Madras H.C : Whether for the purpose of arriving at the value of the unquoted equity shares the Tribunal was right in holding that only the latest published balance sheet of the respective companies, signed by the auditors and passed by the annual general meeting, available as on the valuation dates, should be taken into account and not the balance sheets drawn up on the date immediately preceding the valuation dates but published after the valuation dates?

High Court Of Madras

Commissioner Of Wealth Tax vs. T.R. Kannan

Section WT Rule 1D

Asst. Year 1977-78, 1978-79, 1979-80, 1980-81

Balasubramanian & P. Thangavel, JJ.

C. Nos. 54 to 56 of 1984; 1094, 1380, 1480, 1481, 1486 & 1506 of 1985

and 326 to 330, 395 & 396 of 1986

24th December, 1997

Counsel Appeared

J. Jayaraman & C.V. Rajan, for the Revenue

JUDGMENT

N.V. BALASUBRAMANIAN, J. :

The following questions of law have been referred in the batch of tax cases for our consideration : T.C. Nos. 54 to 56 of 1984 (Asst. yrs. 1977-78 to 1979-80). “1. Whether for the purpose of arriving at the value of the unquoted equity shares the Tribunal was right in holding that only the latest published balance sheet of the respective companies, signed by the auditors and passed by the annual general meeting, available as on the valuation dates, should be taken into account and not the balance sheets drawn up on the date immediately preceding the valuation dates but published after the valuation dates?”

2. Whether the Tribunal was right in law in holding that the provisions of r. 1D of the WT Rules were not mandatory but were merely directory and, therefore, the said rule cannot be rigidly applied? T.C. No. 1094 of 1985 : (Asst. yr. 1977-78) Whether for the purpose of arriving at the value of the unquoted equity shares the Tribunal was right in holding that only the latest published balance sheet of the respective companies should be taken into account and not the balance sheets drawn up on a date immediately preceding the valuation dates, but finalised and published after the valuation dates?” T.C. No. 1383 of 1985 : (Asst. yr. 1978-79) Whether for the purpose of arriving at the value of unquoted equity shares the Tribunal was right in holding that only the latest published balance sheet of the respective companies available on the valuation date should be taken into account and not the balance sheets drawn up on a date immediately preceding the valuation dates, but published after the valuation dates? T.C. Nos. 1480 and 1481 of 1985 : (Asst. yr. 1978-79)

1. Whether for the purpose of arriving at the value of unquoted equity shares, the Tribunal was right in holding that only the latest published balance sheet of the respective companies should be taken into account and not the balance sheets drawn up a date immediately preceding the valuation dates, but finalised and published after the valuation dates?

2. Whether the Tribunal was right in law in holding that in applying the provisions of r. 1D of the WT Rules, the liabilities not shown in the balance sheet form but mentioned in the annexures to the balance sheet and the director’s report should also be taken into account? T.C. No. 1486 of 1985 (Asst. yr. 1977-78)

1. Whether for the purposes of arriving at the value of the unquoted equity shares the Tribunal was right in holding that only the latest published balance sheet of the respective companies available on the valuation date should be taken into account and not the balance sheets shown up on a date immediately preceding the valuation dates but finalised and published after the valuation dates?

2. Whether the Tribunal was right in law in holding that the provisions of r. 1D of the WT Rules were not mandatory but were merely directory and, therefore, the said rule cannot be applied? T.C. No. 1506 of 1985 : (Asst. yr. 1977-78) Whether for the purpose of arriving at the value of the unquoted equity shares, the Tribunal was right in holding that only the latest published balance sheet of the respective companies should be taken into account and not the balance sheets drawn up on a date immediately preceding the valuation dates, but finalised and published after the valuation dates? T.C. Nos. 326 to 330 of 1986 (Asst. yr. 1980-81)

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for the purpose of valuing the shares by the assessee in Shri Ramalinga Mills (P) Ltd., the balance sheet of the company for the year ended on 30th Sept., 1978 and not 30th Sept.,

1979 should be taken?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the advance tax paid should not be deducted from the provisions for taxation while arriving at the values of shares? T.C. Nos. 395 and 396 of 1986 : (Asst. yr. 1980-81)

1. Whether, on the fact and in the circumstances of the case, the Tribunal was right in holding that for the purpose of valuing the shares held by the assessee in Shri Ramalinga Mills (P) Ltd. the balance sheet of the company for the year ended on 30th Sept., 1978 and not 30th Sept., 1979 should be taken?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the advance tax paid should not be deducted from the provision for taxation while arriving at the value of shares?”

