COMMISSIONER OF WEALTH TAX VS VIKRAM SWARUP
1994 P T D 248
[202 ITR 898]
[Calcutta High Court (India)]
Before Ajit K. Sengupta and Shyamal Kumar Sen, JJ
COMMISSIONER OF WEALTH TAX
Versus
VIKRAM SWARUP
Matter No.1795 of 1989; decided on 09/10/1991.
Wealth tax---
---- Valuation of assets ---Unquoted shares of company---Scope of Explanation 11 to R. 1-D of Indian Wealth Tax Rules, 1957---Provision for taxes and gratuity shown as liability in balance-sheet of company is deductible---Amount shown as proposed dividends is not deductible---Indian Wealth Tax Act, 1957, S.46---Indian Wealth Tax Rules, 1957, R.1-D.
Under the Wealth Tax Act, 1957, by section 46, the power to make rules for carrying out the purposes of the Act has been conferred on the Central Board of Revenue and, under subsection (2)(a), without prejudice to the power conferred by subsection (1) of section 46, rules made under the section may provide for the manner in which the market value of any asset may be determined. Accordingly, the Central Board of Revenue, as it then was, made the Rules called the Wealth Tax Rules, 1957. Rule 1-D provides for arriving at the market value of unquoted shares of companies other than investment companies and managing agency companies. Rule 1-D prescribes an artificial rule for determining the market value of unquoted shares. This artificial rule is to be strictly construed. Clauses (i) and (ii) of Explanation II to rule 1-D deal with two different items. Clause (i) of Explanation II deals with two amounts which are shown as assets in the balance-sheet but it is expressly provided that these amounts are not to be treated as assets for the purpose of working out rule 1-D. Clause (ii) of Explanation II deals with liabilities. Once again, though the amounts referred to in clause (ii) are liabilities, which are shown in the balance-sheet, the rule expressly provides that for the purpose of clauses (i) and (ii), these items shall not be treated as liabilities. The expression used in Explanation II(ii)(e) is "the tax payable with reference to the book profits in accordance with the law applicable thereto..." This part of sub-clause (e) clearly requires determination of the book profits and the rate of tax applicable on such book profits for the relevant assessment year. Once the rate of tax as applicable is found out for the relevant assessment year and the same is applied to the book profits, the tax payable would automatically become clear. There is no scope for granting any further deduction from the tax payable so calculated either of advance tax and/or of taxes deducted at source. In fact, sub-clause (3) makes it very clear that advance tax is to be totally ignored since it uses the words "other than the amount referred to in clause (i)(a)" which deals with the amount of advance tax paid under section 210 of the Income Tax Act, 1961. It is not the intention of the statute, as is clear from the provisions of sub-clause (e), that advance tax should be deducted from the gross tax payable with reference to the book profits. Had it been so, the rule would have used the expression "a$ reduced by" and not "other than the amount referred to in clause (i)(a)". The words used are "tax payable" and not "tax due". The tax due on book profits can be worked out after deducting from the gross tax payable the amount of advance tax and the taxes deducted at source. But, when the statute requires the working of only "tax payable" and not "tax due", one has to work out the gross tax payable with reference to the book profits by applying the rate of tax applicable for the relevant assessment, year as laid down in the relevant Finance Act.
The assessee held certain shares of P, which were unquoted. The assessee disclosed the market value of the shares held by him for the purpose of charge to wealth tax based on the average maintainable profits and its earnings for the assessment years 1979-80 and 1980-81. The Wealth Tax Officer did not allow deduction in respect of full liabilities towards provision for income-tax, proposed dividend and gratuity as appearing in the balance sheets of the said company drawn in accordance with Schedule VI of the Companies Act. The Commissioner of Wealth-tax (Appeals) held that the entire provision for taxation including provision for proposed dividend and provision for gratuity-as appearing in the balance-sheet of the said company drawn up as on October 31, 1978, and October 31, 1979, were required to be deducted and taken into account in determining the market value of the said shares based on its break-up value as envisaged in rule 1-D of the Wealth Tax Rules, 1957. On appeal by the Revenue, the said order of the Commissioner of Wealth Tax (Appeals) was confirmed by the Income Tax Appellate Tribunal. On a reference:
Held, (i) that there was no excess provision for taxation. Hence the provision for taxation was fully deductible in computing the value of the shares.
CWT v. Ashok K. Parikh (1981) 129 ITR 46 (Guj.) and CWT v. Arvindbhai Chinubhai (1982) 133 ITR.800 (Guj.) applied.
(ii) that gratuity is now a statutory liability. No clause of Explanation 11 requires any adjustment to be made in respect of a provision for gratuity. Hence the provision for gratuity was deductible in computing the value of the shares:
Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 1TR 559 (SC); CWT v. S. Ramaswami (1983) 140 ITR 606 (Mad.) and CWT v. S. Ram (1984) 147 ITR 278 (Mad.) applied.
(iii) that dividends could not have been declared in either of the said two years before the relevant valuation date inasmuch as the books and records for the said two years were audited and published long after the relevant valuation dates and the annual general meeting approving the proposal of directors in respect of dividends could not have taken place before the relevant valuation dates. Hence proposed dividends could not be deducted as a liability in computing the value of the shares.
Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 (SC) applied.
Ashok Kumar Oswal (Minor) v. CWT (1984) 148 ITR 620 (P&H); Balakrishnan (L.G.) v. CWT (1988) 173 ITR 266 (Mad.); CIT v. Lakshmaiah (M.) (1988) 174 ITR 4 (AP); CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC); CWT v. Krishnan (N.) (1986) 162 ITR 309 (Kar.); CWT v. Latha D. Pai (1989) 179 ITR 249 (Kar.); CWT v. Pratap Bhogilal (1987) 167 ITR 501 (Bom.); Srinivasan (T.V.) v. CWT (1985) 152 ITR 599 (Mad.) and WTO v. Sheth (CJ.) (1983) 4 ITD 706 (Bom.) (SB) ref.
S.K. Mitra for the Commissioner.
N.K. Poddar and Debasish Mitra for the Assessee.
JUDGMENT
SHYAMAL KUMAR SEN, J.---In these references made at the instance of the Revenue, the following question of law has been referred to this Court by the Income Tax Appellate Tribunal under section 27(1) of the Wealth Tax Act, 1957:
"Whether, on the facts and in the circumstances of the ease, the Tribunal was justified in law in upholding the direction of the Commissioner of Wealth Tax (Appeals) for deduction of liabilities towards provision for income-tax, proposed dividend and gratuity from the value of the assets of the company for the purpose of determination of the, value of the unquoted shares of Messrs Paharpur Cooling Towers (Pvt.) Ltd. on the break-up value method in accordance with rule 1-D of the Wealth-tax Rules, 1957, though the directions of the learned Commissioner of Wealth-tax (Appeals) were in contravention of the express provisions of sub-clauses (b), (e) and (f) of clause (ii) of Explanation II to rule 1-D of the Wealth Tax Rules, 1957?"
