W.T.A. NO. 51(IB) OF 1993-94 AND W.T.A NO.7(IB) OF 1995-96, DECIDED ON 6TH NOVEMBER, 1995. VS W.T.A. NO. 51(IB) OF 1993-94 AND W.T.A NO.7(IB) OF 1995-96, DECIDED ON 6TH NOVEMBER, 1995.
1996 P T D (Trib.) 316
[Income-tax Appellate Tribunal Pakistan]
Before Ch. Irshad Ahmad, Judicial Member, Junejo M. Iqbal, Accountant
Member
W.T.A. No. 51(IB) of 1993-94 and W.T.A No.7(IB) of 1995-96, decided on 06/11/1995.
(a) Company---
----Shareholder---Status---Shareholders in a company are not creditors of the company but own equity in the company and are the owners of the company.
(b) Wealth Tax Act (XV of 1963)---
----S. 7---Wealth Tax Rules, 1963, R.8(2)---Valuation of assets---Chose in action---Actionable claim---Determination of value---Procedure---Money deposited by a person with another person including a Bank is not cash---When a person deposits motley in a Bank or in another institution the cash he gives to the Bank or the institution, becomes the property of the banker/institution-- What belongs to the depositor of money is not the cash but the asset known as "chose in action" or "actionable claim"---Value of "chose in action" or "actionable claim" as an asset for the purposes of Wealth Tax Act is determinable with reference to its market price on the valuation date---If the depositor can withdraw the money from the Bank/institution against which he has the claim of chose in action at full price of the demand the value of the chose in action will be equal to the value of the money he has deposited but if the depositor cannot withdraw the amount at full price the value of the chose in action will be the price at which he can assign that right to another person or any other person would be willing to buy the depositors right of chose in action-- Value of the chose in action as an asset therefore would depend upon the credibility of the debtor---Where the institution in which the assessee had deposited the money had refused to return the deposit on account of its bankruptcy, assessee's right of chose in action to recover the deposit in the institution was zero as- no one was willing to buy any claim of chose in action against the institution---Tribunal, in circumstances, directed the Wealth Tax Officer to determine the value of the deposit of assessee in the institution at zero.
R v. Davenport (1954) 1 All ER 602; (1954) 1 WLR 569; (1984) 3 All ER 369; Practice and Law of Banking by Sheldon and Fidler 11th Edn. and 3 Halsbury's Laws of England 4th Edn., para. 40 ref.
Commissioner of Wealth Tax v. Habib Dost Muhammad 1993 PTD 105 distinguished.
(c) Wealth tax--
Asset---"Chose in action" ---Connotation.
Chose in action is a thing in action and is a right of bringing an action to recover a debt or money. It is a right of proceeding in a Court of law to procure payment of sum of money by action.
(d) Wealth Tax Rules, 1963--
----R. 8(3)---Valuation of assets---Lands or building---Determination of value---Primary rule to estimate the value of any land or building is the price it would fetch if sold in the open market--Object of formula provided by R.8 (3), Wealth Tax Rules, 1963 is only to provide a check that the price of the building should not be estimated in excess of the relevant multiplication of its gross annual rental value---If the Wealth Tax Officer fails to bring any material on record to show that the price of the property which was estimated for the last year has increased, he was not justified to estimate the price of the property in excess.
1995 PTD (Trib.) 1048 fol.
Akhtar Hussain for Appellant (in W.T.A. No.51(IB) of 1993-94).
Qurban Hussain, D.R. for Respondent (in W.T.A. No.51(IB) of 1993-94). .
Qurban Hussain, D.R. far Appellant (in W T.A. No.7(IB) of 1995-96).
Akhtar Hussain for Respondent (in W.T.A. No.7(IB) of 1995-96).
Date of hearing: 6th November, 1995.
ORDER
CH. IRSHAD AHMAD (JUDICIAL MEMBER).--By this order we propose to dispose of the assessee's appeal relating to the assessment year 1992-93 and the Wealth Tax Officer's (W.T.O) appeal relating to the assessment year 1993-94 both filed under the Wealth Tax Act, 1963 (the Act).
The facts, so far as now relevant, are that the assessee has deposited a sum of Rs.3,00,000 in M/s. Taj Co. Ltd. (the Company). In her returns of wealth for the above assessment years the assessee declared the value of the deposit at 'nil' because the Company had refused to return the deposit on account of its bankruptcy. The W.T.O. however added the amount of the deposit in the assessee's net wealth chargeable the tax under the Act.
