1. These are four departmental appeals and they are directed against the similar orders passed by the AAC and they relate to the assessment year 1977-78. These four assessees have been assessed as individuals and they all were partners in a firm named as Rawat Jewellers, Jaipur.
The main common question in these four appeals relates to the application of Rule 2B(2) of the Wealth-tax Rules, 1957 ('the Rules') while including the value of the interest of the partners in their wealth-tax assessments. As it was found that there was some divergence of opinion on the issues involved the matters were referred to the President who has constituted this Special Bench for consideration of these matters. It may be mentioned that in the cases of Gopichand Rawat and Shyam Mohan Rawat there was also a similar question relating to the inclusion of their interest in the firm Rawats Bombay. In other two cases the question about this firm does not arise. While making the assessments under the Wealth-tax Act, 1957 ('the Act') the WTO found that the firm Rawat Jewellers was dealing in precious and semi-precious stones. The main trading account was in jawaharat account and in assessment year 1977-78 the firm had disclosed a gross profit of 21.7 per cent. The WTO further found that the firm was showing the closing stocks at cost. On this basis the WTO was of the view that the market value of the closing stock could be at least 27 per cent more than the value at cost as shown in the firm's balance sheet. The WTO further referred to some orders passed by the Jaipur Bench and called upon the assessee to explain why the provisions of Rule 2B(2) should not be invoked. Rule 2B(2) reads as under: (2) Notwithstanding anything contained in Sub-rule (1) where the market value of an asset exceeds its written down value or its book value or the value adopted for purposes of assessment under the Income-tax Act, 1961, as the case may be, by more than 20 per cent, the value of that asset shall, for the purposes of Rule 2A, be taken to be its market value.
The assessee wrote to the WTO that the gross profit worked out in a particular year has no nexus to assume the fair market value of the closing stock as more than 20 per cent of the value as shown in the balance sheet. It was contended that precious stones had no ready market and price differs from buyer to buyer. It was also contended that there was no standardization of these items and different persons may put different value on the stones. It was also pointed out that the closing stock contained old, rejected and unsaleable precious stones.
Such goods are recut, repolished and different assortments are made to ultimately make them saleable. It was also contended that this was a constant process and the firm had to maintain substantial establishment and incur expenditure before such old goods could be sold in the market. It was also pointed out that though the gross profit in the jewellery account may be more than 20 per cent the overall rate of gross profit was much lower. Reliance was placed on certain other orders of the Tribunal where on similar circumstances a view had been taken that Rule 2B(2) was not applicable merely on the basis of gross profit disclosed in the trading account.
2. The WTO was of the view that the contentions raised by the assessees were merely conjectures and assumptions and not statement of facts.
According to the WTO the gross profit rate is an average of all the transactions carried out by the firm during the year and can be said to be the gross profit rate which could have been applicable to the closing stock if the market value was to be taken. The WTO further held that in the succeeding year even higher rate of gross profit was shown at 28.5 per cent and this clearly showed that the margin between the cost and the market rate was much more than 27.7 per cent. The WTO further did not accept the plea of the assessee that there was no ready market for such goods as according to him there was no evidence to show that. He also observed that there was no evidence to show that the closing stock contained some rejected and unsaleable precious stones.
According to him the repolishing and recutting would go to improve the market value and not decrease it. The WTO further did not accept the contention of the assessees that the higher market rate was due to the incurring of the expenses in the profit and loss account. The WTO further rejected the contention that the goods could not be sold on the one particular date and held that for establishing the market value it was not necessary that the goods should actually be sold on one particular day. The WTO did not refer to the decision of the Tribunal relied on by the assessee as according to him each case depended on its own facts. On the basis of the extent of the gross profit disclosed the WTO held that the market value of the closing stock of the firm Rawat Jewellers was exceeding the cost by 27.7 per cent. On this basis the closing stock of the firm was valued at the market rate and an addition of Rs. 18,839 was made to the value of the closing stock in the firm's account by applying Rule 2B(2). The share in the case of each partner was determined accordingly.
3. When the matter came before the A AC it was pointed out that in the case of WTO v. Gopi Chand Rawat [1983] 5 ITD 667 (Delhi). The Third Member had considered the whole issue and he held that on the facts the provisions of Rule 2B(2) had wrongly been applied. Following that order the AAC held that the rule had not been rightly applied in this year as well. The addition made in respect of the Rawat Jewellers was, therefore deleted.