Before going to the merits of the controversy, we reframe the aforesaid question as follows:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the direction of the Commissioner of Wealth Tax (Appeals) for deduction of liabilities towards provision for income-tax, proposed dividend and gratuity from the value- of the assets of the company for the purpose of determination of the value of unquoted shares of Messrs Paharpur Cooling Towers (Pvt.) Ltd. on the break-up value method in accordance with rule 1-D of the Wealth-tax Rules, 1957?"
The facts, inter alia, relating to these references are as under:
These references relate to the assessment years 1979-80 and 1980-81, for which the relevant valuation dates were March 31, 1979, and March 31, 1980, respectively. The assessee held certain shares of Paharpur Cooling Towers (Pvt.) Ltd., which are unquoted. The assessee disclosed the market value of the shares held by him for the purpose of charge to wealth tax based on the average maintainable profits and its earnings. The Wealth Tax Officer, however, held that, for the purpose of valuation of unquoted equity shares under the Wealth Tax Act, 1957, rule 1-D of the Wealth Tax Rules, 1957, was mandatory and, accordingly, he valued the aforesaid shares on the break-up value method as envisaged under rule 1-D of the said Rules. While arriving at the value of the shares of Paharpur Cooling Towers (Pvt.) Ltd., based on its balance-sheets drawn up as at October 31, 1978, and October 31, 1980, corresponding to the assessment years 1979-80 and 1981-82, the Wealth-tax Officer followed the computation made by him in the case of Mahendra Kumar and Sons (Hindu undivided family) and did not allow deduction in respect of full liabilities towards provision for income-tax, proposed dividend and gratuity as appearing in the balance-sheets of the said company drawn up in accordance with Schedule VI of the Companies Act, 1956.
On further appeal by the assessee, the Commissioner of Wealth-tax (Appeals) held, following his earlier order in the case of Mahendra Swarup for the assessment years 1979-80 and 1981-82, that the entire provision for taxation including provision for proposed dividend and provision for gratuity as appearing in the balance-sheet of the said company drawn up as at October 31, 1978, and October 31, 1979, were required to be deducted and taken into account in determining the market value of the said shares based on its break-up value as envisaged in rule 1-D of the Wealth Tax Rules, 1957.
On appeals by the Revenue, the said order of the Commissioner of Wealth Tax (Appeals) was confirmed by the Income-tax Appellate Tribunal.
It has been contended on behalf of the Revenue that, in view of the specific provisions of clause (ii) (b) and (e) of Explanation II to rule 1-D of the Wealth Tax Rules, 1957, the liabilities towards income-tax and proposed dividend and gratuity are not deductible from the assets of the company for purpose of valuation of unquoted equity shares of the company in accordance with the provision of rule 1-D.
It has been submitted on behalf of the assessee, on the other hand, that rule 1-D of the Wealth Tax Rules, 1957, deals with the manner of determining the market value of an unquoted equity share of any company other than an investment company or a managing agency company. The said rule, inter alia, provides that the value of all the liabilities as shown in the balance-sheet of such company shall be deducted from the value of all its assets shown in the balance-sheet. The net amount so arrived at divided by the total amount multiplied by the paid up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 80 per cent of the break-up value so determined.
It has further been submitted that, according to the clear provisions of rule 1-D, the balance-sheet of a company drawn up in accordance with the provisions of the Companies Act, 1956, shall be treated as sacrosanct and from the value of all assets shown in that balance-sheet, the value of all liabilities as shown in the balance-sheet shall be deducted for determining the break-up value, which is the first step in determining the market value in accordance with that rule.
It has also been submitted that Explanation II of the said rule provides for certain adjustments to be made in respect of the assets. and liabilities shown in the balance-sheet of the relevant company. These are the only adjustments, which are permitted by the said rule. No adjustment other than those, which are specifically laid down in Explanation II can be permitted.
Rule 1-D of the Wealth Tax Rule, 1957, and also Explanation 11 (ii) (e) of the said rule are set out here in below:
"The market value of an unquoted equity share of any company, other than an investment company or a managing agency company, shall be determined as follows:
The value of all the liabilities as shown in the balance-sheet of such company shall be deducted from the value of all its assets shown in that balance-sheet. The net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown in the balance sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 85 per cent of the break-up value so determined:
Provided that where, in respect of an equity share, no dividend has been paid by such company continuously for not less than three accounting years ending on the valuation date, or in a case where the accounting year of that company does not end on the valuation date, for not less than three continuous accounting years ending on a date immediately before the valuation date the market value of such share shall be as indicated in the Table below:
THE TABLE
| Number of accounting years ending on the Valuation date or in a case where the accounting year does not end on the valuation date, the number of accounting years ending on a date immediately preceding the valuation date, for which no dividend has been paid | Market value. | |
| (1) | (2) | |
| Three years | 82-1/2 percent of the break-up value of such share | |
| Four years, | 8 | do |
| Five years | 77-1/2 | do |
| Six years and above | 75 | do |
Explanation I.---For the purposes of this rule, balance-sheet in relation to any company, means the balance-sheet of such company as drawn up on the valuation date and where there is, no such balance sheet, the balance-sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balance-sheet drawn up on a date immediately after the valuation date.
Explanation II---For the purposes of this rule---
(i) the following amounts shown as assets in the balance-sheet shall not be treated as assets, namely:
(a) any amount paid as advance tax under section 18-A of the Indian Income Tax Act, 1922 (11 of 1922), or under section 210 of the Income Tax Act,1961(43 of 1961);
(b) any amount shown in the balance-sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset:
(ii) the following amounts shown as liabilities in the balance-sheet shall not be treated as liabilities, namely:
(a) the paid-up capital in respect of equity shares; .
(b) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the valuation date at a general body meeting of the company;
(c) reserves, by whatever name called, other than those set apart towards depreciation;
(d) credit balance of the profit and loss account;
(e) any amount representing provision for taxation (other than the amount referred to in clause (i)(a) to the extent of the excess over the tax payable with reference to the book profits in accordance with law applicable thereto;
(f) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares."
It has also been contended on behalf of the assessee that the main controversy in this case is whether any adjustment is called for in this case in the "provision for taxation" as appearing in the balance-sheets of the said company drawn as at October 31, 1978, and October 31, 1980. It is nobody's case that the provision made by the said company is in excess over the tax payable by it with reference to the book profits in accordance with the law applicable thereto. The Tribunal has not given any finding that the said company made any excess provision in this case. The controversy centres round the question whether, from the provision for gross tax payable with reference to the book profits as appearing in the balance-sheet of the said company, any deduction should be made by way of advance tax and/or taxes deducted at source which are appearing on the assets side of the balance-sheet. It is not the case of the Department that any deduction should be made in respect of taxes deducted at source. It has been further contended by the Department that advance tax paid by the said company, as appearing on the assets side, should be deducted from the gross tax payable on the book profits as appearing on the liabilities side. Both the Commissioner of Wealth Tax (Appeals) as well as the Tribunal, however, did not accept the said contention of the Department, with regard to the expression used in Explanation II(ii)(e) which is "the tax payable with reference to the book profits in accordance with the law applicable thereto".
