# CALCUTIA TRAMWAYS CO. LTD v. COMMISSIONER OF WEALTH TAX

- **Citation:** [1973] 1 S.C.R. 1033
- **Court:** Supreme Court of India
- **Decided:** 1972-08-28
- **Bench:** K. S. HEGpE, P. Jaganmohan Reddy, H. R. Khanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/calcutia-tramways-co-ltd-v-commissioner-of-wealth-tax-5653
- **Pages:** 10

## Headnote

Wealth Tax Act (27 of. 1957), s. 6-Specia/ reserve fund, and Shareholders' account 1naintained ar a result of agree111ent lvith
Governn1ent
proposing to acquire Con1pany-De/Jenture loans payable outside Indias,,ecial rtserve fund, amount (n shareholders' account and debenture loans
if deductible in ascertaining net wealth of Con1pany.
The assessee was a non~resident company for the purpose of Exp\ana~
tion 2 to s. 6 of the Wealth-tax Act, 1957 and was operating a tramway
undertaking in Calcutta.
The
Government of W. Bengal proposed to
acquire the \\ndertak.ing and entered into an agreement in 1957 with the
assessee.
Under the agreement, the Government had an option to :lcquire
the undertaking after the 'purchase date' namely, January 1, 1972.
Jn
compliance with the provisions of the ::i.grccmcnt the nssessce maintained
a special reserve and a shareholders' account in its books. The asscssee had
also issued deberttures which \\'Cre secured by a floating charge on
the
general assets of the company.
All the debenture-holders \Vere hov.·cver
residents in the United Kingdom, the specialities were in the United Kingdom, and the debts were payable in that Country.
For the assessment years 1957-58, 1958-59 am! 1959-60 the assessee
claimed tha.t., (l) the amounts in special reserve account~ (2) the amounts
in sharehu1ders reserve account; and (3) t'he debenture loans as debts,
deductible in ascertaining its net \vealth for the purpose of the Act. The
High Court, in reference, held in favour of the re1vellue \Vith respect to
all the three items.
Dismissing the appeal to this Court,
HELD: (I) Till the assessee-company was acquired by the Government the amounts shown in the special reserve, though shown in accordance with tb,e agreement, were the assei.. of the oompany.
Between the
Gov~rnment and the compμny there was only an
agreement
and
the
Government could not have a.cquired the assessee-company
before
the
purchase date, January 1, )972. [IC40D-FJ
(2) The amount in the shareholders' account did not belong to the
shareholders but was an item of the assets of the a5sessee-cornpany.
[104\D]
A oompany is a different legal entity from its •hareholder<, and the
~hareholders have no rights in the assets of the company except \Vhen
dividends are declared or when the assets of the con1pany are distributed
on liquidation. The fact that a separate shareholders reserve had to be
maintained by the asscssce-company because of the agreement with the
Government di..? not =hange the character of the assef.
[1040H; 1041A-DJ
Kesora111 !ndustrit·s .:nd Culton Mills Ltd. v. Cornn1fa·sioner of JVcalt/i ..
tax (Central), c,/uwa, 59 l.T.R. 767, followed.
( 3) In view of the nature of a floating charge, and the circumstances
in the present case rhat the debc11ture-holders were all residents of the
United Kingliom, the specialities \Vere in the United Kingdom and the
1034
SUPREME COURT REPORTS
[1973] 1 S.C.Jl.
debts were payable in the Unifed Kingdom, the ·debenture loans could
not also be taken into consideration in ascertaining the net wealth of the
a'sessee under s. 6 of the Wealth-tax Act, [104!E; 1042F-G]
... !
Halsbury's Laws of England; 3rd Ed. Vol. 6, p. 472, para 914 and
Vol. 15, p. 58, para 115, rcierred to.
·
Civ1L APPELLATE JURISDICTION : Civil Appeals Nos. 28-30
of 1969.
Appeals by certificate under article 133 of the Constituthn
of India from the judgment and order dated November 15, 1967
of the Calcutta High Court in W. T. Reference No. 405 of 1962.
C. K. Daphtary, T. A. Ramachandran and D. N. Gupta, for
B
the appellant.
c
N. D. Karkhanis, R. N. Sachthey, B. D. Sharma and S. P.
Nayar, for the respondent.

## Text

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CALCUTIA TRAMWAYS CO. LTD.
v.
COMMISSIONER OF WEALTH TAX
August 28, 1972
1033
[K. S. HEGpE, P. JAGANMOHAN REDDY AND H. R. KHANNA, JJ.)
