inspecting Assistant Vs. Sardarmal Dhadda/Umraomal - Court Judgment

Excerpt:
1. the revenue and the assessee have filed their appeals and cross-objections respectively for the assessment years 1975-76 and 1978-77 against the combined order of the aac. involving common questions, both the appeals and the cross-objections are disposed of together by a combined order.3. the first contention of the revenue is that the aac erred in holding that the wto was not justified in invoking the provisions of rule 2b(2) of the wealth-tax rules, 1957 (for short 'the rule 1957') for determining the value of the assessee's interest in the firm m/s.sardarmal umraomal. the assessee is a partner having 50 per cpnt share in the said firm. the dispute relates to the valuation of the interest of the assessee in the said firm. the firm purportedly valued its closing stock at cost. the.....

Judgment:
1. The revenue and the assessee have filed their appeals and cross-objections respectively for the assessment years 1975-76 and 1978-77 against the combined order of the AAC. Involving common questions, both the appeals and the cross-objections are disposed of together by a combined order.

3. The first contention of the revenue is that the AAC erred in holding that the WTO was not justified in Invoking the provisions of Rule 2B(2) of the Wealth-tax Rules, 1957 (for short 'the Rule 1957') for determining the value of the assessee's interest in the firm M/s.

Sardarmal Umraomal. The assessee is a partner having 50 per cpnt share in the said firm. The dispute relates to the valuation of the interest of the assessee in the said firm. The firm purportedly valued its closing stock at cost. The WTO observed that the assessee showed GP rate of 29.3 per cent and 29 per cent for the year under appeal respectively. Considering the GP rate, the WTO was of the view that the market value of the closing stock of the firm in which the assessee is a partner, exceeded the value as adopted by the firm by more than 20 per cent. He, therefore, invoked Rule 2B(2) of the Rules, 1957. The WTO rejected the contention of the assessee that the GP rate could not constitute a good guideline to determine the market value of the stock as on the valuation date. The assessee raised several objections vide reply dated 6-11-1979 why the GP Rate could not be taken as adequate material to come to the conclusion that market value of the stock exceeded the value as adopted by the firm by more than 20 per cent. The WTO was not at all convinced by the assessee's reply dated 6-11-1979.

He, therefore, took the market value of the stock for purposes of the assessments as against the cost price shown by the assessee. The dispute was carried in appeal to the AAC by the assessee. He, having followed an earlier order dated 26-7-1980, concurred with the assessee that Rule 2B(2) could not be invoked simply because the GP rate was 29.3 per cent and 29 percent for the years under appeal respectively. A similar question came up for consideration in the case of Smt.

Ladkunwar Dhadda [WT Appeal Nos. 756 and 757 (Jp.) of 1980] carrying on the same business in assessment year 1975-76 for the consideration before this Bench. Vide order dated 23-7-1981, a copy of which is enclosed in the paper book the Tribunal took the view that simply because the GP rate was high, the WTO was not justified in coming to the conclusion that the market value of the stock exceeded the value as adopted by the firm by more than 20 per cent. The common feature of both the cases-of the assessee and Smt. Ladkunwar-is that in both the sets of cases the WTO simply relied on the GP rate and on no other material to invoke Rule 2B(2). On these facts, the decision dated 23-7-1981 of the Tribunal in the case of Smt. Ladkunwar is squarely applicable to the case of the instant assessee. It has, therefore, to be held that the WTO was not right in invoking Rule 2B(2) to the instant cases, as there was no cogent material before him to come to the conclusion that market value of the stock exceeded the value as adopted by the firm by more than 20 per cent.

