Commissioner of Wealth Tax vs Kesoram Industries and Cotton Mills Ltd.

K.L. Roy, J.—In this reference u/s 27(1) of the Wealth-tax Act, 1957, the following two questions have been referred to this Court by the income tax Appellate Tribunal:

(1) Whether on the facts and in the circumstances of the case the Tribunal, while determining the value of the fixed assets by recourse to Section 7(2)(a) of the Wealth-tax Act, 1957, was justified in making the adjustment for depreciation not provided for in the relevant accounts?

(2) Whether on the facts and in the circumstances of the case the Assessee was entitled to the relief u/s 5(1)(xxi) of the Wealth-tax Act, 1957, in respect of the net wealth employed in its new rayon unit as at the two valuation dates?

The Assessee Messrs. Kesoram Industries and Cotton Mills Ltd. is a public limited company and the reference is in relation to its assessment to wealth-tax for the assessment years 1958-59 and 1959-60 for which valuation dates are March 31, 1957 and March 31, 1968, respectively. So far as the first question is concerned, an appeal was taken by the Assessee company from the decision of this Court on a similar question in respect of the assessment year 1957-58, i.e. the immediate preceding year, to the Supreme Court. The decision of the Supreme Court is reported in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, , and the facts may be stated from the judgment in that case:

The Assessee company was incorporated under the Indian Companies Act sometime prior to 1.95.0 and the original cost of its fixed assets was Rs. 2,30,32,833; During the year ending March 31, 1950, the company made a revaluation of its assets and added an amount of Rs. 1,45,87,000 to the cost of the said fixed assets. After certain adjustments, the value of the fixed assets was determined at Rs. 2,60,52,357. The said fixed assets of the Assessee were shown in the balance-sheet issued by the Assessee from time to time at the added value less depreciation calculated on the original cost. In the balance-sheet of the relevant accounting year also, the said amount was shown as the value of the fixed assets. In computing the net wealth for the purposes of the Wealth-tax. Act, the Wealth-tax Officer accepted the said valuation of the fixed assets u/s 7(2) of the said Act rejecting the plea of the Assessee that each item of the assets-should be valued at the market rate u/s 7(1) thereof. The Assessee''s appeals to the Appellate Assistant Commissioner and the Tribunal having failed the following question was referred at the instance of the Assessee to the High Court, viz.

Whether on the facts and in the circumstances of the case the Wealth-tax Officer was justified in taking the value of the assets of the Assessee as shown in its balance-sheet on the relevant valuation date?

The question was answered against the Assessee by this Court and on further appeal the Supreme Court made the following observations: Under this section (viz. Section 7(2)) in the case of an Assessee carrying on business the Wealth-tax Officer may determine the net value of the assets of the business as a whole having regard to the balance-sheet of the business as on the valuation date. The balance-sheet, as indicated earlier, as on March 31, 1957, showed the appreciated value on revaluation of the assets at Rs. 2,60,52,357. As the value of the assets had increased, a corresponding balancing figures, viz., Rs. 1,45,87,000, was introduced in capital reserve surplus: that figure represented the increase in the value of the assets. It was argued that the revaluation was done for other purposes, that it did not represent the real value of the assets and that that fact was also reflected by the said amount representing the difference being shown as a capital surplus. Apart from the argument raised, there is nothing on the record to disclose why the said figure did not represent the correct value of the assets. We do not also see how the fact that the said increase was shown as capital surplus would detract from the correctness of the valuation, for the corresponding balancing figure had to be introduced in the balance-sheet.... When the Assessee himself has shown the net value of the assets at a figure, the Wealth-tax Officer, in our view, rightly accepted it, as no one could know better the value of the assets than the Assessee himself. It was open to the Assessee to convince the authorities that the said figure was inflated for acceptable reasons; but it did not make any such attempt. It was also open to the Wealth-tax Officer to reject the figure given by the Assessee and to substitute in its place another figure, if he was for sufficient reasons satisfied that the figure given by the Assessee was wrong. But he did not find any such reason to do so. When he accepted the figure shown by the Assessee himself, he did the right thing and there is nothing to complain about. The High Court was right in answering the first question in the affirmative.