4. In respect of the two assessees who were partners in Rawats Bombay, the WTO had found that the average gross profit of that firm had been shown at 20.1 per cent. On this basis he came to the conclusion that the market value of the closing stock of that firm could be in excess of the cost by 25.2 per cent. As the closing stock by the firm Rawats Bombay was shown at Rs. 2,05,171 and it was admittedly shown at cost, the WTO added an amount of Rs. 51,703 under Rule 2B(2). The partners' shares were taken accordingly.
5. Before us extensive arguments were made by the learned standing counsel of the department as well as the departmental representative.
We also heard extensively' Shri Ranka, the learned advocate representing the assessees. It was pointed out on behalf of the department that the main basis of the order of the learned AAC was the order of the Third Member passed in the case of Gopi Chand Rawat (supra) for earlier year. This order was passed on 11-8-1983. It was submitted that there were various aspects of the matter which had not been properly appreciated by the learned Third Member when he decided that question. It was vehemently submitted that for the purpose of market value it was not necessary to have an actual sale on the valuation date and Section 7 of the Act assumes an open market and the market value has to be determined on that assumption. For this reliance was placed on the decisions of the Supreme Court in Ahmed G.H. Ariff v.CWT [1970] 76 ITR 471 and Purshottam N. Amarsay v. CWT [1973] 88 ITR 417. It was further submitted that the balance sheet of the firm was not conclusive and it was open to the WTO to determine the interest of the partner in accordance with the provisions of the law and the rules.
For this reliance was placed on the decision of the Supreme Court in the case of Juggilal Kamlapat Bankers v. WTO [1984] 145 ITR 485.
According to the learned counsel for the revenue declaration of a particular gross profit was an admission by the assessees that the market rate of the goods was in excess at least to that extent. In view of this admission by the assessees the onus was on him to show that the difference between the cost of the market rate was not above 20 per cent. Unless this onus is discharged the assessees must be held to have failed in showing that the prima facie position was not correct. It was further contended that the WTO had given a specific opportunity to the assessee to show that the market, rate of the closing stock was not above 20 per cent of the cost and the assessees having failed to discharge this onus must take the consequence. The standing counsel relied on the decision of the Jaipur Bench in the case of WTO v.Kirtichand Tank [1985] 11 ITD 291. At the same time the learned counsel submitted that the conclusion drawn by the Bench was not correct. In that case it was held that the extent of gross profit earned in a particular year was not conclusive of the margin of difference between the cost and market rate on the valuation date. The relevant observations of that Bench are as under: In our opinion, there is one more reason for holding that the basis of the gross profit alone to apply Rule 2B(2) is not correct. We find that while the gross profit is earned over a full period of 365 days or so, the Wealth-tax Act takes into account only the valuation date, i.e., last day of the accounting year. Unless the WTO brings on record and material to show that on the last day of the year or near about the last day of the accounting period the market value of the closing stock was in excess of the book value by more than 20 per cent, Rule 2B(2) cannot be applied merely on the basis of the gross profit which may have been earned in respect of the exports ; in particular, in the first half of the year or first three quarters of the year and in some cases there may have been no cases of transaction of sales in the last quarter at all. These are mostly cases of exporters of emeralds and exports do not take place on all the days of the year, though in respect of sales inside the country the sales may take place every day. The market rates of goods in which the assessee is dealing may have been higher in the first quarter of the year and lower in the second quarter. It may again have been higher in the third quarter and may have fallen in the fourth quarter. These facts could have been enquired into by the WTO, but he did not do so. By looking at the books of the assessee and by examining the partners, the WTO may be able to make a case sometime that the market value of the closing stock exceeded the book value by more than 20 per cent but merely on the basis of gross profit rate, the said conclusion would not be justified as the Calcutta Bench had held in another case that such a conclusion, merely on the empirical reasoning, is not justified. Therefore, taking into account all the arguments advanced before us, we having independently come to the conclusion that the revenue has not discharged its onus of proving that the market value of the closing stock exceeded the book value by more than 20 per cent. We also respectfully follow the majority view in the case of Gopi Chand Raw at (supra) and uphold the order of the AAC in this regard. (p. 297) 6. The other argument advanced on behalf of the department was that in respect of the goods which are exported by the assessee disclosed some invoice value for the purpose of foreign exchange and that can be taken into consideration for determining the market value of the closing stock. In this connection a reference was made to Section 18 of the Foreign Exchange Regulation Act, 1973. It was also contended that any such matter relating to the books of the firm the onus could not be on the department as that would be putting an impossible burden on the revenue. The opportunity was given to the assessee but that opportunity was not availed of and only general and vague explanations were given.
