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PETITIONER: CALCUTTA ELECTRIC SUPPLY CORPORATION

       Vs.

RESPONDENT: COMMISSIONER OF WEALTH TAX, WEST BENGAL

DATE OF JUDGMENT12/08/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. GROVER, A.N.

CITATION:  1971 AIR 2447            1972 SCR  (1) 159

ACT: Wealth  Tax  Act, 1957 s. 7-Computation of value  of  assets under-Assets  as shown in balance-sheet can be accepted  but Wealth-tax  Officer not bound to accept valuation  as  shown therein-Electricity  company seeking deduction of  value  of service connections installed at cost of  cansumers-Assessee failing  to  prove  that service  connections  were  not  in ownership  of  company-Shown in balance sheet  as  company’s assets-Wealth  Tax Officer justified in refusing  deduction- Fact  that  service connections are not to  be  included  in company’s  assets under s.7 A of Indian Electricity  Act  is irrelevant, for the purpose of s. 7 of Wealth Tax Act.

HEADNOTE: The assessee carried on The business of supplying electrical energy in the City of Calcutta.  During the year 1959-60 the corresponding  valuation  date  being March  31,  1959,  the assessee  showed in its balance sheet a deduction  from  the value  of  its total assets on the ground that  the  sum  in question represented the contribution made by the  consumers for putting up service connections.  The Wealth Tax  Officer proceeded to assess the net wealth of the assessee under  s. 7 (2) of the Wealth Tax Act, 1957 and in doing so refused to grant   the  deduction  claimed,  though  he  accepted   the valuation of the assets as shown in the balance-sheet.   The Appellate Assistant Commissioner and the Appellate  Tribunal however  held  that  the deduction  must  be  allowed.   The Tribunal was influenced in its decision by the fact that  in computing the value of the undertaking under s. 7 (A) of the Indian Electricity Act the value of service lines and  other capital works or any part thereof which had been constructed at  the cost of the consumers had to be ignored.  The  High Court  in reference decided against assessee.  In appeal  to this Court by the assessee, HELD:     (i) Section 7 (2) of the Wealth Tax Act authorises the Wealth-tax officer to accept the valuation of the assets of  a business as shown in the balance-sheet of  a  company. He is not bound to accept any deduction shown in the balance sheet if he comes to the conclusion that the said  deduction was  impermissible.   Section  7(2) does not  say  that  the Wealth  Tax  Officer should accept the balance  sheet  as  a whole  or reject it as a whole.  He is merely authorised  to accept  the value of the assets of the business as shown  in

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the  balance  sheet.   In the present case  the  wealth  tax officer bad accepted the value of the assets of the business as shown in the balance sheet but bad not accepted the  fact that the service lines were not owned by the assessee.  [164 B-D] (ii) There was no material before the authorities under  the Act to hold that the service connections were not the assets of the company.  The fact that those assets were acquired by the  company  by  utilising the contributions  made  by  the consumers was a wholly irrelevant circumstance.  The balance sheet showed the service connections as the assets 160 of the assessee.  It was not said that they were the  assets of  the  consumers  on the  relevant  valuation  date.   The admission  in the balance sheet (profit and  loss  accounts) was  not rebutted by any other evidence.  Hence  the  Wealth Tax  Officer  was  justified  in  holding  that  they   were assessee’s assets. [164 E-H] (iii)     It  is  true  that in view  of  s.7(A)(2)  of  the Electricity  Act,  in  computing the  market  value  of  the undertaking  sold  under sub-s.(1) of s-5 of that  Act,  the value  of service lines and other capital works or any  part thereof  which  had been constructed at the expense  of  the consumers will not be taken into consideration.  But  s.7(A) only deals with sales under s.5(1) of the Act.  If a sale is effected  under  s.8 the licensee shall have the  option  to dispose  of all land building, works, materials  and  plants belonging to the undertaking in such manner as he, may think fit.   In such sales it is open to him to value the  service connections  put up at the expense of the consumers and  add the same in computing the sale price.  It is clear from ss.5 to  8 of the Electricity Act that the licensee is the  owner of  the  service connections put up at the  expense  of  the consumers.   If  that  is not so, there  is  no  purpose  in mentioning  in s.7A that while determining the market  value of  the  undertaking the value of  the  service  connections shall  not be taken into consideration.  Further  s.8  would not have permitted the licensee to pocket the value of those service connections.  The fact that the value of one or more of  the  assets  of an undertaking will not  be  taken  into consideration in computing the value of an undertaking  when sold  under  compulsion  of law because  of  some  statutory provision does not by itself show that it is not a  valuable asset  within  the meaning of s.7 of the Wealth  Tax.   Act. [166 D-H]

