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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