Birla Jute Manufacturing Co. Ltd. Vs.
Commissioner of Wealth Tax, West Bengal, Calcutta  INSC 185 (10 August
CITATION: 1971 AIR 2458 1977 SCR (1) 104
Wealth Tax-Inflated value of assets shown in
balance sheet of company-When wealth tax officer is justified in accepting such
In the assessment year 1948-49, the assessee,
a public limited company revalued its assets and enhanced the book value by Rs.
145,00,000 and continued to show the inflated valuation in the balance-sheets
for subsequent years. For the assessment year 1957-58, the Department took the
valuation of the assets as shown in the balance sheets. The assessee, however,
claimed that the said Rs. 45,00,000 should be deducted in the computation of
the net value.
Before the Tribunal, it was stated that the
reason for the inflation was that the assessee contemplated issuing bonus
shares for that amount, but it did not do so because the necessary consent of
the Central Government was not grant ed. The Tribunal decided in favour of the
assessee but the High 'Court, on reference, held that there was a motive for
the revaluation ,of the assets and therefore the valuation in the balance-sheet
could not be accepted as a correct basis and that the net value would have to
be ascertained by the Wealth-tax Officer under s. 7 of the Wealth-tax Act. Both
the assessee and the Revenue appealed to this Court.
HELD: (1) Under s. 211 of the Indian Companies
Act, 1956, every balance sheet must give a true and fair figure of the state of
its affairs as at the end of the financial year. Under s. 7 of the Wealth-tax
Act the Wealth Tax Officer may determine the net value of the assets of the
business having regard to the balance sheet of the business as on the valuation
date it is open to the Wealth-tax Officer to accept the figure given by the
assessee or to arrive at another figure if he was satisfied for good reasons
that the valuation given in the balance--sheets was wrong. Equally it is open
to the assessee to satisfy the authorities that .the said figure had been
enhanced, for "acceptable reasons". [107 E-H] (2) The main idea
underlying the issue of bonus shares is to bring the nominal amount of the
issued share capital of the company into line 'with the true excess of assets
over liabilities. But the taking of this ,step would involve a genuine and
correct valuation of assets and not their under valuation or inflation,
especially when the power of the Company to issue bonus shares is of fiduciary
nature and must be ,exercised bonafide for the general advantage of the
company. [108G-H., 109A] (3) In the present case, no evidence was placed before
the Wealth Tax Officer for demonstrating how it became necessary to inflate the
valuation by Rs. 1,45,00,000 for the purpose of issuing bonus 105 shares, nor
was it shown that it was so done under expert acturial suggestion under some
misapprehension or mistake.
The Wealth Tax Officer was therefore fully
justified in accepting the figure which the assessee had himself given in the
balance sheet as the correct figure and making the assessment in accordance
with that figure. [109B-E] Kesoram Industries and Cotton Mills Ltd., v.
Commissioner of Wealth Tax (Central) Calcutta, 59 I.T.R. 767 referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals
No. 1834 and 1169 of 1968.
Appeals from the Judgment and order dated
February 21, 22 1967 of the Calcutta High Court in Wealth Tax Reference No.138
S. T. Desai, S. A. Aiyar, R.N. Sachthey and
B. D. Sharma, for the appellant (in C.A. No. 1169/68 and the respondent (in C.
A. No 1834 of 1968) A. C. Mitra, N. R. Khaitan, P. Khaitan, Krishna Sen and
B.P. Maheswari for the respondent (in C. A. No. 1169. of 1968 ) and the
appellant (in C. A. No. 1834 of 1968. ) The Judgment of the Court was delivered
by Grover, J. These appeals have been brought from a judgment of the Calcutta
High Court by certificate in a Wealth Tax Reference. Civil Appeal No. 1834 of
1968 is of the assessee and the other appeal has been filed by the Commissioner
of Wealth Tax, West Bengal.
It is necessary to deal with the appeal of
the Commissioner of Wealth Tax as the other appeal shall also stand disposed of
once the question is answered in the Commissioner's appeal. The assessee is a
public limited company. In the assessment year 1948-49 the assessee revalued
its assets enhancing the existing book value by Rs. 1,45,00,0001which was
credited to the capital reserve account. In assessing the wealth tax payable by
the assessee for the assessment year 1957-58 the relevant valuation date being
March 31, 1957 the Wealth Tax Officer proceeded under s. 7 (2) of the Wealth
Tax Act, hereinafter called the 'Act' and took the valuation of the assets at
Rs. 5,10 40,897 as shown in the balance sheet on the relevant date. The
assessee claimed that a sum of Rs. 1,45,00,0001- by which 106 the book value of
the fixed assets was enhanced in 1948-49 should be deducted in the computation
of the net value. It is not clear from the order of the Wealth Tax Officer, who
rejected the claim, as to what was the ground taken for claiming this
deduction. Before the Appellate Assistant Commissioner it was contended on
behalf of the assessee that the capital reserve was not out of profits and was
only a notional reserve and therefore it should be excluded when global
valuation of the assets was being made. It was urged that the figure of reserve
was purely artificial and had no relation to the working of the company and
should not be taken into account in the valuation of the net assets. The
Appellate Assistant Commissioner did not accede to the contention and confirmed
the assessment. The Appellate Tribunal found that a similar point had come up
for decision before a special bench of the Tribunal consisting of three members
in Bombay' and had been decided in favour of the assessee. Following that
decision the Tribunal allowed the appeal and held that the department was not
justified in valuing the assets at the enhanced figure for the purpose of
computation of the net wealth of the assessee. The relevant question that was
referred was as follows "Whether on the facts and in the circumstances of
the case the Tribunal was justified in excluding the sum of Rs. 1,45,00,000/-
from the net valuation of the assets as shown in the balance sheet of the
assessee as on 31-3- 57." The High Court was of the view that the Revenue
had taken the stand before the Tribunal that the motive of the assessee in
revaluing the assets at a higher figure was to declare the bonus share which,
however, could not be so declared as the permission of the Central Government
was withheld in that behalf. According to the High Court there was a motive for
revaluation of the assets and therefore the valuation in the balance-sheet
could not furnish the correct basis. It was pointed out that the conduct of the
assessee was "far from what was to be desired" because even in the
successive balance sheets the revaluation figure appeared even after the
assessee had failed to get the permission of the Central Government to issue
107 But according to the High Court an
erroneous figure did not become a correct figure by lapse of time. The following
portion of the judgment of the High Court may be reproduced:- "The
Tribunal was, therefore, in a sense right in excluding a sum of Rs.
