Commissioner Of Gift Tax v. Atrilal P. Mewar — 1968 DIGILAW 37 (CAL)

JUDGMENT K.L.ROY J. 1. THIS is a reference under S. 26(1) of the GT Act, 1958, hereinafter referred to as the "Act". On 5th March, 1960, the assessee made a gift of 312 shares in East Ganhodi Colliery (P) Ltd. of the face value of Rs. 100 each to his son who had attained majority. In his return the assessee valued these shares at their face value. The GTO found that the shares of the company were not quoted in the stock exchange and proceeded to value these shares on the break-up value method on the basis of the latest available balance sheet of the company as on 30th June, 1960. He found that the total value of the assets, as disclosed in the balance sheet, was Rs. 29,05,365 and, deducting therefrom the liabilities and provisions in the balance sheet amounting to Rs. 6,91,370, he arrived at the net wealth of the company at Rs. 22,13,995. Dividing this amount by 5,000, being the total number of subscribed shares, he arrived at a valuation of Rs. 443 per share and the value of the shares gifted by the assessee at Rs. 1,38,216. 2. The assessee appealed against the order of assessment and contended before the AAC that the value of each of these shares would be Rs. 337 and not Rs. 443 as computed by the GTO as the GTO had failed to deduct the income-tax liabilities of the company as on 30th June, 1959, amounting to Rs. 5,28,005 from the value of the assets. The AAC rejected this contention on the ground that the amount claimed was neither paid nor charged as a liability by creating a taxation reserve in the balance sheet. He confirmed the assessment. On further appeal by the assessee against the order of the AAC, the Tribunal accepted his contention. The Tribunal observed as follows : "The appellant contends that Rs. 5,28,005, being the amount of the tax liability of the said company, should also be allowed as a deduction in computing the break-up value of its shares. The Departmental Representative has not disputed the quantum of the tax liability but contends that as it was not provided for in the balance sheet as liability, it cannot be allowed. We are unable to accept the contention of the Departmental Representative. The Departmental Representative has not disputed the quantum of the tax liability but contends that as it was not provided for in the balance sheet as liability, it cannot be allowed. We are unable to accept the contention of the Departmental Representative. Liability to income-tax is very much a real liability and whether it is provided for in the accounts or not, any prospective buyer in the open market must take it into consideration in appraising the value of the shares. The observations of Sinha J. in the case of Kastur Chand Jain vs. GTO (1961) 42 ITR 288 (Cal) : TC36R.400, lend support to the view we have taken. In our opinion, therefore, the liability to taxation must be allowed as deduction in the computation of the break-up value of the shares of the said company. There is no dispute that if the taxation liability is taken into consideration, the break-up value would come to Rs. 337 per share." The Tribunal, accordingly, directed the GTO to value the shares at Rs. 337 each. The date of this order is 18th Oct., 1963. 3. The CGT was not satisfied with the decision of the Tribunal and made an application under s. 26 (1) of the Act for reference of certain question of law to the High Court. Along with the applications for reference, an application was filed by the Departmental Representative before the Tribunal under s. 34 of the Act for rectification of the Tribunal's order. It was submitted that the Tribunal erred in recording that the Departmental representative did not dispute the quantum of the tax liability. Actually, the exact quantum of the liability was very much less than what had been contended for by the assessee before the Tribunal. This application is dt. 26th Aug., 1964. By its order dt. 18th Dec., 1964, the Tribunal dismissed the aforesaid application with the following observation : "It is not possible at this stage to remember with any degree of precision as to what was the submission made by the parties at the time of hearing of the appeal which had taken place more than a year back and, therefore, the record of proceedings must be regarded as the best evidence as to what had happened at that time. It may also be mentioned that before the AAC as well, there was, apparently, no dispute that the tax liability was Rs. It may also be mentioned that before the AAC as well, there was, apparently, no dispute that the tax liability was Rs. 5,28,005. The fact, however, remains that the dispute before the Tribunal was regarding the deduction admissible in the computation of the break-up value of the shares of East Ganhodi Colliery (P) Ltd. which were gifted by the assessee. If the view taken by the Tribunal is upheld by the High Court, it is only the actual amount of the tax liability which may have to be deducted, inter alia, from the assets of the company concerned. In that case, the actual amount of tax liability, to be proved by evidence, should be deducted in computing the break-up value of the shares and the value of Rs. 337 per share as computed by the assessee would not be regarded as sacrosanct, subject, of course, to what might be said by the High Court in point." 