Full Judgment Text
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PETITIONER:
COMMISSIONER OF WEALTH TAX ORISSA, BHUBANESHWAR.
Vs.
RESPONDENT:
VYSYARAJU BADREENARAYANA MOORTHY RAJU, BERHAMPUR (GANJAM)-
DATE OF JUDGMENT13/03/1985
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
SEN, A.P. (J)
VENKATARAMIAH, E.S. (J)
CITATION:
1985 AIR 1603 1985 SCR (3) 306
1985 SCC (2) 303 1985 SCALE (1)451
ACT:
Wealth Tax Act 1957, Sections 2(e), 2(m), 2(q) and
7(2).
Net Wealth’-’Valuation date’-What are-Accrued interest-
whether an asset-Distinction between cash and mercantile
system of accounting-Whether relevant for wealth tax.
HEADNOTE:
The respondent- assessee was assessed to wealth tax for
the assessment years 1965-66, 1966-67 and 1967-68, in the
status of a Hindu Undivided Family’. In each of the
assessment years, the Wealth Tax Officer included a sum of
Rs. 1.5 lakhs estimated as the accrued interest on the
assessee’s money lending investments.
The assessee appealed to the Appellate Assistant
Commissioner, con tending that as the books of account were
maintained in accordance with the cash system of accounting,
the accrued interest on the money-lending investment could
not be included in the Wealth-Tax assessments, the Appellate
Assistant Commissioner following the decision of the Orissa
High Court in Commissioner of Wealth-tax Bihar and Orissa v.
Vysyaraju Badreenarayana Moorthy Raju (Orissa) (1971)79 ITR
330 deleted the additions representing accrued interest.
The Wealth Tax Officer, appealed to the Appellate
Tribunal and con tended that the accrued interest was liable
to be included in the Wealth Tax assessment of the assessee,
relying on the judgment of the Andhra Pradesh High Court in
Vedrevu Venkappa Rao v. Commissioner of Wealth Tax A.P.
(1968) 69 ITR 552. The Appellate Tribunal dismissed the
appeal, as it was bound by the- decision of the Orissa High
Court. The Commissioner of Wealth Tax applied under Section
27(1) of the Wealth Tax Act, 1957 for a reference to the
Supreme Court in view of the conflict of opinions between
the Orissa High Court and the Andhra Pradesh High Court and
the question: "Whether the Wealth Tax Officer was justified
in including in the net wealth of the assessee, interest due
on accrual basis (though not realised) on the outstandings
307
of the assessee’s money-lending business, the accounts being
maintained on cash," was referred to this Court.
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HELD: 1. Even though the accounts of the assessee are
maintained on cash basis interest due on accrual basis,
though not realised, on the out standings of the money,
lending business is liable to be included in the net wealth
of the assessee. [310G]
2. The value of a property refers to the value of the
rights in that property. What accrues as a right also falls
to be included within the assets of an assessee under the
Wealth Tax Act 1957. [310F]
2.1. The system of accounting, mercantile or cash or
hybrid, is of no relevance for the purpose of determining
the assets of the assessee. That appears plainly from the
definition of "net wealth" which speaks of "the aggregate
value.. of all the assets" belonging to the assessee on the
valuation date. All the assets of the assessee, bar those
expressly excepted by the statute, are to be taken into
account, and it is immaterial whether the assessee employs
one system of accounting or another. [310 C-D]
3. The assets are not confined to cash. Where the asset
is an asset other than cash, its value is determined
pursuant to sub-section (I) of section 7 as the estimated
price, which, in the opinion of the Wealth Tax Officer, the
asset would fetch if sold in the open market on the
valuation date. It would be the estimated open market value
of the rights in the property which constitute the asset.
[310E-F]
Vedrevu Venkappa Rao v. Commissioner of Wealth-tax A.P.
(1968) 69 ITR 552, Commissioner of Wealth, Tax. A.P_I. v.
Pachigolla Narasimha Rao, (1982) 134 ITR 646 and Dipta Kumar
Basu v. Commissioner oz Wealth Tax, West Bengal, (1976) 450
ITR 450, approved.
Commissioner of Wealth-tax Bihar and Orissa v.
Vysyaraju Badreenarayana MoorthY Raju (Orissa) (1971) 79 ITR
330 and A.T. Mirji v. Commissioner of Wealth-Tax, Karnataka,
(1980) 126 ITR 93. Over-ruled.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Tax Reference Cases Nos.
3
to 5 of 1975
Tax Reference under Section 257 of the Income-tax Act,
1961 made by the Income-tax Appellate Tribunal, Cuttack
Bench, Cuttack
P.A. Francis, Champat Rai and Miss A. Subhashini for
the Appellant.
C.S.S. Rao for the Respondent.
The Judgment of the Court was delivered by
308
PATHAK, J.: These references under s.27(1) of the
Wealth-Tax Act, 1957 have been made by the Income Tax
Appellate tribunal, Cuttack Bench at the instance of the
Commissioner of Wealth Tax, Orissa for the opinion of this
Court on the following question of law:
"Whether on the facts and in the circumstances of the
case, the Wealth Tax Officer was in law justified in
including in the net wealth of the assessee interest
due on accrual basis (though not realised) on the
outstandings of the money lending business, the
accounts of the assessee being maintained on cash basis
?"
