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TMI Blog1991 (10) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... e merits of the controversy, we reframe the aforesaid question as follows: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the direction of the Commissioner of Wealth-tax (Appeals) for deduction of liabilities towards provision for income-tax, proposed dividend and gratuity from the value of the assets of the company for the purpose of determination of the value of the unquoted shares of Messrs. Paharpur Cooling Towers (Pvt.) Ltd. on the break-up value method in accordance with rule ID of the Wealth-tax Rules, 1957 ?" The facts, inter alia, relating to these references are as under: These references relate to the assessment years 1979-80 and 1980-81, for which the relevant valuation dates were March 31, 1979, and March 31, 1980, respectively. The assessee held certain shares of Paharpur Cooling Towers (Pvt.) Ltd., which are unquoted. The assessee disclosed the market value of the shares held by him for the purpose of charge to wealth-tax based on the average maintainable profits and its earnings. The Wealth-tax Officer, however, held that, for the purpose of valuation of unquoted equity shares under the Wealth-tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount so arrived at divided by the total amount multiplied by the paid up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 80 per cent. of the break-up value so determined. It has further been submitted that, according to the clear provisions of rule 1D, the balance-sheet of a company drawn up in accordance with the provisions of the Companies Act, 1956, shall be treated as sacrosanct and from the value of all assets shown in that balance-sheet, the value of all liabilities as shown in the balance-sheet shall be deducted for determining the break-up value, which is the first step in determining the market value in accordance with that rule. It has also been submitted that Explanation II of the said rule provides for certain adjustments to be made in respect of the assets and liabilities shown in the balance-sheet of the relevant company. These are the only adjustments which are permitted by the said rule. No adjustment other than those which are specifically laid down in Explanation II can be permitted. Rule 1D of the Wealth-tax Rules, 1957, and also Explanation II(ii)(e)of the said rule are set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alance-sheet, the balance-sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balance-sheet drawn up on a date immediately after the valuation date. Explanation II.-For the purposes of this rule (i) the following amounts shown as assets in the balance-sheet shall not be treated as assets, namely : (a) any amount paid as advance tax under section 18A of the Indian Income-tax Act, 1922 (11 of 1922), or under section 210 of the Income-tax Act, 1961 (43 of 1961); (b) any amount shown in the balance-sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset : (ii) the following amounts shown as liabilities in the balance-sheet shall not be treated as liabilities, namely: (a) the paid-up capital in respect of equity shares; (b) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the valuation date at a general body meeting of the company; (c) reserves, by whatever name called, other than those set apart towards depreciation ; (d) credit balance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the tax payable so calculated either in respect of advance tax and/or in respect of taxes deducted at source. In fact, sub-clause (e) makes it very clear that advance tax is to be totally ignored since it uses the words " other than the amount referred to in clause (i)(a) " which deals with the amount of advance tax paid under section 210 of the Income-tax Act, 1961. Mr. Poddar, learned advocate, for the assessee further contended that it is clear from the express words that it is not the intention of the Legislature that advance tax should be deducted from the gross tax payable with reference to the book profits. Had it been so, the rule would have used the expression " as reduced by ". It has been suggested that, from the corresponding provisions of section 139(8)(a) of the Income-tax Act, 1961, the same would be clear. The words used therein are to the following effect " the tax payable on the total income as determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source ". It has also been contended that, whenever it is the intention of the Legislature that the advance tax paid and taxes deducted at source should be reduced f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in excess over the tax payable with reference to the book profits in accordance with the law applicable thereto. This is, admittedly, not the case here. The learned advocate for the assessee in this connection cited the following cases in support of his contention. (1) CWT v. Ashok K. Parikh [1981] 129 ITR 46 (Guj). (2) CWT v. Arvindbhai Chinubhai [1982] 133 ITR 800 (Guj). (3) CWT v. Pratap Bhogilal [1987] 167 ITR 501 (Bom). (4) L. G. Balakrishnan v. CWT [1988] 173 ITR 266 (Mad). (5) WTO v. C. J. Sheth [1983] 4 ITD 706 (Bom) [SB]. He has also referred to the following cases which have been decided in favour of the Revenue. (1) Ashok Kumar Oswal (Minor) v. CWT [1984] 148 ITR 620 (P H). (2) CWT v. N. Krishnan [1986] 