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos. 1656  and 1657 of 1968. Appeals from the judgment and order dated August 22, 1967 of the Calcutta High Court in Income-tax Reference Nos. 250 and 325 of 1963. M.   C.  Chagla and D. N. Mukherjee, for the  appellant  (in both the appeals). B.   Sen, A. N. Kirpal, R. N. Sachthey and B. D. Sharma, for the respondent (in both the appeals). The Judgment of the Court was delivered by Hegde, J. These appeals arise from the decision of the  High Court  of  Calcutta  in a Reference under S.  27(1)  of  the Wealth  Tax Act, 1957 (to be hereinafter referred to as  the Act).   In  that decision, the High Court was  requested  to give  its opinion on two questions of law referred to it  by the  Income-tax  Appellate Tribunal,  ’B’  Bench,  Calcutta.

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Following the decision of this Court 161 in  Commissioner of Wealth-tax v. Ramaraju  Surgical  Cotton Mills  Ltd.,[1] the High Court answered the second  question against  the Revenue.  That decision has become  final.   At present we are only concerned with the first question of law referred  to the high Court for its opinion.  That  question reads:               "Whether on the facts and in the circumstances               of   the  case,  the  sum  of   8,54,948   was               deductible in determining the net value of the               assets   of  the  assessee’s  business   under               Section 7(2)(a) of the Wealth-tax Act ?" The  assessee is a Sterling Company incorporated in U.K.  It carries on business of supplying electric energy in the city of  Calcutta.   During the year 1959-60,  the  corresponding valuation date being March 31, 1959, the assessee showed  in its balance-sheet a deduction of 8,54,948 from the value  of its  total  assets on the ground that the  sum  in  question represents  the  contribution  made  by  the  consumers  for putting up service connections.  The relevant portion of the balance sheet reads thus:             "THE CALCUTTA ELECTRIC SUPPLY                  CORPORATION LIMITED      ACCOUNT OF CAPITAL EXPENDITURE AND OF DEPRECIATION           For the year ended 31st March, 1958           Extended to    Added     Cost of    Total           March31,     during year intems scra-  at 3 1 st           1957                     ped duringMarch                                       year        1958           1                  2         3             4 Mains & Service Connections.   8,725205  893,707      50242     9568670           Total      Added   Deprecia  total Net Expenditure          at 31st    frum tion writ-     at 31st at Cost less        March     the re-    ten off on  March     Depreciation        1957    ventue of    Assets    1958    at 31st March                 the year       scrapped             1958         5          6            7        8            9        2,954497     199 39    11598     142138    6426532                      x          x        x         x Less:     Consumer’s  Contributions  for Mains  and  Service Connections since 10th September, 1948.                                                  717,059 The Wealth-tax Officer proceeded to assess the net wealth of the  assessee  under s.7(2) of the Act.  But he  refused  to grant the deduction claimed though he accepted 1.   53, I.T.R. 478; 162 the  valuation of the assets as shown in the balance  sheet. Thereafter  the assessee went up in appeal to the  Appellate Assistant   Commissioner  of  Wealth-tax.    The   Appellate Assistant  Commissioner allowed the appeal holding  that  as the Wealth Tax Officer has proceeded to assess the  assessee under  S. 7(2), he must accept the balance sheet as a  whole Hence  it  was impermissible for him not to  allow  the  de- duction shown in the balance sheet.  He accordingly  deleted the amount added back by the Wealth Tax Officer.  As against that order, the Department went up in appeal to the  Income- tax Appellate Tribunal.  The Tribunal held that although the entire  undertaking  of the company  including  portions  of Mains  and  Service  Connections put up at  the  expense  of consumers  was the property of the company, it would not  be correct  to  include the value of such portions in  the  net wealth of the company’ computed under S. 7(2).  The Tribunal

