Calcutta Tramways Co. Ltd. Vs.
Commissioner of Wealth Tax [1972] INSC 193 (28 August 1972)
HEGDE, K.S.
HEGDE, K.S.
REDDY, P. JAGANMOHAN KHANNA, HANS RAJ
CITATION: 1972 AIR 2600 1973 SCR (1)1033
ACT:
Wealth Tax Act (27 of 1957), s. 6-Special
reserve fund, and Shareholders' account maintained as a result of agreement
with Government proposing to acquire Company-Debenture loans payable outside
India--Special reserve fund, amount in shareholders' account and debenture
loans if deductible in ascertaining net wealth of Company.
HEADNOTE:
The assessee was a non-resident company for
the purpose of Explanation 2 to s. 6 of the Wealth-tax Act, 1957 and was
operating a tramway undertaking in Calcutta. The Government of W. Bengal
proposed to acquire the undertaking and entered into an agreement in 1957 with
the assessee. Under the agreement, the Government had an option to acquire the
undertaking after the 'purchase date' namely, January 1, 1972. In compliance with the provisions of the agreement the assessee maintained a special
reserve and a shareholders' account in its books. The assessee had also issued
debentures which were secured by a floating charge on the general assets of the
company. All the debentureholders were however residents in the United Kingdom,
the specialities were in the United Kingdom, and the debts were payable in that
Country.
For the assessment years 1957-58, 1958-59 and
1959-60 the assessee claimed that, (1) the amounts in special reserve account;
(2) the amounts in shareholders reserve account;
and (3) the debenture loans as debts,
deductible in ascertaining its net wealth for the purpose of the Act. The High
Court, in reference, held in favour of the revenue with respect to all the
three items.
Dismissing the appeal to this Court,
HELD : (1) Till the assessee-company was
acquired by the Government the amounts shown in the special reserve, through
shown in accordance with the agreement, were the assets of the company. Between
the Government and the company there was only an agreement and the Government
could not have acquired the assessee-company before the purchase date, January
1, 1972. [1040D-F] (2) The amount in the shareholders' account did not belong
to the shareholders but was an item of the assets of the assessee-company.
[1041D] A company is a different legal. entity from its.
shareholders, and the shareholders have no
rights in the assets of the company except when dividends are declared or when
the assets of the company are distributed on liquidation. The fact that a
separate shareholders reserve had to be maintained by the assessee-company
because of the agreement with the Government did not change the character of
the asset. [1040H; 1041A-D] Kesoram Industries and Cotton Mills Ltd. v.
Commissioner of Wealthtax (Central), Calcutta, 59 I.T.R. 767, followed.
(3) In view of the nature of a floating
charge, and the circumstances in the present case that the debenture-holders
were all residents of the United Kingdom, the specialities were in the United
Kingdom and the 1034 debts were payable in the United Kingdom, the debenture
loans could not also be taken into consideration in ascertaining the net wealth
of the assessee under s. 6 of the Wealth-tax Act, [1041E; 1042F-G] Halsbury's
Laws of England, 3rd Ed. Vol. 6, p. 472, para 914 and Vol. 15, p. 58, para 115,
referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 28-30 of 1969.
Appeals by certificate under article 133 of
the Constitution of India from the judgment and order dated November 15, 1967
of the Calcutta High Court in W. T. Reference No. 405 of 1962.
C. K. Daphtary, T. A. Ramachandran and D. N.
Gupta, for the appellant.
N. D. Karkhanis, R. N. Sachthey, B. D. Sharma
and S. P. Nayar-, for the respondent.
The Judgment of the Court was delivered by
Hegde, J. These are asessee's appeals by certificate, from the judgment of the
High Court of Calcutta in a Reference under s. 27 (I) of the Wealth-tax Act (to
be hereinafter referred to as the Act). At the instance of the assessee (which
will hereinafter be referred to as the "company") as well as the
Commissioner of Wealth Tax, West Bengal, the Income-tax Appellate Tribunal 'B'
Bench, Calcutta referred the following questions to the High Court for its
opinion.
"(1) Whether on the facts and in the
circumstances of the case, the amounts of pound 1,99,940 and pound 1,92,907,
pound 98,017 standing in the special reserve account in the books of the assessee
company were deductible in determining the net wealth of the company for the
assessment years 195758, 1958-59 and 1959-60 respectively ? (2) Whether on the
facts and in the circumstances of the case, the amounts of pound 1,54,434,
pound 2,08,934 and pound 2,62,811 standing in the shareholders accounts as on
respective valuation dates were deductible in determining the net wealth of the
company for the assessment years 1957-58, 1958-59 and 1959-60 respectively ?