According to the learned Advocate for the assessee, the aforesaid provision of sub-clause (e) clearly requires determination of the book profits and the rate of tax applicable on such book profits for the relevant assessment year. Once the rate of tax as applicable is found out for the relevant assessment year and the same is applied to the book profits, the tax payable would automatically come out. There is no scope for granting any further deduction from the tax payable so calculated either in respect of advance tax and/or in respect of taxes deducted at source. In fact, sub-clause (e) makes it very clear that advance tax is to be totally ignored since it uses the words "other than the amount referred to in clause (i)(a)" which deals with the amount of advance tax paid under section 210 of the Income Tax Act, 1961.
Mr. Poddar, learned Advocate for the assessee further contended that it is clear from the express words that it is not the intention of the Legislature that advance tax should be deducted from the gross tax payable with reference to the book profits. Had it been so, the rule would have used the expression. as reduced by". It has been suggested that, from the corresponding provisions of section 139(8)(a) of the Income Tax Act, 1961, the same would be clear. The words used therein are to the following effect "the tax payable on the total income as determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source".
It has also been contended that, whenever it is the intention of the Legislature that the advance tax paid and taxes deducted at source should be reduced from the tax payable, the same has been specifically provided in the statute and the expression "reduced by" has been used in the relevant portion of the statute. On the other hand, rule 1-D does not intend to require deduction of either advance tax paid and/or taxes deducted at source. The same has not been specifically provided in the rule in the instant case and, therefore, it uses the words "other than the amount referred to in clause (i)(a)", which is nothing but the amount paid as advance tax under section 210 of the Income Tax Act, 1961.
It has been submitted that the expression used in the law is "tax payable" and not "tax due". The tax due on book profits can be worked out after deducting from the gross tax payable the amount of advance tax and the taxes deducted at source. But, when the statute requires the working of only "tax payable" and not "tax due", one has to work out the gross tax payable with reference to the book profits by applying the rate of tax applicable for the relevant assessment year as laid down in the relevant Finance Act.
. The advance tax as well as taxes deducted at source are given credit for only on the making of the regular assessment and against the tax payable on the total income as determined on regular assessment. This is never deducted from the tax payable on book profits.
The learned Advocate for the assessee further submitted that it is a well-settled canon of construction of the statute and/or the rules made thereunder that no words used therein can be held to be otiose; nor can any word be added by the authorities and/or the Courts. If the contention of the Revenue is accepted, it would amount to saying that the words "other than the amount referred to in clause (ii)(e) are otiose and have no meaning". The contention of the Revenue can only be accepted if certain words like "as reduced by the advance tax paid and/or taxes deducted at source" are added at the end of sub-clause (a). This obviously cannot be done either by the authorities and/or by the Court. This is the work of the Legislature and/or the rule-making authority.
The words used in the rule have to be construed plainly. A plain and grammatical construction of the rule makes it very clear that adjustment is to be made in .the provision for taxation appearing on the liabilities side of the balance-sheet only if such provision is found to be in excess over the tax payable with reference to the book profits in accordance with the law applicable thereto. This is admittedly, not the case here.
The learned Advocate for the assessee in this connection cited the following cases in support of his contention.
CWT v. Ashok. K. Parikh (1981) 129 ITR 46 (Guj.); CWT v. Axvindbhai Chinubhai (1982) 133 ITR 800 (Guj.); CWT v. Pratap Bhogilal (1987) 167 ITR 501 (Bom.); L.G. Balakrishnan v. CWT (1988) 173 ITR 266 (Mad.) and WTO v. C.J. Sheth (1983) 4 ITD 706 (Bom.) (SB);
He has also referred to the following cases, which have been decided in favour of the Revenue.
(1) Ashok Kumar Oswal (Minor) v. CWT (1984) 148 ITR 620 (P&H); (2) CWT v. N. Krishnan (1986) 162 ITR 309 (Kar.); (3) CIT v. M. Lakshmaiah (1988) 174 ITR 4 (AP) and (4) CWT v. Latha D. Pai (1989) 179 ITR 249 (Kar.).
We have considered the respective submissions of the parties and the cases cited from the Bar. It has not been disputed before us that the valuation of unquoted shares of Messrs Paharpur Cooling Tower (Pvt) Ltd. has to be determined in accordance with the provisions of rule 1-D of the' Wealth Tax Rules, 1957. It has to be considered, however, whether it is necessary, while computing the value of the aforesaid shares under rule 1-D, to allow deductions for liabilities towards income-tax, proposed dividend and gratuity from the assets of the said company.
In the case CWT v. Ashok K. Parikh (1981) 129 ITR 46 (Guj), it was held that rule 1-D of the Wealth Tax Rules, 1957, makes it clear that, in order to arrive at the break-up value of the shares of a company, first the balance sheet as drawn up by the company itself has to be looked at and all the liabilities as shown in the balance-sheet are to be deducted from all the assets shown in the balance-sheet and the net wealth of the company is to be ascertained. Though, ordinarily, an amount paid as advance tax under section 18-A of the 1922 Act or under section 210 of the 1961 Act will be shown on the assets side of the balance-sheet, for the purpose of arriving at the break-up value, by the artificial rule as laid down in Explanation II, clause (i)(a) to rule 1-D, the amount paid as advance tax under the law relating to income-tax is not to be treated as an asset. When a particular amount, which is shown on the assets side, is not to be treated as an asset, the net wealth of the company will, to that extent, be reduced because, to that extent, the assets will be shown less. Under sub-clause (ii), which deals with what are not to be treated as liabilities under clause (e), it is only the amount shown by way of provision on the liabilities side that is dealt with and any amount representing provision for taxation "other than the amount referred to in clause (i)(a)" to the extent of the excess over the tax payable with reference to the book profits of the company in accordance with the law applicable thereto, is not to be treated as liabilities. Provision for liabilities means provision for taxation, which, according to the ordinary rules of accountancy, will be shown on the liabilities side of the balance-sheet. What clause (e) provides is that only the provision for taxation, which is justifiable in view of the book profits of the company in accordance with the law applicable thereto should be deducted as liabilities. If there is any excess over the amount shown by way of provision over what would be payable with reference to the book profits, that excess provision is not to be treated as liabilities. Sub-clause (e) of clause (ii) of Explanation II deals with a provision and not the actual payment made by the company. The words "other than the amount referred to in clause (i)(a)" refer to the provision for taxation other than the provision for advance tax; they do not mean the amount aid as advance tax under section 18-A of the Indian Income-tax Act, 1922, or section 210 of the Income Tax Act, 1961. While considering the provision for taxation, it must be ascertained that there is no provision for payment"' of advance tax because the provision for advance tax is to be excluded from the scope of sub-clause (e) of clause (ii) by the words "other than the amount referred to in clause (i)(a)". Therefore, what sub-clause (e) of clause (ii) requires the Wealth Tax Officer to do is to ascertain first as to what are the book profits shown by the company and in the light of those book profits, what would be the tax payable with reference to those book profits in accordance with the law applicable thereto. Having thus ascertained the amount of the tax payable with reference to the book profits, the Wealth Tax Officer has then to see, whether the provision for taxation on the liabilities side of' the balance sheet is in excess of the amount of tax payable with reference to the book profits, as already ascertained by him. If there is any excess in the provision for tax liabilities, then, that excess is not to be treated as part of the liabilities of the company while computing the break-up value of the shares of the company. So far as provision for, advance tax is concerned, that provision has to be disregarded while applying the provisions of sub-clause (e) of clause (ii) of Explanation II: Sub-clause (a) of clause (i) of Explanation II is intended to give a benefit to the holders of shares of those companies which have been prompt in making payment of their advance tax under the provisions of the law relating to income-tax. Having granted that benefit to such companies, the rule-making power wants to indicate in sub-clause (e) of clause (ii) of Explanation Il that the excess provision to the extent of the excess when making the provision for liabilities for taxation, other than the provision for advance tax, is to be disregarded and only the provision on the liabilities side by way of provision for taxation to the extent of the tax payable with reference to the book profits in accordance with the law applicable thereto is to be treated as part of the liabilities of the company. Because of the words "other than the amount referred to in clause (i)(a)" occurring in parenthesis in sub-clause (e) of clause (ii), if any advance tax is already paid, that has not to be brought back. Sub-clause (e) of clause (ii) and sub-clause (a) of clause (i) of the rule operate in two different fields altogether. Clause (i)(a) operates in the field of actual payment of advance tax. Clause (ii)(a) operates in the field of excess provision for taxation other than the provision for taxation regarding advance tax.'
