P.B. Mukharji, J.
1. This statement of the case under the Wealth-tax Act at the instance of the Commissioner raises the following two questions for an answer by this court:
'(i) Whether, on the facts and in the circumstances of the case, in determining the break-up value of the shares held by the assessee in Messrs. Hind Mills Ltd., the Income-tax Tribunal was justified in holding that the valuation of the depreciable assets of the company concerned should be based on their income-tax written down value in place of their balance-sheet value ?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that, in computing the break-up value of the shares of Messrs. Sri Hanuman Sugar Mills Ltd., the amount of Rs. 1,75,000, being proposed dividend, should be deducted ?'
2. We shall not tarry for a discussion of the second question which appears to us to be covered by the decision of a Division Bench of this court in Gift-tax Officer, Calcutta v. Kastur Chand Jain : [1964]53ITR411(Cal) . Following that decision, the answer, therefore, to the second question is in the negative, in favour of the revenue.
3. It is the first question which requires some consideration before the answer is given. The facts giving rise to this question are simple and should be stated first. The assessee is an individual. She held 7,000 ordinary shares of the Hind Mills Ltd. of the face value of Rs. 10 each. These shares are admittedly not quoted on the stock exchange. The main point raised in the statement of the case in question No. 1 concerns the computation of the break-up value of these shares. The Tribunal accepted the assessee's contention that, in so far as the assets on which depreciation has been allowed for income-tax purposes, the written down value thereof should be adopted in place of their balance-sheet values. It is found as a fact that the company did not provide adequate or any depreciation and the reason given in the balance-sheet by the company was that there was paucity of profits. The Tribunal came to the conclusion that normal depreciation allowed under the Income-tax Act is a reasonable measure of wear and tear of plant, machinery and buildings, etc., for the purposes of business. It, therefore, came to the conclusion that the valuation of the depreciable assets with reference to the income-tax written down value as on the 30th June, 1959, to be the proper basis. Hence, the break-up value of the Hind Mills ordinary shares was computed accordingly. The assessment relates to the assessment year 1960-61 with the corresponding valuation date being the 10th October, 1959. The usual catena of cases on this point have been duly cited. They are, first, a Division Bench decision of this court in Commissioner of Wealth-tax v. Tungabhadra Industries Ltd. : [1966]60ITR447(Cal) and the observations made thereunder to the following effect:
'While we agree that the written down value may not in all cases represent the real value of the assets, in normal cases it will give the Wealth-tax Officer a fair idea of its proper value unless the plant and machinery are of a rare type or are of a quality which is not generally available in India and for which there is a keen demand. No such uncommon feature is to be found in the case before us.'
4. The second case is another Division Bench decision of this court in Commissioner of Wealth-tax v. Bally Jute Co. Ltd. : [1968]67ITR188(Cal) . This case does not lay down anything new but suggests that in computing the net wealth under Section 7(2)(a) of the Wealth-tax Act, 1957, the value of the depreciable assets should be included after allowing normal depreciation in place of the balance-sheet value though such depreciation need not necessarily be the same as those allowable for income-tax purposes. These two cases were the main authorities on which Dr. Pal, appearing for the assessee, relied.
5. On behalf of the revenue, very large questions have been raised in argument by Mr. Pal. Some of these basic questions are that the enquiry under the Wealth-tax Act is basically different from the enquiry under the Income-tax Act. Under Section 7 of the Wealth-tax Act, the statute lays down how the value of the assets are to be determined for the purposes of that Act. The foundation of this method of valuation in Section 7 of the Act is the price which in the opinion of the Wealth-tax Officer the asset would fetch if sold in the open market on the valuation date. The principle on which depreciation is allowed under the Income-tax Act, however, is different under Section 10(2)(vi). That Section of the Income-tax Act deals with business and the tax payable by an assessee, inter alia, under the head 'Profits and gains of business'. Section 10(2) says that such profits and gains shall be computed after making the allowances named therein. The allowances, therefore, are impressed by the object and purpose of finding out the profit or gain. That is not the purpose or object under the Wealth-tax Act, which has to find out the price that the asset would fetch if sold in the open market on the valuation date. The depreciation mentioned in Section 10(2)(vi) of the Income-tax Act is in respect of depreciation of the physical assets like buildings, machinery, plant or furniture, properties which are from their very nature depreciable with wear and tear according to use.
