Depreciation reserves must be counted as liabilities in unquoted equity share valuation under the wealth-tax rules.

Under rule 1D of the Wealth-tax Rules, depreciation reserves set apart in the balance-sheet are not excluded as ordinary reserves for valuing unquoted equity shares. The rule's second Explanation excludes reserves generally, but specifically preserves reserves created towards depreciation, and that expression is of broad application. The note states that such depreciation reserves, including initial depreciation reserve, remain part of the liabilities side for share valuation and must be taken into account in computing market value under the rule.

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Issues: Whether, while computing the value of unquoted equity shares under rule 1D of the Wealth-tax Rules, depreciation reserve set apart in the balance-sheet could be treated as a reserve excluded from liabilities.

Analysis: Rule 1D prescribes the method for computing the market value of unquoted equity shares. Under the second Explanation, certain assets and liabilities shown in the balance-sheet are to be disregarded for the computation. Clause (c) excludes reserves, but expressly saves reserves set apart towards depreciation. The expression "depreciation" is of general import and is not confined to any particular kind of depreciation. Accordingly, depreciation reserves are to be treated as liabilities shown in the balance-sheet and are not excluded from the computation under the rule.

Conclusion: The depreciation reserve, including the initial depreciation reserve, could not be excluded from the liabilities while valuing the shares under rule 1D; the issue was decided in favour of the assessee.

Final Conclusion: The reference was answered only on the valuation issue, and the court held that depreciation reserve had to be taken into account as a liability for computing share value under the wealth-tax valuation rule.

Ratio Decidendi: Depreciation reserves expressly remain within the liabilities side of the balance-sheet for share valuation under rule 1D and cannot be excluded as reserves.

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