For the assessment years under reference the balance in the capital reserve account had been reduced to Rs. 1,44,26,594. The Assessee contended before the Wealth-tax Officer that for the purpose of wealth-tax assessment, the book value of the assets should be ignored and instead of the depreciated value as taken for the purposes of income tax assessment should be adopted. The Wealth-tax Officer rejected the said contention and computed the net wealth, of the Assessee on the basis of the value of the assets as disclosed in the company''s relevant balance-sheet.

Before the Appellate Assistant Commissioner, in appeal, the Assessee contended in the alternative that as no depreciation had been provided for in the books in the first year and only a sum of Rs. 3,98,702 had, been provided for in the second year, the book value of the assets should be reduced by appropriate depreciation in respect of each year on such book value. The Appellate Assistant Commissioner accepted the alternative contention of the Assessee. He observed that as the enhanced figure of the fixed assets were considered, it was but natural that the allowance of normal wear and tear should be worked out on the basis of such enhanced figure; otherwise it would not give a correct picture. Accordingly, he reduced the net value of the assets in the first year by Rs. 30,67,660 and as the Assessee had already provided for a sum of Rs. 3,98,702 for the second year he reduced the net value of the assets for this year by Rs. 54,60,250 (Rs. 30,67,660 + 27,91,292 - 3,98,702).

Dissatisfied with the decision of the Appellate Assistant Commissioner the Department appealed to the Tribunal. The Tribunal observed that the only question was whether the Appellate Commissioner had rightly reduced the bulk value of the assets by giving a margin for the natural wear and tear of those assets which had been written, up in their value eight and nine years before the relevant valuation dates? All that the Appellate Assistant Commissioner had done in this case was to make an adjustment u/s 7(2) of the Wealth-tax Act for probable wear and tear on the value of the assets written up by the Assessee, using the percentage of depredation allowance as an yardstick for the same. These figures were certainly more than the actual depreciation allowed on the cost or written down value of the assets as they are bound to be, having been calculated on the enhanced book values as a result of the revaluation of the assets to conform to the market value.

Mr. B.L. Pal, learned Counsel for the Department, submitted that the answer to the first question was covered by the decision of the Supreme Court in the Assessee''s case Supra. He submitted that as the Assessee in its balance-sheets had shown the value of the fixed assets at a certain figure, the income tax Officer was entitled to accept that valuation and there was no compelling reason for him to have made any modifications as was pointed out by the Supreme Court in the above case. Accordingly, he argued that the question should be answered against the Assessee. We are entirely unable to accept the submission of Mr. Pal. In the case before the Supreme Court the Assessee''s contention was that the value of the assets had been deliberately enhanced for a certain purpose and as u/s 7(2) the assets were to be valued on the basis of market value the income tax Officer was bound to take the real value of the assets and not its appreciated value. This contention was rejected by the Supreme Court on the ground that as the Assessee itself had valued the assets at a particular figure and had not advanced any acceptable reasons to the income tax Officer for reducing such valuation, the income tax Officer was justified in accepting the valuation made by the Assessee. In these years also neither the Appellate Assistant Commissioner nor the Tribunal has accepted the contention of the Assessee that was advanced before the Supreme Court in the earlier year. They had accepted the alternative contention of the Assessee, viz., that where by inadvertence or by mistake the normal wear and tear or depreciation is not charged to the accounts, it would be incumbent on the Wealth-tax Officer to value the assets after making such allowance for normal wear and tear u/s 7(2).

