9911796707
TMI Blog1982 (1) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... different facts, was also heard as involving some identical issue and it was understood that whatever was the ultimate decision in regard to the point raised in the appeal in WT Appeal No. 769 (Bom.) of 1980 would govern that appeal also in regard to the said point. We shall, therefore, take up the particular appeal [WT Appeal No. 769 (Bom.) of 1980] relating to the assessee, N.M. Shah, who is chartered accountant and is a partner in the firm of Shah Co., Chartered Accountants. 2. The firm of Shah Co., Chartered Accountants, maintains its accounts in what is called "cash basis" and, therefore, it took into its accounts only the professional fees which were actually received, and not professional fees which were outstanding as on the valuation date which coincides with the end of the accounting year 13-11-1974, relevant for the income-tax assessment for the year 1975-76. The return of net wealth submitted by the assessee, therefore, did not include the assessee's share of the outstanding professional fees of the firm. The assessee's claim before the WTO in this respect was that his share in the outstanding fees of the firm cannot be included as the firm follows cash system of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of showing work-in-progress in a manufacturing or commercial business cannot in its very nature apply to the case of a person rendering professional service like the assessee for instance, taking value of any amount as due for half completed audit. 3. That in a learned profession such as that of a lawyer or doctor and now, also a chartered accountant, debts of honour should not be confused with legal debts in the case of a business concern, It was contended that in the of a learned profession like the assessee's, regard must be had to the principle of greater sensitivity and it cannot be treated on a par with commercial debts outstanding and due to trading or other concerns engaged in business. In this connection, a reference is made to the affidavit of the assessee, according to which the two partnership firms, of which the assessee is a partner, were maintaining their accounts on cash basis, that the outstanding professional fees are not reflected in the balance sheets of the said partnership firms as the firms are maintaining accounts on cash basis, and that during the course of their entire professional practice, neither the assessee nor the two partnership firms, of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of sections 9(1) and 163 of the Income-tax Act, the expression "business" does not necessarily mean trade or manufacture only, and it is being used as including within its scope professions, vocations and callings for a fairly long time and, therefore, there is no warrant for giving a restricted meaning to the expression "business connection", so is to exclude from its scope professional connections in the context in which the expression "business connection" is used in section 9(1). It was, however, submitted by him that the correctness of the proposition laid down by the Supreme Court in that case should be held to be confined to the facts in that case in the context of section 9 and not as wide enough to extend to all other cases. 4. Even assuming that section 7(2) applies to an assessee carrying on profession the provisions thereof cannot be applied in the case of a partner of a firm carrying on a profession. The computation of the value of the share of a partner of the firm in such a case is, it is submitted, governed by section 4(1)(b) of the Act read with rule 2 of the Wealth-tax Rules and not by section 7(2) of the Act read with rules 2A to 2G which apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1973] 90 ITR 418 and Seth Satish Kumar Modi v. ITO [1949] 15 ITR 340. 7. An alternative proposition in case the earlier propositions are not accepted is that even if any adjustment is required to be made in respect of the outstanding professional fees, what is required to be included is not the "gross" outstanding professional fees, but the amount after making necessary adjustments on account of: (a) possible bad debts ; (b) tax liability of the firm in which the assessee is a partner; and (c) the tax liability of the partner himself in respect of the same. This proposition is really on the question of valuation of the asset represented by the debt outstanding in respect of professional fees and the argument is that the outstanding professional fee has imbedded in it the three elements stated above, namely, the possibility of the amounts becoming bad debts, the income-tax liability of the firm when it realises the income and also the assessee-partner's tax liability in respect of his share of income. 6. Y.P. Trivedi, learned counsel appearing on behalf of another assessee, Rajendra Kumar Tuli heard analogously on this point, besides adopting the arguments and submissions by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that he does not wish to dispute the proposition that "business" includes "profession" and, therefore, he would confine his stand with reference to the method of accounting of the assessee in his case which is the cash system. 