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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

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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

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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

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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

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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