Ratnam, J.
1. The assessee, an individual, held shares in certain companies which were not quoted in the stock exchange. In determining the value of the shares so held by the assessee for the assessment year 1974-75 as provided under the Wealth-tax Act, 1957, and the Rules thereunder (hereinafter referred to as 'the Act' and 'Rules' respectively), the Wealth-tax Officer was of the view that the depreciation on the assets as shown in the balance-sheets of the companies should be taken into account and not the depreciation under the Income-tax Rules for arriving at the value of the shares. On that basis, the Wealth-tax officer determined the value of the shares for the purpose of assessment and completed the assessment accordingly. On appeal, the Appellate Assistant Commissioner, in a brief order, accepting the stand of the assessee, held that, while computing the value of the shares under Rule 1D of the Rules, short depreciation provided for should be excluded the refixed the value of the shares. On further appeal by the Revenue before the Tribunal, on the point whether the difference between the straightline method and the written down value method of computing the depreciation of the value of the assets should be adopted in arriving at the break up value of the shares under Rule 1D of the Rules, short depreciation provided for should be excluded the refixed the value of the shares. On further appeal by the Revenue before the Tribunal, on the point whether the difference between the straightline method and the written down value method of computing the depreciation of the value of the assets should be adopted in arriving at the break up value of the shares under Rule 1D of the Rule, the Tribunal followed its earlier decision relating to the same assessee for the assessment years 1970-71 to 1972-73 in W.T.A. Nos. 37 to 39/74-75 dated May 29, 1976, and decided against the assessee. In the course of the earlier order of the Tribunal relied on, the Tribunal referred to the adoption by the companies of the straight line method for providing depreciation and the other relevant provisions of the Act and the Rules and the Companies Act and concluded that the reference to the depreciation according to the Income-tax Rules only in the report of the board of directors cannot be regarded as forming part of the balance-sheets of the companies and, therefore, adjustments in accordance with the rules could be made only to the value of the fixed assets as appeared ex facie in the balance-sheet and not anything else. Applying that principle, the Tribunal did not countenance the claim of the assessee. Under section 27(1) of the Act. At the instance of the assessee, the following question of law has been referred to this court for its opinion :
'Whether, on the facts and in the circumstances of the case, for the purpose of valuing the shares of the company for wealth-tax purposes the depreciation computed on the straight-line method should be adopted or the depreciation on the basis of the written down value as under the Income-tax Rules should be adopted ?'
2. Learned counsel for the assessee, inviting our attention to section 7 of the Act, rules 1D, 2A and 2B of the Rules and sections 205(2)(b), 211(6), 217(1)(d) and 222 of the Companies Act, contended that the directors report containing the depreciation on the assets, as worked out under the Income-tax Rules, was attached to the balance-sheets and formed part of them and should have been taken into account by the authorities in determining the market value of the shares but that, on a technical view of the matter, the Tribunal had treated the report of the directors as not forming part of the balance-sheets. Learned counsel further submitted that the value of the assets reflected in a balance-sheet is not conclusive, but adjustable and that would also indicate that the figures furnished in the balance-sheet could be subjected to alteration. Reference in this connection was also made by learned counsel to the decisions reported in CWT v. Aluminium Corporation of India Ltd. : [1972]85ITR167(SC) ; CWT v. Ranganayaki Gopalan : [1973]92ITR529(Mad) ; CWT v. Asarwa Mills : [1978]115ITR612(Bom) and Grace Collis v. CWT : [1988]172ITR597(Ker) . On the other hand, learned counsel for the Revenue, referring to the provisions of section 7 of the Act and the relevant Rules for valuation of the unquoted shares, contended that the balance-sheet is the primary basis and evidence of the value of the assets, subject of course to such adjustments as could be made as provided in the Rules and that the report of the directors showing the depreciation on the assets as per the Income-tax Rules does not form part of the balance-sheet as such and the conclusion of the Tribunal was quite right. Strong reliance was placed by learned counsel on the decision of the Supreme Court reported in CWT v. Hindustan Motors Ltd. : [1976]104ITR430(SC) , which, according to learned counsel, has also explained the observations in CWT v. Aluminium Corporation of India Ltd. [1973] 85 ITR 167.
