A. SIVASAILAM VS COMMISSIONER OF WEALTH TAX, 1998 PTD-MADRAS-HIGH-COURT-INDIA 1466 (1996)

Wealth tax---

---- Valuation of assets ---Unquoted equity shares---Holding company-- Company treated as accountable person for purposes of estate duty---No mention in company's balance-sheet of estate duty liability---Liability cannot be reckoned in computation of break-up value of shares for that year-- Mention of provisional demand in directors' report for next year---Demand can be treated as liability in that year---Sum shown as outstanding demand in note to profit and loss account for following year---Can be treated as liability in that year---Estate duty finally determined by order much after valuation dates in question---Cannot be treated as liability in computing break-up value of shares for years in question---Indian Estate Duty Act, 1953, Ss. 17 & 19-- Central Board of Direct Taxes Circulars Nos.2(WT), dated 31-10-1967 and 118, dated 15-9-1973.

The estate of one A, who died on April 18, 1964, held 100 per cent beneficial ownership in shares in a company. The company was a holding company and its shares were not quoted. The company was held to be the accountable person in respect of the estate of A in estate duty proceedings. The estate duty proceedings were completed on January 27, 1970, and the estate duty was finally determined at Rs.1,66,48,868. In the directors' report of the company for the year ended June 30, 1964, relating to the assessment year 1965-66, the death of A was mentioned, but the balance-sheet of the company made no provision for or indication of any estate duty liability. In the balance-sheet of the company for the year ending June 30, 1965, also (relating to the assessment year 1966-67) there was no provision for the estate duty liability, but the directors' report mentioned that the company had been treated as the accountable person under the Estate Duty Act, 1953, and was served with a provisional demand. The demand was for Rs.65,50,542.73, though this sum was not mentioned in the directors' report. For the year ending June 30, 1966, relating to the assessment year 1967-68, an amount of Rs.30 lakhs being part payment of the provisional demand was debited in the profit and loss account of the company, and there was a note to the profit and loss account stating that a balance of Rs.35,50,453 was payable under the provisional demand. In the wealth tax assessments of the estate of A for the assessment years 1965-66, 1966-67 and 1967-68, the Wealth Tax Officer computed the value of the unquoted shares of the company, and, on the ground that Circulars Nos.2(WT), dated October 31, 1967, and 118 dated September 15, 1973, permitted only those deductions shown as liabilities in the balance-sheet, refused to deduct the estate duty liability. On appeal, the Appellate Assistant Commissioner directed deduction of the entire estate duty liability as finally determined. On appeals by both assessee and Department, the Tribunal held that for the assessment year 1965-66, no deduction in respect of estate duty was called for, for the assessment year 1966-67 a sum of Rs.65,50,542.73 could be allowed as a liability on the basis of the directors' report and for the year 1967-68.a sum of Rs.35,50,453 could be reckoned as a liability in working out the break-up value of the shares, on the basis of the profit and loss account. The Tribunal, however, found no justification to allow deduction of the entire estate duty liability as finally determined. On references at the instance of the assessee as well as the Department:

Held, (i) that the balance-sheet was based upon book entries, profit and loss account, etc. In order to mention the correct assets and liabilities, the balance-sheet depended upon the profit and loss account, which was nothing but an income and expenditure statement. Therefore, the Tribunal considered for the two later years that mentioning of the liability in the directors' report and the profit and loss account would amount to mentioning of the same in the balance-sheet in a more comprehensive and commercial sense. A prudent or average investor, who intended to purchase the unquoted equity shares would definitely ask for all the three documents even if he was supplied with the balance-sheet. The correct picture of the creditworthiness of the company and the intrinsic value of the share could be seen only by seeing all the three above said documents, By seeing merely the balance-sheet alone, one could not vouchsafe the creditworthiness of the company and the approximate intrinsic value of the share. Considering all these aspects on accountancy principles, the finding of the Tribunal for the last two years that mention of the provisional estate duty liability in the directors' report and the note to the profit and loss account of the company could be taken as the liability as disclosed in the balance-sheet in accordance with the two circulars issued by the Board, was correct.

(ii) That for the assessment year 1965-66 except for stating the death of A in, the directors' report, there was no mention of any estate duty liability either in the balance-sheet or in the profit and loss account or in the directors' report. Therefore, the Tribunal rightly held that the estate duty liability pertaining to that assessment year could not be allowed as, a deduction while valuing the unquoted equity shares in accordance with the two circulars issued by the Board.

