1. These appeals have been filed by the revenue and relate to the assessment years 1969-70 to 1975-76. They arise out of reassessments made in the wealth-tax proceedings. Along with this group of appeals, we had also heard the following appeals and cross-objections:Name of assessee WTA Nos.
CO Nos. AssessmentyearsA. Premkumar Reddy (HUF) 16 to 22/83 -- 1969-70 to1975-76A.V. Reddy (Indl.) 23 to 29/83 -- 1969-70 to1975-76A.V. Reddy (HUF-I) 30 to 35/83 -- 1970-71 to1975-76A.V. Reddy (HUF-II) 36/83 -- 1971-72A.V. Reddy Trust forA.V. Seshakumar Reddy 37 to 43/83 -- 1969-70 to1975-76A. Vijayakumar Reddy 44 to 50/83 42 to 48/83 1969-70 to1975-76A.V. Sivakumar Reddy 51 to 57/83 49 to 55/83 1969-70 to1975-76A. Premkumar Reddy (Indl.) 58 to 64/83 56, 57, 58, 1969-70 to59, 61 and 1975-76Smt. A. Saraswathy 65 to 71/83 62, 64 to 1969-70 to69/83 1975-76 In WT Appeal Nos. 16 to 43 (Hyd.) of 1983 also, cross-objections had been filed numbered as CO Nos. 70 to 97 (Hyd.) of 1983, but these cross-objections were barred by limitation and as the delay was not condoned, they were dismissed in limine.
2. As it was agreed before us by both parties that the issues involved were common to all the appeals and the cross-objections, we proceed to consider in this case, which is taken as illustrative, the facts as well as the contentions of the parties before us and we would render our decision in these appeals which would be equally applicable to all other appeals also. As far as our decision on the cross-objections is concerned, inasmuch as the cross-objections in the present case have been dismissed in limine as barred by limitation, we would render our formal decision in that regard while passing consequential orders in each case where there are cross-objections.
3. For each of the assessment years under consideration, the assessee, who held shares in a private limited company called India Fruits Private Limited, Kadiam, had returned the value of the shares with reference to the relevant balance sheet of the aforesaid company computed in accordance with the provisions of Rule 1D of the Wealth-tax Rules, 1957 ('the Rules'). The WTO accepted such values as returned and completed the assessments. The number of shares in the company and the value taken for each share was as under; for the sake of completeness, we give also the value per share taken in reassessment:Assessment year No. of shares Value per share Value taken on reassessment1969-70 380 22,853 24,4701970-71 446 20,364 24,2291971-72 5,200 1,963 2,3831972-73 5.350 2,071 2,5111973-74 5,450 2,167 2,5031974-75 5,450 2,042 2,6681975-76 5,450 1,877 2,742 The WTO later came to know that the company of which the assessee held shares had made a disclosure under the Voluntary Disclosure of Income and Wealth Act, 1976. The letter of the company dated 24-11-1975, addressed to the Commissioner of Income-tax enclosing the form of disclosure reads as under: We beg to enclose herewith Voluntary Disclosure in Form 'A' regarding-the stock of 229 metric tonnes of aluminium wire rod which has accumul lated with us until October 1970, owing to the system of materia accounting pursued until then for aluminium consumed in the manufacture of conductors. This system was changed in October 1970 to stop further accumulations. We are declaring the stocks at a valuation of Rs. 7,500 per metric tonne.
There is also remaining with us a stock of aluminium scrap wire pieces to the extent of 17,362 metric tonnes and making an allowance of 5 per cent towards weight of grease, dirt, etc., the scrap weight can be taken as 16,500 metric tonnes. This scrap accumulation can be taken as from 1970-71 and its value at Rs. 5 per kg. is Rs. 82,500.
The total value of the declaration is, thus, Rs. 18,00,000. It requires a payment of Rs. 10,80,000 towards tax and Rs. 90,000 towards deposit. Since the stocks have to be converted into cash before they will be available to us in that form and since we are very much hard pressed for funds due to severe credit restrictions and high prices of raw materials all-round, we request you to please grant us time for payment until 15-3-1976 to pay these amounts. We have paid by challan a sum of Rs. 80,000 into the State Bank of India, Innespeta Branch, towards tax leaving a balance of Rs. 10,00,000 to be paid before 15-3-1976.
