1967 (5) TMI 14 - HC - Wealth-tax

Determining the net wealth - valuation - deduction in respect of provision for bonus for each of the three years & provision for taxation is permissible - but deduction in respect of bad debts and liability for sales tax is not permissible

Issues Involved:
1. Deduction of provisions for bonus, taxation, bad and doubtful debts, and sales tax liability in determining net wealth.
2. Deductibility of advances made to employees against bonus.
3. Allowance of depreciation as per income-tax records versus balance-sheet values.

Detailed Analysis:

1. Deduction of Provisions for Bonus, Taxation, Bad and Doubtful Debts, and Sales Tax Liability in Determining Net Wealth:

The Tribunal initially rejected the assessee's claim for deductions of provisions for bonus, taxation, and sales tax liabilities, stating that these did not ripen into debts and thus could not be deducted under section 2(m) of the Wealth-tax Act. The Tribunal noted, "Only liabilities which have ripened into debts can be deducted from the net value of the assets in order to arrive at the net value of the assets."

Upon appeal, the High Court reframed the questions to address the real controversy, focusing on whether these provisions could be considered debts owed by the assessee. The Court noted the Supreme Court's stance in Kesoram Industries & Cotton Mills Ltd. v. Commissioner of Wealth-tax, which established that a liability to pay income-tax is a present liability, though it becomes payable after quantification. The Court applied this principle to provisions for bonus and sales tax, concluding these were also present liabilities.

For bonus, the Court recognized its evolution from a voluntary payment to a statutory obligation under the Payment of Bonus Act, 1965, thus affirming it as a liability. The Court stated, "The liability to pay a bonus is a debt and not a contingent liability and, therefore, is liable to be taken into consideration in the computation of the net wealth under section 2(m) of the Wealth-tax Act."

Regarding income-tax, the Court referenced the Supreme Court's decision in Kesoram Industries, affirming that provisions for taxation are allowable deductions. Similarly, for sales tax, the Court found that since the liability was established under the Bengal Finance (Sales Tax) Act, it was also deductible.

2. Deductibility of Advances Made to Employees Against Bonus:

The Tribunal had rejected the claim, stating, "The amounts advanced to employees are pure advances and although they may be adjusted in future against bonus that may be due to the employees as a result of the award of the Industrial Tribunal, so long as the award has not been given the amounts advanced are on the personal credit of the employees."

The High Court, however, found that if the entirety of the provision for bonus is allowable, then the advances made against it should also be considered deductible. The Court stated, "It is not necessary to answer the question in view of our answer given to question No. 1(a) and if the entirety of the provision made towards payment of bonus was allowable as deduction then a part of it was equally allowable as such."

3. Allowance of Depreciation as per Income-Tax Records Versus Balance-Sheet Values:

The Tribunal rejected the claim for substituting the written down value of fixed assets as per income-tax records for the balance-sheet values. The High Court noted that the assessee conceded satisfaction with the depreciation allowance as allowed and did not press for further deductions. Consequently, the Court answered this question in the negative.

Conclusion:

The High Court answered the reframed questions Nos. 1(a), 1(b), and 1(d) in the affirmative, allowing the deductions for provisions for bonus, taxation, and sales tax liability as debts owed by the assessee. Question No. 1(c) and question No. 3 were not pressed and were answered in the negative. Question No. 2 was deemed unnecessary to answer in light of the affirmative response to question No. 1(a). The assessee was entitled to costs.

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