1. In this appeal by the department, the issue is that Section 7(2) has been held to be not applicable for reassessment proceedings followed by allowing of the deduction of Rs. 1,05,100 as representing bad debts.
The plea of the department before us was that even at the time of original assessment the WTO had applied Section 7(2). In the reassessment proceedings again he had applied Section 7(2) and, therefore, there is no change in application or examination of the facts. The CWT (A) was, therefore, clearly in error in holding that originally Section 7(1) was applied. The deduction, thus allowed, which is consequential, has been wrongly allowed.
2. The plea of the assessee, on the other hand, was that each and every item of the debts, as claimed was examined, which was allowed by the WTO to a certain extent. The assessee preferred appeals to the AAC for not allowing of the debts as claimed by him from the total wealth. The AAC gave some more relief to the assessee. By means of the present assessment, the WTO has chosen to withdraw the amount that was earlier allowed by Ms predecessor, which had already been considered by the AAC in appeal as the very issue of debts was the matter in appeal before him. Against the order of the AAC, the department had not preferred any appeals. Therefore, by means of reassessment proceedings they cannot withdraw the deduction already granted.
3. We have given very careful consideration to the arguments of the parties. The perusal of the record shows that the WTO had considered each of the debts and had allowed deduction of some of them from the total wealth as per the balance sheet. The AAC's orders also reveal that some of these very debts for which only part taken was allowed by the WTO he had enhanced the deduction to be allowed. There is no dispute to the fact that the department did not prefer any appeals against the orders of the AAC. The present order of the WTO is purely examination of the same item again by bringing in the provisions of Section 36 of the IT Act for the plea that the said debts had not been written off in the books and, therefore, they cannot be reduced from the wealth. The department had not been able to bring in any material before us in support of their claim that the debts are not bad or that the CWT(A) was wrong in coming to the conclusion that the debts were, in fact, valueless. We, therefore, find no merit in the departmental appeal, which is hereby dismissed.
1. I have had the benefit of going through the order proposed by my learned brother and with great respect to the observations made therein, I am afraid, I have not been able to persuade myself to agree with all his conclusions. A perusal of the return filed by the assessee in the first instance would show that the assessee did not choose to file return of her net wealth in accordance with the principles of valuation contemplated by Section 7(1) of the WT Act. Along with her computation, she filed a statement, copy of which is filed at page 4526 of the paper book which showed the assets and inabilities of some business carried on by her. Therein the liabilities of the business contained the figure of Rs. 11,46,694 stated to be the capital invested by the assessee. Under no circumstances could it be said to be the market value of the assets owned by the assessee. It was either a cash amount for which there was no question of valuation or was the value of the assessee's interest in the business on the global method.
Therefore, by no stretch of imagination can it be said that the original assessment was in accordance with Section 7(1) of the WT Act.
2. It is correct that the debts owed to the assessee were revalued and their market value was determined in the original proceedings. But these were not really the debts owed to the assessee. They were debts owed to a business in which the assessee had made certain investment.
There were other liabilities of that business also as is apparent from the balance sheet at page 6, in which the total liabilities are shown to the tune of Rs. 16 lakhs and odd. It is not understood as to how the market value of all the debts could be recast for estimating the net wealth of the assessee. It is also not understood as to why all deductions in respect of certain assets were allowed to the assessee alone when there was nothing to suggest as to which asset in that balance sheet was relatable to which particular liability. In these circumstances all that can be said is that the previous method of computing the net wealth of the assessee was wholly irregular. The best that can be said was that a global method of valuation had been adopted in which the capital investment standing in the name of the assessee had been taken to be her net wealth after which certain adjustments had been allowed in accordance with Rules 2B to 2-I of the WT Rules. If this was not the method, then there was no logical method of assessment in the first instance and the earlier assessment was bad on this short ground.
3. Before the WTO there was no plea of the assessee that the earlier assessments had been made under Section 7(1) of the WT Act. The plea of the assessee was that the reopening could not be justified on the basis of the audit report as per decision of the Hon'ble Supreme Court in Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996. Apart from the fact that recently the said decision has been sought to be reconsidered by a larger Bench of their Lordships of the Supreme Court itself the proposition laid down in this case was only that the audit authorities could not lay down any law for the guidance of the Income-tax Wealth-tax Officer. They could only point out the mistake and the decision about the correctness or otherwise of the legal position adopted by the WTO in the first instance had to be taken by him alone. As I have pointed out above, the earlier decision of the WTO is wholly contrary to the clearcut language of the rules made under the WT Act. Therefore the reopening of the assessments was certainly in accordance with the law. I am, therefore, of the opinion that the present order of the AAC should be reversed and he should be directed to decide the appeal of the assessee before him on merits.