The matter came up for consideration before this Court in COMMISSIONER OF WEALTH-TAX, CALCUTTA Vs. TUNGABHADRA INDUSTRIES LTD., . In that case also the assets were valued u/s 7(2) on the basis of the valuation in the Assessee''s balance-sheet. The Assessee contended that so far as the fixed assets were concerned they should be valued at the written down value and not on the basis of the value as shown in the balance-sheet. In the balance-sheet the valuation was shown at the original cost and no reduction was made on account of depreciation either for the accounting year or for the earlier years. This Court, after taking into consideration the aforesaid decision of the Supreme Court, observed that the Wealth-tax Officer had the power u/s 7(2)(a) to make adjustments in the net value of the assets of the business as a whole if in his opinion the balance-sheet value did not represent the real value of the assets. In the particular circumstances of the case before this Court it was held that as the plant and machinery had been set up many years ago and did not present any uncommon features such as scarcity, the Tribunal was right in directing that the written down value of the fixed assets should be adopted as the value thereof instead of the balance-sheet value.

In a later decision of another Bench of this Court in COMMISSIONER OF WEALTH-TAX, WEST BENGAL Vs. BALLY JUTE CO. LTD., this Court referred to the decision of the Supreme Court in Kesoram Industry''s case Supra and observed that in the instant case, however, the Assessee sought to show that the balance-sheet figures were wrong and that distinguished the case before this Court from the case before the Supreme Court. In that case also proper depreciation had not been provided for in the Assessee''s accounts and this Court held that the Revenue should have examined the contention of the Assessee and allowed such depreciation over the balance-sheet figures as the circumstances of the case justified. This Court was, however, at pains to point out that the allowance should be in respect of normal depreciation which need not necessarily be the same as that allowance for income tax purposes.

As in the case before us the extreme contention raised by the Assessee before the Supreme Court in the earlier year had not been accepted" by the authorities below who had proceeded on the basis that in making the global valuation u/s 7(2) adjustment for depreciation not provided for in the balance-sheet should be made by the income tax Officer and such basis is in accordance with the two decisions of this Court mentioned above, it must be held that the Tribunal''s decision on this point was correct and the first question must be answered in the affirmative and against the Revenue.

The Assessee company set up a plant for production of rayon. The Appellate Assistant Commissioner has found that the application for establishment of the plant, was made to the Government on September 24, 1955, and the licence from the Government was obtained on February 6, 1966. In June 1956 new capital of Rs. 1 crore was raised by the issue of preference shares for the purpose of financing the new project. During the year ending March 31, 1958, the progress of construction was slowed down and the building was completed and the plant and machineries arrived at the site during the year ending March 31, 1959. The plant went into production from December 16, 1959. On these facts the Assessee claimed exemption from tax of an amount of Rs. 28,59,266 in the first year and a sum of Rs. 1,52,93,763 in the second year under the provisions of Section 5(1)(xxi) of the Wealth-tax Act. This claim was rejected by the Wealth-tax Officer without assigning any reasons in the orders of assessment. On appeal, the Appellate Assistant Commissioner found that the setting-up of the new plant started in September 1955 and that the plant went into production on and from December 16, 1959. He, therefore, held that the conditions laid down in the aforesaid section were satisfied and the Assessee was entitled to exemption from tax in respect of the amount of Rs. 28,59,266 invested up to the valuation date for the first year and Rs. 1,52,93,763 invested up to the valuation date for the second year. On appeal by the Department the Tribunal had upheld the decision of the Appellate Assistant Commissioner. At the instance of the Commissioner the Tribunal has referred the second question to this Court. For a proper appreciation of the contentions raised, it would be necessary to examine the relevant provisions of Section 5(1)(xxi) of the Wealth-tax Act which are as follows:

5(1) Wealth-tax shall not be payable by an Assessee in respect of the following assets, and such assets shall not be included in the net wealth of the Assessee--.

(xxi) that portion of the net wealth of a company established with the object of carrying on an industrial undertaking in India within the meaning of the explanation to Clause (d) of Section 45, as is employed by it in a new and separate unit set up after the commencement of this Act by way of substantial expansion of its undertaking.

Provided further that this exemption shall apply to any such company only for a period of 5 successive assessment years commencing with the assessment years next following the date on which the company commences operations for the establishment of such unit.

