Holding

Accrued interest on an accrual basis, even if unrealised, is to be included in the net wealth of the assessee irrespective of the cash accounting system.

Summary

The respondent, a Hindu Undivided Family, was assessed wealth tax for the years 1965-66 to 1967-68, with the Wealth Tax Officer adding Rs. 1.5 lakh as accrued interest on its money‑lending business. The assessee argued that, because its books were kept on a cash basis, such accrued (but unrealised) interest could not be treated as an asset for wealth‑tax purposes. The Appellate Assistant Commissioner agreed and deleted the addition, following an Orissa High Court decision, but the Wealth Tax Officer appealed to the Appellate Tribunal, which upheld the deletion based on the same Orissa decision. The Commissioner then invoked Section 27(1) of the Wealth Tax Act, 1957, seeking a Supreme Court reference due to conflicting High Court judgments. The Supreme Court held that accrued interest, even if not realised and irrespective of the cash accounting system, constitutes an asset and must be included in the net wealth, with valuation based on open‑market value under Section 7(1). The Court overruled the Orissa and Karnataka decisions and affirmed the revenue’s position.

Issues considered

Whether the Wealth Tax Officer was justified in including in the net wealth of the assessee interest due on an accrual basis, though not realised, on the outstandings of the money‑lending business, when the assessee’s accounts were maintained on a cash basis.

Legislation cited

Wealth Tax Act, 1957s. 27(1), s. 2(e), s. 2(m), s. 2(q), s. 30f, s. 7(1), s. 7(2)

Subjects

Wealth TaxAccrued InterestCash AccountingNet WealthValuation DateHindu Undivided FamilySection 27(1) referenceSupreme CourtConflict of Judgments

Judgment

·COMMISStON!lR OF WEALTH-TAX ORISSA,
BHUBANESHW AR.

v.

VYSYARAJU
. BADREENARAYANA MOOR THY RAJU
BERHAMPUR (GANJAM).
. +
March 13, 1985

.c (R;S. PATHAK, A.P. SEN AND E.S. VENKATARAMIAH, JJ.]

Wealth Tax Act 1957, Sections 2(e), 2(m}, 2(q} and 7(2).

'Net Wealth' - 'Valuation date' - What are -Accrued interest -
Whether .an asset - Distinction between cash and mercantile system of
D accounting - Whether releva·n1 for wea Ith tax.

The respondentMassessee was assessed to wealth tax for the assessment
years 1965-66, 1966-67 and 1967-68, in the status of a Hindu Undivided
~Family'. In each of the assessment years, the Wealth :'ax Officer included a
.sum of Rs. 1.5 lakhs estimated as the accrued interest on the assessee's money
·E lending jnvestrµents.

The assessee appealed to the Appellate Assistant Commissioner, con·
tending that as the books of account were maintained in accordance with the
·cash system of accounting, the accrued interest on the money-lendini invest-
ment could not be included in the Wealth-Tax assessments, the Appellate
:Assistant Commissioner following the decision of the Orissa High Court in
F Commissioner of Wealth-tax Bihar and Orissa v. Vysyaraju Badteenarayana
Moorthy Raju (Orissa) {1971)79 ITR 330 deleted the additions representing
accrued interest.

The Wealth Tax Officer, appealed to the_ Appellate Tribunal and con-
tended that the accrued interest was liable to be included in the Wealth Tax
assessment of the assessee, relying on the judgment of the Andhra Pradesh
G High Court in Vedrevu Venkappa Rao v. Commissioner of Wealth Tax A.P,
(1968) 69 ITR 552. The Appellate Tribunal dismissed the appeal, as it was
bound by the decision of the Orissa High Court. The Commissioner of Wealth
Tax applied under Section 27(1) of the Wealth Tax Act, 1957 for a referenco
to the Supreme Court in view of the conflict of opinions between the Orissa
High Court and the Andhra Pradesh High Court and the question : "Whether
the Wealth Tax Officer was justified in including in the net wealth of the
JI ~sessee, interest due on accrual basis (though not realised) on the outstandings
... 6. w. t v. v.id.t. RAJU
ot the as~essee's money-lending busine,s, · the ·accounts being. maintained· on A /
cash," was referred to this ~ourt.

HELD : 1. Even though the accounts of the asse~sec .are maintained
on cash basis irtterest due on accrual basis, though not realised, on the out-
standings of the money, lending business is liable to be included in the net
wealth of the assessee. [JIOG)
B
2. The value of a property re~ers to the Value of the rights in ihat
property. What accrues as a right also falls t.o be included within the assets
of an assessee under the Wealth Tax Act 1957. [310F]

2.1. The system of accounting, mercantile or cash or hybrid, is ·of no
relevance for the purpose of determining . the assets of the assessee. ~ ·rhat
appears plainly from the definltion of "net wealth" which speaks of "the aggre
gate value ......... of all the assets" belonging to the assessee on the valuation
date. All the assets of the assessee, bar those expressly excepted by the- statute,
are to be taken_ into account, and it is immaterial whether the assessee employs
one system of accounting or another. .[3IOC·D)

