Full Judgment
2. The assessee is an individual. For the assessment year under consideration, the assessee filed return of wealth on 20-7-1981 disclosing a net wealth of Rs. 5,69,953. The assessment was completed under Section 16(3) of the Wealth-tax Act, 1957 on 31-3-1986. According to the Assessing Officer, the assessee held unquoted equity shares of Continental Constructions (P.) Ltd. (for short CCL). The valuation of the said unquoted equity shares of CCL was referred to the Valuation Officer (for short VO) under Section 16A of the Wealth-tax Act, 1957.
The VO by his order dated 21-3-1986 under Section 16A(5) estimated the value of each equity share of CCL as on 30-12-1980 relevant to the assessment year 1981-82 at Rs. 239.58 on simple average yield basis.
The VO while estimating the value of the shares of the CCL followed the judgment of the Hon'ble Delhi High Court in the case of Sharbati Devi Jhalani v. CWT [1986] 159 ITR 549. The AO mentioned in the assessment order that the shareholders of the CCL filed writ petitions for the assessment years 1979-80 and 1980-81 before the Hon'ble Delhi High Court challenging the validity of Rule ID of the Wealth-tax Rules and its applicability to the facts and circumstances of the assessee's own case and that the judgments of the Hon'ble Delhi High Court on the Writ Petitions filed by the shareholders were not available. The AO adopted the value of 4680 equity shares of CCL at Rs. 239.58 per share aggregating to Rs. 11,21,234 by observing as under:- keeping in view all the facts and circumstances of the case and the binding nature of the order dated 21-3-1986 of the Valuation Officer in view of Section 16A(6) of the Act, I adopt the fair market value of the equity shares of M/s. Continental Construction (Private) Ltd. at Rs. 239.58 per share as advised by the Valuation Officer. This value will, however, be subject to revision in the light of the directions which may subsequently be received either from the Supreme Court in Sharbati Devi Jhalani's case or from the Hon'ble Delhi High Court, in the Writ Petitions filed by the shareholders of the company.
In the assessment order dated 31-3-1986 it was stated that penalty proceedings under Section 18(1)(c) have already been initiated.
3. The Assessing Officer passed the order under Section 18(!)(c) of the Wealth-tax Act, 1957 on 14-3-1988 imposing a penalty of Rs. 14,840.
According to the WTO, who passed the said penalty order, during the course of assessment proceedings, it was noticed that the assessee had disclosed the value of the shares of CCL at the face value of Rs. 100 per share subject to valuation. However, till the completion of the assessment, neither any Valuation Report in respect of the said shares nor any revised return with self-assessment tax was filed. As the assessee's case was obviously hit by Explanation 4 of Section 18(1), penalty proceedings under Section 18(1)(c) were initiated at the time of assessment. A notice was served on the assessee. Vide letter dated 3-2-1988, filed by the assessee, it has been stated that the difference in the returned wealth and the assessed wealth was due to the valuation of the shares of the CCL, which was due to the difference of opinion only and it did not constitute any concealment on the part of the assessee and that the value of the shares at Rs. 100 was based on the bona fide facts and, therefore, that was the correct value of the shares as contemplated in the Explanation of Section 18(1)(c). It was also stated that the value of the shares as arrived at by the VO was not final and that the Tribunal in its order dated 30-11-1987 had already given directions to re-work the value of such shares. The assessee placed reliance on the cases of K.P. Varghese v. ITO [1981] 131 ITR 597 (SC), CWT v. Tej Pal Oswal [l978] 112 ITR 429(Punj. & Har.)and Burmah-Shell Oil Storage & Distributing Co. of India Ltd. v.ITO [1978] 112 ITR 592 (Cal.) However, the Assessing Officer rejected the contentions of the assessee and levied the impugned penalty of Rs. 14,840 by observing as under:- I have considered the submissions made by the assessee. There is no force in the contentions of the assessee. The value of shares shown at the face value of Rs. 100 per share is subject to valuation.
