Wealth tax----

---- Valuation of assets---Debt which had become irrecoverable---Not necessary that debt should have been written off in the books of the Assessee---Tribunal not justified in including the debt in net wealth---Indian Wealth Tax Act, 1957, S.7 ---Indian Income Tax Act, 1961, S. 36.

There is no statutory requirement under the Wealth Tax Act, 1957, that an amount should be written off before the assessee can become entitled to claim any deduction of the net value of his assets on the ground that the assets had no price on the valuation date as envisaged in section 7 of the Wealth Tax Act, 1957, such as is laid down under section 36(1)(vii) of the Income Tax Act, 1961, the deduction under which comes into play when there is a bad debt which is written off as irrecoverable in the accounts of the assessee for the previous year. No such requirement can be introduced while ascertaining the price which the asset will fetch if sold in the open market on the valuation date. Subsequent insolvency proceedings under which the debtor was adjudged insolvent can be taken into account.

The assessee submitted his wealth tax returns for the assessment years 1971-72 to 1979-80 as the legal representative of the ex-Ruler of Torbandar. It was contended by the assessee before the Wealth Tax Officer that the deceased Ruler had deposited Rs.4,50,000 with G of Bombay sometime in. 1967-68 but due to the inability of G to pay back the said amount, the assessee was entitled to a deduction thereof. In respect of the debt, a letter was written on March 5, 1972, by the debtor G to the deceased Ruler in which he had stated that he had lost his money and had used deposits and funds, which his friends and others had placed with him on interest. He started suffering losses since 1968-69 and by mid-1971, he was in serious financial trouble. It was indicated that he had absolutely nothing left with him and had large liabilities. Insolvency proceedings were initiated against G in October, 1975, and he was adjudged insolvent. The Wealth Tax Officer did not accept the claim of the assesses and held that the debt had not become bad during the years in question and as such no deduction was admissible and this order was confirmed by the Tribunal. On a reference:

Held that the letter written by G in March, 1972, clearly showed that the debtor had informed the creditor that he had suspended the payment of the amount which was due to the creditor. The reply of the creditor indicated that to wait indefinitely. Thegenuineness of this correspondence was not disputed. In view of the fact that the debtor had clearly indicated his inability to return the amount due to his precarious financial condition, it was clear that the asset would not have fetched any price if sold in open market on the valuation date. Hence, the Tribunal was not right in law in valuing the debt of Rs.4,50,000 at its face value and including it in the net wealth of the assessee.

K.H. Kaji for the Assessee.

B.J. Shelat instructed by M.R. Bhatt for M/s. R.P. Bhatt & Co. for the Commissioner.

JUDGMENT

R.K. ABICHANDANI, J: --The assessee, late Shri Natwarsinhji, ex-Ruler of the erstwhile State of Porbandar, through his legal representative filed wealth tax returns for the assessment years 1971-72 to 1979-80. It was contended by the assessee before the Wealth Tax Officer that the deceased Ruler had deposited Rs. 4,50,000 with Shri V.K. Gandhi of Bombay sometime in 1967-68 but due to the inability of Shri V.K. Gandhi, who merely gave empty promises to pay back the said amount, the assessee was entitled to deduction thereof on the ground that the amount had become irrecoverable as the party had become insolvent. The Wealth Tax Officer, however, did not accept the claim of the assessee and held that the debt had not become bad during the years in question and as such no deduction was admissible. The Commissioner of Wealth Tax (Appeals), before whom the order of the Wealth Tax Officer was challenged held, that since the assessee had not been able to recover the amount, the value of the debt had become "nil" during the years in question, i.e. assessment years 1971-72 to 1979-80. He, therefore, directed deduction of Rs.4,50,000 in computing the net wealth of the assessee and partly allowed the appeal. The Revenue preferred an appeal before the Income Tax Appellate Tribunal and the Tribunal held that the Commissioner of Wealth Tax (Appeals) was not justified in reducing the value of the debt to "nil". The Tribunal found that till the insolvency proceedings were commenced on October 24, 1975 which was long after the valuation date, there was nothing to suggest that there was any major depreciation in the value of the debt. The Tribunal also observed that the deletion of the interest accruing on the debt from the last year's wealth-tax assessment did not affect the valuation of the debt. It further observed that the assessee had not written off the amount of debt in the corresponding income-tax proceedings. It was held that the valuation of the debt has to be at its face value until specific date about the debtor's insolvency or pecuniary embarrassment was received. The Tribunal, therefore, allowed the appeal of the Revenue by its order, dated August 21, 1982, in respect of the assessment year 1971-72 and by its common order, dated August 24, 1984, in respect of the assessment years 1972-73 to 1975-76 restoring the orders of the Wealth Tax Officer.

In compliance with the order of this Court, the Tribunal referred the following common question for the opinion of this Court under section 27(3) of the Wealth Tax Act, 1957 (hereinafter referred to as "the Act"):

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in valuing the debt of Rs.4,50,000 at its face value and including it in the net wealth of the assessee?"

