1988 (3) TMI 16 - HC - Income Tax

Court clarifies deduction rules for taxation liabilities under Wealth-tax Rules, 1957

Commissioner Of Income-Tax Versus M. Lakshmaiah And Another

Commissioner Of Income-Tax Versus M. Lakshmaiah And Another - [1988] 174 ITR 4, 74 CTR 5, 38 TAXMANN 220 Issues Involved:1. Whether the provision for advance tax or advance tax paid should be deducted from the provision for taxation while determining the market value of unquoted equity shares under rule 1D of the Wealth-tax Rules, 1957.Issue-Wise Detailed Analysis:1. Deduction of Provision for Advance Tax or Advance Tax Paid:The primary issue addressed in this judgment is whether the provision for advance tax or the advance tax paid should be deducted from the provision for taxation when calculating the market value of unquoted equity shares according to rule 1D of the Wealth-tax Rules, 1957.The judgment clarifies that the market value of unquoted equity shares should be computed as per rule 1D, which includes specific guidelines and exclusions. According to Explanation II of rule 1D, any amount paid as advance tax should not be treated as an asset. Additionally, certain liabilities listed in clause (ii) of Explanation II should be disregarded, including any excess provision for taxation over the tax payable on book profits.The court explained that the legislative intent is to ensure that the total tax liability for the relevant assessment year is accurately reflected. The advance tax paid should be excluded from the assets side, and only the necessary provision for taxation should be deducted as a liability. Any excess provision for taxation, beyond what is required after accounting for advance tax paid, should be disregarded.The assessees argued that the entire provision for taxation should be allowed as a deduction without exclusion, even if it results in a double deduction of the same tax amount. The court rejected this argument, stating that allowing a liability greater than what is necessary for paying taxes on book profits is not the legislative intention.The court reviewed various high court decisions on this matter, including those from the Gujarat, Bombay, Karnataka, and Punjab and Haryana High Courts. The court disagreed with the Gujarat and Bombay High Courts' view that the entire provision for taxation should be allowed without exclusion. Instead, the court aligned with the Karnataka and Punjab and Haryana High Courts, which interpreted rule 1D to permit the deduction of the provision for taxation only to the extent necessary to cover the total tax liability for the relevant assessment year.The court noted discrepancies in the Wealth-tax Officer's calculations for the assessment years under consideration, including incorrect total asset figures and improper exclusion of the entire provision for taxation. The court directed the Tribunal to verify the correctness of the Wealth-tax Officer's calculations based on the company's balance-sheet figures and to grant appropriate relief to the assessees if necessary.Conclusion:The reference was answered in favor of ensuring that only the necessary provision for taxation, after accounting for advance tax paid, should be deducted as a liability under rule 1D. The Tribunal was directed to re-evaluate the calculations and provide relief accordingly. The court certified the case as fit for appeal to the Supreme Court due to the conflict of judicial opinion on this matter.