4. For these reasons, the combined order of the AAC on this issue is upheld.5. The next ground is that the AAC erred in holding that the assessee is entitled for exemption 5(1)(xxxii) in respect of the Investment in the firm M/s. Sardarmal Umraomal. This issue also is not res Integra and it has come up for hearing before this Bench as well as other Benches in the several other cases in which the firms carried on the identical business. This Bench as well as other Benches have consistently taken the view in several cases that the firm carrying on this type of business is an industrial undertaking within the meaning of Explanation to Clause (xxxi) of Section 5(1) of the Wealth-tax Act, 1957. For example sake, decision of Bombay Bench 'B' Camp at Jaipur in the case of Smt. Manju Devi Kothari [IT Appeal No. 224 (Jp.) of 1979 dated 11-7-1981] assessment year 1976-77 can be cited. Relying on this decision, I hold that the firm in which the assessee is a partner, is an industrial undertaking within the meaning of Explanation to Clause (xxxi) of Section 5(1) and the asseesee's interest in the said firm is exempt under Clause (xxxii) of Section 5(1). For these reasons, the order of the AAC is upheld.6. Another ground is that the AAC erred in not allowing an opportunity to the Valuation Officer as required by Section 23(3A)(a) of the Act, 1957 and in reducing the value of the immovable property as made by the Valuation Officer by Rs. 48,700. No material has been shown by the revenue to substantiate the objection that no notice was served on the Valuation Officer. Shri Swaroop, the learned Sr. Departmental Representative conceded that notice had been sent by the AAC to the Valuation Officer. It is not the contention of the revenue that the notice was sent on a wrong address. No affidavit has been filed by the Valuation Officer to prove that the notice being sent on correct address, was not served on the Valuation Officer. On these facts, it has to be held that the AAC got the notice duly served on the Valuation Officer and the latter chose not to appear before the former. The assessee as well as the revenue agreed that the discrepancy relates the multiplier and deduction of repairs and collection charges. There is no other dispute regarding the valuation of the immovable property. First, we take up the question of multiplier. The WTO applied the multiplier of 16.6.

The AAC adopted the multiplier 10. We have heard the representatives of both the parties and the Valuation Officer. No good reason has been shown to adopt the multiplier as high as 16.6. The AAC has discussed this issue in para 12 of his order. It appears that for adopting multiplier 10, he relied on a decision dated 1-8-1980 of Jaipur Bench in WTA No. 329/JP/1979. In our opinion, the AAC was right in applying the capitalisation factor 10 to the rented property. For repairs and collection charges, the AAC allowed deduction of 18 per cent. The Valuation Officer allowed repairs charges to the extent of 1/10th and collection charges to the extent of 4 per cent. The AAC observes that the repairs expenses are generally allowed at 1/6th and the collection charges at 6 per cent. The Valuation Officer, who appeared before us urges that under the terms of the rent deed, repairs were to be carried out by the tenants and, therefore, nothing was allowable to the assessee as he was not required to incur expenditure on repairs. We do not agree with the Valuation Officer. It is the duty of every landlord to maintain the let out property. The landlord is, therefore, entitled to repair expenses. In our opinion, the AAC was right in allowing deduction of 18 per cent for repairs and collection charges.

7. There is one more contention in the appeal relating to assessment year 1976-77. The contention is that the AAC erred in allowing deduction of Rs. 47,125 in respect of tax liability, which arose as a result of disclosure scheme of 1975. Admittedly, the firm made a disclosure and paid taxes of Rs. 94,250. The assessee's share in the voluntary disclosed income came to Rs. 1,75,000 and thus the assessee claimed deduction of proportionate tax liability of Rs. 47,125. The WTO disallowed the assessee's claim for the reason that the taxes had been paid after the valuation date ending 1975. He was of the view that such tax liability was not a debt due 2(m)(ii) of the WT Act, 1957. A careful perusal of the case shows that further scrutiny is necessary on the issues : (1) as to for which years the disclosure was made, (2) whether the assessee ever disclosed wealth to the extent of Us.

1,75,000 in his wealth-tax return for the assessment year 1976-77, (3) if no such wealth was disclosed in view of the provisions of Voluntary Disclosure Scheme whether still the tax liablity of Rs. 47,125 can be characterised as 'debt owed' in view of Section 2(m)(ii) of the WT Act, 1957.

