BANERJEE J. - These references, under section 27(1) of the Wealth-tax Act, have been made in circumstances hereinafter related.
The assessee is a sterling company, incorporated under the English Companies Act, and has is registered office in London. Admittedly, the assessee is not resident in India, within the meaning of Explanation 2 to section 6 of Wealth-tax Act. It is well-known that the assessee is the owner of the undertaking running tramways, in Calcutta and its suburbs, for public transportation. The Government of West Bengal became desirous of acquiring the undertaking of the assessee and pursuant thereto entered into an agreement with the assessee, on September 30, 1951, under which the assessee was allowed to carry on the under taking till January 1, 1972, (described as the 'purchase date'), subject, inter alia, to the following conditions :
'2. (1) The company shall continue to carry on the undertaking until the purchase date in accordance with this agreement and any statutory powers granted or to be granted to or empowering the company in that behalf.
(2) Except as otherwise specifically provided in this agreement nothing herein shall be deemed to restrict the financial and administrative powers of the company or to restrict the right of the company to carry on its undertaking until the purchase date in the ordinary course of business.
(3) The company shall exercise due care and economy in the management and administration of the undertaking and shall take all such steps as shall be reasonably practicable to work the undertaking to the best advantage of the parties to this agreement....
4. (1) The company shall apply its revenues in the manner following, that is to say :
(a) firstly, paying all expenses of managing, maintaining and working the undertaking, including debenture interest;
(b) secondly, paying all Indian and United Kingdom taxes payable by the company;
(c) thirdly, setting aside in each accounting year in a renewals and replacement reserve account the sum of eighty thousand pounds sterling or such greater sum as the directors of the company for the time being may in consulation with the Government consider necessary in the light of experience and in view of the expansion of the undertaking or increase in prices;
(d) fourthly, setting aside in each accounting year in a fund (hereinafter called the shareholders account) the following sums :
(i) Pounds 87,457 together with,
(ii) four per cent. upon any additional outside share capital raised by the company with the consent of the Government after the date of this agreement;
(e) fifthly, accumulating any surplus in a special reserve account the balance of which (after providing for losses, if any) will eventually accrue to the benefit of the Government. (Before such transfer, however, of a loss against the credit standing in the special reserve account, the Government should be consulted, the final decision on such matter nevertheless being reserved to the company).
(2) If in any accounting year the revenues arising from the undertaking are insufficient to provide for all the matters enumerated in the preceding sub-clause of this clause, such revenues shall be so applied in the priority there set out.
5. (1) The accounts of the company for the year ending the thirty-first day of December, one thousand nine hundered and fifty one and for each subsequent year shall be made out in conformity with this agreement.
(2) The dividends to shareholders in respect of the year ending the thirty-first day of December, one thousand nine hundred and fifty-one and each subsequent year shall be paid out of the shareholders account.
(3) Any sum for the servicing of the debenture stock of the company, that is to say, any sum set apart for or used in, the repayment of the debenture stock of the company shall, in the year ending the thirty-first day of December, one thousand nine hundred and fifty-one and in each subsequent year, be paid out of the shareholders account and be a charge on the same....
7. (1) Not later than twelve months before the purchase date, the Government may serve upon the company notice in writing (hereinafter called a purchase notice) of its intention to acquire the undertaking on the purchase date.
(2) In the event of the Government serving a purchase notice the following provisions shall have effect, that is to say :
(a) The Government shall subject to the exchange regulations and other relevant laws prevailing at the time in the United Kingdom and India pay to the company in sterling in London not less than thirty days before the purchase date :
(i) the sum of Pounds 3,750,000;
(ii) a sum equal to the amount of any additional outside capital brought into the undertaking with the consent of the Government under clause 6(1) of the agreement during the period between the date of this agreement and the first day of January, one thousand nine hundred and seventy-one.
(b) Subject to payment being made in terms of sub-clause (a) above, all the right, title and interest of the company of and in the undertaking shall on the purchase date become vested in the Government free from all mortgages, charges and liens created by the issue of debenture or debenture stocks of the company : Provided that the company shall be entitled to retain all statutory books of account and other documents normally kept outside India but shall afford every facility to the Government to have inspection of the same of take copies of or extracts therefrom.