A bank guarantee dated 21-11-1975 issued by the State Bank of India, Rajahmundry, in favour of the President of India through you, for a sum of Rs. 5,00,000, representing 50 per cent of the tax still to be paid, is enclosed herewith. For the balance of Rs. 5 lakhs, we offer you a surety, the same aluminium stocks on which we are paying these taxes and also personal guarantees of our managing director and one of the directors, namely, Smt. A. Saraswathi for this purpose.
A detailed analysis of the amount of Rs. 18,00,000 was also furnished by the company and such analysis forms Annexure A to this order.
4. The office had recorded a note in wealth-tax proceedings about the disclosure made and with reference to such note (extract from the order sheets in the case of Shri A.V. Reddy, individual, for the assessment year 1969-70), the WTO gave his assent for initiation of proceedings under Section 17 of the Wealth-tax Act, 1957 ('the Act'), as under: The company of which the assessee is a shareholder made a declaration under voluntary disclosure scheme. They disclosed some stocks on each valuation date. The stock disclosed under voluntary disclosure schemes on each valuation date is as under:Value of stock disclosed The total disclosure made is Rs. 17,97,000. The above stocks on each valuation was not taken into account while valuing the shares. After taking this valuation of closing stock on each valuation into consideration, the value of the share will be more. As the assessee's wealth is under-assessed, the assessments from 1969-70 to 1975-76 may be reopened. Put up.
In due course, returns were filed in compliance with the aforesaid notice and the assessee contended before the WTO, firstly, that no revaluation of shares was possible consequent to any disclosure made by the company under the voluntary disclosure scheme in terms of Section 13 of the Voluntary Disclosure of Income and Wealth Act, because there was exemption from wealth-tax in respect of assets specified in the declaration and secondly, that once the audited balance sheet and profit and loss account was adopted by the general body, it could not be interfered with in any manner and the proposed revaluation would amount to altering the balance sheet of the company which was not intended by Rule 1D and finally, it was contended that the proposal of the WTO to reduce the amount of provision for taxation on the liabilities side of the balance sheet of the company by the advance tax paid could not also be done as this was a matter considered and decided in the original assessment. All these contentions of the assessee were negatived and the WTO made reassessment again with reference to the balance sheet figures, but making one addition, viz., the income disclosed under the voluntary disclosure scheme less the amount of income-tax payable to value of assets. Advance tax paid was also deducted in each year from the provision for taxation as also excluded from the assets side. Thus, for the assessment year 1969-70, the addition on account of income disclosed under the voluntary disclosure scheme was Rs. 14,15,750 and income-tax payable excluded was Rs. 8,49,450, giving a net addition of Rs. 5,66,300. This was the starting figure for the next year and the value of stock for that year less tax attributable thereto was added to the net assets as per the balance sheet of such year. The procedure was repeated for the succeeding years. By this process, the value per share went up to the figures in each year of which we have given particulars earlier.
5. The assessee appealed to the Commissioner (Appeals) and challenged the validity of the reopening. There was challenge also on the point that from the figures of provision for taxation, advance tax paid should not be deducted. The Commissioner of Wealth-tax (Appeals) has made a mention in his appellate order that the occasion to reopen the assessments arose when the audit party of the Income-tax Department brought to the notice of the WTO certain alleged discrepancies in the values adopted for the shares in the original assessments. We have set out the reasons recorded by the WTO and there is nothing in the reasons to link any information given by the audit party with the reopening.
The Commissioner of Wealth-tax (Appeals) thereafter adverted briefly to the facts which we have set out in some detail, and proceeded to consider the objection of the assessee against the validity of the reopening. The Commissioner stated that action under Section 17(1)(a) could be taken for reopening an assessment only if the WTO had reason to believe that the net wealth had escaped assessment by reason of omission or failure on the part of the assessee to file a return or to disclose fully and truly all material facts necessary for the assessment of the net wealth. He stated that the valuation of the shares was originally done in accordance with the provisions of Rule 1D and that when the computation of the value of shares was made, the assessee was not aware that the company was in possession of unaccounted stocks which would ultimately be declared under the voluntary disclosure scheme. According to the Commissioner, the assessee could not be expected to anticipate future events and the assessee was required to file a copy of the balance sheet which he did.
