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2002 DIGILAW 769 (KER)

Ahmed Usman v. The Wealth-Tax Officer

2002-11-25

G.SIVARAJAN, K.BALAKRISHNAN NAIR

body2002
Judgment :- Sivarajan, J. All these Appeals arise from a common Order of the Income Tax Appellate Tribunal, Cochin Bench in W.T.A. Nos. 35 to 59 (Coch) / 98. It is relevant to note here that among these Appeals, there is no appeal against the order of the Tribunal in WTA Nos.56 to 59/Coch/98. All these Appeals relate to two assessment years 1991 – 1992 and 1992 – 93, the relevant previous years ended with 31-03-1991 and 31-03-1992 respectively. All the appellants are partners of a firm by name M/s. Abad Fisheries at Cochin. The said firm is engaged in the export of marine products. The firm purchased prawns locally and after subjecting it to certain processes, the same was exported to foreign countries. The firm claimed exemption from liability to pay purchase tax under Section 5 of the Kerala General Sales Tax Act in respect of the purchase turnover of prawns. This claim was made on the ground that the said turnover is exempted under Section 5(3) of the Central Sales Tax Act. However, in the apprehension that liability may be cast on it for the purchase tax, the firm made provisions in its Accounts for liability towards payment of purchase tax under the KGST Act. 2. As already noted, these Appeals are concerned with the wealth tax assessment of the partners of the said firm. In the revised return filed under the provisions of the Wealth Tax Act for the assessment year 1992 – 1993, they claimed that their shares of the liability provided in respect of purchase tax were deductible in the computation of their net wealth for the purpose of assessment under the Wealth Tax Act. The assessing authority, however, did not allow the appellants’ claims. He added back the pro-rata share in the provision created by the firm towards the payment of purchase tax to the declared wealth of the assessee and determined the taxable wealth for the impugned assessment years. In appeal by the appellants, the Commissioner of Wealth Tax (Appeals) relying on the decision of this Court in the case of one of the partners of the firm Shri Anwar Hashim, allowed the appeal and directed the assessing authority to exclude their proportionate share from the net wealth. In appeal by the appellants, the Commissioner of Wealth Tax (Appeals) relying on the decision of this Court in the case of one of the partners of the firm Shri Anwar Hashim, allowed the appeal and directed the assessing authority to exclude their proportionate share from the net wealth. The Department took up the matter in appeal before the Tribunal and connected that the first appellate authority went wrong in holding that the purchase tax is an accrued liability and hence it is an allowable deduction relying on the decision of this Court in Commissioner of Wealth Tax, Cochin v. Anwar Hashim in ITR Nos. 67 and 68 of 1992 (214 ITR 60). It is also stated in the Appeal Memorandum that the Department has not accepted the said decision in view of the decision of the Supreme Court in Sterling Foods v. State of Karnataka and another ( 63 STC 240 ) and further that the Special Leave Petitions filed by the Department against the judgment of this Court in the assessee’s case is pending before the Supreme Court. The Tribunal noted that the Special Leave Petitions filed by the Department against judgment of this Court in ITR Nos. 67 and 68/92 and connected cases were dismissed on the ground of limitation. The Tribunal, however, relying on the decision of this Court in Commissioner of Wealth Tax v. A. M. Moosa (249 ITR 395) and the principles laid down by the Supreme Court in Commissioner of Wealth Tax, Madras v. K. S. N. Bhatt (145 ITR 1) held that there was no tax liability as a result of the final assessments and, therefore, there could be no debt more than what was owed by the assessee for valuation in that case on that account. Hence these Appeals. 3. Shri G. Sarangan, learned senior counsel appearing along with Shri Vinod Chandran submitted that neither the assessing authority, nor the two appellate authorities did consider the claim made by the appellants with reference to the relevant provisions of the Wealth Tax Act and the Rules. The counsel also submits that the question involved in these Appeals are squarely covered by the decision of this Court in the case of the partners of the firm M/s. Abad Fisheries itself in Abad Fisheries v. CIT ( (1995) 213 ITR 694 (Ker) ) and Commissioner of Wealth-Tax v. Anwar Hasim (214 ITR 60). The counsel also submits that the question involved in these Appeals are squarely covered by the decision of this Court in the case of the partners of the firm M/s. Abad Fisheries itself in Abad Fisheries v. CIT ( (1995) 213 ITR 694 (Ker) ) and Commissioner of Wealth-Tax v. Anwar Hasim (214 ITR 60). The senior counsel further submitted that the decision of the Supreme Court in Commissioner of Wealth-Tax. Madras v. K. S. N. Bhatt (145 ITR 1) has to be understood on the peculiar facts of the said cases, and further that, neither the decision of this Court in Anwar Hasim’s case (mentioned supra), nor the decision of the Supreme Court in K. S. N. Bhatt’s case (mentioned above) can have any application to a case arising after the amendment to Sec. 4(1)(b) of the Wealth Tax Act and the introduction of Schedule III simultaneously with effect from 1.4.1989. The senior counsel took us to