2. The points that arise in all the above tax cases are similar and for the sake of convenience, we are not referring to the facts in each and every case individually but refer to the facts in T.C. Nos. 54 to 56 of 1984 for deciding the controversy in all the tax cases. The facts in other cases are similar and the points of the disputes raised are also the same. Further, the order of the Tribunal which is the subject matter in T.C. Nos. 54 to 56 of 1984 was consistently followed by the Tribunal in subsequent cases and, therefore, we felt that it will be appropriate to notice the essential facts in T.C. Nos. 54 to 56 of 1984 for the purpose of rendering answer to all the questions of law referred to us in the various tax cases.

3. The matter arises under the WT Act, 1957 and the assessee is the holder of certain unquoted equity shares in some of the private limited companies. The dispute is with reference to the valuation of the shares held by the assessee in Aruppukottai Sri Jayavilas (P) Ltd. and Shri Ramalinga Mills (P) Ltd. and the face value of the assessee’s shares in both the companies was Rs. 100 per share. The particulars regarding the valuation per share disclosed by the assessee and adopted by the WTO are as under :— Jayavilas (P) Ltd.

1977 19

78-

79

1979

78 80 (i) Number of shares –

455

(ii) Value disclosed in the return.

(iii) Value subsequently claimed at assessment stage

(iv) Value adopted by the

33

5.0

0

31

3.0

9

35

3.3

38

2.2

3

28

2.2

3

41

6.8

482.94

482.94

WTO

5 8 482.94

Shri Ramalinga Mills (P) Ltd. (i) Number of shares . . . 1410 + 1/5th of 2,950 shares belonging to father’s undivided estate. (ii) Value disclosed in the return . . . 471.29 506.67 (iii) Value subsequently claimed at . . . 404.58 478.50 assessment stage

(iv) Value adopted by the WTO . . . 457.43 506.67 The difference between the valuation of the shares claimed by the assessee and adopted by the WTO arose mainly on three following points : (1) The WTO took into account the balance sheet of the company drawn up on the date immediately prior to the assessee’s valuation date for the respective assessment years, but the assessee contended that only the balance sheet of the company which had been signed by the auditors of the company and published before the valuation date should be taken into account. (2) The second point of dispute is with reference to deduction of liability towards income-tax not provided for in the accounts. (3) The third pointed which is confined to Shri Ramalinga Mills (P) Ltd. is with reference to the notes of the directors to the balance sheet for the year ended on 30th Sept., 1977, mentioning about the award against the company for a total sum of Rs. 6,96,124 for which no provision was made in accounts, since the company had taken the matter in appeal. The WTO held that the notes in the balance sheet and the directors’ report cannot be considered as part of the balance sheet and disallowed the claim of the assessee. The CIT(A) accepted the contentions urged on behalf of the assessee and held that the published balance sheet which were available to the prospective buyers should be taken into account for the purpose of determining the value of unquoted equity shares held by the assessee under the provisions of r. 1D of the WT Rules, 1957. He also held that the notes forming part of the concerned balance sheet should be taken into account in determining the value under r. 1D of the WT Rules and he directed the WTO to take note of the liability of the company, namely, Sri Ramalinga Mills (P) Ltd., arising out of award passed in favour of certain cotton suppliers.

1. The Revenue carried the matter in appeals before the Tribunal. The Tribunal held that the provisions of r. 1D of the WT Rules are not mandatory in nature and, therefore, r. 1D cannot rigidly be applied in this view of the matter, held that the published balance sheets which have been signed by the auditors and passed in the annual general meeting before the valuation date should be taken into account for the purpose of determining the value of the shares under r. 1D. The Tribunal followed a decision of the Gujarat High Court in the case of CGT vs. Executors & Trustees of the Estate of late Shri Ambalal Sarabhai 1976 CTR (Guj) 1 : (1975) 100 ITR 447 (Guj) : TC 36R.423, a case arising under the GT Act, in support of its conclusion that the published balance sheet of the two companies should be taken into account for the respective assessment years in computing the valuation of the shares. As regards the tax liabilities, the Tribunal found that the liabilities were mentioned in the directors’ report and so, they should be taken into account. As regards the award amount of Rs. 6,96,124, it held that since the information regarding the award amount was found in the notes forming part of the accounts, the information regarding the tax liabilities as given in the directors’ report as well as other liabilities of the company as given in the notes should have to be taken into consideration in evaluating the market value of the shares of the companies. The Tribunal, in this view of the matter, dismissed the appeals preferred by the Revenue.

