1972 (8) TMI 6 - SC - Wealth-tax

Whether amounts standing in the special reserve account in the books of the assessee-company were deductible in determining the net wealth - Whether amounts standing in the shareholders accounts as on the respective valuation dates were deductible - Whether amounts out of the debentures of the company were allowable as debts owed by the company

Summary

Issues Involved:
1. Deductibility of amounts in the special reserve account in determining the net wealth of the company for the assessment years 1957-58, 1958-59, and 1959-60.
2. Deductibility of amounts in the shareholders' accounts in determining the net wealth of the company for the assessment years 1957-58, 1958-59, and 1959-60.
3. Allowability of debenture amounts as debts owed by the company in light of section 2(m) read with section 6 of the Wealth-tax Act.

Issue-wise Detailed Analysis:

1. Deductibility of Amounts in the Special Reserve Account:
The company argued that the amounts in the special reserve account were not assets of the company but were mandated by law to be set aside and could only be dealt with according to the provisions of the agreement with the Government. The court rejected this contention, stating that no part of the assets of the company had been acquired by the Government, and the agreement only provided an option for the Government to acquire the company in the future. Until such acquisition, the amounts in the special reserve account remained assets of the company. The court concluded that these amounts were not exempt under the Act and thus were includible in the company's net wealth.

2. Deductibility of Amounts in the Shareholders' Accounts:
The company contended that the amounts in the shareholders' accounts belonged to the shareholders and should not be considered assets of the company. The court dismissed this argument, emphasizing the legal distinction between a company and its shareholders. The shareholders only have rights to the company's assets when dividends are declared or upon liquidation. The court referenced the case of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, where it was held that dividends do not become a debt owed to shareholders until declared by the company. Therefore, the amounts in the shareholders' accounts were assets of the company and includible in the net wealth.

3. Allowability of Debenture Amounts as Debts Owed:
The debenture loans were raised in the United Kingdom, with all debenture-holders residing there, and the debts were payable in the United Kingdom. The court explained the nature of a floating charge, which does not immediately fasten on any specific property but remains dormant until the company ceases to be a going concern or the charge is enforced. The court cited Halsbury's Laws of England to clarify that the debts were located in the United Kingdom. According to section 6 of the Wealth-tax Act, the value of assets and debts located outside India should not be taken into account in computing the net wealth of a non-resident company. Thus, the debenture loans could not be considered in determining the net wealth of the company.

Conclusion:
The appeals were dismissed, and the High Court's decision in favor of the revenue was upheld. The amounts in the special reserve account and shareholders' accounts were includible in the company's net wealth, while the debenture loans located outside India were not deductible under section 6 of the Wealth-tax Act.