the definition of “net wealth” in Section 2(m), the charging Section 3, the provisions of Section 4 (1)(b) dealing with a case of an assessee who is a partner in a firm and the provisions of schedule III particularly Rules 14, 15 and 16 thereof and submitted that the facts of that case are different in that, the assessee was a proprietor whereas the assessees in the present case are the partners to whom the provisions of Section 4(1)(b) read with Schedule III applied, with reference to the provisions of Rule 14 of the Schedule III. The senior counsel submitted that it is a code by itself in the matter of determination of net wealth in the case of a partner. The learned senior counsel also submitted that under Rule 14, the assessing authority is obliged to start the computation with reference to the Balance Sheet and to make adjustments in the said Balance sheet with reference to the provisions of Rule 14(2). He also took us to the provisions of Clause (3) of sub-rule (2) and submitted that sub-clause (3) thereof provides for exclusion of only the provision made for improving any future or contingent liabilities and also took us to the explanation thereto which provides that the provisions provided for any purpose otherwise shall be treated as reserve. He also took us to the provisions of Clause (3) of sub-rule (2) and submitted that sub-clause (3) thereof provides for exclusion of only the provision made for improving any future or contingent liabilities and also took us to the explanation thereto which provides that the provisions provided for any purpose otherwise shall be treated as reserve. The senior counsel on the basis of these provisions submits that a provision for taxation made in the Balance Sheet is a permissible deduction in the computation of net wealth under Section 2(m) of the Act for the purpose of assessment to wealth tax in the case of a partner. The senior counsel submits that none of the authorities including the Tribunal had considered the effect of the amendment made to Section 4(1)(b) and the introduction of Schedules III in deciding the question involved in these Appeals. The senior counsel also took us to the decision of this Court in the case of a firm and the partners and submitted that the principles laid down in the said decision are consistent with the amendment to Section 4(1)(b) and Schedule 1(3). It is also pointed out that the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax (Central), Calcutta (59 ITR 767) lays down the principles regarding the determination of the debt owed with reference to the provisions of Section 2(m) of the Act which will also be appropriate in the context of the present provisions of the Wealth Tax Act. The senior counsel also sought to distinguish the decision of the Supreme “Court in Bhatt’s case mentioned earlier by submitting that the question that arose for consideration in that case was only as to whether, in a case where a return is filed claiming a particular amount as provision, it was open to the assessee to contend on the basis of an amendment of a subsequent order determining a higher liability to substitute the figure claimed in the return with the amount determined in the assessment. The senior counsel also submitted that the Supreme Court did not have an occasion to consider as to whether a provision for a liability made in the Balance Sheet cannot be allowed by the circumstances that subsequent to the valuation date an assessment order has been passed in which it was found that there is no tax liability at all. The senior counsel accordingly submitted that the assessing authority as well as the Tribunal had committed a serious error in relying on the decision of this Court in Moosa’ s case and the principles laid down by the Supreme Court in Bhatt’s case. 4. Shri P. K.R. Menon, Senior Central Government Standing counsel appearing for the Revenue on the other hand submitted that the issue raised in this case is squarely covered by the decision of this court in Moosa’s case and the decision of the Supreme Court in Bhatt’s case both mentioned earlier. The senior standing counsel submits that in fact the Revenue had raised a contention in the case before the Supreme Court in Commissioner of Wealth Tax. Gujarat v. Vadilal Lallubhai (1984) 145 ITR 7 that the deductions on account of the Income tax, Wealth Tax and Gift Tax liabilities for the assessment year should have been allowed on the basis of the respective returns filed by the assessee, and not on the basis of the final assessment, as the assessment orders were made after the valuation date and the Supreme Court has not accepted the said contention by holding that it is the final quantification of the particular tax which must be taken into account, and that when the wealth tax assessment is carried in appeal, the appellate authority will take into account the ultimate quantification of the tax liability, even though the ultimate quantification has been reached during the pendency of the Wealth Tax Appeal. The decision of this Court in Anwar Hasim’s case (214 ITR 60) though has referred to in the decision in Vadi Lal’s case mentioned above, did not advert to the principles just now submitted, and, therefore the decision in Anwar Hasim’s case mentioned above it is submitted, it is not consistent with the decision of the Supreme Court. The decision of this Court in Anwar Hasim’s case (214 ITR 60) though has referred to in the decision in Vadi Lal’s case mentioned above, did not advert to the principles just now submitted, and, therefore the decision in Anwar Hasim’s case mentioned above it is submitted, it is not consistent with the decision of the Supreme Court. The Senior counsel further submitted that the principles laid down by the Supreme Court in Bhatt’s case and Vadi Lal’s case mentioned above following the decision in Kesoram Industries and followed by this Court in Moosa’s case was rightly applied by the Tribunal and, therefore, no interference is called for in the decision of the Tribunal. 