COMMISSIONER OF WEALTH-TAX ORISSA, BHUBANESHWAR. vs. VYSYARAJU BADREENARAYANA MOORTHY RAJU, BERHAMPUR (GANJAM).

TAX REFERENCE CASE No. 3/1975Supreme Court[1985] 3 S.C.R. 30613 March 1985Bench: 3 JudgesAuthor: R.S. PATHAK, A.P. SEN, E.S. VENKATARAMIAH6 pages
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What were the facts?

The assessee, a Hindu Undivided Family, was assessed to wealth tax for assessment years 1965-66, 1966-67, and 1967-68. The Wealth Tax Officer included Rs. 1.5 lakhs in each assessment, representing estimated accrued interest on the assessee's money-lending investments. The assessee contended that since accounts were maintained on a cash basis, accrued interest should not be included. The Appellate Assistant Commissioner deleted the additions, following the Orissa High Court. The Wealth Tax Officer appealed to the Appellate Tribunal, citing an Andhra Pradesh High Court judgment. The Tribunal dismissed the appeal, bound by the Orissa High Court decision. The Commissioner applied for a reference to the Supreme Court due to conflicting High Court opinions.

What did the Supreme Court hold?

The Supreme Court held that even though the assessee's accounts are maintained on a cash basis, interest due on an accrual basis, though not realized, on the outstandings of the money-lending business is liable to be included in the net wealth of the assessee. The Court reasoned that the definition of 'net wealth' under the Wealth Tax Act, 1957, refers to the aggregate value of all assets belonging to the assessee on the valuation date. The system of accounting, whether mercantile or cash, is irrelevant for determining the assets. The value of an asset, particularly one other than cash, is determined by its estimated open market value, which represents the value of the rights in that property. Therefore, what accrues as a right also falls to be included as an asset. The Court approved the decisions of the Andhra Pradesh High Court in Vedrevu Venkappa Rao and Commissioner of Wealth-Tax, A.P.-I v. Pachigolla Narasimha Rao, and the Calcutta High Court in Dipti Kumar Basu v. Commissioner of Wealth Tax, West Bengal, while overruling the Orissa High Court's decision in Commissioner of Wealth-tax v. Vysyaraju Badreenarayana Moorthy Raju and the Karnataka High Court's decision in A.T. Mirji v. Commissioner of Wealth-Tax, Karnataka.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Wealth Tax Officer was justified in including in the net wealth of the assessee interest due on accrual basis (though not realised) on the outstandings of the money-lending business, the accounts being maintained on cash basis? (Question of law) Assessee's contention: As the books of account were maintained in accordance with the cash system of accounting, the accrued interest on money-lending investments could not be included in the Wealth-Tax assessments. The assessee relied on Commissioner of Wealth-tax Bihar and Orissa v. Vysyaraju Badreenarayana Moorthy Raju (Orissa) (1971) 79 ITR 330. Revenue's contention: The accrued interest was liable to be included in the Wealth Tax assessment of the assessee. The revenue relied on the judgment of the Andhra Pradesh High Court in Vedrevu Venkappa Rao v. Commissioner of Wealth Tax A.P. (1968) 69 ITR 552.

Which sections of the Income-tax Act were involved?

Section 2(e),Section 2(m),Section 2(q),Section 7(2),Section 3,Section 27(1)

AI-generated summary — verify with the full judgment below

.c D ·COMMISStON!lR OF WEALTH-TAX ORISSA, BHUBANESHW AR. v. VYSYARAJU BADREENARAYANA MOOR THY RAJU . . BERHAMPUR (GANJAM).

March 13, 1985 (R;S. PATHAK, A.P. SEN AND E.S. VENKATARAMIAH, JJ.] Wealth Tax Act 1957, Sections 2(e), 2(m}, 2(q} and 7(2). 'Net Wealth' - 'Valuation date' - What are -Accrued interest - Whether .an asset - Distinction between cash and mercantile system of accounting - Whether releva·n1 for wea Ith tax.

The respondentMassessee was assessed to wealth tax for the assessment years 1965-66, 1966-67 and 1967-68, in the status of a Hindu Undivided ~Family'. In each of the assessment years, the Wealth :'ax Officer included a .sum of Rs. 1.5 lakhs estimated as the accrued interest on the assessee's money · E lending jnvestrµents. F G JI The assessee appealed to the Appellate Assistant Commissioner, con· tending that as the books of account were maintained in accordance with the ·cash system of accounting, the accrued interest on the money-lendini invest- ment could not be included in the Wealth-Tax assessments, the Appellate :Assistant Commissioner following the decision of the Orissa High Court in Commissioner of Wealth-tax Bihar and Orissa

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