1971 (8) TMI 5 - SC - Wealth-tax

Bonus Shares - assessee revaluates its assets for the purpose of issuing bonus shares but Government declined to grant permission for the issue - It was for the assessee to establish that the figure had been inflated for acceptable reasons - It is also open to the Officer not to accept the figure given by the assessee but to arrive at another figure if he is satisfied for good reasons that the valuation was wrong

Summary

Issues:
1. Valuation of assets for wealth-tax assessment based on revaluation by the assessee.
2. Deduction of enhanced book value of fixed assets from the net value of assets.
3. Interpretation of the motive behind revaluation of assets by the assessee.
4. Application of section 7(2) of the Wealth-tax Act in determining asset valuation.
5. Justification for inflating asset valuation for issuing bonus shares.
6. Requirement of bona fide valuation of assets for issuing bonus shares.

Analysis:

1. The case involved a dispute regarding the valuation of assets for wealth-tax assessment by the Commissioner of Wealth-tax, West Bengal, based on the revaluation of assets by the assessee, a public limited company. The assessee had enhanced the book value of its fixed assets by Rs. 1,45,00,000 in a previous assessment year, which the Commissioner sought to include in the computation of net wealth for the assessment year 1957-58.

2. The assessee contended that the sum of Rs. 1,45,00,000 should be deducted from the net valuation of assets as it was credited to the capital reserve account and was not reflective of actual profits. The dispute centered around whether this enhanced book value should be considered in the valuation of assets for wealth-tax purposes.

3. The High Court examined the motive behind the revaluation of assets by the assessee and concluded that there was a motive to declare bonus shares, even though the permission for such issuance was denied by the Central Government. The court emphasized the importance of a genuine and correct valuation of assets, especially in the context of issuing bonus shares, and questioned the reasons behind the inflation of asset valuation by the assessee.

4. The judgment discussed the application of section 7(2) of the Wealth-tax Act, which allows the Wealth-tax Officer to determine the net value of assets based on the balance-sheet of the business. It highlighted the significance of the balance-sheet reflecting a true and fair figure of the state of affairs of the company, with the officer having the discretion to make adjustments if the valuation appears incorrect.

5. The court delved into the rationale behind inflating asset valuation for issuing bonus shares, emphasizing that such actions must be bona fide and in the best interest of the company. It noted that the power to issue shares for capital increase is fiduciary in nature and should be exercised for the general advantage of the company, with a genuine valuation of assets being crucial in such scenarios.

6. Ultimately, the judgment favored the Commissioner of Wealth-tax, ruling that the Wealth-tax Officer was justified in accepting the figure given by the assessee in the balance-sheet as the correct valuation of assets. The court emphasized the lack of convincing reasons provided by the assessee for inflating the asset valuation and upheld the decision to include the enhanced book value in the wealth-tax assessment.

In conclusion, the Supreme Court allowed the appeal of the Commissioner of Wealth-tax, dismissed the appeal of the assessee, and awarded costs to the Commissioner.