As there has been a difference of opinion between us, the following question is referred for opinion of the Third Member under subSection (11) of Section 24 of the WT Act read along with Sub-section (4) of Section 255 of the IT Act, 1961 : Whether the original computation of net wealth made in this case in relation to the assessee's investment in her business should be deemed to have been done under Sub-section (1) or (2) of Section 7 of the WT Act ORDER UNDER Section 24(11) OF THE WEALTH-TAX ACT, 1957 READ WITH Section 255(4) OF THE INCOME-TAX ACT, 1961 The following point of difference between the learned Accountant Member and Judicial Member has been referred to me as a Third Member by the Hon'ble President of the Income-tax Appellate Tribunal : Whether the original computation of net wealth made in this case in relation to the assessee's investment in her business should be deemed to have been done under Sub-section (1) or (2) of Section 7 of the Wealth-tax Act 2. To give briefly the facts it may be mentioned that the original wealth-tax assessment of the assessee was completed on 26-2-1975 by the Wealth-tax Officer. The various debts were shown as assets in the balance sheet. Apart from this, there was an immovable property in the balance sheet. The assessee, in addition owned certain jewellery and other ornaments. By making the assessment, the Wealth-tax Officer had considered the contention of the assessee that the market value of some of the debts was lower than the value shown in the books. The debts specifically mentioned were five in number. For example, in respect of the account of M/s. Harisingh Sanbokchand of Kanpur, the debt having a book value of Rs. 2,03,000 had been shown at a market value of Rs. 40,000. Similarly, a debt in the name of Harisingh Punam chand of Kanpur having a book value of Rs. 76,000 was shown at Rs. 38,000. The other debts were small items. The Wealth-tax Officer had considered the position of these debts and had determined their market value wherever he was satisfied that such market value should be lower than the book value. In respect of one debt in the name of M/s. Indian Commercial Corporation, Calcutta, the Wealth-tax Officer had adopted the market value at a figure higher than what was shown in the books. In respect of this also, the assessee had claimed that its market value was negligible. After considering the nature of those debts, the Wealth-tax Officer worked out the difference of the book and market value of these debts and deducted this difference from the wealth of the assessee.
3. In respect of the immovable property, the Wealth-tax Officer did not adopt the book value and in its place he adopted the market value at a higher figure of Rs. 1,78,000. The net wealth was determined at Rs. 14,19,704.
4. Against this order, there was an appeal in which the assessee had contended that the market value of these debts had not been properly determined. The Appellate Assistant Commissioner considered the contention of the assessee in respect of the various debts and while he rejected the contention in respect of some of the debts, he accepted it in respect of others to some extent. For this, he considered the circumstances, which had affected the value of the debt. The Appellate Assistant Commissioner noted such matters where it appeared that the debt had become doubtful or bad under proceedings which were either before an arbitrator or before the Courts. The Appellate Assistant Commissioner allowed reduction in the value of these debts to the extent of Rs. 1,12,500. This order was passed on 15-10-1976 and there was no further appeal by either of the parties against this order. It may be mentioned that by that time the assessment for the assessment year 1975-76 had been completed and the value of these debts had been taken at a reduced figure by the Wealth-tax Officer himself having regard to the circumstances and the fact that the debts had been scaled down in the books or had been written off. The assessment order for the assessment year 1975-76 had been passed on 31-3-1976.
5. On 26-2-1979, the Wealth-tax Officer reopened the assessment under Section 17(1)(b) on the ground that the deduction on account of difference in book value and market value of debts had wrongly been allowed and also for the reason that deduction on account of matured Life Insurance Policy taken for the payment of estate duty had been wrongly allowed. In this assessment, the Wealth-tax Officer justified the reopening of the assessment under Section 17(1)(b) and also held that the value of the assets should have been taken on the basis of the balance sheet under Section 7(2) of the Wealth-tax Act. The reduction in value could not have been allowed unless the debts were written off in accordance with Rule 2D. He held that such an adjustment could be made only where the value is determined under Section 7(1) of the Wealth-tax Act. He, therefore, held that the deductions allowed earlier were not justified. No reference was made to the order of the Appellate Assistant Commissioner. An addition of Rs. 1,05,600 was made by restoring the value at the book value in respect of the debts.
