Wealth-tax Officer Vs. Gopichand Premchand - Court Judgment

Excerpt:
1. this is an appeal by the revenue arising out of the order of the aac. it relates to the asst. year 1977-78. the brief facts stated are that the assessee is a partner in the firm m/s gems trading corpn. with 22 per cent share in its profit. the said firm deals in precious stones and in mal khata a/c the assessee-firm declared gross profit of rs. 1,49,777 on sales of rs. 5,54,548 in the head office at jaipur giving gross profit rate of 27 per cent. in the mal khata a/c of bombay branch, the firm has declared its sales of rs. 4,67,398 on which gross profit of rs. 1,26,103 had been declared which comes approximately to 23 per cent. the wto has observed that from the record it appeared that the firm in which the assessee was a partner was valuing its closing stock at cost. the declaration.....

Judgment:
1. This is an appeal by the revenue arising out of the order of the AAC. It relates to the asst. year 1977-78. The brief facts stated are that the assessee is a partner in the firm M/s Gems Trading Corpn. with 22 per cent share in its profit. The said firm deals in precious stones and in Mal Khata A/c the assessee-firm declared gross profit of Rs. 1,49,777 on sales of Rs. 5,54,548 in the Head Office at Jaipur giving gross profit rate of 27 per cent. In the Mal Khata A/c of Bombay branch, the firm has declared its sales of Rs. 4,67,398 on which gross profit of Rs. 1,26,103 had been declared which comes approximately to 23 per cent. The WTO has observed that from the record it appeared that the firm in which the assessee was a partner was valuing its closing stock at cost. The declaration of g.p. rate at 27 per cent in the head office and 23 per cent in its branch meant that if the cost of its closing stock at the head office was Rs. 73, its market value was 100 on an average, similarly if the stock of closing stock of Bombay branch was Rs. 77, its market value was 100. Thus, the market value of the closing stock of Head Office which has been shown at Rs. 3,55,608 came to Rs. 4,87,000 in round figures and the market, value of the closing stock of Bombay branch which has been shown at Rs. 6,42.075 came to Rs. 8,80,000. The WTO thus worked out market value of the closing stock of the firm in which the assessee was a partner at Rs. 13,67,000 against the value disclosed at Rs. 9,97,683. The difference between the book value of the closing stock shown by the assessee and its market value as worked out by the WTO came to Rs. 3,69,400 and the assessee's share therein was worked out by the WTO at Rs. 81,200. The WTO has observed that the assessee has not shown the value of his interest in the firm of M/s Gems Trading Corpn. in accordance with the provisions of Rule 2B(2) of the Wealth-tax Rules, 1957 The WTO, therefore issued a show-cause notice to the assessee as to why the interest in the firm should not be valued under Rule 2B(2). The assessee took legal objections stating that Rule 2B(2) was not applicable for determining the value of assets of business as a whole. Secondly, the firm M/s Gems Trading Corpn. in which the assessee was a partner was engaged in the manufacture and processing of the goods and as such the value of the interest of the assessee in the assets of the firm could not be included in the wealth of the assessee. It was also argued that the difference between the market value and the book value was not more than 20 per cent, inasmuch as continued processing and grouping was involved and the rise in prices was not due to rise in the market prices as a result of special circumstances. The AAC did not accept the above contention and held that Rule 2B(2) of the Wealth. Tax Rules was applicable. He also held that in view of the g.p. rate of more than 20 per cent when the closing stock was valued at cost price, the difference in the market value and cost price was more than 20 per cent. He, therefore, included the difference of Rs. 81,200 worked out by him as discussed above in the net wealth of the assessee. The assessee preferred an appeal before the AAC. The AAC deleted the addition following his earlier order dated 1-5-1980 in appeal Nos.

1/79-80 and 4/79-80 in the case of another partner of the same firm, namely, Shri Bhanwar Singh Kothari relating to the asst. year 1976-77.

The revenue is aggrieved against the above finding of the AAC.It has been argued before us on behalf of the revenue that it has been held by more than one Bench of the Tribunal functioning at Jaipur that provisions of Rule 2B(2) of the Wealth-tax Rules are available for valuing the interest of the partner in a firm. Regarding the actual valuation of the closing stock the 1d. deptl. representative has submitted that the difference in the value taken for the purpose of income-tax assessments at cost price and the market price was more than 20 per cent in view of the g.p. rate shown by the assessee. He also submitted that the 1d. AAC had not actually done the valuation taking into consideration the actual inventory of the closing stock and the type of material included therein. According to him, prirna facie, the g.p. rate was the indicator of the market value and, therefore, the order of the 1d. AAC was liable to be struck down. The learned counsel for the assessee on the other hand has supported the order of the AAC and has further relied on the order of the AAC for the assessment year 1976-77 in the case of Shri Bhanwar Singh Kothari, another partner of the same firm.

