Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5
PETITIONER:
BIRLA JUTE MANUFACTURING CO. LTD.
Vs.
RESPONDENT:
COMMISSIONER OF WEALTH TAX, WESTBENGAL, CALCUTTA
DATE OF JUDGMENT10/08/1971
BENCH:
GROVER, A.N.
BENCH:
GROVER, A.N.
HEGDE, K.S.
CITATION:
1971 AIR 2458 1977 SCR (1) 104
ACT:
Wealth Tax-Inflated value of assets shown in balance sheet
of company-When wealth tax officer is justified in accepting
such figure.
HEADNOTE:
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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5
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.
JUDGMENT:
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 of 1962.
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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5
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 bonus shares.
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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5
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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5
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 assess
ment 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.
110