Calcutta Tramways Co. Ltd. v. Commissioner of Wealth Tax, (SC) BS108165
SUPREME COURT OF INDIA

Before:- K.S. Hegde, P. Jaganmohan Reddy and H.R. Khanna, JJ.

Civil Appeals Nos. 28-30 of 1969. D/d. 28.8.1972.

Calcutta Tramways Co. Ltd. - Appellant

Versus

Commissioner of Wealth Tax - Respondent

For the Appellant :- C.K. Daphtary, Sr. Advocate, T.A. Ramachandran and D.N. Gupta, Advocates.

For the Respondent :- N.D. Karkhanis, Sr. Advocate, R.N. Sachthey, B.D. Sharma and S.P. Nayar, Advocates.

A. Wealth-tax Act, 1957, Section 2(m) and 6 - Net Wealth - Assets of company - Company building up a special reserve - To be dealt with as per agreement - Till its acquisition amount in special reserve remaining company's assets - Such reserve includable in company's net wealth (Section 2(m) refers).

[Para 11]

B. Wealth-tax Act, 1957, Section 2(m) - Amounts in shareholders' account - Company & shareholders different entitles - Shareholders having no rights in co's assets except when dividends declared or co's assets distributed on liquidation - No part of co's profit becoming debts due to shareholders unless co.'s assets recommendations of its Directors and declares dividends - Proposed dividend not deductible while computing net wealth of appellant-company - Character of assets not charging when company maintaining separate shareholders reserve due to its agreement with Government (Section 2(m) refers).

[Para 12]

C. Wealth-tax Act, 1957, Section 6 - Debts outside India - Floating charge on company's assets - All debenture holders were residing in foreign land - Debenture loans raised in foreign country - Cannot be included in company's assets (Section 6 refers).

[Paras 13 and 15]

Cases Referred :-

Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax (Central), Calcutta, 59 ITR 767.

JUDGMENT

K.S. Hegde, J. - These are assessee's appeals by certificate, from the judgment of the High Court of Calcutta in a Reference under Section 27(1) of the Wealth-Tax Act (to be hereinafter referred to as the Act). At the instance of the assessee (which will hereinafter be referred to as the "company") as well as the Commissioner of Wealth Tax, West Bengal, the Income Tax Appellate Tribunal 'B' Bench, Calcutta referred the following questions to the High Court for its opinion :

2. The High Court answered all the three questions in favour of the Revenue. Hence these appeals.

3. The assessee is a sterling company. In the relevant assessment years, it was operating the Calcutta Tramways Co. It is a non-resident company for the purpose of Explanation 2 to Section 6 of the Act. The assessment years with which we are concerned in these appeals are 1957-58, 1958-59 and 1959-60 and the relevant valuation dates are 31st December, 1956, 31st December 1957 and 31st December 1958 respectively. The Wealth Tax Officer valued the assets of the company under Section 7(2) (a) of the Act.

4. In 1951 the Government of West Bengal proposed to acquire the undertaking of the Calcutta Tramways Co. Ltd. In pursuance of that policy, the Government entered into an agreement with the company on August 30, 1951. This agreement was later given statutory force. The clauses of the agreement which are relevant for our present purpose are 4, 7 and 8. They read :

5. In compliance with the provisions in the agreement, the company maintained a special reserve. The amounts lying to the credit of that account on the respective valuation dates were # 1,99,407, # 1,92,940 and # 98,017. The company also maintained shareholders' account in its books as required by clause 4 (1) (d) of the agreement. Amounts credited to the said account on the relevant valuation dates stood at #1,54,434, #2,08,934 and #2,62,811 respectively.

6. The company had issued debentures which were secured by a floating charge on the general assets of the company. The assets of the company located outside India were valued at # 4,27,786, # 3,51,888 and # 1,95,916 on the respective valuation dates. The company's assets in India on those dates were valued at # 2,930,032, # 3010.560 and # 3, 119,149.