3. In all the balance-sheets of the companies in which the assessee held shares, the straightline method of providing depreciation which was one of the options available to the companies had been adopted and the balance-sheets prepared accordingly. It was also not disputed that the depreciation as per the Income-tax Rules was not reflected in the balance-sheets. But had been referred to only in the directors' reports. Under section 7 of the Act, the Wealth-tax Officer is required to estimate the value of the shares, for purposes of the Act, subject to the Rules laid down in that behalf. Section 7(2)(a) provides that, in a case where the assessee carried on business for which accounts are maintained regularly, the Wealth-tax Officer may. Instead of determining separately the value of each asset held by the assessee in such business, determine the net value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole. Having regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as may be prescribed. Under Rule 1D of the Rules, provision is made for determining the market value of an unquoted equity share of any company in the manner prescribed thereunder. However, for arriving at the market value of unquoted equity shares of any company, the basis is the balance-sheet Explanation I to rule 1D states that the balance-sheet for purposes of rule 1D in relation to any company means the balance-sheet of such company as drawn up on the valuation date and where there is no such balance-sheet, the balance-sheet drawn up on a date immediately preceding the valuation date and in the absence of both, the balance-sheet drawn up on a date immediately after the valuation date. Explanation II catalogues the assets and liabilities shown in the balance-sheet which shall not be treated as assets or liabilities. Rule 2A provides that, if the Wealth-tax Officer should determine under section 7(2)(a) of the Act, the net value of the assets of the business as a whole having regard to the balance-sheet of the business, he shall make adjustments specified in rules 2B to 2G of the Rules. Under rule 2B providing for adjustments in the value of an asset disclosed in the balance-sheet, it is stated that its value shall be taken to be in the case of an asset on which depreciation is admissible, its written down value and, in the case of an asset on which no depreciation is admissible, its book value. Rule 2B(1)(c) provides that the valuation of the closing stock is that adopted for purposes of assessment under the Income-tax Act, 1961, for the previous year relevant to the corresponding assessment year. Rule 2B(2) makes provision for the value of the asset for purposes of rule 2A to be taken as its market value under certain circumstances. A brief reference to the provisions of the Companies Act would be necessary at this stage. Section 205 of the Companies Act provides for payment of dividends and the manner and time of payment. Section 205(1) permits the declaration or payment by a company of dividend for any financial year out of the profits of the company for that year arrived at financial year out of the profits of the company for that year arrived at after providing for depreciation in accordance with sub-section (2) of section 205 or out of the profits of the company for any previous financial year or years, after provides for depreciation in accordance with those provisions and remaining undistributed or out of both or out of monies provided by the Central Government or State Government for the payment of dividends in pursuance of a guarantee given by that Government. Section 205(2) lays down the manner in which provision for depreciation should be made under section 205(1) of the Companies Act and the depreciation under section 205(2) provided is to the extent specified in section 350. In turn, section 350 providing for depreciation with reference to the written down value of the assets at the rates specified by the Indian Income-tax Act and the Rules, refers to section 349(4)(k), which relates to the determination of the net profits of a company in any financial year for purposes of payment of remuneration to managing agents. The method of providing depreciation under section 205(2)(b) of the Companies Act, which is the straightline depreciation method, had been adopted by the companies and the other two alternatives provided in section 205(c) and (d) are not relevant. Under section 211 of the Companies Act relating to the form and contents of the balance-sheet and profit and loss account, it is provided that the balance-sheet should give a true and fair state of affairs of the company and should be in the prescribed form or as near thereto in accordance with the general instructions for the preparation of the balance-sheet under the heading 'Notes' in Part I of Schedule VI. Section 211(6) provides that any reference to a balance-sheet or profit and loss account shall include any notes thereon or document annexed thereto giving information required by the Companies Act and allowed by the Companies Act to be given in the form of such notes or documents. From the aforesaid provisions, it is seen that the reference to a balance-sheet or profit and loss account would include the notes or documents annexed to the balance-sheet. The use of the expression 'annexed' appears to us to indicate something that forms an integral part of the balance-sheet or profits and loss account. Section 217 of the Companies Act states that there shall be attached to every balance-sheet a report by its board of directors with respect to matters enumerated under clauses (a) to (c) and others. Clause (d) relied on refers to material changes or commitments, if any, affecting the financial position of the company