COMMISSIONER OF WEALTH TAX Vs. RAIPUR MANUFACTURING CO LTD

JUDGEMENT

(1.) This Reference under Section 27(1) of the Wealth Tax Act, 1957, raises some interesting and important questions relating to the construction of Section 2(m) and Section 7 of the Wealth Tax Act which have been argued with considerable vigour and ability by both the sides. One of the noteworthy features of this case is that some cases have been relied upon by both the sides in order to deduce contrary conclusions. The Raipur Manufacturing Company Limited is the assessee in this case. The assessment year in question is the year 1957-58, the relevant valuation date being the 31st December, 1956. On 11th May, 1956, a demand notice had been issued on the assesses under Section 18-A of the Indian Income- tax Act, 1922, for advance payment of tax requiring the Company to pay a sum of Rs. 3,59,549/- in four instalments, the instalments being payable on the 15th June, 1956, the 15th September, 1956, the 15th December, 1956 and the 15th March, 1957. Prior to the valuation date, the assessee paid the three instalments payable on the 15th June, 1956, the 15th September, 1956 and the 15th December, 1956. On 31st December, 1956, the fourth instalment of Rs. 89,889/had remained unpaid, the same being payable on the 15th March, 1957. On 13th February, 1957, a revised demand was made under Section 18-A requiring the assessee to pay a sum of Rs. 4,02,068/- instead of Rs. 89,889/- on the 15th March, 1957. This amount of Rs. 4,02,068/-was duly paid by the assessee. The assessee submitted its wealth-tax return for the year 1957-58. On 26th September, 1957, a demand notice was issued against the assessee under Section 23-B of the Indian Income-tax Act, 1922, for a sum of Rs. 8,28,576/- on the basis of the assessee's return of income after adjusting the advance payments of tax made by the assessee. The Wealth Tax Officer computed the net wealth of the assessee as stated in his assessment order dated 31st January, 1958. The paid up capital was assessed at Rs. 30,00,000/- and the Reserve and Surplus as per balance-sheet at Rs. 1,12,39,079/-. He added to these two amounts, three sums which were claimed by way of liabilities by the assessee which he did not regard as constituting debts. One represented a provision for taxation amounting to Rs. 21,62,785/-, the second represented the amount of the proposed dividend of Rs. 5,83,188/- and the third related to over-provision in sundries amounting to Rs. 11,341/-. The total of all these five items came to Rs. 1,69,96,393/-. The Wealth Tax Officer deducted thereout the value of the shares held by the assessee in other companies which were exempt from inclusion in the wealth of the assessee amounting to Rs. 24,51,416/- and the advance tax paid amounting to Rs. 9,37,943/-. The net value of assets which was made the subject-matter of tax amounted to Rs. 1,36,07,034/-. In the course of the assessment proceedings the assesses claimed inter alia a deduction in respect of the sum of Rs. 21,62,785/- on account of provision for taxation. The sum of Rs. 21,62,785/-was made up as follows:- In the balance-sheet the assessee had made a provision for Rs. 14,32,275/- for taxation. The assessee had carried forward from the previous year a sum of Rs. 730,510/- on account of provision for taxation. These two amounts totalled Rs. 21,62,785/-. The assessee having made a provision of Rs. 21,62,785/for taxation in its books of account, claimed that the assesses was entitled to a deduction in respect thereof. There was another sum of Rs. 3,00,000/- for which deduction was claimed. The relevant facts in connection with this claim are as under: In the balance sheet as at 31st December 1955 the assessee had shown the gross block at Rs. 86,29,439/-. As against this amount there was a depreciation fund amounting to Rs. 60,39,883/-. The Companies Act, 1956, came into force on 1st April 1956. By Section 211 it is provided that every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of the said Section, be in the Form set out in Part I of Schedule VI, or as near thereto as circumstances admit. In the notes to Part I of Schedule VI it is stated as under:-" Depreciation written off or provided shall be allocated under the different asset heads and deducted in arriving at the value of Fixed Assets". In view of these provisions the assesses appropriated Rs. 58,29,794/- out of the Depreciation Fund of Rs. 60,39,883/- as against different assets and after taking into account depreciation for the year ended 31st December 1956, showed the depreciated value of the block at Rs. 37,32,148/-. The assessee transferred the balance sum of Rs. 2,10,089/- from the Depreciation Fund to Development and Rehabilitation Reserve which it created. From the current profit of the year 1956 it transferred a sum of Rs. 89,911/- to the Development and Rehabilitation Reserve, making a total of Rs. 3,00,000/-. In the balance sheet this sum of Rs. 3,00,000/-has been shown by way of Development and Rehabilitation Reserve, The assessee claimed that this sum of Rs. 3,00,000/- representing Development and Rehabilitation Reserve should be the amount which the assessee should be held entitled to deduct. The assessee contended before the Wealth Tax Officer that this sum represented the difference between the written down value of the fixed assets as found in the income-tax records and the value of the fixed assets as shown in the balance sheet. This has been subsequently found to be incorrect. When the matter came up before the Appellate Tribunal, the assessee made an application in which it was stated that the difference between the written down value of the assets of the Company as appearing from the records of the Income-tax authorities and the value of the assets as shown in the balance sheet came to Rs. 8,34,266/- and the assessee claimed before the Tribunal that the assessee was entitled to claim a deduction for this sum of Rs. 8,34,266/-. We are now told on behalf of the assessee that the real difference is not even Rs. 8,34,266/- as stated before the Income-tax Tribunal but that the same amounts to Rs. 8,45,147/-.

