1968 (6) TMI 4 - HC - Wealth-tax

For determining the break-up value one has to ascertain the value of a company s physical assets and deduct therefrom the company s current liabilities and prior charge capital - held that Tribunal was not justified in adopting the net wealth of the company as determined in its wealth-tax assessment as the net assets of the company

Issues Involved:

1. Constitutionality of Section 2(m)(iii) of the Wealth-tax Act, 1957.
2. Deductibility of income-tax arrears under certificate proceedings from net wealth.
3. Method of determining the break-up value of shares.
4. Specific deductions in determining the net assets of Jhagrakhand Collieries Private Ltd.

Detailed Analysis:

1. Constitutionality of Section 2(m)(iii) of the Wealth-tax Act, 1957:

The first issue concerns whether Section 2(m)(iii) of the Wealth-tax Act, 1957, introduced by the Finance Act of 1959, is ultra vires the Constitution of India. The court noted that both parties agreed that the Supreme Court has repeatedly held that courts exercising advisory jurisdiction under various tax acts cannot examine the constitutionality of legislation. Consequently, the court answered this question in the negative, indicating that it could not rule on the constitutionality of the provision. However, it recorded that the assessee reserved the right to challenge this point before an appropriate court.

2. Deductibility of Income-tax Arrears Under Certificate Proceedings:

The second issue pertains to whether arrears of income-tax for which certificate proceedings had been initiated under the Public Demands Recovery Act were deductible in computing the net wealth of the assessee. The Tribunal had held that such arrears, being sought to be realized through certificate proceedings, transformed into a "certificate debt" and were no longer considered "tax payable" under Section 2(m)(iii) of the Wealth-tax Act. However, the court referred to the precedent set in Commissioner of Income-tax v. Jhagrakhand Collieries (Private) Ltd., which held that income-tax dues, even if under certificate proceedings, remained tax demands and were not deductible if outstanding for more than twelve months. Thus, the court answered this question in the negative, aligning with the precedent.

3. Method of Determining the Break-up Value of Shares:

The third issue addresses whether the Tribunal was justified in adopting the net wealth of the company as determined in its wealth-tax assessments as the net assets for determining the break-up value of shares. The court clarified that the break-up value should reflect the difference between the company's assets and liabilities, not merely the net wealth computed under the Wealth-tax Act, which includes various exclusions and exemptions. The court emphasized that the Wealth-tax Act's definition of "assets" and its exclusions are artificial and specific to the Act, making it an unreliable basis for determining break-up value. The court thus answered this question in the negative, indicating that the Tribunal's method was incorrect.

4. Specific Deductions in Determining Net Assets:

The fourth issue relates to specific deductions in determining the net assets of Jhagrakhand Collieries Private Ltd. The court examined whether deductions for goodwill, leasehold property, bad and doubtful debts, certificate amounts under the Public Demands Recovery Act, provision for taxation, and proposed dividends should be made. The court noted that these items were considered by the Appellate Assistant Commissioner but were not specifically addressed by the Tribunal, which relied on the wealth-tax assessments. The court concluded that deductions should be allowed for goodwill, leasehold property, bad and doubtful debts, certificate amounts, and provision for taxation, but not for proposed dividends. Thus, the court answered this question affirmatively for items (i) to (v) but negatively for item (vi).

Conclusion:

The court provided detailed answers to each issue, emphasizing the legal principles and precedents governing the determination of net wealth and the break-up value of shares. The judgment underscores the importance of adhering to statutory definitions and judicial precedents in tax assessments and valuations.

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