which had occurred between the end of the financial year of the company which balance-sheet relates and the date of the report. It is thus even that a distinction is statutorily made between what is 'annexed' to the balance-sheet or the profit and loss account by way of notes or documents and what is 'attached' to the balance-sheet in the shape of a report by the board of directors. We have earlier pointed out that the use of the expression 'annexed' would indicate that what is annexed is intended to be an integral part of that to which it is annexed unlike in the case of the attaching of the report of the board of directors to the balance-sheet. The expression 'attached', in our view, would connote a mere enclosing of the directors' report to the balance-sheet not forming part of the balance-sheet by itself. Section 222 of the Companies Act places matters beyond doubt at the report of the board of directors is not annexed or required to be annexed to the accounts of the company. Prima facie, section 222 of the companies Act states that information required under the Companies Act be given in the accounts, if allowed to be given in a statement to be annexed to the account, may be given in the report of the board of directors instead of in the account and if such information is given, the report shall be annexed to the accounts and the provisions of the Companies Act shall apply in relation thereto accordingly except that the auditors shall report thereon only in so far as it gives that information. We also find from section 227(2) of the Companies Act that the auditor shall make a report to the members of the company on the accounts examined by him and on every balance-sheet and profit and loss account and on every other document declared to be part of or annexed to the balance-sheet or profit and loss account which are laid before the company in a general meeting during his tenure of office and the report shall also further state whether, according to his information and the explanation given to him, the accounts given a true and fair view of the affairs of the company and the profit or loss for that financial year. The report of the directors, in this case, contained the details of depreciation according to the Income-tax Rules, but the balance-sheet did not and the directors' report was not and could not be regarded as an annexure to the balance-sheet, for, our attention was not drawn to any provision in the Companies Act requiring that alternative methods of providing for depreciation should be made known. We may point out that if in any document which could be properly regarded as an annexure to the balance-sheet, the amount of depreciation according to the Income-tax Rules had been worked out, then, perhaps, it might have been open to the assessee to contend that the document forming part of the balance-sheet and the depreciation according to the Income-tax Rules reflected therein may have to be adjusted to arrive at the value of the fixed assets, as against these shown in the balance-sheet. The companies in question did not do any such thing at all but they has referred to the depreciation according to the Income-tax Rules only in the report of the board of directors and that, we have pointed out, was only a document attached to the balance-sheet and not an annexure to the balance-sheet. We are also of the view that the provision of depreciation by an alternative method is not required under the provisions of the Companies Act to be given in the accounts and, therefore, the question of giving it in the report of the directors may not arise. The reliance upon section 217(1)(d) of the Companies Act would not also in any manner asset the assessee, for, that provision contemplates a report by the directors of unusual changes affecting the existence or the substratum of the company between the end of the financial year to which the balance-sheet relates and the date of the report and not a matter relating to the alternative methods of providing for depreciation. We, therefore, hold, on a consideration of the relevant provisions of the Companies Act, that a report by the board of directors referring to depreciation according to the Income-tax Rules, but not annexed to the balance-sheet prepared after providing for depreciation in the manner contemplated under section 205(2)(b) of the Companies Act and reported upon by the auditors cannot be regarded as forming part of the balance-sheet for purposes of valuation of unquoted equity shares under the Act. Section 7 of the Act opens by stating that it is subject to the Rules. Rule 1D provides that the balance-sheet would be taken as the basis and the break-up value of each unquoted equity share arrived at in the manner indicated therein. Explanation I to rule 1D of the Rules makes it abundantly clear that the balance-sheet alone is the primary basis and Explanation II permits the treatment of assets and liabilities found in the balance-sheet as not assets and liabilities. Rule 2A also contemplates only the balance-sheet as the basis for even making the adjustments specified in rules 2B to 2G. We, therefore, hold, on a consideration of the relevant provisions of the Act and the Rules, that the balance-sheet forms the basis foundation for arriving at the market value of the unquoted equity shares in accordance with the relevant Rules. What is found in this case is that the authorities had proceeded on the basis of the balance-sheets. However, the assessee wanted the authorities to travel outside the balance-sheets for the purpose of fixing the market value of the shares held by him. That plainly cannot be permitted to be done in the light of the provisions of the Companies Act and the Rules referred to earlier.
