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TMI Blog1983 (5) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... P.) Ltd., which would be fully illustrative. 2. Where equity shares of a company are not quoted on a stock exchange, one of the methods for determining the market value is the break-up value method. This involves the determination of the 'net worth' of the company, represented by, the excess of the value of assets, over the liabilities as appearing in the balance sheet. Rule 1D prescribes the manner in which the value of 'assets' and of 'liabilities' is to be computed. The rule provides that certain amounts exhibited as 'assets' in the balance sheet shall not be treated as 'assets', and the rule further provides, that certain amounts shown as 'liabilities' in the balance sheet are not to be treated as such. In view of the latter provisions, the result would be that a part, or whole, of certain amounts that are classified in the balance sheet as 'liabilities' may not fall to be deducted from the aggregate value of 'assets' in arriving at the 'net worth'. The two Explanations to rule 1D which are relevant read as under : "Explanation I : For the purposes of this rule, 'balance sheet', in relation to any company, means the balance sheet of such company as drawn up on the valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te, which is 31-3-1977 and which is the relevant balance sheet for the assessment year 1977-78, the total of the asset-side is shown at Rs. 17,20,162 (hereinafter rounded off to Rs. 17.20 lakhs). This includes an item described as 'advance tax' of Rs. 2,10,874 (hereinafter rounded off to Rs. 2.11 lakhs). In computing the value of the shares, the WTO in terms of Explanation II(i)(a) excluded the amount of Rs. 2.11 lakhs from the total value of assets of Rs. 17.20 lakhs and the value of assets was arrived at Rs. 15.09 lakhs. The profits for the year according to the profit and loss account came to Rs. 4.17 lakhs. Exhibited as a liability in the aforesaid balance sheet was provision for taxation of Rs. 2.52 lakhs. The WTO purporting to apply the provisions of Explanation II(ii)(e) to rule 1D, excluded from the amount of provision for taxation appearing on the liability side of Rs. 2.52 lakhs, the amount of advance tax of Rs. 2.11 lakhs. In other words, he computed the deductible liabilities on account of provision for taxation at only Rs. 41,000. The net worth consequently stood increased by Rs. 2.11 lakhs and the assessee was aggrieved by this adjustment made by the WTO. 4. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case for the revenue, Shri Joshi submitted that while section 211 of the Companies Act, which prescribes the form and contents of the balance sheet, did not specifically indicate the manner of exhibiting the payments made on account of advance tax, it was well recognised, as a practice in accountancy, that the advance tax paid was to be exhibited, as an asset on the asset side of the balance sheet. He stated the practice had received judicial recognition and finds mention in the decision of the Gujarat High Court in CIT v. Rohit Mills Ltd. [1965] 58 ITR 854, where at pages 866 and 867, there are the following observations : "....The system of accounting adopted by the assessee-company in the instant case was to treat all payments of advance and other taxes during the relevant assessment years, as advances until the assessments were finalised. The system so adopted by the assessee-company has, to a certain extent, justification inasmuch as an assessee is not likely to anticipate with full certainty as to what precise amount he would be assessed finally, as there are likely to be some items in his return of a debatable character. Until, therefore, an assessment is finalised, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sheet and the advance tax paid which figured as an asset, to the extent such amount did not exceed the tax on the basis of the book profits. In this regard, he stated that by a Notification No. SO 674(E) No. 4194/F. No. 155(84) 1979 TPL, dated 29-8-1981 it had been proposed to make certain amendments in the Rules to provide in the proposed Explanation to the rule that : ". . . liabilities include all debts owed by a company, but does not include any amount representing provision for taxation to the extent it exceeds the amount representing the difference between the tax payable with reference to the book profits of the company and the amount of advance tax paid during the financial year immediately preceding the assessment year relevant to the accounting year." According to the submissions, the proposed amendment was only clarificatory of the position, existed. 8. Finally, the learned counsel referred to the decision of the Supreme Court in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 and submitted that the expression "tax payable" as occurring in Explanation II(ii)(e) has to be interpreted as the gross tax computed less taxes already paid, which in the present case would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, which would have a bearing on the issue before us. 10. Coming to the aspect of the scope of the term 'tax payable', he stated that the decision in the case of Vegetable Products proceeded on the facts of the case and with reference to such facts, the interpretation most beneficial to the assessee was accepted by the Court. His contention was that the tax payable has to be computed in respect of the income of a previous year. It was only after such computation was made, when one comes to the point of payment, that the law permitted a set off against the tax payable, by giving credit for amounts paid as advance tax. His submission was that the two concepts of tax payable, and advance tax paid, were entirely different and there was no warrant for arriving at the tax payable in terms of rule 1D to set off any amount, which may have been paid as advance tax. Finally, he stressed that the two decisions which are in favour of the assessee, being of the Gujarat High Court in Ashok K. Parikh's case, and Arvindbhai Chinubhai's case should be followed. 