It was further submitted that the special facts of the assessee's case were in his knowledge and it was for the assessee to bring those special facts on record so as to rebut the normal presumption that the gross profit rate indicated the margin between the cost and the market rate. Further reliance was placed on the orders of the Jaipur Bench where a view favourable to revenue had been taken.
7. Shri Ranka, the learned counsel for the assessee referred to Sections 7(1) and 7(2) and also Rule 2B which provides for the adjustment in the value of an asset disclosed in the balance sheet. He pointed out that in the case of closing stock its value adopted for the purpose of the Income-tax Act, 1961 ('the 1961 Act') has to be adopted and he pointed out that for the purpose of the 1961 Act the closing stock had not been disturbed. He then referred to the provisions of Rule 2B(2) and pointed out that this was an exception carved out to a general rule and, therefore, it was for the WTO to establish that the market value of the closing stock was more than 20 per cent in excess of the cost. This onus which lay on the revenue could not be discharged merely by referring to the extent of gross profit disclosed in the trading account. The gross profit is not earned in a day but throughout the year and there was no presumption that the goods contained in the closing stock were exactly similar to the goods sold in the course of the year. The market value of the goods in the closing stock would depend on the contents of the closing stock and their market value on the valuation date.
8. The learned counsel for the assessee did not dispute that if the department is able to establish that the market value of any asset appearing in the balance sheet is more than the value shown by more than 20 per cent, the market value can be adopted for working out the value of the net wealth and in the case of a partner the value of his interest in the firm. He, however, contended that the law has not incorporated any legal presumption that wherever the gross profit is more than 20 per cent, the market value of the closing stock which is valued at cost will also be more than 20 per cent. In this connection he referred to the Explanation to Section 271(1 )(c) of the 1961 Act which had been inserted in 1964. The learned counsel in this connection referred to the decision of the Rajasthan High Court in the case of CWT v. Man Industrial Corpn. Ltd. [1980] 123 ITR 298, which was a case relating to the wealth-tax and dealt with the question of valuation He particularly pointed out the observations of the Hon'ble High Court.
Those observations are as under: A review of the aforesaid decisions makes it clear that the law is now well settled that when the WTO proceeds to assess the value of the assets of the assessee, by adopting the global method of valuation under Section 7(2)(a) of the Act, then the valuation of the assets given in the balance sheet of the assessee for the relevant year should normally be taken to indicate the real value of the assets, for the purposes of determining the net wealth. However, the value of the assets shown in the balance sheet is subject to adjustment, on the basis of acceptable evidence produced by the assessee before the WTO. Thus, the value of the fixed assets, shown in the balance sheet of the assessee for the relevant year, should be considered as the primary basis or the prima facie evidence of the value of such assets and merely because the depreciation cannot be sought in earlier years on account of paucity of profits or on account of loss being suffered by the assessee, it cannot automatically be inferred that the written down value arrived at according to the Income-tax Act should be considered as the real value of the assets. The written down value arrived at, according to the provisions of the Income-tax Act, merely represents notional allowance permissible under the Act but neither as a matter of law nor of right, the assessee could claim without anything more that the same correctly represents the real value of the assets and unless the assessee produces reliable material before the WTO to show that the written down value of the assets was the true value thereof, the value mentioned in the balance sheet should be normally accepted as the real value of such assets. It has to be borne in mind that the onus is on the assessee to prove by acceptable evidence that the value mentioned in the balance sheet does not correctly represent the real value of the assets and further to what extent the value mentioned in the balance sheet should be reduced for arriving at the real value of such assets. As observed by their Lordships of the Supreme Court in the cases referred to above, the assessee is the best person to know about the real value of his assets and it is for him to adduce evidence before the WTO, if he desires to convince the authority that the value specified in the balance sheet does not represent the correct figure about the value of his assets. Normally, the value given by the assessee himself, in respect of his fixed assets in the balance sheet, should be taken to represent the true value thereof, although it would be open to the assessee to establish for acceptable reasons that any lower figure or even the written down value represents the proper value of the assets, on the relevant valuation date. (p. 312) The counsel contended that in that case it was the assessee who tried to contend that the value shown in the balance sheet should not be taken and it was in that context that High Court observed that the onus was on the assessee to establish by producing the acceptable evidence that the value shown in the balance sheet was not the correct value. He contended that in this case it was the department which was trying to bring the case of the assessee under the exception as provided in Rule 2B(2). The onus was, therefore, on the department to establish by bringing on record acceptable evidence that the market value of the closing stock was more than by 20 per cent. He further contended that the gross profit is not cogent or essential material for arriving at the market value of the closing stock. He further contended that while considering the question one has to keep in mind the special feature of the business of the precious stones. Here we were not considering any bulk material having uniform price at a particular time. This was a business where sales were slow and it very much depended on the individual taste of the purchaser and the various permutations and combinations which the manufacturer has to try before these stones can be sold in a particular manner. He also contended that sometimes the goods might have been purchased only a few months or days prior to the valuation date and in such cases if they appear in the closing stock it would not be reasonable to take their market value at more than 20 per cent of the cost. He also submitted that the ultimate profit depended on the establishment, payment of interest, etc., and these were to go a long way in giving to the assessee the margin of profit. He contended that it would have been reasonable to take the net profit from this business.