(iii) That the Court was bound to ascertain the value of the unquoted equity shares in accordance with the two circulars mentioned above. In the circulars it was clearly stated that unless the liability was shown in the balance-sheet, it could not be allowed as a deduction. In the present case, whatever might be the quantum of liability, there was no mention about the liability in the balance-sheet for the first year and only the provisional demand of estate duty was mentioned in the directors' report and in the profit and loss account in the last two years. Therefore, there was no scope for allowing the entire estate duty liability determined much later after the valuation dates in the wealth tax assessments.

CWT v. K.S.N. Bhatt (1984) 145 ITR 1 (SC) and CWT v. Kantilal Manilal (1985) 152 ITR 447 (SC) distinguished.

CIT v. Amalgamations Ltd. (1995) 214 ITR 399 (Mad.); CWT v. Kantilal Manilal (1973) 88 ITR 125 (Guj.); CWT v. Ranganayaki Gopalan (1973) 92 ITR 529 (Mad.); Kalyani Sundaram v. Asst, CED (1980) 126 ITR 615 (Mad.); Kalyani Sundaram (Sort.) v. Asst. CED (1989) 179 ITR 75 (SC) and Ramachary (C.S.) (Late) v. CWT (1991) 189 ITR 8 (Mad.) ref.

K.R. Ramamani for P.P.S. Janarthana Raja for the Assessee.

S.V. Subramanian for the Commissioner.

JUDGMENT

K.A. THANIKKACHALAM, J.---In accordance, with the direction given by this Court in T.C.P. Nos.546 to 548, 556 and 557 of 1982, dated April 11, 1983, the Tribunal referred the following questions for the opinion of this Court, in the case of both the assessee as well as the Department, under section 27(3) of the Wealth Tax Act, 1957:

Tax Cases Nos.864 to 869 of 1984:

"(1)Whether, on the facts and in the circumstances of - the case, the Tribunal was, right in holding that the estate duty liability of Rs.1,66,48,868 cannot be allowed as a deduction and the value of shares had to be only on the basis of the 'book values' of assets/liabilities as indicated itt the books on the valuation date?

(2)Whether the Tribunal was right in restricting the deduction of estate duty liability to Rs.65,50,453 (only being the provisional demand) as against Rs.1,66,48,868 being the estate duty finally determined as payable, in valuing the share of Amalgamations Ltd.?

(3)Whether the Tribunal was right in restricting the deduction to Rs.35,50,453 being the balance of the provisional demand of estate duty, as against Rs.1,36,48,868 being the balance of estate duty finally determined as payable in valuing the shares in Amalgamations Ltd.?"

Tax Cases Nos.870 and 871 of 1984:

"(1) Whether, on the facts and in the circumstances of the case and having regard to Circular No.2(WT) of 1967 (see (1973) 92 ITR (St.) 2), dated October 31, 1967, and Circular No. 118 (see (1973) 92 ITR (St.) 1), dated September 15, 1973, the Tribunal was right in holding that the estate duty liability of the late S.Anantharamakrishnan as on the valuation dates relevant for the assessment years 1966-67 and 1967-68 should be deducted while arriving at the valuation of the shares of the assessee in Amalgamations Ltd., Madras?

(2)Whether the Tribunal's view that the estate duty liability belonged to the company and that the liability should be taken as shown in the balance-sheet as it appeared in the directors' report, is sustainable in law?"

The assessee is the estate of the late S. Anantharamakrishnan represented by A. Sivasailam as the administrator of the estate. The estate has 100 per cent beneficial

ownership in shares of Amalgamations Ltd. Tote dispute relates to the valuation of unquoted equity shares in Amalgamations Ltd. The parties are in agreement that the shares which are unquoted in Amalgamations Ltd., which is a holding company, will have to be valued in terms of the Board's Circular No.2 (WT) of 1967 (see (1973) 92 ITR (St.)2), dated October 31, 1967, and No.118 (see (1973) 92 ITR (St.)1), dated September 15, 1973. In working out the valuation of the shares in terms of the circular, there are two points on which there was difference between the assessee and the Wealth Tax Officer. The circulars provided that the Wealth Tax Officer should first work out the average of (a) the break-up value of the share based on the book value of the assets and liabilities disclosed in the balance-sheet, and (b) the capitalized value of the maintainable profits (capitalization at nine per cent.) Then 10 per cent is to be added to such average to arrive at the value of the shares in such companies. Two claims put forward by the assessee were not accepted. They are that the estate duty liability as finally determined should- have been treated as a liability in working out the break-up value of the shares and that the notional average tax liability on the profits of the subsidiaries on the basis of dividend in the hands of the holding company will have to be reckoned as a deduction in working out the maintainable profits of the enterprise as a whole. The first claim was allowed by the first appellate authority and is, therefore, the subject-matter of the Departmental appeals, while the second claim, which was rejected by the Wealth Tax Officer is the subject-matter of the cross objections, before the Tribunal.