(3) Whether on the facts and in the circumstances of the case the amounts of
pound 66,275, pound 131,180 and pound 274,587 out of the debentures of the
Company were allowable as debts owed by the company in the light of section
2(m) read with section 6 of the Wealth-tax Act ?" 1035 The High Court
answered all the three questions in favour of the Revenue. Hence these appeals.
The assessee is a sterling company. In the
relevant assessment years, it was operating the Calcutta Tramways Co. It is a
nonresident company for the purpose of Explanation 2 to s. 6 of the Act. The
assessment years with which we are concerned in these appeals are 1957-58,
1958-59 and 1959-60 and the relevant valuation dates are 31st December, 1956,
31st December 1957 and 31st December 1958 respectively. The Wealth Tax Officer
valued the assets of the company under s. 7 (2) (a) of the Act.
In 1951 the Government of West Bengal
proposed to acquire the undertaking of the Calcutta Tramways Co. Ltd. In
pursuance of that policy, the Government entered into an agreement with the
company on August 30, 1951.
This agreement was later given statutory
force. The clauses of the agreement which are relevant for our present purpose
are 4, 7 and 8. They read:
"4(1) The company shall apply its
revenues in the manner following, that is to say(a) Firstly, paying all
expenses of managing, maintaining and working the undertaking, including
debentures interest;
(b) Secondly, paying all Indian and United
Kingdom taxes payable by the Company;
(c) Thirdly, setting aside in each accounting
year in a Renewals and Replacements Reserve Account the sum of Eight thousand
pounds sterling or such greater sum as the Directors of the Company for the
time being may in consultation with the Government consider necessary in the
light of experience and in view of the expansion of the undertaking or increase
in prices;
(d) Fourthly, setting aside in each
accounting year in a fund (hereinafter called/"shareholders" Account)
the following sums (i) pound 87,457 together with (ii) four per cent', upon any
additional outside share capital raised by the Company with the consent of the
Government after the date of this Agreement.
1036 (e) Fifthly, accumulating any surplus in
a special reserve account the balance of which (after providing for losses, if
any) will eventually accrue to the benefit of the Government. (Before such
transfer however, of a loss against the credit standing in the Special Reserve
Account, the Government should be consulted, the final decision on such matter
nevertheless being reserved to the company).
(2) If in any accounting year the revenues
arising from the undertaking are insufficient to provide for all the matters
enumerated in the preceding sub-clause of this clause, such revenues shall be
so applied in the priority there set out.
7. (1) Not later than twelve months before
the purchase date the Government may serve upon the Company notice in writing
(hereinafter called "a purchase notice") of its intention to acquire
the undertaking on the purchase date.
(2) In the event of the Government serving a
purchase notice the following provisions shall have effect, that is to say .-(a)
The Government shall subject to the exchange regulations and other relevant
laws prevailing at time in the United Kingdom and India pay to the Company in
sterling in London not less than thirty days before the purchase date (i) the
sum of pound 3,750,000;
(ii) a sum equal to the amount of any
additional outside capital brought into the undertaking with the consent of
Government under Clause 6(1) of the Agreement during the period between the
date of this Agreement and the first day of January One thousand nine hundred
and seventy-one.
(b) Subject to payment being made in terms of
sub clause (a) above, all the right, title and interest of the Company of and
in the undertaking shall on the purchase date become vested in the Government
free from all mortgages, charges and liens created by the issue of Debenture or
Debenture Stocks of the Company. Provided that the Company shall be entitled to
retain all statutory 1037 books of account and other documents normally kept
outside India but shall afford every facility to the Government to have
inspection of same or take copies of or extracts there from.
(c) The Government shall also pay to the
Company in sterling in London, the amount of the balance (if any) of the
Shareholders' Account at the purchase date within one month after a certificate
by the Company's Auditors of the amount thereof has been served on the Government.
(d) No further sum than is provided for in
this clause shall be payable to the Company in respect of the transfer of the
undertaking to the Government.
3. From and after such vesting of the
undertaking in the Government all powers, rights, obligations and liabilities
excepting the liabilities in respect of the share and loans Capital of the
Company shall be exercisable by and be binding on the Government in
substitution for the Company and shall cease to be exercisable by or binding on
the Company.
Provided that no contract entered into by the
Company after the date of this Agreement and extending for more than one year
beyond the purchase date shall be binding on the Government unless it has been
previously approved by the Government.