4. STRANGELY enough, in its statement of the case dt. the 10th April, 1965, the Tribunal reiterated that the Departmental Representative did not dispute the quantum of the tax liability but only argued that, as it was not provided for in the balance sheet of the company as a liability, it could not be allowed as a deduction. The Tribunal has referred the following question to this Court: "Whether, on the facts and in the circumstances of the case, in determining the market value of the shares of the East Ganhodi Colliery (P) Ltd. gifted by the assessee the amount of the taxation liability of the company though not provided for in the balance sheet, is liable to be deducted ?" Mr. B.L. Pal, learned counsel for the Revenue appearing in support of this reference, submitted that as the break-up value of the shares is to be determined with reference to the balance sheet of the company, neither any asset nor any liability not shown or provided for in the balance sheet could be taken into consideration for the purpose of determining such valuation. 5. DR. D. Pal, learned counsel for the assessee, on the other hand submitted that as the balance sheet itself showed that the sum of Rs. 5. DR. D. Pal, learned counsel for the assessee, on the other hand submitted that as the balance sheet itself showed that the sum of Rs. 11,89,857, being the balance of profit from the profit and loss account had been brought in the assets side of the balance sheet, the tax liability for this amount calculated at the appropriate rate of tax applicable to the company was readily ascertainable and the GTO should have allowed the amount in computing the break-up value of the shares of this company. He further submitted that there could be no dispute that the claim was made by the assessee before the AAC and that the Tribunal accepted the amount claimed as the company's income-tax liability. A copy of the relevant balance sheet was produced before us from the records and we find that in the auditor's report it had been pointed out that the charge for the Indian income-tax on the balance of profit shown in the profit and loss account had not been accounted for nor any dividend out of the said profit had yet been proposed for declaration. It would, therefore, appear that the company had made no provision for its tax liability even though that fact was pointed out by its auditors. DR. Pal attempted to show that the amount claimed was correct by reference to certain subsequent orders of assessment made on the company but, as such evidence was not considered by the authorities below, we are not able to take these orders into consideration. 6. FOR the proposition that an intended purchaser would take the taxation liability of the company into consideration in making an offer for its shares, Dr. Pal referred us to the two decisions of this Court in the case of Kastur Chand Jain vs. GTO (supra). In that case the assessee had made gifts of certain shares in two private limited companies and claimed before the GTO that in determining the break-up values of the shares of these companies, the provisions made in the balance sheet for taxation and the amount of proposed dividend should be deducted from the value of the assets. This contention was rejected by the taxing authorities and the assessee made an application under article 226 of the Constitution for quashing the order of assessment. This contention was rejected by the taxing authorities and the assessee made an application under article 226 of the Constitution for quashing the order of assessment. D. N. Sinha J. (as he then was) at page 292 made the following observation: "Under the Indian Companies Act, the balance sheet has to be drawn up in the form prescribed in Sch. VI, Part I of the Indian Companies Act, 1956. Under the heading 'Current liabilities and provisions' must be shown the items 'proposed dividend' as also 'provisions for taxations'. Thus, the provisions made for taxation or contingencies or payment of dividend are grouped together with 'current liabilities'. This seems to be accordance with common sense .... Similarly, in the case of 'provisions for taxation' a buyer in the open market will deduct it from the assets, because this is a liability and he will doubtlessly consider that the amount of taxation will have to be paid, and will eventually come out of the assets. In other words, a buyer in the open market will not make a valuation of notional assets but of real assets. That which is earmarked to be paid out, or which must be paid out because there is a legal liability, will never be considered by him as an asset for the purpose of calculating the value which he is prepared to pay for buying a share." His Lordship accordingly held that both the provisions for taxation and the amount of proposed dividend were liable to be deducted in computing the break-up value of the shares of a company which are not quoted in the market. Dissatisfied with this decision, the CIT appealed and in the judgment of the Division Bench of this Court hearing the appeal in GTO vs. Kastur Chand Jain (1964) 53 ITR 411 (Cal) : TC36R.393, Bachawat J. (as he then was), who