(c) The Government shall also pay to the company in sterling in London, the amount of the balance (if any) of the shareholders account at the purchase date within one month after a certificate by the companys auditors of the amount thereof has been served on the Government.
(d) No further sum than is provided for in this clause shall be payable to the company in respect of the transfer of the undertaking of the Government.
(3) From and after such vesting of the undertaking in the government all powers, rights, obligations and liabilities excepting the liabilities in respect of the share and loans capital of the company shall be exercisable by and be binding on the government in substitution for the company and shall cease to be exercisable by or binding on the company :
Provided that no contract entered into by the company after the date of this agreement and extending for more than one year beyond the purchase date shall be binding on the Government unless it has been previously approved by the Government.
8. If the Government does not serve a purchase notice in accordance with the preceding clause, then all the terms and conditions of this agreement shall continue in force subject to the following modifications :
(a) (i) The Government shall pay to the company in sterling in London such sums as may from time to tine be necessary to redeem the second debenture stocks of the company on their due dates;
(ii) After the second debenture stocks have been redeemed as aforesaid the company shall from time to time until the undertaking is vested in the Government pay to the Government sums equal to the interest which would have been payable on such debenture stocks had the same not been redeemed.
(b) (i) The Government shall on giving two years notice to the company be entitled to acquire the undertaking on the 1st day of January of any subsequent year and such date shall be the purchase date.
(ii) In the event of the undertaking being acquired in pursuance of a notice under this clause there shall be deducted from the sum payable under clause 7(2)(a)(i) hereof any sums which may have been paid by the Government in pursuance of paragraph (a)(i) of this clause.'
This agreement was confirmed by an Act passed by the West Bengal legislature, on October 18, 1951, known as the Calcutta Tramways Act, 1951.
The assessment years, with which we are concerned, are 1957-58, 1958-59 and 1959-60, the material valuation dates being December 31, 1956, December 31, 1957, and December 31, 1958.
Pursuant to the terms agreed upon and sanctified by statute, the assessee maintained, (i) under clause 4(1)(e) of the terms, a 'special reserve account', in its books; the amounts lying to the credit of this account were Pounds 199,407, Pounds 192,940, and Pounds 98,017, on the respective valuation dates, and (ii) under clause (4)(1)(d) of the terms, a 'shareholders account', in its books; amounts lying to the credit of this account were Pounds 154,434, Pounds 208,934 and Pounds 262,811, on the respective valuation dates.
The assessee had also issued debentures, which were secured by floating charge on the general assets of the assessee. The debts under the debentures were all due to parties in the United Kingdom.
The assets of the assessee outside India were Pounds 427,786, Pounds 351,888 and Pounds 195,916 on the respective valuation dates. The assets of the assessee in India on those dates were Pounds 2,930,032, Pounds 3,010,560 and Pounds 3,119,149 respectively.
The assessee claimed before the Wealth-tax Officer that in determining its net wealth, (i) amounts credited to the special reserve account, and (ii) amounts credited to the shareholders account should be excluded, and (iii) deduction should be given on account of liability relating to debentures. The Wealth-tax Officer, however, determined the net value of the assets of the assessees business, by reference to the balance-sheets, as on the respective valuation dates, and did not allow any of the claims made by the assessee.
The assessee appealed before the Appellate Assistant Commissioner, who rejected the claim for deduction of amount credited to the 'special reserve account' with the following observation :
'Clause (e) of section 4(1) Calcutta Tramways Act provides that the special reserve will eventually accrue to the benefit of the Government. This eventuality cannot occur before January, 1972, and after that date also it may or may not occur. Until the eventuality occurs the appellant-company has absolute powers of disposal over the funds represented by the special reserve. This means that, until that time, the appellant is the full owner of these assets. The liability to pay the Government will arise only after January, 1972. Therefore, this was not an ascertained liability on the valuation date. Therefore this special reserve cannot be considered as a liability and be allowed as a deduction.'
