1988 (2) TMI 31 - HC - Wealth-tax

Summary

Issues Involved:
1. Interpretation of Rule 1D, Explanation II, Clause (e) of the Wealth-tax Rules, 1957.
2. Whether advance tax paid should be deducted from the tax on book profits to determine the "tax payable with reference to book profits."

Detailed Analysis:

Issue 1: Interpretation of Rule 1D, Explanation II, Clause (e) of the Wealth-tax Rules, 1957
The core issue revolves around the interpretation of Rule 1D, Explanation II, Clause (e) of the Wealth-tax Rules, 1957. The Tribunal and the Wealth-tax Officer (WTO) had excluded the advance tax paid from the total assets of the company and deducted it from the tax chargeable on book profits to determine the "tax payable." The Tribunal's approach was based on the Supreme Court's decision in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192, where it was held that "tax payable" is the amount for which a demand notice is issued after deducting the advance tax already paid.

Issue 2: Whether advance tax paid should be deducted from the tax on book profits to determine the "tax payable with reference to book profits."
The Tribunal upheld the WTO's method, which deducted the advance tax from the tax payable on book profits to ascertain the excess provision for taxation. The assessee contested this, arguing that the rule explicitly states that advance tax shown as an asset should not be treated as an asset, and thus, the provision for taxation should be considered without deducting the advance tax. The High Courts of Gujarat and Bombay supported the assessee's view, while the High Courts of Punjab and Haryana, and Karnataka sided with the Revenue.

Tribunal's Viewpoint:
The Tribunal relied on the Supreme Court's decision in CIT v. Vegetable Products Ltd., interpreting "tax payable" as the amount after deducting advance tax. They argued that the provision for taxation should be adjusted for advance tax paid, aligning with the commercial accounting principles where advance tax remains to be adjusted until the final tax determination.

Assessee's Argument:
The assessee contended that the rule explicitly excludes advance tax from being treated as an asset. Thus, for liabilities, the tax payable should be computed based on book profits without deducting the advance tax. The assessee pointed out the divergence in judicial interpretations, with Gujarat and Bombay High Courts supporting their view.

Revenue's Argument:
The Revenue argued that if advance tax is excluded from assets, it should similarly be deducted from the tax liability to determine the actual tax payable. They maintained that the provision for taxation should reflect the net tax liability after accounting for advance tax paid.

Judicial Precedents:
- Gujarat High Court (CWT v. Ashok K. Parikh [1981] 129 ITR 46): Held that the provision for taxation should be considered without deducting advance tax, emphasizing that the rule's intent is to exclude advance tax from both assets and liabilities.
- Bombay High Court (CWT v. Pratap Bhogilal [1987] 167 ITR 501): Supported the view that "tax payable" refers to the total tax on book profits without deducting advance tax.
- Punjab and Haryana High Court (Ashok Kumar Oswal (Minor) v. CWT [1984] 148 ITR 620): Contrarily, held that "tax payable" should be the net tax after deducting advance tax.
- Karnataka High Court (CWT v. N. Krishnan [1986] 162 ITR 309): Agreed with the Revenue, stating that excluding advance tax from assets necessitates a corresponding reduction in tax liability.

Court's Conclusion:
The court favored the interpretations of the Gujarat and Bombay High Courts, concluding that "tax payable" should be the total tax on book profits without deducting advance tax. The court emphasized that the rule-making authority intended to exclude advance tax from assets and did not imply its deduction from tax liability. The judgment clarified that the provision for taxation should be based on the total tax liability as per book profits, aligning with commercial accounting principles.

Final Judgment:
The question was answered in the negative, in favor of the assessee, and against the Revenue. The court held that advance tax paid should not be deducted from the tax on book profits to determine the "tax payable with reference to book profits." The assessee was awarded costs of Rs. 1,000 in these references, with counsel's fee set as one set.