8. If the Government does not serve a
purchase notice in accordance with the last preceding clause, then all the
terms and conditions of this agreement shall continue in force subject to the
following modifications.(a) (i) The Government shall pay to the Company in
sterling London such sums as may from time to time be necessary to redeem the
second Debenture Stocks of the Company on their due dates;
(ii) After the second Debenture Stocks have
been redeemed as aforesaid the Company shall from time to time until the
undertaking is vested in the Government pay to the Government sums equal to,
the interest which would have been payable on such Debenture Stocks had the
same not been redeemed.
1038 (b) (i) The Government shall on giving
two year notice to the company be entitled to acquire the undertaking on the
1st day of January of any subsequent year and such date shall be the purchase
date.
(ii) In the event of the undertaking being
acquired in pursuance of a notice under this Clause there shall be deducted
from the sum payable under Clause 7 (2) (a) (i) hereof any sums which may have
been paid by the Government in pursuance of paragraph (a) (i) of this
Clause." In compliance with the provisions in the agreement, the company
maintained a special reserve. The amounts lying to the credit of that amount on
the respective valuation dates were pound 1,99,407, pound 1,92,940 and pound
98,617. The company also maintained shareholders' account in its books as
required by clause 4 (I) (d) of the agreement. Amounts credited to the said account
on the relevant valuation dates stood at pound 1,54,434, pound 2,08,934 and
pound 2,62,811 respectively.
The company had issued debentures which were
secured by a floating change on the general assets of the company. The assets
of the company located outside India were valued a, pound 4,27,786 pound
3,51,888 and pound 1,95,916 on the respective valuation dates. The company's
assets in India on those dates were valued at pound 2,930,032, pound 3,010,560
and pound 3,119,149. All the debenture-holders were residents in United
Kingdom. The specialities were in United Kingdom and the debts were payable in
that country.
The company claimed the amounts in special
reserve account, those in the shareholders reserve account as well as debenture
loans as debts deductible in ascertaining the net wealth of the company. The
Wealth-tax Officer rejected those contentions. In appeal the Appellate
Assistant Commissioner agreed with the Wealth-tax Officer in his finding
relating to the amounts in the special reserve account as well as in the
shareholders account. But as regards the debenture loans, he distributed the
same on the basis of the assets held by the company in the United Kingdom and
those held by it in this country. Consequently gave deduction in respect of that
portion of the debt which according to him should be borne by the assets in
India.
Both the Commissioner as well as the company
appealed to the Tribunal. The Tribunal disagreed with the conclusions reached
by the Appellate Assistant Commissioner that any portion of the debenture loans
could be taken into consideration in ascertaining 1039 the net wealth of the
assessee. It agreed with the Wealthtax Officer and the Appellate Assistant
Commissioner that the shareholders reserve was the asset of the company. It
opined that the amounts in the special reserve account were not includible in
the company's net wealth. But as mentioned earlier, the High Court fully
accepted the conclusions reached by the Wealth-tax Officer.
,Before considering the points arising for
decision, it is necessary to refer to the relevant provisions of the, Act.
"Net Wealth" is defined in s. 2 (m)
of the Act thus :
" net wealth" means the amount by
which the aggregate value computed in accordance with the provisions of this
Act of all the assets, wherever located, belonging to the assessee on the
valuation date, including assets required to be included in his net wealth as
on that date under this Act, is in excess of her aggregate value of all the
debts owed by the assessee on the valuation date other than,(i) debts which
under Section 6 are not to be taken into account.
Section 3 is the charging section. It says
"Subject to the other provisions contained in this Act, there shall be
charged for every assessment year commencing on and from the first day of April
1957, a tax (hereinafter referred to as wealth-tax) in respect of the net
wealth on the corresponding valuation date of every individual, Hindu undivided
family and company at the rate or rates specified in the Schedule." Section
4 prescribes what all assets should be taken into consideration in computing
the net wealth. Section 5 provides for certain exemptions. Those exemptions are
not relevant for our present purpose. Then we come to s. 6 which is important
for our present purpose. The portion of that section which is material for our
present purpose reads :
"In computing the net wealth of an
individual who is not a citizen of India or of an individual or a Hindu
undivided family not resident in India or resident but not ordinarily resident
in India, or of a company not resident in India during the year ending on the
valuation date(i) the value of the assets and debts located outside India; and
1040 shall not be taken into account.
Explanation I., Explanation 2.-A company
shall be deemed to be resident in India during the year ending on the valuation
date, if-(a) it is a company formed and registered under the Companies Act,
1956, or is an existing company within the meaning of that Act; or (b) during
that year the control and management of its affairs is situated wholly.
in India." Now that we have before us
the material facts and the relevant provisions of the Act, we shall proceed to
examine\ the question of law referred to the High Court for its opinion.
Coming to question No. 1, the contention of
the company was that under law, it was compelled to build up a special reserve.
