Commissioner Of Wealth-Tax, A.P-I v. Pachigolla Narasimha Rao.

1. The assessee is an individual. He owns certain agricultural lands and does money-lending business. The assessee for the assessment year 1971-72 returned a net wealth of Rs. 1,51,872. This figure was based solely on the valuation of his agricultural lands made by an approved valuer. But the return thus filed by the assessee did not show an amount of Rs. 25,768 which was the interest that accrued to him on his loans though not received by him. As observed by the AAC this amount of accrued interest was not brought into the books of account which were said to be maintained on cash basis.

2. The WTO rejected the valuer's report and estimated the value of the agricultural lands of the assessee at Rs. 2,27,000. He had also added the sum of Rs. 25,768, representing the accrued interest, to the net wealth of the assessee and assessed on that basis. Aggrieved by that order of the WTO, the assessee appealed to the AAC, who, while accepting the assessee's compilant regarding the WTO's order in relation to the value of the agricultural land, rejected the assessee's contention pertaining to the inclusion of the accrued interest of Rs. 25,768. Against that portion of the order of the AAC, the assessee preferred a further appeal to the Income-tax Appellate Tribunal, Hyderabad Bench, which had reversed the decision of the lower Tribunal regarding the inclusion of the accrued interest in the net wealth of the assessee, with the result that the sum of Rs. 25,768 forming the interest accrued but not received by the assessee on the outstanding loans was directed to be deleted from the net wealth of the assessee.

3. The revenue applied for and obtained a reference to this court under s. 27(1) of the W.T. Act of 1957 (hereinafter called "the Act"). Accordingly, the following question had been referred for the opinion of this court by an order of the Appellate Tribunal dated September 6, 1976.

"Whether, on the facts and in the circumstances of the case and on a correct interpretation of rules 2b and 2c of the wealth-tax rules, the accrued interest of Rs. 25,768 is includible in the net wealth of the assessee for the assessment year 1971-72 ?"

4. The Income-tax Appellate Tribunal, while reversing the order of the AAC that confirmed the order of the WTO, observed that inasmuch as the assessee "had filed a balance-sheet which discloses the loans" and "the interest that is said to have accrued on the valuation date forms part of the assets of the assessee", the value of this omitted asset should be determined under r. 2B(1) of the W.T. Rules (hereinafter referred to as the Rules"). As the sum of Rs. 25,768 was less than 20% of the total value of the loans, the Income-tax Appellate Tribuna hleld that "the accrued interest cannot be included in the assessment " and, accordingly, the orders of the lower Tribunals were reversed.

5. It is argued before us for the assessee that looked in the light of the facts that the assessee was maintaining accounts on cash basis and filed a balance-sheet, the order of the Tribunal is perfectly justified by the language of s. 7(2) of the Act read with r.2B of the Rules. It is said for the assessee that the interest that had merely accrued but was not received is not an independent asset and, therefore, must be regarded as part of the debt owed to the assessee and, accordingly, should be considered as falling not under r.2C of the Rules but under r.2B of the Rules. On the other hand, the contention of the revenue is that the liability to pay wealth-tax must be adjudged not on the basis of notions imported from the I.T. Act but on the basis of the definition of the word "asset" given in the Act. So done, the revenue argues, the interest that had accrued but not received, would be an "asset" for the purpose of the Act. It is also said by the revenue that the assessee, being an individual, can never claim to come under s.7(2) of the Act which deals with an alternative mode of estimating the value of the assets shown in a balance-sheet. In any case, the revenue said that s.7(2) of the Act applies only to the valuation of the business assets and not to a case where the assessee has wealth consisting of business assets as well as non-business assets. It is also the contention of the revenue that accrued interest is an "asset" by itself within the meaning of the W.T. Act, and the failure of the assessee to show it in his return would bring the case not under r.2B of the Rules but under r.2C.

6. In order to appreciate the rival contentions urged, it becomes necessary to refer to the broad features of the Act. Section 3 of the Act, which is the charging section, imposes liability to pay wealth- tax every financial year on every individual, HUF or company with respect to the "net wealth" of that person on the valuation date.

7. Section 2(m) defines "net wealth" to mean "the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date".

8. Under s.2(q) "valuation date", in relation to any year for which an assessment is to be made, means the last day of the previous year as defined in s.3 of the I.T. Act, if an assessment has to be made under that Act for that year.

9. Section 7 of the Act provides the mode of ascertaining the value of the assets for the purposes of the Act. Section 7(1) reads as follows:

"7. (1) subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Office it would fetch if sold in the open market on the valuation date."

10. Section 7(2) reads as follows:

"Notwithstanding anything contained in sub-section (1) -

(a) where the assessee is carrying on a business for which accounts are maintained by him 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 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."

11. Where the assessee challenges the liability of one of his assets to suffer wealth-tax it becomes necessary to see what provision of the Act imposes that liability to pay tax and on what assets. A perusal of the provisions of the Act would clearly show that the liability of the petitioner is declared and fixed by s.3 of the Act. Section 3 of the Act declares the liability of the assessee to pay the wealth-tax on his "net wealth" while s.7 merely provides the machinery for the purposes of ascertaining the "net wealth" by valuing the assets composing the wealth. In considering the rival contentions of the parties this age-old distinction between the liability to pay tax on the one hand and the assessment and collection of tax on the other, should be borne in mind. So done, the machinery provisions of s.7 the Act cannot be so interpreted except for reasons of legislative use of intractable language as to exempt certain assets constituting the wealth. Section 7(1) of the Act puts the WTO under a duty to estimate the value of every asset other than cash for the purposes of the Act at the price at which the asset would be sold in the open market on the valuation date while s.7(2) of the Act gives an option to the WTO in the case of an assessee carrying on a business, for which accounts are maintained by him regularly, to determine the net wealth 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 instead of following the method of determining separately the value of each asset held by the assessee in such business.

