COMMISSIONER OF INCOME-TAX VS M. V ARUNACHALAM
2001 P T D 843
[241 I T R 686]
[Madras High Court (India)]
Before N.V. Balasubramanian and P. Thangavel, JJ
COMMISSIONER OF INCOME‑TAX
versus
M.V. ARUNACHALAM and another
Tax Cases Nos. 325 and 326 of 1989, decided on 11/12/1997.
Wealth tax‑‑
‑‑‑‑ Valuation of assets‑‑‑Valuation of unquoted equity shares ‑‑‑Deductions Liability towards sales tax penalty‑‑‑Sales Tax Appellate Tribunal modifying order of penalty subsequent to valuation date‑‑‑Subsequent order must be taken into account in valuing share‑‑‑Indian Wealth Tax Act, 1957‑‑‑Indian Wealth Tax Rules, 1957, R.1D.
Under rule 1D of the Wealth Tax Rules, 1957, the market value an unquoted equity share of any company shall be determined in the man prescribed in the said rules. Under the rules, the value of all the liabilities shown in the balance‑sheet of the company shall be deducted from the value of the assets shown in the balance‑sheet and then the value of the shares shall be determined. The crucial words found in rule 1D of the Rules as "value all the liabilities as shown in the balance‑sheet". The rule emphasises that liability shown in the balance‑sheet should be valued and that the value of liability should be deducted from the value of the assets of the company the valuation date. The final determination of the tax liability, whether way of appeal or revision cannot be ignored as the final order determining the ultimate tax liability would directly relate to the question whether on valuation date, there was any liability at all owed by the company.
The assessee held shares in several companies which are not quoted in the regular stock exchange. While valuing the shares for the assessment year 1980‑81, the Wealth Tax Officer excluded the liability towards the sales tax penalty not shown in the balance‑sheet amounting to Rs.22,83,000. The Appellate Assistant Commissioner held that the liability should be taken into account. At the time of hearing the appeal before the Tribunal, it was submitted on behalf of the Department that the sales tax penalty was subsequently cancelled and., therefore, there was no justification for treating the same as the liability for determining the value of the share in terms of rule 1D of the Rules. The Appellate Tribunal, however, rejected the contention urged on behalf of the Department on the ground that the liability as on the date of valuation has to be taken into account irrespective of the subsequent course of events that may take place after the valuation date. On a reference:
Held, that there was a subsequent modification as regards the quantum of the liability of the sales tax liability of the company towards penalty. Though the order of the Sales Tax Appellate Tribunal was passed subsequent to the relevant valuation dates, the order would have an effect in valuing the liability as such and the order of the Sales Tax Appellate Tribunal could not be ignored in determining the quantum of the liability of the company. The Tribunal should go into the question again and determine what was the exact quantum of sales tax liability towards penalty on the valuation date and on that basis, direct the Wealth Tax Officer to determine the value of the shares in terms of rule 1D of the Rules.
CWT v. K.S.N. Bhatt (1984) 145 ITR 1 (SC) applied.
CWT v. Vadilal Lallubhai (1984) 145 ITR 7 (SC) ref.
C.V. Rajan for the Commissioner.
R. Janakiraman for the Assessee.
JUDGMENT
N.V. BALASUBRAMANIAN, J.‑‑‑The Appellate Tribunal, at the instance of the Revenue, has referred the following common question of law with reference to the two assessees, for our opinion under section 27(1) of the Wealth Tax Act, 1957 (hereinafter referred to as the "Act:).
"Whether, on the facts and in the circumstances of the case the Tribunal was correct in holding that the sum of Rs.22,83,000 being the sales tax penalty should be allowed as a liability while valuing the unquoted equity shares under rule 1D of the Wealth Tax Rules, 1957?
The assessment year involved in respect of both the assessees is 1980‑81. The assessees hold certain shares in several companies which are not quoted in the regular stock exchange. The assessees claimed before the Wealth Tax Officer that the shares held by them should be valued on yield basis. The Wealth Tax Officer, in completing the assessment, rejected the claim of the assessees and held that the valuation of the shares held by the assessees should be done under rule 1D of the Wealth Tax Rules (hereinafter referred to as the ''Rules"). The Wealth Tax Officer while valuing the shares excluded the liability towards the sales tax penalty not shown in the balance sheet amounting to Rs.22,83,000 and after excluding other items, he enhanced the value of the shares of the companies as disclosed in the orders of assessment.