7. S.E. Dastur, learned counsel on behalf of the interveners, the Institute of Chartered Accountants of India and the Bombay Chartered Accountants' Society, who had addressed us next, conceded that he does not dispute the proposition that the expression "business" is a comprehensive term which includes "Profession" and, therefore, the provisions of section 7(2) would be clearly applicable to a person carrying on a profession also. He submitted that section 7(2) brings in the concept of method of accounting adopted for the purpose of determination of the net wealth of the business as a whole. It was pointed out that the cash system of accounting is a well-known method and there are even instances of limited companies governed by the Companies Act maintaining their accounts on cash basis as would be evident from the fact that in the Report of Sachar Committee on the Companies and MRTP Acts, there is a recommendation on section 209, dealing with accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, it is pointed out that the adjustments contemplated under this rule related to an asset not disclosed in the balance sheet. The words "not disclosed in the balance sheet" refer, according to the learned counsel, to those assets which are required to be disclosed in the balance sheet in accordance with the method or system of accounts maintained, and do not cover any other asset which the assessee is not required to disclose in the balance sheet in accordance with the method of accounting employed. It was argued that rule 2C, clause (a), providing for adjustments in the case of a debt due to an assessee contemplates a debt due which is presently payable to the assessee according to the mercantile system of accounts, as is said to be indicated by the provision therein to the effect that where an amount or part of any debt has been allowed as a deduction under section 36(1)(vii) of the Income-tax Act, in computing the total income of the assessee for income-tax purposes, the amount has to be reduced by the deduction so allowed, that is to say, for a debt to come within this clause, it must be one which is capable of being deducted or allowed as a bad debt in computing the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applied to a case of an assessee who prepares a balance sheet integrated to the system of accounting adopted or followed by him and the adjustments contemplated under the rule cannot strike at the root of the system of accounts so as to change the very basis of accounting adopted. The rules, it was submitted, must be interpreted so as to make them readily workable and not involved and complicated. The learned counsel then next contended that in interpreting the provisions of the Wealth-tax Act and the Rules, the various direct taxes should be held as part of an integrated system and, therefore, if the system of accounts maintained by the assessee is a factor affecting the determination of the income according to the provisions of the Income-tax Act, it must equally govern the accrual of asset or wealth for the purpose of wealth-tax as a deciding factor. The learned counsel referred in the context of the observation of S. K. Desai, J. in the case of CGT v. Dr. R.B. Kamdin [1974] 95 ITR 476 (Bom.) according to which "in ascertaining the correct construction of statutes taxing gifts"---the decision was under the Gift-tax Act---"it would be proper to read them in the light of the clo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness. 10. It is then submitted that in the case of the assessee who is a partner in the firm, there is a further difficulty in the way or the revenue in making the adjustments because as laid down in the decision or the Allahabad High Court in Seth Satish Kumar Modi v. WTO [1980] 15 CTR (All.) 340, though the interest of a partner has to be determined as laid down in rule 2 of the Wealth-tax Rules, neither the provisions of the Act, nor the Rules lay down any particular procedure for calculation of the net wealth of a firm and, therefore, the net wealth of the firm has to be calculated under rule 2 in accordance with commercial principles, and the special provision in the Act for computation of net wealth cannot be applied for purposes of computing the net wealth of a firm under rule 2. As in this case, in computing the net wealth of the firm of which the assessee is a partner, the special provisions of the Act and the rules requiring adjustments to be made cannot be resorted to as laid down in this decision, it is argued, the adjustment made by the WTO in respect of the outstanding professional fees is not justified or correct. 11. The learned counsel also further submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quirements under the Companies Act of stating the true and fair state of affairs of a company and not as reflections on the correctness of the accounts. It was pointed out that earlier the Wealth-tax Act while providing for adjustments did not define the scope of the adjustments contemplated but has since circumscribed the scope by the amendment and the rules introduced. On the question of adjustments to be made, he adopted the arguments of the counsel S.E. Dastur, including the contention that the assets not disclosed only refer to the assets which are not disclosed according to the method of accounting, and that the adjustments cannot apply to the determination of the share of a partner in a firm carrying on profession. 