5. We have perused the orders of the assessing authority as well as the two appellate authorities. All the authorities have noted that the assessees have preferred a claim for deduction of the proportionate amount of the purchase tax liability of the firm while computing the net wealth under Section 2(m) of the Act. No details as to whether any assessment under the Kerala General Sales Tax Act determining the purchase tax liability of the appellants was made either as on the valuation date or subsequently and if so what happened to the said assessment, whether such assessment has become final, are available on record. None of the authorities has made any attempt to find out those factual situation also. There is no advertence to the relevant provisions of the Wealth Tax Act in respect of any of these years expect a reference to the provisions of Section 2 (m) of the Act. 6. In the instant case, all the appellants are partners of the firm M/s. Abad Fisheries. It is in respect of the appellants are claiming a proportionate deduction in their wealth tax assessment. 6. In the instant case, all the appellants are partners of the firm M/s. Abad Fisheries. It is in respect of the appellants are claiming a proportionate deduction in their wealth tax assessment. Section 2(m) of the Act defining “net wealth” reads as follows:- “ “net wealth” means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than – (i) debts which under section 6 are not to be taken into account ; (ii) debts which are secured on, or which have been incurred in relation to, any property in respect of which wealth-tax is not chargeable under this Act ; and (iii) the amount of the tax, penalty or interest payable in consequence of any order passed under or in pursuance of this Act or any law relating to taxation of income or profits, or the Estate Duty Act, 1953 (34 of 1953), the Expenditure-tax Act, 1957(29 of 1957), or the Gift-tax Act, 1958(18 of 1958) – (a) which is outstanding on the valuation date and is claimed by the assessee in appeal, revision or other proceeding as not being payable by him ; or (b) which, although not claimed by the assessee as not being payable by him, is nevertheless outstanding for a period of more than twelve months on the valuation date”. The “valuation date” is defined in Section 2(q) which reads: “valuation date”, in relation to any year for which an assessment is to be made under this Act, means the last day of the previous year as defined in section 3 of the Income tax Act, if an assessment were to be made under that Act for that year.” Charging Section 3 reads as follows: “3. Charge of wealth-tax - Subject to the other provisions (including) provisions for the levy of additional wealth-tax) contained in this Act, there shall be charged for every assessment year commencing on and from the first day of April, 1957, a tax (hereinafter referred to as wealth-tax) in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in schedule I.” Section 4(1) (b) which is very relevant for the purpose of this case reads : “4. Net wealth to include certain assets – (1) in computing the net wealth – (b) of an assessee who is a partner in a firm or a member of an association of persons (not being a co-operative housing society), there shall be included, as belonging to that assessee, the value of his interest in the firm or association determined in the manner laid down in Schedule III:” Rules 14, 15 and 16 of the IIIrd Schedule for determining the value of assets of business and for determination of interest reads: “14. Global valuation of assets of business – (1) Where the assessee is carrying on a business for which accounts are maintained by him regularly, the net value of the assets of the business as a whole, having regard to the balance-sheet of such business on the valuation date after adjustments specified in sub-rule(2) shall be taken as the value of such assets for the purposes of this Act. (2) For the purposes of sub-rule (1)-the value of any asset as disclosed in the balance-sheet shall be taken to be- (i) in the case of an asset on which depreciation is admissible, its written-down value; (ii) in the case of an asset on which no depreciation is admissible. (2) For the purposes of sub-rule (1)-the value of any asset as disclosed in the balance-sheet shall be taken to be- (i) in the case of an asset on which depreciation is admissible, its written-down value; (ii) in the case of an asset on which no depreciation is admissible. Its book value; (iii) in the case of closing stock, its value adopted for the purposes of assessment under the income-tax Act for the previous year relevant to the corresponding assessment year; (a) where the value of any of the assets referred to in clause(a), determined in accordance with the provisions of this Schedule as applicable to that particular asset or if there are no such provisions, determined in accordance with rule 20, exceeds the value