COMMISSIONER OF WEALTH TAX vs. JYOTSNABEN P PATGEL

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WTR/124/1995HC GujaratGJHC24022806199523 January 1998Author: HONOURABLE MR. JUSTICE R.K.ABICHANDANI,HONOURABLE MR. JUSTICE ANIL R. DAVE3 pages
AI SummaryRemanded

What did the High Court hold?

The Gujarat High Court held that the Appellate Tribunal was in error in directing the Assessing Officer to value the unquoted equity shares as per Rule 1D of the Wealth Tax Rules, as interpreted by the Gujarat High Court in the case of Ashok K. Parikh. The High Court relied on the Supreme Court's decision in Bharat Hari Singhania v. C.W.T. (207 ITR 1). The Supreme Court had ruled that Rule 1D is mandatory for valuing unquoted equity shares and that no deductions are admissible, including those for capital gains tax, provision for taxation, provident fund, and gratuity. The Supreme Court clarified that advance tax paid, though shown as an asset, should be removed from the list of assets for Rule 1D valuation, and only the remaining tax liability should be considered. The High Court noted that the Supreme Court's view differed from the Gujarat High Court's in Ashok K. Parikh. Consequently, the referred question was answered in the negative, in favour of the Revenue and against the assessee. The reference was disposed of with no order as to costs.

What were the facts?

This case involves a reference made by the Income Tax Appellate Tribunal (ITAT) to the Gujarat High Court concerning the valuation of unquoted equity shares under the Wealth Tax Act. The dispute arose from the Assessing Officer's (AO) valuation method, which was challenged by the Revenue. The ITAT had directed the AO to value the shares as per Rule 1D of the Wealth Tax Rules, as interpreted by the Gujarat High Court in the case of Ashok K. Parikh. The core issue was how to treat advance tax paid, shown on the assets side of a company's balance sheet, when calculating the market value of equity shares using the break-up value method. This question was pending before the Supreme Court at the time of the reference.

What were the issues?

1. Whether the Appellate Tribunal was right in law and on facts in directing the Assessing Officer to value unquoted equity shares as per Rule 1D of the Wealth Tax Rules, as interpreted by the Gujarat High Court in the case of Ashok K. Parikh (129 ITR 46)? Assessee's Contention: The judgment does not record any specific contentions made by the assessee. The ITAT's decision, which is under challenge, was in favour of the assessee, directing valuation as per Rule 1D as interpreted by the Gujarat High Court. Revenue's Contention: The Revenue contended that the ITAT erred in directing the AO to value the unquoted equity shares as per Rule 1D, as interpreted by the Gujarat High Court in Ashok K. Parikh. The Revenue likely argued that the interpretation of Rule 1D by the Gujarat High Court was incorrect, particularly concerning the treatment of advance tax paid.

Which sections of the Income-tax Act were involved?

Section 27,Section 1D

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

WEALTH TAX REFERENCE No 124 of 1995

For Approval and Signature:

Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE A.R.DAVE

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1.

Whether Reporters of Local Papers may be allowed to see the judgements?

2.

To be referred to the Reporter or not?

3.

Whether Their Lordships wish to see the fair copy of the judgement?

4.

Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge? 1 to 5 No -------------------------------------------------------------- COMMISSIONER OF WEALTH TAX Versus JYOTSNABEN P PATGEL -------------------------------------------------------------- Appearance: MR PRANAV G. DESAI for MR MANISH R BHATT for Petitioner Respondent No. 1 served

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CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE A.R.DAVE Date of decision: 23/01/98

ORAL JUDGEMENT : [Per : R.K. Abichandani, J.]

1.

The Income Tax Appellate Tribunal has referred the following question for the opinion of this Court

under Section 27(1) of the Wealth Tax Act :

"Whether, the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to value to unquoted equity shares as per Rule 1-D of the Wealth Tax Rules as interpreted by the Gujarat High Court in the case of Ashok K. Parikh 129 ITR 46?"

2.

The Tribunal dismissed the Appeal of the Revenue holding that there was no substance in the objection raised by the Department in view of the decision of this High Court in the case of ASHOK K. PARIKH v. CWT, reported in 129 ITR 46. In Ashok K. Parikh (supra), in which this Court had taken a view, while construing clauses (i)(a) and (ii)(e) of Explanation II to Rule 1D, that for the purpose of computation of the market value of the equity shares of a company, the advance tax paid under Section 210 of the Income Tax Act, 1961 and shown on the assets side of the balance sheet of the company, cannot be deducted from the tax payable, in determining whether the provision for taxation is in excess over the tax payable with reference to the book profits in accordance with the law applicable thereto within the meaning of clause (ii)(e) of Explanation-II to Rule 1D of the said Rules.

3.

The dispute centres around the treatment to be given to the advanced tax paid shown on the assets side of the balance-sheet of the company while working out the value of the equity shares on break-up value method. At the time of making of Reference, this question was pending before the Apex Court. Now, we have the benefit of the decision of the Apex Court in BHARAT HARI SINGHANIA v. C.W.T., reported in 207 ITR 1. The Supreme Court while construing the provisions of Rule 1D of the Wealth Tax, 1957, held that the said Rule was required to be followed in every case where unquoted equity shares of a company (other than an investment company or a managing agency company) have to be valued and that all the authorities under the Act including the Valuation Officer were bound by the said Rule. It was further held that while valuing the unquoted equity shares under Rule 1D, no deductions on account of capital gains tax which would have been payable in case the shares were sold on the valuation date can be made. Similarly, no other deductions including provision for taxation, provident fund and gratuity are admissible. It was held that Rule 1D was exhaustive on the subject.

4.

The Supreme Court while construing the provisions

of the said Rule 1D read with Explanation -II (ii)(e) of the said Rule held that truly speaking, the advance tax paid is not really an asset but the proforma of balance sheet in Schedule-VI to the Companies Act requires it to be shown as such. It was held that what clause (i)(a) of the said Explanation did was to remove the said amount from the list of assets for the purpose of Rule 1D. It is then that clause (ii)(e), which speaks of liabilities, says that only that amount which is still remaining to be paid shall be treated as a liability on the valuation date. If in the provision for taxation made in the column of liabilities in the balance sheet, the amount of advance tax already paid is again shown as a liability, it will not be treated as a liability. The advance tax paid had already gone out of the profits and been debited in the account books of the company. It was held that this was the true function of both the sub-clauses. The Supreme Court in the process accepted the view of Andhra Pradesh, Karnataka, Punjab & Haryana High Courts and difered from the view taken by the Gujarat High Court in C.W.T. v. Ashok K. Parik (supra).

5.

In view of the decision of the Supreme Court in Bharat Hari Singhania v. C.W.T. (supra), we hold that the Tribunal was in error in directing the Assessing Officer to value to unquoted equity shares as per Rule 1-D as interpreted by the Gujarat High Court in the case of Ashok K. Parik, 129 ITR 46. The question referred to us is accordingly answered in negative in favour of the Revenue and against the Assessee. The Reference stands disposed of accordingly with no order as to costs.

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p.n.nair

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