2. As already stated, the Tribunal, in other cases, followed its earlier order and held that to value the shares in other cases also should be determined on the basis of the earlier directions given by the Tribunal. The assessee has been served. T.V. Ramanathan and A. Moiz have entered appearance and filed their vakalats on behalf of the respondents. Subsequently, they filed verified petitions with a request to withdraw their appearance for the reasons stated in the petitions and taking note of the averments made in the verified petitions, their prayer to withdraw from the cases is granted. However, the assessee-respondents have been served in all the tax cases and the names of the respondents have been called but there was no representation on behalf of the respondents.

3. Mr. Jayaraman, the learned senior counsel for the Revenue, submitted that the Tribunal was not correct in holding that the published balance sheet should be taken into account. He submitted that r. 1D is mandatory in character and exhaustive in nature and the object behind r. 1D is that there should be an uniform valuation of unquoted shares and the rule provides a rough method by which the value of the unquoted equity shares should be worked out. He submitted that a reading of r. 1D as a whole indicates that the figures given in the balance sheet are not conclusive in all respects and the rule tinkers with the figures in the balance sheet in certain contingencies. The learned senior counsel submitted that though the starting point for valuation of the shares is the balance sheet, it cannot be stated that the balance sheet should be published or authenticated before it can be relied upon the provisions of r. 1D should be applied strictly and according to the statutory method of valuation of shares prescribed under r. 1D of the rules, the valuation has necessarily to be done by the WTO in accordance with r. 1D and though the balance sheet was not published, yet, if it was drawn up immediately before the valuation date, but finalised and published after the valuation date, the balance sheet should be regarded as a drawn up balance sheet for the purposes of r. 1D of the rules. The learned senior counsel submitted that if the view of the Tribunal that the published balance sheet should be taken into account is accepted, it will lead to distortion in the valuation of the unquoted equity shares as there may be a time gap of more than one year or two years between the date of published balance sheet and the relevant date and valuation of the shares and the value determined in such cases may not truly reflect the value of the shares as envisaged under the rules. He, therefore, submitted that once the balance sheet was drawn up on the respective valuation dates, that should be taken into account though a published balance sheet may come into existence after the valuation date. Insofar as the order of the Tribunal holding that the provisions for entire tax liabilities should be deducted is concerned, the learned senior counsel submitted the view of the Tribunal was erroneous in law as the Tribunal proceeded on an erroneous view that the provisions of r. 1D are only directory, which view is clearly not sustainable in law. He referred to the provisions of the Expln. II(ii) of the said rules and submitted that on the basis of the decision of the Supreme Court in the case of Bharat Hari Singhania vs. CWT (1994) 118 CTR (SC) 125 : (1994) 207 ITR 1 (SC) : TC 63R.362 the entire provisions of tax liabilities cannot be deducted. Insofar as the liabilities towards the cotton suppliers are concerned, the learned senior counsel submitted that the relevant information is found only in the notes forming part of the accounts and it cannot be regarded as a part of the balance sheet. He placed reliance on the decision of this Court in the case of Late C.S. Ramachary vs. CWT (1991) 92 CTR (Mad) 99 : (1991) 189 ITR 8 (Mad) : TC 63R.477 and submitted that a note attached to the balance sheet cannot be regarded as forming part of the balance sheet for the purpose of valuation of the shares under r. 1D of the WT Rules. He submitted that the Tribunal proceeded on an erroneous view that the provisions of r. 1D of the WT Rules need not be followed strictly.

