Judgment

HEGDE, J.: - These are assessee s appeals by certificate, from the judgment of the High Court of Calcutta in a Reference under S. 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:

"(1) Whether on the facts and in the circumstances 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 assessee company were deductible in determining the net wealth of the company for the assessment years 1957-58, 1958-59 and 1959-60 respectively?

(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 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 of the case the amounts of £ 66,275, £ 1,31,180 and £ 2, 74,587 out of the debentures of the Company were allowable as debts owed by the company in the light of Section 2 (m) read with Section 6 of the Wealth-tax Act?"

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 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 dates are 31st December, 1956, 31st December 1957 and 31st December 1958 respectively. The Wealth Tax Officer valued the assets of the company under S. 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:

"4(1) The company shall apply its revenues in the manner following, that is to say-

(a) Firstly, paying all expenses of managing, maintaining and working the undertaking, including debentures interest;

(b) Secondly, paying all Indian and United Kingdom taxes payable by the Company;

(c) Thirdly, setting aside in each accounting year in a Renewals and Replacements Reserve Account the sum of Eight Thousand pounds 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 experience and in view of the expansion of the undertaking or increase in prices;

(d) Fourthly, setting aside in each accounting year in a found (hereinafter called" shareholders" Account) the following sums:

(i) £ 87,457 together with

(ii) four per cent, upon any additional outside share capital raised by the Company with the consent of the Government after the date of this Agreement.

(e) Fifthly, accumulating any surplus in a special 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 decision 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 matters 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