arrived at in accordance with clause(a) by more than 20 per cent, then the higher value shall be taken to be the value of that asset; (b) the value of an asset not disclosed in the balance-sheet shall be taken to be the value determined in accordance with the provisions of this Schedule as applicable to that asset; a. the value of the following assets which are disclosed in the balance-sheet shall not be taken into account, namely:- (i) any amount paid as advance tax under the Income-tax Act: (ii) the debt due to the assessee according to the balance-sheet or part thereof which has been allowed as a deduction under clause (vii) of sub-section (1) of Section 36 of the Income-tax Act, for the purposes of assessment for the previous year relevant to the corresponding assessment year under that Act; (iii) the value of any asset in respect of which wealth-tax is not payable under this Act; (iv) any amount shown in the balance-sheet including the debit balance in the profit and loss account or profit and loss appropriation account which does not represent the value of any asset; (v) any asset shown in the balance-sheet not really pertaining to the business; b. the following amounts shown as liabilities in the balance-sheet shall not be taken into account, namely:- (i) capital employed in the business other than that attributable to borrowed money; (ii) reserves by whatever name called; (iii) any provision made for meeting any future or contingent liability; (iv) any liability shown in the balance-sheet not really pertaining to the business: (v) any debt owed by the assessee to the extent to which it has been specifically utilised for acquiring an asset in respect of which wealth tax is not payable under this Act: Provided that where it is not possible to calculate the amount of debt so utilised, it shall be taken as the amount which bears the same proportion to the total of the debts owed by the assessee as the value of that asset bears to the total value of the assets of the business. Explanation- Provision for any purpose other than taxation shall be treated as a reserve. 15. Valuation of interest in firm or association of persons – The value of the interest of a person in a firm of which he is a partner or in an association of persons of which he is a member shall be determined in the manner provided in rule 16. 16. Computation of net wealth of the firm or association and its allocation amongst the partners or members. – The net wealth of the firm or association of persons on the valuation date shall first be determined as if it were the assessee and, thereafter,- (i) that portion of the net wealth of the firm or association of its capital shall be allocated among the partners or members in the proportion in which capital has been contributed by them; (ii) the residue of the net wealth of the firm or association shall be allocated amongst the partners or members in accordance with the agreement of partnership or association for the distribution of assets in the event of dissolution of the firm or association or, in the absence of such agreement, in the proportion in which the partners or members are entitled to share the profits, and the sum total of amounts so allocated to a partner or member under clause (i) and clause(ii) shall be treated as the value of the interest of that partner or member in the firm or association: Provided that in determining the net wealth of the firm or association for the purposes of this rule, no account shall be taken of the exemptions in sub-sections (1) and (1A) of Section 5. Explanation – For the purposes of this rule- 1. where the net wealth of the firm or association computed in accordance with this rule includes the value of any assets located outside India, the value of the interest of any partner or member in the assets located in India shall be determined having regard to the proportion which the value of assets located in India diminished by the debts relating to those assets bears to the net wealth of the firm or association; 2. where the net wealth of the firm or association computed in accordance with this rule includes the value of any assets which are exempt from inclusion in the net wealth under sub-sections (1) and (iA) of section 5, the value of the interest of a partner or member shall be deemed to include the value of his proportionate share in the said assets, and the provisions of subsections(1) and (1A) of section 5 shall apply to him accordingly. 3. Where the net wealth of the firm or association computed in accordance with this rule includes the value of any assets referred to in sub-section (2) of section 5, the value of the interest of a partner or member shall be deemed to include the value of his proportionate share in the said assets, and the provisions of sub-section (2) of section 5 shall apply to him accordingly.” 