1983 (6) TMI 66 - AT - Wealth-tax

Summary

Issues Involved:
1. Inclusion of cash incentives in the net wealth of the assessees.
2. Method of accounting for cash incentives.
3. Determination of the right, title, and interest of the assessees in the cash incentives.
4. Deduction of tax liabilities from the cash incentives.

Issue-Wise Detailed Analysis:

1. Inclusion of Cash Incentives in the Net Wealth of the Assessees:
The primary issue in these appeals was whether the cash incentives receivable by the firms, in which the assessees were partners, should be included in the net wealth of the assessees. The WTO/IAC had included the assessees' shares of the cash incentives in their net wealth, asserting that the definition of "assets" under Section 2(c) of the Wealth Tax Act (WT Act) includes property of every description, which covers cash incentives. The CWT(A) upheld this inclusion, reasoning that the assessees should have shown their interest in the cash incentives due to the firm.

2. Method of Accounting for Cash Incentives:
The firms followed a mixed system of accounting: mercantile for general business transactions and cash basis for cash incentives. The WTO/IAC argued that the system of accounting should not affect the inclusion of cash incentives in the net wealth. The assessees contended that since the firms followed the cash system for cash incentives, there was no obligation to declare these incentives as part of their net wealth until actually received. The Tribunal recognized that the method of accounting is at the discretion of the assessee and must be followed consistently. The Tribunal concluded that since the firms accounted for cash incentives on a cash basis, these incentives should not be included in the net wealth until actually received.

3. Determination of the Right, Title, and Interest of the Assessees in the Cash Incentives:
The Tribunal examined whether the assessees had a right, title, and interest in the cash incentives that would justify their inclusion in the net wealth. It was noted that the cash incentives were due only after the claims were scrutinized and approved by the Export Promotion Council. The Tribunal referenced the Special Bench decision in N. M. Shah vs. Second WTO, which held that the value of assets not disclosed in the balance-sheet of a firm following the cash system should not be included in the net wealth of a partner. The Tribunal concluded that the assessees did not have a definitive right, title, or interest in the cash incentives that would constitute an asset under the WT Act.

4. Deduction of Tax Liabilities from the Cash Incentives:
An alternative contention by the assessees was that if the cash incentives were to be included in their net wealth, the tax liabilities of the firm and the personal tax liabilities of the assessees should be deducted from the cash incentives. The CWT(A) rejected this argument, stating that no income tax was payable on the cash incentives on the valuation date, hence no deduction could be made. The Tribunal did not specifically address this issue in detail, as it concluded that the cash incentives should not be included in the net wealth in the first place.

Conclusion:
The Tribunal allowed the appeals, deleting the amounts added by the WTO/IAC by way of cash incentives due to the assessees. The Tribunal held that:
(a) The amounts shown by the firms as due from the Export Promotion Council were not for the purpose of accounting amounts due, hence should not enter the final accounts of the firms.
(b) The WTO could not determine the net wealth of the assessees by adjusting the balance-sheet of the firms.
(c) The assessees did not have a right, title, and interest in the cash incentives that would form an asset within the meaning of the WT Act.

Appeals allowed.