ABDUL SHAKURUL SALAM, J.-This order will dispose of I., C. A. No. 177/81 and I. C. A. No. 178/81 directed against the judgment of the learned Single Judge dated 22-3-1981, as these arise out' of the same transaction.
2. Relevant facts are that in exercise of powers under the Economic Reforms Order, 1972 (President's Order No. 1 of 1972) as amended by Economic Reforms (Amendment) Act, 1973 (Act LXIV of 1973), vide Art. 7-B, the Federal Government acquired the shares of the then Model Steel Mills Limited on 29-11-73. The relevant balance-sheet for the year ending 31-8-72 was audited by Rahim Jan & Company. They in para. 4 of their report stated that "Depreciation on the fixed assets for the period 1964-65 to 1971-72, amounts to Rs. 34,95,210 against which a total provision of Rs. 17,70,376 has been made during the years 1969-70 to 1971-72". In the aforesaid statutory provisions, vide Art. 7-C, it was provided that "where, under Article 7-B, the Federal Government acquires the whole or a portion of the shares of the shareholders of any company or of the proprietary interests of a company or other person in an establishment, the Federal Govern--ment shall pay such compensation as may be determined by it on the basis of the principles set out in the Second Schedule". The principles - so set out in the Second Schedule is No. I which is to the effect that "where the whole or a portion of the shares of such an establishment is acquired by the Federal Government, the value. Of the compensation for the shares so acquired shall be assessed-
(a) in the case of shares not quoted on any of the stock exchanges, at the Break Up Value ; and
(b) in the case of shares quoted or any of the stock exchanges, at the Market Value.
As the shares were not quoted on any of the stock exchange, clause (a) just quoted above was applicable to the case in hand. The phrase Break---Up Value therein is defined in clause (4) of the Schedule as follows : "Break---Up Value shall mean the value of the shares of a company as determined by the auditors of such company on the basis of its latest Audited Annual Balance Sheet in accordance with clause (c) of rule 8 of the Wealth Tax Rules". The applicable clause is, admittedly, not (c) of rule 8 of Wealth Tax Rules, but clause (c) of sub-rule (2) of rule 8 of the said Wealth Tax Rules. This reads as follows
(ii) The Break-Up Value shall be determined in the following manner, namely :- The total wealth of the company shall first be determined. This shall be done by adding to the paid-up capital, the debentures, reserves and the balance as per Profit and Loss Account, the provision for liabilities in the balance-sheet being carefully scrutinised with a view to excluding therefrom items which should really form part of the reserves. From the total so arrived at, the paid-up value of the preference shares and the debentures shall be deducted. The resulting balance shall be divided by the amount of the paid-up ordinary share---capital to arrive at the value of each rupee of paid-up capital. The value of shares held by the assessee shall then be determined by multiplying the sum so arrived at by the paid-up value of such shares."
3. For the purpose of determining the Break-Up Value of the shares, the Auditors on 23-2-74 reckoned as follows;-- Issued Capital consisting of 1,90,000 ordinaryRs.Rs. shares of 10 each.19,00,000 Add ; Reserve under section 15-BB of Income-tax Act.20,01,30537,71,681 Depreciation provided in the accounts.17,70,37656,71,681 Less : Profit & Loss Account Deficit Balance.13,62,366 Depreciation Allowable under rule 8 of the36,76,17350,38,539 Wealth Tax Rules.
Break-up Value of one ordinary share of 10 is.6,33,142 6,33,142 3'33 1,90,000 The determination was accepted by the Federal Government on 27-2-74. The shareholders were offered Rs. 3 33 as compensation for each share of R:.