Therefore, for the purpose of computation of the market value of the shares of a company, the advance tax paid under section 210 of the Income Tax Act, 1961, and shown on the assets side of the balance-sheet of the company cannot be deducted from the tax payable, in determining whether the provision for taxation is in excess over the tax payable with reference to the book profits in accordance with the law 'applicable thereto within the meaning of clause (ii)(e) of Explanation II to rule 1-D of the Wealth Tax Rules, 1957. In the case of CWT v. Arvindbhai Chinubhai (1982) 133 ITR 800, their Lordships of the Gujarat High Court followed their earlier decision in the case of Ashok IC. Parikh (1981) 129ITR 46.
In the case of CWT v. Pratap Bhogilal (1987)167 ITR 501(Bom.), the question for determination was "whether, on the facts and is the circumstances of the case, the liabilities as shown in the balance-sheet of Batliboi and Co. (Pvt.) Ltd., as at March 31, 1969, should be further reduced by the sum of Rs.66,95.020 aforesaid while determining the market value of unquoted equity shares of the company in terms of rule 1-D of the Wealth Tax Rules, 1957"?
The assessee, inter alia, held shares of Messrs Batliboi and Co. (Pvt.) Ltd. (for short, "the company"). The shares were not quoted at any stock exchange and were required to be valued in accordance with the provisions of rule 1-D of the Wealth Tax Rules, 1957. For the purpose of valuing the shares for the involved assessment year 1970-71, the pertinent balance-sheet of the company is that as on March 31,1969.
The assets side of the balance-sheet of the company, inter alia, disclosed an asset in the sum of Rs.66,95,020 representing advance tax paid by, the company. On the liabilities side, there appeared a liability in the sum of Rs.1,19,17,163 representing provision for taxation. There was no dispute that for the purpose of valuing the shares of the company, the sum of Rs.66,95.020, representing advance tax paid appearing as an asset in the balance-sheet is to be ignored in terms of Explanation II(i)(a) to rule 1-D of the Wealth Tax Rules, 1957. The dispute was regarding the liability representing provision for taxation. According to the Revenue, the provision for taxation in excess of the actual liability for taxation is to be excluded from the liabilities. The case of the assessee, on the other hand, is that the excess of provision over the tax payable with reference to the book profits only requires to be ignored in terms of Explanation II (ii)(e) to rule 1-D and that there is no scope for reducing the provision for tax payable with reference to book profits by the amount of Rs.66,95,020 paid as advance tax.
The Bombay High Court referred to rule 1-D and the Explanation thereto set out in the judgment. It was, inter alia, held by the Division Bench of the Bombay High Court that, broadly speaking, the value of the equity shares is computed by dividing the surplus of assets over the liabilities by the number of fully paid-up equity shares. However, for this purpose, certain assets are not to be treated as assets and similarly certain liabilities are not to be treated as liabilities. That the above computation is artificial is evident from the fact that there is no provision in the Rules for inclusion of any liability in the liabilities, however real the same might be, if not provided for in the balance-sheet and, similarly, there is also no provision for inclusion of any assets not appearing in the balance-sheet. As stated earlier, we are concerned in this case with the liabilities referred to in sub-clause (e) of clause (ii) of Explanation II above (at page 504 of 167 ITR). '
Sub-clause (e) has two main parts:
"(i) any amount representing provision -for taxation (other than the amount referred to in clause (i)(a) to the extent of the excess over);
(ii) the tax payable with reference to the book profits in accordance with the law applicable thereto."
To the extent the provision for taxation in the first part is in excess over the tax payable contemplated in the second part, it is not to be treated as a liability. We take up the second part first. On the face of it, it means the amount of the tax payable with reference to the book profits as total income.
The Supreme Court in CIT v. Vegetable Products Ltd. (1973) 88 ITR 192, was concerned with the interpretation of the expression "the amount of tax, if any, payable by him" as used in section 271(1)(a)(i) of the Income Tax Act, 1961. The penalty under that provision is levied with reference to and for the tax payable as determined on regular assessment. The situation envisaged is, thus, post-assessment. In that context, the amount of tax, if any, payable could only mean the tax payable with reference to the assessed profits as reduced by the advance tax paid, tax paid on the basis of self-assessment and taxes deducted at source, etc. The above decision has, thus, no bearing on the question posed before us.
The bracketed portion in the sub-clause is to be read with the first part as (i) bracket starts immediately after the expression "provision for taxation" and (ii) the expression "to the extent of excess over" precedes the words "the tax payable". Therefore, the bracketed portion will have a bearing on the first part only. The first part has, it appears to us, two limbs. The first limb, namely, "any amount representing provision for taxation" refers to a factual aspect of the balance-sheet and there cannot possibly by any dispute or debate about it. The second limb, i.e., the bracketed portion which starts with the words "other than" to our mind, means and can only mean "except". The words "other than" are followed by the words "the amount referred to in clause (i)(a)" which is the amount paid as advance tax. The bracketed portion, thus, means other than advance tax paid. Putting it differently,, the first part of the clause would read as any amount representing provision for taxation other than or except the amount paid as advance tax. Such an interpretation certainly does not support the contention of the Revenue.
To show advance tax paid as an asset is a convenient and well recognised accountancy practice. It has been recognised by sub-clause (a) of clause (i) of Explanation II referred to above. Section 219 of the Income Tax Act, 1961, which envisages adjustment of advance tax paid towards the tax payable on completion of regular and/or provisional assessment lends further support to this practice. If advance tax paid is shown as an asset, the provision for taxation has, of necessity, to be of gross tax payable with reference to the book profits.