Wealth Tax Act (27 of. 1957), s. 6-Specia/ reserve fund, and Shareholders' account 1naintained ar a result of agree111ent lvith
Governn1ent
proposing to acquire Con1pany-De/Jenture loans payable outside Indias,,ecial rtserve fund, amount (n shareholders' account and debenture loans
if deductible in ascertaining net wealth of Con1pany.
The assessee was a non~resident company for the purpose of Exp\ana~
tion 2 to s. 6 of the Wealth-tax Act, 1957 and was operating a tramway
undertaking in Calcutta.
The
Government of W. Bengal proposed to
acquire the \\ndertak.ing and entered into an agreement in 1957 with the
assessee.
Under the agreement, the Government had an option to :lcquire
the undertaking after the 'purchase date' namely, January 1, 1972.
Jn
compliance with the provisions of the ::i.grccmcnt the nssessce maintained
a special reserve and a shareholders' account in its books. The asscssee had
also issued deberttures which \\'Cre secured by a floating charge on
the
general assets of the company.
All the debenture-holders \Vere hov.·cver
residents in the United Kingdom, the specialities were in the United Kingdom, and the debts were payable in that Country.
For the assessment years 1957-58, 1958-59 am! 1959-60 the assessee
claimed tha.t., (l) the amounts in special reserve account~ (2) the amounts
in sharehu1ders reserve account; and (3) t'he debenture loans as debts,
deductible in ascertaining its net \vealth for the purpose of the Act. The
High Court, in reference, held in favour of the re1vellue \Vith respect to
all the three items.
Dismissing the appeal to this Court,
HELD: (I) Till the assessee-company was acquired by the Government the amounts shown in the special reserve, though shown in accordance with tb,e agreement, were the assei.. of the oompany.
Between the
Gov~rnment and the compμny there was only an
agreement
and
the
Government could not have a.cquired the assessee-company
before
the
purchase date, January 1, )972. [IC40D-FJ
(2) The amount in the shareholders' account did not belong to the
shareholders but was an item of the assets of the a5sessee-cornpany.
[104\D]
A oompany is a different legal entity from its •hareholder<, and the
~hareholders have no rights in the assets of the company except \Vhen
dividends are declared or when the assets of the con1pany are distributed
on liquidation. The fact that a separate shareholders reserve had to be
maintained by the asscssce-company because of the agreement with the
Government di..? not =hange the character of the assef.
[1040H; 1041A-DJ
Kesora111 !ndustrit·s .:nd Culton Mills Ltd. v. Cornn1fa·sioner of JVcalt/i ..
tax (Central), c,/uwa, 59 l.T.R. 767, followed.
( 3) In view of the nature of a floating charge, and the circumstances
in the present case rhat the debc11ture-holders were all residents of the
United Kingliom, the specialities \Vere in the United Kingdom and the
1034
SUPREME COURT REPORTS
[1973] 1 S.C.Jl.
debts were payable in the Unifed Kingdom, the ·debenture loans could
not also be taken into consideration in ascertaining the net wealth of the
a'sessee under s. 6 of the Wealth-tax Act, [104!E; 1042F-G]
... !
Halsbury's Laws of England; 3rd Ed. Vol. 6, p. 472, para 914 and
Vol. 15, p. 58, para 115, rcierred to.
·
Civ1L APPELLATE JURISDICTION : Civil Appeals Nos. 28-30
of 1969.
Appeals by certificate under article 133 of the Constituthn
of India from the judgment and order dated November 15, 1967
of the Calcutta High Court in W. T. Reference No. 405 of 1962.
C. K. Daphtary, T. A. Ramachandran and D. N. Gupta, for
B
the appellant.
c
N. D. Karkhanis, R. N. Sachthey, B. D. Sharma and S. P.
Nayar, for the respondent.
The Judgment of the Court was delivered by
•
Hegde, J.
These are asesscc's appeals by certificate, from
the judgment of the High Court of Calcutta in a Reference under
D
s. 27 ( J ) of the Wealth-tax Act (to be hereinafter referred to as
the Act).
At the imtance of the asscssee (which will J1ereinafter
6e referred to as the "company") as well as the Commiss;oner of
Wealth Tax, West Bengal, the Income-tax Appellate T,ibunal
'B' Bench, Caicntta re(crred' the following questions to the High
Court for its opinion :
E
"(l) Whethe~ on the facts and in the circumstanre,s
of the case, the amounts of £ 1,99,940 and
£ 1,92,907, £ 98,017 standing in the special
reserve account in the books of the asscssee company were deductible in determining the net
wealth of the company for the assessment years
1957-58, 1958-59 and 1959-60 respective~y?