1,45,00,000/- from the net value of the assets as shown in the balance sheets
of the assessee as on March 31, 1957. We, however, make it clear that in
answering question No. 1 in the affirmative we did not mean that the net value
of the assets should be taken at the figure as appearing in the balance sheet
reduced by Rs. 1,45,00,000/-. What we mean to say is that in valuing the assets
the addition of Rs.
1,45,00,000/- may not have been correctly
made. This does not, however, mean that the net value of the assets must be the
balance sheet figure reduced by Rs. 1,45,00,000/-.
That net value will have now to be
ascertained under s. 7 (1) of the Wealth Tax Act, now that we have expressed
the opinion that the balance sheet in the instant case has not found the
unequivocal approval both of the assessee and of the Revenue authorities."
It is quite clear that under section 7 (2) of the Act 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. it must
be remembered that under s. 211 of the Indian Companies Act, 1956, every
balance sheet of a company must give a true and fair figure of the state of its
affairs as at the end of the financial year. If the assessee has shown the net
value of the assets at a certain figure in the balance sheet the Wealth Tax
Officer would be entitled to accept it on the footing that the assessee knew
best what the valuation of the assets was. It was, however, open to the
assessee to satisfy the authorities that the said figure had been enhanced or
increased or inflated "for acceptable reasons".
It was equally open to the Wealth Tax Officer
not to accept the figure given by the assessee but to arrive at another figure
if he was satisfied for good reasons that the valuation given in the balance
sheet was wrong. Theer 108 can be no doubt that S. 7 (2) (a) of the Act
contemplates that the book value in the balance sheet should be taken as the
primary basis of valuation and if any adjustment is required it is open to the
Wealth Tax Officer to make such an adjustment in the valuation as given in the
balance sheet as may be necessary in the circumstances of the case. (See
Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax
(Central) Calcutta.(1) In the present case the sole reason which at the stage
of the appeal before the Tribunal came to be disclosed for inflating the
valuation by Rs. 1,45,00,000 in the assessment year 1948-49 was that the assessee
contemplated issuing bonus shares for which the consent of the Central
Government was necessary under S. 3 of the Capital Issues (Control) Act, 1947.
The same was not granted. The assessee, however, did not produce the order of
the Central Government showing the reasons for which permission was declined to
the issuance of bonus shares. It continued to show the enhanced or inflated
valuation in the balance sheet throughout. The circumstances in which bonus
shares are issued are well known. A company may not require any new money but
it may reasonably wish to bring the nominal amount of its issued share capital
more into line with the true excess of assets over liabilities. Unless it takes
this step its annual profits will appear to be disproportionately high in
relation to its nominal capital. By means of issuing bonus shares the reserve
or share premium account or some part of the same are capitalised or converted
into share capital.
The capitalisation of free i.e. voluntary
reserves merely means that undistributed profits have been permanently ploughed
back and converted into share capital which cannot be returned to the members
by way of dividend. (vide Modern Company Law by L.C.B. Gower, p. 110).
It is quite clear that the main idea
underlying the issue of bonus shares is to bring the nominal amount of the
issued share capital of the company into line with the true excess of assets
over liabilities. This will involve a genuine and correct valuation of assets
and not their under-valuation or inflation. It must be remembered that the
power to (1) 59 I.T.R. 767.
109 issue shares for increasing the capital
is of a fiduciary nature and must be exercised bona fide for the general
advantage of the company. No evidence in the shape of an affidavit or any other
material was placed before the wealth tax. authorities by the assessee
demonstrating how it became necessary to inflate the valuation by Rs.
1,45,00,000 for the purpose of issuing bonus shares. It was not even the case
of the assessee that the value was inflated under expert acturial suggestion or
under some misapprehension or mistaken advice. In this situation the only possible
conclusion can be that the assessee could not advance any convincing and
acceptable reasons for the alleged inflation.
The Wealth Tax Officer could reject the
figure given by the assessee in the balance sheet if he was, for sufficient
reasons, satisfied that that figure was wrong. The facts and circumstances
which have been discussed above show that the Wealth Tax Officer was fully
justified in accepting the figure which the assessee himself had given in the
balance sheet as the correct figure and proceed to make the assessment in
accordance with that figure. The High Court should have, therefore, answered
the question in the negative and in favour of the Commissioner of Wealth Tax
The appeal of the Commissioner of Wealth Tax i.e. C.A. 1169/68 is allowed and
the question is answered accordingly.
The appeal of the assessee i.e. C. A. 1834/68
consequently becomes infructuous and must be dismissed in view of the answer
returned in the other appeal. The Commissioner will be entitled to the costs
incurred in this Court (one hearing fee) as also in the High Court.
V.P.S. Appeal dismissed.