Thereafter he will redecide the issue after giving an opportunity of being heard to both the parties.

8. Next, we take up the cross-objection of the assessee. The first common objection is that the AAC erred in not accepting the value of Kanota Bagh plot, Takhte Sham Road, Jaipur. The assessee returned the value of his half share in the said plot at Rs. 35,000 for each year.

Relying on the report of the Valuation Officer, the WTO estimated the value of the assessee's half share in the said plot at Rs. 57,500 and Rs. 65,000 for the years under appeal respectively. The AAC concurred with the WTO. For the assessee, the learned counsel Sh. Ranka urges that emergency was clamped by the Govt. and that continued during these years. He argues that on account of emergency, the prices of the land had drastically gone down. The valuation of the assessee's shares in the said plot was in dispute in the asstt. years 1978-74 to 1974-75 also. In the cross-objections of the assessee, this Bench of the Tribunal fixed up the value of the assessee's share in the said, plot at Rs. 49,500. The question for consideration is as to what extent the value of the plot was increased in the years under appeal as compared to the assessment year 1974-75. On the valuation of Rs. 49,500, the rate works out to Rs. 65 per sq. yd. When the rate of Rs. 65 per sq.

yd. was applied for the assessment year 1974-75 as per the decision dt.

19-8-1981 of this Bench in the case of the assessee, in our opinion, for the years under appeal, the rate of Rs. 70 per sq. yd. will be proper and reasonable. We, therefore, direct the WTO to value the half share of the assessee @ Rs. 70 per sq. yd. for the years under appeal.

9. The second common objection is that in view of Section 7(4) of the WT Act, 1957, the AAC should have taken the same value of the self-occupied property for the years under appeal as taken for the assessment year 1971-72. It was argued by Shri Ranka before us that the WTO himself adopted the valuation of the assessment year 1971-72 for the assessment year 1977-78. This fact has not been controverted by the revenue. We, therefore, accept the submission of Shri Ranka and direct the WTO to adopt the valuation of self-occupied property of the assessment year 1971-72 for the purposes of the assessment year under appeal.

10. In the result, the appeal for the assessment year 1975-76 of the revenue is dismissed and the appeal for the assessment year 1976-77 is allowed for statistical purposes and cross-objections of the assessee are partly allowed.

1. I had the benefit of going through the combined order passed by the learned Judicial Member. I am in agreement with the conclusion arrived at by him on all the issues except in regard to Rule 2B(2) of the W.T.Rules, 1957, for which I have my own reservations. The dispute regarding applicability of Rule 2B(2) of the WT Rules, 1957 is twofold.One is legal issue whether Rule 2B(2) can be invoked in valuing the interest of a partner in a firm. The other is whether on facts the market value of closing stock exceeds more than 20 per cent of the value adopted in the case of the firm for income-tax purposes. Shri N.M. Ranka, the learned counsel of the assessee did not (sic) or the legal aspect of the issue. The same, therefore, calls for no consideration. I shall, however, discuss the other issue in the following paragraph : 2. Rule 2B(2) provides for disturbing the value of a particular asset of the firm if the difference in market value of that asset and the value appearing in the balance-sheet of the firm is more than 20 per cent. The learned Judicial Member has held that in the case of the assessee the difference is not more than 20 per cent. For coming to this conclusion he has relied upon an earlier decision of Jaipur Bench in the case of Smt. Ladkunwar Dhadda, the relevant extract of which is reproduced below : It might so happen that more valuable gems have already been sold out and what remained was the inferior variety which can fetch much less profit, the assessee might have had a very good year but on the last day value could get depressed.