6. The importance of the question raised by Mr. B. Pal on behalf of the revenue can be put in the form of this interrogation: 'Is the market value of the ordinary shares of this company at all dependent on the depreciation of the physical assets of the company ?' Its practical significance cannot be minimised. For instance, if the company does not choose to show in its balance-sheet any depreciation, for, say, a dozen tables and chairs and some electrical fans and lights, on the ground that there is a paucity of profit, will that at all, in any way, affect the valuation of these shares, for the purpose of the Wealth-tax Act It should be pointed out that none of the cases on this point discuss or relate to the valuation of shares. It should also be pointed out that depreciation mentioned in Section 10(2)(vi) of the Income-tax Act is not concerned with depreciation of the value of the shares because shares are not one of the properties mentioned or included within the meaning of the expressions 'buildings, machinery, plant or furniture'. This, however, is to some extent misreading of the problem. What the income-tax authorities have done in giving the allowance under Section 10(2)(vi) was not analysed as depreciation of these shares but in respect of the physical assets of the company, viz., Hind Mills Ltd. But the repercussion of this point need not be missed having regard to the illustration which I have just given. The co-relation between depreciation of the physical assets of a company and its possible effect upon the value of its shares may not only be remote but mythical. The other practical difficulty is to reflect that depreciation in physical assets by either a percentage or a proportion on the valuation of these shares. The seemingly innocuous formula usually adopted is to determine the net-wealth of the physical assets of the company by allowing the depreciation and then divide the number of shares among it so that there is a proportionate reflection of the depreciation in the value of the shares. Neither legally not logically I have been able to follow this forced connection in coming to the valuation of an asset in the open market and the valuation read under Section 7(2) of the Wealth-tax Act with reference to and in the light of depreciation allowance used under the Income-tax Act and in particular under Section 10(2)(vi) of that Act. The bubble on this point has been growing as could be gathered from the case law accumulating on this point unobtrusively but fairly frequently.
7. This bubble has already been pricked. The recent decision of the Gujarat High Court, which has been mentioned and quoted in the decisions already cited by me, indicates the new winds. In that decision. Commissioner oj Wealth-tax v. Raipur Mfg. Co. Ltd. : [1964]52ITR482(Guj) , K. T. Desai C.J. very clearly and strongly observed as follows :
'Under section 7(2) of the Wealth-tax Act, when the net value of assets of a business as a whole has to be determined, regard should be had to the balance-sheet of such business. In numerous balance-sheets it is found that several assets are shown at cost. The price at which the same are shown could not possibly be in such circumstances the price which such asset would fetch if sold in the open market on the valuation date. No doubt there is a power given to the Income-tax Officer to make such adjustments as the circumstances of the case may require. It is urged that this power has to be exercised in order that the price of assets, as shown in the balance-sheet, may equate with the written down value of such assets as appearing in the records of the income-tax department. There is no warrant for such a conclusion. The written down value may be far from the real value of the asset on the valuation date. There cannot be any hard and fast rule in this matter and the Wealth-tax Officer is under no obligation to consider the written down value as the proper value of an asset.'
8. In spite of this observation and the warning that there should be no hard and fast rule on this point, there is a tendency in judicial decisions to harden into almost a doctrine that the system of allowance for depreciation under Section 10 of the Income-tax Act somehow or other always influences, directly or indirectly, the valuation of wealth under Section 7(2) of the Wealth-tax Act. I am unable to subscribe to such a view without qualifications. The primary and major qualifications may thus be formulated. The first qualification is that valuation of assets under Section 7 of the Wealth-tax Act has for its criteria the price that the asset, according to the opinion of the Wealth-tax Officer, will fetch in the open market on the valuation date and not the written down value according to the books or balance-sheet of the company or the assessee. The written down value may or may not be the price in the open market. The second qualification is that the income-tax written down value under Section 10 of the Income-tax Act may not also represent the price in the open market, because the purpose and object under Section 10 of the Income-tax Act are different from the purpose and object of Section 7 of the Wealth-tax Act. The third qualification relates to the valuation of shares as assets under the Wealth-tax Act and the practical difficulty in reflecting the depreciation of physical assets, like 'building, machinery, plant or furniture', under Section 10(2)(vi) of the Income-tax Act, in the valuation of assets like 'shares' either by following the principles of fixing a deceptive percentage or deceptive proportion. This caution is necessary. Desai C.J. did give that caution. I, respectfully, join with his Lordship in reiterating and repeating that caution.
