1980 (3) TMI 54 - HC - Wealth-tax

Summary

Issues Involved:
1. Inclusion of bills receivable as assets in net wealth.
2. Deductibility of notional income-tax liability on bills receivable.

Detailed Analysis:

Issue 1: Inclusion of Bills Receivable as Assets in Net Wealth

The primary question was whether the bills receivable by the assessee on the valuation date should be included as assets in his net wealth. The assessee, an income-tax practitioner, maintained his accounts on a cash basis. He argued that the outstanding bills should not be considered assets as they had not been accepted by his clients and were not received by him on or before the valuation date. The Income-tax Appellate Tribunal had previously upheld the Wealth-tax Officer's (WTO) decision to include these bills as assets.

The court examined Section 3 of the Wealth-tax Act, which levies wealth-tax on the net wealth of an individual as on the valuation date, and Section 4, which defines what constitutes an individual's assets. According to Section 2(e) of the Act, "assets" include all property of every description, except those specifically excluded.

The court noted that professionals like income-tax practitioners typically maintain accounts on a cash basis, meaning they only consider actual receipts as income. The judgment referenced Lord Denning's observations in Mason v. Innes, which emphasized that professionals are taxed on actual receipts, not on potential or outstanding amounts.

The Supreme Court's ruling in Raja Mohan Raja Bahadur v. CIT was also cited, which differentiated between mercantile and cash accounting systems. In cash accounting, income is recognized only upon receipt. The court concluded that the outstanding bills did not constitute the assessee's income or wealth as they were not received by the valuation date.

The court also referenced Section 7(2) of the Wealth-tax Act, which allows the WTO to consider the balance-sheet of a business maintained regularly by the assessee. The court emphasized that the accounting system regularly employed by the assessee should be accepted unless there is a compelling reason to disregard it.

The court disagreed with the Calcutta High Court's view in Dipti Kumar Basu v. CWT, which suggested that the accounting system is irrelevant under the Wealth-tax Act. Instead, it supported the Orissa High Court's view in Vysyaraju Badreenarayanamoorthy Raju, aligning with the Supreme Court's reasoning in Raja Mohan Raja Bahadur.

Ultimately, the court held that the outstanding bills, which were not received by the assessee on the valuation date, did not constitute his wealth. Therefore, the Tribunal was incorrect in including these bills as assets in the assessee's net wealth.

Issue 2: Deductibility of Notional Income-tax Liability on Bills Receivable

Given the court's decision on the first issue, the second question regarding the deductibility of notional income-tax liability on the bills receivable became moot. Since the outstanding bills were not considered assets, the question of deducting any notional income-tax liability on these bills did not arise.

Conclusion

1. Inclusion of Bills Receivable: The Tribunal was not right in holding that the bills receivable by the assessee as on the valuation date are includible as assets in his net wealth.
2. Deductibility of Notional Income-tax Liability: This question does not survive for consideration due to the conclusion on the first issue.