10. They protested and issued legal notices and, finally, on the representation to the Adviser to the Chief Martial Law Administrator, the latter directed the new management to decide the matter of receivables/ payables with the shareholders. In consequence thereof, a meeting was held on 8-3-78 with the shareholders but without any fruitful results. They filed Constitutional petition bearing No. W. P. No. 1648/78 in the High Court on 19-3-78. It was accepted by a learned Single Judge, vide order dated 22-3-81 who held "there is no doubt in the finding that the proposed depreciation could not be deducted under rule 8(2)(c) to work out the `Break-Up Value' of the petitioners' shares and the same is declared to be without lawful authority. Thus the correct net wealth would be Rs. 25,38,969 as given in para. 9 above and the `Break Up Value' shall be worked out accordingly". This has been challenged by the new management and the Federal Government through the first appeal (I. C. A. No. 177/81) and the shareholders have claimed interest on the amounts not paid when those fell due through 1. C. A. No. 178/81.
4. We take up the first appeal first. Mr. Nazir A. Sheikh, Advocate opened the arguments on behalf of the new management and the Federal Government Preparation of the brief showed industry and the argument addressed were vigorous. In fairness to him, these may be mentioned. He submitted that auditors examining a balance-sheet are entitled and under a legal obligation to point out deficiency or omission in the accounts. Therefore, the auditors were quite right in mentioning in para. 4 of their report about the provisions for depreciation as mentioned above. He referred to Hedley Byrne & Co. v. Heller & Partners Ltd. (1) to show that if proper care is not taken, informant or advisor can be held liable for negligence. He then referred to Re Thomas Gerrard & Son Ltd. (2), which lays down company auditors are required to show care and skill in the audit of accounts and for their negligence, they can be held liable. To the same effect is Arenson v. Arenson and another (3). He also referred to `The Principles of Auditing' by F. R. M. DE Paula and read out a passage from p. 115 as follows : - "The Auditor's Duties As Regards Depreciation.-As has already been pointed out, it is impossible for an auditor to estimate the working lives of the assets of a business ; consequently, he cannot estimate the amounts that are necessary to provide for depreciation, but he should see that this subject has been properly considered, and that correct principles have been applied. He should ascertain upon whose advice the amounts written off for depreciation have been fixed, that the working lives have been honestly estimated, and that the rates written off are sufficient to reduce the particular assets to nil by the end of such periods. If he finds that this question has been properly considered, he has no further concern, even though he may think it would be wise to write off larger amounts, for an auditor must appreciate that he has no expert or technical knowledge of such asset as plant and machinery, and that, therefore, he should accept the opinions and conclusions of those who have such knowledge. But, on the other hand, should it be palpable that sufficient depreciation is not being provided for, or he finds, that this question has not been adequately and honestly considered, the rates and amounts having been fixed, either in a haphazard manner, or with a view to inflating the profits, then he should state definitely in his audit report that be is not satisfied that the provisions are sufficient. However, before taking this course, he should discuss the whole question fully with the management hearing their view and laying his before them ; if thereafter, he is still not satisfied, and the directors or partners refuse to alter the accounts, he should then report as stated above."
(1) (1963) 2 All E R 575(2) (1967) 2 All E R 525
(3) (1973) 2 All E R 235 He also referred to 'Principles and Practice of Auditing', by Jamshed R. Batliboi at p. 228 wherein it is stated "without the consent of the directors the auditor has no authority personally to make any amendments in the accounts placed before him by the directors for audit, if they happen to be not in accordance with the Act or misleading in any direction. He cannot also enforce any alternations in accounts, however, desirable and necessary they may be. If however, the directors refuse to amend the accounts as desired by him, he has the right to point out in his report to the shareholders in what particulars the accounts are either misleading or fail to satisfy the Act". He, then, referred to Spicer and Pegler's Practical Auditing at p. 226 which reads as follows :- "Where the auditor is of opinion that the balance sheet does not give a true and fair view of the state of the company's affairs, or, that the profit and loss account does not give a true and fair view of the profit or loss for the year, he must qualify his report accordingly. The most common reasons for the qualification of the report are where the auditor has been unable to verify to his satisfaction the existence or values of certain assets ; where, in his opinion, there has not been sufficient provision for depreciation, or where he is not satisfied that adequate provision has been made for certain liabilities. It may sometimes happen that the auditor does not agree with the treatment of certain material items in the balance-sheet presented to him for audit, and the directors do not agree to such alterations and the auditor may suggest. In such a case the auditor must qualify his report."
