# BIRLA JUTE MANUFACTURING CO. LTD v. COMMISSIONER OF WEALTH TAX, WEST BENGAL, CALCUTTA

- **Citation:** [1972] 1 S.C.R. 104
- **Court:** Supreme Court of India
- **Decided:** 1971-08-10
- **Bench:** K. S. Hegde, A. N.' Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/birla-jute-manufacturing-co-ltd-v-commissioner-of-wealth-tax-west-bengal-5321
- **Pages:** 6

## Headnote

Wealth Tax-Inflated value of assets shown in balance sheet of company
-When wealth tax officer is justified in accepting such figure.
In the assessment year 1948-49, the assessee, a public limited company revalued its assets and enhanced the book value by Rs. 145,00,000
arid continued to show the inflated valuation in the balance-sheets for
subsequent years. For the assessment year 1957-58, the Department
1ook the valuation of the assets as shown in the balance sheets.
The
assessee. however, claimed that the said Rs. 45,00,000 should be
deducted in the computation of the net value.
Before the Tribunal,
it was
stated that the reason for the inflation was that the assessee
contemplated issuing bonus shares for that amount, but it did not do
so because the necessary consent of the Central Government was not
granted. The Tribunal decided in favour of the assessee but the High
Court, on reference, held that there was a motive for the revaluation
-0f the assets and therefore the valuation in the balance-sheet could
not be accepted as a correct basis and that the net value would have to
be ascertained by the Wealth-tax Officer under s. 7 of the Wealth-tax
Act. Both the assessee and the Revenue appealed to this Court.
HELD: (1) Under s. 211 of the Indian Companies Act, 1956, every
balance sheet must give a'trμe and fair figure of the state of its affairs
as at the end of the financial year.
Under s. 7 of the Wealth-tax Act
the Wealth Tax Officer may determine the net value of the assets of the
business having regard to the balance sheet of the business .as on the
valuation date . It is open to the Wealth-tax Officer to accept the figure
given by the assessee or to arrive at another figure if he was satisfied
for good reasons that the va'uation given in the balance-sheets was
wrong. Equally it is open to the assessee to satisfy the authorities that
tlie said figure had been enhanced, for "acceptable reasons". (107 E-H]
(2) The main idea underlying the issue of bonus shares is to bring
the nominal amount of the issued share capital of the company into line
with the true excess of assets over liabilities. But the taking of this
·step would involve a genuine and correct valuation of assets and not
their under valuation or inflation, especially
when the power of the
·Company to issue bonus shares is of fiduciary nature and must be
exercised bona fide for the general advantage of the company.
[I08G-H., I09A]
(3) In the present case, no evidence was placed before the Wealth
Tax Officer for demonstrating how it became necessary to inflate the
valua'titl~ by
Rs. 1,45,00,000 for the purpose
of issuing bonus
1
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B
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D
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B
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BIRLA JUTE MAND. v. C.W.T. (Grover, J.)
105
shares, nor was it shown that it was so done under expert acturial
suggestion under some misapprehension or mistake. The Wealth
Tax Officer was therefore fully justified in accepting the figure which
the assessee had himself given in the .balance sheet as the correct figure
and making the assessment in accordance with that figure. [!09B-E]
Kesoram Industries and Cotton Mills Ltd., v. Commissioner of
Wealth Tax (Central) Calcutta, 59 I.T.R. 767 referred to.
CIVIL APPELLATE JuR1smc10N: Civil Appeals No. 1834
and 1169 of 1968.
Appeals from the Judgment and order dated February 21, 22 1967 of the Calcutta High Court in Wealth Tax
Reference No. 138 of 1962.
S. T. Desai, S. A. Aiyar, R.N. Sachthey and B. D.
Sharma, for the appellant (in C.A. No. 1169/68 and the
respondent (in C. A. No 1834 of 1968)
A. C. Mitra, N. R. Khaitan, P. Khaitan, Krishna
Sen and B.P. Maheswari for the respondent (in C. A.
No. 1169. of 1968) and the appellant (in C. A. No. 1834
of 1968.)

