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TMI Blog1975 (7) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... as the last two questions are concerned, Mr. Joshi on behalf of the revenue and Mr. Dastur on behalf of the assessee have stated that these questions are now concluded by the decisions of the Supreme Court. So far as question No. 2 is concerned, it is covered by the decisions of the Supreme Court in the case of Standard Mills Co. Ltd. v. Commissioner of Wealth-tax and in the case of Bombay Dyeing and Manufacturing Co. Ltd. v. Commissioner of Wealth-tax and in accordance with the said decisions question No. 2 shall have to be answered in the negative and against the assessee. We, accordingly, answer question No. 2 in the negative and against the assessee. So far as question No. 3 is concerned, counsel are agreed that it is covered by the decision of the Supreme Court in the case of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax and it has to be answered in the affirmative and in favour of the assessee. We, accordingly, answer question No. 3 in the affirmative and in favour of the assessee. Then remains for consideration question No. 1 and the facts relevant thereto should be set out. The assessee is an undertaking for supply of electricity. The relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,54,948 was, therefore, not deductible in determining the net value of the assets under section 7(2)(a) of the Act. The Supreme Court further pointed out that section 7(2) nowhere says that the Wealth-tax Officer, while proceeding under that section, was bound to accept every entry in the balance-sheet. The section authorises him to accept the valuation of the assets of a business as shown in the balance-sheet of the company. He is not bound to accept any deduction shown in the balance-sheet if he comes to the conclusion that the said deduction was not permissible. The Wealth-tax Act does not concern itself with the mode in which the assets of the assessee are acquired. It is immaterial whether the assessee acquired these assets from his own money or with the assets of others. Section 7 does not take note of hypothetical possibilities in the matter of valuation of assets. It merely concerns itself as to what is the true market value of the assets in question on the valuation date. Thus, the Supreme Court has emphasised that the only thing relevant for the purposes of the Act is that the assessee should be the owner of the assets in question on the relevant valuation date. The bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Sixth Schedule thereto. The relevant clauses of the Sixth Schedule for the purposes of the contingencies reserve are paragraphs III, IV and V which are as under : " III. There shall be created from existing reserves or from the revenues of the undertaking a reserve to be called 'Contingencies Reserve'. IV. (1) The licensee shall appropriate to Contingencies Reserve from the revenues of each year of account a sum not less than one-quarter of one per centum and not more than one-half of one per centum of the original cost of fixed assets, provided that if the said reserve exceeds, or would by such appropriation, be caused to exceed, five per centum of the original cost of fixed assets, no appropriation shall be made which would have the effect of increasing the reserve beyond the said maximum. (2) The sums appropriated to the Contingencies Reserve shall be invested in securities authorised under the Indian Trusts Act, 1882, and such investment shall be made within a period of six months of the close of the year of account in which such appropriation is made. V. (1) The Contingencies Reserve shall not be drawn upon during the currency of the licence exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the contingencies reserve. Such restrictions, according to his submission, do not affect the question whether the amount of the contingencies reserve is an asset belonging to the assessee. If it is so, then simply because there are fetters or restrictions upon the use of such a reserve or because on a compulsory purchase such reserve is to be handed over to the purchaser will not result in excluding such item from the wealth of the assessee which can be subjected to tax under the Act. On the other hand, Mr. Dastur on behalf of the assessee-company contended that in determining the net wealth the principles which also govern the computation of the income under the Income-tax Act ought not to be overlooked. He submitted that an item may not be assessable as income either because it is not of an income nature or though it is of an income nature it is exempt from tax or it is diverted at source and, therefore, does not accrue or arise to the assessee nor belong to the assessee. His further submission was that where an amount is diverted at source it does not legally reach the assessee and, therefore, the amount does not belong to the assessee. He submitted that under the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee on the valuation date, including assets required to be included in his net wealth as on that date under the Act, is in excess of the aggregate value of all the debts owned by the assessee on the valuation date other than the items which are specifically enumerated. The first question that we have to consider is whether the amount of the contingencies reserve appropriated in the manner required by the Sixth Schedule to the Electricity (Supply) Act, 1948, is an asset belonging to the assessee-company. It is not the case of Mr. Dastur that even if it is an asset it is exempted under any of the specific