Aggrieved by the orders of assessment, the assessees preferred appeals before the Appellate Assistant Commissioner of Wealth Tax. The Appellate Assistant Commissioner was of the opinion that the liability though not shown in the balance‑sheet, but shown in the notices appended thereto should be taken into account and the amount shown towards sales tax liability should be taken into account as a liability in determining the value of the shares under rule 1D of the Rules. Dissatisfied with the order of the Appellate Assistant Commissioner, the Revenue preferred appeals against the order of the Appellate Assistant Commissioner regarding the allowance of sales tax liability, while the assessees filed cross‑objections against the directions of the Appellate Assistant Commissioner regarding other items. The Tribunal considered the appeals preferred by the Revenue as well as the cross‑objections filed by the assessee. We are not here concerned with the order of the Appellate Tribunal regarding the cross‑objections filed by the assessees as the order of the Tribunal with reference to those items is not the subject‑matter of the present reference. However, the Appellate Tribunal held that the sales tax penalty shown in the notes attached to the balance sheet should be taken into account for the purpose of valuation of shares in terms of rule 1D of the Rules. The Appellate Tribunal, following an earlier order of its own in the case of M.A. Murugappan (Individual) and others in W.T.A. No.606 (Mds) of 1986, etc. dated May 12, 1987, held that the sales tax penalty is a liability under the statute and till they are wiped out, they continue to exist as liabilities and it cannot be regarded as a contingent liability. In this view of the matter, the Appellate Tribunal upheld the orders of the Appellate Assistant Commissioner. At the time of hearing the appeal before the Tribunal. It was submitted on behalf of the Department that the sales tax penalty was subsequently cancelled and, therefore, there was no justification for treating the same as the liability for determining the value of the shares in terms of rule 1D of the Rules. The Appellate Tribunal, however, rejected the contention urged on behalf of the Department on the ground that the liability as on the date of valuation has to be taken into account irrespective of the subsequent course of events that may take place after the valuation date. In this view of the matter, the Appellate Tribunal dismissed the appeals preferred by the Revenue. It is this order of the Appellate Tribunal that is the subject‑matter of the present tax case reference.
Mr. C. V. Rajan, learned counsel for the Revenue, submitted that the order of the Appellate Tribunal is erroneous in point of law as the Tribunal has overlooked that the Sales Tax Appellate Tribunal subsequent to the valuation date has cancelled the penalty and once the penalty stands cancelled, there was no liability at all to be taken note of for determining the value of the shares in terms of rule 1D of the Rules. He strongly placed reliance on the decision of the Supreme Court in the cases of CWT v. K.S.N. Bhatt (1984) 145 ITR 1 and CWT v. Vadilal Lallubhai (1984) 145 ITR 7 and submitted that the ultimate qualification of the liability has to be taken into account for the purpose of the determination of the value of the shares in terms of rule 1D.
Mr. R. Janakiraman, learned counsel for the assessees, strenuously urged that value of the shares has to be determined on the valuation date and on the valuation date the liability towards tax liability was existing and the proper amount that should be taken into account in determining the value of the shares under rule 1D of the Rules. He further submitted that it is not correct to say that the entire sales tax penalty was cancelled. He, therefore, submitted that the Tribunal should be directed to consider the question whether any liability towards the sales tax existed on the valuation date.
