Karnataka High Court
A.T. Mirji vs Commissionr Of Wealth-Tax, Karnataka on 28 March, 1980
Equivalent citations: [1980]126ITR93(KAR), [1980]126ITR93(KARN), [1980]4TAXMAN554(KAR)
JUDGMENT Rama Jois, J.
1. The Income-tax Appellate Tribunal, Bangalore Bench, has referred the following two questions for the opinion of this court under s. 27(1) of the Wealth-tax Act, 1957 (hereinafter referred to as "the Act");
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the bills receivable by the assessee as on the valuation date are includible as assets in his net wealth ?
2. Whether, on the facts and in the circumstances of the case, the notional income-tax liability on the bills receivable as on the valuation date is deductible under section 2(m) of the Wealth-tax Act in arriving at the net wealth of the assessee ?"
2. The brief facts of the two references, as set out in the statement of case drawn by the Tribunal, are as follows : The assessee is an individual. He is an income-tax practitioner. Assessment years are 1971-72 and 1972-73. The relevant valuation dates are March 31, 1971, and March 31, 1972, respectively. The assessee has kept his accounts on cash basis. In the wealth-tax returns filed by him for the assessment years 1971-72 and 1972-73, he estimated his collectible fees after deducting 25% out of the total bills outstanding as on March 31, 1971, and March 31, 1972, at Rs. 1,05,000 and Rs. 1,00,000, respectively. The assessee claimed before the WTO that these amounts were not includible in his net wealth. This claim was rejected by the WTO. Aggrieved by the orders of the WTO, the assessee preferred appeals to the AAC. Before the AAC, it was contended for the assessee that as the bills had not been accepted by his clients the amounts representing the bills due as on the valuation date, should not be treated as assets. Alternatively, the assessee claimed that the liability in respect of income-tax payment on these bills should be deducted. The AAC, though he rejected the claim of the assessee that the value of the bills due as on the valuation date should not be treated as assets, accepted the alternative contention of the assessee to the effect that the income-tax payable on such amount should be deducted. Accordingly, he directed the WTO to make a further allowance of 40% of the amount shown as due as on that date. Aggrieved by the said order the department preferred appeals before the Tribunal. In the appeals the department contended that the order of the AAC to the extent he allowed deduction of 40% of the amounts of the bills due to the assessee as on the date of valuation, was wrong. The assessee filed cross-objections contending that the out-standing bills did not constitute any asset assessable under the Act. By a common order made by the Tribunal on the appeals and the cross-objections, the Tribunal not only upheld the order of the AAC holding that the amount of the outstanding bills constituted the assets of the assessee as on the valuation date, but also reversed the order of the AAC directing the deduction of 40% of the amount from the bills due as representing the income-tax liability. Thereafter, on the request of the assessee the two questions, set out earlier have been referred for the opinion of this court.
3. Sri G. Sarangan, learned counsel appearing for the assessee, submitted that the amounts representing the bills outstanding as on the date of the valuation did not constitute the assets of the assessee and the same did not amount to a debt due, as the bills had not been accepted by the assessee's clients. Alternatively, he submitted that as the assessee was maintaining his accounts on cash basis and as the amounts representing the bills had not been received actually by the assessee on or before the valuation date and the bills were outstanding, the WTO should have accepted the value of the assets as shown in the balance-sheet of the assessee. In support of this submission, he relied on the decision of the Orissa High Court in CWT v. Vysyaraju Badreenarayanamoorthy Raju [1971] 79 ITR 330. The further submission made by the learned counsel for the assessee was that in the event of treating the amounts of the bills outstanding on the date of valuation as the assets of the assessee, the corresponding income-tax liability should have been deducted as was rightly done by the AAC. He submitted that the order of the Tribunal setting aside that part of the order of the AAC was also erroneous.
4. Sri S. R. Rajasekhara Murthy, learned counsel appearing for the Commissioner, submitted that the inclusion of amounts representing the outstanding bills as on the date of valuation was correct. He submitted that it is well settled that a debt due to an assessee as on the date of valuation constitutes his "assets" and it is also well settled that a debt is a sum of money, which is presently payable or will become payable in future by reason of a present obligation and, therefore, the amounts representing the bills amounted to a debt due to the assessee as on the valuation date and fell within the description of the word "assets" as defined in s. 2(e) of the Act. In support of his contention, he relied on the decision of the Calcutta High Court in Dipti Kumar Basu v. CWT [1976] 105 ITR 450.