4. We may now proceed to consider the decisions to which our attention was drawn by counsel on both sides. In CWT v. Aluminium Corporation of India Ltd. : [1972]85ITR167(SC) , relied on by learned counsel for the assessee, the assessee was a company and one of the questions which arose for consideration was whether the value of the company's fixed assets, as shown in its balance-sheet on the respective valuation dates, should have been substituted by the written down value of these assets as per the company's income-tax records. The Supreme Court pointed out that the value, as shown in the balance-sheet, afforded a sound basis for valuing the assets and that value was not to be substituted by the written down value as per the Income-tax Act records. While holding so, an observation was made that the valuation of the assets shown in the balance-sheet was not conclusive and this was sought to be taken advantage of by learned counsel for the assessee to make out that the value of the assets, as reflected in the balance-sheet, is not conclusive and that value could be altered, as in this case, on the strength of the report of the directors. We are unable to read those observations of the Supreme Court as lending any assistance to the stand of the assessee. The Supreme Court had pointed out in clear and unmistakable terms that under section 7(2) of the act. The Wealth-tax Officer is required to have regard to the balance-sheet and it is open to the assessee to satisfy the authorities that the valuation shown in the balance-sheet is not correct, but in the absence of such proof, the Wealth-tax Officer will be justified in proceeding on the basis that the value shown in balance-sheet is correct because no one can know the value of the assets of a business more than those who are in charge of that business. The value of the assets, as shown in the balance-sheet, had been stated to be the primary basis of valuation for purposes of the Wealth-tax Act and is prima facie evidence of value. Further, referring to Kesoram Industries case : [1966]59ITR767(SC) , the Supreme Court pointed out that the High Court had ignored the ratio of that decision and held that the balance-sheet cannot be considered as prima facie evidence of the value of the assets of that business. We may point out that the assessee in that case was a company and the decision has to be understood not as declaring that the market value reflected by the balance-sheet is inconclusive in all cases. That this is the manner in which the observations should be understood has been laid down by the Supreme Court in CWT v. Hindustan Motors Ltd. : [1976]104ITR430(SC) , relied on by learned counsel for the Revenue. In that case, the assessee-company had not provided for full depreciation allowable under the provisions of the Income-tax Act in its balance-sheet owning to paucity of profits. The Wealth-tax Officer, under section 7(2)(a) of the Act, adopted the value of the assets as reflected in the balance-sheet, negativing the claim of the assesse that the book value of the assets should be reduced by the difference between the written down value under the Income-tax Act and the figures disclosed by the balance-sheet. Though this order was affirmed in appeal, the Tribunal felt that, in cases where proper depreciation had not been allowed in the balance-sheet for any reason whatsoever, it is proper to accept the written down value as worked out for purposes of the Income-tax Act and directed the Wealth-tax officer to adopt the written down value for inclusion in the net wealth. On a reference, the High Court affirmed the view of the Tribunal following its decision in CWT v. Tungabhadra Industries Ltd. : [1966]60ITR447(Cal) . By the time the matter reached the Supreme Court, the decision in Tungabhadra Industries' case : [1966]60ITR447(Cal) , which was followed by the High Court had been reversed by the Supreme Court in CWT v. Tungabhadra Industries Ltd. : [1970]75ITR196(SC) . Dealing with the question whether the view taken by the High Court was right, the Supreme Court, point out that, in valuing the assets under section 7 of the Act, the object is to arrive at the true value of the assets and, in a case where the assessee is carrying on business and maintaining accounts regularly, it is open to the Wealth-tax Officer to determine the net value of the assets of the business as a whole with reference to the balance-sheet of such business as on the valuation date and to make such adjustments as the circumstances may require and that, if what had been reflected in the balance-sheet is not the true value of the assets, it is open to the assessee to satisfy the Wealth-tax Officer by producing relevant materials that the value of the fixed assets given in the balance-sheet is not the true value and the reduced value should be taken into account and the onus was entirely upon the assessee to satisfy the Officer that what is shown in the balance-sheet is not the true and actual value of the assets on the valuation date. After referring to the decision in Tungabhadra Industries' case : [1970]75ITR196(SC) . The Supreme Court rejected the argument that the provision of inadequate depreciation owing to paucity of profits would not be sufficient to displace the balance-sheet as primary evidence and substitute in its place the written down value. And, in this case also, we may point out that the value of the assets as disclosed in the balance-sheet has not, in any manner, been displaced, for there is not other material except the balance-sheet. We may now refer to the reliance placed by learned counsel for the assessee in that case upon the observations in CWT v. Aluminium Corporation of India Ltd. : [1972]85ITR167(SC) relied on by learned counsel before us also that the value of the assets shown in the balance-sheet is not conclusive. We find from page 435 of the reports in CWT v. Hindustan Motors Ltd. : [1976]104ITR430(SC) that the Supreme Court had explained the manner in which this observation has to be understood in the following terms :
'The value of the assets shown in the balance-sheet is not conclusive in the sense that it can be demonstrated to be more or less than what is shown therein. That is the core of determination under section 7(2)(a) of the Act. The observation of this court in the above case has to be understood only in that context.'
