Advance tax paid cannot be treated as a liability when valuing unquoted equity shares under the wealth-tax break-up method.
While valuing unquoted equity shares under Rule 1D of the Wealth-tax Rules, advance tax paid could not be treated as a liability by adjusting the provision for taxation. Explanation II(i)(a) expressly directs that advance tax paid under the relevant income-tax provisions shall not be treated as an asset, and Explanation II(ii)(e), which excludes only the excess provision for taxation other than that amount, must be read harmoniously with it so that each clause has effect. The rules form part of the statutory code and must be construed to give effect to every part of the scheme. On that construction, the contrary approach was rejected and the issue was answered in favour of the assessee.
Issues: Whether, while valuing unquoted equity shares under Rule 1D of the Wealth-tax Rules, 1957, the amount paid as advance tax can be treated as a liability by adjusting the provision for taxation, instead of being excluded from assets.
Analysis: Rule 1D and its Explanations require the assessing authority to compute break-up value by deducting liabilities from assets shown in the balance-sheet, but Explanation II(i)(a) expressly directs that advance tax paid under section 18A of the Indian Income-tax Act, 1922 or section 210 of the Income-tax Act, 1961 shall not be treated as an asset. Explanation II(ii)(e), which excludes from liabilities only the excess provision for taxation other than the amount referred to in clause (i)(a), must be read harmoniously with clause (a); otherwise clause (a) would be rendered ineffective. The Rules are part of the statutory code and must be construed to give effect to every part of them. On that construction, advance tax paid cannot be treated as a liability and the contrary view would defeat the legislative scheme.
Conclusion: The advance tax paid cannot be treated as a liability while valuing the shares. The reference was answered in the affirmative, in favour of the assessee.
TaxTMI 
AI Drafter ✕
TaxTMI 