5. Section 3 of the Act provides that for every assessment year commencing on and from the first day of April, 1957, wealth-tax is leviable on the net wealth of an individual or an undivided family or a company as on the valuation date. Section 4 provides as to what are the assets which should be considered as belonging to an individual as on the date of valuation. The word "asset" is defined in s. 2(e) of the Act. According to the said definition, the word "asset" used in the Act includes all property of every description, movable or immovable, except to the extent of the assets specifically excluded by the definition with which we are not concerned. On the basis of the definition, it was contended for the Commissioner that the amounts representing the bills outstanding to the assessee as on the date of valuation constituted the debt due to the assessee and consequently it should be regarded as assets belonging to the assessee as on the date of valuation and, therefore, liable to tax under the Act. However, it was contended for the assessee that the amounts representing the bills outstanding cannot be considered as debt due to the assessee as the bills had not been accepted by his clients. The alternative submission made for the assessee was that as he had maintained his accounts on cash basis and as admittedly the assessee had not received any cash towards those bills as on the date of valuation, the same could not be treated as asset and could not be taxed under the Act.
6. It is not in dispute that the assessee is maintaining his accounts on cash basis regularly. Therefore, the limited question, to which we have to confine ourselves in this case is as to whether having regard to the accounting system regularly employed by the assessee the amounts representing the outstanding bills, as on the date of valuation constitute his wealth. Unlike traders, members carrying on professions, such as income-tax practitioners, doctors and advocates, generally maintain cash system of accounting and treat only whatever money they actually receive as their income. In this behalf, it is useful to refer to the observations of Lord Denning in the case of Mason v. Innes [1968] ITR 491 (CA).
7. In that case, the question for consideration was, whether the respondent therein an author of a book, who maintained his accounts on cash basis was liable to pay income-tax on the value of the copyright of a book, in the typescript form of which he had made a gift to his father. Lord Denning with whom M. R. Davies and Russell L.JJ., concurred, observed as follows (p. 499) :
"I start with the elementary principle of income-tax law that a man cannot be taxed on profits that he might have, but has not, made : Sharkey v. Wernher [1956) AC 58; [1956] 29 ITR 962 (HL). At first sight that elementary principle seems to cover this case. Mr. Hammond Innes did not receive anything from the Doomed Oasis.
8. But in the case of a trader there is an exception to that principle. I take for simplicity the trade of a grocer. He makes out his accounts on an 'earning basis.' He brings in the value of his stock-in-trade at the beginning and end of year the brings in his purchases and sales; the debts owed by him and to him; and so arrives at his profit or loss. If such a trader appropriates to himself part of his stock-in-trade, such as tins of beans, and uses them for his own purposes, he must bring them into his accounts at their market value. A trader who supplies himself is accountable for the market value. That is established by Sharkey v. Wernher [1956] AC 58; [1956] 29 ITR 962 (HL)(E) itself. Now, suppose that such a trader does not supply himself with tins of beans, but gives them away to a friend or relative. Again he has to bring them in at their market value. That was established by Petrotim Securities Ltd. v. Ayres [1964] 1 WLR 190 (CA).
9. Mr. Monroe, on behalf of the revenue, contends that that exception is not confined to traders. It extends, he says, to professional men, such as authors, artists, barristers, and many others. These professional men do not keep accounts on an 'earnings basis'. They keep them on a 'cash basis', by which I mean that on one side of the account they enter the actual money they expend and on the other side the actual money they receive. They have no stock-in-trade to bring into the accounts. They do not bring in debts owing by or to them, nor work-in-progress. They enter only expenses on the one side and receipts on the other. Mr. Monroe contended that liability to tax does not and should not depend on the way in which a man keeps his accounts. There is no difference in principle, he says, between a trader and a professional man. And he stated his proposition quite generally in this way : The appropriation of an asset, which has been produced in the ordinary course of a trade or profession, to the trader's or professional man's own purposes, amounts to a realisation of that asset or the receipt of its value, and he must bring it into account.