11. Appearing on behalf of one of the interveners, Shri B. A. Palkhivala sought to formulate his propositions in three parts. First h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er than' only meant that certain items did not fall for consideration and it had to be left untouched in dealing with the type of liabilities referred to in the said clauses. Consistent with this manner of usage and the interpretation to be placed thereon, he stated that the words in parenthesis in Explanation II(ii)(e) only indicated that the amounts representing provision for payment of advance tax, which may be included in the amount exhibited as provision for taxation, were to be left untouched, i. e., that such amounts would continue to qualify for deduction as liabilities and should not be taken into consideration for determining whether the provision for taxation was in excess over the tax on book profits or not. 13. Adverting to the concept of the term 'tax payable', Shri B. A. Palkhivala submitted that this referred to only the computation of the total tax and did not relate to the 'arithmetic' of the manner in which the tax so computed had to be adjusted to arrive at the net tax, which had to be paid to liquidate tax liabilities. He stated that the term 'tax payable' had been used in different provisions of the Income-tax Act with different meanings. In particular, he i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n holding that for the purposes of computation of the market value of the shares of Bipin Silk Mills (P.) Ltd., the advance tax paid under section 210 of the Income-tax Act, 1961, and shown on the assets side of the balance sheet of the said company cannot be deducted from the tax payable in determining whether the provision for taxation is in excess over the tax payable with reference to the book profits in accordance with the law applicable thereto within the meaning of clause (ii)(e) of Explanation II to rule 1D of the Wealth-tax Rules, 1957 ?" He stated that the express issue for which the question required an answer was whether the advance tax paid under section 210 of the Income-tax Act, 1961, and shown on the assets side of the balance sheet was to be deducted, or not, from the tax payable. He, therefore, submitted that this issue had been expressly considered and pronounced upon by the Gujarat High Court, and the conclusion was that the amount of advance tax was not to be deducted. The learned counsel placed reliance on the decision of the Bombay High Court, in the case of CIT v. Chimanlal J. Dalal Co. [1965] 57 ITR 285 and submitted that even where a High Court doubted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of computation of the net worth the language of the rules have to be given their true meaning and have to be strictly followed. The learned counsel for the revenue went on to suggest that the wording of Explanation II(ii)(e) clearly directed an adjustment by way of deduction of the advance tax paid from out of the amount exhibited as provision for taxation. To pronounce on this, in the first instance, the words in paranthesis in Explanation II(ii)(e) '[other than the amount referred to in clause (i)(a)]' call for interpretation. The learned counsel for the revenue had suggested that the import of the words 'other than' meant that advance tax paid exhibited on the asset side which, according to him, was 'the amount referred to in clause (i)(a)' had to be deducted from the amount exhibited as provision for taxation. We are unable to subscribe to this proposition, for, as pointed out by Shri V. H. Patil the words '[other than the amount referred to in clause (i)(a)]' would only refer to provision for payment of advance tax, if any, and not any amount of advance tax which may have actually been paid. In this regard we have to state that there has been a complete dissertation on the sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said that this proposed amendment is merely clarificatory of the intention as it already exists. The proposed amendment spells out a definite adjustment which the rule as it now stands does not enjoin. In any event, this amendment which was proposed as far back as August 1981, has not yet been incorporated into the rules. 17. We agree with the learned counsel for the revenue that though the specific question whether advance tax paid had to be deducted from provision for taxation as exhibited on the liability side of the balance sheet to determine whether there was any excess with reference to the tax on book profits was before the Gujarat High Court in the later case decided by that Court in Arvindbhai Chinubhai's case, the answer to the question was rendered by the Court only on the basis of concession [see Arvindbhai Chinubhai's case] and it cannot, therefore, be construed that there was any pronouncement by the Gujarat High Court on the extent and scope of the term 'tax payable' as occurring in Explanation II(ii)(e) of rule 1D. 18. We now come to the main plank of the argument of Shri Joshi, the learned standing counsel for the revenue, which centres round the interpretati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e regular assessment : Provided that where, before the completion of the regular assessment, a provisional assessment is made under section 141A, the credit shall be given also in such provisional assessment." Here again, the statute enjoins the credit to be given for the advance tax paid when tax is computed on finalisation of the regular assessment. The question of levy of penalty also arises only when an assessment is finalised and at that stage the provisions of section 219 also come into play. However, in our view, in any exercise of computing tax with reference to book profits on a hypothetical basis neither the statutory mandate nor the principles of interpretation which have received judicial recognition for arriving at the tax, if any, payable on finalisation of an assessment would apply and it cannot be said that advance tax paid has invariably to be deducted. We may mention at this juncture that there are provisions in the Income-tax Act, e. g., section 139(8), where in spite of using the expression 'tax payable', it is further explicitly provided that the said amount will be reduced by advance tax actually paid and tax deducted at source. Therefore, we come to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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