( 2) Whether on the facts and in the circumstances of
the
case,
the
amounts
of
£ 1,54,434,
£ 2,08,934 and £ 2,62,811 standing in the
shareholders .accounts as on respective valuation
dates were deductible in determining the net
G
wealth of the company for the assessment years
1957-58, 1958-59 and 1959-60 respectively?
( 3) Whether on the facts and in the circumstances
ofthecasetheamountsof £ 66,275, £ 131,180
and £ 274,587 out of the debentures of the
Company were allowable as debts owed by the
H
company in the light of section 2 ( m) read with
section 6 of the Wealth-tax Act~"
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CALCUTTA TRAMWAYS co. v. C.W.T. (Hegde, J.)
1035
The High Court answered all the three questions in favour ef
the Revenue.
Hence these appeals.
The assessee is a sterling company.
In the relevant assessment years, it was operating the Calcutta Tramways Co. It i8 a
non-resident company for the purpose of Explanation 2 to s. 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 uates are 31st December, 1956, 31st December 1957
and 3:1st December 1958 respectively.
The Wealth Tax Officer
valued the assets of the company under s. 7(2) (a) of the Act.
In 1951 the Government of West Bengal proposed to acquire
the undertaking of the Calcutta Tra.mways 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 :
"4 (1) The company shall apply its revenues in the
manner following, that is to say-
(a) Firstly, paying all expenses of managing, maintaining an~ working the undertaking, including
debentures interest;
(b) Secondly, paying all Indian and United Kingdom
taxes payable by the Company;
(c) Thirdly, set1ing aside in each accounting year in
a Renewals and Replacements Reserve Account
the sum of Eight thousand pound5 sterling or
such greater sum as the Directors of the Company for the time being may in consultation with
the Government consider necessary in the light
of experienee and in view of the expansion of the
undertaking or increase in prices;
.
(d) Fourthly, setting aside in each accounting year
in a fund
(hereinafter called/"shareholden"
Account) the following sums :
(i) £ &7,457 together with
(ii) four per cent, upon any additional outsi~e
share capital raised by the Company With
the consent of the Go..ernment after the
dato of this Agreement.
•
1036
SUPREME COURT REPORTS
[1973] 1 S.C.R.
( e) Fifthly, accumulating any surplus in a special
A
reserve account the balance of which (after providing for losses, if any) will eventually accrue
to the benefit of the Government.
(Before such
transfer however, of a loss against the credit
standing in the Special Reserve Account, the
Government should be consulted, the final deciB
sion on such matter nevertheless being reserved
to the company).
( 2) If in any accounting year the revenues arising
from the undertaking are insufficient to provide for all
the matten enumerated in the preceding sub-clause of
this clause, such revenues shall be so applied in the
priority there set out.
7. ( 1) Not later than twelve months before the
purchase date the Government may serve upon the
Company notice in writing (hereinafter called "a purchase notice") of its intention to acquire t11e undertaking
on the purchase date.
(2) In the event of the Government serving a purchase notice the following provisions shall have effect,
that is to say :-
(a) The Government shall subject to the exchange
regulations and other relevant laws prevailing at
time in the United Kingdom and India pay to the
Company in sterling in London not !es< than
thirty days before the purchase date :-
(i) the sum of £ 3,750,000;
(ii) a sum equal to the amount of any additional
outside capital brought into the undertaking
with the consent of Government under
Clause 6 ( 1) of the Agreement during the
period between the date of this Agreement
and the first day of January One thousand
nine hundred and seventy-one.
(b) Subject to payment being made in terms of subclause (a) above, all the right, title and interest
of the Company of and in the undertaking shall
on the purchase date become vested in the
Government free from all mortgages, charges and
liens created by the issue of Debenture or Debenture Stocks of the Company.
Provided that the
Company shall be entitled to retain all statutory
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CALCUTTA TRAMWAYS co. v. ·c.w.T. (Hegde, ].)
I 037
books of account and other documents normally
kept outside India but shall afford every facility
to the Government to have inspection of saJl!e or
take copies of or extracts therefrom.
( c) The Government shall also pay to the Company
in sterling in London, the amount of the balance
'(if any) of the Shareholders' Account at the
purchase date within one month after a certifi·
cate by the Company's Auditors of the amount
thereof has been served on the Government.
( d) No further sum than is provided for in this clause
shall be payable to the Company in respect of
the transfer of the undertaking to the Government.
3. From and after such vesting of the undertaking in
the Government all powers, rights, obligations and liabilities excepting the liabilities in respect of the share
and loans Capital of the Company shall be exercisable by
and be binding on the Government in substitution for
the Company and shall cease to be exercisable by or
binding on the Company.