delivered the judgment of the Bench, made the following observations: "The value of the shares must be determined on the basis of a hypothetical sale in an open market as indicated in the sub-rule, 'if not ascertainable by reference to the value of the total assets of the company'. In other words, R. 10(2) implies that, if the value of the shares is ascertainable by reference to the value of the total assets of the company, the value must be so ascertained. In other words, R. 10(2) implies that, if the value of the shares is ascertainable by reference to the value of the total assets of the company, the value must be so ascertained. Apart from R. 10(2), there is no other specific provision in the GT Act and Rules requiring valuation of shares by reference to the value of the company's assets for the purposes of gift-tax." Again, it was observed that: "In valuing the shares on the basis of the value of the total assets of the company, the GTO must take into account the net value of its assets ascertained by deducting from the value of its gross assets, all its debts and liabilities and making all fair and reasonable allowances for its uncertain and contingent liabilities. In making this valuation of the share, the GTO was, therefore, bound to take into account the company's liabilities for income-tax. Looking at the balance sheet on which the order of assessment is based and the affidavits of the GTO, it is apparent that he did not take into account this liability and proceeded to make the valuation on an entirely wrong basis." 7. DR. Pal argued that in order to arrive at the real value of these shares, all the liabilities of the company including its income-tax liabilities, which are easily ascertainable, at the end of the accounting year should be deducted. DR. Pal referred to the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. vs. CWT (1966) 59 ITR 767 (SC), where at page 784 the following observation is made: "A liability to pay income-tax is a present liability though it becomes payable after it is quantified in accordance with ascertainable data. There is a perfected debt at any rate on the last day of the accounting year and not a contingent liability. The rate is always easily ascertainable. If the Finance Act is passed, it is the rate fixed by that Act; if the Finance Act has not yet been passed, it is the rate proposed in the Finance Bill pending before Parliament or the rate in force in the preceding year, whichever is more favourable to the assessee." It was further observed that looking from a practical standpoint also, there could not possibly be any difficulty in ascertaining the liability. As the actual assessment would invariably be made after the close of the accounting year, the rate would certainly be available to the authorities concerned for the purpose of quantification. 8. The difficulty we are faced with in this case is that there is no evidence that there has been any quantification of the liability of the company for income-tax. If the Tribunal had simply dismissed the application for rectification made by the Department, we would have to accept the statement in the statement of the case that there was no dispute as to such liability. But in its order dt. 18th Dec., 1964, the Tribunal has observed that if the decision of this Court was in favour of the assessee, then the actual amount of the tax liability which might have to be deducted would have to be proved by evidence. In the face of these observations, the question referred to this Court has more or less become an academic question. In CIT vs. Gangadhar Banerjee and Co. (P) Ltd. (1965) 57 ITR 176 (SC) : TC24R.467, the Supreme Court at page 183 said : "Another question raised is whether the balance sheet is final and both the parties are precluded from questioning its correctness in any respect. There is no provision in the IT Act which makes the balance sheet final for the purpose of s. 23A of the Act or even for the assessment. It no doubt affords a prima facie proof of the financial position of the company on the date when the dividend was declared. But nothing prevents the parties in a suitable case to establish by cogent evidence that certain items were, either by mistake or by design, inflated or deflated or that there were some omissions." It was held that it did not also preclude the assessee from proving that the estimates in regard to certain items had turned out to be wrong and placing the actual figures before the ITO. It would, therefore, appear that it is for the assessee to satisfy the taxing authorities that the estimates made in regard to certain items had turned out to be wrong and placing the actual figures before the authorities for the rectification of such estimates. It is clear that it is for the company to satisfy the taxing authorities as to the reasonableness of the provisions it has made. It is clear that it is for the company to satisfy the taxing authorities as to the reasonableness of the provisions it has made. If no provisions are at all made, then also it would be for the assessee to satisfy the taxing authorities as to the reasonableness of the amount of the liabilities of the company for income-tax claimed as deduction. From the records before us, it is not possible to say that such liability was established with any degree of certainty. 