7. Section 4(1) (b) provides that in computing the net wealth of an assessee who is a partner in a firm, there shall be included as belonging to that assessee, the value of its interest in the firm determined in the manner laid down in schedule III. Rule 15 of the said Schedule provides that the value of interest of a person in a firm of which he is a partner shall be determined in the manner prescribed in Rule 16. The said Rule provides that the net wealth of the firm on the valuation date shall be first determined as if it were an assessee and thereafter that portion of the net wealth of the firm as is equal to the amount of its capital shall be allocated among the partners or members in the proportion in which capital contribution have been provided by them. It is also provided that the residue of the net wealth of the firm shall be allocated among the partners in accordance with the agreement of partnership for the distribution of assets in the event of dissolution of the firm or in the absence of such agreement the proportion in which the partners or members are entitled to the share of the profits and the sum allocated to a partner under clauses (1) and (2) shall be treated as the value of the interest of that partner or member in the firm. Rule 14, according to the senior counsel appearing for the assessee, is a self – contained provision by itself in regard to the valuation of the assets of the business, which provides that in the Accounts maintained by the firm regularly the net value of the assets of the business as a whole having regard to the Balance Sheet of such business on the valuation dates after adjustments specified in sub-rule (2) shall be taken as the value of such assets for the purpose of this Act. Sub-rule(2) provides that for the purpose of sub-rule (1), the value of any asset as disclosed in the Balance Sheet shall be taken to be the amount provided in sub-clauses (a) and (b). Clause (e) of the said sub-rule provides that the following amounts shown as liabilities in the Balance Sheet shall not be taken into account: “1) Capital employed in the business other than attributable to borrowed money; 2) Reserves of whatever name called; 3) Any provision made for meeting any future or contingent liability. 4) Any liability shown in the Balance Sheet not really pertinent to the business. 5) Any debt owed by the assessee in respect of which wealth tax is not payable under the Act. 8. Explanation to these clauses provides that provision for any purpose other than taxation shall be treated as the reserve. From the provisions of Rule 14 of the III schedule, it is evident that what is relevant for the purpose of valuation of the assets of a business in a case where the assessee is maintaining regular Books of Accounts is to adopt the Balance Sheet as the basis for the judgment and the sub-rule (2) clearly provides for adoption of the figures which are specified in the said Balance Sheet under various heads and for disallowances of the various amounts which are specifically excluded. 9. 9. On the basis of these provisions, the contention of the learned senior counsel for the assessee, as already noted, is that the assessing authority has no option, but to follow the provisions of schedule III, particularly Rules 14, 15 and 16 in the matter of determination of the assets of the business in the case of a partner, and if the assessing authority is bound by the said provisions, a provision for tax liability which is made in the Balance Sheet, unless it is inhibited by the inclusion provided under clause (c) of sub-rule (2) particularly with reference to the explanation thereto, there is no question of importing any other principles in the matter of determination of net wealth so far as a partner is concerned. 10. As we have already noticed, none of these authorities including the tribunal had considered this question with reference to the relevant provisions of the Act and the Rules mentioned above. The authorities and the tribunal have decided the matter with reference to the principles laid down by the Supreme Court on the peculiar facts and circumstances of these cases. In short, according to us, there is no proper consideration of the issue involved in this case by any of the authorities including the Tribunal with reference to the relevant provisions. The authorities have not even bothered to find the facts which are relevant for the application of the decisions relied on by them. In these circumstances, without conducting a detailed survey of all the decisions relied on by the counsel on either side, we are of the view that the assessing authority must be directed to consider the question raised in this case afresh in accordance with law and in the light of the provisions of the Wealth Tax Act and the Rules extracted hereinabove after ascertaining the relevant facts. For the said purpose, we set aside the orders of the assessing authority as well as the two appellate authorities and remit the matter to the assessing authority for fresh disposal in accordance with law. While doing so, it is open to the assessee to rely on the provisions of the Act and the Rules and all the relevant decisions which, according to them, have got application in the present case. While doing so, it is open to the assessee to rely on the provisions of the Act and the Rules and all the relevant decisions which, according to them, have got application in the present case. It is open to the Department also to rely on all decisions they consider relevant for the purposes of their case including the decision of the Supreme Court in Satlal Cotton Mills Ltd. v. Commissioner of Income Tax, Bangalore (116 ITR 1) regarding the maintenance of Account Books etc. which according to the senior counsel for the Revenue, have got relevance in the matter of deciding this case. 11. We make it clear that we have not expressed any definite opinion with regard to any of the relevant matters in this Judgment, for according to us, it is for the assessing authority to take a decision in the first instance. All these Appeals are disposed of as above.