TaxTMI 
TaxTMI 
1996 (8) TMI 38
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....only being the provisional demand) as against Rs. 1,66,48,868 being the estate duty finally determined as payable, in valuing the share of Amalgamations Ltd.? 3. Whether the Tribunal was right in restricting the deduction to Rs. 35,50,453 being the balance of provisional demand of estate duty, as against Rs. 1,36,48,868 being the balance of estate duty finally determined as payable in valuing the shares in Amalgamations Ltd.? " Tax Cases Nos. 870 and 871 of 1984 : " 1. Whether, on the facts and in the circumstances of the case and having regard to Circular No. 2(WT) of 1967, dated October 31, 1967, and Circular No. 118, dated September 15, 1973, the Tribunal was right in holding that the estate duty liability of the late S. Anantharamakrishnan as on the valuation dates relevant for the assessment years 1966-67 and 1967-68 should be deducted while arriving at the valuation of the shares of the assessee in Amalgamations Ltd., Madras? 2. Whether the Tribunal's view that the estate duty liability belonged to the company and that the liability should be taken as shown in the balance-sheet as it appeared in the directors' report is sustainable in law? " The assessee is the....
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....rovision for the liability, but the directors' report mentioned that arising out of the estate duty proceedings of the estate of the late S. Anantharamakrishnan, this company has been treated as " an accountable person " under the Estate Duty Act, and has been served with a provisional demand. The directors are bringing this to the notice of the shareholders. The provisional demand was to the tune of Rs. 65,50,542.73. But the amount of demand was not indicated anywhere in the report. In the accounts as on June 30, 1966, relevant for the assessment year 1967-68, an amount of rupees thirty lakhs being a part payment of the provisional demand was debited in the profit and loss account and there was also a note (Note No. 4) to the profit and loss account reading as under. " Balance estate duty payable as an accountable person as per the Estate Duty Controller's provisional demand Rs. 35,50,453. " The estate duty liability, which was finally determined long after the valuation dates was Rs. 1,66,48,868 and this amount was claimed by the assessee as a deduction from the average value and the computation of the value was given by the assessee for the 100 per cent. holdings in Amalgamat....
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....ax (Appeals). The first appellate authority for the proposition that amounts payable much later either in instalments or otherwise, are also a liability in praesenti and not a contingent liability, and, therefore, to be reckoned as such, placed reliance upon the decisions in CWT v. Kantilal Manilal [1973] 88 ITR 125 (Guj) and CWT v. Ranganayaki Gopalan [1973] 92 ITR 529 (Mad). In the opinion of the first appellate authority, estate duty being a charge on the assets of a controlled company is an allowable deduction, since that liability was brought on record for all the three years in the directors' report, though it was not so in so far as the first year is concerned. According to the Commissioner of Income-tax (Appeals) once it is mentioned in the report a prospective buyer would take cognizance of the same, and as such the liability could be an allowable deduction. The Commissioner of Income-tax (Appeals) was also of the view that the circular, dated October 31, 1967, authorised adjustments for " non-recurring and extraordinary items of incomes and expenditure and losses ". In this view of the matter, the Commissioner of Income-tax (Appeals) allowed the appeals by a common ord....
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....ity on the basis of distribution of dividends by subsidiaries should be reckoned, it was held that there is no basis for allowing some other notional tax liability in violation of the concept of a single company and the principle of consolidation of profits on that basis enjoined by this method in the circulars and elsewhere. Accordingly, the cross-objection was dismissed. Learned counsel appearing for the assessee submitted that the Tribunal was not correct in reversing the order of the first appellate authority in the matter of deducting the estate duty liability while valuing the unquoted equity share of the private limited company. Learned counsel submitted that there was clear mention of estate duty liability in the directors' reports for the two later years under consideration, and death was mentioned in the report for the first year. According to him, the view of the Wealth-tax Officer that an intending purchaser would only look at the balance-sheet is too narrow and it was contended that such a view is not justified by the terms of the circular also. Since sections 17 and 19 of the Estate Duty Act fasten primary liability in the nature of a charge on the assessee's asset....
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....ear 1966-67 in the report of the directors, no figure was mentioned, but the provisional demand of estate duty was mentioned. In the assessment year 1967-68, in the profit and loss account, it was shown that a sum of Rs. 30 lakhs was paid and there is a balance of Rs. 33,50,453. The profit and loss account is nothing but an income and expenditure statement. The balance-sheet would show the assets and liabilities. The assets mentioned in the balance-sheet are based upon the profit and loss account. Therefore, the profit and loss account would form part of the balance-sheet. A prudent businessman who would like to purchase the unquoted equity shares, would definitely ask for not only the balance-sheet, but also the profit and loss account and the directors' report. Therefore, the information with regard to the estate duty liability contained in the profit and loss account for one year and in the directors' report for the other two years would definitely go to show that the estate duty liability was disclosed in the balance-sheet. In order to support this contention, reliance was placed upon the decision in C. S. Ramachary (Late) v. CWT [1991] 189 ITR 8 (Mad). Inasmuch as the estate d....