9. DR. Pal made a reference to the decision of this Court in Textile Machinery Corporation Ltd. vs. CWT (1968) 67 ITR 122 (Cal), In that case, the assessee claimed deduction of its liability for sales tax in its income-tax assessment. The assessee had not made any provision in respect of its liability for sales-tax in the balance sheet as on the respective valuation dates. On a reference to s. 4 of the Bengal Finance (Sales-tax) Act, 1941, this Court held that the liability for sales-tax was on the gross turnover during each year and such liability accrued or arose at the end of the year. Accordingly, the Court held that in view of the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. (supra), the liability for sales tax which did not stand on a different footing from income- tax should be allowed as a deduction in computing the break-up value of the shares. It is to be pointed out that in all the above cases, save the last one, provision for taxation was made in the respective balance sheets of the companies. It would also follow from the two decisions of this Court under the GT Act and the decision of the Supreme Court in Kesoram's case (supra) that the taxation liability of the company, either ascertained by assessment or being ascertainable on the basis of the provisions of the relevant Finance Act, would be allowable as a deduction in computing the break-up value of the shares of the company. In a very recent decision of the Supreme Court, reported in the Notes portion in 67 ITR 5, viz., CIT vs. Smt. Anusuya Devi (1968) 68 ITR 750 (SC) the following observations have been made : "The High Court is, however, not bound to answer a question merely because it is raised and referred. In a very recent decision of the Supreme Court, reported in the Notes portion in 67 ITR 5, viz., CIT vs. Smt. Anusuya Devi (1968) 68 ITR 750 (SC) the following observations have been made : "The High Court is, however, not bound to answer a question merely because it is raised and referred. It is well-settled that the High Court may decline to answer a question of fact or a question of law which is purely academic or has no bearing on the dispute between the parties or which, though referred by the Tribunal, does not arise out of its order. The High Court may also decline to answer a question arising out of the order of the Tribunal, if it is unnecessary or irrelevant or is not calculated to dispose of the real issue between the tax payer and the Department." 10. IN this case, in the absence of any finding that the claim made by the assessee as to the income-tax liabilities of the company was reasonable, any answer that we might give to the question referred would be purely academic. We, therefore, decline to answer the question referred to this Court and direct the Tribunal to dispose of the appeal in accordance with the views expressed in our judgment. There would be no order as to costs. P. B. MUKHARJI, J.: I agree. The principle that an assessee should have deduction for tax liability is well-settled and is not in dispute on this reference. But the sole question on this reference is whether the assessee who is an individual in this case has qualified himself to claim the deduction. There is no legal proof to support the order of the Tribunal allowing "deduction for the sum of Rs. 5,28,005 being the amount of the tax liability and directing that the sum of Rs. 337 should be taken as the market value of each of the shares gifted." On the record, at any rate, we do not find any legal evidence or material to support it. The conclusion is drawn only from the submissions in arguments made before the Tribunal but which again were contested. 337 should be taken as the market value of each of the shares gifted." On the record, at any rate, we do not find any legal evidence or material to support it. The conclusion is drawn only from the submissions in arguments made before the Tribunal but which again were contested. The Tribunal itself must have subsequently realised it because its later order under s. 34 of the GT Act clearly states this: "If the view taken by the Tribunal is upheld by the High Court, it is only the actual amount of the tax liability which may have to be deducted, inter alia, from the assets of the company concerned. IN that case, the actual amount of tax liability, to be proved by evidence, should be deducted in computing the break-up value of the shares, and the value of Rs. 337 per share as computed by the assessee would not be sacrosanct, subject, of course, to what might be said by the High Court in point." 