7. We have carefully considered the submissions made by the learned senior counsel for the Revenue and perused the records carefully. There can be no dispute that the balance sheet is the fundamental basis for the determination of the value of unquoted equity shares under r. 1D and the decision of the Supreme Court in Bharat Hari Sighania’s case (supra) makes it clear that the provisions of r. 1D of the rules are valid and effective and the provisions of r. 1D are mandatory in nature. The Supreme Court further held that the rule has to be followed in every case where unquoted equity shares of the company (other than investment company or management company) are to be valued and all authorities under the Act including the valuation officer are bound by it. In view of the authoritative pronouncement of law laid down by the Supreme Court, the view of the Tribunal that the r. 1D is directory in nature is erroneous and is not sustainable in law. The Supreme Court in Bharat Hari Singhania’s case (supra) also held that in the case of working out or determination of unquoted equity shares, the balance sheet of the company would constitute the basis for the working of the rule and the rule cannot be worked out without the balance sheet. The Supreme Court considered the question where the date of the balance sheet does not coincide with the valuation date and after noticing the difficulties the following observations made by the Supreme Court are pertinent to the facts of the case : “. . . . . .This situation is met by Expln. 1. The Explanation contemplates a situation where the valuation date of the assessee concerned and the date of balance sheet of the company is not the same. In such a situation, it says, take the balance sheet drawn up on a date immediately preceding the valuation date of the assessee. In case if both these balance sheets are not available, the rule says, take the balance sheet drawn up on a date immediately following the valuation date of the assessee.”

8. It is clear that the provisions of r. 1D of WT Rules enable the authorities under the WT Act to evaluate the value of the shares and therefore, the question of availability of the balance sheet to the prospective buyer is not of much significance. Therefore, the view of the Tribunal that the published balance sheets which were available to the members of the public should be the basis is not quite accurate as the rule directs the WTO to follow the statutory method of valuation of shares. Yet, the question remains what is the meaning of the term, ‘balance sheet drawn up’ and to resolve the controversy, it is necessary to notice certain facts.

9. In T.C. Nos. 54 to 56 of 1984, the assessment years involved are 1977-78 to 1979-80 and the relevant valuation dates are 31st March, 1977, 31st March, 1978 and 31st March, 1979. The WTO took into account the balance sheets of Jaya Vilas (P) Ltd. as on 31st Dec., 1976, 31st Dec., 1977 and 31st Dec., 1978 and the balance sheets of Shri Ramalinga Mills (P) Ltd. as on 30th Sept., 1977 and 30th Sept., 1978. It is seen that on those dates in the case of Jaya Vilas (P) Ltd. the balance sheets for the years ended on 31st Dec., 1975, 31st Dec., 1976 and 31st Dec., 1977, have been published. So also, for Shri Ramalinga Mills (P) Ltd., it is seen, the accounts for the year ending on 30th Sept., 1978 were not available before 31st March, 1979. In this situation, the CIT(A) as well as the Tribunal held that the balance sheets as on 31st Dec., 1975, 31st Dec., 1977 and 31st Dec., 1978 for Jaya Vilas (P) Ltd. and the balance sheets of Shri Ramalinga Mills (P) Ltd. as on 30th Sept., 1977 should be taken into account for the purpose of determining the value of the shares for the asst. yrs. 1978-79 and 1979-80. No doubt, there is a yawning gap between the valuation date of the assessee, viz., 31st March, 1977 and the balance sheet as on 31st Dec., 1975 spanning over a period of one year and three months, however, the balance sheet available on the valuation date 31st March, 1977 was the balance sheet as on 31st Dec., 1975.

10. The expression, ‘balance sheet’ has been defined in Expln. 1 to r. 1D of the WT Rules as under : “For the purposes of this rule, ‘balance sheet’, in relation to any company means the balance sheet of such company as drawn up on the valuation date and where there is not such balance sheet, the balance sheet drawn up on the 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.” The Expln. 1 to r. 1D of WT Rules, no doubt, provides that the balance sheet of the company drawn up on the valuation date should be taken into account but it does not positively provide that the drawn back balance sheet should be the balance sheet drawn up for the internal purposes of the company.