9. The learned counsel further pointed out that the WTO had not disturbed the value of the closing stock of the firm but had disturbed the value of only one account. He submitted that this was not proper.
He also pointed out that if all the trading accounts were taken together the gross profit could not be more than 16.5 per cent and, thus, the basic presumption made by the WTO would also disappear. The learned counsel also adopted the reasons given by the Third Member in the case of Gopi Chanel Rawat (supra). He also drew our attention to the submissions made before the AAC where the various factors which may affect the market value of the closing stocks were given. He relied on those arguments.
10. The learned counsel pointed out that the WTO did write to the assessee about the intention to invoke the provisions of Rule 2B(2).
He, however, submitted that when the assessee wanted to know the material in possession of the WTO on the basis of which he was taking the value of closing stock at a figure in excess by 20 per cent the WTO did not give any reply and proceeded to adopt the gross profit as the sale basis for his inference. The counsel submitted that as the WTO failed to perform his duty in establishing the market value he could not have invoked Rule 2B(2). He also relied on the various orders of the Tribun al where it has been held that the onus was on the department and it could not be discharged only by making a reference to the rate of gross profit shown in the trading account of a particular year.
11. The learned counsel referred to the arguments of the revenue that export invoice-value as shown by the assessee should be the basis for adopting the market value. He submitted that exports were on consignment basis and not on outright sale basis and export invoice value was not the market price of the goods. In this connection he submitted that this matter had been considered by the various Benches of the Tribunal and it had been held in the case of Gulabchand Badar that the export invoice-value could not be considered as the market value. A reference was made to the observations of the Settlement Commission in the case of K.D. Jhaweri & Sons where it had been observed that the value of the goods exported had to be reduced by as much as 20 to 30 per cent as compared to the export invoice price. Even at reduced price it would not be possible to sell the goods at many occasions and they were reimported and again exported with different lots and at reduced price. It was also observed by the Settlement Commission that the export invoice price was not the selling price. He further submitted that the WTO had not been able to bring on record any material in respect of such goods which were intended to be exported and had also not referred to the export invoice-value or the extent to which they should be reduced for ascertaining the market value.
12. Referring to the arguments of the revenue that this was a shifting onus, the learned counsel submitted that the ultimate burden was on the revenue and after the assessee had raised several objections and had requested the WTO to let him know the materials on the basis of which he was proposing to value the closing stock, the WTO did not take any action. He, therefore, submitted that this exercise by the WTO must fail.
13. The counsel further submitted that the firm and its partners were separate entity and the WTO should have called upon the firm to produce materials for ascertaining the market value. It was not for the partners to bring before the WTO any material which related to the firm and not to the partner himself. The counsel for the assessee further submitted that the value of the partners' interest in the firm should be ascertained on yield basis and on that basis the value will be much lower as given by him in the paper book. He also submitted that large number of orders of the Tribunal clearly show that there was a view in favour of the assessee and even if two views were possible, the one favourable to the taxpayer should be taken. For this fie relied on the decision of the Rajasthan High Court in the case of Mansinghka Bros.
(P.) Ltd. v. CIT [1984] 147 ITR 361. The learned counsel also submitted that there was no justification for referring to Section 18 of the Foreign Exchange Regulation Act as the WTO himself had not taken that basis in his orders. In the absence of any material that aspect could not be considered.