9. This point arises directly in the instant reference before us because here the balance-sheet is subordinated to the allowance under the income-tax written down value on the ground that the balance-sheet itself says that there is paucity of profit. The debate is, is that by itself enough to discard the balance-sheet value in favour of the written down value under the Income-tax Act By itself alone, I am of the opinion, as at present advised, it is not so.
10. The other decision is Commissioner of Wealth-tax v. Indian Standard Metal Co. Ltd. : [1963]49ITR832(Bom) , where it is laid down that it cannot be an invariable rule of law that simply because depreciation has been allowed under the Income-tax Act, the same must be allowed in determining the net value of the assets for the purposes of wealth-tax. Whether such depreciation should be deducted or not must depend on the facts and circumstances of each case. In that case it was held that the assessee was entitled to claim deduction of the amount of accumulated depreciation allowance in its fixed assets, not written off in the books but allowed by the department in the income-tax assessment for the purpose of computing the net wealth under Section 7 of the Wealth-tax Act.
11. Again in Commissioner of Income-tax v. Bipin Chandra Maganlal & Co. Ltd., : [1961]41ITR290(SC) , Shah J. observed, at page 295 :
'In computing the profits and gains of a company under Section 10 of the Act (Income-tax Act) for the purpose of assessing the taxable income, the difference between the written down value of the machinery in the year of account and the price at which it was sold (the price not being in excess of the original cost) was to be deemed to be profit in the year of account, and being such profit, it was liable to be included in the assessable income in the year of assessment. But this is the result of a fiction introduced by the Act. What in truth is a capital return is by a fiction regarded for the purposes of the Act as income. Because this difference between the price realized and the written down value is made chargeable to income-tax, its character is not altered, and it is not converted into the assessee's business profits. It does not reach the assessee as his profits ; it reaches him as part of the capital invested by him, the fiction created by Section 10(2)(vii), second proviso, notwithstanding. The reason for introducing this fiction appears to be this. Where, in the previous years, by the depreciation allowance, the taxable income is reduced for those years and ultimately the asset fetches on sale an amount exceeding the written down value, i.e., the original cost less depreciation allowance, the revenue is justified in taking back what it had allowed in recoupment against wear and tear, because in fact the depreciation did not result. But the reason of the rule does not alter the real character of the receipt.'
12. Having said so far it will not be necessary to discuss in detail Kesoram's case : [1963]48ITR31(Cal) . I shall mention one more case which was referred to by Mr. Pal for the revenue and that is Rathan Singh v. Commissioner of Income-tax, A.I.R. 1926 Mad. 462, in support of his submission that income-tax depreciation on written down value is not a correct guide for the actual market value of the assets under the Wealth-tax Act.
13. The handicap, however, for the revenue, in the instant case, is that no circumstances have been shown to suggest an alternative procedure in the facts and circumstances of the case for the valuation of the depreciable assets of the company concerned. Undoubtedly, there is the income-tax written down value so far as the company is concerned. Undoubtedly, the balance-sheet says that the assets have not been depreciated because of the paucity of profit. It was open no doubt to the revenue to show circumstances to show that, in the facts of this particular case, the balance-sheet value was the more appropriate value than the income-tax written down value.
14. Within the limits of the observations that I have made above and particularly in the facts of this case recorded, I, therefore, answer the first question in the affirmative and in favour of the assessee and this affirmative answer must be read with the three major qualifications and considerations stated above. Each party to pay its own costs.
Sabyasachi Mukharji, J.
15. I agree.