Referring to the decisions of the Gujarat High Court in CWT v. Ashok K. Parikh (1981) 129 ITR 46 and CWT v. Arvindbhai Chinubhai (1982) 133 ITR 800 and the decision of the Madras High Court in T.V. Srinivasan v. CWT (1985) 152 ITR 599 and also of the Punjab and Haryana High Courts in Ashok Kumar Oswal (Minor) v. CWT (1984) 148 ITR 620 and of the Karnataka High Court in CWT v. N. Krishnan (1986) 162 ITR 309, the Division Bench of the Bombay High Court held that, for the purpose of determining the excess provision for taxation over the tax payable with reference to book profits in terms of Explanation 11(ii)(e) to rule 1-D, tax the payable with reference to book profits cannot be reduced by the amount of advance tax paid and, accordingly, answered the question of law referred to them in the negative and in favour of the assessee.
In the case L.G. Balakrishnan v. CWT (1988) 173 ITR 266 (Mad.), the Wealth Tax Officer determined the break-up value of the shares of a private limited company on the basis of rule 1-D, Explanation II of the Wealth Tax Rules, 1957. The Wealth Tax Officer excluded the advance tax paid from the total assets of the company. The Wealth Tax Officer deducted the advance tax paid from the tax payable on the basis of book profits to determine the actual tax payable. The Wealth Tax Officer deducted the actual tax payable from the provision for taxation and treated the excess as an excess provision.
The Tribunal held that the method of computation adopted by the Wealth Tax Officer was correct. On a reference, it was held that since for the purpose of the balance-sheet, the tax has to be computed on the basis of the book profits and a provision has to be made therefore, what is to be ascertained for the purpose of clause (ii)(e) is whether the provision for taxation is in excess of the tax payable. The words "tax payable clearly refer to the total amount of tax payable on the basis of book profits computed in accordance with the provisions of the Income Tax Act. There is no warrant for deducting the amount of advance tax and to give an artificial meaning to the words "tax payable". The Tribunal was not, therefore, right in its view that the advance tax paid has to be deducted from the tax on the book profits 'to arrive at the quantum of "tax payable" with reference to the book profits in accordance with the law applicable thereto" referred to in sub-clause (ii)(e) of Explanation II to rule 1-D of the Wealth Tax Rules, 1957.
It was also observed by the Division Bench of the Madras High Court as follows (at page 272);
'The two conflicting arguments had been considered by different Courts. Before we refer to these decisions, although we make it clear that we are inclined to follow the view taken by the Gujarat and Bombay High Courts, it is necessary to point out that clauses (i) and (ii) of Explanation II deal with two different items. Clause (i) of Explanation II deals with two amounts which are shown as assets in the balance-sheet but it is expressly provided that these amounts are; not to be treated as assets for the purpose of working out rule 1-D. Clause (ii) of Explanation II deals with liabilities. Once again, though the amounts referred to in clause (ii) are liabilities, which are shown in the balance-sheet, the rule expressly provides that for the purpose of clauses (i) and (ii), these items shall not be treated as liabilities. In so far as the advance tax is concerned, while it is expressly shown as assets in the balance-sheet, the rule says that it shall not be treated as an asset. When the rule-making authority made a provision in clause (e) to provide that a certain amount which is in excess of the actual liability by virtue of the provision for taxation being made at a higher figure than what would be payable on the basis of the book profits, clearly and properly did not want that excess amount to be treated as a liability, because it is not a liability at all. Some difficulty has been experienced in construing sub-clause (e) because of some inelegant drafting by an introduction of the bracketed portion. The bracketed portion, other than the amount referred to in clause (i)(a), is preceded by the words `any amount representing provision for taxation'. There are two ways of looking at that, bracketed portion. One way is the strictly grammatical way and to construe the word `other' in the context of the word preceding the words `provision for taxation', which would mean that the words following the word `other' must refer to some provision for taxation. If we adopt strictly the grammatical rule of construction, then the bracketed portion will have to be read as `provision for taxation other than the amount which is referred to in clause (i)(a)'. Though clause (i)(a) says that the amount paid as advance tax shown as assets in the balance-sheet shall not be treated as assets, the fact remains that it is an asset and it cannot be construed as a provision as commonly understood either for the purpose of taxation or for the purpose of commercial accounting. Such a construction, therefore, would not be permissible.
The other construction, which seems to be more plausible is to relate the `other' to the word `amount' which occurs in the opening part of the clause. If the rule is so read, then it will read as follows:
"Any amount, other than the amount referred to in clause (i)(a) representing provision for taxation to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto."
It is a well-known rule of construction that, as far as possible, a statutory provision should not be so construed as to make it nugatory or ineffective. If clause (e) is read in the manner indicated above, the obvious effect of such construction is that the amount referred to in clause (i)(a) which is the amount paid as advance tax, is to be left out for the purpose of determination of the excess contemplated by clause (e). Such a construction alone appears to us to be plausible because it will indicate that while providing that the amount paid as advance tax shall not be treated as an asset, the rule making authority also accepted the general principle of commercial accounting on which the balance-sheet is made when a provision for taxation is made only with reference to the total liability which alone is taken into account for the purpose of arriving at the picture in the balance-sheet. Sub-clause (e) refers merely to `tax payable' which means the total tax payable and not the balance of the tax payable after deducting the advance tax. If the advance tax is deducted from the amount which would be due on the basis of the book profits so as to arrive at the figure of the `tax payable' as contended by the Revenue, in our view, it would amount to adding words in clause (e) by reading it as `tax payable after giving credit for the amount of advance tax paid'. This, in our view, would not be permissible. When clauses (i) and (ii) of Explanation II specifically refer to the balance-sheet, we must also assume that the rule making authority had in mind the normal way of making a provision for taxation which is made with reference to the total tax liability.
In our view, plainly and clearly, since for purposes of the balance -sheet, the tax has to be computed on the basis of the book profits and a provision has to be made therefore, what is to be ascertained for the purpose of clause (e) is whether the provision for taxation is in excess of the tax payable. The words `tax payable' clearly refer, to in our view, the total amount of tax payable on the basis of the book profits computed in accordance with the provisions of the Income Tax Act. In our view, there is no warrant for deducting the amount of advance tax and to give an artificial meaning to the words `tax payable'.
The Andhra Pradesh, Karnataka, Punjab 'and Haryana High Courts have decided in favour of the Revenue. The two issues have been emphasised in these cases. Firstly, the Courts have tried to identify and equate "tax payable" with "tax due". There is wide difference between the words "tax payable" and "tax due". The latter expression clearly means the amount ultimately payable after deducting advance tax and taxes deducted at source from the gross tax. The expression used in sub-clause (e) is "tax payable" and not "tax due". Secondly, it has been accepted in the aforesaid decision in favour of the Revenue that, if the assessee's submissions are accepted following the views taken by the Gujrat, Bombay and Madras High Courts, it would amount to double deduction. However, there is no question of double deduction: Rule 1-D prescribes an artificial rule of determining the market value of unquoted shares. This artificial rule is to be strictly construed.