He also rejected the claim for deduction of amounts credited to 'shareholders account' on the following ground :
'As regards the shareholders reserve, the claim of the appellant is less well-founded. After all, all the assets of the company belong to the shareholders. The shareholders reserve is only a portion of the assets of the company. Therefore, what the appellant owes itself cannot be allowed as a deduction will computing the wealth. Moreover, the amount of the credit of the shareholders account is not payable to the shareholders on demand. Therefore, it has not become a liability on the valuation date; it cannot, therefore, be allowed as a deduction.'
He, however, allowed the claim for deduction of liability for debentures in the following language :
The Wealth-tax Officer disallowed this claim because these were liabilities in London, outside India. The debentures are secured on the general assets of the company. The Wealth-tax Officer has found that Pounds 427,786 (this figure is subject to verification by the Wealth-tax Officer in consulation with the appellant) are assets outside India. If this is deducted from the debentures value, then a balance of Pounds 66,275 is left. This is secured on the assets of the company in India. So they must be treated as debts located in India. Even if it is not considered as debts located in India, under section 7 of the Wealth-tax Act, when the Wealth-tax Officer has to find out the market value of the assets of the appellant, he has to deduct the debentures secured on assets. After all, any person who buys the assets of the company will buy them subject to the debentures liability of Pounds 66,275 mentioned above. Therefore, both under section 7(1) and 7(2) of the Wealth-tax Act, the appellant is entitled to the deduction of Pounds 66,275. The Wealth-tax Officer will allow this as a deduction.'
As against the order of the Appellate Assistant Commissioner, the assessee and the Wealth-tax Officer both appealed before the Appellate Tribunal. The Tribunal affirmed the order of the Appellate Assistant commissioner in so far as disallowance of the claim for deduction of 'shareholders accounts' was concerned, with the following observation:
According to clause 4(1)(d), the company had to set aside in each accounting year certain sums in a fund called the shareholders account and the dividends to the shareholders for the year 1950-51, and subsequent years were to be paid out of shareholders account. The learned counsel for the company contended before us that the amounts standing to the credit of the shareholders account on the respective valuation dates could be only utilised for the purpose of declaring dividend to the shareholders, and had, therefore, been taken out of the capital fund of the company itself. According to him, therefore, the amount should have been deducted from the net wealth of the company. The contention of the learned counsel is not tenable. The company is only entitled to deduct from the aggregate value of its assets only debts owned by it and in no sense of the term can the amounts lying to the credit of the shareholders account be called debts owed by the company. It is true that according Calcutta Tramways Act, 1951, the amount can be disbursed only as a dividend to the shareholders, but the right of the shareholders to receive the dividend does not arise till the company takes the initiative and declares the dividend. In effect, therefore, the amount remains a part of the capital of the company till the dividend is declared and was rightly included in its net wealth by the wealth-tax authorities.'
The Tribunal, however, reversed the order of the Appellate Assistant Commissioner, in so far as claim concerning 'special reserve account' was concerned, on the following ground :
'In our opinion, the amounts held in the special reserve account were not includible in the companys net wealth. In the first place, the determination of the net value of the assets of the companys business as a whole has been made under section 7(2) of the Wealth-tax Act, in this case, having regard to the balance-sheet of the companys business as on valuation date. The section itself permits such adjustments as the circumstances of the case may require. Now, there can be no doubt that the case of the assessee-company is a very special case. It is the case of a public utility company which is bound to run its undertaking within the rigid framework of an Act of state legislature. Within that framework, there is a provision for setting apart surplus profits, after ensuring a fair return to the shareholders, for the benefit of the Government. It leaves no choice with the assessee-company to dispose of the balance in that account in any manner other than that prescribed in the Act. Except in the event of a loss in the undertaking, the balance in the special reserve account has got to be accumulated for the ultimate benefit of the Government. Any other inroad into that reserve will mean a breach of the agreement between the company and the State Government and violation of the Act of 1951. It is, therefore, not altogether correct for the wealth-tax authorities to the state that the assessee-company was the full owner of the amounts until 1st January, 1972, which is the proposed date of purchase of the undertaking by the Government. We are, therefore, of the view that the company held these amounts on the Government account and, in determining the value of the net assest of the companys business as a whole, it would not be proper to take into account amounts which it was accumulating for the benefit of the Government who was a kind of sleeping partner in the undertaking for duration. To the extent that the amounts accumulated in the accounts were invested in the companys undertaking, the assets of the undertaking did not belong to the company within the meaning of section 2(m) of the Wealth-tax Act and the assessee-company was entitled to the deduction of these amounts from the determination of its net wealth as a necessary adjustment required by the peculiar circumstances of its case.'