3. The assets are not confined to cash. Where the asset is an asset
other than cash, its value is determined pursuant to sub-section (1) of se"ctioil.' 7
as the estimated price, which, in the opinion of the Wealth Tax Officer, the
asset would fetch if sold in the open market on- the valuation date. It would·
be the estimated open market value of the rights in the property which consti-
tute the asset. [3 IOE-F]

Vedrevu Venkappa Rao v. Commissioner'of Wealth-tax A.P. (1968) 69 _ E
ITR 552; CommiSsioner of Wealth-Tax. A.P-I. v. Pachigolla NarasimhQ Rao r•
{1982) :134 ITR 646 and Dipta - Kumar. Basu v. Commissioner of Wealth Tax'.
West Bengal, (1976) 450 JTR 450, approved.

-Commissioner of Wealth-tax Bihar and Orissa v. Vysyaraju Badreenara-
yana Moorthy Raju (Orissa). (1971-) 79 JTR 330 and A.T. Mlrjf v. Commis-'.-11
sioner of Wealth-Tax, Karnatka, (1980) 126 ITR 93, over-ruled. ._ F J
. . .
• CIVIL APPELLATE JURISDICTION : Tax Reference Cas~s 'Nos. 3

to 5 of 1975

Tax Reference under Section 257 of the Income-tax Act, 1961 ,; ' G ,1
made by the.Income-tax Appellate Tribunal, Cuttack Bench, Cuttack_i,,

P.k Francis, Champat Rai and Miss A. Subhashini for the··.
Ap"pellant.
C.S.S. Rao for the Respondent."
The Judgment of the Court was delivered by H ll
I

sb~aliMh etlbat REPORtS l19ssj 3s.c.ti
PATHAK, J, : These references under s.27(!) of the Wealth tax
A
Act, 1957 have been made by the Income Tax Appellate 1ribunal,
Cuttack Bench at the instance of the Commissioner of Wealth Tax,
Orissa for the opinion of this Court on the following question of
law:

B "Whether on the facts and in the circumstances of the case,
the Wealth Tax Officer was in law justified in including in
the net wealth of the assessee interest due on accrual basis
(though not realised) on the outstandings of the money-
lending business, the accounts of the assessee being maintai-
ned on cash basis ?".

The respondent assessee was assessed to wealth tax for the
assessment years 1965-66, 1966·67 and 1967-68 (the respective valua-.
tion dates being March 31, 1965, March 31, 1966 and March 31,
1967), in the status of a 'Hindu Undivided Family. In each of the
assessments, the Wealth Tax Officer included a sum !of Rs. 1,50,000
D estimated as the accrued interest on the assessee's money-lending
investments. The assessee appealed to the Appellate Assistant Com-
missioner and urged that as it maintained its books of account in
accordance with the cash system of accounting the accrued interest
on the money-lending investments could pot be included in the
wealth-tax assessments. The contention found favour with the
E Appellate Assistant Commissioner, and accordingly he deleted the
additions of Rs. 1,50,000 representing accrued interest. In doing ·
so the Appellate Assistant Commissioner followed "Commissioner Of
Wealth-tax Bihar and Orissa v. Vysyaraju Badreenarayana Moorthy
Raju (Orissa)(I).

The Wealth Tax Officer appealed to the Appellate Tribunal and
contended that accrued interest was liable to be included in the .
wealth-tax assessments of the asscssee. The Wealth Tax Officer
sought support from a judgment of the Andhra Pradesh High Court
in · Vedreva Venkappa Rao v. Commissioner of Wealth-tax( 2) A.P.
The App.ellate Tribunal observed that the judgment of the Orissa
High Court was binding on it, and accordingly by a consolidated
order dated April 3, 1972, it dismissed the appeals. The Commissio-
ner of Wealth Tax applied under sub-s. (1) of s. 27 of the Wealth
'
(I) [1971] 79 I.T.R. 330.
(2) (1968) 69 I.T.R. 552.
e.w.+. v. v.11. MWu (Puthak, J.)
-'tu Act for a reference ·or the casts· to this Court in view or the
-conflict of opinion between the Oris•a High Court and the Andhra
·Pradesh High Court, and so these
. references, have been-made. ' ·. -'-. i ~

The question can be disposed'. of shortly. 'under s. 30f the
Wealth Tax Act, wealth tax. is charged for every assessment. year
• in· respect of the net wealth of the assessee on the corresponding
· _ valuation date. The expression "net wealth" is defined· by cl.' (m)
· of s.2 of the Act as "the amount by which the aggregate value.;;,;.:•..
or all the assets, wherever located, belonging: to. the 'assessee on the
: valuation· date...:.: .. :.~ .... ls in e~i:ess 'of the aggregate value ~of ~II
- the debts owed .
. . by the assessee .on the valuation . date ......... " .