13. Dinesh Vyas, counsel representing one of the interveners, submitted in the first place that it is only the income which becomes taxable under the Income tax Act becomes wealth for the purpose of wealth-tax. He referred to the Commentary of Kanga and Palkhivala at page 170 on the topic of accrual of income, according to which the point of time when income accrues and can be charged should be determined according to the method of accounting regularly employed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 7(1) itself and need not go by section 7(2). It is pointed out that the original section 7(1) did not contain the words "subject to any rules made in this behalf", but later this section was amended in 1964 by the introduction of these words. He further submitted that even where the determination is made under section 7(2)(a), the WTO is not precluded from making such adjustments therein as may be considered necessary to determine the market value of the assets on the valuation date and that section 7(2)(a) did not preclude resort to section 7(1). Support for this proposition is sought on the decision of the Delhi High Court in CWT v. Mela Ram [1972] 84 ITR 323. He also contended that the rules made under section 7 cannot be held to be binding on the WTO as they are directory rather than mandatory as held by the Bombay High Court in Smt. Kusumben D. Mahadevia v. N.C. Upadhya [1980] 124 ITR 799. He also referred to the decision of the Allahabad High Court in CWT v. Rani Kaniz Abid [1974] 93 ITR 332 and the observations of Justice Pathak where it is stated that section 7(4) is merely concerned with the mode of valuing an asset and it in no way indicates what is an asset for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication as wealth-tax is a self-contained code by itself and the ratio of the decisions based on the provisions of section 145 of the Income-tax Act making it obligatory on the part of the income-tax authorities to compute the income in accordance with the method of accounting employed by an assessee cannot be invoked as held by the Calcutta High Court in Dipti Kumar Basu v. CWT. It was submitted that the correct view on the point is that of the Calcutta High Court. 16. As regards the contention raised on behalf of the assessee that the outstanding fees due to a person engaged in a learned profession are debts of honour, it was submitted that this principle is generally applicable only to Barristers and Senior Advocates and though as a matter of convention or principle the outstanding fees are not sought to be recovered by legal proceedings, there is no specific provision which debars the person practising the legal profession from resorting to legal proceedings for recovery of outstanding fees. It was also his submission that the observations of Lord Denning referred to by the learned counsel for the assessee in Mason's case have no relevance as it was concerned with the system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finally, it was submitted that even assuming that the decision of the Calcutta High Court in Dipti Kumar Basu v. CWT correctly holds that the determination of wealth is not dependent upon the method of accounting followed, the decision was rendered in the context of the provisions of the Act which were then in force and does not take into consideration the amendment subsequently brought about and the only decision directly on the point after the change is introduced in the provision is the decision of the Karnataka High Court reported in A.T. Mirji v. CWT. It was, therefore, argued that the decision of the Karnataka High Court should be preferred. The points highlighted by the other counsels in reply are, according to the learned counsel Dastur, that section 7(1), when it states "subject to any rules made in this behalf", restricts its scope and the rules framed thereunder circumscribe the ambit or the adjustment and the determination of the value. As an instance of how otherwise the construction would lead to an absurdity or anomaly, it is pointed out that sub-rule (2) of rule 2B provides that where the market value or an asset exceeds its written down value or the book value or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such the provisions of the said clause would apply to the case of persons engaged in the carrying on of a profession for which they maintain accounts regularly. 3. Whether, if the term "business" includes profession ; in the case of individual assessee engaged in a profession or rendering professional services for which they maintain accounts regularly, the valuation of the assets of such profession or business requires to be made only under section 7(2)(a) or the WTO is entitled to determine the wealth even in respect of such business or profession in terms of section 7(1). 4. Whether, even where the WTO proceeds to determine the net value of the business as a whole in regard to a profession carried on by an assessee under section 7(2)(a) read with the rules prescribed, he is at liberty to include by way of adjustment the value of an asset not disclosed in the balance sheet either as failing within clause (a) or (b) of section 2 (m)(iii)(d) the outstanding professional fees as a debt in a case where the accounts are maintained under cash system as distinct from mercantile system of accounting even though such outstanding fees are not charged to income-tax under the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of leading advocates and senior advocates who are briefed by junior advocates are not legally recoverable and as such cannot be regarded as "assets" for the purposes of the Wealth-tax Act. It is further stated in the Memorandum that the ascertainment of the correct amount of outstanding fees of advocates and solicitors also present practical difficulty, and, therefore, it is proposed to exempt from wealth-tax the value of outstanding fees due to a person in respect of services rendered by him as a legal practitioner within the meaning of the Advocates Act, 1961. This amendment takes effect from 1-4-1975 and applies to the assessment year 1975-76 and subsequent years. 