Therefore, the Commissioner held that the assessee had disclosed all relevant materials when the original assessments were completed and there was no omission or failure on the part of the assessee to disclose material facts when the returns were filed.
6. The Commissioner further held that the assessee had deposed information with, the WTO on the basis of which the assessments were reopened and it was not such as to lead to a conclusion that the net wealth had been under-assessed. Under the provisions of Rule 1D, the value of unquoted shares had to be determined in the manner prescribed.
It was to be with reference to the assets and liabilities as reflected in the balance sheet. The Commissioner, hence, took the view that the WTO could adopt only the value of the assets of the company as shown in the balance sheet and even if there were any omissions in the balance sheet, to record any assets, the value of the shares in the hands of a shareholder would not automatically stand enhanced.
7. The Commissioner also considered that there was some force in the contention of the assessee that in view of the provisions of Section 13 of the VD Act a further enhancement in the value of shares based on the declaration by the company would not be permissible. The Commissioner, therefore, gave a categoric finding that the valuation of shares was correctly done in terms of Rule 1D in the original assessments by including only the assets declared in the balance sheet as on the relevant valuation dates. He further held that the WTO was not competent to reopen the assessments, because the information in his possession was not such as to enable him to believe that the value of shares had been under-assessed and further, there was no omission or failure on the part of the assessee to disclose material facts at the time the original assessments were completed. He, therefore, cancelled the reassessments for all the years under consideration. The Commissioner refrained from giving any finding on the point regarding deduction from the provision for taxation on the liabilities side of the advance tax paid, which was exhibited on the assets side of the balance sheet by the company but which was excluded from the assets side in terms of the Rules for arriving at the break-up value of the shares.
8. The revenue is aggrieved with the findings of the Commissioner cancelling the reassessments. The contention of the learned departmental representative is that the WTO was competent to reopen the assessments and the Commissioner erred in cancelling the reopening.
Wherever cross-objections were filed, the contention put forth is that the exclusion of the amount of advance tax from the provision for taxation appearing on the liabilities side was not permissible under the Rules.
9. Taking up the revenue's appeals first, the stand of the learned departmental representative was that the WTO had noticed that the balance sheet of the company did not exhibit the value of the disclosed stocks and, therefore, the assets as disclosed in the balance sheet called for an enhancement. He made a reference to the decision of the Supreme Court in CWT v. Aluminium Corporation of India Ltd.  78 ITR 483 to state that values, as shown in the balance sheet, could be adjusted where the WTO considered that balance sheet values called for adjustments. He, of course, very fairly pointed out that that was a case where determination of the net wealth of the company itself was concerned, but according to him the ratio was equally applicable where the break-up value of shares was to be computed.
9.1. The next case on which reliance was placed by the learned departmental representative was the decision of the Bombay High Court in CWT v. Gammon India (P.) Ltd.  130 ITR 471. He stated that the Bombay High Court had referred to a circular of the Board on the point of global valuation and the Court had held that even where a global valuation was adopted, if certain assets were undervalued in the balance sheet, revaluation was permissible. According to the learned departmental representative, even if Rule 1D prescribed the method of valuation of shares with reference to the balance sheet of the company, it did not prohibit revaluation of particular assets if circumstances merited it, and he went on to submit that just as a circular of the Board was binding on the WTO, the rule was also binding on the WTO and if when applying the circular some modifications could be made where circumstances merited, in applying the rule also modifications could be made if circumstances necessitated the same.
9.2. Another decision which was pressed into service on behalf of the revenue was that in CWT v. Pachigolla Narasimha Rao  134 ITR 640 (AP). It was submitted that if when making a global valuation, the value of assets which were not disclosed in the balance sheet could be included and, therefore, in the present case also, the value could be included.
9.3. The decision of the Tribunal in WTO v. Mrs. Grace Col/is  1 ITD 72 (Coch.) was next adverted to and it was submitted that there were observations of the Tribunal at page 77 which showed that in appropriate circumstances, the balance sheet values could be discarded in computing the value of the shares under Rule 1D. This is because, according to the learned departmental representative, the principle that was recognised, viz., adjustments were permissible in computing the value of assets in the balance sheet of the company, would be equally applicable in the case of valuation of shares of the shareholder.
