1972 (1) TMI 13 - HC - Wealth-tax

Right to receive dividends on shares it is the property of assessee and cannot be treated as annuity therefore, it is includible in assets for wealth-tax purposes

Summary

Issues Involved:
1. Taxability of the right to receive dividends as an asset under the Wealth-tax Act.
2. Correctness of the valuation method adopted by the Wealth-tax Officer.

Issue-Wise Detailed Analysis:

1. Taxability of the Right to Receive Dividends as an Asset
The primary issue was whether the right of the assessee to receive dividends declared by Chrome Leather Company (Private) Ltd. was a taxable asset under the Wealth-tax Act, 1957. The assessee argued that her interest in the estate was contingent and subject to conditions such as the company making profits and declaring dividends, and thus could not be evaluated. The Tribunal initially held that the right to receive dividends was a valuable right but did not constitute "property" under the Act, likening it to future maintenance excluded from property under section 6(dd) of the Transfer of Property Act. However, the court clarified that the assessee was entitled to the entirety of the dividends declared by the company during her lifetime, as per the court's order in C.S. No. 165 of 1942.

The court then examined the definition of "net wealth" under section 2(m) and "assets" under section 2(e) of the Wealth-tax Act. It was concluded that the right to receive dividends is not an annuity, as it is not a predetermined sum payable annually. The court referred to several Supreme Court judgments, including Ahmed G. H. Ariff v. Commissioner of Wealth-tax, which held that the term "property" is of the widest import and includes every possible interest a person can hold. Therefore, the right to receive dividends was deemed a taxable asset under the Wealth-tax Act.

2. Correctness of the Valuation Method
The second issue was whether the valuation method adopted by the Wealth-tax Officer was correct. The Tribunal had not given due consideration to the aspect of valuation, having initially ruled out the right to receive dividends as property. The court pointed out that Rule 1B of the Wealth-tax Rules, 1957, provides the method for valuing a life interest by multiplying the average annual income by a prescribed formula. The valuation should also consider the premium rates that a life insurance company might demand for insuring the assessee's life, ensuring that the value does not exceed the market value of the corpus from which the life interest is derived.

The court referenced the Inland Revenue Commissioners v. Crossman case, which held that the market value of shares should be considered even if there are restrictions on transfer. The Supreme Court in Ahmed G. H. Ariff v. Commissioner of Wealth-tax also emphasized that the words "if sold in the open market" in section 7(1) imply a hypothetical open market scenario. Therefore, the Tribunal's view that the life interest in dividends had no market value was incorrect.

The court concluded that the right to receive dividends was a taxable asset and remanded the case to the Tribunal for fresh consideration of the valuation, instructing it to give the parties an opportunity to present their case on this aspect.

Conclusion
The court answered the first question in favor of the revenue, establishing that the right to receive dividends is a taxable asset. The second question was also answered in favor of the revenue, but the Tribunal was directed to reconsider the valuation method afresh. The revenue was awarded costs of the reference, with counsel's fee set at Rs. 250.