11. The difference in valuation of the shares has arisen only because of the adoption of two different balance sheets in the instant case. The CIT(A) as well as the Tribunal noticed the argument advanced to the effect that the WTO took into account the balance sheets of Jaya Vilas (P) Ltd. as on 31st Dec., 1976, 31st Dec., 1977 and 31st Dec., 1978 (which were the dates immediately preceding the valuation dates) and the balance sheets of Shri Ramalinga (P) Ltd as 30th Sept., 1977 and 30th Sept., 1978. The authorities pointed out that the balance sheet as on 31st Dec., 1976 was signed only on 9th Sept., 1977, that is to say, long after the assessee’s valuation date. Similarly, the company’s balance sheet as on 31st Dec., 1977 was signed on 5th June, 1978 which was also well after 31st March, 1978 and the balance sheet as on 31st Dec., 1978 was signed on 4th June 1979 which was subsequent to the valuation date, 31st March, 1978, for the asst. yr. 1979-80. According to the learned senior counsel for the Revenue, once the balance sheet has been approved in the annual general meeting, it would date back to the last date of the accounting year and, therefore, the balance sheet though signed later should be taken into account.

12. The expression, ‘drawn-up’ in Expln. 1 to r. 1D of the WT Rules is not defined. The necessity for working to Expln. 1 arises only in cases where the date of balance sheet and the valuation date of the assessee may not coincide. On the working of Expln. 1, to r. 1D of WT Rules in Bharat Hari Singhania’s case (supra), the Supreme Court made the following observations : “The Explanation says that where the date on which the balance sheet is drawn up does not coincide with the valuation date of the assessee, ‘the balance sheet drawn up on a date immediately preceding the valuation date’ shall be adopted as the basis for working the rule. Yet another situation contemplated by the Explanation is where both the above situations are absent, ‘the balance sheet’ drawn up on the date immediately after the valuation date’ shall be adopted as the basis. Now, one would think that this was the most reasonable thing to do in the circumstances but the contention of the learned counsel for the assessee runs thus : the asset of an assessee has to be valued as on the valuation date and not with reference to any other date; if the balance sheet is drawn up with reference to a date anterior to the valuation date, it cannot be said that such balance sheet reflects the position obtaining on the valuation date; many things may happen between the date of the balance sheet and the valuation date; the value of the shares may go down the company may be closed or any other untoward development may depreciate the value of the shares; this difficulty would be more pronounced if the balance sheet drawn up on a date immediately preceding the valuation date is taken irrespective of how many years before it may have been prepared. In our opinion, the submission has no substance. Once the basis of working the rule is the balance sheet, one must necessarily have the balance sheet. Without a balance sheet the rule cannot be worked. It is for this reason that Expln. 1 says that what it does. Normally one would expect every company to prepare its balance sheet on the due date. Sometimes, there may be default on the part of the company in preparing its balance sheet on time. But, on the basis of such exceptional circumstances, the rule cannot be faulted. Indeed the Explanation also provides that in the absence of both the said situations, the balance sheet drawn up on a date immediately after the valuation date shall be adopted…” A fair reading of the Expln. 1 shows that if a balance sheet was drawn up on the valuation date, then that balance sheet should be taken into account for the purpose of r. 1D of the WT Rules. The second contingency provided in the rule is that if the balance sheet was not drawn up on the valuation date, then the balance sheet drawn up on a date immediately preceding the valuation date should be taken into account. The third situation that is contemplated in the rule is that in the absence of both, the balance sheet drawn up on the date immediately after the valuation date should be taken into account. Though it is not very clear now the company could prepare a subsequent balance sheet where it has not drawn up the balance sheet for the earlier years, the situation contemplated in the third contingency has not arisen.

1. The CWT(A) and the Tribunal noticed the argument that as regards Jaya Vilas (P) Ltd. the balance sheet as on 31st Dec., 1976 was signed only on 9th Sept., 1977, long after the valuation date. Similarly, the company’s balance sheet as on 31st Dec., 1977 was signed only on 5th June, 1978 which was well after 31st March, 1978. So long, the balance sheet as on 31st

Dec., 1978 was signed on 4th June, 1979 long after the valuation date 31st March, 1979. As far as Sri Ramalinga Mills (P) Ltd. is concerned, the account year ended on 30th September. The WTO adopted the balance sheet as on 30th Sept., 1977 for the valuation of shares of the assessee as on 31st March, 1978, and it was found that the annual general meeting was held on 31st March, 1978, and, therefore, the action of the officer in adopting the balance sheet as on 30th Sept., 1977, is correct. As far as the balance sheet for the year ending on 30th Sept., 1978, it was pointed out that the annual general meeting was held on 26th May 1979, and the balance sheet and accounts were signed on 27th April, 1979. Therefore, on the valuation date ended on 31st March, 1979, the balance sheet of the company as on 30th Sept., 1978 was not available and the drawn up balance sheet would be 30th Sept., 1977. In our view, though r. 1D has to be construed in a strict manner and the rule operates irrespective of the presence of the prospective buyers, the expression, ‘balance sheet’ cannot be construed as divorced from the context of preparation, authentication and approval of the balance sheet under the Companies law.