Nevertheless, neither any valuation report was ever filed nor any revised return and self-assessment tax deposited. On the other hand as evident from the order of the Valuation Officer, the assessee himself argued against the valuation being taken on the basis of Rule 1D and contended that the correct method for valuing such shares would be the method as approved by the Supreme Court in 86 ITR 621 and 122 ITR 38 which is by applying the 'Yield' method. It need not be pointed out that the Valuation Officer has valued the shares in question on yield basis. Thus, the decision relied upon by the assessee that the difference of opinion on valuation of assets will not justify levy of penalty is totally irrelevant in this case and does not come to the rescue of the assessee in the present circumstances when the assessee himself has agreed to the yield basis of valuation and the same has been taken in the valuation of shares. It may further be mentioned that the Valuation Officer in his order under Section 16A(5) has pointed out that the assessee himself has worked out the value of Equity Shares at Rs. 213 per share against the value of Rs. 239.58 per share arrived at by the Valuation Officer. Thus, the filing of wrong particulars in the shape of under-valuation of shares by the assessee is patent and accepted by the assessee himself. Further, it may not be out of place to mention that the appeal of the assessee before the AC/ACIT(A) has also been rejected. The point that the Hon'ble ITAT B Bench vide their order dated 30-11-1987 has given direction to rework the value of shares can be taken care of while giving effect to the appellate order as and when received.
Thus, in view of aforesaid discussion, by undervaluing the shares of Continental Construction P. Ltd., the assessee is deemed to have furnished inaccurate particulars of his asset in terms of.
Explanation 4 and I, therefore, impose a penalty of Rs. 14,840 (Rupees Fourteen thousand eight hundred and forty only) under Section 18(1)(c) of the Wealth-tax Act, 1957 which is equivalent to the amount of tax sought to be evaded.
Aggrieved by the said penalty order, the assessee preferred the appeal before the CWT (Appeals).
4. Before the CWT (Appeals), the assessee's counsel submitted that, while filing the W.T. return for the assessment year under consideration, the value of the equity shares of the CCL was shown at face value of Rs. 100 per share subject to valuation as per W.T. Rules, that the VO adopted yield method following the judgment of the Delhi High Court in the case of Sharbati Devi Jhalani (supra) deviating from the earlier procedure under Rule 1D adopted by the department, that during the course of the valuation of the said shares by the VO, the assessee had declared the value of the equity shares at Rs. 213 per share, and that, the difference between the VO and the assessee was on the issue that the actual income-tax levied on the company in each of the preceding five years should be allowed as deduction by the VO.While working out the average maintainable profits, whereas the correct procedure should be to allow income-tax on average maintainable profit.
It was also submitted that the matter of valuation has been restored back by the Tribunal to the file of the WTO. It was also urged that the assessee had declared the correct number of shares held by him in the CCL and that the valuation of shares was a matter of estimation and that there was no element of offence in it. In the course of the appellate order, the CWT (Appeals) stated that opportunity was given to the assessee by the VO to show the correct valuation of shares and that the assessee gave the valuation at Rs. 213 per share and that even at this stage the assessee did not revise the value of the shares shown in the return at Rs. 100 per share. The CIT(A) stated in the appellate order that the assessee also worked out alternative valuation as per Rule 1D and that the assessee worked out the net assets of CCL at Rs. 3,67,71,896. In Paragraph 28 of the appellate order, the CWT (Appeals) stated that even though the assessee got so many opportunities to revise his return and file a correct value of the shares, but the assessee did not avail the opportunity of filing the correct value of the shares. Ultimately, he held that the assessee was in the know of the fact that the value of the shares returned by him was not the correct value and that Explanation 4 to Clause (iii) of Section 18(1)(c) was applicable in the case of the assessee. In that view of the matter, he confirmed the penalty levied by the WTO. Dissatisfied with the order of the CWT (Appeals), the assessee filed the present appeal before the Tribunal.
5. The assessee's counsel filed a Paper Book of 58 pages, photostat copies of the wealth-tax return filed by the assessee and written submissions. The arguments of the assessee's counsel were to the following effect: The assessee filed his return of wealth on 20-7-1981.