It is also observed that unless the facts are analysed properly and positive material brought on record to show that market value was very much higher than the cost price on the last day of the accounting period, it would not be possible to uphold the WTO's action and the burden rested heavily on the WTO to prove that the market value was more than 20 per cent. In the combined order the observation made is that WTO has not brought on record material to reach the conclusion that market value of the closing stock was more than 20 per cent of the value disclosed in the books of the firm.

3. I have my own reservations on this issue. I fully endorse the views that unless the facts are analysed properly and positive material brought on record, value of the closing stock cannot be determined. I do not agree with the remaining observations. The valuation of closing stock has to be as a fact. It cannot be based on generalisation or on hypothetical statements. I also do not agree that onus to bring the positive material on record is on the WTO and not on the assessee. On whom the onus lies would depend on the facts in each case. Coming to the facts of the instant case it is a common ground between the parties that the rates of gross profits disclosed by the assessee for the assessment years 1975-76 and 1976-77 are at 29.3 per cent and 29 per cent respectively. It is also the case of the assessee that closing stock in the firm is valued at cost.

4. In a trading account where the method of valuing the closing stock is taken as the cost price the GP will only be a difference between the purchase price and the sale price. Sale price is normally the market value of an asset on the date of its sale and the purchase price will be the cost of acquisition of the asset out of which profit has been earned. In other words, the market value will be the increase of GP earned over the purchase price. Now the percentage of GP rates are 29.3 & 29 per cent respectively. In other words, the market price is more by 41.3 per cent for the assessment year 1975-76 and 40.84 per cent for the assessment year 1976-77 of its cost in terms of Rule 2B(2) of the WT Rules. This is the position which emerges prima facie from trading account where the method of valuing the closing stock is the cost price. This prima facie difference between the cost price and the market value can, however, be dislodged by certain factors. After considering the relevant facts sometimes the market value with reference to the valuation dates may be less than the percentage of the increase of the GP rate and sometimes it may even be more than the percentage of GP. The onus to dislodge this position, i.e., the apparent is not real consequently falls on the assessee by giving positive evidence that the real market value of the closing stock is lower than the increase in the GP rate with reference to cost. The submissions made before the WTO are general and not specific. Neither any basis for valuation of the closing stock has been spelt out. The submissions made before the AAC were as under : That the gross profit during the said years was more than 20 per cent. It does not mean fair market value of the closing stock was more by 20% of the book value. We may mention that the jewellery trade has its own special feature. Goods may remain in stock for years together and may not be saleable at all. Some goods may be sold at 10 per cent profit and others may be sold at 25 per cent profit also. One has to take an overall view and for putting value as fair market value, one has to see that the goods in stock are sold out on that day in lump sum to the willing buyer on that day.

None would be agreeable to the book value of the valuation date.

Whatever stock is available with the assesses on today the assessee is prepared to sell it at rate above 18 per cent of its cost/books value. If you have any evidence in your possession that the fair market value of the closing stock on the valuation date was more than 20 per cent of the cost/books value you are requested to let us know the same so that evidence in rebuttal may be adduced. We may mention here that normally global valuation deserves to be taken and if you want to substitute the value, onus is upon you and not on the assessee. Apparent position is real unless other is proved. We object to your preposition and request you to accept the book value and not to adopt any other value for the closing stock.

5. The first contention made on behalf of the assessee is that goods may remain in stock for years together and may not be saleable at all.

This statement made on behalf of the assessee is not even a general statement, what to speak of specific statement supported by any evidence. It is only a hypothetical statement, surmise and conjecture.