162 ITR 309 (Kar). (3) CIT v. M. Lakshmaiah [1988] 174 ITR 4 (AP). (4) CWT v. Latha D. Pai [1989] 179 ITR 249 (Kar). We have considered the respective submission of the parties and the cases cited from the Bar. It has not been disputed before us that the valuation of unquoted shares of Messrs. Paharpur Cooling Tower (Pvt.) Ltd. has to be determined in accordance with the provisions "of rule 1 D of the Wealth-tax Rules, 1957. It has to be considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation II deals with a provision and not the actual payment made by the company. The words " other than the amount referred to in clause (i)(a) " refer to the provision for taxation other than the provision for advance tax ; they do not mean the amount paid as advance tax under section 18A of the Indian Income-tax Act, 1922, or section 210 of the Income-tax Act, 1961. While considering the provision for taxation, it must be ascertained that there is no provision for payment of advance tax because the provision for advance tax is to be excluded from the scope of sub-clause (e) of clause (ii) by the words " other than the amount referred to in clause (i)(a) ". Therefore, what sub-clause (e) of clause (ii) requires the Wealth-tax Officer to do is to ascertain first as to what are the book profits shown by the company and in the light of those book profits, what would be the tax payable with reference to those book profits in accordance with the law applicable thereto. Having thus ascertained the amount of the tax payable with reference to the book profits, the Wealth-tax Officer has then to see whether the provision for taxation on the liabilities side of the balance-sheet is in exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lordships of the Gujarat High Court followed their earlier decision in the case of Ashok K. Parikh [1981] 129 ITR 46. In the case of CWT v. Pratap Bhogilal [1987] 167 ITR 501 (Bom), the question for determination was " whether, on the facts and in the circumstances of the case, the liabilities as shown in the balance-sheet of Batliboi and Co. Pvt. Ltd., as at March 31, 1969, should be further reduced by the sum of Rs. 66,95,020 aforesaid while determining the market value of unquoted equity shares of the company in terms of rule ID of the Wealth-tax Rules, 1957 ? " The assessee, inter alia, held shares of Messrs. Batliboi and Co. Pvt. Ltd. ( for short, " the company The shares were not quoted at any stock exchange and were required to be valued in accordance with the provisions of rule ID of the Wealth-tax Rules, 1957. For the purpose of valuing the shares for the involved assessment year 1970-71, the pertinent balance-sheet of the company is that as on March 31, 1969. The assets side of the balance-sheet of the company, inter alia, disclosed an asset in the sum of Rs. 66,95,020 representing advance tax paid by the company. On the liabilities side, there appeared a liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the tax payable with reference to the book profits as total income. The Supreme Court in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192, was concerned with the interpretation of the expression " the amount of tax, if any, payable by him " as used in section 271(1)(a)(i) of the Income-tax Act, 1961. The penalty under that provision is levied with reference to and for the tax payable as determined on regular assessment. The situation envisaged is, thus, post-assessment. In that context, the amount of tax, if any, payable could only mean the tax payable with reference to the assessed profits as reduced by the advance tax paid, tax paid on the basis of self-assessment and taxes deducted at source, etc. The above decision has, thus, no bearing on the question posed before us. The bracketed portion in the sub-clause is to be read with the first part as (i) bracket starts immediately after the expression " provision for taxation " and (ii) the expression " to the extent of excess over " precedes the words " the tax payable ". Therefore, the bracketed portion will have a bearing on the first part only. The first part has, it appears to us, two limbs. The first limb, namely, " any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax paid from the total assets of the company. The Wealth-tax Officer deducted the advance tax paid from the tax payable on the basis of book profits to determine the actual tax payable. The Wealth-tax Officer deducted the actual tax payable from the provision for taxation and treated the excess as an excess provision. The Tribunal held that the method of computation adopted by the Wealth-tax Officer was correct. On a reference, it was held that since for the purpose of the balance-sheet, the tax has to be computed on the basis of the book profits and a provision has to be made therefor, what is to be ascertained for the purpose of clause (ii)(e) is whether the provision for taxation is in excess of the tax payable. The words " tax payable " clearly refer to the total amount of tax payable on the basis of book profits computed in accordance with the provisions of the Income-tax Act. There is no warrant for deducting the amount of advance tax and to give an artificial meaning to the words "tax payable". The Tribunal was not, therefore, right in its view that the advance tax paid has to be deducted from the tax on the book profits to arrive at the quantum of " tax payable " with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount which is referred to in clause (i)(a) . Though clause (i)(a) says that the amount paid as advance tax shown as assets in the balance-sheet shall not be treated as assets, the fact remains that it is an asset and it cannot be construed as a provision as commonly understood either for the purpose of taxation or for the purpose of commercial accounting. Such a construction, therefore, would not be permissible. The other construction which seems to be more plausible is to relate the word 'other' to the word 'amount' which occurs in the opening part of the clause. If the rule is so read, then it will read as follows : "Any amount, other than the amount referred to in clause (i)(a) representing provision for taxation to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto." It is a well-known rule of construction that, as far as possible, statutory provision should not be so construed as to make it nugatory or ineffective. If clause (e) is read in the manner indicated above, the obvious effect of such construction is that the amount referred to in clause (i)(a) which is the amount paid as advance tax, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the gross tax. The expression used in sub-clause (e) is "tax payable" and not "tax due". Secondly, it has been accepted in the aforesaid decision in favour of the Revenue that, if the assessee's submissions are accepted following the views taken by the Gujarat, Bombay and Madras High Courts, it would amount to double deduction. However, there is no question of double deduction. Rule ID prescribes an artificial rule of determining the market value of unquoted shares. This artificial rule is to be strictly construed. In the case of Ashok Kumar Oswal (Minor) v. CWT [1984] 148 ITR 620, it has been held by the Punjab and Haryana High Court that in Explanation II to rule ID of the Wealth-tax Rules, 1957, clause (i) deals with the amounts on the assets side in the balance-sheet which are not to be treated as assets, and clause (ii) with the amounts on the liabilities side in the balance-sheet which are not to be treated as liabilities. Under sub-clause (a) of clause (i), any amount paid as advance tax and shown as an asset in the balance-sheet of a company is not to be treated as an asset, and, under sub-clause (e) of clause (ii), the difference between the amount representing prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other way of interpretation of clause (ii)(e) than to correspondingly reduce the provision for taxes by the amount of advance tax paid. The provision for tax payable with reference to the book profits in the balance-sheet has to be reduced by the amount of advance tax paid. What clause (ii)(e) seeks to achieve is not to overload the liabilities side of the balance-sheet with the total tax payable, while the total tax payable in fact and in law is the gross tax as determined on book profits less the advance tax already paid. Therefore, in determining the break-up value of unquoted equity shares of a company under rule 1D, the amount representing the advance tax paid by the company and shown on the assets side of the balance-sheet is to be deducted from the excess provision for taxation shown on the liabilities side. In the case of CIT v. M. Lakshmaiah [1988] 174 ITR 4, the Andhra Pradesh High Court observed that the manner in which the market value of unquoted equity shares of companies should be computed is indicated in rule 1D of the Wealth-tax Rules, 1957. Explanation II to the rule provides, inter alia, that any amount paid as advance tax under section 18A of the Indian Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2)(a), without prejudice to the power conferred by sub-section (1) of section 46, rules made under the section may provide for the manner in which the market value of any asset may be determined. Accordingly, the Central Board of Revenue as it then was, made the Rules called the Wealth-tax Rules, 1957. Rule ID provides for arriving at the market value of unquoted shares of companies other than investment companies and managing agency companies. The said rule provides as follows: "The market value of an unquoted equity share of any company, other than an investment company, or a managing agency company, shall be determined as follows : The value of all the liabilities as shown in the balance-sheet of such company shall be deducted from the value of all its assets shown in that balance-sheet. The net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 85 per cent. of the break-up value so determined . . . ..." The proviso to rule I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s advance tax under section 18A of the 1922 Act or under section 210 of the 1961 Act will be shown on the assets side of the balance-sheet, for the purpose of arriving at the break up value, by the artificial rule laid down in Explanation II, clause (i)(a), the amount paid as advance tax in this manner under the law relating to income-tax is not to be treated as an asset. It is obvious that when particular amount which is shown on the assets side is not to be treated as an asset, the net worth of the company will, to that extent, be reduced because to that extent the assets will be shown less. On the other hand, when it comes to sub-clause (ii), which deals with what are not