We have carefully considered the rival submissions of learned counsel for the parties. The question involves the proper interpretation of rule 1D of the Wealth Tax Rules. Under rule 1D of the Rules, the market value of an unquoted equity shares of any company shall be determined in the manner prescribed in the said Rules. Under the Rules, the value of all the liabilities as shown in the balance‑sheet of the company shall be deducted from the value of the assets shown in the net balance‑sheet and then the value of the shares shall be determined. The crucial words found in rule 1D of the Rules, in so far as they are relevant for the purpose of the case are, "value of all the liabilities as shown in the balance‑sheet". The rule emphasises that the liability shown in the balance‑sheet should be valued and that value of the liability should be deducted from the value of the assets of the company on the valuation date. It is no doubt true and it is not disputed that on the relevant valuation date, there was a sales tax liability towards the penalty amounting to Rs.22,83,000 existing on that date. The company against whom the sales tax penalty was imposed has not accepted the liability but carried the matter in appeal before the authorities constituted under the relevant Sales Tax Act and it is seen from the order of the Appellate Tribunal that the sales tax penalty was cancelled by the Tamil Nadu Sales Tax Appellate Tribunal. Though the exact quantum for the amount of penalty which was cancelled is not clear from the reading of the order of the Appellate Tribunal it is seen that there was a subsequent modification as regards the quantum of the liability of the company towards penalty. Though the order of the Sales Tax Appellate Tribunal was passed subsequent to the relevant valuation dates, the order would have effect in valuing the liability as such and the order of the Sales Tax Appellate Tribunal cannot be ignored in determining the quantum of the liability of the company. More or less, a similar situation came up for consideration before the Supreme Court with reference to the deduction of statutory liabilities under the direct tax laws under the head "debt" under the provisions of section 2(m) of the Wealth Tax Act. The Supreme Court 16CWT v. K.S.N. Bhatt (1984) 145 ITR 1 held that in computing the net wealth of the assessee for the wealth tax, the liabilities towards the Income‑tax, wealth tax and gift‑tax which crystallise on the relevant valuation date as determined in the respective assessment orders as liabilities are to be deducted even though those assessment orders are finalised after the valuation date. Where the said assessment order was the subject‑matter of appeal and the superior authority ultimately found there was no liability at all it must be taken in law, there was never any tax liability. The apex Court laid down the proposition that there was no liability on the valuation date it by virtue of any appeal or reference it was found ‑there was no tax liability at all. The observations of the apex court which are relevant for the purpose of the case, read asunder (page 5);
"If, however, it is found on such ultimate determination that there is no tax liability, it cannot be said that merely because originally a tax liability had been determined and stood existing on the valuation date there was a debt owner by the assessee. The fact cannot be ignored that when the case was carried in appeal or reference it was found by the superior authority that in fact there was no tax liability at all. That final determination, even though rendered after the valuation date, directly relates to the question whether on the valuation date there was a debt owed by the assessee. If the finding is that there was no tax liability, it must be held that there was no debt owed by the assessee on the valuation date.
Applying the principles of law laid down by the Supreme Court, we are of the opinion that the final determination of the tax liability, whether by way of appeal or revision cannot be ignored as the final order determining the ultimate tax liability would directly relate to the question whether on the valuation date, there was any liability at all owed by the company towards the sales tax. It is seen that the Tamil Nadu Sales Tax Appellate Tribunal has cancelled the penalty and though the order of the said Tribunal was passed subsequent to the valuation date, that order would be a relevant piece of evidence to determine the value of liabilities as provided in rule 1D of the Rules. Therefore, though the view of the Appellate Tribunal that the liability as on the valuation date should be taken into account is correct, that the events that happened subsequent to the valuation date should be ignored, is not correct in law. There may be cases of enhancement of tax liability or enhancement of penalty and if this view of the Appellate Tribunal is accepted, then it will result in distorted valuation of the shares under rule 1D of the Rules will be done in a distorted manner. Therefore, we are of the view that the view of the Tribunal that the events that happened subsequent to the valuation date regarding the determination of the value of the liability should be completely eschewed for the determination of the shares in terms of rule 1D of the Rules is not correct in law, though the Appellate Tribunal was correct in holding that the liability towards the sales tax cannot be regarded as a contingent liability. However, if they are wiped out, they cannot be regarded as liabilities at all.
It is stated by Mr. R. Janakiraman learned counsel for the assessee, that the Tribunal has not determined the exact quantum of liability towards the sales tax penalty. The Appellate Tribunal apparently has proceeded on the basis that the subsequent event should be ignored and in this view of the matter, it has not determined the question as to the exact quantum of the liability on the valuation date. Therefore, we are of the opinion that the Tribunal should go into the question again and determine what was the exact quantum of sales tax liability towards penalty on the valuation date and on that basis, direct the Wealth Tax Officer to determine the value of the shares in terms of rule 1D of the Rules. In this view of the matter, though we answer the common question of law referred to us in the negative and in favour of the Revenue, the Tribunal is directed to go into the question afresh in the light of the observations made by us. No costs.
M.B.A./413/FCReference answered.