For the three years under consideration, the balance-sheets for working out the break up value are those on June 30, 1964, June 30, 1965, and June 30, 1966. While considering the Departmental appeals, the Tribunal pointed out that in balance-sheet for the assessment year June 30, 1964, there had been no provision for estate duty, nor was there any indication of estate duty liability in the statements accompanying the return. It was pointed out, that the death of S. Anantharamakrishnan is noticed. In the balance-sheet as on June 30, 1965, also there was no provision for the liability, but the directors' report mentioned that arising out of the estate duty proceedings of the estate of the late S. Anantharamakrishnan, this company has been treated as "an accountable person" under the Estate Duty Act, and has been served with a provisional demand. The directors are bringing this to the notice of the shareholders. The provisional demand was to the tune of Rs.65,50,542.73. But the amount of demand was not indicated anywhere in the report. In the accounts as on June 30, 1966, relevant for the assessment year 1967-68, an amount of rupees thirty lakhs being a part payment of the provisional demand was debited in the profit and loss account and there was also a note (Note No.4) to the profit and loss account reading as under. "Balance estate duty payable as an accountable person as per the Estate Duty Controller's provisional demand Rs.35,50,453".

The estate duty liability, which was finally determined long after the valuation dates was Rs.1,66,48,868 and this amount was claimed by the assessee as a deduction from the average value and the computation of the value was given by the assessee for the 10C per cent. holdings in Amalgamations Ltd.

By allowing the assessee's appeal on this point, the order of the first appellate authority directs the acceptance of the value as furnished by the assessee. It is the assessee's case that the assets of a controlled company are deemed to be passing on death for purposes of estate duty under section 17 of the Estate Duty Act, 1953. Section 19(5) of the said Act provides that "the duty payable on the death of the deceased by virtue of section 17 shall be a first charge by way of floating security, on the assets which the company had at the death or has at any time thereafter and any part of the duty for which by virtue of clause (c) of the subsection (1) any person is accountable in respect of any distributable assets, shall be a first charge also on these assets." Section 74 which makes, the estate duty a first charge on the property liable is also subject to the provisions of section 19. The assessee submitted that the full estate duty as per law is allowable, once it is conceded that estate duty is a liability in view of the decision of the Gujarat High Court in the case of CWT v. Kantilal Manilal (1973) 88 ITR 125, where it was held that the final liability is the liability that has to be reckoned in the wealth tax assessment of the assesses. According to the Wealth Tax Officer, the break up value had to be ascertained with reference to the "book value of assets and liabilities disclosed in the balance-sheet". These were not disclosed in the balance-sheet for any of the three years under consideration. If one were to make similar adjustments by taking into consideration the assets not disclosed in the balance-sheet or by adoption of the market value of assets so as to arrive at the correct value, the assessee would be much worse off, as the value of the shares then will be more than what they have been worked out with reference to the balance-sheet. The Wealth Tax Officer was not prepared even to reckon the note to the profit and loss account or the directors' report for the last year where specific further liability, of Rs.35,50,453 after payment of Rs.30 lakhs was mentioned. Only Rs.30 lakhs, which was actually debited in the profit and loss account for the third year was reckoned because it was already debited in the accounts. He did not make any adjustment for estate duty. Hence, the-assessee filed appeals to the Commissioner of Income-tax (Appeals).

