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TMI Blog1997 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... not be rigidly applied?" T C. No. 1094 of 1985: (assessment year 1977-78): "Whether for the purpose of arriving at the value of the unquoted equity shares the Tribunal was right in holding that only the latest published balance-sheet of the respective companies should be taken into account and not the balance-sheets drawn up on a date immediately preceding the valuation dates, but finalised and published after the valuation dates?" T. C. No. 1383 of 1985: (assessment year 1978-79) "Whether for the purpose of arriving at the value of the unquoted equity shares the Appellate Tribunal was right in holding that only the latest published balance-sheet of the respective companies available on the valuation date should be taken into account and not the balance sheets drawn up on a date immediately preceding the valuation dates, but published after the valuation dates?" T. C. No. 1480 of 1985 and T. C. No. 1481 of 1985: (assessment year 197879): " 1. Whether for the purpose of arriving at the value of the unquoted equity shares, the Appellate Tribunal was right in holding that only the latest published balance-sheet of the respective companies should be taken into account and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce-sheet of the company for the year ended on September 30, 1978, and not September 30, 1979, should be taken? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the advance tax paid should not be deducted from the provision for taxation while arriving at the value of shares?" The points that arise in all the above tax cases are similar and for the sake of convenience, we are not referring to the facts in each and every case individually, but refer to the facts in T. C. Nos. 54 to 56 of 1984 for deciding the controversy in all the tax cases. The facts in other cases are similar and the points of the disputes raised are also the same. Further, the order of the Appellate Tribunal which is the subject-matter in T. C. Nos. 54 to 56 of 1984 was consistently followed by the Tribunal in subsequent cases and, therefore, we felt that it will be appropriate to notice the essential facts in T. C. Nos. 54 to 56 of 1984 for the purpose of rendering answer to all the questions of law referred to us in the various tax cases. The matter arises under the Wealth-tax Act and the assessee is the holder of certain unquoted equity shares i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; Shri Ramalinga Mills Pvt. Ltd. ----------------------------------------------------------------------------------------------- (i) Number of shares ... 1410 + 1/5th of 2,950 shares belonging to the father's u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee under the provisions of rule 1D of the Wealth-tax Rules. He also held that the notes forming part of the concerned balance-sheet should be taken into account in determining the value under rule 1D of the Wealth-tax Rules and he directed the Wealth-tax Officer to take note of the liability of the company, namely, Sri Ramalinga Mills Pvt. Ltd., arising out of the award passed in favour of certain cotton suppliers. The Revenue carried the matter in appeals before the Income-tax Appellate Tribunal. The Tribunal held that the provisions of rule 1D of the Wealth-tax Rules are not mandatory in nature and therefore rule 1D of the Wealth-tax Rules cannot rigidly be applied while valuing the shares under rule 1D of the Rules. The Tribunal, in this view of the matter, held that the published balance-sheets which have been signed by the auditors and passed in the annual general meeting before the valuation date should be taken into account for the purpose of determining the value of the shares under rule 1D of the Wealth-tax Rules. The Tribunal followed a decision of the Gujarat High Court in the case of CGT v. Executors and Trustees of the Estate of late Shri Ambalal Sarabhai [1975] 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned senior counsel submitted that though the starting point for valuation of the shares is the balance-sheet, it cannot be stated that the balance-sheet should be published or authenticated before it can be relied upon and the provisions of rule 1Dshould be applied strictly and according to the statutory method of valuation of shares prescribed under rule 1Dof the rules, the valuation has necessarily to be done by the Wealth-tax Officer in accordance with rule 1D of the Rules and though the balance-sheet was not published, yet, if it was drawn up immediately before the valuation date, but finalised and published after the valuation date, the balance-sheet should be regarded as a drawn up balance-sheet for the purposes of rule 1D of the Rules, Learned senior counsel submitted that if the view of the Tribunal that the published balance-sheet should be taken into account is accepted, it will lead to distortion in the valuation of the unquoted equity shares as there may be a time gap of more than one year or two years between the date of the published balance-sheet and the relevant date of valuation of the shares and the value determined in such cases may not truly reflect the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer are bound by it. In view of the authoritative pronouncement of law laid down by the Supreme Court, the view of the Appellate Tribunal that rule 1D is directory in nature is erroneous and is not sustainable in law. The Supreme Court in Bharat Hari Singhania's case [1994] 207 ITR 1 also held that in the case of working out or determination of unquoted equity shares, the balance-sheet of the company would constitute the basis for the working of the rule and the rule cannot be worked out without the balance-sheet. The Supreme Court considered the question where the date of the balance-sheet does not coincide with the valuation date and after noticing the difficulties the following observations made by the Supreme Court are pertinent to the facts of the case: " This situation is met by Explanation I. The Explanation contemplates a situation where the valuation date of the assessee concerned and the date of balance-sheet of the company is not the same. In such a situation, it says, take the balance-sheet drawn up on a date immediately preceding the valuation date of the assessee. In case both these balance-sheets are not available, the rule says, take the balance-sheet drawn up on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this rule, 'balance-sheet' in relation to any company, means the balance-sheet of such company as drawn up on the valuation date and where there is no such balance-sheet, the balance-sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balance-sheet drawn up on a date immediately after the valuation date." Explanation I to rule 1D of the Wealth-tax Rules, no doubt, provides that the balance-sheet of the company drawn up on the valuation date should be taken into account, but it does not positively provide that the drawn back balance-sheet should be the balance-sheet drawn tip for the internal purposes of the company. The difference in valuation of the shares has arisen only because of the adoption of two different balance-sheets in the instant case. The