## Text

104
BIRLA JUTE MANUFACTURING CO. LTD.
v.
COMMISSIONER OF WEALTH TAX, WEST
BENGAL, CALCUTTA
August 10, 1971
[K. S. HEGDE AND A. N.' GROVER, JJ.]
Wealth Tax-Inflated value of assets shown in balance sheet of company
-When wealth tax officer is justified in accepting such figure.
In the assessment year 1948-49, the assessee, a public limited company revalued its assets and enhanced the book value by Rs. 145,00,000
arid continued to show the inflated valuation in the balance-sheets for
subsequent years. For the assessment year 1957-58, the Department
1ook the valuation of the assets as shown in the balance sheets.
The
assessee. however, claimed that the said Rs. 45,00,000 should be
deducted in the computation of the net value.
Before the Tribunal,
it was
stated that the reason for the inflation was that the assessee
contemplated issuing bonus shares for that amount, but it did not do
so because the necessary consent of the Central Government was not
granted. The Tribunal decided in favour of the assessee but the High
Court, on reference, held that there was a motive for the revaluation
-0f the assets and therefore the valuation in the balance-sheet could
not be accepted as a correct basis and that the net value would have to
be ascertained by the Wealth-tax Officer under s. 7 of the Wealth-tax
Act. Both the assessee and the Revenue appealed to this Court.
HELD: (1) Under s. 211 of the Indian Companies Act, 1956, every
balance sheet must give a'trμe and fair figure of the state of its affairs
as at the end of the financial year.
Under s. 7 of the Wealth-tax Act
the Wealth Tax Officer may determine the net value of the assets of the
business having regard to the balance sheet of the business .as on the
valuation date . It is open to the Wealth-tax Officer to accept the figure
given by the assessee or to arrive at another figure if he was satisfied
for good reasons that the va'uation given in the balance-sheets was
wrong. Equally it is open to the assessee to satisfy the authorities that
tlie said figure had been enhanced, for "acceptable reasons". (107 E-H]
(2) The main idea underlying the issue of bonus shares is to bring
the nominal amount of the issued share capital of the company into line
with the true excess of assets over liabilities. But the taking of this
·step would involve a genuine and correct valuation of assets and not
their under valuation or inflation, especially
when the power of the
·Company to issue bonus shares is of fiduciary nature and must be
exercised bona fide for the general advantage of the company.
[I08G-H., I09A]
(3) In the present case, no evidence was placed before the Wealth
Tax Officer for demonstrating how it became necessary to inflate the
valua'titl~ by
Rs. 1,45,00,000 for the purpose
of issuing bonus
1
A
B
c
D
E
F
G
H
B
c
D
E
F
G
H
BIRLA JUTE MAND. v. C.W.T. (Grover, J.)
105
shares, nor was it shown that it was so done under expert acturial
suggestion under some misapprehension or mistake. The Wealth
Tax Officer was therefore fully justified in accepting the figure which
the assessee had himself given in the .balance sheet as the correct figure
and making the assessment in accordance with that figure. [!09B-E]
Kesoram Industries and Cotton Mills Ltd., v. Commissioner of
Wealth Tax (Central) Calcutta, 59 I.T.R. 767 referred to.
CIVIL APPELLATE JuR1smc10N: Civil Appeals No. 1834
and 1169 of 1968.
Appeals from the Judgment and order dated February 21, 22 1967 of the Calcutta High Court in Wealth Tax
Reference No. 138 of 1962.
S. T. Desai, S. A. Aiyar, R.N. Sachthey and B. D.
Sharma, for the appellant (in C.A. No. 1169/68 and the
respondent (in C. A. No 1834 of 1968)
A. C. Mitra, N. R. Khaitan, P. Khaitan, Krishna
Sen and B.P. Maheswari for the respondent (in C. A.
No. 1169. of 1968) and the appellant (in C. A. No. 1834
of 1968.)
The Judgment of the Court was delivered by
Grover, J. These appeals have been brought from a
judgment of the Calcutta High Court by certificate in a
Wealth Tax Reference. Civil Appeal No. 1834 of 1968
is of the assessee and the other appeal has been filed by the
Commissioner of Wealth Tax, West Bengal.
