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TMI Blog1967 (11) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... the undertaking until the purchase date in accordance with this agreement and any statutory powers granted or to be granted to or empowering the company in that behalf. (2) Except as otherwise specifically provided in this agreement nothing herein shall be deemed to restrict the financial and administrative powers of the company or to restrict the right of the company to carry on its undertaking until the purchase date in the ordinary course of business. (3) The company shall exercise due care and economy in the management and administration of the undertaking and shall take all such steps as shall be reasonably practicable to work the undertaking to the best advantage of the parties to this agreement.... 4. (1) The company shall apply its revenues in the manner following, that is to say : (a) firstly, paying all expenses of managing, maintaining and working the undertaking, including debenture interest ; (b) secondly, paying all Indian and United Kingdom taxes payable by the company ; (c) thirdly, setting aside in each accounting year in a renewals and replacements reserve account the sum of eighty thousand pounds sterling or such greater sum as the directors of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the United Kingdom and India pay to the company in sterling in London not less than thirty days before the purchase date ? (i) the sum of pounds 3,750,000 (ii) a sum equal to the amount of any additional outside capital brought into the undertaking with the consent of the Government under clause 6(1) of the agreement during the period between the date of this agreement and the first day of January, one thousand nine hundred and seventy-one. (b) Subject to payment being made in terms of sub-clause (a) above, all the right, title and interest of the company of and in the undertaking shall on the purchase date become vested in the Government free from all mortgages, charges and liens created by the issue of debenture or debenture stocks of the company : Provided that the company shall be entitled to retain all statutory books of account and other documents normally kept outside India but shall afford every facility to the Government to have inspection of the same or take copies of or extracts therefrom. (c) The Government shall also pay to the company in sterling in London, the amount of the balance (if any) of the shareholders' account at the purchase date within one month af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctified by statute, the assessee maintained, (i) under clause 4(1)(e) of the terms, a " special reserve account ", in its books ; the amounts lying to the credit of this account were pounds 199,407, pounds 192,940, and pounds 98,017, on the respective valuation dates, and (ii) under clause (4)(1)(d) of the terms, a " shareholders' account ", in its books ; amounts lying to the credit of this account were pounds 154,434, pounds 208,934 and pounds 262,811, on the respective valuation dates. The assessee had also issued debentures, which were secured by floating charge on the general assets of the assessee. The debts under the debentures were all due to parties in the United Kingdom. The assets of the assessee outside India were pounds 427,786, pounds 351,888 and pounds 195,916 on the respective valuation dates. The assets of the assessee in India on those dates were pounds 2,930,032, pounds 3,010,560 and pounds 3,119,149 respectively. The assessee claimed before the Wealth-tax Officer that in determining its net wealth, (i) amounts credited to the special reserve account, and (ii) amounts credited to the shareholders' account should be excluded, and (iii) deduction should be give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eft. This is secured on the assets of the company in India. So they must be treated as debts located in India. Even if it is not considered as debts located in India, under section 7 of the Wealth-tax Act, when the Wealth-tax Officer has to find out the market value of the assets of the appellant, he has to deduct the debentures secured on assets. After all, any person who buys the assets of the company will buy them subject to the debentures' liability of pound 66,275 mentioned above. Therefore, both under section 7(1) and 7(2) of the Wealth-tax Act, the appellant is entitled to the deduction of pounds 66,275. The Wealth-tax Officer will allow this as a deduction." As against the order of the Appellate Assistant Commissioner, the assessee and the Wealth-tax Officer both appealed before the Appellate Tribunal. The Tribunal affirmed the order of the Appellate Assistant Commissioner in so far as disallowance of the claim for deduction of " shareholders' account " was concerned, with the following observation : " According to clause 4(1)(d), the company had to set aside in each accounting year certain sums in a fund called 'the shareholders' account' and the dividends to the shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her than that prescribed in the Act. Except in the event of a loss in the undertaking, the balance in the special reserve account has got to be accumulated for the ultimate benefit of the Government. Any other inroad into that reserve will mean a breach of the agreement between the company and the State Government and violation of the Act of 1951. It is, therefore, not altogether correct for the wealth-tax authorities to state that the assessee-company was the full owner of the amounts until 1st January, 1972, which is the proposed date of purchase of the undertaking by the Government. We