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TMI Blog1991 (1) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... D of the Rules, short depreciation provided for should be excluded the refixed the value of the shares. On further appeal by the Revenue before the Tribunal, on the point whether the difference between the straight-line method and the written down value method of computing the depreciation of the value of the assets should be adopted in arriving at the break up value of the shares under Rule 1D of the Rules, the Tribunal followed its earlier decision relating to the same assessee for the assessment years 1970-71 to 1972-73 in W. T. A. Nos. 37 to 39/74-75 dated May 29, 1976, and decided against the assessee. In the course of the earlier order of the Tribunal relied on, the Tribunal referred to the adoption by the companies of the straight line method for providing depreciation and the other relevant provisions of the Act and the Rules and the Companies Act and concluded that the reference to the depreciation according to the Income-tax Rules only in the report of the board of directors cannot be regarded as forming part of the balance-sheets of the companies and, therefore, adjustments in accordance with the rules could be made only to the value of the fixed assets as appeared ex fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Hindustan Motors Ltd. [1976] 104 ITR 430, which, according to learned counsel, has also explained the observations in CWT v. Aluminium Corporation of India Ltd. [1972] 85 ITR 167 (SC). In all the balance-sheets of the companies in which the assessee held shares, the straight-line method of providing depreciation which was one of the options available to the companies had been adopted and the balancesheets prepared accordingly. It was also not disputed that the depreciation as per the Income-tax Rules was not reflected in the balance-sheets, but had been referred to only in the directors' reports. Under section 7 of the Act, the Wealth-tax Officer is required to estimate the value of the shares, for purposes of the Act, subject to the Rules laid down in that behalf. Section 7(2)(a) provides that, in a case where the assessee carried on business for which accounts are maintained regularly, the Wealth-tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole, having regard to the balance-sheet of such business as on the valuation date and making such adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both or out of monies provided by the Central Government or State Government for the payment of dividends in pursuance of a guarantee given by that Government. Section 205(2) lays down the manner in which provision for depreciation should be made under section 205(1) of the Companies Act and the depreciation under section 205(2) provided is to the extent specified in section 350. In turn, section 350 providing for depreciation with reference to the written down value of the assets at the rates specified by the Indian Income-tax Act and the Rules, refers to section 349(4)(k), which relates to the determination of the net profits of a company in any financial year for purposes of payment of remuneration to managing agents. The method of providing depreciation under section 205(2)(b) of the Companies Act, which is the straight-line depreciation method, had been adopted by the companies and the other two alternatives provided in section 205(c) and (d) are not relevant. Under section 211 of the Companies Act relating to the form and contents of the balance-sheet and profit and loss account, it is provided that the balance-sheet should give a true and fair state of affairs of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and if such information is given, the report shall be annexed to the accounts and the provisions of the Companies Act shall apply in relation thereto accordingly except that the auditors shall report thereon only in so far as it gives that information. We also find from section 227(2) of the Companies Act that the auditor shall make a report to the members of the company on the accounts examined by him and on every balance-sheet and profit and loss account and on every other document declared to be part of or annexed to the balance-sheet or profit and loss account which are laid before the company in a general meeting during his tenure of office and the report shall also further state whether, according to his information and the explanation given to him, the accounts give a true and fair view of the affairs of the company and the profit or loss for that financial year. The report of the directors, in this case, contained the details of depreciation according to the Income-tax Rules, but the balance-sheet did not and the directors' report was not and could not be regarded as an annexure to the balance-sheet, for, our attention was not drawn to any provision in the Companies Act r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he primary basis and Explanation II permits the treatment of assets and liabilities found in the balance-sheet as not assets and liabilities. Rule 2A also contemplates only the balance-sheet as the basis for even making the adjustments specified in rules 2B to 2G. We, therefore, hold, on a consideration of the relevant provisions of the Act and the Rules, that the balance-sheet forms the basic foundation for arriving at the market value of the unquoted equity shares in accordance with the relevant Rules. What is found in this case is that the authorities had proceeded on the basis of the balance-sheets. However, the assessee wanted the authorities to travel outside the balance-sheets for the purpose of fixing the market value of the shares held by him. That plainly cannot be permitted to be done in the light of the provisions of the Companies Act and the Rules referred to earlier. We may now proceed to consider the decisions to which our attention was drawn by counsel on both sides. In CWT v. Aluminium Corporation of India Ltd. [1972] 85 ITR 167 (SC), relied on by learned counsel for the assessee, the assessee was a company and one of the questions which arose for consideration w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In that case, the assessee-company had not provided for full depreciation allowable under the provisions of the Income-tax Act in its balance-sheet owing to paucity of profits. The Wealth-tax Officer, under section 7(2)(a) of the Act, adopted the value of the assets as reflected in the balance-sheet, negativing the claim of the assessee that the book value of the assets should be reduced by the difference between the written down value under the Income-tax Act and the figures disclosed by the balancesheet. Though this order was affirmed in appeal, the Tribunal felt that, in cases where proper depreciation had not been allowed in the balance-sheet for any reason whatsoever, it is proper to accept the written down value as worked out for purposes of the Income-tax Act and directed the Wealth-tax Officer to adopt the written down value for inclusion in the net wealth. On a reference, the High Court affirmed the view of the Tribunal following its decision in CWT v. Tungabhadra Industries Ltd. [1966] 60 ITR 447. By the time the matter reached the Supreme Court, the decision in Tungabhadra Industries' case [1966] 60 ITR 447, which was followed by the High Court had been reversed by the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The observation of this court in the above case has to be understood only in that context." In view of the abovesaid observations of the Supreme Court explaining the manner in which the observation in CWT v. Aluminium Corporation of India [1972] 85 ITR 167 should be understood, we are of the view that reliance on that observation would not in any manner assist the assessee. In CWT v. Ranganayaki Gopalan [1973] 92 ITR 529 (Mad), relied on by the assessee, the question that came up for consideration was whether a sum representing the contribution to employees' gratuity fund was deductible for purposes of ascertaining the value of the unquoted equity shares in a company. The amount was payable by the company under a deed of trust to the trustees with an option that the amount may be paid in one lump sum or in instalments. Further, the balance-sheet of the company also referred to the liability for employees' gratuity at that amount on the basis of an actuarial valuation. The report of the directors also made a reference to the liability for payment of gratuity to employees. It was under those circumstances that this court held that the amount payable by way of gratuity liability ..... X X X X Extracts X X X X X X X X Extracts X X X X
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