The first appellate authority for the proposition that amounts payable much later either in installments or otherwise, are also a liability in praesenti and not a contingent liability, and, therefore, to be reckoned as such, placed reliance upon the decisions in CWT v. Kantilal Manilal (19731 88 ITR 125 (Guj.) and CWT v. Ranganayaki Gopalan (1973) 92 ITR 529 (Mad.). In the opinion of the first appellate authority, estate duty being a charge on the assets of a controlled company is an allowable deduction, since that liability was brought on record for all the three years in the directors' report, though it was not so in so far as the first year is concerned. According to the Commissioner of Income-tax (Appeals) once it is mentioned in the report a prospective buyer would take cognizance of the same, and as such the liability could be an allowable deduction. The Commissioner of Income-tax (Appeals) was also of the view that the circular, dated October 31, 1967, authorized adjustments for "non-recurring and extraordinary items of incomes and expenditure and losses". In this view of the matter, the Commissioner of the Income-tax (Appeals) allowed the appeals by a common order. Aggrieved, the Department filed appeals against this common order before the Tribunal. Before the Tribunal, the Department contended that for the various reasons stated by it, the orders passed by the Wealth Tax Officer in all the three assessment years under consideration should be restored. The assessee before the Tribunal contended that the entire estate duty liability should be allowed as deduction while valuing the unquoted equity shares in all the three assessment years under consideration. On considering the submissions made by the learned Departmental representative as well as learned counsel appearing for the assessee, the Tribunal held that in so far as the assessment year 1967-68, is concerned, the amount of Rs.35,50,453 should undoubtedly be reckoned as a liability in working out the break 'up value of shares in working out the value with reference to the balance-sheet as on June 30, 1966. The Wealth Tax Officer was accordingly directed to do so.

In so far as the assessment year 1966-67 is concerned, the Tribunal held that the letter and the spirit of the circulars is not against the allowance of Rs.65,50,542.73 as a liability in working out the break up value for the assessment year 1966-67 with reference to the balance-sheet as on June 30, 1965, and the Wealth Tax Officer was directed to do so.

In so far as the assessment year 1965-66 is concerned, the Tribunal held that there is no case for reckoning the estate duty liability in terms of the circular for the assessment year 1965-66. There is, therefore, no need to vary the Wealth Tax Officer's computation, which is restored.

While considering the assessee's claim as to why the entire estate duty as finally determined as payable at Rs.1,66,48,868 should not be taken as a liability on the ground that it is a lawful liability, the Tribunal held that it cannot find any justification for a larger relief than what has been authorized by the Tribunal for the assessment years 1966-67 and 1967-68. Accordingly, the Departmental appeal for the assessment year 1965-66 was allowed and the Departmental appeals for the assessment years 1966-67 and 1967-68 were allowed in part as indicated in the order.

While considering the cross-objection filed by the assessee claiming that in ascertaining the maintainable profits of Amalgamations Ltd., for the purpose of its share valuation, the tax liability on the basis of distribution of dividends by subsidiaries should be reckoned, it was held that there is no basis for allowing some other notional tax liability in violation of the concept of a single company and the principle of consolidation of profits on that basis enjoined by this method in the circulars and elsewhere. Accordingly, the cross-objection was dismissed.

Learned counsel appearing for the assessee submitted that the Tribunal was not correct in reversing the order of the first appellate authority in the matter of deducting the estate duty liability while valuing the unquoted equity share of the private limited company. Learned counsel submitted that there was clear mention of estate duty liability in the directors' reports for the two later years under consideration, and death was mentioned in the report for the first year. Accordingly to him, the view of the Wealth Tax Officer that an intending purchaser would only look at the balance-sheet is too narrow and it was contended that such a view is not justified by the terms of the circulars also. Since sections 17 and 19 of the Estate Duty Act fasten primary liability in the nature of a charge on the assessee's assets and since these provisions of the Estate Duty Act should be taken as known to any investor, the allowance of this liability, it was urged, cannot be a violation of either the letter or the principles embodied in the circulars. Once it was conceded that estate duty was a known or a certain liability, the claim for the correct estate duty as legally determined, it was pleaded, has to be allowed. No one, it was argued, expects the provisional assessment as per the assessee's return to be a final one especially when difficult valuations are involved. Reliance was placed on the decision of this Court in CIT v. Amalgamations Ltd. (1995) 214 ITR 399. Wherein it was held that estate duty paid was an allowable deduction in the assessment of the company for the income-tax purposes. It was further submitted that it is an undisputed fact that there is estate duty liability arising on April 18, 1964, when the demise of S. Anantharamakrishnan took place. Even though estate duty liability was ascertained on a later date, before the completion of the wealth tax assessments, as per the decision in CWT v. K.S.N. Bhatt (1984) 145 ITR 1 (SC) and CWT v. Kantilal Manital (1985) 152 ITR 447 (SC), the estate duty liability should be considered as an allowable deduction while valuing the unquoted equity shares, as per the circulars mentioned in the order.