2. Sec. 211 of the Companies Act, 1956 (hereinafter to be referred to as the “the Companies Act”) provides for the form and contents of the balance sheet and P&L a/c. A balance sheet prepared shall be true and fair view of the state of affairs of the company as at end of the financial year. The P&L a/c has to be annexed to the balance sheet and the auditor’s report shall be attached to the balance sheet. Sec. 215 of the Companies Act provides for authentication of balance sheet and P&L a/c and s. 215 says that every balance sheet and every P&L a/c shall be signed on behalf of the directors and the balance sheet and the P&L a/c shall be approved by the board of directors before they are signed on behalf of the board in accordance with the provisions of s. 215 of the Companies Act. Under s. 217 of the Companies Act, there shall be attached to every balance sheet, a report of the board of directors with reference to the matters mentioned therein. Under s. 227 of the Companies Act, the auditor shall make a report on the members of the company and the accounts examined by him and shall certify that the company’s balance sheet reflects the state of affairs of the company truly and fairly. The balance sheet and P&L a/c are required to be placed in the annual general meeting and not in any other general meeting. Under s. 219 of the Companies Act every copy of the balance sheet including the P&L a/c, auditor’s report and other documents which are to be laid before the company’s annual general meeting, shall be sent to the members of the company with sufficient time not less than 21 days before the date of the annual general meeting and under s. 220 of the Companies Act, after the balance sheet and the P&L a/c has been laid in the annual general meeting, they shall be filed before the registrar.

1. It is now necessary to notice s. 166 of the Companies Act which mandates that every company in each year should hold an annual general meeting. The holding of annual general meeting is a statutory requirements and s. 166 of the Companies Act provides that there shall be an annual general meeting held at least once in a year. It also provides the time-limit within which the annual general meeting should be held. Sec. 210 of the Companies Act provides that in every annual general meeting the company is required to place before the said annual general meeting the balance sheet and the P&L a/c for the period and the provisions of s. 210 r/w ss. 216 and 218 indicate the unaudited balance sheet and the P&L a/c cannot be laid before the annual general meeting.

2. A close study of various sections of the Companies Act indicates that the board of directors of a company is required to lay before the annual general meeting the balance sheet and the P&L a/c. The scheme of the Companies Act contemplates holding of annual general meeting each year and it is open to the members of he company to adopt the annual accounts and the balance sheet and if they do not adopt the balance sheet, then it would be taken as if there is no confidence in the board of directors. Certain instructions have been issued by the Companies Law enabling the board of directors to revise the accounts and resubmit the same to the auditors provided the original accounts have not been placed before the shareholders in the annual general meeting and a company could not reopen and revise its accounts after the adoption in the annual general meeting. Though there is a subsequent circular for reopening of the accounts or revising the accounts, in order to comply with the technical requirements for taxation of liabilities, that situation has not arisen on the facts of the case and, hence, it is not necessary to consider the case of reopening of the accounts. Therefore, till the shareholders of the company adopt the balance sheet and the P&L a/c, it cannot be regarded as the balance sheet for the purpose of r. 1D of the WT Rules. The expression, ‘drawn up’ in r. 1D of the WT Rules, in our opinion, should be given the same meaning as found in the Companies Act and since the balance sheet of Jaya Vilas (P) Ltd. as on 31st Dec., 1976, was signed only on 9th Sept., 1977, it could not be stated that the balance sheet was drawn up and available as on 31st March, 1977. The same principle will apply with reference to other balance sheets for other assessment years also. Therefore, we are of the view that the Tribunal was correct in holding that only the published balance sheet should be taken into account for the purpose of evaluating the shares under r. 1D of the WT Rules.

