1. These appeals are filed by the revenue in the cases of three assessees. They are against the orders of the ACC, and relate to the assessment years 1970-71 to 1974-75 except in the case of Mrs. Grace Collis, where the appeals relate to the years 1970-71 to 1973-74. A common issue is raised in these appeals. These appeals are, therefore, consolidated.
2. The common issue raised in these appeals is regarding the valuation of the unquoted shares held by these three assessees in Collis Line (P.) Ltd. The dispute is confined to the value to be assigned to the ships held by the company as its fixed asset in the various years while applying rule 1D of the Wealth-tax Rules. It may be mentioned at the outset that this company was formed on 2-4-1969 and took over three ships, namely as SS Anton, SS Effiginy and SS radiant from Ambassador Steam Ships (P) Ltd. This transfer was in a schedule to the compromise approved by the Kerala High Court as per order dated 2-4-1969 in OP N.2 of 1969. These three ships had the written down values of Rs. 5,83,333, Rs. 9,09,550 and Rs. 16,44,521, in the books of the transferor company, namely, Ambassador Steam Ships (P.) Ltd. For the purpose of the transfer, however, they were valued by Turner & Hitchok Ltd., Shipping Valuers, Glasgow, UK at Rs. 10,26,000, Rs. 16,20,000 and Rs. 22,50,000, respectively. The transfer from Ambassador Steam Ships (P.) Ltd. was made at these values determined by Turner and Hitchok Ltd. The valuation date for the assessees here for the various assessment years were on the 31 st March of the relevant years. The accounts of the company, however, were closed on 30th September, the first account being closed on 30-9-1969 of Collis Line (P.) Ltd. has been taken for the assessment year 1970-71 and so on for the subsequent assessment years. In the books of the company, Collis Line (P.) Ltd., these three ships were shown at the values at which they were transferred under the company compromise agreement. The ships have not continued for all the valuation dates. Some of the ships have been sold and some new ships have been acquired.
3. In its accounts the company had depreciated these three ships at about 5 per cent of the transfer values. The same rates seem to have been applied in respect of the ships that were subsequently acquired by the company, i.e., on the cost at which each ship has been acquired. In the income-tax assessment of Collis Line (P.) Ltd., however, the depreciation has been given at varying rates depending upon the age of the ship. Such rates have been applied to the original cost of these ships, i.e., the cost of the ships to Ambassador Steam Ships (P.) Ltd. It is necessary to make this point clear because the learned chartered accountant who had represented the assessees before the AAC and who also assisted the written own values of these three ships in the case of the company, namely, Collis Line (P.) Ltd., were arrived at by deducting the depreciation admissible under the Income-tax Act from the values at which the ships have been transferred by Ambassador Steam Ships (P.) Ltd. to Collis Line (P.) Ltd. This particular position does not appear to subsist for the other ships that have been acquired by the company subsequent to its incorporation.
4. It was the contention of the assesses before the WTO and also before the AAC that in applying rule 1D, the value of this particular category of assets, namely, ships should be taken only at their written down value as adopted for income tax purpose. The WTO did not accept this contention. The AAC, however, accepted this contention. He has made three points in this regard. The first point is that under rule 1D it is only the liabilities that should be taken at the value as shown in the balance sheet but the rule does not say that the assets should be taken at the values as shown in the balance sheet. He, therefore, concluded that the correct value of the assets should be adopted and not any artificial has made is that the written down value of the ships as per the balance sheet drawn up for income-tax purposes would give a correct value as depreciation is allowed under the Income-tax Act on a scientific basis. The third point that he has made out is that for the purpose of gift-tax assessment in the case of Shri F. Collis, related to the assessees her, the GTO has himself valued the shares taking the value of the assets of the company at the figures shown in the balance sheet of the company drawn up for income tax purposes.
5. It is pointed out by the departmental representative that the gift-tax assessment of Shri F. Collis is in respect of the gift of shares in Ambassador Steam Ships (P.) Ltd. and not of the shares of Collis Line (P.) Ltd. It is urged that the method of valuation for the purpose of gift-tax is in any event not relevant for the purpose of valuing the shares under the wealth tax Act where the shares in question have to be valued under rule 1D. It is pointed out that the Kerala High court has held in the case of CWT v. Mammen Varghese that rule 1D is mandatory and, therefore, there cannot be any dearture from this for valuing of the assets under rule 1D should be made in the samemanner as the valuation of the value arrived at. It is urged that the balancesheet of the assets and it is binding. Reliance in this regard is placed on CWT v. Man Industrial Corpn. Ltd. [1980] 123 ITR 298 (Raj). It is pointed out that it is for the assessee to show that the balance sheet values are not the real values.
