TMI Blog1988 (3) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... r case was March 31, 1980. In both these cases, a question arose in connection with the valuation of shares held by the two assessees in a company known as "Maddi Lakshmaiah Private Limited." It is common ground that the company being a private limited company, its shares are not quoted on the stock exchange, and, therefore, their value has to be determined in accordance with rule 1D of the Wealth-tax Rules, 1957. In connection with the assessment year 1976-77, the Wealth-tax Officer found that the assessee was holding 4,000 shares in the company. The market value of each share was reckoned at Rs. 383.08 and applying the provisions of rule ID, the value was determined at Rs. 274.36 per share. For the assessment year 1980-81, the assessee was likewise holding 2,500 shares in the company ; the value in accordance with rule 1D was worked out by the Wealth-tax Officer at Rs. 483.31 per share. The assessees objected to the value of the shares computed by applying the provisions contained in rule 1D. The contention urged in particular was that the Wealth-tax Officer committed an error in disallowing the provision for taxation made by the company. The assessees' claim was that the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputation of the value of each share as held by the Wealth-tax Officer were not available. We called upon learned standing counsel to secure the records from the Wealth-tax Officer so that we can find out the manner in which the share value was computed and whether in computing the value, the Wealth-tax Officer committed any error. The records have since been placed before us. We find the records equally unhelpful as we will presently indicate. The manner in which the market value of unquoted equity shares of companies should be computed is indicated in rule ID. Omitting the particulars not necessary for our present purpose, we may refer to Explanation II of the rule which provides, inter alia, that any amount paid as advance tax under section 18A/210 shall not be treated as an asset. The Explanation also refers to the amounts shown as liabilities in the balancesheet which should not be treated as liabilities for the purpose of the rule. The items of liabilities which should be disregarded are specified in clause (ii) of Explanation II. We are concerned with sub-clause (e) which specifies that any amount representing provision for taxation (other than the amount referred to in cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance-sheet shows any sum in excess of Rs. 20 by way of provision for taxation, then sub-clause (e) of clause (ii) of Explanation II provides that the excess shall be disregarded. In the given illustration, the provision made is Rs. 100. The excess over Rs. 20 has to be excluded from the liabilities side. Now, the entire exercise, as we see, is to ensure that the total amount of tax payable by an assessee on the income, profits and gains for the relevant assessment year is allowed as a deduction. The deduction is allowed partly by excluding the advance tax already paid from the assets side and partly by allowing the balance by way of provision for taxation on the liabilities side. If the provision for taxation made is in excess of what is really required for the purpose of paying tax on the book profits for the relevant assessment year, then, obviously, the excess does not represent a proper liability and, therefore, the rule requires that that liability should be disregarded. This, according to its, is the real and simple effect of the adjustments directed to be made by sub-clause (e), but then the assessees' case is that while excluding advance tax from the assets side, the entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er as it appeals to us. We would, in the circumstances, hold that the real effect of sub-clause (e) of clause (ii) of Explanation II to rule ID is to permit the deduction of provision for taxation only to the extent that is necessary for ensuring the deduction of the total liability relating to the assessment in respect of the income, profits and gains for that year and it does not have the effect of allowing provision for taxation In excess of what is required to be allowed. Now, in the present case, we do not know how the Wealth-tax Officer had worked out the valuations. We have reasons to think that the Wealth-tax Officer had not worked out the valuations correctly. For instance, we have perused the record for the assessment year 1976-77. According to the record, the total assets were taken at Rs. 3,73,60,162 whereas we find that the correct figure is Rs. 3,73,63,162. There is an identical difference in the total extent of liabilities also. And then, the Wealth-tax Officer excluded advance tax of Rs. 12,99,000 from the gross assets. We do not find any advance tax payment on the assets side of the balance-sheet and we do not know how he arrived at this figure. It is possible th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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