1970 (5) TMI 21 - HC - Wealth-tax

Valuation of an asset under section 7(2) - tussle between the balance-sheet value and the written down value

Summary

Issues Involved
1. Determination of the net value of the assets under Section 7(2) of the Wealth-tax Act.
2. Adjustment on account of normal depreciation of fixed assets from the date of revaluation to the valuation date.

Issue-wise Detailed Analysis

Issue 1: Determination of the Net Value of the Assets Under Section 7(2) of the Wealth-tax Act

The primary issue was whether the value of the company's fixed assets as shown in its balance-sheet on the valuation date should be substituted by the written down value of these assets as per the company's income-tax records. The assessee argued that the land, buildings, and machinery should be valued according to the written down value in the income-tax records after allowing depreciation per the Income-tax Act. The Wealth-tax Officer, however, took the value shown in the company's balance-sheet as on the valuation date, arguing that the valuation was under Section 7(2) of the Wealth-tax Act of the assets of the business as a whole.

The Appellate Assistant Commissioner of Wealth-tax agreed with the Wealth-tax Officer, stating that if assets were revalued periodically and depreciation was not provided for in the accounts to the extent admissible under the Income-tax Act, it was because the company wished to show the correct value of the assets in its books. The Tribunal upheld the Wealth-tax authorities' action but allowed for normal depreciation on the recomputed values of the assets.

The High Court initially answered the first question in the affirmative, favoring the assessee, based on the judgment in Tungabhadra Industries Ltd.'s case. However, the Supreme Court set aside this judgment, stating that the High Court erred in holding that the case was governed by the principle laid down in Tungabhadra Industries case. The Supreme Court clarified that Section 7(1)(a) contemplates that the book value in the balance-sheet should be taken as the primary basis of valuation, and if any adjustment is required, the Wealth-tax Officer may make such adjustments as the circumstances of the case require. Consequently, the Supreme Court remanded the case for rehearing according to the principles laid down in Kesoram Industries case.

Upon rehearing, the High Court acknowledged that the Supreme Court had already answered the first question in the negative, thereby favoring the revenue. The High Court noted that the balance-sheet value is not sacrosanct and may need to yield to the written down value in appropriate cases under Section 7(2)(a) of the Wealth-tax Act.

Issue 2: Adjustment on Account of Normal Depreciation of Fixed Assets from the Date of Revaluation to the Valuation Date

The second issue was whether an adjustment on account of normal depreciation of the fixed assets from the date of revaluation to the valuation date was justified. The Tribunal had allowed for normal depreciation at prescribed rates on the recomputed values of the assets to be deducted from the value of the assets as appearing in the balance-sheet on the valuation date.

The High Court, upon remand, proceeded to answer this question. It interpreted Section 7(2)(a) of the Wealth-tax Act to mean that the Wealth-tax Officer may determine the net value of the assets of the business as a whole, having regard to the balance-sheet, and making such adjustments as the circumstances of the case may require. The Court noted that "adjustment" in this context should include depreciation. However, it emphasized that if depreciation had already been accounted for during revaluation, it could not be allowed again. In this case, since no depreciation had been allowed between the date of revaluation and the valuation date, some allowance for depreciation was necessary.

The Court referred to Rule 2B of the Wealth-tax Rules, which, though not applicable to the 1957 assessment, provided that the value of an asset on which depreciation is admissible should be its written down value. The Court agreed with the Tribunal that the assessee should be entitled to normal depreciation at prescribed rates on the recomputed value of the assets.

In conclusion, the High Court answered the second question in the affirmative, favoring the assessee, but with the interpretation that adjustments for depreciation should be made as per the principles laid down in the judgment.

Conclusion

The High Court, following the Supreme Court's remand order, answered the first question in the negative, favoring the revenue, and the second question in the affirmative, favoring the assessee, with the conditions and interpretations stated in the judgment. Each party was ordered to bear its own costs.