12. A perusal of the language of s.7(1) as contrasted with the language of s.7(2) of the Act shows that the Act provides primarily for the method of individual valuation of each asset. Section 7(2) of the Act provides only an alternative method of estimating the value. But this is discretionary with the WTO and he can choose to adopt that method subject to two conditions, one of which is that the assessee should be having only business assets requiring valuation and the other is that the assessee should have been maintaining a balance-sheet. In our opinion, s.7(2) of the Act is not intended to apply to a case like the present one where the wealth-tax assessment is dependent not merely on the business assets but also on the holding of the wholly unconnected agricultural assets in which the assessee is not carrying on any business. The words "the net value of the assets of the business as a whole" clearly rule out the applicability of s.7(2) to such a case. In other words, s.7(2) would have no application to a case where the wealth is composed of business as well as non-business assets, both of which come under the Act. For the applicability of s.7(2) of the Act, the value of assets of a business as a whole must be capable of being determined with regard to a balance-sheet of such business as on the date of valuation. In the absence of any fact of business covering the entire assets the net value of the assets of the assessee cannot be determined by the method provided for under s.7(2) of the Act. The language "the net value of the assets of the business as a whole having regard to the balance-sheet of such business" clearly points to the fact that the assets other than those which are connected with the business cannot form part of the balance-sheet under s.7(2). Further, the word "balance-sheet" which means a statement showing the assets and liabilities cannot be intended to have any applicability to the case of an individual who only maintains a profit and loss account.

13. Even on the assumption that s.7(2) of the Act is capable of being applied to the facts of this case we must still hold that the order of the Tribunal is wrong. Section 7(2) of the Act only confers a discretionary power on the WTO. Exercising that power, the WTO could, in an appropriate case, resort to the method of valuing the assets as provided for under s. 7(2). Decided cases only hold that where the WTO takes recourse to the s. 7(2) method, he cannot be permitted either partially or wholly to revert back to the method of s. 7(1). In this case, the WTO has not valued any part of the assets of the assessee on the basis of the method provided for under s. 7(2) of the Act. On the other hand, the WTO determined the value of agricultural assets separately and also added to that the accrued interest holding the same to be an "asset" within the meaning of s. 2(e) read with s. 2(m) of the Act. It is, therefore, clear that the WTO had followed the method provided for under s. 7(1) of the Act in preference to the method provided for under s. 7(2) of the Act. Once the WTO had applied the method provided for under s. 7(1) of the Act, the entire basis of the order of the Income-tax Appellate Tribunal disappears, because in such a case there would be no scope for the application of s. 7(2) or r. 2B of the Rules. In our opinion, the Income-tax Appellate Tribunal erred in applying to the facts of the present case s. 7(2) and r. 2B. Even otherwise, it is a clear case where the assessee had not shown the accrued interest in his books of account. It follows that the assessee had failed to disclose some of his assets. To such a situation the applicable rule even on the assumption that s. 7(2) would apply would be r. 2C and nor r. 2b of the rules. rule 2c which deals with the adjustments of the value of assets not disclosed in the balance-sheet directs the value of undisclosed assets to be taken into account. But the argument of the assessee is that the interest is not an individual asset. We cannot agree with this argument which goes contrary not only to commonsense but also to the definition of the word "asset" given in s. 2(e) of the Act. Accrued interest is "property" as defined in s. 2(e) and it is, therefore, liable to be valued as an "asset" for the purpose of computation of the net wealth. The argument that the petitioner is maintaining his accounts on cash basis is in our opinion not relevant for the purpose of deciding the assessee's wealth-tax. The question whether the petitioner had received the accrued interest or not would be hardly material for the purpose of determining whether that accrued interest is an asset and whether it forms part of the assessee's net wealth. The analogy of income-tax cannot be extended to the wealth- tax, because the Wealth-tax Act by means of s. 2(m) read with s. 2(e) defines what constitutes "net wealth" and "an asset". The indicia of ownership is enough to qualify the accrued interest as an asset. A Division Bench of this court in V. Venkappa Rao v. CWT [1968] 69 ITR 552 at 556, clearly ruled that accrued interest is liable to be included in the wealth for the purpose of wealth-tax. At p. 556 of the above report, it was observed thus:

"The interest that accrues on the valuation date forms part of the asset and must be added to the value of the asset to determine the liability for wealth-tax. In an unreported judgment dated 23-7-1966, in R.C.No. 51/63 ( Pachigolla Subba Rao v. Commissioner of Wealth-tax) a Bench of this court consisting of Kumarayya and Sharfuddin Ahmed JJ. was considering a similar question and it was held that for purposes of wealth-tax the amounts due on pro-notes and mortgage bonds, both principal and the interest on the valuation date, have to be taken into account for determining the net wealth and, therefore, the addition of Rs. 35,000 made by the Wealth-tax Officer was quite in accordance with law. In another unreported judgment dated 28-6-1963, R.C.No. 54/61 ( Chekka Suryanarayana v. Commissioner of Wealth-tax) a Bench of this court consisting of Chandra Reddy C. J. and Narasimham J. held that the loans and advances owing to the assessee occurring in annexure III are wide enough to included interest. The mere fact that the term 'interest' does not occur as such in this description of asset would not convey or compel an inference that interest was deliberately omitted and cannot be taken into account. Accordingly, the answer of the Bench was that the interest accrued due was properly includible in the value of the money-lending asset."

14. We, therefore, reject this argument also of the assessee.

For the aforesaid reasons, we answer the question in favour of the revenue and against the assessee. The assessee shall pay the costs. Advocate's fee Rs. 250.