9.4. The learned departmental representative also submitted that though there were decisions of certain High Courts holding that the provisions of Rule 1D were mandatory in evaluating shares such as the decision of the Allahabad High Court in the case of CWT v. Sripat Singhania  112 ITR 363, which was followed in CWT v. Padampat Singhania  117 ITR 443 (AP), as also the decision of the Kerala High Court in CWTv.Mamman Varghese, yet there was the decision of the Bombay High Court in Smt. Kusumben D. Mahadevia v. CWT  124 ITR 799, where the Bombay High Court held that the provisions of Rule 1D were only directory and not mandatory.
9.5. In the light of this state of the law, the learned departmental representative submitted that the WTO had reason to believe that by non-disclosure of the value of certain stocks in the balance sheet of the company, and failure on the part of the assessee in the present case, who was the managing director, and the assessee in some other cases, who were directors, from adverting to the same while filing their individual returns of wealth, there was omission or failure on their part to disclose fully and truly all material facts consequent to which wealth had escaped assessment. The submission of the learned departmental representative was that as long as there were some reasons to believe that there was such a failure on the part of the assessee and consequent escapement of wealth due thereto, the adequacy of the reasons could not be gone into by the Tribunal. He stated that under the Act, it was not necessary for the WTO to record reasons before reopening the assessments and if the totality of the circumstances was viewed and regard was also had to the reasons mentioned in the order sheet to which we have referred, it was clear that the initiation of proceedings under Section 147 of the Income-tax Act, 1961 ('the 1961 Act') was in order. He went on to emphasize that while 'failure' connoted an obligation which was not carried out, and if there was no obligation to state a fact, there would not be a failure on the part of the party;'omission' was a colourless word which merely referred to the 'not doing' of something, and if some fact was not stated, even if there was no failure, there could still be an omission and as long as there was escapement from taxation of wealth consequent to such omission, the provisions of Section 17 would be attracted. For the distinction between the concepts of 'failure' and 'omission' reliance was placed on the decision of the Bombay High Court in Pannalal Nandlal Bhandari v. CIT  30 ITR 57. The learned departmental representative also stated that the Commissioner was in error in considering that there was force in the contention that the provisions of Section 13 gave immunity to the assessee-shareholder. The immunity, he stated, was only to the declarant and none other.
9.6 For all the aforesaid reasons, he submitted that the Commissioner was in error in coming to the conclusion that the provisions of Section 17(1) were not attracted.
9.7 In particular, the learned departmental representative stated that Shri A.V. Reddy was the managing director and he signed the returns in all cases except in the case of A. Premkumar Reddy and Smt. A.Saraswathy. Smt. A. Saraswathy was also a director and Shri A.V. Reddy and Smt. A. Saraswathy should be presumed to have direct knowledge, or at least constructive knowledge of the value of stock not being accounted for by the company and, hence, there was both failure and omission to disclose fully and truly all material facts.
10. The learned Counsel for the assessee stated that the assessees no doubt held equity shares in the company. The company in which the assessees held shares took advantage of the disclosure scheme and they had made a disclosure of income. The company had also pointed out that the excess stock arose with the company because of the method adopted from year to year, viz., finding out the quantity of material consumed based on measurement of conductor wire manufactured. The quantity of the material consumed was not ascertained with reference to actual weighment and it was only because of the method adopted that there was some stock quantitywise which was not expressly exhibited in the balance sheet. When the voluntary disclosure scheme was announced, the company felt it would be more appropriate to show the excess weight of stock which had accumulated from year to year at the appropriate value and this was done and, according to him, there was no concealment at any earlier stage, nor had any false balance sheet been prepared. He stated that the value shown of stock was not, therefore, an item which would have rendered the balance sheet in any manner untrue. Therefore, he stated that there was no duty cast on the assessee to disclose the value of any stocks not shown explicitly in the balance sheet of the company, and apart from it, he also stated that there was no specific value known as on each of the valuation dates and a decision was taken to ascertain the weight and show the value only when the disclosure scheme came into force. The balance sheets as prepared, he stated, were correct at the material time. He also went on to contend alternatively that a shareholder could not have known the existence of the stock till the company made the disclosure and the fact that some of the shareholders were also directors should not make any difference. He stated as an alternative contention that all information which a director knew need not be disclosed in his capacity as a shareholder.
