CWT Vs. RAIPUR MFG COMPANY LIMITED

JUDGEMENT

(1.) This Reference under sec. 27(1) of the Wealth Tax Act 1957 raises some interesting and important questions relating to the construction of sec. 2(m) and sec. 7 of the Wealth Tax Act which have been argued with considerable vigour and ability by both the sides. One of the noteworthy features of this case is that some cases have been relied upon by both the sides in order to deduce contrary conclusions. The Raipur Manufacturing Company Limited is the assessee in this case. The assessment year in question is the year 1957-58 the relevant valuation date being the 31st December 1956. On 11th May 1956 a demand notice had been issued on the assessee under sec. 18-A of the Indian Income-Tax Act 1922 for advance payment of tax requiring the Company to pay a sum of Rs. 3 59 549 in four instalments the instalments being payable on the 15th June 1956 the 15th September 1956 the 15th December 1956 and the 15th March 1957. Prior to the valuation date the assessee paid the three instalments payable on the 15 June 1956 the 15th September 1956 and the 15th December 1956. On the 31st December 1956 the fourth instalment of Rs. 89 889 had remained unpaid the same being payable on the 15th March 1957. On the 13th February 1957 a revised demand was made under sec. 18-A requiring the assessee to pay a sum of Rs. 4 2 68 instead of Rs. 89 889 on the 15 March 1957. This amount of Rs. 4 2 68 was duly paid by the assessee. The assessee submitted its wealth-tax return for the year 1957 On the 26th September 1457 a demand notice was issued against the assessee under sec. 23B of the Indian Income-tax Act 1922 for A sum of Rs. 8 28 576 on the basis of the assessees return of income after adjusting the advance payments of tax made by the assessee The Wealth lax Officer computed the net wealth of the assessee as stated in his assessment order dated 31st January 1958. The paid up capital was assessed at Rs. 30 0 0 and the Reserve and Surplus as per balancesheet at Rs. 1 12 39 79 He added to these two amounts three sums which were claimed by way of liabilities by the assessee which he did not regard as constituting debts. One represented a provision for taxation amounting to Rs. 21 62 785 the second represented the amount of the proposed dividend of Rs. 5 83 188 and the third related to over provision in sundries amounting to Rs. 11 341 The total of all these five items came to Rs. 1 69 96 393 The Wealth Tax Officer deducted thereout the value of the shares held by the assessee in other companies which were exempt from inclusion in the wealth of the assessee amounting to Rs. 24 51 416 and the advance tax paid amounting to Rs. 9 37 943 The net value of assets which was made the subject matter of tax amounted to Rs. 1 36 7 34 In the course of the assessment proceedings the assessee claimed inter alia a deduction in respect of the sum of Rs. 21 62 785 on account of provision for taxation. The sum of Rs. 21 62 785 was made up as follows:- In the balancesheet the assessee had made a provision for Rs. 14 32 275 for taxation. The assessee had carried forward from the previous year a sum of Rs. 7 30 510 on account of provision for taxation. These two amounts totalled Rs. 21 62 785 The assessee having made a provision of Rs. 21 62 785 for taxation in its books of account claimed that the assessee was entitled to a deduction in respect thereof. There was another sum of Rs. 3 0 0 for which deduction was claimed. The relevant facts in connection with this claim are as under: In the balance sheet as at 31st December 1955 the assessee had shown the gross bloc at Rs. 86 29 43 As against this amount there was a depreciation fund amounting to Rs. 60 39 883 The Companies Act 1956 came into force on 1st April 1956. By sec. 211 it is provided that every balance sheet of a company shall give a true and fair view of the state of affair: of the company as at the end of the financial year and shall subject tn the provisions of the said section be in the Form set out in Part I of Schedule VI or as near thereto as circumstances admit. In the notes to Part I of Schedule VI it is stated as under :- Depreciation written off or provided shall be allocated under the different asset heads and deducted in arriving at the value of Fixed Assets. In view of these provision the assessee appropriated Rs. 58 29 794 out of the Depreciation Fund of Rs. 60 39 883 as against different assets and after taking into account depreciation for the year ended 31st December 1956 showed the depreciated value of the block at Rs. 37 32 148 The assessee transferred the balance sum of Rs. 2 10 89 from the Depreciation Fund to Development and Rehabilitation Reserve which it created. Prom the current profit of the year 1956 it transferred a sum of Rs. 89 911 to the Development and Rehabilitation Reserve making a total of Rs. 3 0 0 In the balance sheet this sum of Rs. 3 0 0 been shown by way of Development and Rehabilitation Reserve. The assessee claimed that this sum of Rs. 3 30 0 representing Development and Rehabilitation Reserve should be the amount which the assessee should be held entitled to deduct. The assessee contended before the Wealth Tax Officer that this sum represented the difference between the written down value of the fixed assets as found in the income-tax records and the value of the fixed assets as shown in the balance sheet. This has been subsequently found to be incorrect. When the matter came up before the Appellate Tribunal the assessee made an application in which it was stated that the difference between the written down value of the assets of the Company as appearing from the records of the Income-tax authorities and the value of the assets as shown in the balance sheet came to Rs. 8 34 266 and the assessee claimed before the Tribunal that the assessee was entitled to claim a deduction for this sum of Rs. 8 34 266 We are now told on behalf of the assessee that the real difference is not even Rs. 8 34 266 as stated before the Income-Tax Tribunal but that the same amounts to Rs. 8 45 147

