1991 (11) TMI 36 - HC - Wealth-tax

Summary

Issues:
1. Valuation of unquoted shares under the Wealth-tax Act.
2. Interpretation of rule ID of the Wealth-tax Rules, 1957 regarding deduction of liabilities including advance tax.
3. Disagreement on the meaning of "tax payable with reference to the book profits" in the context of rule ID.

Valuation of Unquoted Shares:
The judgment dealt with applications under section 27(3) of the Wealth-tax Act regarding the valuation of unquoted equity shares. The controversy revolved around the computation of the market value of such shares held by the assessees. The Central Board of Direct Taxes formulated rule ID of the Wealth-tax Rules, 1957 to provide a statutory formula for determining the value of unquoted shares based on the company's balance sheet. The key issue was the interpretation of the expression "tax payable with reference to the book profits" in the context of rule ID.

Interpretation of Rule ID:
The main dispute centered around whether the provision for taxation in the balance sheet should consider the net tax after deducting advance tax or the gross tax payable in its entirety. The court analyzed the language of rule ID and explained that the provision for taxation should only include the gross tax leviable with reference to the book profits, disregarding any excess provision or advance tax paid. The court emphasized that tax laws are to be strictly construed without room for equity or sentiments, and the interpretation should be in favor of the assessee.

Meaning of "Tax Payable with Reference to the Book Profits":
The court examined the conflicting views of various High Courts on the interpretation of clause (ii)(e) of Explanation II to rule ID. It referred to decisions by the Gujarat and Bombay High Courts, which favored excluding advance tax paid from the provision for taxation in the balance sheet. The court disagreed with the views of the Punjab and Haryana High Court and the Karnataka High Court, which supported including advance tax in the provision for taxation. It upheld the interpretation that the liability mentioned in clause (ii)(e) should be treated in its entirety, following the precedent set by the Bombay High Court.

Conclusion:
The Tribunal's refusal to refer the matter to the High Court was deemed correct, considering the settled law on the issue. The court acknowledged that the controversy persisted among different High Courts, with conflicting views on the interpretation of rule ID. Despite the pending challenge in the Supreme Court, the court summarily rejected the applications without issuing notice to the assessees, affirming the interpretation favoring the exclusion of advance tax from the provision for taxation in the balance sheet.