1991 (1) TMI 103 - HC - Wealth-tax

Summary

Issues Involved:
1. Method of depreciation to be adopted for valuing unquoted shares for wealth-tax purposes.
2. Whether the directors' report forms part of the balance-sheet.
3. Applicability of relevant provisions of the Wealth-tax Act and the Companies Act.
4. Interpretation of judicial precedents regarding valuation of assets.

Detailed Analysis:

1. Method of Depreciation for Valuing Unquoted Shares:
The key issue was whether the depreciation computed on the straight-line method should be adopted or the depreciation based on the written down value as per the Income-tax Rules should be adopted for valuing the shares of the company for wealth-tax purposes. The Wealth-tax Officer used the straight-line method as reflected in the balance-sheets of the companies. The Tribunal upheld this approach, emphasizing that the balance-sheet is the primary basis for valuation under Rule 1D of the Wealth-tax Rules. The court concluded that the balance-sheet forms the basic foundation for arriving at the market value of unquoted equity shares in accordance with the relevant Rules.

2. Directors' Report and Balance-Sheet:
The court examined whether the directors' report, which contained depreciation details as per the Income-tax Rules, forms part of the balance-sheet. It was determined that the directors' report is "attached" to the balance-sheet but does not form an integral part of it. The court clarified that the term "annexed" implies something that forms an integral part of the balance-sheet, whereas "attached" connotes a mere enclosure. Therefore, the depreciation details in the directors' report could not be considered for valuation purposes.

3. Applicability of Relevant Provisions:
The court reviewed the provisions of the Wealth-tax Act, particularly Section 7 and Rule 1D, which mandate using the balance-sheet as the basis for valuation. Section 7(2)(a) allows the Wealth-tax Officer to determine the net value of the assets based on the balance-sheet, making adjustments as prescribed. Rule 2B specifies that the value of an asset on which depreciation is admissible should be its written down value. The Companies Act provisions, including Sections 205, 211, and 222, were also analyzed to understand the requirements for depreciation and the form and content of balance-sheets. The court concluded that the balance-sheet prepared under the Companies Act, reflecting depreciation as per the straight-line method, should be used for wealth-tax valuation.

4. Interpretation of Judicial Precedents:
The court considered various judicial precedents cited by both parties. In *CWT v. Aluminium Corporation of India Ltd.*, the Supreme Court held that the value shown in the balance-sheet is prima facie evidence of value but not conclusive, allowing for adjustments if proven incorrect. In *CWT v. Hindustan Motors Ltd.*, the Supreme Court emphasized that the balance-sheet is the primary basis for valuation, and the onus is on the assessee to prove if the value is incorrect. The court also examined other cases like *CWT v. Ranganayaki Gopalan*, *CWT v. Asarwa Mills Ltd.*, and *Grace Collis v. CWT*, concluding that none supported the assessee's stand to use depreciation as per the Income-tax Rules over the straight-line method reflected in the balance-sheet.

Conclusion:
The court upheld the Tribunal's decision that the balance-sheet value, reflecting depreciation computed on the straight-line method, should be used for valuing unquoted shares for wealth-tax purposes. The directors' report containing depreciation details as per the Income-tax Rules does not form part of the balance-sheet and cannot be considered for valuation adjustments. The court's decision aligns with the provisions of the Wealth-tax Act, the Companies Act, and relevant judicial precedents, affirming the balance-sheet as the primary basis for asset valuation. The question referred to the court was answered in favor of the Revenue, with costs awarded to the Revenue.