On assessee's appeal relating to the assessment year 1992-93 the Appeal Commissioner has also confirmed the addition. The, Appeal Commissioner who heard the assessee's appeal relating to the assessment year 1993-94 has however directed that the assessee's deposit in the Company amounting to Rs.3,00,000 may not be included in her net wealth for the said year.
For the assessment year 1993-94 the assessee has declared the value of her house identified as No. 214-C Lalkurti, Rawalpindi at Rs.6,00,000. The W.T.O. has determined the value of the house at Rs.7,20,000 equal to 12 times of the gross annual rental value of the house. On assessee's appeal the Appeal Commissioner has directed that the value of the house shall be taken at Rs.6,00,000 equal to 10 times of its gross annual rental value.
The assessee has objected to the orders of the tax authorities relating to the assessment year 1992-93 on the ground that they were not justified to determine the value of her deposit in the Company at Rs.3,00,000 because on account of the bankruptcy of the Company the value of the deposit was zero. The W.T.O. has objected to the order of the Appeal Commissioner relating to the assessment year 1993-94 whereby the Appeal Commissioner has directed that the value of the assessee's deposit in the Company shall not be included in her net wealth and that the value of her house determined by the W.T.O. determined at Rs.7,20,000 shall be taken at Rs.6,00;000.
We have heard Mr. Akhtar Hussain, Advocate for the assessee and Mr. Qurban Hussain, D.R.
Value-deposit in the Company
Section 3 of the Act provides that subject to the other provisions contained in the Act, there shall be charged for every financial year a tax (referred to as wealth tax) in respect of the net wealth on the corresponding valuation date of every individual, etc. at the rate or rates specified in the Schedules to the Act. Section 7 of the Act provides that the value of any assets, other than cash, for the purposes of the. Act, shall be estimated by the W.T.O. in accordance with the rules made under section 46 of the Act. Rule 8 of the Wealth Tax Rules, 1963 made under section 46 of the Act lays down the manner in which the value of any asset, other than cash, shall be estimated by The W.T.O. Rule 8 ibid provides that subject to the provisions of sub-rule (2) (relating to share and securities), sub-rule (3) (relating to land and buildings) sub-rule (3-A) (relating to agricultural land), sub-rule (4) (relating to mortgage of property, sub-rule (4-A) relating to hotels etc. sub-rule (4C) relating to halls etc. let on hire, sub-rule (5) relating to patents or copyrights, design and other similar assets, sub-rule (6) relating to life tenancies, sub-rule (7) relating to annuities, sub-rule (8) relating to interest in partnership etc. and sub-rule (9) relating to bulk valuation the value of any assets other - than cash shall be estimated to be the price, which, in the opinion of the W.T.O., it would fetch if sold in the open market on the valuation date. In determining the value of the assessee's deposit in the Company the first question of central importance that arises is: whether the deposit in cash or an asset other than cash. Before we proceed to answer the above question it is relevant that the nature of the deposit as an asset as taken by the tax authorities and the reasons for its inclusion or not inclusion in assessee's net wealth are stated. The W.T.O. who has made assessment for the assessment year 1992-93 has noted that the assessee had "shares of Taj Company Limited at Rs.3,00,000". The Appeal Commissioner who disposed of the assessee's appeal relating to the assessment year 1992-93 has also referred to the amount as shares of the Company but has referred the assessee as the creditor of the Company. It appears that the W.T.O. as well as the Appeal Commissioner who dealt with the assessment relating to the assessment year 1992-93 were not sure what was the nature of the deposit the assessee had made in the Company. The W.T.O. had added the said amount of deposit in the assessee's net wealth on the ground that "since the amount is still payable to the assessee, the same cannot be written off and as such the share value is added to the total wealth of the assessee". The Appeal Commissioner has rejected the assessee's claim regarding the exclusion of the amount from her net wealth for the reason the "as the assets of the Company are still to be distributed among the creditors the W.T.O. was justified to include Rs.3,00,000 in the total wealth of the assessee".