20. But in the decision of the Calcutta High Court in the case of Dipti Kumar Basu v. CWT, it has been held that a solicitor is legally entitled to his fees and cost from his client the moment the solicitor renders service to his client and in the commentary by A.C. Sampath Iyengar on the Three New Taxes, 4th edn., vol. I, page 154, it is stated that in India it has been decided that by virtue of the Legal Practitioners (Fees) Act, 1926, sections 3 and 4, and by the Rules of the High Courts, fees due to "advocates" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri Palkhivala on this aspect. Merely because the two expressions "business" and "profession" have been separately used in certain provisions of the statute and in certain other provisions only the term "business" is used, it does not necessarily follow that where the expression "business" is used, it per se or automatically excludes the concept of profession. As stated by the Supreme Court in Barendra Prasad Ray v. ITO, the expression "business" is a comprehensive term which includes in its fold not only a trading or a commercial activity but also an activity by way of profession or vocation. There may be various reasons why only one of the two expressions or both is or are used in some provisions. For instance, where the Legislature wants to make certain provisions applicable only to profession the term "profession" may be used. It may be that sometimes the two expressions are used, not intending to bring out any distinction but as synonymous terms in the context of the relevant provisions (see section 28). Unless, therefore, it can be said that the concept of profession in the use of the expression "business" is inconsistent with the context and is necessarily excluded thereby, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregate value of all the assets shall have to be computed in accordance with the provisions of the Act and the relevant provision for computation of the aggregate value of the assets ate to be found in section 7. It is only section 7 which activates the charge under section 3 on the market value or otherwise, of the asset and, therefore, it is also part of the charging provisions of the Act. Otherwise, it appears to us, in the absence of definition of "value" contained in section 2(m), that it is not possible to invoke the charge on the market value of an asset as the "value" can mean any value, for instance, cost or book value and not necessarily the price which it would fetch if sold in the open market. As we have already seen, section 2(m) defining the expression "net wealth" speaks of the aggregate value of all the assets computed in accordance with the provisions of the Act and the computation is provided in section 7. Section 7(1) is a general provision stating that the value of an asset shall be estimated to be the price it would fetch if sold in the open market. But section 7(2) is a special provision dealing with the case of an assessee carrying on business and who main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to accounts maintained on cash basis. If the concept of balance sheet is peculiar only to a mercantile system of accounts, the sub-section could have indicated accordingly by use of the appropriate words such as "for which accounts are maintained under the mercantile system regularly". Now, this sub-section also contemplates certain adjustments in the balance sheet. Again such adjustments are not left to the arbitrary discretion of the WTO, but are prescribed by the rules which leave no scope for him to act otherwise than under the provisions. The relevant rules are rules 2A to 2G. Rule 2A by the use of the mandatory term "shall" clearly enjoins the WTO to make the adjustments specified in rules 2A to 2G. It is, therefore, clear that sub-section (2) of section 7 read with rules 2A to 2G circumscribes the scope of the adjustments to be made by the WTO. The learned standing counsel for the department, therefore, is not, according to us, correct in stating that for any adjustments not provided in the rules, the WTO can still make them under the general authority conferred under section 7(1). 23. The reasonings and conclusions reached by us above are based on the plain and natura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in its judgment at page 197 of the report referred to the first contention of the assessee that the investments in the money-lending business were generally sold at 50 per cent of the book value and, therefore, it was not correct on the part of the authorities to have taken the value at the figure shown in the books, and stated that "apparently this contention as to the market value of the investment was based on the terms of section 7(1)". The second contention noticed by it was that it is wrong to suppose that under section 7(2) the value of an asset must necessarily be taken at the figure shown in the balance sheet and it was suggested on behalf of the assessee that an adjustment of 50 per cent should be made as regards the value of investment mentioned in the balance sheet of the business, which contention was evidently based on section 7(2). Whether