1962 (4) TMI 129 - HC - Income Tax

Proposed dividends not deductible under Wealth Tax Act

Kothari Textiles Ltd. and Ors. Versus Commissioner of Wealth Tax

The court held that proposed dividends on preference and ordinary shares are not deductible in computing the net wealth of the assessee company under the ... - Issues Involved:1. Proper interpretation of the expression 'net wealth' as defined in the Wealth Tax Act.2. Whether proposed dividends on preference and ordinary shares are deductible in computing the net wealth of the assessee company under Section 2(m) of the Act on the valuation date.3. Whether the provision for payment of dividends is deductible for arriving at the net wealth of the assessee for the assessment year.Detailed Analysis:1. Proper Interpretation of 'Net Wealth' as Defined in the Wealth Tax Act:The primary issue in all four tax references was the interpretation of 'net wealth' under the Wealth Tax Act, specifically whether proposed dividends should be deducted when computing net wealth. Section 3 of the Wealth Tax Act charges tax on the net wealth of a company on the valuation date. 'Net wealth' is defined in Section 2(m) as the value of all assets minus the value of debts owed on the valuation date. The court emphasized that the Wealth Tax Officer has the discretion to make adjustments to the balance sheet, ensuring that only actual liabilities are deducted from the net wealth.2. Deductibility of Proposed Dividends on Preference and Ordinary Shares:T.C. No. 210 of 1959:The assessee company sought to deduct proposed dividends on preference and ordinary shares from its net wealth. The Income Tax Officer, Appellate Assistant Commissioner, and Tribunal all disallowed these deductions, stating that no debt is created in favor of a shareholder until a dividend is declared by the general body. The court agreed, stating that a mere recommendation by the directors does not create a liability. The balance sheet prepared by directors is provisional and does not create a debt until the general body approves the dividend.T.C. No. 94 of 1960, T.C. Nos. 100 and 104 of 1961:Similar issues arose in these cases, where the assessees sought to deduct proposed dividends from their net wealth. The court reiterated that the liability to pay dividends only arises after the general body declares the dividend. The court dismissed the argument that the preparation of accounts indicating proposed dividends creates a liability, emphasizing that the general body has the authority to approve or modify the recommendation.3. Provision for Payment of Dividends and its Deductibility:The court examined whether the provision for dividends in the balance sheet should be considered a liability. The court held that the Wealth Tax Officer is competent to examine the balance sheet and determine if any amounts shown as liabilities are not actual liabilities on the valuation date. The court rejected the argument that the balance sheet should be accepted as it is without such examination.Additional Considerations:The court also addressed the argument that preference shareholders have a different standing. It concluded that preference shareholders are entitled to preferential treatment only if and when dividends are declared by the general body. The court cited various legal authorities to support its position that no liability for dividends exists until a formal declaration by the general body.Conclusion:The court answered all the questions referred to it in the negative, holding that proposed dividends do not constitute debts owed by the company on the valuation date and thus cannot be deducted when computing net wealth. The assessees were ordered to pay the costs of the department.