It could not deal with the same except in accordance with the provisions of the
agreement. Hence the same cannot be considered as the asset of the company.
This is a wholly untenable contention. No part of the assets of the company had
been acquired by the Government. Between the Government and the company, there
was only an agreement.
The Government could not have acquired the
company before the "purchase date" viz. January 1, 1972. Even after
that date, only an option is given to the Government to acquire the company.
The Government could not be compelled to acquire the company. The agreement had
fixed the consideration to be paid for the acquisition of the company.
Till the company was acquired, the amounts
shown in the special reserve were the assets of the company. Once we come to
the conclusion that ,they were not the assets of the Government, which
conclusion to our mind is obvious, then it follows that they are the assets of
the company. It is not the case of he company that these assets belonged to
some third party. Every item of asset must belong to someone.
The question is to whom did it belong, ? The
obvious answer is that it belonged to the company. It is not the case of the
company that the asset in question came within any of the exemptions mentioned
in the Act.
Now coming to the second question formulated
for the opinion of the High Court which relates to the amounts in "shareholders
Account", the contention of the company was that the amount belonged to
the shareholders and therefore it was not an item of the assets of the company.
This again is an unacceptable contention. A company is a different legal entity
from its shareholders. The shareholders have no rights in the 1041 assets of
the company except when dividends are, declared or when the assets of the
company are distributed on liquidation. Until a company in its general meeting
accepts the recommendation of the Director and declares dividends, no part of
the profits of the company becomes debt due to the shareholders. In Kesoram
Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax (Central),
Calcutta(1) this Court ruled that until the company in its general body meeting
accepted the recommendation of its Directors and declared the dividends, the
report of the Directors in that regard was only a recommendation. and the same
be withdrawn or modified. In that case the company in its general body meeting
had not declared dividends before the relevant valuation date. Hence this Court
held that on the valuation date nothing had happened beyond mere recommendation
by the Directors as to the amount that might be distributed as dividends.
Consequently there was no debt owed by the company to the shareholders on that
date. Hence the proposed dividend was not deductible in computing the net
wealth of the appellant company. The fact that a separate shareholders reserve had
to be maintained by the company because of its agreement with the Government
did not change the character of the asset.
This takes us to the last question. As
already mentioned the debenture loans were raised in United Kingdom. All the
debentures holders were residents in United Kingdom. The specialities were in
the United Kingdom. The debts were payable in the United Kingdom. Those
debenture loans had only a floating charge on the assets of the company. No
particular portion of the assets were specially charged.
The meaning of a floating charge is explained
in Halsbury's Laws of England. 3rd edn. Vol. 6 p. 472 paragraph 914 thus :
"The terms "floating security"
and "floating charge" mean a security or charge which is not to be
put into immediate operation, but is to float so that the company is to be
allowed to carry on its business. It contemplates, for instance, that book
debts may be extinguished by payment, and other book debts may come in and take
the place of those that have disappeared. While a specific chance is one that,
without more fastens on ascertained and definite property or property capable
of being ascertained and defined, a floating charge moves with the property
which it is intended to affect, until some, event occurs or some act is done
which causes it to settle and fasten on the subject of the charge within its
reach and grasp. It is of the essence of a floating charge that it remains
dormant (1) 59 I.T.R. 767.
17---L172SupCI/73 1042 until the undertaking
charged ceases to be a going concern, or until the person in whose favour the
charge in created intervenes. His right to intervene may be suspended by
agreement, but if there is no such agreement he may exercise his right whenever
he pleases after default." Quite clearly the debts in question were
located in United Kingdom. Dealing with the business debts this is what is
stated in Halsbury's Laws of England, 3rd edn. Vol. 15, p. 58 paragraph II 5
"Simple contract debts, including those owing under bills of exchange and
promissory notes are situate where the debtor resides. A debtor company may for
this purpose be resident in any country where it has a branch office.
A speciality debt is in general an asset
situate where the instrument is physically situate. In particular, a judgment
debt is situate where the judgment is recorded. A debt secured by mortgage of
land is in character primarily a debt, with an accessory right to resort to the
land for payment, not an estate in the land measured by 'the amount of the
debt; its locality as an asset of the mortgage is therefore to be determined
prima facie under the rules relating to debts.
A share in a partnership business and the
goodwill of a business are each situate where the business is carried on."
From what has been said above, it is clear that the debenture loans in question
cannot be taken into consideration in ascertaining the net wealth of the
company in view of S. 6 of the Act.
In the result these appeals fail and they are
dismissed with costs--advocates' fee one set.
V.P. S. Appeal dismissed.
Back