6. The assessee filed an appeal before the Commissioner of Income-tax (Appeals), who considered the plea of the assessee that the wealth had been determined under Section 7(1) of the Wealth-tax Act. He also considered that Sections 7(1) and 7(2) were alternative provisions and either of them could be applied. The Commissioner of Income-tax (Appeals) accepted the plea of the assessee that the provisions of Section 7(1) having been applied in the original assessment, the provisions of Section 7(2) could not be so applied. The Commissioner of Income-tax (Appeals) accepted the plea of the assessee and held that the addition made in the value of the debts was not justified. The addition was, therefore, deleted. It is against this order that an appeal was filed before the Tribunal and the ground taken was as under : On the facts and in the circumstances of the case, the learned CIT(A) has erred in allowing a deduction of Rs. 1,05,100 and further holding that Section 7(2) of the Wealth-tax Act, 1957 does not apply on re-assessment proceedings.
7. There was a difference of opinion between the two Members and while the learned Accountant Member held that in the original assessment the provisions of Section 7(1) had been applied by the Wealth-tax Officer, who had considered each item of debt and other assets and valued them according to the facts available. In view of this, the Accountant Member was of the view that the valuation of the assets of the assessee could not be made under Section 7(2) of the Wealth-tax Act in the reassessment proceedings. The Judicial Member, on the other hand, noted that in the original assessment the Wealth-tax Officer had started from the capital investment in the business and from that certain deductions had been allowed. He was, therefore, of the view that the valuation had been done on the global method and in such a valuation the adjustments could have been made only if they were so prescribed under the law. The Judicial Member pointed out that though the debts owed to the assessee had been valued in the original proceedings but they were in fact debts owed to a business in which the assessee had made certain investments.
He was of the view that the value of those debts could not be worked out except as given in the balance sheet and they could be excluded or could be reduced in value to only (sic) it was so required under the rules. He was also of the view that the previous method adopted by the Wealth-tax Officer was wholly irregular and at best it was the adoption of the global method. The Judicial Member observed that the earlier order of the Wealth-tax Officer was wholly contrary to the language of the rules and on that basis the reopening was called for. On this basis he reversed the order of the Commissioner of Wealth-tax (Appeals) and proposed to direct him to decide the appeal on merits. In other words, he wanted him to consider the question of valuation on the basis of the provisions of Section 7(2).
8. It was in these circumstances that there was a difference of opinion and the point of difference has already been given in paragraph 1 of this order.
9. I have heard the learned departmental representative as well as the learned counsel for the assessee at length. Section 7 deals with the question of valuation and it is concerned with the true market value of the assets in question on the valuation date. Sub-sections (1) and (2) of Section 7 are not mutually exclusive. Where an assessee carries on his business and maintains regular accounts the Wealth-tax Officer may adopt the method prescribed in Section 7(1) or he can proceed to work out the overall wealth on the basis of the balance-sheet. Sub-section (2) of Section 7 refers to such cases where it is not necessary to determine the value of each asset and it is possible to determine the net value of the asset of the business as a whole having regard to the balance-sheet of such business. The adjustments to this can be only under the rules. However, the whole purpose is to determine the value of the business as a whole. But words 'having regard to the balance-sheet of the such business' do not mean that whatever is written in the balance-sheet has to be adopted. However, that has to be the main basis for determining the valuation. It is open to the Wealth-tax Officer to adopt a valuation different from what is shown in the balance-sheet if there are good reasons for the same. Where, however, the books are maintained the onus is on the assessee to establish that the value shown in the books is not the correct value and if the value is increased it is for the Wealth-tax Officer to establish it.
10. With this background when we see to the original assessment, we find that the assessee was carrying on a money-lending business. The assets belonging to the assessee were mostly in the form of various debts. The only other major asset was an immovable property. In the original assessment, the assessee had placed before the Wealth-tax Officer the circumstances under which the debts were claimed to be of a lesser value than shown in the balance-sheet. The Wealth-tax Officer had gone into the facts of each debt and had accepted to some extent the plea of the assessee. He valued the debts having regard to the circumstances of each debt. Similarly, in respect of the immovable properties the market value had to be accepted and not the value shown in the balance-sheet. Thus, the basic approach of the Wealth-tax Officer was to determine the value of different assets separately and this could be done under Section 7(1) of the Wealth-tax Act. Tha fact that the Wealth-tax Officer mentioned the capital of the assessee and then made deductions or additions in that would not mean that there was determination on the basis of the balance sheet. There was detailed discussion in the order of the Wealth-tax Officer about the assets and thus it could not be said that some adjustments as contemplated in Section 7(2) was being made. The learned Judicial Member has also made the remark that the approach of the Wealth-tax Officer was not very consistent. However, it does not appear to be any flaw in the approach of the Wealth-tax Officer in the original proceedings. It may also be mentioned that against the original order there was an appeal before the Appellate Assistant Commissioner. The assessee had contended before the Appellate Assistant Commissioner that the determination of the value of each asset had not been done properly by the Wealth-tax Officer. The Appellate Assistant Commissioner considered the valuation of the immovable property as well as the valuation of various debts. He went into the circumstances of each debt and considered the plea of the assessee about certain deductions to be allowed in the valuation of those debts. The Appellate Assistant Commissioner accepted the reduction in the value in certain cases whereas in certain others the plaa of the assessee was rejected. It is clear from the order of the Appellate Assistant Commissioner that there was determination of value of separate debts and the CWT (Appeals) allowed a relief of Its.
