1975 (7) TMI 60 - HC - Wealth-tax

Inclusion of Reserves in Net Wealth Calculation: Tax, Gratuity Provisions Analyzed

The court held that the capital reserve, contingent reserve, and development reserve are includible in determining the net wealth of the assessee. The ... - Issues Involved:1. Inclusion of capital reserve, contingent reserve, and development reserve in determining the net wealth of the assessee.2. Deduction of provision made for gratuities to employees in determining the net wealth.3. Deduction of provision made for taxation in determining the net wealth.Issue-wise Detailed Analysis:1. Inclusion of Reserves in Net Wealth:The first issue revolves around whether the capital reserve of Rs. 43,08,785, the contingent reserve of Rs. 7,53,433, and the development reserve of Rs. 7,22,477 should be included in determining the net wealth of the assessee.- Capital Reserve:The capital reserve was created from contributions by consumers for laying service lines, with Rs. 43,08,785 standing to its credit. The Supreme Court's decision in the case of Calcutta Electric Supply Corporation v. Commissioner of Wealth-tax was cited, emphasizing that the ownership of the assets on the valuation date is the key factor. The court concluded that the capital reserve should be included in the net wealth of the assessee as the balance-sheet showed these service connections as the assets of the assessee.- Contingent Reserve:The contingent reserve of Rs. 7,53,433 is mandated by the Electricity (Supply) Act, 1948. Despite the restrictions on its use and the requirement to hand it over to the purchaser in case of compulsory purchase, the court held that it remains an asset of the assessee. The court referenced the Supreme Court's decision in Calcutta Tramways Co. Ltd. v. Commissioner of Wealth-tax, which underscored that restrictions on the use of an asset do not change its ownership. Therefore, the contingent reserve is includible in the net wealth of the assessee.- Development Reserve:The development reserve of Rs. 7,22,477, created under paragraph VA of Schedule 6 to the Electricity (Supply) Act, 1948, is intended for reinvestment in the business. The court noted that the development reserve, like the contingent reserve, is an asset of the assessee. The court cited the case of Commissioner of Income-tax v. P. K. Badiani, which explained that development rebate is for the expansion of the industry. Thus, the development reserve is also includible in the net wealth of the assessee.2. Deduction of Provision for Gratuities:The second issue concerns whether the provision of Rs. 8,58,850 made for gratuities to employees should be allowed as a deduction in determining the net wealth of the respondent.- The court noted that this issue is covered by the Supreme Court decisions in Standard Mills Co. Ltd. v. Commissioner of Wealth-tax and Bombay Dyeing and Manufacturing Co. Ltd. v. Commissioner of Wealth-tax. In accordance with these decisions, the court answered the question in the negative and against the assessee, meaning the provision for gratuities is not deductible in determining the net wealth.3. Deduction of Provision for Taxation:The third issue pertains to whether the provision of Rs. 5,18,160 made for taxation in respect of the year ended on March 31, 1959 (assessment year 1959-60), should be allowed as a deduction in determining the respondent's net wealth.- The court acknowledged that this issue is covered by the Supreme Court's decision in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax. Consequently, the court answered the question in the affirmative and in favor of the assessee, meaning the provision for taxation is deductible in determining the net wealth.Conclusion:The court concluded that the capital reserve, contingent reserve, and development reserve are includible in determining the net wealth of the assessee. The provision for gratuities is not deductible, while the provision for taxation is deductible in determining the net wealth. The assessee was directed to pay the costs of the revenue.