1980 (9) TMI 64 - HC - Wealth-tax

Summary

Issues Involved:
1. Computation of market value of shares for wealth-tax purposes.
2. Treatment of advance tax paid in the balance sheet.
3. Interpretation of Explanation II to Rule 1D of the Wealth-tax Rules, 1957.

Summary:

1. Computation of Market Value of Shares:
The primary issue in this case was the determination of the market value of unquoted equity shares of M/s. Mehta Parikh & Co. Pvt. Ltd. for wealth-tax purposes for the assessment years 1965-66 to 1971-72. The Wealth-tax Officer (WTO) determined the break-up value of the shares as per Rule 1D of the Wealth-tax Rules, 1957, which required deducting liabilities from assets as shown in the balance sheet.

2. Treatment of Advance Tax Paid:
The WTO added back advance tax paid but allowed as a deduction advance tax payable as per returns of income of earlier years not disposed of. The Appellate Assistant Commissioner (AAC) partially upheld the WTO's decision but did not accept the assessee's contention that advance tax paid should not be treated as an asset in the balance sheet. The Tribunal, however, directed that the WTO should not make any adjustment for advance tax paid and taken to the assets side of the balance sheet while determining the value of shares.

3. Interpretation of Explanation II to Rule 1D:
The court examined Explanation II to Rule 1D, particularly clause (i)(a) and clause (ii)(e). Clause (i)(a) states that any amount paid as advance tax u/s 18A of the Indian Income-tax Act, 1922, or u/s 210 of the Income-tax Act, 1961, should not be treated as an asset. Clause (ii)(e) specifies that any amount representing provision for taxation (other than the amount referred to in clause (i)(a)) to the extent of the excess over the tax payable with reference to the book profits should not be treated as a liability.

The court clarified that the net worth of the company is to be ascertained by deducting liabilities from assets as shown in the balance sheet. The amount paid as advance tax should not be treated as an asset, reducing the net worth of the company. Provision for taxation should only be deducted as liabilities to the extent of the tax payable with reference to the book profits. The court emphasized that sub-clause (e) of clause (ii) deals with provisions, not actual payments, and the provision for advance tax should be excluded from the scope of sub-clause (e).

Conclusion:
The court concluded that the wealth-tax authorities were not justified in adding back the amount of advance tax paid by M/s. Mehta Parikh & Co. Pvt. Ltd. for arriving at the market value of the shares. The Tribunal's decision was upheld, and the question was answered in the affirmative, in favor of the assessee and against the revenue. The Commissioner was directed to pay the costs of the reference to the assessee.