10. I cannot accept Mr. Monroe's proposition. Suppose an artist paints a picture of his mother and gives it to her. He does not receive a penny for it. Is he to pay tax on the value of it ? It is unthinkable. Suppose he paints a picture which he does not like when he has finished it and destroys it. Is he liable to pay tax on the value of it. Clearly not. These instances-and they could be extended endlessly-show that the proposition in Sharkey v. Wernher [1956] AC 58; [1956] 29 ITR 962 (HL) does not apply to professional men. It is confined to the ease of traders who keep stock-in-trade and whose accounts are, or should be, kept on an earnings basis, wehereas a professional man comes within the general principle that, when nothing is received, there is nothing to be brought into account."
11. The above view indicates that in the case of professionals, only actual receipt constitutes income. The Supreme Court in Raja Mohan Raja Bahadur v. CIT [1967] 66 ITR 378, which arosc under the Indian I.T. Act, 1922, considered the scope of s. 13 of that Act which provided that the income of the assessee from business or profession, should be computed in accordance with the method of accounting regularly followed by the assessee. The Supreme Court explained the difference between mercantile system of accounting as follows (p. 382) :
"If accounts are maintained according to the mercantile system, whenever the right to receive money in the course of a trading transaction accrues or arises, even though income is not reaslied, income embedded in the recepit is deemed to arise or accrue. Where the accounts are maintained on cash basis receipt of money or money's worth and not the accrual of the right to receive is the determining factor."
12. The aforesaid views hold good for the purpose of computation of income of the assessee and, therefore, it cannot be said that the outstanding bills constituted the income of the assessee during the relevant year.
13. Further, the I.T. Act, 1961, also contains s. 145 which is similar to s. 13 of the 1922 Act. In view of s. 145 of the 1961 Act also, the amount representing the unpaid bills due to the assessee, who is maintaining his accounts on cash basis do not constitute his income received for the relevant assessment year. Only the income received by the assessee on or before the valuation date and retained by him as on the valuation date constitutes his wealth. In a case of this type, the cause for the wealth is the income or in other words the effect of the receipt of income is the wealth. Therefore, it would be anomalous to say that the wealth which would be the effect of the receipt of income was possessed by the assessee on the valuation date though its cause did not exist, i.e., the income itself was not received. In this behalf, it is pertinent to note that the Act and the I.T. Act are cognate enactments. Therefore, if the amounts representing the outstanding bills of an assessee, who maintains his accounts on cash basis is not income, under the I.T. Act for the relevant year, in the absence of any specific provision to the contrary in the Act, it should be held that it is not wealth as on the valuation date. Moreover, s. 7(2) of the Act also indicates that the method of accounting employed by the assessee is a relevant factor in assessing the wealth of the assessee under that. The relevant portion of s. 7(2) reads :
"7. (2) 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 whose having regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as may be prescribed......"
14. In view of the above provision in the normal course the assessing officers under the Act must have due regard to the accounting system regularly followed by the assessee. The WTO is, however, competent to scrutinise the accounts and to include any asset which should have been included in the accounts having regard to the accounting system regularly employed by the assessee. This is the view expressed by the Full Bench of the Allahabad High Court on the interpretation of s. 13 of the 1922 Act in CIT v. Shrimati Singari Bai [1945] 13 ITR 224, 239.
"I read that as meaning, if I have understood the case rightly, that it is the method of accounting regularly employed by the assessee himself that the Income-tax Officer is bound to take as the basis for computing profits and gains, but, if the assessee's own accounts do not bring out the true income-tax figure according to that method, then it is open to the Income-tax Officer to make any adjustment that is necessary for the purpose of giving full and true effect to the method itself."
15. The above reasoning equally applies to this case in view of s. 7(2)(a) of the Act. In the present case, there was no reason for disregarding the cash system of accounting employed by the assessee according to which the amounts not received could not be treated as the income of the assessee.
16. In the case of CWT v. Aluminium Corporation of India Ltd. [1972] 85 ITR 167, the Supreme Court held that unless an assessee satisfied the WTO that the valuation shown in the balance-sheet is not correct, the WTO would be entitled to proceed on the basis of the value shown in the balance-sheet for computing the value of assets of such assessees for purposes of levying tax under the Act in view of s. 7(2) of the Act. The relevant portion reads (p. 172) :
"Wealth-tax is levied on the value of the assets of the assessee on the valuation date. Section 7(2) of the Wealth-tax Act merely requires the Wealth-tax Officer to have regard to the balance-sheet. It is open to the assessee to satisfy the authorities under the Wealth-tax Act that the valuation shown in the balance-sheet is not correct. But in the absence of such a proof, the Wealth-tax Officer will be justified in proceeding on the basis that the value shown in the 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 the business. In other words, the value of the assets shown in the balance-sheet can justifiably be made the primary basis of valuation for the purpose of the Wealth-tax Act. In other words, it can be taken as prima facie evidence of the value of the assets."