The respondent assessee was assessed to wealth tax for
the assessment years 1965-66, 1966-67 and 1967-68 (the
respective valuation dates being March 31, 1965, March 31,
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1966 and March 31, 1967), in the status of a ’Hindu
Undivided Family. In each of the assessments, the Wealth Tax
Officer included a sum of Rs. 1,50,000 estimated as the
accrued interest on the assessee’s money-lending
investments. The assessee appealed to the Appellate
Assistant Commissioner and urged that as it maintained its
books of account in accordance with the cash system of
accounting the accrued interest on the money-lending
investments could not be included in the wealth-tax
assessments. The contention found favour with the Appellate
Assistant Commissioner, and accordingly he deleted the
additions of Rs. 1,50,000 representing accrued interest. In
doing so the Appellate Assistant Commissioner followed
"Commissioner of Wealth-tax Bihar and Orissa v. Vysyaraju
Badreenarayana Moorthy Raju (Orissa)(1),
The Wealth Tax Officer appealed to the Appellate
Tribunal and contended that accrued interest was liable to
be included in the wealth-tax assessments of the assessee.
The Wealth Tax Officer sought support from a judgment of the
Andhra Pradesh High Court in Vedreva Venkappa Rao v.
Commissioner of Wealth-tax(2) A.P. The Appellate Tribunal
observed that the judgment of the Orissa High Court was
binding on it, and accordingly by a consolidated order dated
April 3, 1972, it dismissed the appeals. The Commissioner of
Wealth Tax applied under sub-s. (1) of s. 27 of the Wealth
(1) [1911] 79 I.T.R. 330.
(2) [1968] 69 I.T.R. 552.
309
Tax Act for a reference of the cases to this Court in view
of the conflict of opinion between the Orissa High Court
and the Andhra Pradesh High Court, and so these references
have been made.
The question can be disposed of shortly. Under s. 3 of
the Wealth Tax Act, wealth tax is charged for every
assessment year in respect of the net wealth of the assessee
on the corresponding valuation date. The expression "net
wealth" is defined by cl. (m) of s.2 of the Act as "the
amount by which the aggregate value ....... Of all the
assets, wherever located, belonging to the assessee on the
valuation date.. is in excess of the aggregate value of all
the debts owed by the assessee on the valuation date.. "
According to the scheme of the Wealth Tax Act, the net
wealth of an assessee has to be determined as it obtains on
a particular date. That is the "valuation date". Clause (q)
of s 2 defines the expression "valuation date" as follows:-
;
"(q) Valuation date, in relation to any year for which
an assessment is to be made under this Act, means
the last day of the previous year as defined in
(Section 3) of the Income Tax Act, if an
assessment were to be made under that Act for that
year;
Provided that-
(i) Where in the case of an assessee there are
different previous years under the Income Tax Act
for different sources of income, the valuation
date for the purposes of this Act shall be the
last day of the last of the previous years
aforesaid,
(ii) in the case of a person who is not an assessee
within the meaning of the Income Tax Act, the
valuation date for the purposes of this Act shall
be the 31st day of March immediately preceding the
assessment (z year;
(iii)where an assessment is made in pursuance of
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section 19A, the valuation date shall be the same
valuation date as would have been adopted in
respect of the net wealth of the deceased if he
were alive."
310
The computation of the net wealth of an assessee calls
for a determination of his assets and debts as on the
valuation date. The definition embodied in the substantive
part of cl. (q) of s.2 indicates that broadly Parliament has
fixed upon the last day of the "previous year", as defined
under the Income Tax Act, as the valuation date. The figure
of net wealth of the assessee at the end of the "previous
year" takes into account the financial activities of the
assessee during that "previous year". His financial
activities during that period determine how his net wealth
on a particular valuation date differs from his net wealth
on the immediately preceding valuation date. There is an
obvious advantage in adopting as the valuation date the last
day of a period which is also the relevant period under the
Income Tax Act. The reasons for defining the valuation date
in terms of the last day of the income tax "previous year"
stop there. The system of accounting, mercantile or cash or
hybrid, is of no relevance for the purpose of determining
the assets of the assessee. That appears plainly from the
definition or "net wealth" which speaks of "the aggregate
value.. of all the assets" belonging to the assessee on the
valuation date. All the assets of the assessee, bar those
expressly excepted by the statute, are to be taken into
account, and it is immaterial whether the assessee employs
one system of accounting or another. There is clear
indication that the assets to be considered are not
circumscribed by any consideration of the particular system
of accounting adopted by the assessee. The assets are not
confined to cash. Where the asset is an asset other than
cash, its value is determined pursuant to sub-s. (I) of s.7
as the estimated price, which, in the opinion of the Wealth
Tax Officer, the asset would fetch if sold in the open
market on the valuation date. In other words, it would be
the estimated open market value of the rights in the
property which constitute the asset. When we speak of the
value of a property, on a legal plane we refer to the value
of the rights in that property. It is apparent that what
accrues as a right also falls to be included within the
assets of an assessee under the Wealth Tax Act. That being
so, the conclusion is inescapable that even though the
accounts of the assessee are maintained on cash basis
interest due on accrual basis, though not realised, on the
outstandings of the money lending business are liable to be
included in the net wealth of the assessee.
In this view of the matter, we approve of the opinion
expressed by the Andhra Pradesh High Court in Vedrevu
Venkappa Rao (supra)
311
and in Commissioner of Wealth-Tax, A.P.-I v. Pachigolla
Narasimha Rao(1) and the Calcutta High Court in Dipti Kumar
Basu v. Commissioner of Wealth Tax, West Bengal(2) and hold
that the view taken by the Orissa High Court in Commissioner
of Wealth tax v. Vysyaraju Badreenarayana Moorthy Raju
(Orissa) (supra) and by the Karnataka High Court in A. T.
Mirji v. Commissioner of Wealth-Tax, Karnataka(3) cannot be
accepted.
In the result, the question is answered in the
affirmative, in favour of the Revenue and against the
assessee. There is no order as to costs.
N.V.K. Appeal allowed
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(1) (1982) 134 I.T.R. 640.
(2) (1976) 105 I.T.R. 450.
(3) (1980) 126 I.T.R. 93.
312