The assessment in the present case is the wealth tax assessment of the estate of the late S. Anantharamakrishnan, represented by the accountable person, A. Sivasailam. There cannot be any wealth tax assessment against a company. Therefore, the provisions of section 2(m) of the Wealth Tax Act and rule 1-D of the Wealth Tax

Rules are not applicable to the facts of this case. The unquoted equity shares of the holding company are directed to be valued as per the two circulars issued by the Central Board of Direct Taxes. For the assessment years 1965-66, 1966-67 and 1967-68, the wealth tax returns were filed on February 28, 1966, July 21, 1966 and September 30, 1967, respectively. The estate duty assessment was completed on January 27, 1970. Notice was issued under section 55 of the Estate Duty Act to file the return on September 13, 1965, for the first time. In the directors report pertaining to the assessment year 1965-66, the death of S. Anantharamakrishnan was brought to the notice of the shareholders. In the assessment year 1966-67 in the report of the directors, no figure was mentioned, but the provisional demand of estate duty was mentioned. In the assessment year 1967-68, in the profit and loss account, it was shown that a sum of Rs.30 lakhs was paid and there is a balance of Rs.33,50,453. The profit and loss account is nothing but an income and expenditure statement. The balance-sheet would show the assets and liabilities. The assets mentioned in the balance-sheet are based upon the profit and loss account. Therefore, the profit and loss account would form part of the balance-sheet. A prudent businessman who would like to purchase the unquoted equity shares, would definitely ask for not only the balance-sheet, but also the profit and loss account and the directors' report. Therefore, the information with regard to the estate duty liability contained in the profit and loss account for one year and in the directors' report for the other two years would definitely go to show that the estate duty liability was disclosed in the balance-sheet. In order to support this contention, reliance was placed upon the decision in C.S. Ramachary (Late) v. CWT (1991) 189 ITR 8 (Mad.). Inasmuch as the estate duty liability was discharged in spite of the fact that the estate duty liability was not shown in the balance-sheet, but shown in the directors' reports and profit and loss account, that would be sufficient for allowing the estate duty liability as a deduction while valuing the unquoted equity share as per the above said two circulars issued by the Central Board of Direct Taxes. The estate duty liability is not a contingent liability but it is a certain liability. While considering whether the estate duty liability is mentioned in the balance-sheet no narrow meaning attributable to the balance-sheet should be adopted. Inasmuch as the final ascertained estate duty liability was Rs.1,66,48,868, that should be allowed as a deduction while valuing the unquoted equity shares under the above said two circulars. It was, therefore, pleaded that the Tribunal was not correct in not allowing the estate duty as a deduction while valuing the unquoted equity share in the assessment year 1965-66. So also the Tribunal was not correct in restricting the allowance, of estate duty in the assessment. years 1966-67 and 1967-68.

On the other hand, learned senior standing counsel appearing for the Department submitted that there was no dispute that the method adopted was the one that was laid down by the Board by common agreement. If the intrinsic value is to be ascertained with reference to the market value of all the assets and liabilities, whether disclosed or not, the value as pointed out by the Wealth Tax Officer will undoubtedly be much larger than what has been computed. The method followed pre-supposes the price that will be paid by a intending investor, who goes by the final accounts (profit and loss account and balance-sheet), both for the number of items of assets and liabilities and their value. Estate duty of Rs.30 lakhs paid in the third year under consideration is all that appears in the accounts and it had already gone to reduce the break-up value. The assessee could not ask for anything better. There is some confusion in the attempt to apply the case-law relating to computation of wealth tax payable under the Wealth Tax Act to the assessee's case where the share value has to be ascertained with reference to the procedure laid down by the circulars. The circulars require two components to be worked out. The first component is ascertainment of break up value "based on the book value of the assets and liabilities disclosed in the balance-sheet". This is precisely what has been done by the Wealth Tax Officer the second component is an ascertainment of maintainable profits and capitalization of the same at nine per cent. The average of both is then taken and a premium of 10 per cent. is added to arrive at the value to be included in the wealth. It was in connection with the ascertainment of "maintainable profits" that non-recurring and extraordinary items of income and expenditure and losses required adjustments. The adjustments contemplated are not to provide for them but to eliminate abnormal receipts and expenditure to arrive at the normal profits, which alone provide a stable basis for arriving at the capital value. The Commissioner of Income-tax (Appeals) misunderstood the scope of adjustments and wrongly applied what was mentioned in relation to the second component to the first component and that too in a sense which was just the opposite of what was intended. Acceptance of the assessee's case would lead to absurd results and further it would lead to a "nil" value, when the shares are very valuable.