Commissioner (Appeals) as well as the Tribunal noticed the argument advanced to the effect that the Wealth-tax Officer took into account the balance-sheets of Jaya Vilas Private Limited as on December 31, 1976, Decemeber 31, l977. and December 31, 1978 (which were the dates immediately preceding the valuation dates), and the balance-sheets of Shri Ramalinga Private Limited as on Sept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the balance-sheet drawn up on a date immediately preceding the valuation date is taken irrespective of how many years before it may have been prepared. In our opinion, the submission has no substance. Once the basis of working the rule is the balance-sheet, one must necessarily have the balance-sheet. Without a balance-sheet the rule cannot be worked. It is for this reason that Explanation I says what it does. Normally one would expect every company to prepare its balance-sheet on the due date. Sometimes, there may be a default on the part of the company in preparing its balance-sheet on time. But on the basis of such exceptional circumstances, the rule cannot be faulted. Indeed the Explanation also provides that in the absence of both the said situations, the balance-sheet drawn up on a date immediately after the valuation date shall be adopted." A fair reading of Explanation I shows that if a balance-sheet was drawn up on the valuation date, then, that balance-sheet should be taken into account for the purpose of rule 1D of the Wealth-tax Rules. The second contingency provided in the rule is that if the balance-sheet was not drawn up on the valuation date, then the balance-she ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company as at the end of the financial year. The profit and loss account has to be annexed to the balance-sheet and the auditor's report shall be attached to the balance-sheet. Section 215 of the Companies Act provides for authentication of balance-sheet and profit and loss account and section 215 says that every balance-sheet and every profit and loss account shall be signed on behalf of the directors and the balance-sheet and the profit and loss account shall be approved by the board of directors before they are signed on behalf of the board in accordance with the provisions of section 215 of the Companies Act. Under section 217 of the Companies Act, there shall be attached to every balance-sheet, a report of the board of directors with reference to the matters mentioned therein. Under section 227 of the Companies Act, the auditor shall make. a report to the members of the company and the accounts examined by him and shall certify that the company's balance-sheet reflects the state of affairs of the company truly and fairly. The balance-sheet and profit and loss account are required to be placed in the annual general meeting and not in any other general meeting. Under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of liabilities, that situation has not arisen on the facts of the case and hence, it is not necessary to consider the case of reopening of the accounts. Therefore, till the shareholders of the company adopt the balance-sheet and the profit and loss account, it cannot be regarded as the balance-sheet for the purpose of rule 1D of the Wealth-tax Rules. The expression, "drawn up" in rule 1D of the Wealth-tax Rules, in our opinion, should be given the same meaning as found in the Companies Act and since the balance-sheet of Jaya Vilas Private Limited as on December 31, 1976, was signed only on September 9, 1977, it could not be stated that the balance-sheet was drawn up and available as on March 31, 1977. The same principle will apply with reference to other balance-sheets for other assessment years also. Therefore, we are of the view that the Tribunal was correct in holding that only the published balance-sheet should be taken into account for the purpose of evaluating the shares under rule 1D of the Wealth-tax Rules. Though the effect of approval would date back to the end of the relevant accounting years, it cannot be stated that it should have effect for all purposes. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the provisions of rule 1D of the Wealth-tax Rules do not apply to that case. Therefore, we hold that the Tribunal was correct in holding that the latest balance-sheet of the respective companies signed by the auditors and passed in the annual general meeting should be taken into account and not the balance-sheet drawn up on the date immediately preceding the valuation date or published after the valuation date. We have already seen that the Supreme Court in Bharat Hari Singhania's case [1994] 207 ITR 1, has taken a view that the provisions of rule 1D of the Wealth-tax Rules are mandatory in nature. The Tribunal when it decided the appeals did not have the advantage of the decision of the Supreme Court and therefore it proceeded only on the basis that the provisions of rule 1D of the Wealth-tax Rules need not be strictly followed and it is, because of the view taken by the Appellate Tribunal that the provisions of rule 1D of the Wealth-tax Rules are directory in nature, the Tribunal, apparently, held that the entire provision for taxation should be allowed as deduction. It also proceeded on the basis that the notes forming part of the accounts and the report of the directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt [1991] 189 ITR 8 (Mad) was before the Appellate Tribunal, the Tribunal has not noticed the distinction between the two sets of documents which were annexed to the balance-sheet and the documents which were attached to the balance-sheet and the consequential different legal effect that will flow from the two concepts, viz., annexed to the balance-sheet and attached to the balance-sheet. Our above view with reference to the distinction between annexed to the balance-sheet and attached to the balance-sheet will not only apply to the notes indicating the award amount, but also equally apply to the directors' report furnishing information regarding the provision for taxation. We have held that the provisions of rule 1D are only mandatory and should be complied with strictly, unless the directors' report or the notes forming part of the accounts form part of the balance-sheet, the assessee is not entitled to deduct those liabilities. Further, in so far as the provision for taxation is concerned, even if the directors' report is held to be a part of the balance-sheet, the entire provision cannot be allowed as deduction, but only to the extent indicated in Explanation II (ii)(e) to rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Revenue. T C. Nos. 1480 and 1481 of 1985: First question: It is answered in the affirmative and against the Revenue. Second question: It is answered in the negative and in favour of the Revenue. T. C. No. 1486 of 1985: First question: It is answered in the affirmative and against the Revenue. Second question: It is answered in the negative and in favour of the Revenue. T C. No. 1506 of 1985: Question of law It is answered in the affirmative and against the Revenue. T. C. Nos. 326 to 330 of 1986: First question: It is answered in the affirmati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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