2. We have given a careful consideration to the rival submissions. The order of the AAC in the case of Shri Bhanwar Singh Kothari relating to the asst. year 1976-77 which has been relied upon by the AAC for the asst. year under appeal came up for consideration before the Calcutta Bench 'A' of the Apellate Tribunal (Camp at Jaipur) and vide its order dt. 25-7-1981 in WTA Nos. 453 and 454/Jp./80 it has restored the issue of actual valuation of the closing stock to the file of the AAC to find out whether there is difference of 20 per cent as envisaged in Rule 2B(2) as the decision of the AAC was based on generalisation and not on specific assets included in the closing stock. Following the reasoning in the decision of the Calcutta Bench 'A' which covers both the issues raised, i.e, whether Rule 2B(2) will be applicable for valuing the interest of a partner in the firm as also on actual value of the closing stock, we restore the issue regarding finding of the actual value of the closing stock to the file of AAC as directed in the case of Bhanwar Singh Kothari in the order of the Tribunal referred to supra. The directions of the Tribunal with reference to the valuation of the closing stock are recorded in para 7 of its order which is reproduced below : As a result of discussion we hold that Rule 2B(2) is available for valuing the interest of a partner in the firm. As to the actual market value of the closing stock so as to invoke the provisions of Rule 2B(2), we restore the issue to the file of the AAC in the light of the directions in the case of Shri B.S. Kothari as reproduced above.

3. In the result, the appeal is allowed though for statistical purposes.

1. As in my opinion the appeal of the revenue deserves to be dismissed I write my separate order : I have carefully gone through the order of my 1d. brother. The dispute relates to the valuation of the interest of the assessee in the firm M/s Gems Trading Corpn. The assessee was a partner in the said firm having 22 per cent share. The firm deals in precious stones and in Mal Khata A/c of the head office the firm showed a g.p. rate of 27 per cent and in the Mal Khata A/c of Bombay branch at 23 per cent. The case of the assessee was that the firm valued its closing stock at cost. Prom the g.p. rate shown by the firm the ITO assumed as if the cost of the closing stock in the head office and branch office was say Ra. 73 and Rs. 77 respectively as against the market value of Rs. 100 each. This is why he took the view that the market value exceeds the cost price as adopted by the firm by more than 20 per cent and, therefore, the closing stock should have been valued by the firm at market value in view of Rule 2B(2) of the Wealth-tax Rules, 1957 (for short the Rules 1957). He accordingly valued the closing stock at market value. The difference in the value as given by the firm and the one estimated by the WTO came to Rs. 3,69,400 in which the assessee's share was worked out at Rs. 81,200. The grievance of the assessee is that there was no material with the WTO to invoke Rule 2B(2) of the Act. Also a legal objection was taken that Rule 2B(2) could not be invoked while finding out the interest of a partner in the firm. On appeal, the AAO followed his earlier order and delated the addition.

2. Aggrieved, the revenue came up in appeal to the Tribunal. So, the question for consideration in this case is whether on the basis of the g.p. rates as shown by the firm in the Mal Khata A/o of the Head Office and branch office was the WTO justified in coming to the conclusion that the market value of the closing stock exceeded the value as adopted by the firm by more than 20 per cent. The submission of Shri Mathur, the 1d. counsel for the assessee is that g.p. rate shown by the firm cannot constitute a good guideline to determine the market value and that if the g.p. rate is more than 20 per cent that does not necessarily mean that the market value of the closing stock on the valuation date exceeded the value as adopted by the firm by more than 20 per cent. He says that the WTO invoked Rule 2B(2) simply on the surmises, conjectures and wholly inadequate material. Why the g.p.

cannot constitute a good guideline for determining the market value as on the valuation date. Shri Mathur made the same submissions at the time of hearing that were made in the case of Smt. Lad Kanwar Dkadha [WT Appeal Nos. 756 and 757 (Jp.) of 1980] assessment year 1975-76 by the assessee's counsel. The said case was decided by Jaipur Bench to which I was a party by order dated 23-8-1981 and then the view was taken that simply on the basis of g.p. rates the WTO could not say that the market value of the closing stock exceeded the value as adopted by the firm by more than 20 per cent. Without considering the legal objection whether Rule 2B(2) can be invoked or not, the Jaipur Bench on facts only gave the decision against the revenue that there was no adequate material on the basis of which Rule 2B(2) could be invoked by the revenue. Following the said detailed order dated 23-7-1981, I dismiss the appeal of the revenue.