It was urged on behalf of the assessee by Mr. KH. Kaji, the learned Advocate appearing for the assessee, that there was ample material on record which clearly suggested that the debt in question would not have fetched any value if sold in the open market on the valuation date and, therefore, the decision of the Commissioner of Wealth Tax (Appeals) holding that the value of the debt had become "nil" during the year was correct. He submitted that for the purpose of claiming deduction on the ground that the asset would have no value as envisaged in section 7 of the said Act, as was applicable during the relevant years, it was not essential for the assessee to write off the debt in his books of account as was required to be done under the provisions of section 36(1)(vii) of the Income Tax Act, 1961. Learned counsel, Mr. B.J. Shelat, appearing for the revenue, on the other hand, strongly contended that there was no specific repudiation or denial of liability by the debtor who had only expressed some difficulty in making the payment and sought indulgence of the creditor by praying for time to make deposit. He submitted that, in any event, it was a question of appreciation of evidence and, therefore, this Court in its reference jurisdiction ought not to re-examine the issue.

The undisputed facts on record clearly disclose that, in respect of the debt in question, a letter was written on March 5, 1972, by the debtor VX Gandhi to the deceased Ruler in which he had stated that he had lost his money and had used deposits and funds which friends and others had placed with him on interest. He started suffering losses since 1968-69 and by mid 1971, he was in serious financial trouble. It was indicated that he had absolutely nothing left with him and had large liabilities. The creditor was in terms informed that, on the day on which the letter was written, he had nothing to give to anyone towards the interest or capital and that he was not able to send any amount as he was already "flat broke." The tenor of this letter which has been couched in a polite and disarming language clearly indicated that the debtor in terms informed the creditor that he was not in a position to pay any amount and that he would not be paying the same in the foreseeable future. The language used in this letter clearly shows that the debtor had informed the creditor that he had suspended the payment of the amount which was due to the creditor. Even the reply which was sent by the creditor on March 15, 1972, response to the said letter, a copy of which is on record, clearly shows that the creditor had understood that he was required to wait indefinitely. The genuineness of this correspondence is not at all disputed and what transpires therefrom is that the debtor showed his inability to repay the amount in .no uncertain terms. He had incurred heavy financial losses starting from 1968-69 and by mid-1971 he was in a precarious financial condition. It would, therefore, not be appropriate to confine pecuniary embarrassment to the period subsequent to April 1, 1972, as was sought to be suggested on behalf of the Revenue. The expression "by mid-1971" would mean before mid-1971 and, therefore, the inability of the debtor to pay the amount need not be confined only to the period after mid-June, 1971. Under section 7 of the said Act, as it stood during the relevant years, the value of any asset, other than cash, was the price which, in the opinion of the Assessing Officer, the asset would fetch if sold in the open market on the valuation date. In, view of the fact that the debtor had clearly indicated his inability to return the amount due to his precarious financial condition, it is clear to us that tie asset would not have fetched any price if sold in the open market on the valuation date. In other words, there would not be any prudent person available to pay any price for the asset in question. Having regard to the stand taken by the debtor suspending the payment, which itself amounted to an act of insolvency, it is obvious that there would not have been available any "prospective, able and willing buyer" thought of by the Tribunal, who would be prepared to buy the asset from the assessee in respect of which the debtor had announced his inability to repay. We, therefore, have no hesitation in holding that the finding of the Tribunal that the value of the said debt could not be brought down to "nil" is unreasonable and given without considering the contents of the correspondence which clearly indicated that the said asset would have no value on the relevant valuation date, having regard to the stand taken by the debtor. The subsequent events that took place clearly justified such a conclusion. Admittedly, insolvency proceedings were instituted against the debtor on October 24, 1975, and the debtor was adjudged insolvent by the High Court of Bombay by its order, dated July 6, 1976. There is no dispute about the fact that even prior to the institution of the insolvency proceedings, the assessee was not able to recover any amount and there was no possibility of any recovery having regard to the stand taken by the debtor as reflected from .the letter, dated March 5,1972, which was in response to a registered letter, dated February 28, 1972, sent by the ex-Ruler, Natwarsinhji, presumably demanding the amount. If in the background of the case, the assessee took the stand that the debt was not recoverable, in our opinion, he was justified in doing so. There is no statutory requirement under the Act of writing off the amount before assessee can become entitled to claim any deduction of the net value on the ground that the asset had no price on the valuation date as envisaged in section 7 of the said Act as is laid down under section 36(1)(vii) of the Income-tax Act, 1961, the deduction under which comes into play when there is a bad debt which is written off as irrecoverable in the accounts of the assessee for the previous year. No such requirement can be introduced while ascertaining the price which the asset will fetch if sold in the open market on the valuation date. The subsequent event of the insolvency proceedings under which the debtor was adjudged insolvent can be taken into account since it indicates that the stand taken by the assessee that the debt had become irrecoverable was justified.

In view of the above discussion, we answer the question referred to us in the negative and against the Revenue. Reference shall stand disposed of accordingly with no order as to costs.

M.BA./2440/TReference answered.