3. Though the effect of approval would date back to the end of relevant accounting years, it cannot be stated that it should have effect for all purposes. Hence, we are unable to accept the contention of the learned senior counsel for the Revenue that the balance sheet as on 31st Dec., 1976, 31st Dec., 1977 and 31st Dec., 1978 in the case of Jaya Vilas (P) Ltd. and in case of Shree Ramalinga Mills, the balance sheet as on 30th Sept., 1977 and 30th Sept., 1978 should be taken into account for the purposes of r. 1D of the WT Rules. In our opinion, since there was no balance sheet drawn up on the valuation date and in the absence of any balance sheet, the second contingency contemplated under r. 1D of the WT Rules operates on the facts of the case, the balance sheet drawn up on a date immediately preceding the valuation date should be the basis for valuation of the shares. It is, no doubt, true that there is a yawning gap of nearly one year and three months between the date of the balance sheet of the company and the valuation date of the assessee, but where the rule expressly provides that in the absence of the balance sheet of the company on the valuation date, the earlier balance sheet drawn up immediately preceding the valuation date should be taken into account, this Court as Court of construction cannot give any other meaning to the expression, ‘balance sheet drawn up.’

1. It is brought to our notice certain cases relating to the valuation of the shares under the GT Act in CGT vs. K. Ramesh (1983) 141 ITR 462 (Mad) : TC 36R.401, CGT vs. Venu Srinivasan (1987) 61 CTR (Mad) 70 : (1985) 156 ITR 679 (Mad) : TC 36R.443, CGT vs. Gopal Srinivasan (1996) 130 CTR (Mad) 39 : (1995) 214 ITR 637 (Mad) : TC 36R.447, CGT vs. Gopal Srinivasan (Minor) (1996) 130 CTR (Mad) 38 : (1995) 214 ITR 641 (Mad) : TC 36R.428 and CGT vs. Sundaram Industries Ltd. (1996) 141 CTR (Mad) 213 : (1996) 222 ITR 710 (Mad) : TC S36.3341 on the question as to which the balance sheets should be taken into account for the purpose of determining the value of the shares. In our opinion, those cases have no application to the facts of the case where there is an express rule providing for the valuation of the unquoted equity shares. Therefore, we are of the opinion that it is not necessary to consider all those cases in detail as they are no applicable to the facts of the case. As a matter of fact, the Supreme Court in Bharat Hari Singhania’s case (supra), refers to its own decision in CGT vs. Executors & Trustees of the Estate of Late Shri Ambalal Sarabhai (1988) 67 CTR (SC) 247 : (1988) 170 ITR 144 (SC) : TC 36R.415 and held that it was a case arising under GT Act and the provision of r.

1D of the WT Rules do not apply to that case. Therefore, we hold that the Tribunal was correct in holding that the latest balance sheet of the respective companies signed by the auditors and passed in the annual general meeting should be taken into account and not the balance sheet drawn up on the date immediately preceding the valuation date or published after the valuation date.

2. We have already seen that Supreme Court in Bharat Hari Singhania’s case (supra) has taken a view that the provisions of r. 1D of the WT Rules are mandatory in nature. The Tribunal when it decided the appeal did not have the advantage of the decision of the the Supreme Court and, therefore, it proceeded only on the basis that the provisions of r. 1D of the WT Rules need not be strictly followed and it is because of the view taken by the Tribunal that the provisions of r. 1D of the WT Rules are directory in nature, the Tribunal, apparently, held that the entire provision for taxation should be allowed as deduction. It also proceeded on the basis that the notes forming part of the accounts and the report of the directors should be considered as a part of the balance sheet. Subsequent to the order of the Tribunal, this Court in Late C.S. Ramachary’s case (supra) held that the report of the directors would not form part of the balance sheet. It is, in the right of the subsequent development of law, the order of the Tribunal has to be considered. The Tribunal omitted to take into account the provisions of Expln. II(ii)(e) to r. 1D of the WT Rules which provides that any amount of provision for taxation [other than the amount referred to cl. (1)(a)] to the extent of the excess of the tax payable with reference to the book profits will not be treated as liability. The Tribunal overlooked the said provision and committed an error in law in holding that the entire provision of the taxation should be deducted. In view of the decision of the Supreme Court in Bharat Hari Singhania’s case (supra) holding that the advance tax paid cannot be regarded as an asset and if the provision for taxation includes the advance tax, then the entire provision for taxation cannot be regarded as liability and the order of the Tribunal holding that the entire provision for tax liabilities should be allowed as deduction is not sustainable in law.