1. As there is difference of opinion between tha Members, a reference is being made to the Hon'ble President, Income-tax Appellate Tribunal, Bombay for further reference to the Third Member. The issue involved is regarding the application of Rule 2B(2) of the WT Rules in valuing the closing stock of the firm Gems Trading Corpn. for the purpose of valuing the interest of the assessee in the said firm as the assessee is having 22 per cent share therein. The closing stock of the firm has been valued at cost while making the assessment under the Income-tax Act, the G.P. rate disclosed in the firm is 27 per cent. Difference in terms of Rule 2B(2) is at 37 per cent. This difference prima facie reveals that provisions of Rule 2B(2) are applicable and, thereafter the onus is upon the assessee to prove that the apparent is not real by leading positive evidence in support thereof and not by mere hypothetical statement. We shall therefore, refer the following issues to the Hon'ble President, Income-tax Appellate Tribunal, Bombay for being referred to the Hon'ble Third Member : 1. Whether, on the facts and in the circumstances of the case, the GP rate in the case of the firm with reference to cost price at 37 per cent for the assessment year 1977-78 will not prima facie show that the difference"as provided under Rule 2B(2) of the WT Rules is more than 20 per cent and the WTO has discharged the initial burden cast upon him 2. If the answer to question No. 1 is in the affirmative, whether the burden shifts to the assessee to prove that the prima facie difference of 37 per cent is not real by leading positive evidence particularly when he is in possession of evidence like vouchers, books of account, inventory of closing stock, etc. and not by hypothetical general statements 3. Whether any evidence has been adduced by the assessee to discharge the above burden 4. Whether the market value of the closing stock has to be found as a fact and whether any value has been fixed by the CWT (Appeals). If not, whether the issue regarding actual market value of the closing stock should be restored to the file of the CWT (Appeals) for fresh determination 1. I have carefully perused the questions framed by my learned brother (Accountant Member) for decision by the Third Member. In my opinion, the question that arises is as follows : Whether, on the facts and circumstances of the case, the GP rate taken in the case of the assessee constitutes adequate material to come to the conclusion that market value of the closing stock of the assessee exceeds the value as adopted by the assessee by more than 20 per cent within the meaning of Rule 2B(2) of the Wealth-tax Rules, 1957 and to invoke the provisions of Rule 2B(2) of the WT Rules, 1957 ORDER UNDER Section 24(11) OP THE WEALTH-TAX ACT, 1957 READ WITH Section 255(4) OF THE INCOME-TAX ACT, 1961 1. In this case the learned Members who heard this appeal could not agree on the conclusion to be reached. The point involved in this case is whether only on the ground that the rate of gross profit shown by the trading account was more than 20 per cent to measure referred to in Rule 2B(2) of the WT Rules, could it be concluded that the market value of the closing stock was more by 20 per cent than the book value so as to treat that value as the market value for the purpose of wealth-tax.

The learned Accountant Member has framed as many as four questions as his points of view, whereas the learned Judicial Member has framed only one question as his point of view. The questions framed by the learned Accountant Member and Judicial Member are reproduced below : 1. Whether, on the facts and in the circumstances of the case, the GP rate in the case of the firm with reference to cost price at 37 per cent for the assessment year 1977-78 will not prima facie show that the difference as provided under Rule 2B(2) of the WT Rules is more than 20 per cent and the WTO has discharged the initial burden cast upon him 2. If the answer to question No. 1 is in the affirmative, whether the burden shifts to the assessee to prove that the prima facie difference of 37 per cent is not real by leading positive evidence particularly when he is in possession of evidence like vouchers, books of account, inventory of closing stock, etc. and not by hypothetical general statement 3. Whether any evidence has been adduced by the assessee to discharge the above burden 4. Whether the market value of the closing dtock has to be found as a fact and whether any value has been fixed by the CWT (Appeals), if not whether the issue regarding actual market value of the closing stock should be restored to the file of the CWT (Appeals) for fresh determination 1. Whether, on the facts and in circumstances of the case, the GP rate taken in the case of the assessee constitutes adequate material to come to the conclusion that market value of the closing stock of the assessee exceeds the value as adopted by the assessee by more than 20 per cent within the meaning of Rule 2B(2) of the Wealth-tax rules, 1957 and to invoke the provisions of Rule 2B(2) of the WT Rules, 1957 2. I have heard the case at length and my task is made much easier by the decision of the Special Bench in the case of WTA No. 9 (Delhi)/1984 where the Special Bench after considering the elaborate arguments addressed to it and after carefully considering all the relevant aspects of the case came to the conclusion that the solitary fact that higher rate of gross profit was shown by the trading account would not by itself be taken to be conclusive proof of the fact, that the market value of the closing stock shown in the trading account would be more than the book value by 20 percent in order that Rule 2B(2) could be invoked. This is also the view taken by another Bench of the ITAT in WTA Nos. 62, 60 & 61/JP/1981 where on a difference of opinion between the Members, the Third Member came to the same view as that of the Special Bench referred to above. This also is the view taken by the several other Benches of the Tribunal. There, thus, appears to be unanimous view that mere fact that the trading account showed higher rate of profit (more than 20 per cent) could not by itself conclusively show that the market value of the closing stock shown in the books is more by 20 per cent than the book value. I lay emphasis on the measure of 20 per cent referred to in Rule 2B(2) of the WT Rules. It is that measure of 20 percent that gives the jurisdiction to the WTO to invoke Rule 2B(2). For a variety of reasons which have been very elaborately discussed in all those orders, it is well nigh impossible to say that the market value of the closing stock would be more by the measure of 20 per cent. I, therefore, following respectfully the views expressed by the Special Bench and other Benches refer-ed to above, agree with the view expressed by the learned Judicial Member.

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. This is an appeal by the revenue. The only main issue raised for our consideration in this appeal 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 under Section 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 CIT(A).