14. In reply, the standing counsel as well as the departmental representative submitted that the gross profit was an admission of the trading results and, therefore, of the market value. It was also stated that all the materials which were necessary for establishing the market value were in possession of the assessee and, therefore, it could not be accepted that the WTO will be able to discharge his burden unless the assessee comes forward and gives all the materials for this purpose. It was contended that the objections raised by the assessee were general in nature and the arguments were hypothetical. It was contended that the gross profit shown in the trading account definitely raised the presumption that there was this difference if the market value was adopted. It was also submitted that the difference between the cost and the market value is more than the rate of gross profit and, therefore, where the gross profit was more than 20 per cent there could not be any doubt that the market value was in excess of the cost by at least that much margin.
15. The standing counsel contended that the books of the firm were the books of the partners and the partners had never stated before the WTO that it was not in a position to produce the books or to give any material relating to the firm. He contended that the explanation given by the assessee was not explanation at all and the WTO had to draw inference from whatever explanation had been given. In reply to the contention that the view favourable to the taxpayer should be adopted, it was submitted that Rule 2 of the Rules was a mandatory section and it should be interpreted in a manner so as to make it workable and another interpretation which makes it unworkable should be avoided. It was also contended that the earlier orders of the Tribunal and the order of the Third Member in Gopi Chand Rawat's case (supra) should not be followed as they were wrongly decided. It was also contended that the assessee must fail as he had not been able to rebut the presumption which arises on the face of the gross profit rate. It was also contended that an interpretation which is given in favour of the taxpayer would encourage tax evasion and in this connection a reference was made to the observations in the case of (sic).
16. We have carefully considered the facts of the case and the contentions of the learned counsels of both the sides. In the present cases the question involved is not one of any legal principle. There is no dispute that the firm in which the assessees were partners had shown the closing stock at cost. The value of the 'interest of a partner has to be determined in accordance with Rule 2. For ascertaining the value of interest in a partnership, the balance sheet of the firm has been taken into consideration. The rule permits certain adjustments to be made in the value of an asset disclosed in the balance sheet. This is incorporated in Rule 2B which has already been reproduced above. Rule 2B(2) provides that where the market value of an asset exceeds the value adopted for the purpose of assessment under the 1961 Act by more than 20 per cent the value of that asset shall for the purpose of Rule 2A of the Rules be taken to be its market value. Thus, the rule does not require that in all circumstances the market value of the assets should be adopted. The market value will be ascertained and adopted only if such market value exceeds the value as shown in the books or the value adopted for the purpose of assessment by more than 20 per cent. In a case where the market value exceeds by a smaller margin no adjustment whatsoever had to be made in respect of the assets disclosed in the balance sheet. Insofar as the closing stock is concerned, the application of Rule 2B(2) is possible only if the condition given in that rule is present. Where an assessee values its closing stock at market rate the question of application of Rule 2B(2) would not generally arise unless the WTO is of the view that the market value has been understated. Where the closing stock is valued at cost Rule 2B(2) can be applied where it is found that the market value exceeds the value shown in the books by more than 20 per cent. It is clear from the reading of this rule that it will be for the WTO to give this finding that the market value of the closing stock exceeds the value shown at cost by 20 percent on the valuation date. Thus, the basic burden is on the revenue to show the margin of difference. This burden can be discharged by the WTO by ascertaining all the relevant facts and then showing that the market value was exceeding the cost by more than 20 per cent. In ascertaining all these facts no doubt it is open to the WTO to require the assessee to give specific facts as those facts are in the special knowledge of the person who carries on the business and who maintains books but what is the material to be gathered in this regard will be for the WTO to decide. There is no possible presumption that because the assessee has shown a gross profit exceeding 20 per cent the market value will also be in excess by more than that margin.
The various factors which would determine the market value would be the contents of the closing stock and the manner in which its stock has been taken and the value for the income-tax purposes deter-minded. The exercise to be done would be much simpler if the business carried on is of a simple nature where some consumer goods are dealt with in bulk and its market rate is more or less uniform at a particular time. For example, if a firm is dealing in edible oil it is not difficult to find out the market value of a particular edible oil at a particular place at a particular time. The same may be the position of foodgrains or other such articles. However, in a case where the business is of a more complicated nature and the variety of goods is large and the margin in those varieties differ the exercise will have to be more exhaustive and complicated.