'Aceording to the scheme or th~ Wealth T~x A~( 11i~-~~t
0

wealth · of an assessee has to · be determined as ·it obtains on a
particular date. That is the "valuatiori' date".· Clause. (q) ofs:2
defines the expression -"valuati~n date" as fono.:.:s_:...:.. . · : .. , · ..
..
- ~
' . . . -· .,_ (' . ''. J:. 'b
"(q) _Valuation date, in, relation to any year, for which ari
assessment is to be mademiiler. this Act, me~ns'.the _
_ lasiday of the previ~us year as 'defined in (Secticiii'3) '
- of the Income..Tax Act,' if an assessmen'i were . to be
made under th:a_t Act for tlia t }'ear ; ; ' -. I ·: ' •'

0 ; L -· • 1 ... 1,,.

Provided that_: · · .·.;: . 'J ,:·,-..

: - (i) '· Where' in the CaSe Of an _aSSCSSeC there are different I ';
• previous years under the · Iricome Tax Act·for different· -
..,..._ sources of income,· ihe v~Iuation· date for-the purposes .,
I of this Act shali' be th'e last day of the Iasi of the p~e- - F
• vious years aforesaid;' ,.. - :· -•· ' . ''- · · · ' .. ·
·, -'. =··!. ,_1 • .:·;
(ii) in the case · of a person who · is not an asseisee within·-' :
the meaning" of the Income Tax Act;· the valuation "
date for the purposes 'of· this Act shall be the 31st day''
of March immediately ' preceding the" assessment '' G
year; ' -' .
.~; .. - . . ' '.. ~~ . '.)}

'.'.' ·: '. ;, :

(iii) where an assessment is made iri pursuance of se~iio~ .·
19A, the valuation date shall be the same valuation
"
date as would have b~en adopted in respect of the net
wealth of the deceased if he were alive."

----------------'----------·-----··-
310 sut1RiiMB cotJRf Riii!oR rs t19ssi 3s.c.it
A The computation of the net wealth of an assessee calls for a
determination of his assets and debts as on the valuation date.
The definition embodied in the substantive part of cl. (q) of s.2
indicates that broadly Parliament has fixed upon the last day of the '
"previous year", as defined under the Income Tax Act, as the
valuation date. The figure of net wealth of the assessee at the end
B of the "previous year" takes into account the financial activities of
the assessee during that "previous year". His financial activities
during that period determine how his net wealth on a particular .
valuation date differs from his net wealth on the immediately
preceding valuation date. There is an obvious advantage in adopt-
ing as the valuation date the last day of a period which is also the
c relevant period under the Income Tax Act. The reasons for defining
the valuation date in terms of the last day of the income tax "pre-
vious year" stop there. The system of accounting, mercantile or
cash or hybrid, is of no relevance for the purpose of determining the
assets of the assessee. That. appears plainly from the definition or
"net wealth" which speaks of"the aggregate value ..................... of
D
all the assets" belonging to the assessee on the valuation date. All
the assets of the assessee, bar those expresely excepted by the
statute, are to be taken into acc'ount, and it is immaterial whether
the assessee employs one system of accounting or another. There
is clear indication that the assets to be considered are not circum-
E scribed by any consideration of the particular system of accounting
adopted by the assessee. The assets are not confined to cash.
Where the asset is an asset other than cash, its value is determined
pursuant to sub-s. (I) of s.7 as the estimated price, which, in the
opinion of the Wealth Tax Officer,· the asset would fetch if sold in
the open market on the valuation date. In other words, it would
be the estimated open market value of the rights in the property
which constitute the asset. When we speak of the value of a pro-
perty, on a legal plane we refer to the value of the rights in that •
property. It is apparent that what accrues as a right also falls to
be included within the assets of an assessee under the Wealth Tax
Act. That being so, the conclusion is inescapoble that even though
G the accounts of the assessee are maintained on cash basis interest
due on accrual basis, though not realised, on the outstandings of
the money lending business are liable to be included in the net wealth
of the assessee.
In this view of the matter, we approve of the opinion expressed
H by the Andhra Pradesh High Court in. Vedrevu Venkappa Rao (supra)
C.W.T. v. V.B.M. RAJU (Pathak, J.) 311

and in Commissioner of Wealth' Tax, A.P.-I v. Pachigolla Narasimha A
Rao(l) and the Calcutta High Court in Dlpti Kumar Basu v. Com-
missioner of Wealth Tax, West Bengal(') and hold that the view
taken by the Orissa High Court in Commissioner of Wealth tax v.
Vysyilraju Badreenarayana Moorrhy Raju (Orissa) (supra) and by the
Karnataka High Court in'A. T. Mirji v. Commissioner of Wealth-Tax,
Karnataka(') cannot be accepted. B

In the result, the question is answered in the affirmative, in
favour of the Revenue and against the assessee. There is no order
-as to costs.

c

N.V.K. Appeal allowed

_ _ _ _ _ _ ..,...... _ _ _ _ ---:-:-::--:--;i

(-1) (1982) 134 I.T.R. 640 •
. (2) (1976) !OS I.T.R. 4SO,
m (1980) i~~ l,T,R. 93,