The assessee held 4680 equity shares of Rs. 100 each in CCL and 25 equity shares of Rs. 100 each in Chauhan Agricultural Farm (P.) Ltd. The details of the shares held are given at page 56 of the Paper Book filed by the assessee. The value of the shares in these companies is shown as "at face value subject to the valuation as per W.T. Rules - Rs. 4,70,500". This can be seen from Annexure VI at page 6 of the return of net wealth, photo copy of which was filed by the assessee before the Tribunal. The AO held that the assessee has concealed the wealth/furnished inaccurate particulars of the wealth and levied penalty under Section 18(1)(c). The CWT (Appeals) held that the assessee was conscious that the value of the shares of the CCL were valuable, that he has failed to revise his return, so admitting appropriate higher value of such shares and that he has failed in not submitting fresh calculations of the valuation of such shares. He, therefore, confirmed the penalty levied under Section 18(1)(c). The AO as well as CWT (Appeals) referred to Explanation 4. According to the said Explanation, if a person does not return the value of an asset at less than 70% of the value of such asset determined by the WTO in the assessment, he shall be deemed to have furnished inaccurate particulars of such asset within the meaning of Clause (c) of Section 18(1), unless he proves that the value of the asset as returned by him is the correct value. The lower authorities have only alleged that the assessee should have revised his valuation. The lower authorities were conscious that the assessee has admitted in his return of wealth the value of the shares at face value but subject to the valuation as per the WT Rules.
Thus the assessee has admitted that, whatever is the value to be determined as per the Wealth-tax Rules, the same is admitted. The valuation of shares of companies, not quoted in the stock exchange is a matter of considerable litigation from time to time. The Allahabad High Court in the cases of CWT v. Sripat Singhania [1978] 112 ITR 363 and Bharat Hari Singhania v. CWT[1979] 119 ITR 258 held that the value of the unquoted equity shares must be done according to Rule 1D. The Delhi High Court in the case of Sharbati Devi Jhalani (supra) held that if the valuation date of the wealth-tax assessee is different from the closing date of the accounting period of the company in which the equity shares are held by that assessee, then the shares have to be valued on yield basis. In the assessee's case, the AO referred the matter of valuation of equity shares to the VO. The VO valued the said shares on yield basis as he was bound by the judgment of the Delhi High Court in the case of Sharbati Devi Jhalani (supra). The paradox can be seen here explicitly. The assessee prayed that the valuation of shares of the CCL must be subject to WT Rules, but the VO valued them on yield basis. The issue of valuation of unquoted equity shares of a company was ultimately decided by the Hon'ble Supreme Court in the case of Bharat Hart Singhania v. CWT [1994] 73 Taxman 3. The Supreme Court laid down the same principle what the assessee has stated in his return of wealth, that the shares should be valued as per WT Rules. The complicated thinking of various High Courts and the Supreme Court, the assessee cannot be expected to admit an exact figure of value which is replete with lot of complications. Judging from the various circumstances of the assessee's case and the judgments of the various High Courts and the Supreme Court mentioned above, the assessee should not be burdened to have shown not the correct value. The penalty under Section 18(1)(c) may kindly be deleted.