17. The firm in which the assessees are partners was doing business in precious stones after they were set in a particular manner. This is a business where the variety is innumerable and the sale of these articles depends on the requirements of the purchaser and his personal preference. Though it is not possible to take into consideration while ascertaining the market value the possible personal preference yet it is necessary to ascertain the details of the closing stock, the period for which they were held, the price which might have been offered for it in the past and the general market rate at the place of business.
Unless all these facts are ascertained it is not possible to come to a conclusion that the market rate was in excess of the cost by a margin of more than 20 per cent. It is true that consistent earnings of gross profits would show that the market rate could be higher than the cost but here what we have to ascertain is the margin of excess and not merely the fact that the market rate was higher than the cost. It is true that for the purpose of Section 7 and the relevant Rules one has to consider only hypothetical sale and not the actual sale on the valuation date. The fact that all these goods will be put in the market and at the same time, thus, depressing the market rate has also not to be taken into consideration. At the same time there has to be positive material for establishing the market value of the closing stock on the valuation date. The amount of closing stock carried from by the firm in different years shows that the goods in which the firm deals the sales are slow. In this line of business it is necessary to hold on certain goods for a considerable period. As was rightly stated by the Third Member in the case of Gopi Chanel Rawat (supra) a hypothetical sale on the valuation date to a dealer would not fetch the same price which the assessee can get from sales to different parties over a period of 12 months.
18. Unfortunately in this case the exercise required has not been done.
If the WTO had called upon the assessee to produce before him a particular material or details and the assessee had declined to do so, an adverse inference could have been drawn. In this case the WTO himself did not know as to what facts should be ascertained for establishing the margin and he had, therefore, not put any specific enquiries to the assessee or asked him to produce any specific facts, The result is that the assessee gave general explanation and had also asked the WTO that he should let him know the basis on which he was coming to the conclusion that the margin exceeded 20 per cent. It was incumbent on the WTO to inform the assessee about the particular materials that he wanted and he could not just direct the assessee to show why the market value should not be taken at more than 20 per cent of the cost only on the basis of the gross profit rate. As the assessee was requesting the WTO to let him know the basis of his conclusion, it was necessary for him to do so by calling upon the assessee to give more facts which could be analysed for ascertaining the final position.
As this was not done, it cannot be said that the WTO had discharged his burden under the rule. As already stated above the basic burden was on the WTO and as he failed to bring on record any material other than the rate of gross profit on the basis of which one could come to a positive conclusion that the market rate exceeded the cost by 20 per cent, the action of the WTO cannot be supported, We do not agree that the matter should be set aside and the WTO should be directed to do what he had not done at the time of the assessment. The WTO having failed to bring the case of the assessee under the exception provided under Rule 2B(2) the main rule of 2B(1)(c) would be applicable. Here it is not a case where the WTO had asked for the relevant details in a specific manner and the assessee had failed to furnish them. Had that been the position an inference could have been drawn from such circumstance.
19. We are not specifically dealing with the contention of the revenue regarding export invoices and the value declared in them. We could have gone into that aspect if the WTO had gone into them in his order and had drawn any inference from them. We have already reproduced above the observations of the Settlement Commission that the value shown for the purpose of export could not be considered as the market value and a substantial discount has to be allowed for ascertaining the market value at home. We are, however, not going into that matter as that would have become necessary only if some inference would have been drawn by the WTO on that basis.
20. We do not accept the plea of the counsel of the assessee that the firm and the partners were different entities for this purpose and we consider it not necessary to go into that matter as that question does not arise for consideration in the present case and it has not been the case that the partner when called upon to give a particular fact had stated that it was in possession of the firm. We also do not accept the plea of the counsel for the assessee that it is the net profit which should be taken into consideration for ascertaining the margin between the market value and the cost. The closing stock is an item of trading account and the net profit is not a part of the trading account. In view of this while holding that the gross profit alone cannot be made the basis of ascertaining the difference between the cost and the market value, we do not accept that the difference will be indicated by the net rate of profit. We also reject the plea for valuing the interest of the partners on yield basis as here we are considering the mode of ascertaining the value of the partners' interest in accordance with the Rules. The arguments with reference to the Foreign Exchange Regulation Act are also extraneous and neither the assessment order for the ascertainment made by the WTO had proceeded on the consideration of that matter. We are also not taking the above view on the basis of the principle that the view in favour of the taxpayer should be taken when the two views are possible. Here it is a question of fact and we are of the view that gross profit by itself could not be made the basis for ascertaining the difference in the value of the market rate and the cost of the goods as shown in the closing stock of the firm in which the above assessees were partners. Thus, in a suitable case where that margin is established the additions can certainly be made as provided under the Rules.