5. He, secondly, submitted that since depreciation of assets takes place as a matter of course, depreciation is always allowable and must be provided for; in case it was not done as in the present case, it could be calculated and deducted from the assets. He referred to Commissioner of Wealth Tax, Delhi & Rajasthan v. Ganganagar Sugar Mills Limited 1972 PTD 349 wherein it was observed "that the Appellate Tribunal directed the Wealth Tax officer to re-compute the net wealth of the assessee after making adjustment for depreciation due under the Income-tax Act for the preceding years, but not taken into account while drawing up the balance-sheet". It was held "that in valuing the assets under section 7(2), adjustment may be made as the circumstances of the case may require and it was in the discretion of the Tribunal to make such adjustment as it deemed proper. Though depreciation of assets as shown in the balance-sheet of a company is not necessarily liable to be adjusted in every case with reference to the written down value of such assets according to the provisions of the Income-tax Act, if the Tribunal is satisfied in the circumstances of a particular case, it could allow depreciation according to the provisions of the Income-tax Act. The Tribunal did not make any mistake of law in taking the view that, in the circumstances of the case, the proper valuation of the assets was by making the adjustment in respect of depreciation due on the assets according to the provisions of the Income-tax Act." In case of Commissioner of Wealth Tax, West Bengalys v. Bally Jute Company Ltd. (1969) 20 Taxation"In computing the net wealth of the assessee the Wealth Tax Officer took into account the value of the depreciable assets as shown in the balance-sheet and not the value of the depreciable assets after allowing the normal depreciation as computed for the purpose of income-tax assessm ent. The Appellate Tribunal held that the depreciable assets should be included in the net wealth after allowing for normal depreciation as computed for the purpose of income-tax assessm ents. Affirming the Tribunal order; it was held "that in .Computing the net wealth under section 7(2) (a) of the Wealth Tax Act the value of depreciable assets should be included after allowing normal depreciation in place of the Balance Sheet Value though such depreciation need not necessarily be the same as those allowable for income-tax purposes."
Learned counsel then referred to Central India Machinery Manufacturing Co. Ltd. v. Commissioner of Wealth Tax, Nagpur 1971 PTD 861wherein in the balance-sheets the assessee had made no deduction on account of depreciation. The Wealth Tax Officer, therefore, rejected the claim of the assessee' that the valuation of its assets for the purposes of its assessment to wealth tax should be made after allowing depreciation according to the provisions of the Income-tax Act, 1922. In the appeals which the assessze then preferred the Appellate Assistant Commissioner took the view that, even though no depreciation had been shown in the balance-sheets, the Wealth Tax Officer had discretion under section 7(2) (a) of the Act to make a re-adjustment of the valuation of the fixed assets of the assessee for purposes of its - assessment to wealth tax by allowing depreciation according to the provisions of the Income-tax Act in respect of machinery, buildings, etc. However, it was held that in determining the net value of the assets the initial and additional depreciation referred to in sec--tion 10(2) (vi) (a), (b) and (c) a9d 10(2) (via) of the Income-tax Act, 1922, could not be allowed and must be excluded. According to him, the depreciation allowable under the aforesaid provisions of the Income-tax Act, 1922, was for the purpose of computing business profits only with a view to give incentive to growth of industries and was not on account of "wear and tear" of the fixed assets. The Appellate Tribunal agreed with this view taken by. The Appellate Assistant Commissioner. On a reference, the High Court held that "the Tribunal was right in holding that the initial and additional depreciation permissible under sections 10(2) (vi) (a). (b) and (c) and 10(2)
(via) of the Income-tax Act, 1922, could not be taken into account in determining the net value of the assessee under section 7(2) (a) of the Act. Under section 7(2) (a), as it stood at the material time, it is the net value of the assets of the business as a whole that has to be determined having regard to the balance-sheet of the business as on thevaluation date after making such adjustments therein as the circumstances of the case may require. In ascertaining the true value of the assets, depreciation which is allowable for income-tax purposes is allowed for the reason that fixed assets such as plant and machinery run out their utility by lapse of time and wear and tear". In case of "Commissioner of Wealth Tax v. S. Radha Debim Nopany (1972) Taxation 203, it was held that "it cannot be laid down as an invariable rule of law that simply because depreciation has been allowed under the Income-tax Act, the same must be allowed in determining the net value of the assets for the purposes of Wealth Tax. Whether such depreciation should be deducted or not, must depend on the facts arid circumstances of each case". 1n the case of Assessee v.