6. The Departmental Representative filed written submissions and relied upon the order of the Tribunal in the case of WTO v. Sardar Kehar Singh [1987] 29 TTJ (Jp.) 372. The arguments of the Departmental Representative were to the following effect: The basic question to be decided by the Bench is, whether in view of Explanation 4 to Section 18(1)(c) of the WT Act, penalty is leviable in the assessee's case. The assessee filed his return of wealth on 20-7-1981 declaring a wealth of Rs. 5,70,000 including a sum of Rs. 4,70,500 on account of 4680 Equity Shares of the CCL. The AO valued the said shares at Rs. 11,21,234 at Rs. 239.58 per share on yield basis in accordance with the Valuation Report of the VO under Section 16A(5) dated 21-3-1986. Penalty proceedings under Section 18(1)(c) read with Explanation 4 were initiated against the assessee. The reply of the assessee was that the difference in the returned wealth and the assessed wealth was due to the valuation of the shares of CCL which is due to the difference of opinion and does not constitute concealment on his part. The value of these shares at Rs. 100 was based on bona fide fact and, therefore, that was the correct value as contemplated in Explanation 4 of Section 18(1)(c). This plea of the assessee was not accepted and penalty of Rs. 14,840 was levied by the order dated 14-3-1988. This penalty was confirmed by the CWT (Appeals). During the course of arguments, the assessee filed a copy of the return said to have been filed on 20-7-1981. In the said return, at page 6 at Annexure VI, Item No. 4 shares in Indian Companies referred to in Section 5(1)(xxiii) was shown at face value subject to the valuation as per W.T. Rules - Rs. 4,70,500. The claim of the assessee's counsel was that the assessee has declared the value of these shares at Rs. 100 each which is the face value since there was a lot of controversy about the method of valuation of unquoted shares and the assessee absolved of blame as he had mentioned "subject to valuation as per WT Rules" and that the valuation as per Rule 1D had been upheld by the Supreme Court in the case of Bharat Hari Singhania (supra). Therefore, since the claim of the assessee was the correct claim, no penalty was leviable under Section 18(1)(c). Another aspect referred to by the assessee's counsel was that the particulars of the number of shares had already been declared by the assessee and as such the question of concealment does not arise. This plea of the assessee is not acceptable as the assessee has not declared the correct value of the shares which is what is to be seen once the Explanation 4 to Section 18(1)(c) is attracted. In the present case, the value declared by the assessee is Rs. 4,70,500 whereas the assessed value is Rs. 11,21,23 4. Even after the Tribunal's order, the value of shares comes to much more than the declared value and would be hit by Explanation 4 as it is less than 70%. The assessee cannot get away by merely filing any sum as the value of an asset until and unless he can prove that it is the correct value to avoid the consequence of penalty under Section 18(1)(c). Neither has the assessee declared the value on yield basis nor as per Rule 1D merely mentioning that the value may be taken as per Rule 1D does not mean that the value has been returned as per Rule 1D. If such interpretation was to be permitted, any assessee would simply declare the value of jewellery at any sum and give a clarification that the market value of gold be taken. Such a value would not be the correct value of jewellery and only if market value is ascertained and returned then only can it be said that the correct value has been given. Another plea which was raised by the assessee was that the AO had never asked the assessee to give the valuation as per Rule 1D of the shares of CCL. In fact, the AO has given an opportunity to the assessee to file his objections if any, in writing in respect of the value of shares at Rs. 713.32 per share and time was given up to 13-3-1986. This can be seen from para 2 in the order under Section 16A(5) given at pages 33 to 47 of the assessee's paper book. The assessee took the plea that the value of the shares as per Rule 1D was not referred to by the AO. But the VO in page 6 of his order under Section 16A(5) stated that instead of following Rule 1D, he proceeded to value the shares of CCL as on 31-12-1980 on yield basis.
Opportunity given by the VO amounts to giving an opportunity by the AO.Therefore, the assessee's contention that he has returned the correct value cannot be accepted. The view of the department finds support from the order of the Tribunal in the case of Sardar Kehar Singh (supra) wherein it has been held that merely by bringing an asset into wealth is not sufficient in itself and what is required is to bring the asset at its proper value. In other words, Explanation 4 means that the value of the asset must have been arrived on a scientific method which is the only basis on what the valuation is possible. The case of the assessee is squarely covered by the above-mentioned order of the Tribunal and the assessee's appeal deserves to be dismissed. If the interpretation sought to be placed by the assessee's counsel is accepted it would lead to Explanation 4 to Section 18(1)(c) being rendered negatory which can never be the intention of the Legislature. Various courts have held that an interpretation which renders any provision negatory is to be avoided.
7. We have considered the rival submissions and the case law cited and perused the papers filed before us. Rule 1D was introduced w.e.f.