5. In view of the above said observations of the Supreme Court explaining the manner in which the observation in CWT v. Aluminium Corporation of India : [1972]85ITR167(SC) should be understood, we are of the view that reliance on that observation would not in any manner assist the assessee. In CWT v. Ranganayaki Gopalan : [1973]92ITR529(Mad) , relied on by the assessee, the question that came up for consideration was whether a sum representing the contribution to employees' gratuity fund was deductible for purposes of ascertaining the value of the unquoted equity shares in a company. The amount was payable by the company under a deed of trust the trustees with an option that the amount may be paid in one lump sum or in instalments. Further, the balance-sheet of the company also referred to the a liability for employees' gratuity at that amount on the basis of an actuarial valuation. The report of the directors also made a reference to the liability for payment of gratuity to employees. It was under those circumstances that this court held that the amount payable by way of gratuity liability was deductible for the purpose of ascertaining the value of the equity shares, in may be noticed that, according to proper accounting methods, this liability should have been brought into the accounts and not shown by way of any note to the balance-sheet, but the fact remained that it formed part of the balance-sheet and that was held to make no difference to the character of the liability. When once the liability was shown in the balance-sheet, that would suffice for purposes of deducting that liability, unlike in this case where there is no mention whatever of the written down value of the assets according to the Income-tax Rules in the balance-sheet. We are of the view that this decision cannot be of any assistance to the assessee. CWT v. Asarwa Mills Ltd. : [1978]115ITR612(Bom) dealt with a case of the valuation of an asset in the balance-sheet at an inflated figure and the permissibility of the adoption of a lower value. The finding that there was an inflated value of the assets in the balance-sheet was not challenged and it was pointed out that the revision of the value of the assets at a figure lower than that shown in the balance-sheet by the Tribunal by allowing adjustment for depreciation was in order. This decision had proceeded on the footing of an admitted inflated market value of assets in the balance-sheet and the availability of materials to justify the adjustments to be made by the provision of depreciation. The ratio of this decision, we are afraid, cannot advance the case of the assessee, on the facts and the circumstances of this case. In Grace Collis v. CWT : [1988]172ITR597(Ker) , one of the questions that arose was whether for purposes of valuing the shares in a shipping company, the value of ships, as reflected in the balance-sheet of the company, should be taken into account and not the written down value of the ships. We find from the judgment that it was the accepted case of the parties that the valuation of the shares, applying rule 1D of the Rules, must be made on the basis of the value of the assets shown in the balance-sheet and adjustments made. We are unable to find from this decision anything in support of the stand of the assessee in this case, for, it is clearly stated that the arithmetic adopted in working out rule 1D alone was in dispute and not any basic principle regarding either the provisions of the Act or the Rules or even the Companies Act, as here. We, therefore, hold that none of the decisions relied on by learned counsel for the assessee, in any manner, support the stand of the assessee and that the Tribunal was right in upholding the valuation of the shares held by the assessee, on the basis of the balance-sheet value of the assets arrived at after computing the depreciation adopting the straight-line method. We answer the question referred to us accordingly. The Revenue will be entitled to the costs of this reference. Counsel's fee Rs. 500.