JUDGMENT
DR. B.P. Saraf, J.
1. By this reference under section 27(1) of the Wealth-tax Act, 1957, the Income-tax Appellate Tribunal; Bombay Bench “C”, Bombay, has referred the following question of law to us for opinion :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that in computing the value of unquoted equity shares of Messrs. Hico Products P. Ltd., under rule 1D of the Wealth-tax Rules, 1957, the difference in depreciation of Rs. 44,93,329 should be deducted from the value of assets shown in the balance-sheet ?”
2. The assessee is an individual. The assessment year is 1979-80. The relevant valuation date was March 31, 1979. On the relevant valuation date, the assessee held certain shares in Messrs. Hico Products Pvt. Ltd. The assessee as well as the Wealth-tax Officer determined the value in A accordance with the provisions of rule 1D of the Wealth-tax Rules, 1957. The valuation made by the assessee was as follows :
Rs.
"Total assets as per balance-sheet as at 31-12-1978 9,95,08,401
Less : Advance payment of tax 2,09,92,826
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7,85,15,575
Less : Liabilities Rs.
Secured loans 1,98,44,200
Unsecured loans 14,64,302
Provision for taxation 2,07,46,040
Other current liabilities 1,47,07,158 5,67,61,700
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2,17,53,875
Add : Goodwill 4,69,000
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2,22,22,875
Less : Difference in depreciation 44,93,329
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1,77,29,546
Less : 15 per cent. as per Wealth-tax Rules,
representing 1,98,688 shares as on March
31, 1979 26,59,432
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1,50,70,114
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Therefore, value of each share as on
March 31, 1979, is Rs. 75.85 75.85"
3. The amount of Rs. 44,93,329 claimed is deduction from the value of assets appearing in the accounts represented the difference in the depreciation mentioned in the accounts and that allowable under the Income-tax Act. The Wealth-tax Officer did not accept this valuation. According to him, the difference in the depreciation was not liable to be deducted. The assessee filed an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner followed his earlier order in a similar case and accepted the plea of the assessee that the difference in the depreciation was liable to be deducted in computing the value under rule 1D of the Wealth-tax Rules, 1957. The Revenue appealed to the Tribunal. The submission on behalf of the Revenue before the Tribunal was that rule 1D of the Wealth-tax Rules, 1957, did not permit deduction of the difference in depreciation of Rs. 44,93,329. According to the Revenue, the balance-sheet figures alone had to be taken into consideration and no deduction therefrom on account of the supposed difference in depreciation was permissible. This contention of the Revenue did not find favour with the Tribunal. The Tribunal observed that there was a note in the annexure which formed part of the profit and loss account for the year ended December 31, 1978, as under :
“2. The method of providing depreciation on plant and machinery and plant for scientific research was changed from the year 1969 from the income-tax basis to the straight line basis, contemplated under section 205(2) of the Companies Act, 1956. The claim under the Income-tax Act for the current year is Rs. 34,06,356 as against the provision of Rs. 30,81,562 in accounts. The cumulative difference between the two methods being excess on income-tax basis is Rs. 44,93,329 up to December 31, 1978. Depreciation on other assets continues to be taken on income-tax basis.”
4. The Tribunal also noted that in the statement which was described as an annexure forming part of the balance-sheet as at December 31, 1978, there was a note being Note No. 9 in which it was mentioned that :
“Note No. 2 appearing in the annexure forming part of profit and loss account for the year ended December 31, 1978. forms an integral part of the balance-sheet as at December 31, 1978.”
5. Consequently, according to the Tribunal, Note No. 2 quoted above was part of the balance-sheet itself. The Tribunal referred to section 211(6) of the Companies Act which states that any reference to a balance-sheet or profit and loss account shall include any notes thereon and documents annexed thereto giving information required by that Act and allowed by the said Act to be given in the form of such note or documents. According to the Tribunal, the difference in depreciation refereed to above was part of the balance-sheet and as such an admissible deduction from the value of the assets in terms of rule 1D of the Wealth-tax Rules. The Tribunal, accordingly, held that the difference of depreciation of Rs. 44.93,329 should be deducted from the value of assets in computing the value of the shares under rule 1D of the Wealth-tax Rules, 1957. Hence, this reference at the instance of the assessee.
6. Mr. G. S. Jetley, learned counsel for the Revenue, submits that under rule 1D of the Wealth-tax Rules, the value of the assets as shown in the balance-sheet of the company has to be taken. It is not open to make any deduction from such value. The submission of learned counsel for the assessee, Mr. Arun Sathe, on the other hand, is that the value shown in the balance-sheet would mean not only the value shown but also the value that could have been shown if the assessee had claimed depreciation on a different basis than the one adopted by it. In that view of the matter, according to Mr. Sathe, the Tribunal was right in deducting the difference in the amount of depreciation that could have been claimed and the one actually claimed from the value of the assets in computing the value for the purpose of rule 1D. We have carefully considered the submission of Mr. Sathe appearing on behalf of the assessee. We, however, find it difficult to accept the same, as in our opinion, this contention goes counter to the clear terms of rule 1D and the mode of valuation contained therein.