(2.) The Wealth Tax Officer took the view that the income-tax became payable to Government when demand was made therefor. He only allowed a deduction for the sum of Rs. 2,69,658/-being the aggregate of the three instalments of tax which had been paid during the accounting year under Section 18-A of the Indian Income-tax Act, 1922, in pursuance of the demand made on 11th May 1956. He took the view that neither the amount which became payable on 15th March 1957 nor the amount which became payable under Section 23-B of the Act could be regarded as a debt owed by the assessee on the valuation date. He also disallowed the claim for the sum of Rs. 3,00,000/- which was then made before him. The assessee preferred an appeal from that decision before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that on the valuation date i.e., 31st December 1956, there was a demand already made for payment of the fourth instalment of the advance payment of tax under Section 18A and as that amount was owing on the 31st December 1956, it constituted a debt and allowed the sum of Rs. 89,889/- to be deducted. He substantially confirmed the rest of the assessment. Both the Department and the assessee being dissatisfied with the decision of the Appellate Assistant Commissioner, two appeals were filed before the Income-tax Appellate Tribunal. The Department objected to the allowance of the sum of Rs. 89,889/-. The assessee objected to the various disallowances. Before the Tribunal the claim for further deduction on account of provision for taxation came to Rs. 11,40,755/-. The sum of Rs. 11,40,755/- was made up as follows:-- The fourth instalment of advance payment of tax paid by the assessee on 15th March 1957 was Rs. 4,02,068/-. As against this sum of Rs. 4,02,068/-, the Appellate Assistant Commissioner had allowed a deduction of Rs. 89,889/- leaving the balance of Rs. 3,12,179/-. To this sum was added the amount of tax paid under Section 23-B in accordance with the demand made on 26th September 1957 amounting to Rs. 8,28,576/-. The total of these sums came to Rs. 11,40,755/-. A further sum of Rs. 54,693/- was also claimed on account of the wealth-tax for the assessment year 1957-58. That claim for Rs. 54,693/- is not pressed before us. The Tribunal came to the conclusion that the sum of Rs. 11,40,755/- was liable to be allowed. The Tribunal has stated that just as income accrued from day to day, the tax liability also accrued simultaneously and that no computation of net wealth was possible without taking into account the liability of taxation on the income which increased the wealth. As regards the question relating to the assets of the assessee being valued at the written down value as on 31st December 1956 for the purpose of Income-tax Act, the Tribunal took the view that depreciation in respect of assets should be computed on the basis of the provisions of the Income-tax Act as otherwise it would lead to numerous complications. It held that depreciation should be allowed on the basis of the depreciation allowed by the Income-tax authorities as otherwise it would lead to "absurd results". In the course of its decision it observed that the assessee may write off excessive depreciation or no depreciation at all to suit its convenience. The amount transferred to the depreciation fund may not reflect the actual depreciation suffered in the case of an asset. It observed that the depreciation allowed by the Income-tax authorities was on a very systematic basis and that by deducting such depreciation it arrived at the correct value of the assets to the business. It directed that for the purpose of arriving at the correct value of the assets of a business the Income-tax Officer should take the original cost price as shown by the books of account and deduct therefrom such depreciation as had been allowed under the Income-tax Act. In other words, it is the written down value of an asset which should ordinarily be taken into account. On the application made before the Tribunal for altering the claim on this score from Rs. 3,00,000/to Rs. 8,34,266/- the Tribunal stated that it would lay down the principle and leave it to the Wealth Tax Officer to compute the amount in accordance with the principle laid down by it and make the necessary deduction. The Commissioner of Income-tax being aggrieved by the decision of the Tribunal required the Tribunal to state a case and refer questions of law arising out of the order of the Tribunal to this Court under Section 27(1) of the Wealth Tax Act. The Tribunal has accordingly referred to us the following questions of law for determination:

(3.) The Commissioner of Wealth Tax has filed an application before us for re- framing the questions on the ground that the questions framed by the Tribunal were vague and did not bring out clearly the points in issue in this reference. The Commissioner desires that we should frame the questions in the following form: -