In the case of Ashok Kumar Oswal.(Minor) v. CWT (1984) 148 ITR 620, it has been held by the Punjab and Haryana High Courts that in Explanation II to rule 1-D of the Wealth Tax Rules, 1957, clause (i) deals with the amounts on the assets side in the balance-sheet which are not to be treated as assets, and clause (ii) with the amounts on the liabilities side in the balance- sheet which are not to be treated as liabilities. Under sub-clause (a) of clause (i), any amount paid as advance tax and shown as an asset in the balance-sheet of a company is not to be treated as an asset, and, under sub -clause (e) of clause (ii), the difference between the amount representing provision for taxation and the amount payable as tax on the book profits is not to be treated as a liability. It is well-settled that various clauses in a rule should be interpreted harmoniously. In sub-clause (e), the words "the tax payable with reference to the book profits" are important. These words connote the amount of tax due from a company after deducting the advance tax and not the whole of the amount of tax worked out on the book profits. A provision for taxation is made in the balance-sheet under rules of accountancy and not under any rule of law. The liability of a company to pay tax is the amount of tax worked out on its profits minus the payment made as advance tax. It cannot be said that the advance tax paid is not relevant for determining the tax liability of a company. Therefore, under sub-clause (e), out of the provision for taxation, the actual amount payable after deducting the advance tax will be taken as the liability of the company and not the whole of the tax on the book profits.
In the case of CWT v. N. Krishnan (1986) 162 ITR 309 (Kar.) the advance tax paid was shown as an asset in the balance-sheet because it was a deposit made with the Government which is adjusted against the total liability as determined on completion of the assessment. The exclusion of advance tax from the total assets under clause (i)(a) of Explanation II to rule 1-D of the Wealth Tax Rules, 1957, is not to he confused with the provision for the total tax payable by the company, which is referred to in clause (ii)(e) of Explanation II to rule 1-D as a liability. The advance tax has to be paid during the- accounting year of the company. It has already been paid during the accounting year and all that remains is its adjustment against the total tax due. Advance tax paid is on the assets side of the balance-sheet and that amount is embedded in the full provision for tax, which appears on the liabilities side. If advance tax as an asst is taken out, there has to be a corresponding reduction from the tax liability, which appears as a provision for tax due at a gross figure from which the Government will collect only the net tax after adjusting the advance tax already paid by the company. When the assets side is already reduced under clause (i)(a) by excluding the advance from the assets side of the balance-sheet, the Karnataka High Court held that there can not be any other way of interpretation of clause (ii)(e) than to correspondingly reduce the provision for taxes by the amount of advance tax paid. The provision for tax payable with reference to the book profits in the balance-sheet has to be reduced by the amount of advance tax paid. What clause (ii)(e) seeks to achieve is not to overload the liabilities side of the balance-sheet with the total tax payable, while the total tax payable in fact and in law is the gross tax as determined on book profits less the advance tax already paid.
Therefore, in determining the break-up value of unquoted equity shares of a company under rule 1-D, the amount representing the advance tax paid by the company and shown on the assets side of the balance-sheet is to be deducted from the excess provision for taxation shown on the liabilities side.
In the case of CIT v. M. Lakshmaiah (1988) 174 ITR 4, the Andhra Pradesh High Court observed that the manner in which the market value of unquoted equity shares of companies should be computed is indicated in rule 1-D of the Wealth Tax Rules, 1957. Explanation Il to the rule provides, inter alia, that any amount paid as advance tax under section 18-A of the Indian Income Tax Act, 1922, or under section 210 of the Income Tax Act, 1961, shall not be treated as an asset. The Explanation also refers to the amounts shown as liabilities in the balance-sheet which should not be treated as liabilities for the purpose of the rule. The items of liabilities, which should be disregarded, are specified in clause (ii) of Explanation II. Sub-clause (e) of clause (ii) of Explanation II specifies that any amount representing provision for taxation (other than the amount referred to in clause (i)(a) to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto shall not be treated as a liability. Explained in simple language, the position turns out as under: whatever amount of advance tax is paid by an assessee appearing as an asset in the balance-sheet shall be excluded and only the balance of the assets shall be taken into consideration for the purpose of rule 1-D. Sub-clause (e) of clause (ii) of Explanation II, in terms, provides that an adjustment must be made, if called for, to the amount appearing as "provision for taxation" in the balance-sheet. The entire exercise is to ensure that the total amount of tax payable by an assessee on the income, profits and gains for the relevant assessment year is allowed as a deduction. That deduction is allowed partly by excluding the advance tax already paid from the assets side and partly by allowing the balance by way of provision for taxation on the liabilities side. If the provision for taxation made is in excess of what is really required for the purpose of paying tax on the book profits for the relevant assessment year, then, obviously, the excess does not represent a proper liability and, therefore, the rule requires that that liability should be disregarded. The real effect of sub-clause (e) of clause (ii) of Explanation II to rule 1-D is to permit the deduction of provision for taxation only to the extent that is necessary for ensuring the deduction of the total liability relating to the assessment in respect of the income, profits and gains for that year and it does not have the effect of allowing provision for taxation in excess thereof.
Under the Wealth Tax Act, 1957, by section 46, the power to make rules for carrying out the purposes of the Act has been conferred on the Central Board of Revenue and under subsection (2)(a), without prejudice to' the power conferred by subsection (1) of section 46, rules made under the section may provide for the manner in which the market value of any asset may C be determined. Accordingly, the Central Board of Revenue as it then was, made the Rules called the Wealth Tax Rules, 1957. Rule 1-D provides for arriving at the market value of unquoted shares of companies other than investment companies and managing agency companies. The said rule provides as follows:
"The market value of an unquoted equity share of any company, other than an investment company, or a managing agency company, shall by determined as follows:
The value of all the liabilities as shown in the balance-sheet of such company shall be deducted from the value of all its assets shown in that balance-sheet. The net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown .in the balance-sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each uquoted equity share. The market value of each such share shall be 85 per cent of the break-up value so determined ...."
The proviso to rule 1-D is not material for the purpose of this judgment. Explanation I to rule 1-D provides:
"For the purposes of this rule, `balance-sheet' in relation to any company, means the balance-sheet of such company as drawn up on the valuation date and where there is no such balance-sheet, the balance-sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balance-sheet drawn up on a date immediately after the valuation date."
Explanation II is in these words:
"For the purposes of this rule---
(i) the following amounts shown as assets in the balance-sheet shall not be treated as assets, namely:--
(a) any amount paid as advance tax under section 18A of the Indian Income Tax Act, 1922 (11 of 1922), or under section 210 of the Income Tax Act, 1961. (43 of 1961)..."
Sub-clause (b) of clause (i) of Explanation II is not material for the purposes of this judgment. Under clause (ii) of Explanation II:
"For the purposes of this rule--- ....
(ii) the following amounts shown as liabilities in the balance-sheet shall not be treated as liabilities, namely:---
(e) any amount representing provision for taxation (other than the amount referred to in clause (i)(a)) to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto..."
It is in the light of sub-clause (a) of clause (i) and sub-clause (e) of clause (ii) of the Explanation II to rule 1-D that the question referred to us by the Tribunal has to be answered: It appears on a proper appreciation of rule 1-D that in order to arrive at the break up value of the shares of any company, first, the balance-sheet as drawn up by the company itself has to be looked at and all the liabilities as shown in the balance-sheet are to be deducted from all the assets shown in the balance-sheet and thus what is known as the net worth of the company is to be ascertained.