3. Insofar as the award amount in the case of Shri Ramalinga Mills (P) Ltd. is concerned, the award was passed against the company and in favour of certain cotton suppliers. The Tribunal merely recorded a finding that it cannot be regarded as a contingent liability. But, the Tribunal has overlooked the question whether the information furnished in the notes forming part of the accounts can be regarded as a part of the balance sheet. This Court in Late C.S. Ramachary’s case (supra) held that there is a distinction between what is annexed to the balance sheet and the P&L a/c and what is attached to the balance sheet. It is not clear from the order of the Tribunal whether the report of the board of directors or the notes were annexed to the balance sheet or attached to the balance sheet and if it is the former, then, it can be regarded as part of the balance sheet and if it is the latter, it cannot be regarded as a part of the balance sheet. Though the order of the Tribunal in Late C.S. Ramachary’s case (supra) which was subsequently upheld by this Court was before the Tribunal, the Tribunal has not noticed the distinction between the two sets of documents which were annexed to the balance sheet and the documents which were attached to the balance sheet and the consequential different legal effect that will flow from the two concepts viz., annexed to the balance sheet and attached to the balance sheet. Our above view with reference to the distinctions between annexed to the balance sheet and attached to the balance sheet will not only apply to notes indicating the award amount but also equally apply to the directors’ report furnishing information regarding the provision for taxation. We have held that the provisions of r. 1D are only mandatory and should be complied with strictly, unless the directors’ report or the notes forming part of the accounts form part of the balance sheet, the assessee is not entitled to deduct those liabilities. Further, insofar as the provision for taxation is concerned, even if the directors’ report is held to be part of the balance sheet, the entire provision cannot be allowed as deduction but only to the extent indicated in Expln. II(ii)(e) to the r. 1D of the WT Rules.

1. The second question referred to us challenges the view of the Tribunal that the provisions of the r. 1D of the WT Rules are directory in nature and once we hold that the provisions of r. 1D of the said rules are mandatory, the Tribunal has necessarily to go into the question afresh and apply the provisions of r. 1D in the matter of deduction of both the liabilities mentioned in the directors’ report and in the notes forming part of the accounts. Though there is no specific question as regards the deduction of tax liabilities as well as liabilities of other companies, the necessary logical consequence of our decision is that the Tribunal should go into the question again and apply the provisions of the said rule and in accordance with the decision of the Supreme Court in Bharat Hari Singhania’s case (supra). Though in some of the tax cases, there is no independent question whether the provisions of r. 1D of the WT Rules are directory or mandatory in nature, as the Tribunal has merely followed its earlier order, we are of the view that in all the tax cases, the matter should go to the Tribunal to decide the question of deduction of the said two sums.

2. Accordingly, we answer the questions of law referred to us as under : Nos. 54 to 56 of

1984 Nos. 1480 and 1481 of 1985

First question

Second question

T.C. No.

1094 of

1985

Question of law

T.C. No.

1383 of

1985

Question of law

It is answered in the affirmative and against the Revenue.

It is answered in the negative and in favour of the Revenue.

It is answered in the affirmative and against the Revenue.

It is answered in the affirmative and against the Revenue.

First question It is answered in the affirmative and against the Revenue. Second question It is answered in the negative and in favour of the Revenue. T.C. No. 1486 of 1985 First question It is answered in the affirmative and against the Revenue. Second question It is answered in the negative and in favour of the Revenue. T.C. No. 1506 of 1985 Question of law It is answered in affirmative and against the Revenue. T.C. Nos. 326 to 330 of 1986 First question It is answered in the affirmative and against the Revenue. Second question It is answered in the negative and in favour of the Revenue. T.C. Nos. 395 and 396 of 1986 First question It is answered in the affirmative and against the Revenue. Second question It is answered in the negative and in favour of the Revenue.

The Tribunal is directed to consider all the tax cases in the light of the observations made by us above. However, as the assessee-party remains unrepresented, there will be no order as to costs.

[Citation : 252 ITR 382]

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