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Swadeshi Cotton Mills Ltd. vs Commissioner Of Wealth-Tax

High Court Of Judicature at Allahabad|29 April, 1970

JUDGMENT / ORDER

JUDGMENT Pathak, J.
1. Three questions have been referred by the Appellate Tribunal in this wealth-tax reference :
"(1) Whether, on the facts and in the circumstances of the case, the enhancement in the value of the assets, according to the revaluation made in 1948, could be taken into account in ascertaining the net wealth for the assessment year 1957-58 ?
(2) If the answer to question No. 1 is in the affirmative, whether the value to be included in the net wealth is the value as fixed in 1948 or such value as reduced by depreciation in the intervening years ?
(3) Whether in computing the net wealth, the assessee-company is entitled to deduction of provision made for tax liability relating to periods ending on or before the valuation date, although the relevant assessments had not been completed and the demand notices served till that date ?"
2. The assesssee is a limited company and owns a textile mill. Its fixed assets were revalued in 1948 and, consequently, the value of the assets was enhanced by a sum of Rs. 1,68,65,270, the increased valuation being adopted by the assessee by a resolution of its directors passed on August 22, 1949. In 1953, an old dye house of the assessee was demolished, thereby the block account was reduced by a sum of Rs. 29,492. The net increase on the revaluation of 1948 was thus reduced to Rs. 1,68,35,778 in 1953.
3. The assessee was assessed to wealth-tax for the year 1957-58, the valuation date being December 31, 1956. The Wealth-tax Officer determined the total wealth of the assessee by adopting the value of the assets according to the balance-sheet of the assessee as on the valuation date. He chose to proceed under Section 7(2)(a) of the Wealth-tax Act. The increased valuation having been incorporated in the accounts and as the Wealth-tax Officer adopted the global method of valuation the increased valuation was taken into consideration for the purpose of computing the net wealth. The assessee appealed against the inclusion of the enhanced value before the Appellate Assistant Commissioner of Wealth-tax but was unsuccessful. In second appeal before the Appellate Tribunal it urged that the increase in the valuation of the assets should have been excluded from the net wealth. It pointed out that the adoption of the market value of the individual assets was permissible if recourse was had to Section 7(1) of the Act but not where the assessment was made with reference to Section 7(2)(a). It submitted that the Wealth-tax Officer should exercise his discretion under Section 7(2) and make adjustments in the valuation of the assets as disclosed in the balance-sheet so that only the valuation before enhancement was taken for computing the total wealth. The Tribunal rejected this contention of the assessee and held that the full enhanced value of the assets should be adopted. But it proceeded to give the benefit of depreciation to the assessee on the full enhanced value by allowing depreciation for the years following the year of revaluation. The allowance on account of depreciation, the Tribunal held, was an adjustment which the Wealth-tax Officer should make in the balance-sheet values, relying on the power to make adjustments conferred under Section 7(2).
4. The first two questions referred here deal with the controversy whether the enhanced valuation of the assets, upon the revaluation effected in 1948, should be taken into account and, if that be so, whether the value to be included in the net wealth is the value fixed in 1948 as reduced by the depreciation in the following years.
5. The assessee also claimed that it was entitled to treat the provision for taxes as a deduction in computing the net wealth even though the tax liability had not been quantified by an assessment order. The Tribunal held that a provision for taxes was not a "debt owed" for the purpose of computing the net wealth as denned by Section 2(m) of the Wealth-tax Act. Accordingly, the third question set out above has been referred.
6. The first and third questions can be disposed of shortly. Similar questions arose in Kesoram Industries & Cotton Mills Ltd. v. Commissioner of Wealth-tax, [1960] 59 I.T.R. 767 ; [1966] 2 S.C.R. 688 (S.C.). In that case the assessee had shown in his balance-sheet the property value, on revaluation of its assets, at Rs. 2,60,52,357 and had introduced in the capital reserve surplus a corresponding balancing figure of Rs. 1,45,87,000 representing the increase in the value of the assets upon revaluation. The Wealth-tax Officer took the sum of Rs. 2,60,52,357 as the value of the assets. The assessee contended that an adjustment had to be made in view of the increase in the value shown in the balance-sheet upon revaluation. The Supreme Court, however, held that the Wealth-tax Officer was justified in taking the value of the assets at the figure shown in the balance-sheet in the absence of a convincing explanation by the assessee that the figure was inflated for acceptable reasons. Here also, in the case before us, the balance-sheet showed the value of the assets on the enhanced figure and no attempt has been made to show that it was an inflated figure. Upon the principle which found favour with the Supreme Court, we hold that the Wealth-tax Officer, when ascertaining the net wealth for the assessment year 1957-58, was entitled to take into consideration the enhanced value of the assets on the basis of the revaluation made. We answer the first question in the affirmative.
7. As regards the third question, the law is now well-settled that a "debt owed", for the purposes of Section 2(m) of the Wealth-tax Act, may be defined as the liability to pay in praesenti or in futuro an ascertained or ascertainable sum of money, that a liability to pay tax was a present liability although the tax became payable after it was quantified in accordance with ascertainable data and, therefore, an amount shown as provision for payment of such income-tax or super-tax is a "debt owed" for the purposes of Section 2(m) on the valuation date, and as such deductible in computing the net wealth. That was the view taken by the Supreme Court in Kesoram Industries & Cotton Mills Ltd., and has since been reiterated in a number of cases. Accordingly, we answer the third question in the affirmative.
