1965 (11) TMI 41 - SC - Wealth-tax

Valuation of Assets for Wealth-tax Upheld, Dividend Deductibility Rejected, Tax Provisions Allowed

Kesoram Industries And Cotton Mills Limited Versus Commissioner Of Wealth-Tax (Central), Calcutta

The court affirmed the valuation of assets as per the balance-sheet for Wealth-tax purposes, rejected the deductibility of proposed dividend in computing ... Whether, on the facts and in the circumstances of the case, the Wealth-tax Officer was justified in taking the value of the assets of the assessee as shown in its balance-sheet on the relevant valuation date ? Whether, on the facts and in the circumstances of the case, in computing the net wealth of the assessee the amount of proposed dividend was deductible from its total assets ? Whether, on the facts and in the circumstances of the case, in computing the net wealth of the assessee, the amount of the provision for payment of income-tax and super-tax in respect of the year of account was a debt owed within the meaning of section 2(m) of the Wealth-tax Act, 1957, and as such deductible in computing the net wealth of the assessee ? Held that:- It was open to the assessee to convince the authorities that the said figure was inflated for acceptable reasons ; but it did not make any such attempt. It was also open to the Wealth-tax Officer to reject the figure given by the assessee and to substitute in its place another figure, if he was, for sufficient reasons, satisfied that the figure given by the assessee was wrong. But he did not find any such reasons to do so. When he accepted the figure shown by the assessee himself, he did the right thing and there is nothing to complain about. The High Court was right in answering the first question in the affirmative. Till the company in its general body meeting accepts the recommendation and declares the dividend the report of the directors in that regard is only a recommendation which may be withdrawn or modified as the case may be. As on the valuation date nothing further happened than a mere recommendation by the directors as to the amount that might be distributed as dividend, it is not possible to hold that there was any debt owed by the assessee to the shareholders on the valuation date. The High Court rightly answered the second question in the negative. We agree with the conclusion arrived at by the Gujarat High Court. We, therefore, hold that the liability to pay income-tax is a debt within the meaning of section 2(m) of the Wealth-tax Act and it arises on the valuation date during the accounting year. Issues Involved:1. Valuation of assets for Wealth-tax purposes.2. Deductibility of proposed dividend in computing net wealth.3. Deductibility of provision for income-tax and super-tax as a debt owed.Detailed Analysis:1. Valuation of Assets for Wealth-tax Purposes:The first issue was whether the Wealth-tax Officer was justified in taking the value of the assets of the assessee as shown in its balance-sheet on the relevant valuation date. Section 7 of the Wealth-tax Act lays down how the value of assets is to be ascertained. According to Section 7(1), the value of any asset, other than cash, shall be estimated to be the price it would fetch if sold in the open market on the valuation date. However, Section 7(2) allows the Wealth-tax Officer to determine the net value of the assets of the business as a whole, having regard to the balance-sheet of such business as on the valuation date and making necessary adjustments.The balance-sheet as on March 31, 1957, showed the appreciated value on revaluation of the assets at Rs. 2,60,52,357. The assessee argued that the revaluation was done for other purposes and did not represent the real value of the assets. However, the court found no evidence to support this claim and upheld the Wealth-tax Officer's decision to accept the valuation shown in the balance-sheet. The High Court's affirmative answer to the first question was thus upheld.2. Deductibility of Proposed Dividend in Computing Net Wealth:The second issue was whether the amount of proposed dividend was deductible from the total assets in computing the net wealth of the assessee. Under Section 2(m) of the Wealth-tax Act, 'net-wealth' means the amount by which the aggregate value of all the assets of the assessee on the valuation date exceeds the aggregate value of all the debts owed by the assessee on the said date. The directors of the assessee-company showed a sum of Rs. 15,29,855 as the amount of dividend proposed to be distributed for the year ending March 31, 1957. However, this dividend was declared only on November 27, 1957.The court held that the proposed dividend was merely a recommendation by the directors and not a debt owed by the company on the valuation date. The High Court rightly answered the second question in the negative.3. Deductibility of Provision for Income-tax and Super-tax as a Debt Owed:The third issue was whether the provision for payment of income-tax and super-tax in respect of the year of account was a debt owed within the meaning of Section 2(m) of the Wealth-tax Act and thus deductible in computing the net wealth of the assessee. The High Court held that although the assessee was liable to pay income-tax on the valuation date, the actual amount of the liability was not ascertained until the Finance Act was passed and the determination made by the income-tax authorities. Therefore, no debt was owed by the assessee on the valuation date.The court examined various legal definitions and precedents to determine what constitutes a 'debt.' It concluded that a debt is a present obligation to pay an ascertainable sum of money, whether payable in praesenti or in futuro. A liability to pay income-tax is a present liability, though it becomes payable after it is quantified. Thus, there is a perfected debt at the latest on the last day of the accounting year, not a contingent liability.The court held that the liability to pay income-tax is a debt within the meaning of Section 2(m) of the Wealth-tax Act and arises on the valuation date during the accounting year. Therefore, the High Court's answer to the third question was modified, and the liability to pay income-tax was deemed deductible.Separate Judgment:Shah J. delivered a separate judgment, disagreeing with the majority on the third issue. He argued that the liability to pay tax arises only when the Finance Act becomes operative on the first day of April of the assessment year. Therefore, the estimated amount of tax in the balance-sheet could not be considered a debt owed on the valuation date. He also rejected the alternative argument based on Section 7(2) of the Wealth-tax Act, stating that it only provides machinery for valuation of assets, not for determining net wealth.Conclusion:The court answered the first question in the affirmative, the second question in the negative, and the third question in the affirmative, thereby modifying the High Court's order. The parties were directed to bear their own costs.