1992 (5) TMI 41 - AT - Income Tax

Tribunal excludes Rs. 1,03,50,437 from net assets, directs deduction of tax liabilities from share valuation.

Paras V. Doshi Versus Income-Tax Officer.

The Tribunal directed the Wealth Tax Officer to exclude the sum of Rs. 1,03,50,437 from the net assets of E Ind. PL and to deduct the finalized tax ... High Court, Quoted Equity Shares, Tax Liability, Unquoted Shares Issues Involved:1. Valuation of unquoted equity shares of Echjay Industries Pvt. Ltd. (E Ind. PL) under Rule 1D of the Wealth-tax Rules, 1957.2. Deductibility of tax liability from assets, specifically the quantum of Rs. 2,47,25,618.Issue 1: Valuation of Unquoted Equity Shares of Echjay Industries Pvt. Ltd.The primary dispute revolves around the valuation of unquoted equity shares of Echjay Industries Pvt. Ltd. (E Ind. PL) using the break-up value method as per Rule 1D of the Wealth-tax Rules, 1957. The contention is whether the excess of assets over liabilities amounting to Rs. 1,03,50,437, transferred to Echjay Forgings Pvt. Ltd. (E Forgings PL) under a Scheme of Arrangement approved by the Bombay High Court, should be considered in the valuation.The assessees argue that since the Scheme of Arrangement, effective from 1-1-1983, was approved on 3-9-1986, and the balance sheet for the year ending 31-12-1983 was finalized on 18-3-1987, the said amount should be excluded from the valuation of E Ind. PL. The Departmental authorities, however, did not accept this claim, stating that the shareholders of E Ind. PL would receive shares of E Forgings PL, and thus the transfer did not affect the valuation.The Tribunal found merit in the assessee's argument, noting that the balance sheet of E Ind. PL as on 31-12-1983 should reflect the reduction of Rs. 1,03,50,437 from the General Reserves, as per the Scheme of Arrangement. The Tribunal concluded that the net assets transferred to E Forgings PL should not be considered as part of E Ind. PL's net assets for the purpose of valuation under Rule 1D. Therefore, the Wealth Tax Officer (WTO) was directed not to include the sum of Rs. 1,03,50,437 in the net assets of E Ind. PL.Issue 2: Deductibility of Tax Liability from AssetsThe second dispute concerns the deductibility of a tax liability amounting to Rs. 2,47,25,618 from the assets of E Ind. PL. The assessees claimed that the tax liabilities for the years 1976-77 to 1984-85 had been crystallized and finalized by the date of the balance sheet's finalization on 28-3-1987, and thus should reduce the break-up value of the equity shares.The Departmental authorities rejected this claim, relying on sub-clause (e) of clause (ii) of Explanation II below Rule 1D, which excludes certain liabilities from being treated as liabilities for valuation purposes.The Tribunal examined the submissions and found that once tax liabilities are quantified and finalized, they cease to be mere provisions and should be considered in the valuation. The Tribunal agreed with the assessee's interpretation that the phrase 'provision for taxation' in sub-clause (e) did not apply to finalized tax liabilities. Therefore, the Tribunal accepted the assessee's contention in principle but left the quantification to the Assessing Officer, directing that the additional tax liability finalized up to the date of the balance sheet should be deductible in the valuation under Rule 1D.Conclusion:The appeals were allowed, with the Tribunal directing the WTO to exclude the sum of Rs. 1,03,50,437 from the net assets of E Ind. PL and to deduct the finalized tax liabilities from the valuation of the shares, subject to quantification by the Assessing Officer.