8. During the hearing before us, it was pointed out on behalf of the Commissioner that the provision for taxes made by the assessee included provision in respect of tax liability accruing during periods ending more than twelve months before the valuation date, and it is urged that by reason of Section 2(m)(iii)(b) of the Wealth-tax Act, such tax liability must be excluded when computing the aggregate value of the "debts owed" by the assessee on the valuation date for the purposes of determining its net wealth. Section 2(m) of the Act, so far as it is material here, reads:
"(m) 'Net wealth' means the amount by which the aggregate value ... of all the assets . . . belonging to the assessee on the valuation date . . . is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than,--. . .
(iii) the amount of the tax, penalty or interest payable in consequence, of any order passed under or in pursuance of this Act or any law relating to taxation of income or profits, or the Estate Duty Act, 1953, the Expenditure-tax Act, 1957, or the Gift-tax Act, 1958,--
(a) which is outstanding on the valuation date and is claimed by the assessee in appeal, revision or other proceeding as not being payable by him, or
(b) which although not claimed by the assessee as not being payable by him, is nevertheless outstanding for a period of more than twelve months on the valuation date."
9. In the first place it is not clear from the statement of the case whether in point of fact the provision for taxes included any tax liability accruing during a period ending more than twelve months before the valuation date. In the next place, it is clear, on the plain reading of the statute, that only such amount of tax, penalty or interest is liable to be excluded from the aggregate value of the "debts owed" by the assessee on the valuation date as is payable in consequence of an order passed under or in pursuance of the enactments mentioned in Section 2(m)(iii) and is outstanding for a period of more than twelve months on the valuation date. Section 2(m)(iii) treats of an amount which is "payable". It does not contemplate a liability which has merely arisen in the sense considered in Kesoram Industries & Cotton Mills Ltd., and becomes payable subsequently upon assessment and demand. It refers to a liability which is of the nature of a present debt, an amount which is payable in consequence of an order passed under or in pursuance of any of the enactments mentioned. It refers to the stage of "payability". The sense of Section 2(m)(iii) is clearly apparent when its Sub-clauses (a) and (b) are read with it. The construction which learned counsel for the Commissioner wishes us to place on Section 2(m)(iii) cannot be accepted.
10. We now turn to the second question which raises the point whether in computing the net wealth on the basis of the enhanced value of the assets, the depreciation in the value of the assets in the years following revaluation can be taken into account. It seems to us that if the Wealth-tax Officer is entitled to take into consideration the enhanced value of the assets for the purpose of computing the wealth-tax, there is no good reason why an allowance should not be made for depreciation on the enhanced value during the years following. The depreciated value provides a fair estimate of the true value of the asset. There can be no dispute that ordinarily, an asset, through wear and tear occasioned by efflux of time, diminishes in value. In the absence of factors enhancing the value of the asset, the normal rule is that the true value of the asset is the value after allowing for depreciation. The object of Section 7 of the Wealth-tax Act is to ascertain the true value of the asset for the purpose of determining the wealth of the assessee. The different options provided in that section are intended for that purpose. The law-makers apparently recognised that if the Wealth-tax Officer chooses to adopt the method of valuation contemplated by Section 7(2) on the basis of the balance-sheet value of the assets, he must also be armed with the power to make necessary adjustments to the balance-sheet value if in his opinion it did not represent the true value of the assets. There can be innumerable cases in which such adjustments may be called for. Without entering into their enumeration, we think it sufficient to point oat that where the plant and machinery have become old, the factor of depreciation assumes considerable relevance in arriving at their true value. In the present case, the assets were revalued, but that was as long ago as 1948. If the revaluation in 1948 represents the true value of the assets in that year, it is not possible to assume, in the absence of definite circumstances pointing to (he contrary, that the assets continued to enjoy that value year after year thereafter. It seems to us that when the Tribunal held the assessee entitled to depreciation on the full enhanced value of the assets as determined in 1948, it adopted a view which was plainly right and proper.
The courts in India have had repeated occasions to consider whether the Wealth-tax Officer should allow for depreciation on the value of the assets when proceeding under Section 7(2), and the courts have held in favour of the Wealth-tax Officer doing so. Some of these cases are Commissioner of Wealth-tax v. Tungabhadra Industries Ltd., [1966] 60 I.T.R. 447 (Cal.), Commissioner of Wealth-tax v. Andhra Sugars Ltd., [1966] 62 I.T.R. 841 (A.P.), Commissioner of Wealth-tax v. Bally Jute Co. Ltd., [1968] 67 I.T.R. 188 (Cal.), Loyal Textile Mills Ltd. v. Commissioner of Wealth-tax, [1968] 68 I.T.R. 14 (Mad.), Commissioner of Wealth-tax v. Swadeshi Cotton, [1968] 69 I.T.R. 539 (M.P.) and Flour Mills Ltd. and Commissioner of Wealth-tax v. Ganga Nagar Sugar Mills Ltd, [1969] 73 I.T.R. 450 (Raj.).
10. Accordingly, we hold that the value of the assets which should be considered for the purpose of computing the net wealth of the assessee is the value as fixed in 1948, reduced by the depreciation in the years following. This computation should take into account the reduction in the enhanced value occasioned by the demolition of the old dye house in 1953. We answer the second question accordingly.
11. It was urged on behalf of the Commissioner that the Tribunal should not have disturbed the exercise of discretion by the Wealth-tax Officer in refusing depreciation on the enhanced value of the assets. We have perused the assessment order and we do not find that the Wealth-tax Officer has considered this question at all. Consequently, the submission lacks foundation altogether.
12. The questions referred are answered as follows :
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Title

Swadeshi Cotton Mills Ltd. vs Commissioner Of Wealth-Tax

Court

High Court Of Judicature at Allahabad

JudgmentDate
29 April, 1970
Judges
  • R Pathak
  • T Mukerjee