The W.T.O. who fnalised the assessment for the assessment year 1993-94 again, treated the deposit as shares of the Company and added the amount of deposit to the net wealth of the assessee for the reasons given by the Appeal Commissioner relating to the previous year. The Appeal Commissioner who heard the assessee's appeal relating to the assessment year 1993-94 has directed that the amount shall not be included in the assessee's net wealth because on account of company's bankruptcy the amount has become only a general promise of the Government to pay compensations to the persons who had deposited money with the Company and such a promise does not constitute an asset within meanings of the Act. In support of the above view the Appeal Commissioner has relied on the decision of Karachi High Court in Income Tax Reference No.51 of 1983 Commissioner of Wealth Tax v. Habib Dost Muhammad decided on 9-12-1991 reported as 1993 PTD 105.
It is regrettable to note that the tax authorities have not properly addressed themselves to the fundamental question that as an asset within the meanings of the Wealth Tax Act which was the nature of the assessee's deposit in the Company. The W.T.O. has referred to the amount as assessee's shares in the Company. If it was share money then its value was determinable in accordance with the provisions of sub-rule (2) of rule 8 of the Wealth Tax Rules, 1963. That has not been done. The Appeal Commissioner in his order relating to the assessment year 1992-93 has referred to the amount as shares but has termed the assessee as one of the "creditors of the Company." A shareholder in a company is not a creditor of the company. The shareholders of a company own equity in the company and are the owners of the company. The Appeal Commissioner who decided the assessee's appeal relating to the assessment year 1993-94 has referred to the amount as an investment in the company. Unfortunately that Commissioner too has not decided how the value of the investment was determinable.
As a question of fact we have found that the assessee had deposited the money in the Company as term deposit in the same fashion as money is deposited in a bank. Although the Company's business to accept or take deposit was unlawful but as a reality it was going on The question that thus arises is; how the value of the money deposited by a person in a bank, a Company or other institution is determinable for the purposes of the Wealth Tax Act, 1963. As noted earlier section 7 of the Act provides that the value of any assets, other than cash, for the purposes of the Act, shall be estimated by the W.T.O. in accordance with the rules made under section 46 of the Act. Thus if the money deposited by a person in a bank is cash, its value shall not be determined as stated above and shall be taken the same as was of the money deposited but for it is not cash then its value is required to be determined in accordance with the rules made under section 46 of the Act. It is well established proposition that the money deposited by a person with another person including a bank is not cash. When a person deposits money in a bank the cash he gives to the banker becomes the property of the banker. What belongs to the depositor is not the cash but the property known as "chose in action" or "actionable claim". The position has been described in clear language by Lord Goddard, C.J. in R v. Davenport (1954) 1 All ER 602; (1954) 1 WLR 569 where he says:
"...although we talk about people having money in a bank, the only person who has money in a bank is the banker. If I pay money into my bank, either by paying cash or a cheque, that money at once becomes I* the money of the banker. The relationship between banker and customer is that of debtor and creditor. He does not hold my money as an agent or trustee. The leading case of Foley v. Hill (1848) 2 H L Cas 28, (1843-60) All ER Rep 16) exploded that idea. When the banker is paying out, whether in cash or over the counter or whether by crediting the bank account of somebody else, he is paying out his own money, not my money, but he is debiting me in my account with him. I have a chose in action, that is to say, I have a right to expect that the banker will honour my cheque, but he does it out of his own money."
The above exposition has been reaffirmed by English Court of Appeal in Attorney-General's Reference No.l of 1983 (1984) 3 All ER 369 where Lord Lane, C.J. has said that when any amount has been paid into bank account what the account holder gets "is simply the debt due to him from his own bank". He further said: "that the property which the depositor owns is the debt owed by the bank to the depositor". He also held that the banker's debt is a thing in action and things in action are property.
Sheldon and Fidler in Practice and Law of Banking (11th Edition) describe the nature of the property the person owns when he deposits the money in the bank in the following words:
"When a customer deposits money in a bank account, he does not, strictly speaking, "deposit" the money; he lends it to the banker. The relationship between the banker and his customer is, therefore, the contractual relationship of debtor and creditor, not, as might be thought, the very different relationship of trustee and beneficiary. The debtor-creditor nature of the relationship was described by Lord Cottenham in Voley v. Hill (1848) 2 HL Case 28 money in the custody of a banker is to all intents and purposes the money of the banker, to do with it at he pleases; he is guilty of no breach of trusth employing it; he is not answerable to the (customer) if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his (customer); but he is, or course, answerable for the amount because he has contracted, having received that money, to repay to the (customer), when demanded, a sum equivalent to that paid into his hands; "
The nature of the deposit of money in a bank has been compendiously described in 3 Halsbury's Law (4th Edition), para. 40. The most relevant lines in the above para to the situation before us are:
"The receipt of money by a banker from or on account of his customer constitutes him the debtor of the customer. The banker is not a trustee for the customer, who has no right to inquire into or question the use of the money by the banker. The receipt of money on deposit account: constitutes the banker a debtor to the depositor but not a trustee thereof for him."