2. As I read this order of the Tribunal under s. 34 of the GT Act, it appears to me, it was really in fact and virtually in effect overruling its own finding and direction that it has already found Rs. 337 as the value, a course which obviously the Tribunal could not adopt. I, therefore, agree with my learned brother that this order taking the value at Rs. 337 per share cannot be maintained. If the amount was to be proved by evidence as the Tribunal's order under s. 34 of the GT Act shows, then the whole question as referred to this Court is entirely academic. Unless the tax liability for a particular amount is proved by legal evidence or legal material, the question whether there should be a deduction or not on that ground even if such claim was not made in the balance sheet, becomes entirely hypothetical. I agree that such questions should not be answered. This Court in this jurisdiction does not sit in any examination to answer theoretical questions set by the Tribunal and which do not arise on the facts of the case. As pointed out by my learned brother, not one of the cases cited was a case where the balance sheet and the profit and loss account did not contain the tax liability or provision for it. As pointed out by my learned brother, not one of the cases cited was a case where the balance sheet and the profit and loss account did not contain the tax liability or provision for it. The observations made in those cases, therefore, were all obiter. Obiter dicta have been said to have the capacity of coming home to roost. This is one of those cases. Because of this obiter dictum certain arguments have been made which require to be clarified on this reference. 3. Balance sheet of a company is a statutory obligation. It has both private and public consequences. It has legal effects. A company's balance sheet is the only document by which the public and even the outside world would know the real financial position of the company. A company acts by its charter of incorporation. It is a legal entity. Its acts are to be performed according to law. The Companies Act and its sections make it clear and require that the balance sheet has to present "a true and fair view of the state of affairs of the company". It is common learning and it will not be necessary for us to repeat that such balance sheets are clear statutory obligations and they have to contain certain specific facts. They are to be found in ss. 209, 210 211 and 212 of the Companies Act. Sec. 211 of the Companies Act begins with the celebrated words: "211. Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Sch. VI, or as near thereto as circumstances admit...." If, therefore, a company does not include in a balance sheet, any provision for any tax liability and its payment, the question immediately crops up, does it in law exist so far as the company is concerned within the meaning of the Companies Act. It is not a matter of estimate of tax liability in the present reference, either of underestimate or over-estimate, but it is a matter of complete exclusion of the very fact of any existing or prospective tax liability in this case. It is not a matter of estimate of tax liability in the present reference, either of underestimate or over-estimate, but it is a matter of complete exclusion of the very fact of any existing or prospective tax liability in this case. It is found as fact neither the balance sheet nor the profit and loss account provides at all for payment of any tax liability in the present case on this reference. The form set out in Part I of Sch. VI contains express provision for including tax liability. That form is also statutory. The statutory form and its express provision were clear notice to include in the balance sheet the tax liability, if there be any at all. 4. The Supreme Court in CIT vs. Gangadhar Banerjee and Co. (P) Ltd. (1965) 57 ITR 176 (SC) : TC24R.647 points out at pages 183-184 and which has already been quoted by my learned brother, that the balance sheet is not final for the purpose of s. 23A of the IT Act or even for the assessment under the IT Act. All that the Supreme Court said there was that the balance sheet no doubt offered a prima facie proof of the financial position of the company on the date when the dividend was declared. There the question was one of dividend under s. 23A of the IT Act. It is in that connection that the Supreme Court had observed at page 184 of the report : "But nothing prevents the parties in a suitable case to establish by cogent evidence that certain items were, either by mistake or by design, inflated or deflated or that there were some omissions. It does not also preclude the assessee from proving that the estimate in regard to certain items has turned out to be wrong by placing the actual figures before the ITO." We do not think that this observation should be torn out of its context. The observation is naturally in very guarded language for obvious reasons. In the first place, the balance sheet is a prima facie proof of the financial position; secondly, in order to override that prima facie proof, an assessee has to actually "prove" that the items turned out to be wrong either by mistake or by design inflated or deflated or that there were some omissions. No such proof has been offered here. No such proof has been offered here. Indeed there is no legal proof nor any legal material. That is the weakness here of the assessee in the facts of this reference. 