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TMI Blog1969 (9) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... ee, however, contended before the Wealth-tax Officer that in computing the break-up value of the shares of Messrs. Hind Mills Ltd. and Sri Hanuman Sugar Mills Ltd., the depreciable assets of the two companies should be taken at their written down values as per income-tax records. The Tribunal was of the opinion that no depreciation had been shown in the balance-sheets and, therefore, it would be unrealistic to take the book value of the assets. The Tribunal came to the conclusion that the prospective buyers of the shares would take into consideration the fact that the assets of the companies concerned had depreciated year after year due to use, although no depreciation had been shown in the balance-sheets. The Tribunal, therefore, directed that the written down values of such depreciable assets should be taken instead of the values shown in the respective balance-sheets. Another contention was put forward by the assessee that the dividends proposed but not declared by Messrs. Hind Agents Private Ltd. and Shri Hanuman Sugar Mills Ltd. as on the relevant valuation date should be deducted from the gross value of the assets of the companies. The Tribunal was of the opinion that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not justified in directing that the value of the depreciable assets of the companies should be based on their written down value instead of their balance-sheet values. It was contended that depreciation under the Income-tax Act is allowed on the statutory basis and it has not necessarily any correlation with the market value of the assets. Therefore, it was submitted, that in computing the market value of the assets, there is no warrant for treating the written down value in the income-tax assessment of a particular asset as the basis. Before this contention is considered, it has to be borne in mind that the assets are depreciable assets. Therefore, the position seems to be admitted that these are assets which, with the passage of time, depreciate. It also appears from the order of the Tribunal that in the balance-sheets depreciation of these assets have not been provided for. The Tribunal in its order in this connection relied upon the judgment of the Tribunal in the case of another shareholder of the said company, i.e., Sri Narayan Prasad Nopany, relating to the assessment year 1959-60. The said order of the Tribunal in the case of Sri Narayan Prasad Nopany has been annexed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lecting the depreciation of physical assets, like 'building, machinery, plant or furniture', under section 10(2)(vi) of the Income-tax Act, in the valuation of assets like ' shares' either by following the principles of fixing a deceptive percentage or deceptive proportion." In the above case, in view of the fact that there was statement in the balance-sheet that the depreciation had not been shown due to paucity of profit and in view of the fact that there was no evidence before the Tribunal to come to the conclusion that the written down value did not represent the market value, this court came to the conclusion that the Tribunal was justified in proceeding to take into consideration that the prospective buyer would be guided by the written down value. Mr. Pal, appearing for the revenue, drew our attention to two judgments of the Supreme Court in Commissioner of Wealth-tax v. Tungabhadra Industries Ltd. and Commissioner of Wealth-tax v. Aluminium Corporation of India Ltd. (Civil Appeal No. 1596 of 1968), for the argument that the values put in the balance-sheets should be taken as the basis of valuation. It has to be borne in mind that both the cases were concerned with the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Wealth-tax v. Srimathi Radha Debi M. Nopany (unreported) and the facts discussed before, we answer question No. 1 in the affirmative and in favour of the assessee. In view of the judgment of the Supreme Court in the case of Keshoram Industries Cotton Mills Ltd. and the decision of this court in Commissioner of Wealth-tax v. Rajendra Singh Singhi , question No. 2 must be answered in the negative and in favour of the revenue. Indeed, on this question no argument was advanced by the parties before us. The third question canvassed before us is of a controversial nature. It appears from the order of the Wealth-tax Officer that the assessee claimed deduction of Rs. 3,50,771 for agricultural income-tax as "claimed but not provided." The Wealth-tax Officer in his order observed that the foot-note to the balance-sheet as on September 30, 1958, showed as follows : "The company has been assessed to agricultural income-tax for the accounting years 1951-52 and 1952-53, amounting to Rs. 5,14,156 towards which Rs. 1,63,385 have been advanced by the company under protest and the references have been decided in favour of the company. However, the department has preferred appeals again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvanced by the company under protest and the reference has been decided in favour of the company. However, the department has again preferred appeal against the same." The Tribunal has observed that on the assets side of the balance-sheet it is shown that the advance payment of Rs. 1,63,385 has been paid to the Government on account of agricultural income-tax assessment. The Tribunal also observed that on the liabilities side no provision existed in respect of the demand of Rs. 5,14,156 made by the said agricultural income-tax department. The Tribunal dealing with the contention of the assessee on this point in the case of Sri Narayan Prasad Nopany observed as follows : "We agree with the learned counsel's submission that, in these circumstances, the contingencies of the department succeeding in appeal cannot be left out of the amount while valuing the assets. We would presume that the assessee has more than 50 : 50 chance of the issue being decided in his favour. As against the liability of Rs. 5,14,156 we would estimate the value of the liability at Rs. 1,63,385, being the sum already paid to the Government and not yet refunded to the assessee. Whether the liability amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be bought in the open market. In computing the value of the shares under section 15(3) read with rule 10(2), the Gift-tax Officer added the following two items, namely, (i) provision for taxation, and (ii) proposed dividend. Thereupon, an application was made under article 226 of the Constitution of India. The Bench decision of this court held that though the amount of tax liability was uncertain on the date of the gift it was necessary to make a just and fair allowance for the liability. The provision of taxation made by the company was a fair estimate of the tax liability and the amount so set apart was liable to be deducted. It was further held that in computing the value of shares by reference to the value of the company's assets no deduction or allowance could be made for dividends not declared on the date of the gift. The amount set apart as proposed dividend could not therefore be deducted. It has to be borne in mind that here under section 7(1) of the Wealth-tax Act, when the wealth-tax authorities are considering the market value of the shares by following the break-up method of the assets of the company it is not possible to lay down the precise factors which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this was the asset of the company, namely, a sum of Rs. 1,63,385, was not a correct estimate. This being the position, there is no basis for saying that this is a factor which a prospective buyer is likely to take into consideration in estimating the market value. A contingent liability or a bad debt is a factor which a prospective buyer would take into consideration. In order to influence the mind of a prospective buyer the facts must be as on the valuation date. Here, in the balance-sheet which is mainly brought to the notice of the prospective buyer there is no indication of anything doubtful about recovering this sum of Rs. 1,63,385 from the Government. Counsel for the assessee also drew our attention to a decision of the Supreme Court in the case of Commissioner of Wealth-tax v. Standard Vacuum Oil Co. Ltd., where it was held that where a notice under section 18A of the Indian Income-tax Act, 1922, was concerned, the amounts mentioned in the said notices were debts owed within the meaning of section 2(m) of the Wealth-tax Act on the valuation dates and had to be deducted in computing the net wealth of the respondent. Here, the company was claiming deduction from its assets. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as grown around that section is deceptive and conceals many thorns specially with regard to, (1) opinion of the Wealth-tax Officer, and (2) the open market. The first controversy is what happens when there is or can be in fact no "open market". In this case the fact is that the assessee who holds shares in Messrs. Hind Mills Ltd. has these shares which are not admittedly quoted on the stock exchange and there is no open market as such for such shares. While the market does not remain open, law opens the field of imagination. The answer is said to be to imagine a hypothetical market, a hypothetical seller and a hypothetical purchaser and then fix what must necessarily be the hypothetical price. But in the process, the law still says that one has to look for reality in the illusory market with illusory buyer and illusory purchaser trying to buy shares which have no market. The situation is ideal where the normally pent up legal romance gets its chance to operate. Many theories have been advanced in law for valuation of such shares. First, there is the book value or the balance-sheet value. Then there is the written down depreciation value in income-tax proceedings. The two recent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular facts of a particular case. The question of onus would depend on whether on the records in each case there are facts which suggest that one or the other test should be applied. But the fact that I desire to emphasise in this case is that, in valuing assets under section 7 of the Wealth-tax Act, the object of the Wealth-tax Act should never be missed. The object is to find the value in the open market. Balance-sheet value and the written down value are not the only two methods of valuing the asset. I do not read section 7 of the Wealth-tax Act to mean that the valuation is confined always and invariably to these two methods of valuation. It is open to the Wealth-tax Officer in search of value in the open market, even in hypothetical cases, to consider any relevant economic factor. Many factors determine the value of an asset like the share in a company. The value of shares fluctuates in the market due to many reasons--political and economic. If in any particular case the Wealth-tax Officer finds that the valuation of the shares on the basis of the balance-sheet will not be justified for reasons which can be tested in court or in the other case where the Wealth-tax Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned in the balance-sheet on the ground of paucity of profits. Absence of depreciation, therefore, in the balance-sheet must be read with the express finding that it was due to the paucity of profit and certified by the auditor as such. It, therefore, should not be taken to mean only that the prudent management thought either there was no depreciation in fact or that the depreciation should not be allowed in the balance-sheet under any circumstances. It was not shown on the express ground of paucity of profits. That was the point which we emphasized in our recent decision in Commissioner of Wealth-tax v. Smt. Radha Debi M. Nopany (unreported). The other question in this reference is about the payment of agricultural income-tax and whether the Tribunal was right in holding that in determining the break-up value of the shares of Sree Hanuman Sugar Mills Ltd., agricultural income-tax paid by the said company amounting to Rs. 1,63,385 was liable to be deducted from the gross value of the assets. Here, at the foot of the balance-sheet of Sree Hanuman Sugar Mills Ltd. it is shown that "the company has been assessed to agricultural income-tax for the accounting years 1951-52 and 1952-53 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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