21. We may now proceed to consider the other grounds taken in these matters. In the case of Madhuri Devi there is a ground against the deletion of Rs. 22,600 which had been added by the WTO. This jewellery, according to the assessee, belonged to Smt. Sandhya Rawat but the WTO included it in the wealth of the assessee as per his finding given in earlier years. The AAC following his earlier orders deleted the addition.
22. It has been pointed out before us that in the earlier years this matter had been considered by the Tribunal and the deletion of the value of this jewellery had been upheld. In view of this departmental ground has to be rejected.
23. In the other three appeals there is a common ground stating that the assessees are entitled to exemption under Section 5(1)(xxxii) of the Act in respect of the interest in the firm in which the assessees were partners. The question for consideration is whether the business carried on by the firm in processing of the precious stones be considered as an industrial undertaking within the meaning of Section 5(1)(xxxii). The AAC has relied on certain orders of the Commissioner of Income-tax (Appeals) in the case of Maliram Puranmal as well as in the case of Premlata Navlakha. It is also pointed out before us that this matter had been considered by the Tribunal in the earlier years and it was decided that processing of goods was involved in the undertaking of this firm. As the facts remained the same we uphold the order passed by the AAC and reject the ground taken by the department.
1. Personally speaking I am of the opinion that in relation to the main dispute, the contrary view of the matter would be more appropriate and in accordance with the language and spirit of law. It is well established that so far as computation of total income is concerned, an assessee can value its closing stock on cost or market price whichever is less. It was not seriously disputed before us that the firm in which the assessees are partners had actually taken the value of the closing stock at the lesser figure, i.e., the cost. In fact, it was never disputed that the closing stock itself had been valued by the firms by deducting a certain percentage (which was not less than the gross profit disclosed by the said firms) from the market price on the relevant accounting date. Consequently, the gross profit would ordinarily be less than the margin between the cost and the market value. It was also not disputed that the rate of gross profit disclosed by the said firms was more than 20 per cent in eithej case.
2. My respected and learned brethren have observed that from the reading of Rule 2B(2) it is clear that it would be for the WTO to show that the market value of the closing stock exceeded the value by more than 20 per cent on the relevant valuation date. Actually, the language of Rule 2B itself shows that the framers of this rule were alive to cases of the kind like the one in hand. Under Sub-rule (1) they laid down that the value of the assets disclosed in the balance sheet shall be taken to be the written down value and in case of closing stock, its value adopted for the purpose of the 1961 Act. Then they specifically incorporated Sub-rule (2) which was to apply notwithstanding anything contained in Sub-rule (1). Now, as I have pointed out above, the market value of the closing stock owned by the firm certainly exceeded the value adopted for the purpose of assessment under the 1961 Act because for the purpose of that Act, the value that has to be taken is cost or market whichever is less, so that there can be no dispute that there is always a difference between the cost and market value and the lesser of the two is adopted for the purpose of assessment under the 1961 Act.
The only possible dispute is as to what would be the percentage of difference between the two. It is in this behalf that the question of onus is stated to be material. This much is not disputed that there is a difference between the cost and the market price and the lesser has been adopted tinder the 1961 Act. Now what is the percentage of difference and who is the person who knows about it Ordinarily, the initial onus of showing the applicability of Rule 2B(2) may be on the department, because of Sections 102 and 103 of the Evidence Act, 1872, but under Section 106 of the Evidence Act, the fact of market value of the closing stock being within the special knowledge of the assessees, the burden of proving the same would be upon them and the former Sections would have no application to the present cases. The provisions relating to burden of proof in the Evidence Act lay down general principles of law and can certainly be considered while deciding cases under the 1961 Act. At any rate Section 106 has been held to be applicable to the present proceedings by the Hon'ble Supreme Court in CWT v. J.K. Cotton Mfrs. Ltd. [1984] 146 1TR 552 at p. 563.
