1982 (1) TMI 83 - AT - Wealth-tax

Summary

Issues Involved:
1. Whether outstanding fees for services rendered by professionals constitute a debt and are includible in computing net wealth.
2. Whether the term "business" in section 7(2)(a) includes "profession."
3. Whether the valuation of assets for professionals should be done under section 7(2)(a) or section 7(1).
4. Whether the WTO can include outstanding professional fees as assets in the balance sheet for cash system accounting.
5. Whether the outstanding fees should be reduced by tax liabilities or potential bad debts.
6. Whether the net wealth of a professional firm should be computed based on commercial principles or adjusted under the Wealth-tax Rules.

Detailed Analysis:

1. Outstanding Fees as Debt:
The Tribunal held that outstanding fees for services rendered by professionals cannot be regarded as a debt and therefore are not includible in computing their net wealth under the Wealth-tax Act. The argument that such fees are debts of honor and not legally recoverable was rejected, citing legal provisions that allow professionals to recover their dues through legal proceedings.

2. Inclusion of "Profession" in "Business":
The Tribunal concluded that the term "business" in section 7(2)(a) includes a profession carried on by an individual, whether individually or in partnership. This conclusion was supported by the Supreme Court decision in Barendra Prasad Ray v. ITO and the concession by counsel that "profession" is comprehended by the term "business."

3. Valuation of Assets:
The Tribunal determined that in cases where an assessee carries on a business or profession and maintains accounts regularly, the WTO must act under section 7(2)(a) and not under section 7(1). Section 7(2) is a special provision that overrides the general provisions of section 7(1). The WTO is bound to determine the net value of the assets of the business as a whole, having regard to the balance sheet of such business as on the valuation date.

4. Inclusion of Outstanding Fees:
The Tribunal held that the WTO cannot include outstanding professional fees as assets in the balance sheet for cash system accounting. The balance sheet must be prepared according to the method of accounting employed by the assessee. Outstanding fees that are not required to be disclosed under the cash system cannot be included by way of adjustment.

5. Reduction by Tax Liabilities or Bad Debts:
Even if the WTO is competent to include outstanding fees, the amount cannot be reduced by tax liabilities or potential bad debts. Rule 2C(a) requires the inclusion of the amount due to the assessee and not its market value.

6. Net Wealth of Professional Firm:
For determining the interest of a partner in a professional firm, the net wealth of the firm must be computed according to the general provisions of the Act read with the Rules, except those inapplicable or specific to an assessee. The adjustments provided in the Rules are applicable, and outstanding professional fees are not to be included if the accounts are maintained under the cash system.

Conclusion:
The appeal was allowed, and the objections of the department were rejected. The Tribunal's decision emphasized that the method of accounting employed by the assessee is crucial in determining the net wealth of a business or profession. The Tribunal also acknowledged the competent assistance received from the Bar in this case.