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Wealth-tax Officer Vs. Mrs. Ritu Nanda - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1985)14ITD269(Delhi)
AppellantWealth-tax Officer
RespondentMrs. Ritu Nanda
Excerpt:
.....rights of its own in the partnership assets and when one talks of the firm's property or of the firm's assets all that is meant is property or assets in which all partners have a joint or common interest". similarly, the hon'ble supreme court in the case of mrs. bacha f. guzdar v. cit [1955] 27 itr 1 held "a shareholder who buys shares does not buy any interest in the property of the company which is a juristic person entirely distinct from the shareholders".the hon'ble supreme court went on to hold that the nature of the income in the hands of the company which in that case was agricultural company would be different from the nature of the income in the hands of the shareholder which in that case was dividend. similarly, the supreme court in cit v. ramniklal kothari [1969] 74 itr 57.....
Judgment:
1. The appeal is by the revenue and following specific grounds have been raised before us : 1. On the facts and in the circumstances of the case, the AAC Range 'A', New Delhi, has erred in directing the Wealth-tax Officer to adopt value of Escorts Ltd. shares at cost and not market value.

2. On the facts and in the circumstances of the case, the AAC Range 'A', New Delhi, has erred in allowing the full liability of Rs. 50,000 under Section 2(m)(a) of the Wealth-tax Act, 1957.

2. The respondent-assessee is a resident-individual. The assessment year involved is 1975-76 and the valuation date shown is 31-3-1975.

3. As regards ground No. 1, vide orders dated 29-5-1982 made by the Tribunal, Delhi Bench 'A' at New Delhi, in the case of Mrs. Dolly Nanda v. WTO [WT Appeal Nos. 590 to 597 (Delhi) of 1981], identical ground and issue stands decided in favour of the assessee. Again, the Tribunal, Delhi Bench 'D', had also occasion to discuss identically worded ground and an issue on appeal by the revenue in WT Appeal Nos.

1886 and 1887 (Delhi) of 1980 and there also the assessee succeeded.

Yet again, the Tribunal, Delhi Bench 'D', vide orders dated 15-9-1983 made in WT Appeal No. 1204 (Delhi) of 1982 relating to the assessment year 1973-74, on appeal by the revenue and in the case of this very assessee, rejected the revenue's appeal and thereby decided the issue in favour of the assessee. In view of all these decisons ground No. 1, taken by the revenue before us, merits to be rejected, which we do.

4. However, since at the time of the hearing of the present appeal, there was a reliance on the decision of the Hon'ble Supreme Court in the case of Juggilal Kamlapat Bankers v. WTO [1984] 145 ITR 485, the parties were also heard on this aspect and reliance of the revenue.

5. Having had the benefit of the decision of the Hon'ble Supreme Court in the case of Juggilal Kamlapat Bankers (supra), we are of the opinion that the ratio laid down by the Hon'ble Supreme Court in the above case does not alter the decisions already taken and arrived at by the Tribunal mentioned as above and in this view of the matter also, ground No. 1 taken by the revenue merits to be rejected. Our reasoning to that effect is as under : In the above case the Hon'ble Supreme Court was basically concerned with the question as to whether the interest of a karta representing his HUF in a firm is exigible to wealth-tax. In this context, their Lordships held that, 'Reading Sections 2(e), 2(m) and 3 of the Wealth-tax Act, 1957 together, it would be clear that a partner's interest in a firm either in his individual capacity or in his capacity as the karta of his HUF is property, and is includible in the expression 'assets' as defined in Section 2(e), and will have to be taken into account while computing the net wealth or the individual or the HUF and on such net wealth the charge has been imposed under Section 3.

6. The other issue was as to whether the deemed provision under Section 4(1)(b) of the Wealth-tax Act, 1957 ('the Act') only applies to an individual and not a HUF. Their Lordships held that "the deeming provision in Section 4(1)(b) is referable only to the quantification of his interest in the firm. Section 4(1)(b) only relates to the quantum of his interest as determined in the prescribed manner which is includible in the net wealth." 7. The third issue involved was the valuation of HUF's interest in a partnership firm and on page 494, paragraph No. 3, while interpreting sections 7(1), 7(2)(a), 7(3) of the Act and rules 2A and 2B of the Wealth-tax Rules, 1957 ('the Rules'), their Lordships held that the expression used in Section 2 is the 'net wealth' which is to be determined on the respective valuation date first and the determination of net wealth of the firm as required under Rule 2 automatically requires the determination of net wealth as defined in Section 2(m) which implies valuation as provided in Section 7. Therefore, Section 7(1) automatically comes into play for determining the net wealth of the firm and the WTO is empowered to estimate the price of the assets of the firm which, in his opinion, it would fetch if sold in the open market on the respective valuation date.