All the debenture holders were residents in United Kingdom. The specialites were in United Kingdom and the debts were payable in that country.-

7. The company claimed the amounts in special reserve account those in the share-holders reserve account as well as debenture loans as debts deductible in ascertaining the net wealth of the company. The Wealth-tax Officer rejected those contentions. In appeal the Appellate Assistant Commissioner agreed with the Wealth-tax Officer in his finding relating to the amounts in the special reserve account as well as in the share-holders account. But as regards the debenture loans, he distributed the same on the basis of the asses held by the company in the United Kingdom and those held by it in this country. Consequently he gave deduction in respect of that portion of the debt which according to him should be borne by the assets in India. Both the Commissioner as well as the company appealed to the Tribunal. The Tribunal disagreed with the conclusions reached by the Appellate Assistant Commissioner that any portion of the debenture loans could be taken into consideration in ascertaining the net wealth of the assessee. It agreed with the Wealth-tax Officer and the Appellate Assistant Commissioner that the share-holders reserve was the asset of the company. It opined that the amounts in the special reserve account were not includible in the company's net wealth. But as mentioned earlier, the High Court fully accepted the conclusions reached by the Wealth-tax Officer.

8. Before considering the points arising for decision, it is necessary to refer to the relevant provisions of the Act. "Net Wealth" is defined in Section 2 (m) of the Act thus :

* * * *

9. Section 3 is the charging section. It says :

10. Section 4 prescribes that all assets should be taken into consideration in computing the net wealth. Section 5 provides for certain exemptions. Those exemptions are not relevant for our present purpose. Then we come to Section 6 which is important for our present purpose. The portion of that section which is material for our present purpose reads :

11. Now that we have before us the material facts and the relevant provisions of the Act, we shall proceed to examine the questions of law referred to the High Court for its opinion. Coming to question No. 1, the contention of the company was that under law, it was compelled to build up a special reserve. It could not deal with the same except in accordance with the provisions of the agreement. Hence the same cannot be considered as the asset of the company. This is a wholly untenable contention. No part of the assets of the company had been acquired by the Government. Between the Government and the company, there was only an agreement. The Government could not have acquired the company before the "purchase date" viz. January 1, 1972. Even after that date, only an option is given to the Government to acquire the company. The Government could not be compelled to acquire the company. The agreement had fixed the consideration to be paid for the acquisition of the company. Till the company was acquired, the amounts shown in the special reserve were the assets of the company. Once we come to the conclusion that they were not the assets of the Government, which conclusion to our mind is obvious, then it follows that they are the assets of the company. It is not the case of the company that those assets belonged to some third party. Even item of asset must belong to someone. The question is to whom did it belong ? The obvious answer is that it belonged to the company. It is not the case of the company that the asset in question came within any of the exemptions mentioned in the Act.

12. Now coming to the second question formulated for the opinion of the High Court which relates to the amounts in "shareholders Account", the contention of the company was that the amount belonged to the shareholders and , therefore, it was not an item of the assets of the company. This again is an unacceptable contention. A company is a different legal entity from its share-holders. The shareholders have no rights in the assets of the company except when dividends are declared or when the assets of the company are distributed on liquidation. Until a company in its general meeting accepts the recommendation of the Director and declares dividends, no part of the profits of the company becomes debt due to the shareholders. In Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax (Central), Calcutta, 59 ITR 767 this Court ruled that until the company in its general body meeting accepted the recommendations of its Directors and declared the dividends, the report of the Directors in that regard was only a recommendation and the same be withdrawn or modified. In that case the company in its general body meeting had not declared dividends before the relevant valuation date. Hence this court held that on the valuation date nothing had happened beyond mere recommendation by the Directors as to the amount that might be distributed as dividends. Consequently there was no debt owed by the company to the shareholders on that date. Hence the proposed dividend was not deductible in computing the net wealth of the appellant company. The fact that a separate shareholders reserve had to be maintained by the company because of its agreement with the Government did not change the character of the asset.

13. This takes us to the last question. As already mentioned the debenture loans were raised in United Kingdom. All the debenture holders were residents in United Kingdom. The specialties were in the United Kingdom. The debts were payable in the United Kingdom. Those debenture loans had only a floating charge on the assets of the company. No particular portion of the assets were specially charged. The meaning of a floating charge is explained in Halsbury's Laws of England, 3rd edn. Vol. 6 p. 72 paragraph 914 thus :

14. Quite clearly the debts in question were located in United Kingdom. Dealing with the business debts this is what is stated in Halsbury's Laws of England, 3rd Edn. Vol. 15, p. 58 paragraph 115 :

15. From what has been said above, it is clear that the debenture loans in question cannot be taken into consideration in ascertaining the net wealth of the company in view of Section 6 of the Act.

16. In the result these appeals fail and they are dismissed with costs-advocates' fee one set.

Appeals Dismissed.