the assessee in that case specifically claimed a valuation of the investments at market value under section 7(1) is not clear from the facts stated in the judgment, but what is clear is that the assessee in that case claimed that the investments should be valued at 50 per cent at which generally they are sold, but the High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and if be can do so he can also value one of the assets. This decision also apparently supports the department's stand. It is, however, considered necessary to point out that this decision proceeds, on the premises, firstly, that cases to which attention of the Court was drawn, (sic) distinction between section 7(1) and section 7(2) as being respectively a general and special provision of the Act, was not made while on the other hand the two provisions have been regarded as alternative provisions and when so read the WTO has the discretion either to value the assets separately and to value the business as a whole, and secondly, the main object of section 7 is to evaluate the assets on the valuation date which has to be on the basis of market value. So far as the first premises is concerned it is to be noted that the construction placed by us on a plain reading and interpretation of the two provisions that while section 7(1) is a general provision, section 7(2) is a special provision applicable to valuation of business as a whole has the support of the identical view taken by the Allahabad High Court in Sahu Dharmata Saran v. CIT. As regards the second premises, while it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net wealth. It was held that since the WTO is authorised to make adjustment in the balance sheet under section 7(2)(a) as the circumstances of the case may require him to do, the fact that the book debt is not entered in the books was itself a circumstance justifying its inclusion and that such inclusion does not convert the cash system into mercantile system of accounting. We shall deal with the question as to whether the outstandings of a professional assessee maintaining accounts on cash basis would constitute an asset and the system of account has any impact or relevance on the question of inclusion of any such asset in the computation of his net wealth more elaborately later, but suffice it to say at this juncture that a contrary view has been taken earlier by the Orissa High Court in CWT v. V.B. Raju and the views expressed in the Calcutta High Court decision have categorically been dissented by the Karnataka High Court in A. T. Mirji v. CWT. In any case, this decision also was rendered under the provisions of the Act before the amendment to section 7(2)(a) and the introduction of the Rules prescribed thereunder when the provisions of the Act contemplated adjustment of the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion contained under section 7(2). The High Court further disagreed with the view that when an assessee maintains his account on cash basis regularly and has the balance sheet prepared on that basis and the assessing authority considers the amounts representing outstanding bills as assets not shown in the accounts, the assessing officer is not converting the assessing system from cash into mercantile system, On the other hand, it was held that it would change the accounting system. 29. We may next turn to examine the point in proposition No. 4, namely, as to whether the WTO who acts under section 7(2)(a) is at liberty to include by way of adjustments in the value of an asset not disclosed in the balance sheet either as falling within clause (a) or clause (d) the outstanding professional fees in a case where the accounts are maintained under cash system. As we have already stated the provisions of sub-section (2) are special provisions for the determination of net wealth of a business as a whole and contemplates, in our view, a departure, as already pointed out, from the general provision under section 7(1). So far as cases coming under that clause is concerned, the considerations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter advert to the question as to whether an outstanding fee of a professional maintaining accounts regularly under the cash system can be regarded as a debt so as to constitute an asset in the balance sheet or not and refer to the authorities based on accounting principles and rulings but we shall at this stage consider the contentions of the parties based on the provisions of rule 2C which provides for adjustments in respect of an asset not disclosed in the balance sheet. Though it is true, as contended by the learned standing counsel, that the words "not disclosed" does not necessarily mean an erroneous or wilful omission of an assessee to disclose an asset in the balance sheet and may simply mean "not appearing" or "not shown", it is not possible for us to hold that it also contemplates an asset which has not been disclosed because it is not required to be disclosed according to the system or accounts maintained by the assessee. As we have seen section 7(2) is a special provision in regard to the determination of the value of assets of a business and the scope of consideration and the ambit of application thereof is the balance sheet maintained according to the system of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed as a deduction by way of bad debt under section 36(1) of the Income-tax Act in determining the assessee's income also requires to be excluded even if it appears on