8. The fourth issue decided by the Supreme Court was the adjustments required under Rule 2B(2) for determining the net value of assets of the business as a whole, when the market value of an asset exceeds its written down value of the book value or the value adopted for purposes of assessment under the Income-tax Act, 1961, by more than 20 per cent, then the market value be substituted.

9. Their Lordships were in fact valuing a partner's interest in a partnership firm which has in a number of decisions by the Hon'ble Supreme Court and in fact by Mr. Justice V.D. Tulzapurkar himself, who had incidentally also delivered the judgment aforesaid, held in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 that "a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or of the firm's assets all that is meant is property or assets in which all partners have a joint or common interest". Similarly, the Hon'ble Supreme Court in the case of Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 held "a shareholder who buys shares does not buy any interest in the property of the company which is a juristic person entirely distinct from the shareholders".

The Hon'ble Supreme Court went on to hold that the nature of the income in the hands of the company which in that case was agricultural company would be different from the nature of the income in the hands of the shareholder which in that case was dividend. Similarly, the Supreme Court in CIT v. Ramniklal Kothari [1969] 74 ITR 57 held that the "business carried on by a firm is business carried on by the partners.

Profits of the firm are profits earned by all the partners in carrying on the business". Therefore, the distinction drawn of a partner's interest in the partnership assets and income is different from a shareholder's interest in a limited company, hence, the ratio of Juggilal Kamlapat Bankers' case (supra) has absolutely no bearing on the issue involved in the appeal before us, viz., valuation of a shareholder's interest in a limited company.

10. The Hon'ble Supreme Court in Juggilal Kamlapat Bankers' case (supra) was further not interpreting expression used in Section 7(1), i.e., "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". What the Supreme Court was interpreting was an entirely different issue, in fact it was interpreting the expressions, as stated before, contained in Section 4(1)(6) and one limb of Section 7(2), i.e., 'notwithstanding anything contained in Sub-section (1)'. The expression 'subject to any rules made in this behalf has been judicially interpreted by the Delhi Special Bench of the Tribunal in the case of Biju Patnaik v. WTO [1982] 1 SOT 623 in which the Tribunal has held that the said expression used in the first part of Section 7(1) would override the second part of Section 7(1) and the rules of the nature of rules ID and IBB of the Rules were mandatory in nature and had to be given effect to in law.

11. The Hon'ble Supreme Court in the aforesaid judgment was then interpreting the expression 'having regard to the balance sheet of such business' (on p. 496), whereas the expression used in rule ID is as under : 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 expression interpreted by the Supreme Court is materially different from the expression as used in rule ID. Their Lordships of the Supreme Court have very rightly held that the expression 'having regard to the balance sheet of such business' would not make the values shown in the balance sheet as conclusive or binding or decisive. However, the expression as in rule ID is much narrower and confines itself to the values as shown in the balance sheet only.

12. Rule ID is an artificial method for determining the market value of an unquoted equity share of certain companies, and has to be strictly complied with for determining the market value. A higher burden of tax on a citizen cannot be levied unless it is intended by the statute or by the rules made thereunder, and if as a result of the rules a lower burden of tax is to be put on the citizen, the State cannot demand a larger share. Rule ID only envisages adjustments in the values as shown in the balance sheet as per the Explanation, viz., Explanation II which reads as under : (I) the following amounts shown as assets in the balance sheet shall not be treated as assets, namely :- (a) any amount paid as advance tax under section ISA of the Indian Income-tax Act, 1922 (11 of 1922), or under Section 210 of the Income-tax Act, 1961 (43 of 1961) ; (b) any amount shown in the balance sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset ; (II) the following amounts shown as liabilities in the balance sheet shall not be treated as liabilities, namely :- (b) the amount set apart per payment of dividends on preference shares and equity shares where such dividends have not been declared before the valuation date at a general body meeting of the company ; (c) reserves, by whatever name called, other than those set apart towards depreciation ; (e) any amount representing provision for taxation other than the amount referred to in Clause (i)(a) to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto ; (i) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.

13. The above two adjustments are the only adjustments envisaged by the said rule in the value of assets shown in the balance sheet of a company and no further adjustments can be made in the same. If the Legislature had thought it just and proper that the adjustment as envisaged in Rule 2B(2), i.e., substitution of market value of an asset in place of the value as shown in the balance sheet in case the difference is more than 20 per cent, was also required to be made in rule ID, then such a proviso could be added in Explanation II itself.

As there is no such adjustment called for by rule ID, no adjustment of the type asked for by the revenue can be made, since we have to apply the law as it is and not as it ought to be or is required to be.

14. It is evident from the above that the case of Juggilal Kamlapat Bankers (supra) has no application to the present dispute.

15. As regards ground No. 2, in the impugned order the learned first appellate authority has relied on the ratio of the decision of the Hon'ble Madras High Court in CIT v. M.N. Rajam [1982] 133 ITR 75 and in the absence of any counter decision relied upon by the learned departmental representative, this ground also stands rejected.


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