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Gift-tax Officer Vs. Ambalal Sarabhai (Huf) - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1984)9ITD227(Ahd.)
AppellantGift-tax Officer
RespondentAmbalal Sarabhai (Huf)
Excerpt:
.....completed, these shares have been valued as per wealth-tax rules but under the gift-tax act, the gift-tax rule 10(2), the value of unquoted shares of a company are to be ascertained with reference to the value of total assets of the company including goodwill and not on the book value of the total assets; that the language of gift-tax rule 10(2) is identical to that of section 37 of the estate duty act and the valuation has to be done on the lines of section 37 of the estate duty act; that these rules are not the same as wealth-tax rules and since in the original assessment the gto had failed to adopt this method and the mistake has been pointed out by the revenue audit party of accountant general, this constituted information within the meaning of section i6(1)(b) of the gift-tax act,.....
Judgment:
1. This is a revenue's appeal against the order of the Commissioner (Appeals) wherein he has annulled the assessment framed under Section 15(3) read with Section 16(1)(b) of the Gift-tax Act, 1958 ('the Act').

2. The facts of the case till the reassessment was made by the GTO, are summarised by the Commissioner (Appeals), as under: 2. The appellant had gifted 36 shares of Karamchand Premchand Private Ltd., on 29-3-1973 to three trusts. One share each was gifted to Ambalal Sarabhai, HUF Trust No. 1 and Mana Sarabhai Trust Nos. 20 and 34 shares were gifted to Ambalal Sarabhai HUF Trust No. 2. The appellant filed gift-tax return on 28-9-1973 showing the value of these shares at Rs. 96,048, being Rs. 2,668 per share and claimed a deduction of Rs. 5,000 under Section 5(2), and returned the taxable gift at Rs. 91,048. The valuation of shares was supported by a Valuer's report dated 28-10-1972 and was based on the company's balance sheet dated 31-3-1972. The GTO completed the assessment on 24-1-1976 on the same taxable gift of Rs. 91,048.

During the course of original assessment proceedings, the assessee claimed deduction for stamp duty of Rs. 3,910. This claim was rejected by the GTO while making the assessment. The appellant filed an appeal to the AAC against this assessment contesting against the disallowance of claim of stamp duty. The appeal was allowed by the AAC, vide his order dated 4-1-1978 giving relief of Rs. 3,910 in the assessed gift. Thereafter, the GTO reopened the appellant's assessment under Section 16(1)(b) vide notice dated 22-3-1978 and completed the reassessment on 11-7-1978 on a taxable gift of Rs. 2,48,260 by revaluing the shares at Rs. 7,035 per share. In his order of reassessment, the GTO has mentioned that the assessment was reopened under Section 16(1)(&); that when the original assessment was completed, these shares have been valued as per Wealth-tax Rules but under the Gift-tax Act, the Gift-tax Rule 10(2), the value of unquoted shares of a company are to be ascertained with reference to the value of total assets of the company including goodwill and not on the book value of the total assets; that the language of Gift-tax Rule 10(2) is identical to that of Section 37 of the Estate Duty Act and the valuation has to be done on the lines of Section 37 of the Estate Duty Act; that these rules are not the same as Wealth-tax Rules and since in the original assessment the GTO had failed to adopt this method and the mistake has been pointed out by the revenue audit party of Accountant General, this constituted information within the meaning of Section I6(1)(b) of the Gift-tax Act, in view of the Supreme Court decision in the cases of Kalyanji Mavji & Co. v.CIT [1976] 102 ITR 287 and R.K. Malhotra, ITO v. Kasturbhai Lalbhai [1977] 109 ITR 537. According to the GTO, therefore, the assessment has been reopened on the basis of this fresh information regarding under assessment of the gift so as to bring to tax the correct value of the taxable gift which has escaped the assessment by way of under assessment.