In our opinion, the Division Bench of the Gujarat High Court has correctly explained and interpreted the provision relating to rule 1-D and also Explanation II and other relevant provisions of the said rule.
In the case of CWT v. Ashok K. Parikh (1981) 129 ITR 46, 50, the Division Bench of the Gujarat High Court observed as follows:
"Explanation II to rule 1-D lays down certain rules of interpretation and though, ordinarily, an amount paid as advance tax under section 18-A of the 1922 Act or under section 210 of the 1961 Act will be shown on the assets side of the balance-sheet, for the purpose of arriving at the break up value, by the artificial rule laid down in Explanation II, clause (i)(a), the amount paid as advance tax in this manner under the law relating to income-tax is not to be treated as an asset. It is obvious that when a particular amount, which is shown, on the assets side is not to be treated as an asset, the net worth of the company will, to that extent, be reduced because to what extent the assets will be shown less. On the other hand, when it comes to sub- clause (ii), which deals with what are not to be treated as liabilities under clause (e}, it is only the amount shown by way of provision on the liabilities side that is dealt with and clause (e) makes it clear that any amount representing provision for taxation and the words in parenthesis, namely, `other than the amount referred to in clause (i)(a) to the extent of the excess over the tax payable with reference to the book profits of the company in accordance with the law applicable thereto, is not to be treated as liabilities. Provision for tax liabilities means provision for taxation, which would, under the ordinary rules of accountancy, be shown on the liabilities side of the balance-sheet. What clause (e) provides is that only the provision for taxation, which is justifiable in view of the book profits of the company in accordance with the law applicable thereto should be deducted as liabilities. If there is Any excess over the amount shown by way of provision over what would be payable with reference to the book profits, that excess provision is not to be treated as liabilities. It must be borne in mind that sub-clause (e) of clause (ii) of Explanation II deals with a provision, that is, it does not deal with the actual payment made by the company concerned but it deals only with the provision for liability for taxation and it is, therefore, clear that the words `other than the amount referred to in clause (i)(a)' refer to the provision for taxation other than the provision for advance tax. The words `the amount referred to in clause (i)(a)' do not mean the amount paid as advance tax under section 18A of the Indian Income Tax Act, 1922, or section 210 of the Income Tax Act, 1961. Really speaking, the words `referred to in clause (i)(a)' mean the amount mentioned in clause (i)(a) and the entire sub-clause (e) of clause (ii) of Explanation II refers to the provision and not to the payment and, therefore, while considering this question of provision for taxation and to what extent the provision in excess of the amount of tax payable as per the book profits in accordance with the law applicable thereto, what one has to see is not the payment made but the provision made by the company in its balance-sheet on the liabilities side. While considering the provision for taxation, it must be found out that there is no provision for payment of advance tax because provision for advance tax is to be excluded from the scope of sub-clause (e) of clause (ii) by the words `other than, the amount referred to in clause (i)(a)'. Therefore, what sub-clause (e) of clause (ii) requires the Wealth Tax Officer to do is to ascertain first as to what are the book profits shown by the company and in the light of those book profits what would be the tax payable with reference to those book profits in accordance with the law applicable thereto. Having thus ascertained the amount of the tax payable with reference to the book profits, the Wealth Tax Officer has then to see whether the provision for taxation on the-liabilities side of the balance-sheet is in excess of the said amount of tax payable with reference to the book profits as already ascertained by him. If there is any excess in the provision for tax liabilities, then that excess is not to be treated as part of the liabilities of the company while computing the break-up value of the shares of the company. It is equally clear that so far as provision for advance tax is concerned, that provision has to be disregarded while applying the provisions of sub-clause (e) of clause (ii): of Explanation II. It is obvious that to the extent to which the liabilities are reduced, the net wealth will go up. The Revenue would be interested in showing a higher net wealth and higher break-up value whereas the assessee who has shares in a company, the shares of which are not quoted on the stock exchange, is interested in seeing that the net worth and, consequently, the break-up value of the shares is shown as low as possible. In our opinion, sub-clause (a) of clause (i) of Explanation II is intended to give a benefit to t1fe (holders of) shares of those companies, who have been prompt in making payment of their advance tax under the provisions of the law relating to income-tax. Once having granted that benefit to such companies, the rule-making power wants to indicate in sub-clause (e) of clause (ii) of Explanation II that excess provision to the extent of the excess, when making the provision for liabilities for taxation, other than the provision for advance tax, is to be disregarded and only the provision on the liabilities side by way of provision for taxation to the extent of the tax payable with reference to the book profits in accordance with the law applicable thereto is to be treated as part of the liabilities of the company. It is obvious that, under the operative part. of rule 1-D, the main provision, the balance-sheet of the company is ordinarily to be taken on its face value for the purpose of arriving at the break-up value of shares on the basis of net worth. If there is any undue provision for taxation made and thus there is an inflated figure of liabilities shown by making an excess provision for taxation on the liabilities- side, to the extent of the excess, that provision is to be disregarded by the operation of sub-clause (e) of clause (ii) of Explanation II and that is sound commonsense. But because of the words `other than the amount referred to in clause (i)(a)' occurring in parenthesis in sub-clause (e) of clause (ii) if any advance tax is already paid, that has not to be brought back, as the Wealth Tax Officer and the Appellate Assistant Commissioner seek to do in the instant case. Sub-clause (e) of clause (ii) and sub-clause (a) of clause (i) of the rule operate in two different fields altogether. Clause (i)(a) operates in the field of actual payment of advance tax. Clause (ii)(e) operates in the field of excess provision for taxation other than the provision for -taxation regarding advance tax, and it is in this light that rule 1-D has to be approached:
It thus appears to us that rule 1-D of the Wealth Tax" Rules, 1957, deals with the manner of determining the market value of unquoted equity share of any company other than an investment company or a managing agency company. The said rule, inter alia, provides that the value of all the liabilities as shown in the balance-sheet of such company shall be deducted from the value of all its assets shown in that balance-sheet. The net amount so arrived at shall be divided by the total amount of its paid-up share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 85 per cent of the break-up value so determined.
In other words, according to the clear provisions of rule 1-D, the balance-sheet of a company drawn up in accordance with the provisions of the Companies Act, 1956, shall be treated as sacrosanct and from the value of all assets shown in that balance-sheet, the value of all liabilities as shown in the balance-sheet shall be deducted from determining the break-up value, which is the first step in determining the market value in accordance with that rule.
Explanation II of the said rule provides for certain adjustments to be made in respect of assets and liabilities shown in the balance-sheet of the relevant company. These are the only adjustments, which are permitted by the said rule. No adjustment other than those, which are specifically laid down in Explanation II can be permitted.