17. The present case is a converse one. The assessee is insisting on the acceptance of his accounting system for valuation of his assets, but the revenue has discarded it and has computed his assets which result in changing the accounting system. The ratio of the two decisions of the Supreme Court in Raja Mohan Raja Bahadur [1967] 66 ITR 87 and Aluminium Corporation of India Ltd. applies to this case. There was no justification to refuse to accept the accounting system regularly employed by the assessee.
18. Learned counsel for the revenue, however, tried to make out that as s. 7(2)(a) of the Act refers to a "business" and not profession, and as the assessee in this case is only carrying on a profession and not a business, the said provision has no application. We are not impressed by the submission. Though there is undoubtedly a difference between a business and profession, the former being in the nature of trade and commerce, and the latter being in the nature of rendering professional service, in so far it relates to the requirement to accept their accounting system for taxation, there is no difference between the two. In this behalf, it should be pointed out that income, i.e., profits and gains of business or profession, is treated as one head under s. 14D of, the I.T. Act. Therefore, in our view, whether the assessee is carrying on a business or profession, if he has maintained accounts regularly, the system of accounting adopted should be normally accepted for computing the value of the assets on the date of valuation. In the present case, there was no basis for the revenue not to accept the accounting system regularly employed by the assessee. In a similar situation the Orissa High Court has taken a similar view in the case of Vysyaraju Badyeenarayanamoorthy Raju [1971] 79 ITR 330 (Orissa). We are in agreement with the view taken by the Orissa High Court.
19. In our view, no sufficient and valid reason is furnished by the Calcutta High Court in the case of Dipti Kumar Basu to dissent from the view taken by the Orissa High Court which was based on the reasoning of the decision of the Supreme Court in the case of Raja Mohan Raja Bahadur . Further, we do not agree with the view taken by the Calcutta High Court that the system of accounting adopted by an assessee is of no consequence under the W.T. Act as such s view would be contrary to the express provision contained in s. 7(2) of the Act and this aspect is overlooked as is clear from the following portion of the judgment (p. 463) :
"The tax officer is expressly authorised to make adjustments in the balance-sheet under section 7(2)(a) of the Act 'of the circumstances of the case may require ' him to do so. The fact that a book debt is not entered in the books is itself a circumstance which justifies its inclusion in the balance-sheet under this section for the purpose of making the adjustment.
In our opinion, by making such adjustment in the balance-sheet, the tax officer does not convert the cash system of book-keeping into a mercantile system of booking-keeping for the purpose of the Wealth-tax Act."
20. Further, we do not agree with the view that even when an assessee has maintained his accounts on cash basis regularly and has his balance-sheet prepared on that basis and the assessing authority considers the amounts representing the outstanding bills as asset though not shown as such in the accounts of the assessee, the assessing officer is not converting the accounting system from cash system into mercantile system. On the other hand, we are of the view that by doing so he changes the accounting system regularly employed by the assessee, which he cannot do.
21. Another decision relied on for the revenue was the case of Vadyev Venkaa Rao v. CWT [1968) 69 ITR 552 decided by the Andhra Pradesh High Court. It is not helpful. From the judgment, it is seen, though the contention of the assessee was that as he had maintained accounts on cash basis, the compensation amount and interest thereon not actually received should not be treated as asset, this aspect has not at all been considered by the High Court.
22. In the light of the above discussion, we hold that the amounts representing the outstanding bills which were due to the assessee, but not actually received by him on the valuation date, did not constitute his wealth as on that day as the assessee was maintaining cash system of accounting. In view of this conclusion, our answers to the two questions are as follows :
(i) Reg. 1st question : On the facts and in the circumstances of the case, the Tribunal was not right in holding that the bills receivable by the assessee as on the valuation date are includible as assets in his net wealth.
(ii) Reg. 2nd question : In view of our answer to the Ist question, the 2nd question, namely, as to whether the notional income-tax liability on the bills receivable as on the valuation date is deductible under s. 2(m) of the W.T. Act, in arriving at the net wealth of the assessee, does not survive for consideration.