It is necessary to deal with the appeal of the Commis~
sioner of \Vealth Tax as the other appeal shall also stand
disposed of once the question is answered in the Commission•
er's appeal. The assessee is a public limited company. In the
assessment year 1948-49 the assessee revalued its assets
enhancing the existing book value by Rs. 1,45,00,000/-
which was credited to the capital reserve account. In
assessing the wealth tax payable by the assessee for the
assessment year 1957-58 the relevl\llt valuation date being
March 31, 1957 the Wealth Tax Officer proceeded under
s. 7 (2) of the Wealth Tax Act, hereinafter called the 'Act'
and took the valuation of the assets at Rs. 5, 10,40,897
as shown in the balance sheet on the relevant date. The
assessee claimed tha.t a sum of Rs. 1,45,00,000/- by which
106
SUPREME COURT REPORTS
[1972] l S.C.R.
the book value of the fixed assets was enhanced in 1948-49
A
should be deducted in the computation of the net value.
It is not clear from the order of the Wealth Tax Officer,
who rejected the claim, as to what was the ground taken
for claiming this deduction. Before the Appellate Assistant Commissioner it was contended on behalf of the
B
assessee that the capital reserve was not out of profits
and was only a notional reserve and therefore it should be
excluded when global valuation of the assets was being
made. It was urged that the figure of reserve was purely
artificial and had no relation to the working of the company
and should not be taken into account in the valuation of c
the net assets. The Appellate Assistant Commissioner
did not accede to the contention and confirmed the assessment. The Appellate Tribunal found that a similar point
had come up for decision before a special bench of the
Tribunal consisting of three members in Bombay and
had been decided in favour of the assessee. Following
D
that decision the Tribunal allowed the appeal and held that
the department was not justified in valuing the assets at
the enhanced figure for the purpose of computation of the
net wealth of the assessee. The relevant que~tion that was
referred was as follows :-
"Whether on the facts and iu the circumstances
of the case the Tribunal was justified in excluding the sum of Rs. 1,45,00,000/- from the net
valuation of the assets as shown in the balance sheet
E
of the assessee as on 31-3-57."
F
The High Court was of the view that the Revenue had
taken the stand before the Tribunal that the motive of the
assessee in revaluing the assets at a higher figure was to
declare the bonus share which, however, could not be so
declared as the permission of the Central Government was
G
withheld in that behalf. According to the High Court
there was a motive for revaluation of the assets and therefore the valuation in the balance-sheet could not furnish
the correct basis. It was pointed out that the conduct of
the assessee was "far from what was to be desired" because
even in the successive balance sheets the revaluation figure
H
appeared even after the assessee had failed to get the permission of the Central Government to issue bonus shares.
tt I
I
BIRLA JUTE MAND. v. C.W.T. (Grover,!.)
107
A But according to the High Court an erroneous figure did
not become a correct figure by lapse of time. The following portion of the judgment of the High Court may be
reproduced:-
B
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"The Tribunal was, therefore, in a sense right in
excluding a sum of Rs. 1,45,00,000/- from the
net value of the assets as shown in the balance
sheets of the assessee as on March 31, 1957. We,
however, make it clear that in answering question
No. 1 in the affirmative we did not mean that the
net value of the assets should be taken at the figure
as appearing in the balance sheet reduced by
Rs. 1,45,00,000/-. What we mean to say is that
in valuing the assets the addition of Rs.
1,45,00,000/- may not have been correctly made.
This does not, however, mean that the net value
of the assets must be the balance sheet figure
reduced by Rs.1,45,00,000/-. That net value
will have now to be ascertained under s. 7 (i)
of the Wealth Tax Act, now
that
wc have
expressed the opinion that the balance sheet in the
instant case has not found the unequivocal approval
both of the assessee and of the Revenue authorities."
It is quite clear that under section 7 (2) of the Act the
Wealth Tax Officer may determine the net value of the
assets of the business as a whole having regard to the
balance sheet of the business as on the valuation date.