So far as debentures were concerned, the Tribunal also reversed the order of the Appellate Assistant Commissioner with the following observation :
The assessee-company is not a resident in India. The debts arising out of the debentures concerned are debts owed to parties in the United Kingdom. They are, therefore, clearly debts located outside India. The mere fact that the debts are secured by floating charge on the debtors companys assets in India does not change the location of the debts. Nor are we impressed with the argument of the Appellate Assistant Commissioner that in determining the market value of the assets of the company the debentures have to be deducted in any case. The Wealth-tax Act has a very clearly defined scheme according to which there has to be an aggregate of assets on one side and an aggregate of debts on the other and the aggregate of debts has to be deducted from the aggregate of assets in order to arrive at the net wealth. Section 7 , both in sub-sections (1) and (2), is concerned only with the net value of the assets and it does not make any provision for deduction of debts or liabilities. For that deduction, resort has to be had to section 2(m) which permits only the deduction of debts owed by the company subject to a few exceptions. Even when the valuation of the assets of an assessee has been made under section 7(1) or 7(2), the deduction was liability is governed by section 2(m). Ordinarily, these debts would have been deductible under section 2(m) , but section 2(m) is controlled by section 6 which in the case of certain classes of assessees excludes assets on the one hand and debts on the other if located outside India from the computation of their net wealth. Having regard to the scheme, the relief given by the Appellate Assistant Commissioner was not in accordance with law. The net wealth of the company will, therefore, be increased by the amounts of debentures allowed to be deducted by the Appellate Assistance Commissioner.'
Thereupon, both the assessee and the revenue applied for reference of certain questions to this court, limited to their respective unsuccessfulness before the Tribunal. The Tribunal referred the following questions before this court :
At the instance of the revenue
'(1) Whether, on the facts in the circumstances of the case, the amounts of Pounds 199,407, Pounds 192,940 and Pounds 98,017 standing in the special reserve account on the books of the assessee-company were deductible in determining the net wealth of the company for the assessment years 1957-58, 1958-59 and 1959-60 respectively ?'
At the instance of the assessee
'(2) Whether, on the facts and in the circumstances of the case, the amounts of Pounds 154,434, Pounds 208,934 and Pounds 262,811 standing in the shareholders accounts as on respective valuation dates were deductible in determining the net wealth of the company for the assessment years 1957-58, 1958-59 and 1959-60 respectively ?
(3) Whether, on the facts and the circumstances of the case, the amounts of Pounds 66,275, Pounds 131,189 and Pounds 274,587 out of the debentures of the company were allowable as debts owed by the company in the light of section 2(m) read with section 6 of the Wealth-tax Act ?'
We propose to take up questions Nos. 2 and 3 for consideration first of all, because that was order in which we heard the learned counsel for contending parties.
Mr. Ginwalla, learned counsel for the assessee, submitted that, under clause 4(1)(d) of the agreement, the assessee was liable to set apart, in each accounting year, in a fund called 'shareholders account,' the following sums :
(i) Pounds 87,457,
(ii) 4 per cent. of any additional outside share capital raised by the assessee with the consent of the West Bengal Government after the date of the agreement after August 30, 1951.
The amounts so funded in the 'shareholders account' were to be employed, under clauses 5(2) and 5(3) of the agreement :
(a) in payment of dividend to shareholder in respect of the year ending December 31, 1951, and in each subsequent year;
(b) in servicing of the debenture stock of the assessee (that is to say, any sum set apart for or used in the repayment of the debenture stock) in the year ending December 31, 1951, and in subsequent years,
He submitted that the said reserve was a liability and should have been deducted in computing the net wealth of the assessee.