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further   held  that  the  marketability  of  the   Electric Undertaking  had  certain special features which had  to  be taken  into consideration in assessing its  Valuation.   One such special feature the Tribunal noted was that the company could not sell the undertaking except in accordance with the provisions  of s.5 of the Indian Electricity Act, 1910,  and the market value of the undertaking in the event of sale had to be determined in accordance with the provisions in s.7(A) of the Act.  While come putting the value of the undertaking under  s.7(A)  of that Act, the value of service  lines  and other  capital  works  or any part thereof  which  has  been constructed  at  the  expense of the  consumers  has  to  be ignored.   In  the  result  the  Tribunal  agreed  with  the conclusions reached by the Appellate Assistant Commissioner. As mentioned earlier at the instance of the Department,  the Tribunal  submitted two questions of law.  We  have  already set  out the question with which we are concerned  in  these appeals. The High Court answered the questions referred to it for its opinion against the assessee. Section 7 of the Act deals with the mode of determination of the value of the assets.  It reads thus: "7. Value of assets how to be determined.-               (1)   Subject  to  any  rules  made  in   this               behalf,  the  value of any asset,  other  than               cash, for the pur-               16 3               poses  of this Act, shall be estimated  to  be               the price which in the opinion of the  Wealth-               tax Officer it would fetch if sold in the open               market on the valuation date.               (2)   Notwithstanding  anything  contained  in               Sub section(1),               (a)   where  the  assessee is  carrying  on  a               business for which accounts are maintained  by               him  regularly,  the Wealth-tax  Officer  may,               instead of determining separately the value of               each asset held by the assessee in such ’busi-               ness, determine the net value of the assets of               the  business as a whole having regard to  the               balance-sheet  of  such  business  as  on  the               valuation  date  and making  such  adjustments               therein as may be prescribed;               (b)   where the assessee carrying on the busi-               ness, is a company not resident in India and a               computation in accordance with clause (a) can-               not  be made by reason of the absence  of  any               separate   balance-sheet  drawn  up  for   the               affairs of such business in India, the Wealth-               tax  Officer  may take the net  value  of  the               assets  of  the business in India to  be  that               proportion  of the net value of the assets  of               the  business as a whole wherever  carried  or               determined as aforesaid as the income  arising               from  the  business in India during  the  year               ending  with the valuation date bears  to  the               aggregate  income from the  business  wherever               arising during that year." As  seen earlier, the Wealth-tax Officer had determined  the value of the assets under s. 7(2).  There is no dispute that the  assessee  is  maintaining  regular  accounts  for   the business  it is carrying on.  Therefore it was open  to  the Wealth-tax  Officer, instead of determining  separately  the value  of each asset held by the assessee as a part  of  its business,  to determine the net value of the assets  of  the

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business  as a whole as on the valuation date having  regard to the balance-sheet of such business.  This section nowhere says that the Wealth-tax Officer while proceeding 164 under S. 7(2) is bound to accept every entry in the balance- sheet.   What the section permits the Wealth-tax Officer  is that  instead of separately valuing each asset forming  part of  the  business,  he may determine the net  value  of  the business  as a whole having regard to the  balance-sheet  of such  business as on the valuation date.  In other words  S. 7(2)  authorises  the  Wealth-tax  Officer  to  accept   the valuation  of  the  assets of a business  as  shown  in  the balance sheet of the company.  He is not bound to accept any deduction  shown  in the balance-sheet if he comes  to  the conclusion  that  the  said  deduction  was   impermissible. Section 7(2) does not say that the Wealth-tax Officer should accep t  the  balance-sheet  as a whole or reject  it  as  a whole.   He is merely authorised to accept the value of  the assets  of the business as shown in the  balance-sheet.   In the  present case, the Wealth-tax Officer has  accepted  the value of the assets of the business as shown in the balance- sheet.   But he has not accepted the fact that  the  service lines are not owned by the assessee. We shall proceed to consider whether the service lines which were constructed at the expense of consumers are the  assets of the company.  In the balance-sheet they are shown as  the assets  of  the company.  There was no material  before  the authorities  under  the Act to hold that they were  not  the assets  of  the company.  The fact that  those  assets  were acquired by the company by utilizing the contributions  made by the consumers is a wholly irrelevant circumstance.   ’The only  thing relevant for the purpose of the Act is that  the assessee  should be the owner of the assets in question  ,on the  relevant  valuation  date.  The Act  does  not  concern itself  with the mode in which those assets  were  acquired. It  is  immaterial for the purpose of the  Act  whether  the assessee  acquired those assets from his own money  or  with the  assistance  of others.  The balance-sheet  shown  those service  connections as the assets of the assessee.  It  was not  said that they were the assets of the consumers on  the relevant  valuation  date.  The admission in  the  balance-’ :sheet  (profit  and loss accounts) is not rebutted  by  any other ,evidence.  Hence the Wealth-tax Officer was justified in  holding that they were assessee’s assets.  The  Tribunal Was  impressed by the fact that if and when the  undertaking is sold the assessee will not get any price for the  service connections in view of s.7 (A) (2) of the Indian Electricity 165 Act 1910.  Section 7(A)provides for the determination of the purchase price on revocation of licence under s. 4. Whenever a licence of a licensee under the Indian Electricity Act  is revoked  under  s. 4 it is open to the State  Government  to acquire the undertaking itself or to direct the licensee  to sell the undertaking lo one or the other of the  authorities or  person designated therein.  When a sale in pursuance  of such  a  direction is effected valuation of  undertaking  is made in accordance with s. 7(A).  Section 7 (A) reads:               "7A.  (1) Where an undertaking of  a  licensee               not being a local authority is sold under sub-               section (1) of section 5 the purchase price of               the  undertaking shall be the market value  of               the  undertaking  at the time of  purchase  or               where  the  undertaking  has  been   delivered               before  the purchase under sub-s. (3) of  that               section  at  the time of the delivery  of  the