6-10-1967. It prescribes market value of unquoted equity shares of companies other than investment companies and managing agency companies. The basis is the break up value. The Allahabad High Court in its judgment dated 14-12-1976 in the case of Sripal Singhania(supra) held that Rule 1D is mandatory. This was followed later in the judgment dated 18-9-1978 in the case of Bharat Hari Singhania (supra). However, the Bombay High Court in its judgment dated 21-2-1979 in the case of Smt. Kusumben D. Mahadevia v. CWT [1980] 124 ITR 799 held that Rule 1D was directory and not mandatory. Even while applying Rule 1D, certain controversies were there. Some High Courts, e.g., Gujarat High Court in its judgment dated 25-9-1980 in the case of CWT v. Ashok K. Parikh [1981] 129 ITR 46 held that the amount of advance tax paid by the company in the relevant year and shown on the assets side of the Balance Sheet was not to be deducted from the tax payable in determining whether the provision for taxation was in excess or the tax payable with reference to the book profits in accordance with the law applicable thereto. The Allahabad High Court in its judgment dated 7-9-1978 in the case of CWT v. Rajendra Kumar Jhunjhunwala [1979] 118 ITR 523 held that initial depreciation reserve could not be excluded from the set of liabilities shown in the Balance Sheet.
8. In the present case, the assessee filed the return of wealth on 20-7-1981 when the legal position of valuation of shares as per Rule 1D was not settled. How the assessee can be expected to give a definite and certain amount as the value of his share in CCL as on 31-3-1981 (Valuation Date) when the accounting year of the CCL ended on 31-12-1980 Faced with such a dilemma, the assessee had mentioned in the return as "at face value subject to valuation as per W.T. Rules - Rs 4,70,500". It cannot be said that the assessee declared any amount as the value of shares held by him in the CCL. He had shown the amount of Rs. 4,70,500 with a qualification as "At face value subject to valuation as per WT Rules". It means that the assessee did not want to commit himself by declaring the value of his shares in CCL at a definite and certain amount. He suggested to the AO to value them as per WT Rules and adopt the same as value returned by him (assessee).
Apparently, the Assessing Officer failed to value them as per WT Rules.
Instead he referred the valuation to the Valuation Officer under Section 16A "to make valuation of the shares held in the Continental Construction (P.) Ltd., New Delhi for the assessment year 1981-82".
Please see page 2 of the Valuation Officer's order under Section 16A(5) dated 21-3-1986. In fact, the Valuation Officer valued the shares on yield basis at Rs. 239.58 per share as on 30-12-1980, relevant to the assessment year 1981-82 by following the judgment of the Delhi High Court dated 28-8-1985 in the case of Sharbali Devi Jhalani(supra). The AO adopted the said value subject to revision in the light of the directions which may subsequently be received either from the Supreme Court in the case of Sharbati Devi Jhalani (supra) or from the Delhi High Court in the Writ Petitions filed by the shareholders of the company. The assessment order was passed on 31-3-1986. Hence, it cannot be said that the Valuation Officer valued the share AO determined the value of shares at a certain and definite amount. The AO's valuation is also a qualified one. Thus, it would be seen that neither the assessee nor the AO had given any certain and definite amount as the value of the assessee's shares in CCL. Both their figures of Rs. 4,70,500 and Rs. 11,21,234 were subject to the qualifications mentioned by them.
When such is the factual position, how can it be said that the value of shares in CCL returned by the assessee is less than 70% of the value of such shares as determined in the assessment The invoking of Explanation 4 to Clause (in) of Sub-section (1) of Section 18 of the WT Act, 1957 is misconceived and unjustified.
9. The AO in his penalty order alleged that "filing of wrong particulars in the shape of under valuation of shares by the assessee is patent and accepted by the assessee himself." When there is no valuation of shares given by the assessee in the return, where is the question of undervaluation as alleged by the AO Where did the assessee accept under valuation of shares in CCL This is all the imagination of the AO based on no materials before him.
10. On these facts and circumstances of the case, we hold that the AO is not at all justified in levying the penalty of Rs. 14,840 under Section 18(1)(c) of the Wealth-tax Act, 1957. We delete the same.