Unless the estate duty liability is shown in the balance-sheet, the assessee cannot claim deduction while valuing the unquoted equity shares. In the first year in the directors report only a mention was made with regard to the death of S.Anantharamakrishnan. In the second year in the report of the directors, the provisional demand was mentioned, but no figure was mentioned. In the third year in the profit and loss account the provisional demand of Rs.35,50,453 was mentioned. Thus, it is shown in the profit and loss account, the balance of the provisional demand and this was not shown in the balance-sheet. While we are valuing the unquoted equity share as per the two circulars issued by the Board, we are concerned with what is mentioned in the balance-sheet. The profit and loss account would not form part of the balance-sheet and it cannot be said that the balance-sheet is neither as an Annexure to the balance-sheet nor forming part of the balance-sheet (sic). ' No doubt, learned senior standing counsel appearing for the Department, in order to elucidate this point, took us to various provisions contained in the Companies Act and the provisions contained in section 2(m) of the Wealth Tax Act and in rule 1-D of the Wealth Tax Rules. In order to support this contention, learned senior standing counsel relied upon the decision of this Court in Kalyam Sundaram v. Asst. CED (1980) 126 ITR 615 and the decision of the Supreme Court in Smt. Kalyani Sundaram v. Asst. CED (1989) 179 ITR 75. Thus, according to learned senior standing counsel appearing for the Department, the estate duty liability, which was not mentioned in the balance-sheet as per the circulars cited supra is not an allowable deduction in any one of the assessment years under consideration while valuing the unquoted equity shares.

We have heard learned counsel appearing for the assessee as well as learned senior standing counsel appearing for the Department.

The estate of S. Anantharamakrishnan, represented by A. Sivasailam is the assessee in the wealth tax assessments pertaining to the assessment years 1965-66, 1966-67 and 1967-68. The wealth tax returns were filed for these three years on February 28, 1966, July 21, 1966, and September 30, 1967. The estate has 100 per cent beneficial ownership in the shares of Amalgamations Ltd. The holding company was held the accountable person in the estate duty proceedings. The estate duty proceedings were completed on January 27, 1970. The estate duty liability was finally determined at Rs.1,66,48,868. The point for consideration relates to valuation of unquoted equity shares in Amalgamations Ltd. which is a holding company. There is no dispute that the unquoted equity shares have to be valued in terms of the Board's Circulars Nos.2(WT) of 1967 (see (1973) 92 ITR (St.) 2), dated October 31, 1967, and 118 (see (1973) 92 ITR (St.) 1), dated September 15, 1973. In working out the value of the shares in terms of the circulars, there are two points on which there was difference between the assessee 'and the Wealth Tax Officer. As pointed out, both sides want Circular No.2(WT) of 1967 (see (1973) 92 ITR (St.) 2), dated October 31, 1967, as modified by Circular No. 118 (see (1973) 92 ITR (St.) 1), dated September 15, 1973, to be followed. These circulars require the value to be worked out by adding 10 per cent. as premium to the average of (a) the break-up value of the shares based on the book value of the assets and liabilities disclosed in the balance sheet, and (b) the capitalized value arrived at by applying a rate of yield of nine per cent. of its maintainable profits. It was this resultant value that had to be taken as representing the fair market value of the shares of an investment company, which are substantially holding companies. The Tribunal agreed with the Department that they have to limit their consideration to the assets and liabilities disclosed and that -the book value alone has to be reckoned, but the Tribunal was not prepared to accept the view that the mention of the liabilities as a "note" in the profit and loss account or a mention in the directors' report has to be ignored. According to the Tribunal, the directors' report is an integral part of the final accounts and so is the profit and loss account. It is more so in the case of a company incorporated under the Indian Companies Act. The Tribunal pointed out that the balance-sheet, the profit and loss account and the directors' report always go together. According to the Tribunal, a prudent or an average investor would ask for all the three even if he were supplied only with the bare balance-sheet. Therefore, the Tribunal considered that the directors' report and the profit and loss account as necessary adjuncts and, therefore, part of the balance-sheet in a more comprehensive and commercial sense. Therefore, the Tribunal held that the liabilities mentioned therein cannot be ignored.