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             undertaking and if there is any difference  or               dispute regarding such purchase price the same               shall be. determined by arbitration.               (2)   The  market value of an undertaking  for               the purpose of sub-section(1) shall be  deemed               to  be  the  value of  all  lands,  buildings.               works,  materials  and plant of  the  licensee               suitable to, and used by him, for the  purpose               of   the   undertaking,  other  than   (i)   a               generating  station declared by  the  licensee               not  to form part of the undertaking  for  the               Purpose of purchase and (ii) service-lines  or               other capital works or any part thereof  which               have  been  constructed  at  the  expense   of               consumers, due regard being had to the  nature               and  condition  for  the time  being  of  such               lands,  buildings, works, materials and  plant               and  the  state of repair thereof and  to  the               circumstance that they are in such position as               to  be ready for immediate working and to  the               suitability of the same for the purpose of the               undertaking,  but  without  any  addition   in               respect of compulsory purchase or of  goodwill               or  of any profits which may be or might  have               been  made  from  the undertaking  or  of  any               similar consideration.               (3)   Where an undertaking of a licensee being               a  local authority is sold  under  sub-section               (1)  of  section 5 the purchase price  of  the               undertaking shall be such               166               as  the State Government having regard to  the               market value of the undertaking at the date of               delivery of the undertaking may determine.               (4)   Where  an undertaking of a  licensee  is               purchased under section 6, the purchase  price               shall  be the value thereof as  determined  in               accordance with the provisions of sub-sections               (1) and (2) :               Provided  that  there shall be added  to  such               value  such percentage if any,  not  exceeding               twenty  per  centum of that value  as  may  be               specified   in  the  licence  on  account   of               compulsory purchase. It  is  true that in view of S. 7(A)(2) of  the  Electricity Act,., in computing the market value of the undertaking sold under  sub-s.(1)  of S. 5 of that Act the value  of  service lines  which  had  been constructed at the  expense  of  the consumers will not be taken into consideration.  The  reason for  this provision is obvious.  It will be the duty of  the new licensee to not only maintain and repair those lines but also to replace them when they become unserviceable.  But s. 7 (A) of the Electricity Act only deals with sales under  S. 5(1)  of the Act.  But if a sale is effected under S. 8  the licensee shall have the option to dispose of all land build- ing  works material and plants belonging to the  undertaking in  such  manner as he may think fit.  In such sales  it  is open  to him to value the service connections put up at  the expense  of the consumers and add the same in computing  the sale price.  It is clear from ss. 5 to 8 of the  Electricity Act   that  the  licensee  is  the  owner  of  the   service connections put up at the expense of the consumers.  If that is not so there was no purpose in mentioning in section 7(A) that  while determining the market value of the  undertaking the value of the service connections shall not be taken into

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consideration.   Further S. 8 would not. have permitted  the licensee  to pocket the value of those service  connections. The  fact that the value of one or more of the assets of  an undertaking will not be taken into consideration in  comput- ing  the value of an undertaking when sold under  compulsion of  law  because  of some statutory provision  does  not  by itself  show that it is not a valuable asset.  Section 7  of the Act does not take note of hypothetical possibilities  in the  matter of valuation of the assets.  It merely  concerns itself as to 167 what  is the true market value of the assets in question  on the  valuation date So far as the market value of the  asset with  which  we  are concerned in this case.,  there  is  no difficulty   We  have the assessee’s own  admission  in  its balance sheet. In the result these appeals fail and they are dismissed with costs-hearing fee one set. G.C.                               Appeals dismissed -MI245Sup.CI/72 16 8