3. How can the ITO possibly find out the market value of each item of closing stock held by the firm on the relevant valuation date Even the detailed particulars of the closing stock of the firm may not be available with the WTO, assessing the present assessees. The WTO, therefore, would have to raise some kind of presumption from the available facts. The fact of the gross profit being more than 20 per cent would prima facie discharge the burden lying upon the department and justify the WTO in raising the presumption. The actual market price of each item of closing stock was a fact within the special knowledge of the assessees because they are partners of the firms who owned the closing stocks. A partner may be different entity from a firm for the purpose of assessment under the 1961 Act, but a partner is an agent of the firm for all dealings with the third parties and is expected to know all facts relating to the conduct of the business by the firm so that it were the assessees who knew as to what was the actual market value of the items forming part of the closing stock. My learned brethren have accepted the proposition that for the purpose of Section 7 and the relevant Rules, one has only to consider the hypothetical sales because there cannot be any actual sales on the valuation date, but they have been influenced by the fact that there would be some depreciation in the market rate by the time the goods will be actually sold, because the amount of closing stock showed that the sales of the goods in this line were rather low and it was necessary to hold goods for a considerable period. In that sense every property owned by an assessee may have been sold at a throw away price if the assessee has to necessarily dispose it of on the relevant accounting date. In fact the immovable properties owned by the assessees not sold for years and years altogether. There may be no immediate customer for such properties. The fact that if the owners are compelled to sell the properties on the relevant valuation dates, they may get only a throw away price would not be a ground for taking that throw away price as the market value. A hypothetical sale to a dealer may not fetch the same price which an owner can get on sales to different parties. But for the purpose of estimating the market value under Section 7, it is to be presumed that there is a ready buyer for the closing stock and he would pay the price at which the stock would be sold in the normal course of business. The buyer is not presumed to be a dealer who would keep his own margin of profit while purchasing the stock. Nobody having disputed that the gross profit rate disclosed by the firm was higher than 20 per cent, the WTO could at least raise a presumption that the market value of the closing stocks was in excess of the cost by more than 20 per cent. In such circumstances, it was for the assessees to show that because of the fact that there were no ready buyers, the goods actually forming part of the closing stock were to be held for a considerable period and that in the particular items left in the closing stock, the margin of profit by the firms was less ihan 20 per cent, because this was a fact within the special knowledge of the assessees.
4. My learned brethren have observed that the WTO should have called upon the assessees to produce before him particular material and details relating to the value of the closing stock, but the WTO himself did not know as to what facts should be ascertained for establishing the margin and, therefore, had not put any specific queries or asked the assessees to produce any specific facts. However, he had asked them to show cause as to why the closing stock should not be revalued. In reply the assessees only gave general explanation and asked the WTO that he should give them the basis for coming to the conclusion that the margin exceeded 20 per cent. The prima facie basis was already there in the form of the gross profit earned by the firm. Nothing more was known to the WTO, but everything was known to the assessees. They could give all the relevant facts to enable the WTO to ascertain the actual position. As I have pointed out above, the basic burden on the WTO was not there as has been presumed by my learned brethren, because the WTO did not know the items of closing stocks held by the firms and the market price of each one of them. He only knew two facts, namely, that the value of the closing stock for the purpose of computation of income was taken to be the cost which was certainly less than the market value and the gross profit earned by the firm during the relevant accounting year being more than 20 per cent, this difference prima facie exceeded 20 per cent. Beyond that possibly the WTO could not know anything and how can there be an onus of proof on a public servant who does not know anything about the items of closing stock and their values. All these facts were within the special knowledge of these assessees and the onus of proving that the difference between the cost and the market was a particular percentage, ought to be placed upon the assessees. They did not give any material to the WTO to eable him to ascertain the actual market value of the closing stock. He could not seize these articles to ascertain the actual value. Therefore, he was not expected to do anything more than what he has done.
5. My learned brethren have been influenced by the observations of the Settlement Commission that the value shown for the purpose of export could not be considered as the market value and a substantial discount had to be allowed for ascertaining the market value at home. But what would be the percentage of this discount was never looked into by anybody and who knew as to what the actual deduction ought to have been. Obviously, it were the assessees.
6. I am, therefore, of the opinion that the departmental ground raised in this behalf ought to have been allowed. However, since my respected and learned brethren have taken a contrary view, in accordance with the general principle of jurisprudence and the provisions of Section 255(4) of the 1961 Act which would apply to this case, because of Section 24(11) of the 1957 Act, the view of the majority in case of difference of opinion should prevail. I, therefore, respectfully concur with all the ultimate conclusion arrived at by my learned brethren.