the balance sheet on the principle of its not representing any real asset, and similarly, the amount shown in the balance sheet representing the debit balance in the profit and loss account or the profit and loss appropriation account, which is really the amount of loss requires to be excluded as it does not represent any real asset. Again, rule 2E provides for exclusion from the liabilities the amounts shown or appearing in the liabilities side which really do not represent any liability or debt such as, for instance, the capital of the business and the reserves. It also provides that any provision made for any future and contingent liability which is not an existing liability and any debt incurred in relation to an asset which is our side the scope of charge his to be excluded. Rule 2F provides for deduction of a debt relating to the business owed by all assessee but not disclosed in the balance sheet. Rules 2B to 2F having provided for determination of the value of the assets and liabilities disclosed or not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act. Insofar as the clause in the earlier part reads that in the case of debts due to an assessee, the amount due to the assessee shall be taken, it deals with debts generally and, therefore, may and can include a debt which is not necessarily confined to the mercantile system of accounts and if a debt due requires to be shown even under the cash system. It would fall under that clause. In such a case, the later part will not be applicable. The clause does not require that every debt must be one where it or part of it is required to be or entitled to be allowed under section 36(1)(vii). The argument of the assessee appears to us to proceed on the assumption that the debt referred to in this clause is a debt arising from transactions of an assessee which are of a revenue nature, that is to say, where such debt or any part has been taken into account in computing the assessee's income as provided in section 36(2), or where it represents the money lent in the course of money-lending business or banking where the money forms the stock-in-trade of the business. But there is nothing in the rules to show that the "debts" contemplated by this clause are confined only to such debts. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uires to be shown as such in the balance sheet maintained under the cash system of account or, in other words, whether the accrual or arisal of the amount as a debt is governed or affected by the method of accounting employed by an assessee in the business. It is here that we have to consider the accounting principles set out in the treatises of well-known authors on accountancy and also the authorities stated in the various decisions. According to a note prepared by the Institute of Chartered Accountants of India, after referring to certain principles stated by the well-known author Shri J.R. Batliboi in his book Advanced Accounting first, 21st edn., it is stated that when accounts are maintained in a double entry book-keeping system, the accounts give a true and correct picture of the state of financial affairs of the person concerned and under the double entry system of book-keeping, the accounts may be maintained in any of the three recognised methods of accounting, namely, (1) mercantile method, (2) cash method, and (3) hybrid method. Whatever method is followed, the accounts will give a true and correct view provided such method is regularly employed. It is further stated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc., and these assets will be recorded on the basis of actual payments made by the person concerned. On the liabilities side will appear the capital account or liabilities which have arisen as a result of actual receipts. 32. It is further stated in the note that under the Companies Act, 1956, even a limited company can maintain its accounts on cash system of accounting and if this system is regularly employed, the accounts will give a true and fair view of the financial position of the company and it would not be necessary for the auditors of the company to qualify the accounts on this ground. The cash method of accounting is recognised as a valid method of accounting and the income and expenditure statements as well as the balance sheet prepared by employing this method would reflect the true and correct financial position of a company. Companies engaged in consultancy services, business of selling agencies, money-lending and similar other activities, it is stated, maintain their accounts on cash method of accounting. As an instance, where a company maintains accounts under cash system, is cited the case of SICOM, which is a wholly owned Government company's, which follow the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y which I mean that on one side of the amount they enter the actual money they expend and on the other side the actual money they receive. They have no stock-in-trade to bring into the account. They do not bring in debts owing by or to them, nor work in progress. They enter only expenses on the one side and receipts on the other." After stating that the proposition in Sharkey v. Wernher [1965] AC 58 does not apply to professional men, it was observed by him that the proposition is confined to the case of traders who keep stock-in-trade and whose accounts are or should be kept on an earning basis, whereas a professional man comes within the general principles that when nothing is received, there is nothing to be brought into account. 