TMI Blog1966 (10) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... ate and was as such deductible in computing the net wealth. The view expressed by the High Court on the second question, in so, far as it relates to provision for income-tax, cannot therefore be sustained and that part of the question should be answered in the affirmative. The true function of section 7(2)(a) of the Wealth-tax Act was not appreciated. Section 7 does not deal with the computation of net wealth. It deals with the computation of the aggregate value of the assets. Under section 7 the Wealth-tax Officer is competent, where the assessee is carrying on business of which accounts are maintained regularly, to determine the net value of the assets of the business as a whole. But in doing so he determines the value of the assets of the business as a whole, and not the net wealth of the business. Appeal partly allowed. - - - - - Dated:- 6-10-1966 - Judge(s) : V. RAMASWAMY., J. C. SHAH., V. BHARGAVA JUDGMENT The judgment of the court was delivered by SHAH J.--For the assessment year 1957-58 the appellant-company claimed, in proceedings for assessment of wealth-tax, that the following four amounts be deducted in the computation of its net wealth : (1) Rs. 29,44, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alance-sheet of the assessee-company, could be allowed as a deduction in computing the net wealth of the assessee-company ? " At the hearing before the High Court, the fourth question was not pressed by the appellant-company. The High Court answered the first question in the affirmative, the second question in the affirmative in so far as it related to the estimated liability of business profits tax subject to verification by the Wealth-tax Officer, and in the negative in so far as it related to the estimated liability of income-tax. The third question was answered in the negative. In this appeal the company challenges the correctness of the answers to the second part of the second question and the third question. The second question in so far as it relates to estimated liability for payment of income-tax needs no detailed consideration, for the answer thereto will be governed by the judgment of this court in Kesoram Industries Cotton Mills Ltd. v. Commissioner of Wealth-tax. It was held by this court in that case that liability to pay income-tax was a present liability though the tax became payable after it was quantified in accordance with ascertainable data : there was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly and company at the rate or rates specified in the Schedule. Broadly speaking, net wealth is the difference on the valuation date between the aggregate value computed in accordance with the provisions of the Act of the assets belonging to the assessee and the aggregate value of all the debts owed by the assessee. If there is no debt owed on the valuation date, it can obviously not be deducted in determining the net wealth which is liable to tax under the Wealth-tax Act. Apart from the concession made by counsel for the company, there is little doubt on the plain terms of the awards that the liability to pay gratuity to the employees of the appellant-company on determination of employment is a mere contingent liability which arises only when the employment of the employee is determined by death, incapacity, retirement or resignation. The relevant terms of the awards dated October 28, 1948, November 28, 1956, and October 17, 1954, are as follows : " Gratuity should be paid... on the following scale : 1. On the death of an employee, while in service of the company or on his becoming physically or mentally incapacitated for further service--one month's salary for each year o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave in our judgment no relevance in this case. In Southern Railway of Peru Ltd's case, under the legislation of Peru a company operating a railway was bound to pay its employees compensation on the termination of their services. The right to receive compensation arose on dismissal or on termination of the employment by the employer by proper notice, or on such termination by the death of the employee or on the expiry of the terms of the employment. The compensation was an amount equivalent to one month's salary at the rate in force at the date of determination for every year of service. The company claimed in the computation of taxable income, under the Income Tax Act, 1918, to be entitled to charge against each year's receipts the cost of making provision for the retirement payments which would ultimately be thrown on it, calculating what sum would be required, to be paid to each employee if he retired without forfeiture at the close of the year and setting aside the aggregate of what was required in so far as the year had contributed to the aggregate. It was held that the company was not entitled to make the deductions, but the company was entitled to charge against each year's r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t do so under section 2(m) has, in our judgment, no force. Section 7 deals with the manner of valuation of assets. It provides in so far as it is material : " (1) The value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date. (2) Notwithstanding anything contained in sub-section (1), (a) where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth-tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as the circumstances of the case may require. " Section 7 falls in Chapter II which deals with the charge of wealth-tax and assets subject to such charge : it is intended to provide a machinery for the determination of the value of assets. It was observed in the minority judgment in Kesoram Industries Cotton Mills' case : " By the first sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar that the tax officer must first determine the aggregate value of all the assets belonging to the assessee on the valuation date, and then determine the aggregate value of all the debts owed by the assessee on the valuation date. Excess of the aggregate value of the assets over the debts is the net wealth. The aggregate value of the assets must be computed in accordance with the provisions of section 7. But in the aggregation of the value of all the debts owed by the assessee on the valuation date, section 7 has no operation. In holding in New Rajpur Mills case that a contingent liability can be taken into account while computing the net wealth of the assessee under section 7(2)(a), in our judgment, the true function of section 7(2)(a) of the Wealth-tax Act was not appreciated. Section 7 does not deal with the computation of net wealth. It deals with the computation of the aggregate value of the assets. Under section 7 the Wealth-tax Officer is competent, where the assessee is carrying on business of which accounts are maintained regularly, to determine the net value of the assets of the business as a whole. But in doing so he determines the value of the assets of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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