1,12,500 in the valuation of different assets. This order of the Appellate Assistant Commissioner, as already pointed out above, had been passed on 15-10-1976. At the time of hearing of this appeal, the Appellate Assistant Commissioner had taken into consideration the fact that in the accounting period relevant to the assessment year 1975-76 many of the debts had been written off and some of them had been scaled down. This fact had been shown on the basis of the arbitration where the arbitrator had considered the financial conditions of the debtors in recommending the write off or scaling down. This had been so accepted by the Wealth-tax Officer in the assessment year 1975-76. As these facts were available before the Appellate Assistant Commissioner, he took this into consideration and directed that the market value of these debts should be taken at a figure which was slightly higher than the value as per the accounts of 1975-76. It was much after this that the reassessment proceedings had been started in 1980. It is true that the arbitration proceedings had been completed on 11-4-1975 but ft did indicate the position of these debts on the basis of which the Appellate Assistant Commissioner had accepted the plea of the assessee for taking them at the figure lower than shown in the balance-sheet. I have also to note that by reopening the assessment the Wealth-tax Officer wanted to withdraw the benefit of lower valuation which had been determined by him in the original assessment and which had further been reduced by the Appellate Assistant Commissioner after considering the each debt separately. This order of the Appellate Assistant Commissioner had become final as there was no appeal against it by the Department. It had been argued before me that this finality of the order of the Appellate Assistant Commissioner could not be disturbed by reopening an assessment on the basis that one mode of valuation should be adopted in preference to another which had been originally adopted and upheld in appeal. For this reliance had been placed on the decision of the Madras High Court in the case of P. Palaniswami v. CIT [1977] 106 ITR 811 and the decision of the Supreme Court in the case of CIT v.Rao Thakur Narayan Singh [1965] 56 ITR 234.
11. The learned counsel had also rightly relied on another decision of the Supreme Court in the case of CWT v. Raghubar Narain Singh [1984] 146 ITR 228, where it had been held that where decrees had been valued at figures different from what were shown in the balance-sheet such valuation had been made under Section 7(1) and not under sectinn 7(2).
Their Lordships observed that merely because the assessee had shown the full decretal amounts in the books as still due would not ipso facto lead to the conclusion that they would be valued at those sums without taking into consideration the hazards for realising of the decrees. The asses-see's counsel had also relied on the decision of the Kerala High Court in the case of CWT v. K.P. Subbarama Sastrigal [1981] 129 ITR 502 where it was held that debts would be valued having regard to the creditworthiness of the debtors and the nature of the contentions which are placed on record.
12. The learned counsel had also pointed out that in another case of this group, namely, the case of Ravi Prakash Dugar v. WTO [WT Appeal Nos. 124 to 130 (Jp.) of 1983], the market value of the debts had been determined having regard to the circumstances of the case and the circumstances in that case were similar. The Tribunal there turned down the plea of the Department that the value of the debts should be taken at the same figure as shown in the balance-sheet. There again the Tribunal had taken into consideration the fact that the debts had been written off in a subsequent year and having regard to that the values had to be determined to the relevant year.
13. The departmental sepresentative had pointed out that in earlier years in the case of the assessee the reopening of the assessments under similar circumstances had been upheld.14. Having considered, the facts of the case, I am of the view that the computation of net wealth in relation to the assessee's investment in business was made under Sub-section (1) of Section 7 and not Sub-section (2) of Section 7. This I hold on the basis of the assessment orders originally passed and the appellate order by the Appellate Assistant Commissioner which had become final. In the original proceedings there was no question of valuing the business under Section 7(2) of the Wealth-tax Act.
15. The matter will now go back to the original Bench so as to enable it to pass an order in conformity with the majority view.