Department, the Appellate Tribunal, Karachi Bench, decided on 22-1-69 "that it is apparent from a plain reading of clause (c) of Rule 8(9) of the Wealth Tax Rules that deduction on account of depreciation allowance shall have to be made at the normal rate only specified in rule 9 of the Income-tax Rules. It does not mean that unless depreciation is allowable under the Income-tax Act, it will not be allowable for the purposes of the Wealth Tax Act as well. The Wealth Tax Officer, therefore, fell into an error in not allowing depreciation for the assets mentioned above at the normal rates".
Reference may also be made to Sree Meenakshi Mills Ltd. v. Commissioner of Wealth Tax, Madras 1968 I T R 6371t was held that when the assessee has not shown depreciation in the balance-sheet, "the revenue authorities were justified in proceeding on the basis that the balance-sheet, as it was, fairly and truly represented the value of the assets mentioned therein".
6. The sum and substance of the arguments of the learned counsel for the appellants are firstly, that the auditors were entitled to -point out in their report the shortfall in the provision for the depreciation. It may be so. But that has nothing to do with the determination of Break-Up Value, the problem in hand as will be seen a little later. Secondly, that depreciation can be claimed and allowed. The cases referred to by the learned counsel for the appellants support him on the point.
There is no difficulty so far either. But the inference the learned , counsel for the appellants draws from these cases that if depreciation is not provided for, it can nonetheless be calculated and deducted from the value of the assets, even though the assessee does not want that or does not wish to claim that, does not necessarily follow from the relevant provisions of the Income-tax Act or the Wealth Tax Rules. The reasons are that depreciation is allowable 'for the benefit of the assessee under the Taxing Laws to reduce his liability. If for some reason- known to him, he does not want .The benefit or does not claim the depreciation, may be believing his assets not to have depreciated but appreciated he cannot be obliged to utter the untruth, claim depreciation and pay less: The whole purpose of Taxing Laws is to realise the tax leviable --not to reduce it when the payee does not want that for any reason. None of the cases quoted by the, learned counsel for the appellants lay down that depreciation must be allowed when that is not asked for. All the cases dealt with the question that in what circumstances, depreciation can be allowed when claimed and asked .For.
7. -In any case, we have referred to the treatise and cases quoted by the learned counsel for the appellants in deference to his endeavours. But really the matter in hand is. Simple and regulated by the relevant rule. The rule is 8(2) (c) (ii) of the Wealth Tax Rules, which tells us how to determine the Break-Up Value. - It may be re-quoted for facility of reference;-- "The Break-Up ,Value shall be determined in the following manner :- The total wealth of the company shall first be determined. This shall be done by adding to the paid-up capital, the debenture, reserves, and the balance as per Profit and Loss Account, the provision for liabilities in the balance-sheet being carefully scrutinized with a view to excluding there--from items which should really form part of reserves. From the total so arrived at, the paid- up value of the preference shares and the debentures shall be deducted. The resulting balance shall be divided by the amount of the paid-up ordinary shares capital to arrive at the value of each rupee of paid-up capital. The value of shares held by the assessee shall then be determined by multiplying the sum so arrived at by the paid-up value of such share".. (Underlining is ours to focus attention).
In the light of the above, the learned Single Judge added up the items at the end of para. 9 of his judgment as follows;-- PlusMinus
(i) Paid-up Capital19,00,000
(ii) Debentures
(iii) Reserves20,01,305._---------..