Explanation II(i)(a) of the said rule provides that any amount paid as advance tax under section 210 of the Income Tax Act, 1961, as appearing in the balance-sheet of the relevant company shall not be treated as an asset. In our opinion, this part of the rule has been correctly applied by the Wealth Tax Officer, namely, the aggregate value of all assets of the said company as appearing in its balance-sheet drawn as at October 31, 1978, was Rs.7,46,85,468.98. From this amount, the Wealth Tax Officer has already deducted the income-tax paid in advance appearing on the assets side of the balance-sheet and shown as Rs.1,65,23,781.37. Similarly, in the balance-sheet of the said company drawn up as at October 31, 1980, the total value of the assets is shown at Rs. 13,49,84,229.86. From this, the amount of advance tax as appearing on the assets side in the sum of Rs. 3,46,61,660.37 has already been deducted in accordance with Explanation II(i)(a) of the said rule. Similarly, the Wealth Tax Officer has also deducted the income-tax deducted at source as appearing on the assets aside of the balance-sheet of the said company for the said two years. The taxes deducted at source do not represent the value of any asset and this is covered by Explanation II(i)(b). There is no controversy on these two deductions already made by the Wealth Tax Officer from the gross value of the assets as appearing in the two balance-sheets of the said company.
The controversy in this case, in so far as it relates to the provision for taxation, is concerned with the interpretation of Explanation II(ii)(e) which reads as under:
"Any amount representing provision for taxation (other than the amount referred to in clause (i)(a)) to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto."
It is nobody's case that the provision made by the said company is in excess over the tax payable by it with reference to the book profits in accordance with the law applicable thereto. The Tribunal has not given any finding that the said company made any excess provision in this case. Nor is it the Department's case that the provision made by the said company is excessive. The controversy centres now on the question whether from the expression used in Explanation II(ii)(e) is "the tax payable with reference to the book profits in accordance with the law applicable thereto".
This part of sub-clause (e) clearly requires determination of the book profits and the rate of tax applicable on such book profits for the relevant assessment year. Once the rate of tax applicable is found out for the relevant assessment year and the same is applied to the book profits, the tax payable would automatically come out. There is no scope for granting any further deduction from the tax payable so calculated either in respect of advance tax and/or in respect of taxes deducted at source. In fact, sub-clause (e) makes it very clear that advance tax is to be totally ignored since it uses the words "other than the amount referred to in clause (i)(a)" which deals with the amount of advance tax paid under section 210 of the Income Tax Act, 1961. It is not the intention of the statute as is clear from the provisions of sub-clause (e) that advance tax should be deducted from the gross tax payable with reference to the book profits. Had it been so, the rule would have used the expression "as reduced by" and not "other than the amount referred to in clause (i)(a)". This part of the submission gets support from the corresponding provisions of section 139(8)(a) of the Income Tax Act, 1961. There, the words used are "the tax payable on the total income as determined on regular assessment, as reduced by the advance tax, if any, paid and any tax deducted at source".
In other words, when the statute provides that the advance tax paid and taxes deducted at source should be reduced from tax payable, it said so clearly and used the expression "reduced by". On the other hand, the rule does not intend to require deduction of either advance tax paid and/or taxes deducted at source. The rule, therefore, uses the words "other than the amount referred to in clause (i)(a)" which is nothing but the amount paid as advance tax under section 210 of the Income Tax Act, 1961. The expression used in the law is "tax payable" and not "tax due". The tax due on book profits can be worked out after deducting from the gross tax payable the amount of advance tax and the taxes deducted at source. But, when the statute requires the working of only "tax payable" and not "tax due" one has to work out the gross tax payable with reference to the book profits by applying the rate of tax applicable for the relevant assessment year as laid down in the relevant Finance Act.
The advance tax as well as taxes deducted at source are given credit for only on the making of the regular assessment and against the tax payable on the total income as determined on regular assessment. This is never deducted from the tax payable on book profits.
It is well-settled canon of construction of the statutes and/or the rules made thereunder that no words used therein can be held to be otiose nor can any word be added by the authorities and/or the Courts. 1f the contention of the Revenue is accepted, it would amount to saying that the words "other than the amount referred to in clause (i)(a)" are otiose and have no meaning. The contention of the Revenue can only be accepted if certain words like "as reduced by the advance tax paid and/or taxes deducted at source" are added at the end of sub-clause (a). This obviously cannot be done either by the authorities and/or by the Courts. This is the work of the Legislature and/or the rule-making authority. Under such circumstances, the contention of the learned Advocate for the assessee cannot be said to be without any substance.
The words used in the rule have to be considered plainly. A plain and grammatical construction of the rule makes it very clear that adjustment is to be made in the provision for taxation appearing on the liabilities side of the balance-sheet only if such provision is found to be in excess over the tax payable with reference to the book profits in accordance with the law applicable thereto. This is, admittedly not the case here.
In our opinion, the aforesaid decision of the Tribunal does not call for any interference.
The second item in respect of provision for gratuity is directly covered by the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559, at page 574. In that case, their Lordships of the Supreme Court clearly held that a provision for gratuity, whether made on actuarial valuation or on estimate, is a provision intended to meet a known liability. Unless it is found that the provision made is in excess, the whole of the provision represents a liability and not a reserve. In fact, in the surtax assessment of Paharpur Cooling Towers (Pvt.) Ltd. (copy of the assessment is filed in course of hearing of the reference), it has been clearly recognised by the Assessing Officer that the provision made by the said company in respect of taxation, gratuity and/or proposed dividend was proper and there was no excess provision on this account. In fact, it is nobody's case that there was excess provision. The liability for gratuity is now a 'statutory liability. In this view of the matter and following the principles laid down by the Supreme Court in Vazir Sultan's case (1981) 132 ITR 559 (SC), as well as by the Madras High Court in the two cases reported in CWT v. S. Ramaswami (1983) 140 ITR 606 and CWT v. S. Ram (1984) 147 ITR 278, we agree with learned counsel for the assessee, Mr. Poddar, that gratuity was rightly treated as a proper liability of the said company for the purpose of the said rule. Furthermore, no clause of Explanation II requires any adjustment to be made in respect of provision for gratuity. In view of the judgment of the Supreme Court as well as of the Madras High Court referred to hereinabove and further in view of the fact that gratuity is now a statutory liability, by no stretch of imagination, it can any more be treated as a contingent liability. There is a provision of Rs.3,00,000 made by Paharpur Cooling Towers (Pvt.) Ltd. in each of the said two years towards proposed dividend. In the light of the Supreme Court's decision in Vazir Sultan's case (1981) 132 ITR 559, 596, such provision for proposed dividend is nothing but a liability and not a reserve. Even the Assessing Officer for the purpose of surtax assessment has treated this provision for proposed dividend as a liability. But, admittedly, the proposed dividend was not declared before the relevant valuation date. In fact, such dividend could not have been declared in either of the said two years before the relevant valuation date inasmuch as the books and records for the said two years were audited and published long after the relevant valuation date and the general meeting approving the proposal of the directors in respect of dividends could not have taken place before the relevant valuation dates. In this view of the matter, it appears that the proposed dividend cannot be deducted as a liability since sub-clause (b) of clause (ii) of Explanation II prohibits it.
We, therefore, answer the question referred to this Court by saying that, while the Tribunal was justified in directing to allow full deduction of liabilities as appearing in the relevant balance-sheets of Paharpur Cooling Towers (P.) Ltd. by way of provision for taxation and gratuity for the purpose of rule 1-D of the Wealth Tax Rules, 1957, no deduction in respect of proposed dividend shall be admissible in this case.
AJIT K.SENGUPTA, J.---I agree.
M.B.A./47/T.F.Reference answered.