What had to be seen was whether an information the assessee knew as a shareholder, was disclosed. If this was done, he stated the proceedings under Section 17 could not be invoked.
11. We have considered the rival submissions. It is true that the Act does not contain a specific requirement as in the 1961 Act, that the WTO should record reasons setting, out his belief before initiating action for reopening an assessment. But, nevertheless, both the 1957 Act and the 1961 Act require that there should be reasons to believe.
'Therefore, the criteria for considering whether initiation of proceedings is valid or not are the same under both the Acts save for the fact that there was no requirement that there should be formal recording of reasons under the Act. The Supreme Court in the case of Ganga Saran & Sons (P.) Ltd. v. ITO  130 ITR 1 has observed as under: It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under Section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the ITO would be without jurisdiction. The important words under Section 147(a) are 'has reason to believe' and these words are stronger than the words 'is satisfied'. The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the ITO in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under Section 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the ITO could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid.
The conditions required are that the WTO must have reason to believe that wealth has escaped assessment and secondly, the WTO must have reason to believe that such escapement is by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts. Both these conditions have to be satisfied or, in other words, if either of these conditions is not satisfied, the notice issued by the WTO would be without jurisdiction.
12. We have first to determine in the present case whether the WTO could have reason to believe that wealth had escaped assessment. The WTO in the present case had, in making the original assessments, proceeded with reference to the provisions of Section 7(1) the relevant portion of which reads as under: Subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date.
The evaluation was made in terms of Rule 1D. This rule stated that the market value of an unquoted equity share of company would be arrived at by deducting the value of all liabilities from the value of all assets as shown in the balance sheet and dividing the difference by the number of shares and taking 85 per cent thereof as the market value. If dividends had not been declared in earlier years, a further deduction was to be given. There is Explanation 2 under Rule 1D which provides that certain amounts shown as assets in the balance sheet are not to be treated as assets and certain amounts shown as liabilities in the balance sheet are not to be treated as liabilities. The assessee had, in filing the original returns, computed the value of the shares in question strictly in accordance with the provisions of Rule 1D based on the relevant balance sheet of the company and the WTO adopted such figures. The provisions of Section 7, no doubt, do not override the provisions of the charging section, i.e., Section 3, which prescribes that the net wealth is to be determined, and 'net wealth' as defined in Section 2(m) of the Act as the aggregate value computed in accordance with the provisions of the Act of all assets as exceeds the aggregate value of all debts owed by an assessee. Therefore, we have to see what other provisions of the Act could have a bearing in determining the value of the shares.
13. In the case before us, there is no dispute that the provisions of Section 7(2) are not applicable. The Andhra Pradesh High Court, in the case relied on by the learned departmental representative in Pachigolla Narasimha Rao's case (supra), had observed as under: A perusal of the language of Section 7(1) as contrasted with the language of Section 7(2) of the Act shows that the Act provides primarily for the method of individual valuation of each asset.
Section 7(2) of the Act provides only an alternative method of estimating the value. But this is discretionary with the WTO and he can choose to adopt that method subject to two conditions, one of which is that the assessee should be having only business assets requiring valuation and the other is that the assessee should have been maintaining a balance sheet ....
Therefore, this not being a case where there are only business assets, Section 7(1) was applicable. However, under the provisions of Section 7(3), read with Section 16A of the Act, the WTO can refer the valuation of any asset to a Valuation Officer under certain conditions. One such condition is where an asset was valued by a registered valuer, which is not the case here, and other conditions are: (i) that the fair market value of the asset exceeds the value of the asset as returned by more than such percentage of the value of the asset as returned or by more than such amount as may be prescribed in this behalf; or (ii) that having regard to the nature of the asset and other relevant circumstances, it is necessary so to do.
It is again an admitted fact that even after the recomputation made by the WTO, the value of the share did not exceed the prescribed amount or the prescribed percentage (which have been set out in rule 3B of the Rules), in any of the years excepting in the last year where it exceeded marginally. The only other case in which a reference could have been made would have been where, having regard to the nature of the asset and other relevant circumstances, it was necessary to do so.