In the last of the three years, viz., assessment year 1967-68 under consideration, there is a "note" in the profit and loss account on further liability of Rs.35,50,453, after payment of Rs.30 lakhs debited to the profit and loss account. According to the Tribunal, this amount of,Rs.35,50,453 should be reckoned as a liability in working out the break-up value of the shares with reference to the balance-sheet as on June 30, 1966.

For the assessment year 1966-67 service of provisional demand is specifically mentioned in the directors' report, but the amount is not mentioned. Therefore, according to the Tribunal, the mentioning of the liability of the provisional demand in the directors' report would be sufficient for the allowance of the provisional demand of Rs.65,50,542.73. The Tribunal pointed out that any prudent or average buyer is bound to ask the seller for the extent of provisional estate duty demand as mentioned and is known to exist. Thus, the provisional demand of Rs.65,50,542.73 was allowed as a liability in working out the break-up value for the assessment year 1966-67 with reference to the balance-sheet as on June 30, 1965.

In so far as the assessment year 1965-66 is concerned, there is no mention of estate duty liability either in the balance-sheet, the profit and loss account or in the Director's report. But in the directors' report, the death of S. Anantharamakrishnan alone was mentioned. It was pointed out that notice of death is no notice of liability to a company and much less to an intending buyer of shares in such companies. This is because generally companies are not liable to pay estate duty. It is true that there are primary liabilities as a floating charge on the assets of a controlled company under sections 17 and 19 of the Estate Duty Act, 1953. But that cannot be considered as a liability either admitted or demanded. A mere notice of death does' not ipso fact indicate that there is any liability under section 17 read with section 19, because liability depends upon the transfer of assets, if any, made by the deceased to the company, and accruing of any benefits to such deceased in the three years before death. The company in question in a controlled company within the meaning of section 17, In the present assessment year under consideration, neither the balance-sheet nor the annexure by way of the profit and loss account and the directors' report indicate the conditions required for imposing such a liability on the company prior to mention of the liability itself. Thus, the estate duty liability was not indicated in any of the three documents, viz., the profit and loss account, the balance-sheet or the directors' report for the assessment year 1965-66. Therefore, the Tribunal held that reckoning of estate duty liability in terms of the circular for the assessment year 1965-66 does not arise.

In Late C.S. Ramachary v. CWT (1991) 189 ITR 8 (Mad.) while considering section 7 of the Wealth Tax Act, 1957, rule 1-D of the Wealth Tax Rules, 1957, and sections 205, 211, 217, 227, 349 and 350 of the Companies Act, 1956, this Court held that the report of the directors in this case contained the details of depreciation according to the Income Tax Rules, but the balance-sheet did not and the directors' report was not and could not be regarded as an Annexure to the balance-sheet, for, our attention was not drawn to any provision in the Companies Act requiring that alternative methods of providing for depreciation should be made known. We may point out that if in any document, which could be properly regarded as an Annexure to the balance-sheet the amount of depreciation according to the Income Tax Rules had been worked out, then, perhaps it might have been open to the assessee to contend that the document forming part of the balance-sheet and the depreciation according to the Income Tax Rules reflected therein, may have to be adjusted to arrive at the value of the fixed assets, as against those shown in the balance-sheet. The companies in question did not do any such thing at all but they had referred to the depreciation according to the Income Tax Rules only in the report of the board of directors and that, we have pointed out, was only a document attached to the balance-sheet and not an Annexure to the balance-sheet. We are also of the view that the provision of depreciation by an alternative method is not required under the provisions of the Companies Act, to be given in the accounts and, therefore, the question of giving it in the report of the directors may not arise. Placing rely and upon this decision, learned senior counsel appearing for the assessee submitted that there are cases and cases, in which there was acceptance of liability mentioned in the profit and loss account and the directors' report, even though such a liability was not mentioned in the balance-sheet. Therefore, according to learned counsel appearing for the assessee, considering the facts arising in the present case, mentioning the death of S. Anantharamakrishnan in the directors' report in the first year, the mentioning of the provisional liability in the directors' report without mentioning the actual amount of liability, and mentioning of the balance of provisional liability in the profit and loss account in the third year as well as in the directors' report, would have to be considered in a broad" view, meaning thereby that the liabilities were mentioned in the" balance-sheet so as to enable the assessee to get deduction of estate duty liabilities, which are certain, and not contingent, while valuing the unquoted equity shares.

