Wealth tax-

---- Valuation of asset---Valuation of unquoted equity shares---Amount paid as advance tax deductible from provision for taxes---Indian Wealth Tax Rules, 1957, R.1D.

Rule 1D of the Wealth Tax Act, 1957, states, inter alia, that the market value of unquoted equity shares of a company other than an investment company and managing agency company shall be determined by deducting the value of all the liabilities as shown in the balance-sheet from the value of all its assets shown in that balance-sheet and 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 of the break-up value so determined. The broad scheme of the provisions of Explanation II to rule 1D is to ensure that advance tax paid is not treated as an asset and tax liability is not inflated for the purpose of working out the value of the "equity shares" of the company: Inflation of an asset or a liability in this regard will naturally result in increase or reduction in the value of the shares and the wealth-tax payable. There is no controversy that advance tax paid and shown as such in the balance-sheet is not to be treated as an asset. But the fact remains that advance tax has been paid. That must necessarily be reflected in the balance-sheet as well as in the valuation. The commonsense view, therefore, is that, in reckoning the tax liability, computation should be of the net tax liability after deducting the advance tax paid. If the advance tax is not to be deducted from the tax liability for the purpose of computation, the valuation of the equity shares will not be correct or lawful. The main object of Explanation II(ii)(e) is to ensure that the valuation is not affected by inflation of tax liability. Tax liability must be related to the book profits in accordance with the law applicable thereto. If the balance-sheet shows tax liability as any amount in excess of the tax payable with reference to the book profits in accordance with the law applicable thereto, it will not reflect the correct tax liability and will affect the correct valuation of the equity shares. Therefore, only that amount representing the provision for taxation which is equal to tax payable with reference to book profits in accordance with the law applicable thereto shall be treated as liability and any excess shown is to be ignored. The bracketed words, namely, "other than the amount referred to in clause (i)(a)" have been incorporated by way of abundant caution to neither the assessee nor the Revenue is prejudiced by ignoring the advance tax paid and shown in the balance-sheet as an asset. If the balance-sheet shows the advance tax paid as an asset, the provision for taxation must naturally be the total tax payable by the assessee and the net tax payable by the assessee would be the amount of total tax reduced by the advance tax paid. If the advance tax shown as paid in the balance-sheet is regarded as an asset, naturally the tax liability is the gross tax liability. If it is not treated as an asset, naturally and necessarily, the tax liability which is to be reckoned can only be the net tax liability and not the gross tax payable with reference to the book profits. The purpose of incorporating the bracketed words is to ensure that the advance tax paid is reckoned for the purpose of arriving at the real liability in regard to the tax. Hence, while the advance tax paid is ignored under Explanation II(i)(a) of the Rules, it is not ignored in arriving at the tax liability under Explanation II(ii)(e) of the Rules. The amount of advance tax paid shall be deducted from the total tax liability in respect of which provision is made, subject of course to the limit of the tax payable with reference to the book profits in accordance with the law.

D.K. Talukdar and B.J. Talukdar for the Commissioner.

None appeared for the Assessee.

JUDGMENT

U.L. BHAT, C.J.---The following two questions have been referred by the Income Tax Appellate Tribunal at the instance, of the Revenue under section 27(1) of the Wealth Tax Act, 1957:

"(1) Whether on the facts and in the circumstances of the case, and having regard to the provision of Explanation II(ii)(e) read with Explanation II(i)(f) to rule 1D of the Wealth Tax Rules, 1957, the Tribunal was justified in directing that the provision for taxation appearing on the liabilities side of the balance-sheet should not be reduced by the advance tax paid appearing in the assets side of the balance-sheet for the purpose of valuation of shares in terms of rule 1D aforesaid?

(2) Whether, on the facts and in the circumstances of the case and having regard to the provisions of Explanation II(ii)(e) read with Explanation II(i)(a) to rule 1D of the Wealth Tax Rules, 1957, the Tribunal was justified in directing the provision for taxation appearing on the liabilities side, not to be reduced by the advance tax paid appearing on the assets side of the balance-sheet?"

The reference to Explanation 11(i)(f) in the former question appears to be a mistake for Explanation II(i)(a).

The references relate to two assessment years, namely, 1972-73 and 1973-74. The Wealth Tax Officer initially passed orders of assessment. They were set aside in appeal with a direction to pass fresh orders. The Wealth Tax Officer passed such fresh orders. The assessee preferred appeals before the Appellate Assistant Commissioner who allowed the appeals in part and directed modification of the assessments. The Revenue filed appeals before the Appellate Tribunal and the Tribunal restored the Wealth Tax Officer's orders. The Tribunal directed further changes to be made in the assessments.

