Commissioner of Wealth-tax vs Nirajkumar Bajaj (Huf)

V.A. Mehta, J.—These are applications u/s 27(3) of the Wealth-tax Act, 1957 ("the W.T. Act"), filed by the Commissioner of wealth-tax Vidarbha, Nagpur, requiring the tribunal to refer to this Court the following two questions, said to be of law :

"(1) whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in setting aside the order of the Commissioner of Wealth-tax to be deducted while working out the valuation of the assessee''s interest in partnership concerns/AOPs ?"

Since points involved are common and applications u/s 27(1) were disposed of by a common order by the Tribunal, these applications are heard together and are being disposed of by this order. Point No. 1 : This pertains to the valuation of quoted equity shares of limited companies. Various assessees are individual/Hindu undivided family and the material assessment years are 1985-86 to 1987-88. The assessees filed the returns under the Wealth-tax Act showing the value of the equity shares of M/s. Bajaj Auto Ltd. and M/s. Bajaj Tempo Ltd. as per quotations of the Poona Stock Exchange on the base dates for valuation. The Wealth-tax Officer assessed the value of those shares on the basis of quotations of the Bombay stock Exchange mainly for the reasons that, for the previous years, the assesses had made the valuation on the basis of quotations of the Bombay Exchange only and had transacted business of sale and purchase through a broker of the Bombay Exchange These orders were confirmed in appeals by the Commissioner. The assesses preferred second appeals before the Tribunal which was pleased to reverse the orders passed by the Wealth-tax Officer and the Commissioner, taking the view that the assessees were fully justified in making valuation as per quotations of the Poona Exchange for the following reasons :

(i) The assessees started adopting Poona quotations consistently ever since the Poona Stock Exchange started functioning regularly.

(ii) Poona quotations were adopted even when they were higher than Bombay quotations.

(iii) Quotations on the base dates for valuation were available on Poona Exchange and not on Bombay Exchange.

(iv) Poona quotations were ex-bonus, whereas Bombay quotations were cum-bonus.

Now, valuation of an asset is essentially a questions of fact but it can give rise to a question of law, if (i) any wrong principle is followed, (ii) the right principle is not followed, and (iii) the valuation adopted is either against law or is perverse. Challenge to the Tribunal''s findings of facts cannot be tampered with merely for the reason that another view is possible on the same material. As far as valuation of shares in public limited company is concerned, a settled principle is that where they are quoted on a stock exchange and there are dealings in them, the price prevailing on the base date should normally be treated as the correct value, unless there are compelling reasons not to do so.

It may be mentioned that schedule III newly introduced from April 1, 1986, statutorily recognised the fact that the prices quote on a recognised stock exchange, on the base date, or where there is not quotation on the base date, on a date close to the base date, should be taken as the value. However, there has been no statutory guidelines in India for giving premier ranking to any particular stock exchange, as is granted in the Unite kingdom to the London stock Exchange u/s 44(3) of the U.K. Finance Act, 1965.

The Central Board of Revenue has issued a Circular No. 3(WT) of 1957, dated September 28, 1957, reading as under :

"Shares in joint stock companies and securities issued by Government or local authorities which are the subject of dealing in a recognised stock exchange may be valued on the basis of the closing price quoted on the stock exchange on the valuation date. For this purpose, it an assessee is assessed within a state in which there is a recognised stock exchange, the price quoted on that exchange may be taken into account. However, if there is not recognised stock exchange in the State in which the assessee is assessed, the price quoted on the recognised stock exchange located in a State nearest to State in which the assessee is assessed may be adopted. In either case, if no price is quoted on the valuation date (for example, when the exchange is closed for business for that day), the price on a date nearest to the valuation date may be adopted."

But even that circular (for whatever worth it is) does not deal with a situation where there are more than one stock exchange in a State Under the circumstances, the answer to such questions has to be found on the totality of the circumstances in each case.

Keeping all these factors in view, it cannot be said that either any general principle of valuation is violated or there is any perversity in the conclusion reached. Indeed, the Tribunal has given good reasons for preferring the Poona quotations. Even if any other view on facts is possible it cannot be said that any question of law needing reference had arisen.

Point No. 2 : This pertains to the valuation of assessee''s interest in partnership-firms/associations of persons. At the material time, the said valuation was to be made as per the statutory formula prescribed by rule 2 to rule 2-I of the Wealth-tax Rules, 1957, rules 2A to 2G prescribe the method of valuation. Rule 2A mandates that, in the determination of the net value of the assets of business as a whole, having regard to the balance-sheet 7(2) (a) of the Wealth-tax Act, adjustment as specified in rules 2B, 2C, 2D, 2F and 2G have to be made. Rule 2B specifies adjustments in the value of the assets disclosed in the balance-sheet; rule 2C specifies the adjustments in the value of the assets not so disclosed; rule 2D specifies the value of assets shown in the balance-sheet to the excluded and rule 2E specifies the liabilities shown in the balance-sheet to be excluded for purposes of rule 2A. Rule 2D (a) refers to the amounts paid as advance tax u/s 18A of the Indian Income Tax Act 1922, or u/s 210 of the Income Tax Act, 1961 and rule 2E (b) to the "reserves by whatever name called." The explanation below rule 2E specifies that "provision for any purpose other than taxation shall be treated as a reserve".