In my opinion such a hypothetical statement cannot be advanced in a course of law. The learned counsel of the assessee during the course of hearing of the appeal expressed his inability to furnish details of such goods so as to consider modification of the valuation of closing stock in relation to such goods. The other contention is that some goods may be sold at 10 per cent profit and others at 25 per cent also and the market value of goods with lesser margin of profit will be less than the rates of gross profit and, therefore, the GP will not reflect the correct market value. Here again the statement made is hypothetical one and deserves to be rejected. The learned counsel of the assessee again expressed his inability to furnish details of such goods included in the closing stock to consider modifications in the value of closing stock in relation to such goods. Even though no details have been furnished, I would like to add that if margin of GP in certain goods is 10 per cent or less than 20 per cent in others it would be more than 41 per cent so as to reflect the overall G.P. rate of the year at 41.3 per cent for the assessment year 1975-76 and 40.84 per cent for the assessment year 1976-77 as reflected in the case of the assessee with reference to cost price. Even if details of goods with lower margin of profit are available, the same will not help the assessee as the same have to be considered with goods with higher margin of profit. I, therefore, do not find any merit in this contention made on behalf of the assessee. With regard to the other contention of the assessee, I would add that the department is not the purchasing agency to purchase the goods at 18 per cent margin of profit. This contention, therefore, also deserves to be rejected. Another point made out is that while valuing the closing stock at market value one has to see that the goods in stock are sold out on that day in lump sum to the willing buyers and none will be willing to buy the entire lot on that day and, therefore, it will affect the market value. I do not see any justification in this contention as well. It is not necessary to sell the entire stock on a single day. Purchasing and selling is a continuing process in the trade. The value on the valuation date has to be determined taking into consideration the market trends on that date or nearabout. In fact a prudent businessman would try to sell goods in piecemeal or in one lump depending upon the favourable market trends. If the market trends on a particular date are not favourable, there is no need to sell the entire lot in one lump. I have already taken similar view in my order in WTA Nos. 664 & 665/JP/80 for the assessment years 1973-74 and 1974-75 in the case of the assessee himself. Calcutta Bench 'A' of the Appellate Tribunal coming at Jaipur also took similar view in the case of WTO v.Sri Chand Golecha [WT Appeal Nos. 667 and 679 (Jp.) of 1980] relating to the assessment years 1972-73 to 1975-76.

6. I have pointed out above that even before us the learned counsel of the assessee failed to furnish the exact details of goods profit which have remained in stock for years together having no market value of the goods on which the margin of gross profit is 10 per cent or less. In the absence of these details also in view of the observations made by me earlier, the value of the closing stock has to be estimated. The WTO has already given reduction of 5 per cent out of the prima facie margin of profit of 41.3 per cent & 40.84 per cent for the assessment years 1975-76 and 1976-77 respectively. I would say that the WTO has been quite fair in allowing this reduction which is quite reasonable. I, therefore, uphold the additions made by the WTO and the order of the AAC on this point is, therefore, reversed.

7. In the result, both the departmental appeals and cross-objections of the assessee are partly allowed.

1. The revenue and the assessee both have filed the appeals and the cross-objections respectively for the assessment years 1975-76 and 1976-77 against the combined order of the AAC. The issues being raised in these appeals and the cross-objections are identical to those that were raised in the case of Shri Sardarmal Dhadda by the revenue and the assessee in their appeals and the cross-objections respectively.

Combined order in the appeal of the revenue and the cross-objections of the assessee in the case of Shri Sardarmal Dhadda has since been passed which fully covers the controversy arising from the instant appeals and the cross-objections of the assessee.

Following the said detailed order, in the case of Shri Sardarmal Dhadda, the appeals of the revenue are dismissed and the cross-objections of the assessee are partly allowed.

1. I have gone through the combined order passed by the learned Judicial Member while disposing of the appeals and the cross-objections in the case of the assessee. He has relied upon his order in the case of IAC v. Sardarmal Dhadda [WT Appeal Nos. 6 and 7 (Jp.) of 1981] relating to the same assessment years. I have passed a separate order in the case of Sardarmal Dhadda (supra) in WTA Nos. 6 and 7 vide my order dated 23-12-1981. Following myabove order in the case of Sardarmal Dadda, the appeals of the revenue and the cross-objections by the assessee are partly allowed.