7. Rule 1D of the Wealth-tax Rules, 1957, prescribes the manner of valuation of unquoted equity shares of companies other than an investment company or a managing agency company. This rule, as it stood at the material time, so far as relevant, read :
“1D. The market value of an unquoted equity share of any company, other than an investment company or a managing agency company, shall be determined as follows :
The value of all the liabilities as shown in the balance-sheet of such company shall be deducted from the value of all its assets shown in the balance-sheet. The net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 85 per cent. of the break-up value so determined :
Explanation I. – For the purposes of 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 II. – For the purposes of this rule, –
(i) the following amounts shown as assets in the balance-sheet shall not be treated as assets, namely :
(a) any amount paid as advance tax under section 18A of the Indian Income-tax Act, 1922 (11 of 1922), or under section 210 of the Income-tax Act, 1961 (43 of 1961);
(b) any amount shown in the balance-sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset;
(ii) the following amounts shown as liabilities in the balance-sheet shall not be treated as liabilities, namely :
(a) the paid-up capital in respect of equity shares;
(b) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the valuation date at a general body meeting of the company;
(c) reserves, by whatever name called other than those set apart towards depreciation;
(d) credit balance of the profit and loss account;
(e) any amount representing provision for taxation (other than the amount referred to in clause (i)(a)) to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
(f) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.”
It is clear from the above rule that the basis of valuation of the market value of a share is “the value” of all the assets of the company “shown in the balance-sheet”. It is from such value, the “value of all the liabilities shown in the balance-sheet” has to be deducted.
The Wealth-tax Officer has taken the value of all the assets of the company as “shown in the balance-sheet”. The assessee wants this value to be reduced by a sum of Rs. 44,93,329 which, according to the assessee, it could have claimed as extra deduction on account of depreciation from 1969 till the year of assessment. In other words, the assessee wants the Wealth-tax Officer to take the value of the assets of the company not at the figure shown in the balance-sheet but a figure different from that – a figure which would have appeared in the balance-sheet had the depreciation been claimed by it at a figure which it could have claimed. This claim of the assessee, in our opinion, is not tenable on the face of the clear language of rule 1D which requires the Wealth-tax Officer to take the value of all the assets “shown in the balance-sheet”.
8. We are supported in our above conclusion by the recent decision of the Supreme Court in Bharat Hari Singhania v. CWT [1994) 207 ITR 1. In that case, the Supreme Court analysed rule 1D to find out what it says and observed (at page 11) :
“. . . . The formula prescribed in the main limb of the rule is this : take the balance-sheet of the company; deduct the value of all the liabilities as shown in the balance-sheet from the value of all the assets shown therein divide the net amount so arrived at by the total amount of its paid-up equity share capital as shown in the balance-sheet; multiply the resultant amount thus obtained by the paid-up value of each equity share; the value so arrived at is the break-up value of each unquoted equity share; 85 per cent. of such break-up value shall be treated as the market value of the share.
The balance-sheet of the company thus constitutes the basis for working the rule. The rule cannot be worked without the balance-sheet….”
9. Thus, for determining the market value of unquoted equity shares, one has to take the value of all the assets shown in the balance-sheet and deduct therefrom all the liabilities shown in the balance-sheet. The basis of the rule is the balance-sheet of the company and the value of assets and liabilities shown therein, subject only to modifications provided in Explanation II. There is no dispute in this case that the Wealth-tax Officer has taken the value of assets shown in the balance-sheet and deducted therefrom the liabilities shown therein. The extra depreciation referred to in the note in the profit and loss account is not shown as a liability in the balance-sheet. It cannot, therefore, be deducted from the value of the assets shown in the balance-sheet.
10. We have also considered the submission of counsel for the assessee that the note in the annexure to the profit and loss account should be treated as a part of the profit and loss account in the balance-sheet. We, however, fail to understand how this submission can help the assessee in this case, The note merely points out the method followed by the assessee-company for providing depreciation and indicates the additional amount that could have been claimed as depreciation in the year under consideration if a different method of depreciation had been followed and the amount that could have been so claimed in the past since the year 1969. This is merely information. It cannot affect either the provision for depreciation made by the assessee ever since the year 1969 and in the year under consideration or the written down value of such assets shown in the balance-sheet of the company. Allowing deduction from the value of the assets for such extra depreciation which could have been provided for but in fact not provided for, would amount to substituting the value of assets shown in the balance-sheet by a different figure which according to the assessee represents its correct written down value, is. not permissible under rule 1D. The true effect of allowance of such deduction would be to take the assets not at the value shown in the balance-sheet but at a value that could or would have been shown in the balance-sheet if the assessee had made provision for depreciation since 1969 for a higher amount. This cannot be done because rule 1D provides in most clear and unambiguous terms that the value of the assets shown in the balance sheet has only to be taken into consideration for the purpose of valuation of shares. The expression “shown” means “actually shown”. It cannot be construed as “could have been shown”.
11. For the reasons set out above, we are of the clear opinion that the Tribunal was not right in allowing deduction of the supposed difference between the depreciation that could have been claimed and the depreciation actually claimed from the value of the assets shown in the balance-sheet of the assessee-company.
12. In the result, the question referred to us is answered in the negative and in favour of the Revenue. In the facts and circumstances of the case, there shall be no order as to costs.