Provided that no contract entered into by the Company after the date of this Agreement and extending for
more than one year beyond the purchase, date shall h
binding on the Government unless it has been previJusly
approved by the Government.
8. If the Government does not serve
a purchase
notice in accordance with the last preceding clause, then
all the terms and conditions of this agreement Shall continue in force subject to the following modifications.-.
(a) (i) The Government shall pay to the Company in sterling London such sums as may
from time to time be necessary to redeem
the second Debenture Stocks of the Company on their due dates;
(ii) After
the
second
Debenture
Stocks
have been redeemed as aforesaid the Company shall from time to time until the undertaking is vested in the Government pay to
the Government sums equal to the interest
which would have been payable on such
Debenture Stocks had the same not been
redeemed.
l03S
SUPREME COURT REPORTS
[1973] I s.c.R,
(b) (i) The Government shall on giving two year
notice to the company be entitled to acquire
the undertaking on the 1st day of January
of any subsequent year and such date shall
be; the purchase date.
(ii) In the event of the
undertaking
being
acquired in pursuance of a notice under this
Clause there shall be deducted from the
sum payable under Clause 7(2)
(a)(i)
]lereof any sums which may have been paid
· by the Government in pursuance of paragraph (a) (i) of this Clause."
In compliance with the provisioPs in the
agreement,
the
company maintained a special reserve.
The amounts lying tG
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the credit of that amount on the respective valuation dates were
£1i99,407, £1,92,940 and £98.617. The company also maintained shareholders' account in its books as required by clause
4(1) (d) of the agreement. Amounts credite.d to 1the said account
D
on the relevant valuation dates stood at £ l,54;434, £2,08,934
and £2,62,811 respectively.
The company had issued debentures which were secured by
a floating change on the general assets of •lie company.
The
assets of the company located outside India were
valued
at
£4,27,786
£3,Sl,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, £3,010,S(SO and £3,119,149. All
the debenture-holders were residents in United Kingdom.
The
specialities were in United Kingdom and the debts were payable
in that COUlllry.
Tho company claimed the amounts in special rei;erve account,
thOliC in the shareholders reserve account as well as debenture
loans a8 debt.s deductible in ascertaining lthe net wealth of the
c0mpany.
The Wealth-tax Officdt rejected those confuntion>.
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 wen · as· ia the shareholders
account.
But as regards the debenture loans, he distributed
the same on the basis of the assets held by the company in the
United Kingdom and those held by it in this country. Conliequently gave deduction in respect of that portion of til'! debt which
·according to h~ should be borne by the assets in India. Both
the Commissione_r as wen as the company appealed to the Tribunal.
The Tribunal disagreed with the conclusions reached by
the Appellate ~ssistant Commissioner that any portion ·of the
debenture loans· could be taken into consideration in ascertaining
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CALCUTTA TRAMWAYS CO. V. C.W.T, (Htgdt, /.)
1039
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the net wealth of the assessee.
It agreed with the Wealth-tax
Officer and the_ Appellate Assistant Commissioner that til'3 shareholders reserve was 1the 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 accemed the conclusions reached by the Wealth-tax •
8
Officer.
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Before considering the points arising for decision, it is neceii·
sary to refer to the relevant provisions of the Act. "Net Wealth"
is defined in s. 2(m) of the Act thus :
" "net wealth" means the amount by which the
aggregate value computed in accordanoe with the provisions of this Act of all the assets, wherever located.
belonging to the assessee· on the valuation date, includ·
ing assets required to be included in his net wealth- as
on that date under this Act, is in excess of her aggre·
gate value of all the debts owed by the assessee on tke
¥aluation date other than,-
( i) debts which under Section 6 are not to be take ti
into account.
Section 3 is the charging section. It ilYS :
"Subject to the other provisions contained in this
Act, there shall be charged for every assessment year
commencing on and from the first day of April 1957,
a tax (hereinafter referred to as wealth-tax) in respect
of tho net wealth on the corresponding valuation date
of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule."
· Section 4 prescribes wh811: all assets should be taken into
coosideratio11- in computing !ho net wealth.
Section 5 provides
for certain exemptions. Those exemptions -are not relevant for
oor present P.~· Then wi eome to 11. 6 which is important
for our present purpose. The portion Of that section which is
material for our present purpose reads :
"In computing the net wealth of an individual wh11
is not a citinen of India or of an individual or a Hindu
undivided family not resident in India or resident but
not ordinarily resident in India, or of a company riot
resident in India during the year endin~ on the valuation date-
[ ·
(i) the value of the asseits and debts located 011tside
India; and
1040
SUPREME COURT REPORTS
. [1973] 1 S.C.R.
shall not be taken into account.