Now, "reserve" and "provision" are identifiably distinct concepts and yet, under rule 2E, Provision for any purpose other than taxation is fictional treated as a reserve and, on that basis, it is left out of reckoning. Provision for taxation, however, is treated as such and had to be included in the liabilities for the purpose of rule 2A. According to Department, since the amount paid as advance tax is left our of reckoning in determining the value of assets. The tax liabilities have to be reduced by that amount as otherwise, the assessee gets double benefit in the calculations which could not have been the intention of the farmers of the Rules. According to the assessee, the language of rule 2E (b) plainly speaks about gross tax in entirety and not net tax, and the valuation is to be made as per statutory formula which even ignores certain actualities and under the circumstances, there is no scope to reduce the provision for taxes by the advance tax paid. The Tribunal has upheld the assessee''s submission and it seems to us that the Tribunal is right.

Such a situation arises also in the Explanation II to rule 1D which deals with valuation of unquoted equity shares of certain companies sub-clause (i)(a) of the said Explanation II is similar to sub-clause (a) of rule 2D and clause (ii) (e) of the Explanation II is similar to clause (b) of rule 2E Indeed, the language employed in Explanation (ii) (e) to rule 1D is somewhat clumsy and not as clear as the language employed in rule 2E(b) and yet several High Courts including this court have held that the terminology "tax payable with reference to the book profits in accordance with the law applicable thereto" used in sub-clause (e) of clause (ii) of Explanation II to rule 1D means the gross tax payable in entirety without deducting the advance tax shown on the assets side of the balance-sheet. The Tribunal has held that the ratio of the above decisions applies with equal force, if not more, to clause (b) or rule 2E also. It has noticed the controversy prevailing in different High Courts on that issue but has held that it was bound by the decision of the jurisdictional court.

The submission of Department that the two provisions are dissimilar and therefor, the ratio of those decisions will not apply to rule 2E (b) does not appear to be correct. We extract the two provisions to show that they are similar :

"Rule 1D....

Explanation II. - For the purposes of this rule...

(ii) the following amounts shown as liabilities in the balance-sheet shall not be treated as liabilities, namely :- ...

(e) any amount representing provision for taxation (other than the amount referred to in clause (i) (a)) to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto"

"Rule 2E : Value of certain liabilities not to be taken. - The following amounts shown as liabilities in the balance-sheet shall not be taken into account for the purposes of rule 2A :- ...

(b) reserves by whatever name called....

Explanation. - Provision for any purpose other than taxation shall be treated as a reserve."

We may at this stage take a quick resume of the controversial case law. The Gujarat High Court in the case of Commissioner of Wealth Tax, Gujarat-I Vs. Ashok K. Parikh, , the Bombay High Court in the case of Commissioner of Wealth-tax Vs. Pratap Bhogilal and another, and the Madras High Court in the case of L.G. Balakrishnan and Others Vs. Commissioner of Wealth-tax, have taken the view that tax payable means net tax without deducting advance tax actually paid and the Punjab and Haryana High Court in the case of Ashok Kumar Oswal Vs. Commissioner of Wealth-tax, the Karnataka High Court in the case of Commissioner of Wealth Tax Vs. N. Krishnan, and the Andhra Pradesh High Court in the case of Commissioner of Income Tax Vs. M. Lakshmaiah and Another, have taken the view that tax payable means gross tax after deducting advance tax actually paid.

All these divergent view points have been recently considered by this court in the case of Commissioner of Wealth-tax Vs. Ramakrishna Bajaj (Huf), (Wealth-tax Application No. 2 of 1990, decided on November 18, 1991) in which the view adopted by the Gujarat, Bombay and Madras High Courts have been concurred with. Upholding the contention of the assessee that a taxing statues has to be literally and strictly construed, it is observed (at page 343) : "The submission made on behalf of the Department that once the assets side is fictional reduced by excluding the advance tax, corresponding reduction of the said amount in the provision for tax liabilities is inevitable, cannot be accepted. The provisions for computation either of assets or of liabilities are artificial and there is no scope to introduced considerations based on actuality in interpreting the same. Tax laws are dry and prosaic, having no place for equity or sentiments and have to be strictly construed. There is no room for any intendment or presumption. Nothing is to be read in nothing is to be implied. One has fairly to look at the plain language used and if it is ambiguous and capable of two constructions the construction favorable to the subject ought to be adopted."

The Tribunal is perfectly right in coming to the conclusion that it was bound by the decision of the Bombay High Court which is the jurisdictional court for it and refusing to make a reference on the ground that it would be an exercise in futility.

Under the circumstances, these applications are dismissed without issuing rule.