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....sed on the book value of the assets and liabilities disclosed in the balance-sheet ". This is precisely what has been done by the Wealth-tax Officer. The second component is an ascertainment of maintainable profits and capitalisation of the same at nine per cent. The average of both is then taken and a premium of 10 per cent. is added to arrive at the value to be included in the wealth. It was in connection with the ascertainment of " maintainable profits " that non-recurring and extraordinary items of income and expenditure and losses require adjustments. The adjustments contemplated are not to provide for them but to eliminate abnormal receipts and expenditure to arrive at the normal profits, which alone provide a stable basis for arriving at the capital value. The Commissioner of Income-tax (Appeals) misunderstood the scope of adjustments and wrongly applied what was mentioned in relation to the second component to the first component and that too in a sense which was just the opposite of what was intended. Acceptance of the assessee's case would lead to absurd results and further it would lead to a " nil " value, when the shares are very valuable. Unless the estate duty liab....
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....ate duty proceedings were completed on January 27, 1970. The estate duty liability was finally determined at Rs. 1,66,48,868. The point for consideration relates to valuation of unquoted equity shares in Amalgamations Ltd. which is a holding company. There is no dispute that the unquoted equity shares have to be valued in terms of the Board's Circulars Nos. 2(WT) of 1967, dated October 31, 1967, and 118, dated September 15, 1973. In working out the value of the shares in terms of the circulars, there are two points on which there was difference between the assessee and the Wealth-tax Officer. As pointed out, both sides want Circular No. 2 (WT) of 1967, dated October 31, 1967, as modified by Circular No. 118, dated September 15, 1973, to be followed. These circulars require the value to be worked out by adding 10 per cent. as premium to the average of (a) the break-up value of the shares based on the book value of the assets and liabilities disclosed in the balance-sheet, and (b) the capitalised value arrived at by applying a rate of yield of nine per cent. of its maintainable profits. It was this resultant value that had to be taken as representing the fair market value of the shar....
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....ssessment year 1965-66 is concerned, there is no mention of estate duty liability either in the balance-sheet, the profit and loss account or in the director's report. But in the directors' report, the death of S. Anantharamakrishnan alone was mentioned. It was pointed out that notice of death is no notice of liability to a company and much less to an intending buyer of shares in such companies. This is because generally companies are not liable to pay estate duty. It is true that there are primary liabilities as a floating charge on the assets of a controlled company under sections 17 and 19 of the Estate Duty Act, 1953. But that cannot be considered as a liability either admitted or demanded. A mere notice of death does not ipso facto indicate that there is any liability under section 17 read with section 19, because liability depends upon the transfers of assets, if any, made by the deceased to the company, and accruing of any benefits to such deceased in the three years before death. The company in question is a controlled company within the meaning of section 17. In the present assessment year under consideration, neither the balance-sheet nor the annexure by way of the profit....
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....and loss account and the directors' report, even though such a liability was not mentioned in the balance-sheet. Therefore, according to learned counsel appearing for the assessee, considering the facts arising in the present case, mentioning the death of S. Anantharamakrishnan in the directors' report in the first year, the mentioning of the provisional liability in the directors' report without mentioning the actual amount of liability, and mentioning of the balance of provisional liability in the profit and loss account in the third year as well as in the directors' report, would have to be considered in a broad view, meaning thereby that the liabilities were mentioned in the balance-sheet so as to enable the assessee to get deduction of estate duty liabilities, which are certain, and not contingent, while valuing the unquoted equity shares. It remains to be seen that the balance-sheet is based upon book entries, profit and loss account, etc. In order to mention the correct assets and liabilities, the balance-sheet is depending upon the profit and loss account, which is nothing but an income and expenditure statement. Therefore, the Tribunal considered for the two years that ....
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....ave been different if the liability is a direct one and has to be reckoned as a liability of the estate itself as in the cases cited and not in a case where the break-up value of a share in a company is computed with reference to the balance-sheet. Where the break-up value is taken at the book value of an asset as per the circulars, we cannot substitute a value which an asset may ultimately fetch or a value on which a liability may be ultimately computed or at which it may be determined in the place of book value. The value is the book value on the valuation date and not with reference to any future date. In the present case, there was no enhanced payment, which could reasonably be expected on the valuation date with reference to accounts. The Tribunal pointed out that there is no reason why any one should imagine that a verified return which invited the provisional assessment is an incorrect one. Therefore, the Tribunal found that there is no justification for granting a relief larger than what has been authorised for the assessment years 1966-67 and 1967-68. In CWT v. K. S. N. Bhatt [1984] 145 ITR 1, the Supreme Court held that in computing the net wealth of the assessee for w....