36. In our view, the contention that though for the purpose of assessing income to income-tax, the system of accounts maintained by the assessee is material and must govern the charge because of special provision contained in section 145 of the Income-tax Act that principle can have no application in the case of wealth-tax, is not correct. If the argument is based on the fact that charge is created in regard to net wealth by section 3 of the Wealth-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enactments relating to direct taxes, such as income-tax, wealth-tax, etc., have to be construed as an integral system, they being complementary to one another and the observations of the Karnataka and other High Courts relied on by the assessee have become relevant in this context. According to the decision of the Karnataka High Court in A. T. Mirji v. CIT as already noted, it is only the income received by an assessee maintaining his accounts on cash basis on or before the valuation date and retained by him as on the valuation date that would constitute his wealth. In a case of this type it was observed, the case for the wealth is the income or in other words the effect of the receipt of income is the wealth. Therefore, it is anomalous to say that the wealth which would be the effect of the receipt of income was possessed by the assessee on the valuation date, though its cause did not exist, i.e., the income is itself not received. The decision has also referred to the provisions of section 7(2) as indicating that the method of accounting employed by the assessee is a relevant factor in assessing the wealth of the assessee. The decision as already stated has expressly dissented f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness including the profession carried on by the assessee, whether individually or with other persons. It would also apply for computing the net wealth of a firm on the assumption that the provisions of the Act including the adjustments contemplated by the rules are applicable in such a case. In that view of the matter, it may not be necessary to give a finding on the proposition Nos. (v) and (vi) posed above but as the matter may not rest at this level, it is necessary to completely dispose of the contentions raised in this case. We may, therefore, proceed to deal with the proposition Nos. (v) and (vi) as well. 39. Assuming that the WTO is competent to make the adjustments in respect of outstanding fees even in a case where the assessee engaged in a profession maintains his accounts under the cash system, the next question that arises is as to whether it is the entire amount of outstanding fees for which bills have been sent which requires to be included or only its estimated market value as a debt. In other words whether amount of such debt has to be reduced suitably by way of determining its saleable value with reference to the imbedded tax liability and the possibility of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the event of a dissolution or the firm ; if there is no such agreement, then according to their profit-sharing ratio. The amount allocated to a partner on account of capital contribution and the amount allocated to him of the residue represent the value of his interest in the firm. The only question agitated before us with regard to this rule is as to whether in computing the net wealth of the firm the adjustments provided in rules 2A to 2G are permissible or authorised under the provisions of the Act. The assessee has relied on the decision of the Allahabad High Court in CWT v. Padampat Singhania wherein it was observed that the term "net wealth" in rule 2 is to be determined in accordance with commercial principles since the firm is not an assessee and rule 2 provides complete mode for determination of the net wealth or the firm for the purpose of allocating it amongst the partners. The further contention is that there is no rule prescribing the method of computation of net wealth of a firm apart from the rule itself and, therefore, it has to be computed according to the general principles. It is, therefore, contended that the adjustments provided in the Rules cannot apply t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they maintain accounts regularly. 3. In such a case, the valuation of the assets of such business or profession is required to be made only under section 7(2)(a) and the WTO is not entitled to determine the net wealth in that case in terms of section 7(1). 4. Where the WTO is required to determine the net value of the business in regard to profession carried on by an assessee under section 7(2)(a) read with the Rules prescribed, we cannot include by way of adjustment the value of an asset not disclosed in the balance sheet either as falling within clause (a) or (d) where the accounts are maintained on cash system as distinct from mercantile system. 5. Assuming that the WTO is competent to include outstanding fees of an assessee engaged in profession maintaining accounts on cash system by way of adjustment, the amount to be included in respect of such outstanding cannot be reduced either on account of tax liabilities or for any anticipated bad debt by way of determining its market value. 6. In the case of an individual assessee engaged in profession as a partner in a professional firm, in determining his interest in the partnership firm for inclusion in his net wealth in ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