5. Having regard to the relevant sections of the Companies Act and the form in which balance sheets have to be given, drawing special attention for provision for tax liability, we would think that this is a fairly strong prima facie proof and if it has to be discarded, it can only be discarded by cogent, convincing and legal evidence. IN this case there is no scope even for omission. Not only does the statutory form expressly draw attention to the provision for tax liability in making out a balance sheet but the auditor's note itself expressly pointed out that "the charge for the Indian income-tax on the balance of profit and loss account has not been accounted for." How is the valuation to be done in such a case as in the present reference? It is found as a fact by the AAC, Gift-tax "on scrutinising the balance sheet of the company it is observed that amount was neither paid nor charged as a liability by creating any taxation reserve. Hence, Rs. 5,28,005 cannot be excluded for the purpose of determining the value of the shares." 6. The assessment of valuation under the GT Act is given under s. 6 of that Act. It provides that the value of any property other than cash transfer by way of gift, is subject to the provisions of sub-ss. (2) and (3) to be estimated to be the price, which in the opinion of the GTO, it would fetch if sold in the open market on the date on which that gift was made. Sub-s. (3) of s. 6 provides that where the value of any property cannot be estimated under sub-s. (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner. The prescribed manner is to be found in r. 10 of the GT Rules, under the statute. Sub-s. (3) of s. 6 provides that where the value of any property cannot be estimated under sub-s. (1) because it is not saleable in the open market, the value shall be determined in the prescribed manner. The prescribed manner is to be found in r. 10 of the GT Rules, under the statute. Sub-r. (2) of r. 10 provides, inter alia, that where the articles of association of a private company contain restrictive provision as to the alienation of shares, the value of shares if not ascertainable by reference to the value of the total assets of the company, shall be estimated to be what they would fetch if on the date of the gift they could be sold in the open market, on the terms of the purchaser being entitled to be registered as a holder, subject to the articles, but the fact that a special buyer would for his special reason give a higher price than the price in the open market shall be disregarded. The statement of fact has been rather perfunctory in this finding that the shares in this case are not saleable in the open market. There appeared to be almost tacit assumption to proceed on the break-up value of the shares in the present case. The admitted fact, however, is that the company itself neither paid this amount nor charged it as a liability for creating this taxation reserve, for which the present assessee is now claiming a reduction in price and valuation of the shares under the gift. A serious word of caution needs to be given. 7. The assessee in this case is not the company. The company made no provision in its statutory balance sheet and profit and loss account, in spite of the statutory forms and in spite of the auditor's note for tax liability. The present assessee who is an individual, and not the company and who has made gifts of the shares of this company which he was holding in favour of his son, is now attempting to say that the company, which was not himself, omitted to include provision for tax liability in its balance sheet. The present assessee who is an individual, and not the company and who has made gifts of the shares of this company which he was holding in favour of his son, is now attempting to say that the company, which was not himself, omitted to include provision for tax liability in its balance sheet. If he had purchased the shares from the company where the balance sheet did not provide for tax liability and on the basis that it did not, then it is no longer open to this shareholder- assessee to say that, although that was the value to him when he purchased the shares, they must be re-valued at a lower price when he acts really as the donor to make the gift of these shares to his son by introducing a liability on the basis of which he did not pay the price. The value in this case is the value to the donor and not value to the donee for it is the donor who is being assessed. I am of the opinion, therefore, that the individual assessee-donor in this case cannot invoke the doctrine of error, mistake or omission of the balance sheet. All the cases reported and cited at the Bar were only between the company as the assessee and the Revenue authorities. It is understandable, even if not to be encouraged, that a company as assessee may be allowed to represent and plead its own deficiency in its own balance sheets on the ground of mistake, error or omission. If strangers or individual shareholders are allowed to introduce new matters in the balance sheet and to find fault of omissions and mistakes in the balance sheet which the balance sheet of the company itself does not include or provide, and which balance sheet has been duly passed by the general body of shareholders at the annual general meeting, then it will lead to a very serious state of financial uncertainty and instability in company law and in company management. If such a situation is allowed to develop, shareholders will be under great risk and the public still greater. With these observations I agree with the order proposed by my learned brother.