We have the reasons which weighed with the WTO when he initiated the proceedings. He did not consider that a reference to the Valuation Officer was called for. He did not entertain, therefore, any such belief nor is there any material to show that having regard to the nature of the asset or other relevant circumstances, there could have been any belief that it was necessary to refer the matter to the Valuation Officer. The Valuation Officer would not perhaps have been bound by the Rules relating to the valuation of an asset. But, since there was no belief by the WTO that the matter would have to be referred to the Valuation Officer, the question that arises is whether, at the stage of initiation of proceedings, the requirement that the WTO could have had reason to believe that wealth had escaped assessment was satisfied. Under the provisions of Section 7(1), which was the provision under which he proceeded both initially and later, a valuation had to be made 'subject to rules'. The operative part of Rule 1D stated as under: The market value of an unquoted equity share of any company, other than an investment company or a managing agency company, shall be determined as follows: The value of all the liabilities as shown in the balance sheet of such company shall be deducted from the value of all its assets shown in that balance sheet. The net amount so arrived at shall be divided by the total amount, of its paid-up equity share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up value of each equity share shall be the break-up value of each unquoted equity share. The market value of each such share shall be 85 per cent of the break-up value so determined: It is settled law that an authority administering the Act is bound by the terms of the Rules.
14. The learned departmental representative attempted to draw an analogy from certain observations of the Bombay High Court in Gammon India (P.) Ltd.'s case (supra), where according to him, the Court had held that in making a global valuation, adjustments could be made in the balance sheet. In that judgment, the Court had clearly pointed out that the circular contained only a direction requiring the WTO to 'ordinarily apply the global valuation'. This clearly showed that any adjustment which was necessary could be made. We may further point out that the Court in that case had specifically stated that if a circular of the Board was relied upon for the first time even in the High Court in the course of hearing of a reference under the 1961 Act, it must be given effect to because circulars issued by the CBDT were binding on the ITOs. Thus, if anything, the ratio of the judgment is that a circular would be binding on the ITO and he had to operate within the ambit of the same. Much more so the provisions of a rule are binding on the WTO. In the present case, there is no saving clause like a rule being 'ordinarily applicable' nor even does the rule have any preface such as 'having regard to the balance sheet of such business...', which is the term which has received judicial interpretation which would show that the balance sheet is to be taken into consideration but that the same is not conclusive or binding or decisive of the value of assets appearing therein (as observed by the Supreme Court in deciding the appeal from the decision of the Allahabad High Court in Juggilal Kamlapat Bankers v. WTO  116 ITR 646--See Juggi Lal Kamlapat Bankers v. WTO  16 Taxman 1 (SC). Rule 1D states in terms that the difference between the value of assets 'as shown in the balance sheet' and the liabilities 'as shown in the balance sheet' is to be determined in the first instance. The computation is not one to be made 'with regard' to such figures. Therefore, the judgment of the Bombay High Court does not help the revenue.
15. The learned departmental representative also stated that while there were decisions of several High Courts holding that the provisions of Rule 1D are mandatory, there was the judgment of the Bombay High Court which stated that the rule was not mandatory. This decision is that of Smt. Kusumben D. Mahadevia's case (supra). Since there was no judgment of the Andhra Pradesh High Court, we would agree with the learned departmental representative that if there is any indication to show that having regard to the ratio of the judgment of the Bombay High Court relied on by him, the WTO would have had reason to believe, the adequacy of which reason, we are conscious, we cannot go into that wealth had escaped assessment, the reopening would be in order. The judgment only stated that the provisions of Rule 1D were only directory and not mandatory. The judgment pointed out with reference to the ratio of the judgment of the Supreme Court in CWTv. Mahadeo Man  86 ITR 621 that the normally permissible method of determining the market value in the case of unquoted shares was the yield method, though under exceptional circumstances the break-up method could also be utilised.
If the break-up method was to be utilised, it was the method prescribed under the Rules. If such method was not to be utilised, then, according to the ratio of the Bombay High Court, other acceptable methods would have to be utilised. We have set out the reasons which weighed with the WTO. The WTO never considered that the break-up method was not the proper method or that some other alternative method would have to be looked into. The WTO only considered that the value of stocks not having been taken into account, the value of the share, if such addition is made, would be more. There is no material to show that the WTO had reason to believe that a more appropriate method of valuation had to be resorted to than the break-up method.