1. As the Members of the Bench differ in opinion on the following point : Whether, on the facts and in the circumstances of the case, does the gross profit rate taken in the case of the firm, constitute adequate material to come to the conclusion that market value of the closing stock of the firm exceeds the cost price as adopted by the firm by more than 20 per cent and whether merely on that basis, can Rule 2B(2) of the Wealth-tax Rules, 1957 be invoked The same is referred for hearing by a Third Member in view of Section 24(11) of the Wealth-tax Act, 1957, read with Section 255, Sub-sections (4), (5) of the Income-tax Act, 1961.

ORDER 24(11) OF THE WEALTH-TAX ACT, 1957 READ WITH Section 255(4) OF THE INCOME-TAX ACT, 1961 1. This is a common difference of opinion referred to me by the President under the provisions of Section 24(11) of the WT Act, 1957 read with Section 255(4) of the IT Act, 1961. The point of difference of opinion is as under : Whether, on the facts and in the circumstances of the case, does the gross profit rate taken in the case of the firm, constitute adequate material to come to the conclusion that market value of the closing stock of the firm exceeds the cost price as adopted by the firm by more than 20 per cent and whether merely on that basis, can Rule 2B(2) of the Wealth-tax Rules, 1957 be invoked 2. I have had the occasion to dispose of the similar point of difference of opinion in several other cases today This identical point had come up for consideration before the Special Bench of the Tribunal in the case of WTA No. 9 (Delhi)/1984 and before another Bench of the Tribunal in the case of WTA Nos. 62, 60 and 61/JP/1981. In all these cases with which I agree respectfully, the view taken was that a conclusion that the market value of the closing stock of the firm exceeds the book value by 20 per cent cannot be arrived at merely on the basis that the gross profit shown by the trading account was more than 20 per cent. For those reasons which were elaborately discussed in those orders, which I do not find it necessary to reproduce them here and with which I entirely agree, I hold that the view taken by the learned Judicial Member appears to be the correct and justifiable view.

I, therefore, agree with him and hold that that circumstance of a higher gross profit shown by trading account cannot be held to have proved that the market value of the closing stock exceeded the book value by 20 per cent so that the provisions of Rule 2B(2) could be applied. Before I conclude, I would like to mention a fact brought to my notice during the course of hearing of these appeals by the learned Advocate for the assessee, Mr. N.M. Ranka, that huge stocks amounting to Us. 1,65,000 were purchased either one day before the closure of the accounting year or on the last day of the accounting year which formed a large chunk and which were included in the closing stock at cost and in respect of which the market value could not be anything other than the cost at which they were purchased. An article purchased on the last day of the accounting year will not have a market value higher than the cost unless it was shown by positive evidence that the purchase value of that commodity or article was grossly under-valued or under-invoiced. Otherwise, normally the market value of such an article or commodity would be the same as that of the purchase price. This is also an additional reason why the rate of gross profit shown by the trading account cannot be taken as the conclusive proof that the market value of the closing stock would exceed the book value by 20 per cent.

This would again prove how fallacious, unsafe the conclusion of the WTO could be if reliance is to be placed all by itself on the rate of gross profit disclosed by the trading account.

3. The matter will now go before the regular Bench so that the appeal can be disposed of in accordance with the opinion of the majority.

1. These appeals are by the revenue. The only main issue for our consideration in these appeals is whether on the facts and in the, circumstances of the case the Commissioner (Appeals) erred in holding that the WTO was not justified in invoking the provisions of Rule 2B(2). There was a difference between the Members of the Bench. The matter was referred to the President 24(11) of the WT Act read with Section 255(4) of the IT Act, 1961. The Hon'ble President as Third Member has agreed with the view taken by the Judicial Member. The majority view expressed is that Rule 2B(2) cannot be invoked on the facts and in the circumstances of the case. Following the majority view, we confirm the view taken by the CWT(A). Since there is no difference of opinion with regard to Section 5(1)(xxxii), the view taken by the CWT(A) is confirmed.