to be treated as liabilities under clause (e), it is only the amount shown by way of provision on the liabilities side that is dealt with and clause (e) makes it clear that any amount representing provision for taxation and the words in parenthesis, namely, 'other than the amount referred to in clause (i)(a)' to the extent of the excess over the tax payable with reference to the book profits of the company in accordance with the law applicable thereto, is not to be treated as liabilities. Provision for tax liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits, the Wealth-tax Officer has then to see whether the provision for taxation on the liabilities side of the balance-sheet is in excess of the said amount of tax payable with reference to the book profits as already ascertained by him. If there is any excess in the provision for tax liabilities, then that excess is not to be treated as part of the liabilities of the company while computing the break up value of the shares of the company. It is equally clear that so far as provision for advance tax is concerned, that provision has to be disregarded while applying the provisions of sub-clause (e) of clause (ii) of Explanation II. It is obvious that to the extent to which the liabilities are reduced, the net wealth will go up. The Revenue would be interested in showing a higher net wealth and higher break up value whereas the assessee who has shares in a company, the shares of which are not quoted on the stock exchange, is interested in seeing that the net worth and, consequently, the break-up value of the shares is shown as low as possible. In our opinion, sub-clause (a) of clause (i) of Explanation II is intended to give a benefit to the (holders of) shares of those companies, who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be divided by the total amount of its paid-up share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 85 per cent. of the break-up value so determined. In other words, according to the clear provisions of rule ID, the balance-sheet of a company drawn up in accordance with the provisions of the Companies Act, 1956, shall be treated as sacrosanct and from the value of all assets shown in that balance-sheet, the value of all liabilities as shown in the balance-sheet shall be deducted for determining the break-up value, which is the first step in determining the market value in accordance with that rule. Explanation II of the said rule provides for certain adjustments to be made in respect of the assets and liabilities shown in the balance-sheet of the relevant company. These are the only adjustments which are permitted by the said rule. No adjustment other than those which are specifically laid down in Explanation II can be permitted. Explanation II(i)(a) of the said rule provides that any amount paid as advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly requires determination of the book profits and the rate of tax applicable on such book profits for the relevant assessment year. Once the rate of tax applicable is found out for the relevant assessment year and the same is applied to the book profits, the tax payable would automatically come out. There is no scope for granting any further deduction from the tax payable so calculated either in respect of advance tax and/or in respect of taxes deducted at source. In fact, sub-clause (e) makes it very clear that advance tax is to be totally ignored since it uses the words " other than the amount referred to in clause (i)(a) " which deals with the amount of advance tax paid under section 210 of the Income-tax Act, 1961. It is not the intention of the statute as is clear from the provisions of sub-clause (e) that advance tax should be deducted from the gross tax payable with reference to the book profits. Had it been so, the rule would have used the expression " as reduced by " and not " other than the amount referred to in clause (i)(a) ". This part of the submission gets support from the corresponding provisions of section 139(8)(a) of the Income-tax Act, 1961. There, the words us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat adjustment is to be made in the provision for taxation Appearing on the liabilities side of the balance-sheet only if such provision is found to be in excess over the tax payable with reference to the book profits in accordance with the law applicable thereto. This is, admittedly, not the case here. In our opinion, the aforesaid decision of the Tribunal does not call for any interference. The second item in respect of provision for gratuity is directly covered by the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, at page 574. In that case, their Lordships of the Supreme Court clearly held that a provision for gratuity, whether made on actuarial valuation or on estimate, is a provision intended to meet known liability. Unless it is found that the provision made is in excess, the whole of the provision represents a liability and not a reserve. In fact, in the surtax assessment of Paharpur Cooling Towers (Pvt.) Ltd. (copy of the assessment is filed in course of hearing of the reference), it has been clearly recognised by the Assessing Officer that the provision made by the said company in respect of taxation, gratuity and/or proposed di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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