The Department had been interpreting this section to mean that the operations for setting up the new unit must be commenced after the coming into operation of this Act, namely, after April 1, 1957. The aforesaid section was considered by the Supreme Court in Commissioner of Wealth-tax Madras Vs. Ramaraju Surgical Cotton Mills Ltd., . In that case the Board of Directors. of the Assessee company resolved in March 1955 to establish a new spinning unit for the purpose of manufacturing absorbent cotton wool and the necessary industrial licence was obtained in August 1955. The company placed orders for the necessary machinery and plant in January and February 1956. Construction of buildings was begun in March 1956 and completed by December 1957. Installation of the machinery and plant was completed by stages commencing from June 1957. A licence under the Factories Act for working the factory was obtained in June 1958. In its assessment to wealth-tax for the year 1957-58 for which the valuation date was September 30, 1956, the company claimed exemption from wealth-tax in respect of the amount spent for setting up the new unit. The claim was rejected by the Department but was upheld by the High Court. On further appeal to the Supreme Court by the Department, the Supreme Court held that the new unit was completed and became ready to go into business only after April 1, 1957, when the Act came into force and, therefore, the conditions laid down in the principal Clause of Section 5(1)(xxi) was satisfied. The Supreme Court further observed that the unit could not be said to have been set up unless it was ready to discharge the function for which it was being set up. It was only when the unit had been put into such a shape that it could start functioning as a business or a manufacturing organisation that it could be said that the unit had been set up. Operations for the establishment of a unit, from the very nature of that expression used in the proviso to Section 5(1)(xxi), could only signify steps that had to be taken to establish the unit. The applicability of the proviso had, therefore, to be decided by finding out when the company commenced operations for establishment of the unit, which operations must be antecedent to the actual date on which the unit is held to have been set up for the purpose of principal clause. The Supreme Court further held that for the purpose of the second proviso to Section 5(1)(xxi) the first assessment year following the commencement of operations for establishment of a unit, in the case of any company which commenced operations at any time before April 1, 1957, would be the assessment year 1957-58. It is to be noticed that in that case also the claim was in respect of an assessment year of which the valuation date was prior to the date when the plant was set up.

In view of the aforesaid decision of the Supreme Court Mr. Pal, the learned Counsel for the Department, submitted that as in this case the new unit had undoubtedly been set up in December 1959, the Assessee was not entitled to the exemption u/s 5(1)(xxi) in the two years of assessment under reference as the respective valuation dates for these two years were earlier than the date on which the new plant was set up.

As I have already mentioned, in the case before the Supreme Court also the valuation date of the assessment year under reference preceded the date on which the new plant was ready to start production, but the Supreme Court allowed the Assessee''s claim in that case. A similar contention was raised before this Court in Commissioner of Wealth-tax, West Bengal v. Birla Jute Manufacturing Co. Ltd., Calcutta Unreported judgment of Banerjee, J. in Matter No. 226 of 1962, the judgment in that case was delivered by my Lord Mr. Justice Banerjee. One of the contentions raised in that, case is stated in the judgment in the following words:

So far as the assessment-year 1958-59 is concerned, Mr. Sabyasachi Mukherjee, learned Counsel for the Revenue, submitted that in view of the fact that the new unit was not fired earlier to February 12, 1959, it must not be deemed to have been set up on March 31, 1958, and as such must not be deemed to be entitled to any exemption in that year.

After reviewing the decision of the Supreme Court in Ramraju Surgical Cotton Mills case Supra his Lordship observed that on the interpretation put on the section by the Supreme Court it was clear that the claim put forward by the Respondent for exemption had been rightly allowed by the Tribunal as the facts involved in that case were not in any way different from the facts involved in the case before the Supreme Court.

I am of the opinion that the fact that the new unit started production or was in a position to start production after the respective valuation dates for the two years under reference is immaterial for the purpose of exemption u/s 5(1)(xxi). So long as the new unit is set up after the commencement of the Wealth-tax Act, the Assessee is entitled to the exemption for a period of five years commencing from April 1, 1957, if the process of setting up commenced before that date as held by the Supreme Court. Mr. Pal''s contention must, therefore, be rejected.

In the premises, the second question referred to this Court must also be answered in the affirmative and against the Department. The Commissioner is to pay the costs of this reference to the Assessee.

Banerjee, J.

I agree.