1965 (9) TMI 7 - HC - Wealth-tax

Valuation - balance-sheet itself would show that a depreciation allowance has been allowed before arriving at the net valuation of the assets -therefore, that after the deduction, the net value of the assets represents the market value of the assets as estimated by the assessee itself, and unless circumstances justify, the assessee cannot claim further depreciation as it is seeking to claim in this case

Summary

Issues Involved:
1. Correctness of the Appellate Tribunal's decision to allow a deduction for depreciation under the Wealth-tax Act.
2. Interpretation of Section 7(2)(a) of the Wealth-tax Act regarding asset valuation.
3. Relationship between depreciation under the Income-tax Act and the Wealth-tax Act.

Issue-wise Detailed Analysis:

1. Correctness of the Appellate Tribunal's Decision to Allow a Deduction for Depreciation:
The primary question referred to the High Court was whether the Appellate Tribunal was correct in law in allowing a deduction from the net value of the assets of the business as a whole, as determined by the Wealth-tax Officer under Section 7(2)(a) of the Wealth-tax Act, based on the balance-sheet as on the valuation date. The Tribunal had directed that the Wealth-tax Officer should deduct the aggregate sum of normal depreciation and extra shift allowance from the book value of the assets.

2. Interpretation of Section 7(2)(a) of the Wealth-tax Act Regarding Asset Valuation:
Section 7 of the Wealth-tax Act provides two methods for valuing assets:
- Sub-section (1): The value of any asset, other than cash, should be estimated based on the price it would fetch if sold in the open market on the valuation date.
- Sub-section (2)(a): For businesses maintaining regular accounts, the Wealth-tax Officer may determine the net value of the assets as a whole, based on the balance-sheet on the valuation date, making necessary adjustments.

The court noted that the Wealth-tax Officer has the discretion to either value each asset separately or take the net value of the assets as a whole, making necessary adjustments. The main objective of Section 7 is to evaluate the assets based on their market value on the valuation date. The court highlighted that the allowances and deductions under the Income-tax Act do not necessarily represent the market value of the assets.

3. Relationship Between Depreciation Under the Income-tax Act and the Wealth-tax Act:
The court emphasized that the depreciation allowed under the Income-tax Act is notional and varies based on revenue exigencies and industry promotion. It does not represent the real market value of the asset. The written down value under the Income-tax Act is not necessarily the real value for wealth-tax purposes. The court cited several judgments supporting this view:
- Kesoram Cotton Mills Ltd. v. Commissioner of Wealth-tax: The wealth-tax authorities can accept the valuation made by the assessees themselves unless there is a reason to believe it is incorrect.
- Kothari Textiles Ltd. v. Commissioner of Wealth-tax: The Wealth-tax Officer can examine the balance-sheet and make appropriate adjustments.
- Commissioner of Wealth-tax v. Raipur Manufacturing Ltd.: The written down value under the Income-tax Act is not always the market value of the asset.
- Commissioner of Wealth-tax v. Mysore Commercial Union Ltd.: The balance-sheet is the basis for valuation under Section 7(2), with necessary adjustments.
- Commissioner of Wealth-tax v. Tungabhadra Industries Ltd.: The Wealth-tax Officer can make adjustments if the balance-sheet values do not represent the real value of the assets.

The court concluded that the assessee cannot claim further depreciation as a matter of right. However, if the assessee can show that the depreciation in the balance-sheet requires revision due to mistakes or omissions, the Wealth-tax Officer can consider such claims.

Conclusion:
The court answered the reference in the negative, stating that the Appellate Tribunal was incorrect in allowing the deduction based on the difference between the depreciation allowed under the Income-tax Act and the depreciation provided in the company's books. The reference was answered in favor of the department, with costs awarded to the department. The assessee retains the right to contend that the depreciation in the balance-sheet requires revision.