1996 (8) TMI 94 - HC - Wealth-tax

Summary

Issues:
1. Interpretation of the computation of average book profits for a company in which the assessee holds shares.
2. Determining the correct interpretation of the expression "five years preceding the valuation date" as per the Central Board of Direct Taxes' Circular.

Analysis:
The case involved a reference by the Commissioner of Wealth-tax regarding the computation of book profits for a company in which the assessee held shares. The main dispute was whether the profits of five completed years immediately preceding the valuation date should be considered or if the profit of the accounting period ending with the valuation date should also be included. The Tribunal disagreed with the Assessing Officer and the Commissioner of Wealth-tax (Appeals), stating that the valuation date is the last day of the previous year as defined in the Income-tax Act. The Tribunal referred two questions to the High Court for interpretation of the Circular regarding the five-year period and the exclusion of the year ending with the valuation date.

The High Court analyzed the definitions of "valuation date" and "previous year" as per the Wealth-tax Act and the Income-tax Act. It concluded that the valuation date is the last day of the previous year as defined in the Income-tax Act, and a year immediately preceding the valuation date should be considered a completed year. Therefore, the year ending with the valuation date must be excluded when computing the five-year period as per the Circular. The Court held in favor of the assessee, stating that the profits of the year pertaining to the valuation date should not be included in the calculation of the five-year period.

The Court addressed the argument that the interpretation of the Circular should include the profit of the year ending on the relevant valuation date. However, based on the definitions of "valuation date" and "previous year," the Court determined that the year ending with the valuation date cannot be considered a completed year. Consequently, the Court ruled in favor of the assessee, emphasizing the exclusion of the year pertaining to the valuation date in the computation of the five-year period for book profits.

The High Court clarified that the interpretation of the Circular's language regarding the five-year period must exclude the year ending with the valuation date. The Court's decision favored the assessee's position, emphasizing that the year immediately preceding the valuation date should be considered a completed year for the purpose of computing average book profits.