(2.) The Wealth Tax Officer took the view that the income-tax became payable to Government when demand was made therefor He only allowed a deduction for the sum of Rs. 2 69 658 being the aggregate of the three instalments of tax which had been paid during the accounting year under sec. 18A of the Indian Income-Tax Act 1922 in pursuance of the demand made on 11th May 1956 He took the view that neither the amount which became payable on 15th March 1957 nor the amount which became payable under section 23B of the Act could be regarded as a debt owed by the assessee on the valuation date. He also disallowed the claim for the sum of Rs. 3 0 0 which was then made before him. The assessee preferred an appeal from that decision before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that on the valuation date i.e. 31 December 1956 there was a demand already made for payment of the fourth instalment of the advance payment of tax under sec. 18A and as that amount was owing on the 31st December 1956 it constituted a debt and allowed the sum of Rs. 89 889 to be deducted. He substantially confirmed the rest of the assessment. Both the Department and the assessee being dissatisfied with the decision of the Appellate Assistant Commissioner two appeals were filed before the Income-tax Appellate Tribunal. The Department objected to the allowance of the sum of Rs 89 889 The assessee objected to the various disallowances. Before the Tribunal the claim for further deduction on account of provision for taxation came to Rs. 11 40 755 The sum of Rs. 11 40 755 was made up as follows:-The fourth instalment of advance payment of tax paid by the assessee on 15th March 1957 was Rs. 4 2 68 As against this sum of Rs. 4 2 68 the Appellate Assistant Commissioner had allowed a deduction of Rs. 89 889 leaving the balance of Rs. 3 12 179 To this sum was added the amount of tax paid under sec. 23B in accordance with the demand made on 26th september 1957 amounting to Rs. 8 28 576 The total of these sums came to Rs. 11 40 755 A further sum of Rs. 54 693 was also claimed on account of the wealth-tax for the assessment year 1957-58. That claim for Rs. 54 693 is not pressed before us. The Tribunal came to the conclusion that the sum of Rs. 11 40 755 was liable to be allowed. The Tribunal has stated that just as income accrued from day to day the tax liability also accrued simultaneously and that no computation of net wealth was possible without taking into account the liability of taxation on the income which increased the wealth As regards the question relating to the assets of the assessee being valued at the written down value as on 31st December 1956 for the purpose of Income-tax Act the Tribunal took the view that depreciation in respect of assets should be computed on the basis of the provisions of the Income-tax Act as otherwise it would lead to numerous complications. It held that depreciation should be allowed on the basis of the depreciation allowed by the Incometax authorities as otherwise it would lead to absurd results In the course of its decision it observed that the assessee may write off excessive depreciation or no depreciation at all to suit its convenience. The amount transferred to the depreciation fund may not reflect the actual depreciation suffered in the case of an asset. It observed that the depreciation allowed by the Income-tax authorities was on a very systematic basis and that by deducting such depreciation it arrived at the correct value of the assets to the business. It directed that for the purpose of arriving at the correct value of the assets of a business the Income-tax Officer should take the original cost price as shown by the books of account and deduct therefrom such depreciation had been allowed under the Income-tax Act. In other words it is the written down value of an asset which should ordinarily be taken into account. On the application made before the Tribunal for altering the claim on this score from Rs. 3 0 0 to Rs. 8.34 266 the Tribunal stated that it would lay down the principle and leave it to the Wealth Tax Officer to compute the amount in accordance with the principle laid down by it and make the necessary deduction. The Commissioner of Income-tax being aggrieved by the decision of the Tribunal required the Tribunal to state a case and refer questions of law arising out of the order of the Tribunal to this Court under sec. 27(1) of the Wealth Tax Act. The Tribunal has accordingly referred to us the following questions of law for determination:-

(3.) The Commissioner of Wealth Tax has filed an application before us for re-framing the questions on the ground that the questions framed by the Tribunal were vague and did not bring out clearly the points in issue in this reference. The Commissioner desires that we should frame the questions in the following form:-