Explanation 1.
Explanation 2.-A company shall be deemed to be
resident in India during the year ending on t1'.e valuation da~~. if-
( a) it is a company formed and reg,istered under
the Companies Act, I 956, or is an existing company within the meaning of that Act; or
( b) during that year the control and management
of its affairs is situated wholly in India."
Now that we have before us the material facts and the relevant provisions of the Act, we shall proceed to examine · the
question
of law
referred
to
the
High
Court
for
its
opinion. Coming to question No. I, 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 Governmenl and the company, there was only an agreement. The Government could not have acquired th>~ company before the "purchase date" viz. January I. I 972. 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 agreem~nt had fixed the consideration to be paid
for the acquisition of the company.
Till the company was
acquired, the ?mounts 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 he company that these
as~ets belonged to some third party.
Every item of asset must
belong to someone.
The question is to whom did it belong ?
The obvious answer is tha't 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.
Now coming to the second question fonnulated for the opinion
of the High Court whi\:h relates to
the amounts in "shareholders Account'', the contention of the company was that the
amount belonged to th>~ shareholders and therefore it was not
an item of the assets of the cc!Tipany.
This again is an unacceptable contention.
A company is a different legal entity
from its shareholders.
The shareholders have no rights in the
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CALCUTTA TRAMWAYS co. v. C.W.T. (Hegde, J.)
1041
assets of the company except wh~n dividends are declared or
when the assets of the company are diGtributed on liquida'lion.
Un!IJ a company in its general meeting accepts the
recommendation of the Director and declares dividends, no part of the
profits of the company tccomes debt due to the shareholders. In
Kesoram Industries and Cotton Mills Ltd. v. Commissioner of
Wealth-tax ( Ce/l/ral), Calcutta(') this Court ruled that
until
the company in its general body meeting accepted the recommendation 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 tho~ company in
its general body meethg 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 distribued
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 separa~~ shareholders reserve
had to be maintained by !he company because of its agreement
with the Government did not change the character of the asset.
This takes us to the .dst question.
As
already mentioned
the debenture loans were raised in United Kingdom.
All the
debentures holders were residents in United Kingdom.
The
specialities 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
partion of the assets were specially charged.
The meaning of
a floating charge is explained in Halsbury's Laws of Englanl.
3rd edn. Vol. 6 p. 472 paragraph 9!4 thus :
"The terms "floating security" and "floating charge"
mean a security or charge which is not to be put into
immediate operation, but is to float so that the company is to be allowed to carry en its business. It contemplates, for instance, that book debts may be extinguished by payment, and other book debts ·may come
in and take the place of those that have disappeared.
While a specific chance is one
th~t, ·.vithout
max>~.
fastens on ascertained and definite property or property
capable of being ascertained and defined,
a floating
charge moves with the property which it is intended to
affect, until some event occurs or som! act
is
done
which causes it to settle and fasten on the subject of
the · charne within its reach and grasp. It is of the
essence of a floating charge that it remains donnant
(I) 591.T.R. 767.
17-Ll7"S 1pCli/l
SUPREME COURT REPORTS
[1973] l S.C.lt.
until the undertaking charged ceases to be a going
concern, or until the person in whose favour the charge ·
is created intervenes.
His right tO intervene may be
suspended by agreement, but if there is no such agreement he may exercise his right whenever he pleases
after default."
Qurte clearly th•.:l debts in question were located in United
Kingdom. Dealing with the business debts this is what is stated
ia Halsbury's Laws .of England, 3rd edn. Vol. 15, p. 58 paragraph 115 :
"Simple contract debts, including those owing under
A
bills of exchange and promissory notes are situate
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where the debtor resides. A debtor company may for
this purpose be resident in any country where it bas a
branch office.
A speciality debt is in . general an asset situate
where the instrument is physically situate.
In particular, a judgment debt is situate where the judgment
is recorded. A debt secured by mortgage of land is Jn
character primarily a debt, with an accessory right to
resort to the land. for payment, not an estate in tho
land measured by the amount of the debt; itq locality
as an'asset of the mortgage is therefore to be determine9 prima facie under tho rules relating to debts.
. A share in a partnership business and the goodwill
of a business are each situate where the business is
carried on."
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From what has been said above, it is clear that the debcn ·
ture Joans in question cannot be taken into consideration in asF
certaining the net wealth of the company in view of s. 6 of the
Act.
In the result these appeals fail and they are dismissed witll
costs-advocates' fee one set.
Appeal dismissed.
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