COMMISSIONER OF WEALTH TAX Vs. M S OBEROI

JUDGEMENT

(1.) This is a reference under s. 27 (3) of the WT Act,1957 ('the Act') for the asst. yrs. 1982 -83 to 1984 -85. For all the three years the assessee was owning unquoted equity shares of several companies. The shares are valued according to r. 1D of the WT Rules, 1957, by the AO while completing the assessment . Later, the CWT found that the valuation made was not strictly in accordance with the provisions of the said rules. He issued a notice under s. 25 (2) of the said Act proposing to revise the order of the AO as the same was erroneous insofar as it was prejudicial to the interests of the Revenue. The assessee contested the revision proceeding before the CWT contending that there was no error committed by the officer in applying r. 1D. It was further submitted before the CWT that the figures of under valuation given in the show -cause notice were not supported by any details, with the result that the assessee was not enabled by the notice to meet the case against the assessee. The contentions were, however, rejected and the assessments set aside. Being aggrieved, the assessee carried the matter to the Tribunal in appeal. The Tribunal upon hearing the rival contentions and going through the papers made the following observations: - -

(2.) IN this background, the following questions have been referred for our opinion: - -

(3.) THEREFORE , the entire issue turns on the question whether the contentions made on behalf of the assessee that the break -up value arrived at by the AO was more than the value to be correctly ascertainable by application of r. 1D. Without, however, pronouncing on the soundness of this approach we first proceed to examine the very basic premise in the assessee's arguments. First, we do not agree that there was any ultimate error in taking the advance tax as an asset on the one hand and taking the provision for taxation in full as the liability. Even if advance tax is not to be taken as an asset, the gross tax payable before adjustment of the advance tax against the tax payable with reference to the book profits cannot also be taken as liability. In this regard, we take the view that while advance tax is is not to be taken as asset, the provision for gross tax payable with reference to book profits without adjustment of the advance tax is not also to be reckoned as a liability. The rule, of course, requires advance tax not to be taken as an asset, but exclusion of advance tax as an asset necessarily postulates that the tax liability computable as deduction from the net worth of the company should be the net tax liability remaining payable after adjustment of the advance tax against it. The principles of accountancy cannot admit of the proposition that advance tax should be excluded from assets and at once the gross tax liability on the book profit before adjustment of the advance tax should also be included as liability. Therefore, we do not agree with the learned counsel's contention that there was any error on the part of the AO in taking the advance tax as an asset insofar as he allowed the gross tax liability as provided for in the Balance Sheet as liability. Again, it cannot be said that prepaid expenses do not represent any asset. Rule 1D contemplates exclusion of only the fictitious asset, but prepaid expenses cannot be said to be fictitious asset. It is a tangible asset in the sense that the party who was prepaid is a debtor to the company which he is to satisfy either by rendering service or delivering goods. It is a real debt receivable. An asset could be fictitious only where it does not represent any quid pro quo. That is not the case in the case of pre -paid expenses. In fact, the claim arising from pre -paid expenses is an actionable claim. So, in our view, pre -paid expenses represent an asset to be taken into account for the purpose of computing the net worth of the company under r. 1D.