are, therefore, of the view that the company held these amounts on Government account and, in determining the value of the net assets of the company's business as a whole, it would not be proper to take into account amounts which it was accumulating for the benefit of the Government who was a kind of a sleeping partner in the undertaking for the duration. To the extent that the amounts accumulated in the accounts were invested in the company's undertaking, the assets of the undertaking did not belong to the company within the meaning of section 2(m) of the Wealth-tax Act and the assessee-company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... At the instance of the revenue " (1) Whether, on the facts in the circumstances of the case, the amounts of pounds 199,407, pounds 192,940 and pounds 98,017 standing in the special reserve account on the books of the assessee-company were deductible in determining the net wealth of the company for the assessment years 1957-58, 1958-59 and 1959-60 respectively ? " At the instance of the assessee " (2) Whether, on the facts and in the circumstances of the case, the amounts of pounds 154,434, pounds 208,934 and pounds 262,811 standing in the shareholders' accounts as on respective valuation dates were deductible in determining the net wealth of the company for the assessment years 1957-58, 1958-59 and 1959-60 respectively ? (3) Whether, on the facts and in the circumstances of the case, the amounts of pounds 66,275, pounds 131,189 and pounds 274,587 out of the debentures of the company were allowable as debts owed by the company in the light of section 2(m) read with section 6 of the Wealth-tax Act? " We propose to take up questions Nos. 2 and 3 for consideration first of all, because that was the order in which we heard the learned counsel for contending parties. Mr. Ginwall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a debt owed by a company, in Kesoram Industries and Cotton Mills Ltd. case, in the following language : " The directors cannot distribute dividends but they can only recommend to the general body of the company the quantum of dividend to be distributed. Under section 217 of the Indian Companies Act, there shall be attached to every balance-sheet laid before a company in general meeting, a report by its board of directors with respect to, inter alia, the amount, if any, which it recommends to be paid by way of dividend. Till the company in its general body meeting accepts the recommendation and declares the dividend, the report of the. directors in that regard is only a recommendation which may be withdrawn or modified as the case may be. As, on the valuation date, nothing further happened than a mere recommendation by the directors as to the amount that might be distributed as dividend, it is not possible to hold that there was any debt owed by the assessee to the shareholders on the valuation date." The money funded in " shareholders' account is not debt according to the above test. It does not appear what dividend, if any, was declared by the assessee, which became payable o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh v. Queen, to an Irish decision in Lawson v. Commissioners of Inland Revenue and to another decision of the Privy Council in Toronto General Trusts Corporation v. King B. What happened in the last mentioned case was that certain mortgages secured upon land held by the testator in the Province of Alberta who was domiciled and died in the Province of Ontario, were subjected to succession duty in the Province of Alberta. The question raised in appeal before the Privy Council, was whether they were in fact so subject. In upholding the claim to duty, Lord Cave observed : " . . . A simple contract debt is to be deemed to be within the area of the local jurisdiction within which the debtor for the time being resides, the locality of a specialty debt is the place where the specialty is found at the time of the creditor's death ... This rule has been recognised in numerous decisions both here and in the Dominion of Canada, and the general principle must be regarded as well settled. But in the present case there is a difficulty in applying the rule, owing to the fact that each of the mortgages was created and evidenced by duplicate deeds, and that at the date of the testator's death one o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to account, the only possible conclusion appears to be that the mortgages in question in this case were at the testator's death situate in Alberta." In the case of Delhi Cloth and General Mills Co. Ltd. v. Harnam Singh the Supreme Court points out : " That a debt is property is, we think, clear. It is a chose in action and is heritable and assignable and it is treated as property in India under the Transfer of Property Act which calls it an 'actionable claim' ; sections 3 and 130. But to give it position in space is not easy because it is intangible and so cannot have location except notionally and in order to give it notional position rules have to be framed along arbitrary lines. " In such matters, complications under the private international law are sought to be resolved by some, by the " situs rule ", by others by " the proper law of contract ", that is to say, the system of law by reference to which the contract was made or that with which the transaction has its closest and most real connection. We are not bothered with such refinements in the present case. Here a British company issued debentures, all held by holders in the United Kingdom. The specialties were in the Un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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