6. On behalf of the assessees it is urged that the language used in rule 1D for the purpose of adopting the value of the liabilities and of the assets is different in that it is provided that the liabilities should be taken at the values as shown in the balance sheet while it is to provided that the value of the assets shown in the balance sheet is to be adopted. It is submitted that for the purpose of valuing the assets rule 1D only provides for taking the assets shown in the balance sheet for the purpose of valuing the assets rule 1D only provides for taking the assets shown in the balance sheet for the purpose of valuation and then valuing them on a real basis. There is no restriction that the asset should be valued only at the figures shown in the balance sheet. Reliance is placed in this regard on the decision of the Bombay High Court in CWT v. Raghuvashi Mills Ltd. [1976] 104 ITR 544 and to the observations at page 546. In reply, it is submitted by the departmental representatives that if the value of the assets are to be disturbed and not taken at the figures as shown in the balance sheet they could as well be determined at the market price an not at a figure of the written down values which is adopted specifically for the purpose of granting and controlling allowance of depreciation.
7. We have carefully considered the submissions. We are of the opinion that the AAC was not correct in directing that the written down values of the ships as for the income tax assessment should be adopted as the value of these assets for the purpose of applying rule 1D. We are unable to accept the arguments advanced on behalf of the assessee which found favour with the AAC that the assets appearing in the balance sheet are to be valued on a basis different from those appearing in the balance sheet, which basis is, it is accepted, to be adopted for valuing the liabilities. It has been held by the Kerala High Court in the case of the Mammen Varghese (supra) that rule 1D is mandatory and, therefore, the valuation of these shares are to be made in accordance with rule 1D. The opening paragraph of rule 1D reads as follows :- "The market value of an unquoted equity share of any company, other than an investment company or a managing agency company, shall be determined as follows :- The value of all the liabilities as shown in the balance-sheet of such company shall be educated from the value of all its assets shown in the balance sheet. The net amount so arrived as shall be divided by the total amount of its a paid-up equity share capital as shown in the balance sheet." Sub-clause (c) of clause (ii) of Explanation II would also be relevant.
This reads as follows : (ii) The following amounts shown as liabilities in the balance sheet shall not be treated as liabilities, namely -(a) ** ** **(b) ** ** ** (c) reserves, by whatever name called, other than those set apart towards depreciation;" This sub-clause of the Explanation makes it very clear, in our opinion that even the assets appearing in the balance sheet should be taken at the values shown in the balance sheet. It would be seen that sub-clause (c) excludes the reserves appearing in the balance sheet from being treated as liabilities. However, an exception is made in the case of depreciation reserve. Depreciation reserve is created normally and shown in the balance sheet as the depreciation reserve only when the assets in respect of which such depreciation reserve is created are not reduced in value from year to year by the depreciation for each asset.
The effect of sub-clause (c) if clause (ii) of Explanation II is, in our opinion, to adopt the value of the fixed asset as reduced by the depreciation that is written off or carried to a reserve account for the purpose of rule 1D i.e., the asset is to be taken at the value shown in the balance sheet. We, therefore consider that the AAC was in error in directing the WTO to adopt value for the ships different from the value shown for them in the balance sheet.
8. Even accepting for the sake of arguments the submissions advanced on behalf of the assessee, we are unable to agree that in the circumstances, it is only the written down value appearing in the income-tax assessment that should be adopted for these assets. The main objection to such argument is provided in the manner in which these three ships have been transferred to Collis Line (P.) Ltd. by Ambassador Steam Ship (p.) Ltd. under the compromise petition. Though the written down values in the income-tax assessments of Ambassador Steam Ship (P.) Ltd. were lower, the transfer had been effected at such higher figures determined by a shipping valuer from UK. It would be clear from this that the written down values for the purpose of income tax assessments may not really indicate real value of the asset. It has been held by the Supreme Court in Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 that under section 211 of the Companies Act, 1956 every balance sheet of a company must give a true and fair view of the state of its affairs as at the end of the financial year and when the net value of the assets are shown at a certain figure in the balance sheet, the WTO was justified in adopting such values. It was observed that it was open to the assessee to convince the authorities that the said figures were inflated for acceptable reasons.
This was no doubt a case in which the company itself was an assessee under the wealth-tax Act. Nevertheless the principle that has been recognised by the Supreme Court would be equally applicable of to the case of valuation of the shares in the wealth-tax assessment of the shareholder. This principle has been reiterated in CWT v. Aluminum Corporation of India Ltd. [1970] 78 ITR 483 (SC). In this decision, though it was with reference to section 7(2) (a) it has been held that the book value of the assets in the balance sheet and not the written down value should be taken as the primary basis of valuation an only if adjustment is required they may be made. We, therefore, do not accept the submissions advance on behalf of the assessees here that the written down value for the purpose of income-tax assessments should be adopted as the value of these assets, namely, the ships held by the company, Collis Line (P.) Ltd. for the various assessment years. The order of the AAC is reversed and the order of the WTO on this are restored. The appeals are allowed.