From the above exposition it is clearly established that when a person deposits cash in a bank or other institution in the fashion similar to a bank the cash he deposits, as the asset of the depositor, ceases 'to be cash and transforms into chose in action.
The expression chose in action as an asset has various connotations which can briefly be stated as follows:---
"Chose in action is a thing in action and is right of bringing an action to recover a debt or money. It is a right of proceeding in a Court of law to procure payment of sum of money by action."
In view of the position stated as above that the money deposited in a bank or any other institution is not cash but is only chose in action or actionable claim its value for the purposes of the Wealth Tax Act is required to be determined in accordance with the rules made under section 46 of the Act. As noted earlier rule 8 of the Rules ibid provides that the value of any assets, other than cash, shall, subject to the provisions of certain sub-rules, be estimated to be the price which, in the opinion of the W.T.O., it would fetch if sold in the open market on the valuation date. No special provisions have been made to determine the value of chose in action or actionable claim under the Rules. And, where no special provision has been made to determine the value of any special assets the value of any assets shall be estimated under the primary rule that the value shall be the price, which, in the opinion of the W.T.O., it would fetch if sold in the open market on the valuation date. Therefore, the value of the chose in action or actionable claim as an asset for the purposes of the Wealth Tax Act is determinable with reference to its market price on the valuation date. The next E question is: how the price of chose in action shall be determined. The answer is if the depositor can withdraw the money from the bank or any other institution against which he has the clam of chose in action at full price of the demand the value of the chose in action will be equal to the value of the money, he has deposited but if he cannot withdraw the amount at full price the value of the chose in action will be the price at which he can assign that right to another person or any other person would be willing to buy the depositor's right of chose in action. Naturally the value of the chose of action as an asset would depend upon the credibility of the debtor.
We all agree that on the valuation date relevant to the assessment years under appeal the value of the assessee's right of chose in action to recover her deposit in the Company was zero. Even today no one is willing to buy any claim of chose in action against the Company.
For these reasons we allow the assessee's appeal relating to the assessment year 1992-93 and direct the Wealth Tax Officer to determine the value of her deposit in the Company at zero. The W.T.O.'s appeal on the above t point relating to the assessment year 1993-94 is also rejected. Before leaving the point we would like to indicate that the principle laid down in the Karachi High Court's decision in Habib Dost Muhammad's case referred to by the Appeal Commissioner in his order was not applicable to the facts and circumstances of the case. In that case Habib Dost Muhammad's shares in the Habib Bank Ltd. had, by operation of law, vested in the Government for which he, as provided in the expropriation law, was only entitled to compensation. Under those circumstances the Court held that Habib Dost Muhammad's right to get compensation was only a promise and as such was not an asset. There has bee no expropriation of assessee's deposit in the Company. The assessee is no getting her money back from the company because the company ha become bankrupt. The Government has not made any actionable promise to the assessee and other depositors of the money in the Company to refund their deposits.
So far as the W.T.O.'s appeal regarding the valuation of the assessee' house identified as No.214-C Larkurti, Rawalpindi, is concerned that too is without any substance. The primary rule to estimate the value of any land o building is the price it would fetch if sold in the open market. The provision o sub-rule (3) of rule 8 of the Wealth Tax Rules, 1963 regarding the valuation o any building equal to 10 or 12 times of its gross annual rental value is only to provide a check that the price of the building shall not be estimated in excess o the relevant multiplication of its gross annual rental value. If reference is needed it may be made to this Tribunal's decision reported in 1995 PTD (Tribunal 1048. Since the W.T.O. has failed to bring any material on record to show that the price of the house which was estimated for the last year at Rs.6,00,000 has increased to Rs.7,20,000. The W.T.O.'s appeal on this point is also rejected. The Appeal Commissioner's order is maintained but for different reasons.
The assessee's appeal relating to the assessment year 1992-93 is accepted and the W.T.O.'s appeal relating to the assessment year 1993-94 is rejected.
M.B.A/156/Trib.
Order accordingly.