreciation admissible under the Income-tax Act in the balance-sheet...
In Spicer and Peglers Book-keeping and Accounts, 15th edition, page 48, the learned authors say : At the end of its effective life, the asset ceases to earn revenue, i.e., the capital outlay has expired, and the asset will have to be replaced or a substitute found. Provision for depreciation is the setting aside, out of the revenue of an accounting period, the estimated amount by which the capital invested in the asset has expired during that period. It is the provision made for the loss or expense incurred through using the asset for the purpose of earning profits, and should therefore be charged against those profits as they are earned... If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits; having been purchased, the asset is, in effect then hired by capital to revenue, and the true profit cannot be ascertained until an analogous charge for the use of the asset has been made. Moreover, unless provision is made for depreciation, the balance-sheet will not present a true and fair view of the state of affairs, since the assets will be shown at an incurred on their acquisition...
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 common feature is to be found in the case before us.'
In giving the aforesaid answer, their Lordships found support from the views expressed by the Bombay High Court in Commissioner of Wealth-tax v. Indian Standard Metal Co. Ltd. and by the Gujarat High Court in Commissioner of Wealth-tax v. Raipur .
I generally agree with the view expressed in the case of Tungabhadra Industries Ltd. I do not, however, think that in making adjustment in the balance-sheet in respect of depreciation, the depreciation as computed for the purpose of income-tax assessment must always be followed. That computation merely affords a rough and ready method of reckoning loss in value and need not be resorted to except under compelling circumstances.
Now, in this case it is not the contention of the assessee that its fixed assets are very old and have suffered considerable depreciation. The case of the assessee is that the depreciation provided in its books was lower than what was allowable as normal depreciation under the Income-tax Act. In taking the extreme view that where the global method of valuation of assets was adopted, as per balance-sheet, no deduction by way of adjustment should be allowed, the Wealth-tax Officer was wrong. The Appellate Assistant Commissioner was also wrong in assuming that the value of the assets was more than the value shown in the income-tax records. The Tribunal was, therefore, right in directing the Wealth-tax Officer to exercise his discretion and allow depreciation. The Tribunal was not, however, right in direction the Wealth-tax Officer to allow depreciation as computed for the purposes of income-tax assessment. In the view that I take, I find some support from a judgment of the Andhra Pradesh High Court (per Jaganmohan Reddy J.) in Commissioner of Wealth-tax v. Andhra Sugars Ltd. from which I quote a relevant extract :
'In Commissioner of Wealth-tax v. Tungabhadra Industries Ltd., the Calcutta High Court, after referring to Kesoram Cotton Mills Ltd. v. commissioner of Wealth-tax, Commissioner of Wealth-tax v. Indian Standard Metal Co. Ltd. and Commissioner of Wealth-tax v. Raipur . held similarly that section 7 (2) (a) of the Wealth-tax Act, 1957 Act, 1957, gives the Wealth-tax Officer power to adopt the balance-sheet value of the assets as the net value of a business as a whole but this valuation is not sacrosanct and that the officer is at liberty to make adjustments therefore, if, in his opinion, the balance-sheet value does not represent the real value of the assets. It was further observed that even though 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 a great demand. No such uncommon feature was found in that case. On the facts of that case, they accepted the written down value because no special circumstances existed which would show that the written down value did not represent the real value.
A review of these cases leaves no doubt that where the Wealth-tax Officer adopts the global valuation, he has to take the balance-sheet as the basis and make such adjustments as may be necessary. This does not, however, mean that apart from the values given in the balance-sheet, the power given to him to make the necessary adjustments must, as a matter of course, compel him to adopt the written down value or the depreciation allowed under the Income-tax Act. The written down value of an asset on the valuation date is one thing and the total depreciation allowed in a number of years for the purpose of arriving at the written down value under the Income-tax Act is another. In this case, the balance-sheet itself would show that a depreciation allowance of nearly Rs. 15 1/2 lakhs has been allowed before arriving at the net valuation of the assets. It is apparent, therefore, that after the deduction, the net value of the assets represents the market value of the assets as estimated by the assessee itself, and unless circumstances justify, the assessee cannot claim further depreciation as it is seeking to claim in this case. No doubt, it will be open to it to show that the depreciation deducted for the purpose of arriving at the net valuation on the valuation date in the balance-sheet is not correct or that some further depreciation ought to have been allowed by reason of any mistake committed or by reason of any omission or otherwise. In this case, the assessee says that it has not deducted the depreciation attributable to double-shift. If it the purpose of computing the net value of that asset on that ground. It is open to the Wealth-tax Officer, where such material is placed before him, to consider the same and give such relief as the assessee is entitled. But, apart from that, as matter of law or of right, it 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 and which had been allowed up to the chargeable accounting period under the said Act.'
I cannot close this judgment, without reference to Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax in which Subba Rao J. (as the Chief Justice then was) had to consider a case in which the assessee, in its balance-sheet for the period ending March 31, 1957, had shown the appreciated value on revaluation of its assets, after making certain adjustments at Rs. 2,60,52,357 and had introduced in the capital reserve a corresponding balancing figure of Rs. 1,45,87,000 representing the increase in the value of the assets upon revaluation. For the purposes of wealth-tax, the officer took the sum of Rs. 2,60,52,357 as the value of the assets, whereas the assessee-company contended that an adjustment ought to be made in view of the increase in the valuation showing the balance-sheet on revaluation. In that context, it was observed that, as no one could know better the value of the assets than the assessee himself, the Wealth-tax Officer was justified in accepting the value of the assets at the figure shown by the assess-company. It was further observed that it was open to the assessee to convince the authorities that the figure was inflated for acceptable reasons, but the assessee did not make any such attempt; it was also open to the Wealth-tax Officer to reject the figure given by the assessee and adopt another figure if he was, for sufficient reasons, satisfied that the figure given by the assessee was wrong but he chose to accept the figure. In the instant case, however, the assessee sought to show that the balance-sheet figure was wrong. That distinguishes the instant case from the case before the Supreme Court. The revenue should have examined that contention and allowed such depreciation over the balance-sheet figure, as the circumstances of the case justified.
In the view that I take, I answer the question referred to this court in the following manner, namely, that in the facts and circumstances of the cases, for the purpose of computing the wealth under section 7 (2) (a) of the Wealth-tax Act, the Tribunal was right in directing that the value of the depreciable assets should be included in the net wealth after allowing normal depreciation in place of the balance-sheet value. The Tribunal was not, however, right in directing the Wealth-tax Officer to do so according to the computation for the purposes of income-tax assessment. The valuation is to be made under section 7 (2) (a) after making such adjustments as done for income-tax purposes.
I do not make any order as to costs in this matter because the success is only partial.
MASUD J. - I agree.