He further submitted that the said reserve was not transferable and was of no value to the assessee, except that it would be utilised for the purposes agreed upon. He also submitted that the liability was not a contingent liability but was impressed with a character. Lastly, he submitted, that the Wealth-tax Officer went wrong in valuing a liability when section 7(2)(a) of the Wealth-tax Act entitled him only to value assets. We are not satisfied with these arguments. Net wealth, under section 2(m) , is no doubt to be calculated by excluding certain debts. The excess of assets over debts is the amount of net wealth. Now, does the 'shareholders account' represent the account of the debts of the assessee We find from clause 5 of the agreement that the 'shareholders account' is to be utilised in paying dividend to shareholders and in repayment of debenture stock. Now, 'debt is a sum of money which is now payable or will become payable in future by reason of a present obligation : debitum in praesenti, solvendum in futuro... If there is a debt, the fact that the amount is to be ascertained does not make it any the less debt, if the liability is certain and what remains is the quantification of the amount : (vide Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax). So far as dividends are concerned, the Supreme Court indicated when a dividend became a debt owed by a company, in Kesoram Industries and Cotton Mills Ltd. case, in the following language :
'The directors cannot distribute dividends but they can only recommend to the general body of the company the quantam of dividend to be distributed. Under section 217 of the Indian Companies Act, there shall be attached to every balance-sheet laid before a company in general meeting, a report by its board of directors with respect to, inter alia, the amount, if any, which it recommends to be paid by way of dividend. Till the company in its general body meeting accepts the recommendation and declares the dividend, the report of the directors in that regards is only a recommendation which may be withdrawn or modified as a case may be. As, on the valuation date, nothing further happened than a mere recommendation by the directors as to the amount that might be distributed as dividend, it is not possible to hold that there was any debt owed by the assessee to the shareholders on the valuation date.'
The money funded in 'shareholders account' is not debt according to the above test. It does not appear what dividend, if any, was declared by the assessee, which become payable of this account. If there was no dividend declared, the money in the account remained part of the assets of the assessee, to be utilised in payment of dividend, if and when declared.
So also is the position with the provision for servicing the debenture stock, out of this account, until materialisation, that is, until set apart or used by the company. The charge under the agreement is on what is so set apart and not on the general fund. For the reasons aforesaid, the answer to question No. 2 should be in the negative and against the assessee.
Turning now to question No. 3, we need remind ourselves that the assessee is not a resident of India. The debenture debts were all due to the creditors in the United Kingdom, although secured by a floating charge on the assessees assets in India. If the debts be treated as located outside India, then, under section 6 of the Wealth-tax Act, they have to be excluded from consideration in computing the net wealth of the assessee. The question is, what is the location of the debt.
Mr. Ginwalla submitted that the debentures were specially debts, that is to say, debts secured by bonds or mortgages. The law relating to specialty debt is thus summarised in Halsburys Laws of England (3rd edition), volume 15, article 115 :
'Simple contract debts, including those owing under bills of exchange and promissory notes, are situated where the debtor resides. A debtor company may for this purpose be resident in any country where it has a branch office.
A specialty debt is in general an asset situate where the instrument is physically situate. In particular a judgement debt is situate where the judgement is recorded. A debt secured by mortgage of land is in character primarily a debt, with an accessory right to resort to the land for payment, not an estate in the land measured by the amount of debt; its locality as an asset of the mortgagee is, therefore, to be determined prima facie under the rules relating to debts.'
Mr. Ginwalla, however, submitted that the Wealth-tax Officer was required to value the net wealth. If the Indian assets of the assessee were encumbered by the floating charge of debentures, the value of the assets was reduced to that extent and debt should be treated as located at the place where the assets were situate.