It remains to be seen that the balance-sheet is based upon book entries profit and loss account, etc. In order to mention the correct assets and liabilities, the balance-sheet is depending upon the profit and loss Account, which is nothing but an income and expenditure statement. Therefore, the Tribunal considered for the two years that mentioning of the liability in the directors' report and the profit and loss account would amount to mentioning of the same in the balance-sheet in a more comprehensive and commercial sense. This is because any prudent or an average investor, who intends to purchase the unquoted equity shares would definitely ask for all the three documents even if he was supplied with the balance-sheet. The correct picture of the credit worthiness of the company and the intrinsic value of the share can be, seen only by seeing all the three above aid documents. By seeing merely the balance-sheet alone one cannot vouchsafe the creditworthiness of the company and the approximate intrinsic value of the share. Considering all these aspects on the accountancy principles, we accept the finding of the Tribunal for the last two years that mentioning of the provisional estate duty liability in the directors' report and the profit and loss account of the company can be taken as the liability as disclosed in the balance-sheet as per the above aid two circulars issued by the Board.

In the first assessment year except by stating the death of S.Anantharamakrishnan in the directors' report, there was no mention of any estate duty liability either in the balance-sheetor in the profit and loss account or in the directors' report. Therefore, the Tribunal held that the estate duty liability pertaining to that assessment year cannot be allowed as a deduction while valuing the unquoted equity shares as per the above said two circulars issued by the Board. When this is the factual position, we are also in agreement with the Tribunal in holding that for the first assessment year, viz., 1965-66, the assessee is not entitled to ask for deduction of the estate duty liability while valuing the unquoted equity share,

Learned counsel appearing for the assessee claimed that the entire estate duty as finally determined as payable at Rs.1,66,48,868 should be taken as a liability on the ground that it is a lawful liability. It is already seen that we have to take the assets and liabilities disclosed at book value. The actual value may be more or less. The Wealth Tax Officer pointed out that if we were to find the ultimate value, the assessee would be much worse off; at any rate no intending buyer, however, prudent he may be, could foresee the liability. The Tribunal pointed out that the matter would have been different if the liability is a direct one and has to be reckoned as a liability of the estate itself as in the cases cited and not in a case where the break-up value of a share in a company is computed with reference to the balance-sheet. Where the break-up value is taken at the book value of an asset as per the circulars, we cannot substitute a value which an asset may ultimately fetch, or a valt4e on which a liability may be ultimately computed or at which it may be determined in the place of book value. The value is the book value on the valuation date and not with reference to any future date. In the present case, there was no enhanced payment, which could reasonably be expected on the valuation date with reference to accounts. The Tribunal pointed out that there is no reason why any one should imagine that a verified return which invited the provisional assessment, is an incorrect one. Therefore, the Tribunal found that there is no justification for granting a relief larger than what has been authorized for the assessment years 1966-67 and 1967-68.

In CWT v. K.S.N: Bhatt (1984) 145 ITR 1, the Supreme Court held that in computing the net wealth of the assessee for wealth tax, the liabilities towards income-tax, wealth tax and gift tax, which crystallize on the relevant valuation date as determined in the respective assessment orders as liabilities are to be deducted even though the assessment orders are finalized after the valuation date. A similar view was also, taken by the Supreme Court again in CWT v. Kantilal Manilal (1985) 152 ITR 447. But in the present case, we are bound to ascertain the value of the unquoted equity shares as per the two circulars mentioned above. In the above said circulars it is clearly stated that unless the liability is shown in the balance sheet, it cannot be allowed as a deduction. In the present case, whatever might be the quantum of liability, there was no mention about the liability in the balance-sheet for the first year and only the provisional demand of estate duty was mentioned in the directors' report and in the profit and loss account in the last two years. Therefore, in the present case, there is no possibility for allowing the entire estate duty liability determined much later after the valuation date in the wealth tax, assessment. Accordingly, we answer the questions referred to us in T.C. Nos.864 to 869 of 1984 in the affirmative and against the assessee. So also in T.C. Nos.870 and 871 of 1984, we answer the questions referred to us in the affirmative and against the Department. No costs. Counsel's fee is fixed at Rs.2,000 in each case.

M.B.A./1689/FC Question answered.