16. The learned departmental representative had relied on a judgment of the Supreme Court in Aluminium Corpn. of India Ltd.'s case (supra) wherein the Court had held that adjustments to balance sheet could be made. The judgment itself sets out the provisions of Section 7(2)(a), as they stood at the material time, which permitted appropriate adjustments to be made. In the present case, the Rules do not permit any such adjustment. In the decision of the Tribunal relied on Mrs.
Grace Collis's case (supra), the Tribunal had categorically held that the provisions of Rule 1D were mandatory following the judgment of the Kerala High Court. The observations relied on by the learned departmental representative were in the process of dealing with an assumed argument. This decision also, therefore, does not help the revenue.
17. Adverting again to the decision in Pachigolla Narasimha Rao's case (supra), it is again a case where the Court eventually held that the adjustments made were within the terms of the Rules if it was considered that the provisions of Section 7(2) were the really applicable provisions.
18. Therefore, the only conclusion which we can arrive at in the present case is that the WTO had only believed that in terms of Rule 1D itself there was undervaluation. We would hold that there was absolutely no warrant for forming such a belief, because Rule 1D did not permit adjustments as contemplated by the WTO. In this regard, it would be useful to point out that an amendment to Rule 1D was proposed to be substituted by the Wealth-tax Draft (Amendment) Rules, 1981, with effect from 1-4-1981, but this subordinate legislation has as on date not come on the statute book. In the amended rules, Rule 1D(3) provided in Clause (a) that, where having regard to the facts and circumstances of the case, the WTO with the previous approval of the IAC is of the opinion that it would not be practicable or realistic to apply the provisions of the rule, than nothing contained in the rule would apply to the valuation of a share. It is, therefore, clear that the rule making authority itself had realised that the WTO should be given authority not to apply the rule where there were special reasons. But, the rule making authority considered that such discretion should not be untrammelled, but should be exercised only with the previous approval of the IAC. In the absence of any such provisions in the existing rules, the WTO was clearly bound by the Rules. Therefore, the WTO had to go by the balance sheet of the company and apply the provisions of Rule 1D, and if this rule was applied, then as long as the balance sheet did not disclose the value of any stock left out on the particular valuation dates, the question of reworking the value of the share could not arise.
19. Looked at from another angle, even if a particular shareholder had come on record and had stated that some stocks were left out of the balance sheet of the company, as long as the balance sheet of the company did not disclose this matter albeit even by a note which formed part of balance sheet in proceeding under Rule 1D, such disclosure would have had no bearing.
20. Therefore, since even if the assessee had disclosed this matter at the time of the original assessment, the valuation would still have been the same; there is no escapement of wealth from proper assessment consequent to this fact not having been brought on record earlier.
21. The learned Counsel for the assessee referred us to the statements accompanying the voluntary disclosure petition. It is clear therefrom that the excess stock did not arise out of any purchases outside the books or any sales being understated. It arose only because the material consumed was being evaluated on the basis of a linear measurement and not actual weighment and, therefore, excess stock had started accumulating from year to year. There was also some scrap, the value of which was not shown, but the plea of the assessee there was that such scrap was being accounted for as and when sold. Those assertions are not controverted by any material on record. Therefore, it cannot be said that merely because some excess quantity of stock might have existed and the value thereof was not shown in the balance sheet, the balance sheet became one which was in law no balance sheet.
Rule 1D, of course, can be given the go-by if there is no balance sheet in law. Such a proposition, perhaps, could be inferred from the decision of the Delhi High Court in CWT v. Brij Raj Punj  140 ITR 574. But, on the facts, the present is not a case where it could be said that there was no balance sheet in the eye of law consequent to the value of the stock in question not being shown on the relevant valuation dates.
22. Each case has to be considered on the facts. We have set out the facts in some detail. Proceeding on the footing that some of the assessees were directors and one of them was the managing director and he may have had knowledge of the existence of some excess stock, looking to the circumstances in which such excess occurred, it is difficult to hold that as a director there was certain information with him that the value of some stogk, which should have been accounted for on the relevant valuation dates, was not accounted for. Even assuming that as a director he had possessed that information, that would have been information of a confidential nature which as a shareholder he would not have been bound to disclose because it was special information in his possession and such special information known to a few special people would not be relevant in determining the price which the asset would fetch, if sold in the open market as required by Section 7(1). The 'open market' presumes a market where all persons including those who do not have a special information could participate. The decision of the House of Lords in Lynall v. IRC  83 ITR 563 is instructive on this point. Each of the law Lords came to the conclusion independently that confidential information known to the directors was not material in determining the market value of shares.