(iv) Profit & Loss13,62,336 Account balance(deficit)
39,01,305minus13,62,336 25,38,969 The calculations are in: accordance with the aforequoted rule. There is adding to the paid-up capital, the reserves and minusing therefrom the deficit per Profit and Loss Account.
8. Problem has been created by the auditors when relying on their note in para. 4 of the audit report that "Depreciation on the fixed assets for the period 1964-65 to 1971-72 amounts to Rs.
35,95,210 against which a total provision of Rs. 1:7,70,376 bad been made during the years 1969/70 to 1971-72", it was sought to be given effect to in determining the Break-Up Value. Two mistakes were made. First, clerical-that instead of carrying the total figure of Rs. 34,95,210, they took on in the reckoning the figure as Rs. 36,76,173, an excess of no less than Rs. 1,80,963. This inaccuracy had been conceded by the learned counsel for the appellants themselves before the learned Single Judge as would appear from the last. Sentence in para. 7 of the judgment under appeal. Second is more fundamental and that is that there was no question of bringing in depreciation in the calcu-- lations. The rule 8(2) (c) (ii) clearly provided that adding up is to the paid-up capital, of debentures, reserves and the balance as per Profit and Loss Account. (Underlining* is ours to attract attention to the point to be made). The auditors in their report dated 4th May, 1980 submitted in the High Court before the learned Single Judge at page 5 thereof say that "from the above letter (of the new management) it appears that the break, up value has to be worked out under the Wealth tax- rule in accordance with clause (C. Ii) of rule 8 of Wealth Tax Rules. For this purpose the correct balance of Profit and. Loss Account has to be ascertained which has to be added/deducted to/from the paid-up capital of the Company". Now this authority to ascertain the `correct' balance of Profit and Loss Account is arrogated out of the blue. The auditors had to and to the paid-up capital, reserve and the balance as per Profit- and Loss Account. They were not to go behind the Profit and Loss Account. Certainly they. Could riot do so without notice to the persons likely to be affected which, it is nobody's case, was ever given. Moreover, if the auditors were to go behind the Profit and Loss Account and deduct depreciation not claimed nor available as the company enjoyed tax holiday during the relevant period, it would also be open to the company to say that its asset, like land, which obviously had increased in value during the period, should be assessed at higher value. The legislature in its wisdom has left out ail these exercises and laid down uniform formula for determining the Break---Up Value of shares of a company by providing specific items to be added up. And where it thought that the matter may be examined, it laiddown that "provisions for liabilities in the balance-sheet being carefully scrutinized with a view to excluding therefrom items which should really form part of the reserves." This authority is clearly meant to see that no unjustifiable liability is shown so as to reduce the taxable liability and if that is done, that is brought on the reserve to augment the assets. In the case in hand, reverse result is sought to be achieved. Therefore, it is quite clear that the auditors travelled beyond the purview of the relevant rule in bringing in extraneous item in determining the Break-Up Value and their determination having been ipsi dixit accepted by the Federal Government, its resultant decision was without lawful authority. The learned Single Judge rightly, if we may say so with profound respect, excluded irrelevant consideration and determined the Break-Up Value in accordance with the relevant rule. It has also to be kept in view that the legislation concerned is confiscatory in nature and when it provides for payment of compensation according to a certain formula given in a rule, sophistory is not to b employed to render nugatory or illusory what has been given by the la with the left hand. Therefore, respectfully agreeing with the learned Single Judge, we dismiss the first appeal. Since the matter has been brought in appeal by the shareholders as well, we leave the parties to bear their own costs.
9. Now taking up the second appeal of the shareholders, it need only be said that the interest claimed was mentioned by the learned counsel for the shareholders and he also referred to Lal Khan v. Land Acquisition Collector, Sargodha PLD 1979 Lah. 735but he did not press the point because the sums were unascertained and disputed in view of different interpretation of the relevant provisions of law. The appeal fails and is dismissed but without any order as to costs for the same reason as in the first appeal.