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PETITIONER: CALCUTTA TRAMWAYS CO.  LTD.

       Vs.

RESPONDENT: COMMISSIONER OF WEALTH TAX

DATE OF JUDGMENT28/08/1972

BENCH: HEGDE, K.S. BENCH: 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  debenture- holders  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]

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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.

JUDGMENT: 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  1957-               58, 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

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             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  non-               resident   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

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             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  subclause (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               therefrom.               (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

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             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.

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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  Wealth- tax  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  rele- vant provisions of the Act, we shall proceed to examine\ the question of law referred to the High Court for its  opinion.

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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  "share- holders 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  com- pany  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

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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  deben- ture 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. 1043