In this regard, the observations of Viscount Dilhorne in the case of Lynall (supra) were: On a sale in the open market is it to be assumed that possible purchasers would have information as to the contents of the reports of McLintocks and Cazenoves They were confidential to the directors. All the shareholders in Linread were directors but it is not to be assumed that they would disclose confidential information they possessed to the public without the consent of the board; nor is it to be supposed that the board would have given its consent to the disclosure of the contents of those reports ....
I have been a little perturbed about the procedure adopted in this case, apparently as an innovation, that discovery should be applied for as a means of prising out of the appellants the secrets of the board room. The corresponding procedure, had not the appellants been directors of the company as well as executors, would presumably have been the service of a subpoena duces tecum upon an officer of the company with the like and in view. I think it would be wrong to try and compel such a witness to disclose, under pain of committal if he refused, information of a confidential character, the publication of which might do the company (which is not even a party to the proceedings) immense harm. The revenue, following I suppose its own notions of what is permissible and what is not, have hitherto efficiently performed their duties under the Act of 1894 without resort to any such procedure. They are now proved to have been in the right since the effect of your Lordships' decision is that such confidential information is irrelevant to the determination of the value of shares under Section 7(5); and being irrelevant is, therefore, inadmissible.
In the present case, however, the company's board of directors had received reports and advice which were obviously of a confidential character, and the board had come to no decision as to whether they would act on the advice or not but were maintaining their cautious and uncommitted attitude. It is reasonable to imagine that in that situation the board would have kept these matters confidential, and would have been unwilling to disclose the reports and advice which they had received, and in particular unwilling to make them available to participants in the open market. Prima facie the information would not have been available.
It is, however, suggested that it would have been available in two ways. First, it is said that the likely purchasers might have included a director of the company, and he would have had the information ex-officio. But unless others also knew it, his possession of the information would not materially affect the market price which he or any other purchaser would have to pay. The situation differs from that in IRC v. Clay  3 KB 466, 471, where the special fact enhancing the price of property was assumed to be a matter of local knowledge. Secondly, it is said that the directors of the company might have been willing to impart the information confidentially to a chartered accountant or other expert acting as agent for a purchaser, though the information would be imparted on the terms that it would not be passed on to the purchaser himself. But in such a case the transaction would be in the nature of a private placing and not a sale in the open market such as has to be envisaged under Section 7(5). In my opinion, the reasonable supposition is that the information would not be available in the hypothetical open market, and so the assessment should be 3 10s. and not 4 10s.; and, therefore, the appeal should be allowed and the judgment of Plowman, J. should be restored.
The view expressed by the Calcutta High Court in CWT v. Smt.
Chandrakala lal  111 ITR 185 that the market value cannot vary from person to person, or assessee to assessee, also stems out of the aforesaid reasoning that confidential information cannot be relevant in determining the price which an asset would fetch, if sold in open market, which is what Section 7(1) required to be done. We have, therefore, to hold in the present case that there was no failure on the part of the assessees, even where they were directors, in their capacities as shareholders, which is the capacity from which we have to examine the case, to disclose any material fact. There was also no omission because as a shareholder, there was no material of which they were in the know at the material time.
23. We, therefore, hold that neither of the conditions as set out in the observations of the Supreme Court which we have reproduced from the decision in Ganga Saran & Sons (P.) Ltd.'s case (supra), at page 11, the cumulative satisfaction of which is a prerequisite to valid initiation of proceedings under Section 17, is satisfied. Therefore, we agree with the Commissioner of Wealth-tax (Appeals), though for somewhat different reasons, that the reassessments cannot stand and the cancellation of assessments was in order.
24. For the sake of completeness, we would state that we agree with the learned departmental representative that the immunity conferred under Section 13 applies only to the declarant, i.e., the company in the present case, and none of the assessees can take shelter under those provisions where the reopening of the assessments was otherwise in order.
25. As far as the cross-objections are concerned (in the appeals in which they arise), we do not consider them because we have agreed with the Commissioner that the reopening of assessments was invalid.