In this context, our attention was drawn to a judgment of the Privy Council in Walsh v. Queen, to an Irish decision in Lawson v. Commissioners of Inland Revenue and to another decision of the Privy Council in Toronto General Trusts Corporation v. King. What happened in the last mentioned was that certain mortgages secured upon land held by the testator in the Province of Alberta who was domiciled and died in the Province of Ontario, were subjected to succession duty in the Province of Alberta. The question raised in appeal before the Privy Council, was whether they were in fact so subject. In upholding the claim to duty, Lord Cave observed :
'...A simple contract debt is to be deemed to be within the area of the local jurisdiction within which the debtor for the time being resides, the locality of a specialty debt is the place where the specialty is found at the time of the creditors death... This rule has been recognised in numerous decisions both here and in the Dominion of Canada, and the general principle must be regarded as well settled. But in the present case there is the difficulty in applying the rule, owing to the fact that the each of the mortgages was created and evidenced by duplicate deeds, and that at the date of the testators death one of the deeds was in the Province of Ontario and other in the Province of Alberta. An attempt was made to show that, having regard to the terms of the Land Titles Act, the duplicate of each mortgage held by the testator was the principal or dominant instrument, but in their Lordships opinion no such ascendancy was made out, and the deed produced to and retained by the registrar under the provisions of the statute was not of less importance than the duplicate delivered to and retained by the mortgagee....
In the present case the circumstances, other than the single fact of the presence of a duplicate deed in the Province of Ontario, are all in favour of the conclusion that the mortgages were situate in Alberta. It is established by formal admissions made in the course of the proceeding that at the date of the execution of the mortgages, the mortgagors were resident in the Province of Alberta, and that the place of payment of the debt was in each case in the personal obligation of the mortgages, but also the mortgages which created interests in lands in Alberta, and this fact cannot be put out of account. See Walsh v. Queen. The mortgages are executed in a form prescribed by the Land Titles Act of Alberta, and derive their force and effect from the terms of that statute, and this is not less the case because a seal has been voluntarily affixed to each mortgage. The administrator cannot enforce any of his securities without procuring registration of his succession in the Alberta registry and relying on documents registered in that province; and though the debtors may be prepared to pay the debts secured without putting the administrator to the trouble of suing or of realising his securities, it is plain that they would not do so except on the terms of the mortgages lands being released in accordance with Alberta law. In short, the administrator cannot recover the debts or have the benefit of his securities without claiming the protection and assistance of the Alberta law; and the case falls within the test laid down by Lord Cranworth in Wallace v. Attorney-General as to the limitation on the imposition of succession duty, namely, that such a duty must be considered to be imposed only on those who claim title by virtue of law of the taxing State.
When all these circumstances are taken into account, the only possible conclusion appears to be that the mortgages in question in this case were at the testators death situate in Alberta.'
In the case of Delhi Cloth and General Mills Co. Ltd v. Harnam Singh, the Supreme Courts points out :
That a debt is property is, we think clear. It is a chose in action and is heritable and assignable and it is treated as property in India under the Transfer of Property Act which calls it an actionable claim; sections 3 and 130. But to give in position in space is not easy because it is intangible and so cannot have location except notionally and in order to give it notional position rules have to be framed along arbitrary lines.'
In such matters, complications under the private international law are sought to be resolved by some, by the 'situs rule', by others by 'the proper law of contract', that is to say, the system of law by reference to which the contracts are made or that which the transaction has its closest and most real connection. We are not bothered with such refinement in the present case. Here a British company issued debentures, all held by holders in the United Kingdom. The specialties in the United Kingdom and the debt was payable in that country. These go to make the debt as one situate outside India, notwithstanding that the properties secured are in India. We therefore propose to answer question No. 3 in the negative and against the assessee.
We now turn to question No. 1. Money in the special reserve account is, under clause 4(1)(e) of the agreement, eventually to accrue to the benefit of the Government of West Bengal, that is to say, to be applied in making up the purchase price. The purchase date is January 1, 1972, but time is not the essence of the contract, as appears from clause (8) of the agreement, hereinbefore quoted. Then again, money transferred to this account is not irrevocably transferred. Losses may be set off against credits in this account. In the matter of transfer of loss against this credit, the decision of the assessee is final. Thus, when the time arrives for the Government to take the benefit if this account, everything may have eaten up by loss. With this discretion of transferring losses against this account, the assessee had domain over this account and the wealth does not fall outside the definition of section 2(m). We therefore answer question No. 1 in the negative and against the assessee.
The Commissioner is entitled to costs of this reference.
K.L. ROY J. - I agree.
Questions answered in the negative.