1972 (2) TMI 9 - HC - Wealth-tax

Whether on the facts and in the circumstances of the case the shares held by the assessee in the Madras Motor and General Insurance Co. Ltd. has been valued in accordance with the Wealth-tax Act Whether the amounts shown in balance sheet under the head balance of funds and accounts and reserves and surplus are to be considered for finding out intrinsic value of shares of an insurance company - result will be that the Tribunal has to work out the intrinsic value of the shares after excluding the amounts standing to the credit of balance of funds and accounts in each of the years

Issues Involved:
1. Valuation of shares under the Wealth-tax Act.
2. Treatment of "balance of funds and accounts" as surplus profits.
3. Applicability of statutory reserves for unexpired risks.

Detailed Analysis:

1. Valuation of Shares under the Wealth-tax Act:
The primary issue was whether the shares held by the assessee in Madras Motor and General Insurance Co. Ltd. were valued correctly under the Wealth-tax Act. The assessee valued the shares at their face value of Rs. 100 each, while the Wealth-tax Officer computed their value based on the company's balance sheet, arriving at Rs. 202.33 per share for the assessment year 1960-61 and Rs. 231.72 per share for 1961-62. The Wealth-tax Officer included amounts shown as "balance of funds and accounts" as revenue reserve, enhancing the intrinsic worth of the shares.

2. Treatment of "Balance of Funds and Accounts" as Surplus Profits:
The assessee contended that the "balance of funds and accounts" should not be treated as surplus profits. It was argued that these amounts were set aside as reserves for unexpired risks as per statutory requirements under the Insurance Act, and not as an appropriation of profit. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the Wealth-tax Officer's method of valuation, treating these reserves as revenue reserves, which the assessee contested.

3. Applicability of Statutory Reserves for Unexpired Risks:
The court had to determine whether the statutory reserves for unexpired risks could be treated as surplus profits. The assessee argued that these reserves represented accrued liabilities, not contingent liabilities, and should be excluded from the computation of the intrinsic value of the shares. The court examined several precedents, including Sun Insurance Office v. Clark, Commissioner of Income-tax v. Calcutta Hospital and Nursing Home Benefits Association, Metal Box Company of India Ltd. v. Their Workmen, and Standard Mills Co. Ltd. v. Commissioner of Wealth-tax, to understand the nature of such reserves.

Court's Judgment:

The court held that the Code of Conduct for general insurance business framed by the General Insurance Council is statutory and binding. The court ruled that the "balance of funds and accounts" should not be treated as surplus profits or revenue reserve for the purpose of determining the intrinsic value of the shares. The court distinguished between contingent liabilities and accrued liabilities, stating that the reserve for unexpired risks is a provision for a liability certain, although its extent would be determined in the future. The court emphasized that the liability towards unexpired risks is not contingent but a commercial certainty, and thus should be deducted when computing the net profit.

The court concluded that the Wealth-tax Officer was not justified in treating the "balance of funds and accounts" as surplus profits. The intrinsic value of the shares should be recalculated after excluding these amounts. The court answered the question in the negative, in favor of the assessee, and directed the Tribunal to work out the intrinsic value of the shares accordingly.

Conclusion:
The question was answered in the negative, favoring the assessee. The Tribunal was instructed to exclude the amounts standing to the credit of "balance of funds and accounts" when determining the intrinsic value of the shares. The assessee was awarded costs, with counsel's fee set at Rs. 250.

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