The controversy in the case relates to the deductibility of advance tax paid from the liabilities of the company for the purpose of computing the "market value of unquoted equity shares of the company other than investment companies and managing agency companies" under rule 1D of the Wealth Tax Rules, 1957 (for short, "the Rules"). The Wealth Tax Officer held that the actual tax liability is "to be allowed as liability. The Appellate Assistant Commissioner held that the net tax payable after adjustment of advance tax already paid should be allowed as liability in computing the value of the shares in the company to the extent it has been allowed in the income-tax assessment. The Tribunal held that the provision for taxation appearing on the liabilities side should not be reduced by advance tax paid as appearing on the assets side.

Rule 1D of the Rules states, inter alia, that the market value of unquoted equity shares of a company other than an investment company or a managing agency company shall be determined by deducting the value of all the liabilities as shown in the balance-sheet from the value of all its assets shown in that balance-sheet and 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 percent. of the break-up value so determined. The proviso to the rule and the Explanation I are not relevant for the purpose of this case.

Explanation II to rule 1D of the Rules reads thus:

"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 18A 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 the law applicable thereto;

(f) any amount ' representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares."

We are concerned in this case only with the Explanation II(i)(a) and II(ii)(e). By virtue of Explanation II(i)(a), for the purpose of the rule, any amount paid as advance tax under section 210 of the Income Tax Act, 1961; shown as an asset in the balance-sheet shall not be treated as an asset. According to Explanation II(ii)(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 according to law applicable thereto shown as liability in the balance-sheet shall not be treated as liability.

The broad scheme of the provisions of Explanation II is to ensure that advance tax paid is not treated as an asset and tax liability is not inflated for the purpose of working out the value of the "equity shares" of the company. Inflation of an asset or liability in this regard will naturally result in increase or reduction in the value of the shares and the wealth-tax payable. There is no controversy that advance tax paid and shown as such in the balance-sheet is not to be treated as asset. But the fact remains that advance tax has been paid. That must necessarily be reflected in the balance-sheet as well as in the valuation. The commonsense view, therefore, is that in reckoning the tax liability, computation should be of the net tax liability after deducting the advance tax paid. If the advance tax is not to be deducted from the tax liability for the purpose of computation, the valuation of the equity shares will not be correct or lawful. We do not think that any other interpretation can be given to Explanation II(ii)(e).

The main object of Explanation II(ii)(e) is to ensure that the valuation is not affected by inflation of tax liability. Tax liability must be related to the book profits in accordance with the law applicable thereto. If the balance-sheet shows the tax liability as any amount in excess of the tax payable with reference to the book profits in accordance with the law applicable thereto it will not reflect the correct tax liability and will affect the correct valuation of the equity shares. Therefore, only that amount representing the provision for taxation which is equal to the tax payable with reference to the book profits in accordance with the law applicable thereto shall be treated as a liability and any excess shown is to be ignored. The bracketed words, namely, "other than the amount referred to in clause (i)(a)" have been incorporated by way of abundant caution to ensure that neither the assessee nor the Revenue is prejudiced by ignoring the advance tax paid and shown in the balance-sheet as an asset. If the balance-sheet shows the advance tax paid as an asset, the provision for taxation must naturally be the total tax payable by the assessee and the net tax payable by' the assessee would be the amount of total tax reduced by the advance tax paid. If the advance tax shown as paid in the balance-sheet is regarded as an asset, naturally the tax liability is the gross tax liability. If it is not treated as an asset, naturally and necessarily, the tax liability which is to be reckoned can only be the net tax liability and not the gross tax payable with reference to the book profits. The purpose of incorporating the bracketed words is to ensure that the advance tax paid is reckoned for the purpose of arriving at the real liability in regard to the tax. We, therefore, hold that, while the advance tax paid is ignored under Explanation II(i)(a) of the Rules, it is not ignored in arriving at the tax liability under Explanation II(ii)(e) of the Rules. The amount of advance tax paid shall be deducted from the total tax liability in respect of which provision is made, subject of course to the limit of the tax payable with reference to the book profits in accordance with the law.

The reference is answered in the negative, that is in favour of the Revenue and against the assessee. A copy of this judgment under the signature of the Registrar and Seal of the High Court shall be transmitted to the Income Tax Appellate Tribunal. In the circumstances, there will be no direction as to costs.

M.BA./190/T.F.?????????????????????????????????????????????????????????????????????????????????? Reference answered.