provisions of the Act. For determining the question whether it is an asset belonging to the assessee regard must be had to the provisions contained in paragraphs III, IV and V of the Sixth Schedule to the Electricity (Supply) Act. Such contingencies reserve has to be created from existing reserves or from the revenues of the undertaking. Existing reserves undoubtedly is a part of the assets of the assessee-company. So also any revenue earned by it will form part of its assets. Under clause (1) of para. IV a licensee is under an obligation to appropriate to contingencies reserve from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used for replacing an asset which ultimately formed part of the assessee's undertaking. It is undoubtedly true that under clause-(2) of paragraph V of the Sixth Schedule, in the event of a compulsory purchase of the undertaking, the amount standing to the credit of the contingencies reserve has to be handed over to the purchaser, namely, the Electricity Board, the State Government or a local authority because they are the only authorities who can exercise the power of compulsory purchase, but that by itself will not be a sufficient reason to come to the conclusion that it cannot be treated as a part of the asset of the assessee-company. If power of compulsory purchase is not exercised, then under section 8 it continues to form part of the assets of the undertaking and can be dealt with like any other assets belonging to the assessee-company. This being the nature of the amount of contingencies reserve, can it be said that this amount which is an asset, belongs to an entity other than the assessee-company ? It was urged by Mr. Dastur that the provisions contained in the Sixth Schedule are meant for the benefit of the public and, therefore, the public should be treated as beneficiari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice. Pending the acquisition, the company was bound under the agreement to apply its revenues in specific ways as provided in the agreement. It was to set aside, in each accounting year, in a fund called the shareholders' account, certain specified sums. The assessee was also required to accumulate any surplus of its profits after providing for losses, if any, in a special reserve account which was eventually to accrue to the benefit of the Government. The assessee, inter alia, claimed that the amounts set aside in the special reserve account and in the shareholders' account were to be deducted in computing its net wealth for the relevant assessment years. It was held that till the undertaking was acquired the amounts shown in the special reserve account were the assets of the company and, therefore, were not deductible in computing its net wealth ; that the fact that a separate shareholders' reserve had to be maintained by it because of the agreement with the Government did not change the character of the asset. It was sought to be contended on behalf of the assessee-company that under the agreement with the Government the company was under an obligation to maintain the special re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity Co. Ltd. v. Commssioner of Income-tax with a view to contend that as the amount of the contingencies reserve is diverted at source it cannot be regarded as income accruing to the assessee-company and, therefore, not an asset of the assessee-company. He submitted that whatever amount is permitted as a deduction can never form part of the assets of the assessee. He also submitted that in both these cases it has been held that it was deductible under section 10(1) of the Income-tax Act and, therefore, it cannot be regarded as an asset of the company. At the outset it should be pointed out that in both these cases the court was really concerned with the question of determination of the income of the assessee-company under the head of profits and gains of business. Questions which may be relevant for the purpose of determining the liability to pay income-tax may not be germane or applicable while deciding a question whether a particular asset is an asset belonging to the assessee and can be subjected to a liability for payment of wealth-tax. Under the Income-tax Act "income-tax" is a tax on the real income, i.e., profits arrived at on commercial principles subject to the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated in respect of each accounting year a sum equal to the amount of income-tax and super-tax calculated at rates applicable during the assessment year for which the accounting year of the licensee is the previous year, on the amount of development rebate to which the licensee is entitled for the accounting year under clause (vi)(b) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 : Provided that if in any accounting year, the clear profit (excluding the special appropriation to be made under item (va) of clause (c) of sub-paragraph (2) of paragraph XVII together with the accumulations, if any, in the Tariffs and Dividends Control Reserve less the sum calculated as aforesaid falls short of the reasonable return, the sum to be appropriated to the development reserve in respect of such accounting year shall be reduced by the amount of the shortfall. (2) Any sum to be appropriated towards the development reserve in respect of any accounting year under sub-paragraph (1), may be appropriated in annual instalments spread over a period not exceeding five years from the commencement of that accounting year. (3) The development reserve shall be available only for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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