F It must be remembered that under s. 211 of the Indian
Companies Act, 1956, every balance sheet of a company
must give a true and fair figure of the state of its affairs
as at the end of the financial year. If the assessee has
shown the net value of the assets at a certain figure in the
balance sheet the Wealth Tax Officer would be entitled to
G accept it on the footing that the assessee knew best what the
valuation of the assets was. It was, however, open to the
assessee to satisfy the authorities that the said figure had
been enhanced or increased or inflated "for acceptable
reasons". It was equally open to the Wealth Tax Officer
H not to accept the figure given by the assessee but to arrive
at an-Other figure if he was satisfied for good reasons that
the :Valuation given in the balance sheet was wrong. Theer
108
SUPREME COURT REPORTS
[l972J I S.C.R.
A
can be no doubt that s. 7 (2) (a) of the Act contemplates
that the book value ill' the balance sheet should be taken
as the primary basis of valuation and if any adjustment is
required it is open to the Wealth Tax Officer to make such
an adjustment in the valuation as given in the balance
sheet as may be necessary in the circumstances of the case.
B
(See Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax (Central) Calcutta:(1)
In the present case the sole reason which at the stage
of the appeal before the Tribunal came to be disclosed for
inflating the valuation by Rs. 1,45,00,000 in the assessment c
year 1948-49 was that the assessee contemplated issuing
bonus shares for which the consent of the Central Government was necessary under s. 3 of the Capital Issues (Control) Act, 1947. The same was not granted. The assessee,
however, did not produce the order of the Central Government showing the reasons for which permission was deD
clined to the issuance of bonus shares. It continued to
show the enhanced or inflated valuation in the balance
sheet throughout. The circumstances in which bonus
shares are issued are well known. A company may not
require any new money but it may reasonably wish to bring
the nominal amount of its issued share capital more into
E
line with the true excess of assets over liabilities. Unless
it takes this step its annual profits will appear to be disproportionately high in relation to its nominal capital.
By means of issuing bonus shares the reserve or share
premium account or some part of the same are capitalised or
'Ji'
converted into share capital. The capitalisation of free
i.e. voluntary reserves, merely means that undistributed
profits have been permanently ploughed back and converted into share capital which cannot be returned to the
members by way of dividend. (vide Modern Company
Law by L.C.B. Gower, p. llO).
G
It is quite clear that the main idea underlying the issue
of bonus shares is to bring the nominal amount of the
issued share capital of the company into line with the true
excess of assets over liabilities. This will involve a genuine
and correct valuation of assets and not their under-valuation H
or inflation. It must be remembered that the power to
(I) 591.T.R. 767.
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BIRLA JUTE MANU. v. C.W.T. (Grover, /.)
I Of>
Issue shares for increasing the capital is of a fiduciary natureand must be exercised bona fide for the general advantage
of the company.
No evidence in the shape of an affidavit
or any other material was placed before the wealth . tax
authorities by the assessee demonstrating how it became
necessary to inflate the valuation by Rs. I ,45,00,000 for
the purpose of issuing bonus shares. It was not even the
case of the assessee that the value was inflated under expert
acturial suggestion or under some misapprehension or
mistaken advice.
In this situation the only possible
conclusion can be that the assessee could not advance any
convincing and acceptable reasons for the alleged inflation.
The Wealth Tax Officer could reject the figure given by the
assessee in the balance sheet if he was, for sufficient reasons,
satisfied that that figure was wrong.
The facts and circumstances which have been discussed above show that the
Wealth Tax Officer was fully justified in accepting the
figure which the assessee himself had given in the balance
sheet as the correct figure and proceed to make the assess
ment in accordance with that figure.
The High Col.:rt
should have, therefore, answered the question in the neg~:ive and in favour of the Commissioner of Wealth Tax
The appeal of the Commissioner of Wealth Tax i.e.
C.A. 1169/68 is allowed and the question is answered
accordingly.
The appeal of the assessee i.e. C. A. 1834/68
consequently becomes infructuous and must be dismissed
in view of the answer returned in the other appeal.
The
Commissioner will be entitled to the costs incurred in this
Court (one heHi11g fee) as also in the High Court.
V.P.S.
Appeal dismissed.