3. Before the Commissioner (Appeals), the assessee challenged the assessment framed by the GTO under Section 15(3) read with Section 16(1)(b) on the following grounds: (i) that in the notice issued under Section 16 the GTO had not mentioned whether he was reopening the assessment under Clause (a) or Clause (b) of that section, (ii) since the assessment was reopened on a mere change of opinion as to valuation of shares in question, the same was bad in law, (iii) since Circular No. IB/GT of 1968 issued by the Board was applicable to the year under consideration, the fact that revised circulars were issued on 29-10-1974 and 24-5-1975 would not have any effect and, therefore, the reassessment made by the GTO was bad in law, (iv) since the GTO had reopened the assessment on the basis of the revenue audit objection, the same was bad in law in view of the decision of the Hon'ble Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996, (v) since the Circular No. IB/GT of 1968 was a beneficial circular in favour of the assessee, the GTO could not have ignored the same and framed the reassessment on the basis of the subsequent circulars issued on 29-10-1974 and 24-5-1975.

(vi) the decisions of the Hon'ble Supreme Court in the cases of Kalyanji Mavji & Co. v. CIT [f976] 102 ITR 287 and R.K. Malhotra, ITO v. Kasturbhai Lalbhai [1977] 109 ITR 537 have lost their force in view of the subsequent decision in the case of Indian & Eastern Newspaper Society (supra), and (vii) the GTO was not justified in reopening the assessment on the basis of certain events which took place after the date of the gift, viz., on 29-3-1973. In support of these submissions, the assessee relied on the decision of the Hon'ble Mysore High Court in the case of CED v. J. Krishna Murthy [1974] 96 ITR 87 and of the orders of the Tribunal in the cases of C.V. Krishnammal [GT Appeal No. 35 (Mad.) of 1979, dated 12-3-1980] and Smt. Giro Sarabhai [GT Appeal No. 23 (Ahd.) of 1981, dated 31-8-1982].

It was, therefore, urged that the assessment framed by the GTO under Section 15(3) read with Section 16(1)(b) should be quashed.

4. After considering the submissions made on behalf of the assessee as well as the revenue, the Commissioner (Appeals) annulled the assessment framed under Section 15(3) read with Section 16(1)(b). In order to appreciate the rival submissions of the parties, it would be necessary to reproduce the concluding portion of the order of the Commissioner (Appeals), which reads as under: 9. In my view, there is force in the contentions of the appellant's representative. The original assessment was made in accordance with the Board's instructions which existed in the assessment year 1973-74. Although these instructions stood modified before the assessment was completed, there is nothing in the said circular nor has the GTO brought on record any decision of any Court to support the view that such modification applied retrospectively to all pending assessments even for earlier years. On the facts of the appellant's case, the original instructions directing the application of Rule 1D of the Wealth-tax Rules for valuation of unquoted shares of private limited companies even for gift-tax purposes was beneficial to the appellant and the application of the subsequent circular would operate against the appellant's interest.

There is no decision to support the view that such benefit could be withdrawn retrospectively. On the contrary, the Kerala High Court decision in the case of CIT v. B.M. Edward, India Sea Foods [1979] 119 ITR 334 (FB) is in the appellant's favour. It is a Full Bench decision and it was held in that decision that when the circular was in force and operation throughout the assessment year, the assessee was entitled to have the assessment made and completed in accordance with the circular and the ITO was bound by such circular which conferred privileges and rights on assessees, even though he passed the assessment order subsequent to the withdrawal of the said circular. In my view, therefore, the appellant was entitled to the benefit of the instructions of 1968 which were prevailing in the assessment year 1973-74 and it cannot be said that the valuation of the shares in accordance with Rule 1D of the Wealth-tax Rules was erroneous. It has also been argued by the appellant's representative that the use of the words 'value of the total assets of the company' in Rule 10(2) in contrast with the words 'market value of the assets of the firm' in Rule 10(3) is significant and it cannot be said that Rule 10(2) necessarily requires the adoption of market value of total assets including valuation of goodwill for valuation of shares with reference to total assets of the company, instead of adoption of global value method on the basis of book value. The law on this point is not settled. There are decisions of the High Court against the department under the Estate Duty Act in the context of similar provisions under Section 37 of the Estate Duty Act, e.g., the Mysore High Court decision in CED v. J. Krishna Murthy [1974] 96 ITR 87.

The Supreme Court in CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 also recognises the practice of valuation under Rule 1D of the Wealth-tax Rules for gift-tax purposes as well as one of the methods of valuation. The revenue audit objection, therefore, constitutes only an opinion as to the state of the law regarding valuation of shares under the Gift-tax Act which is on a question of law. It cannot, therefore, be said that the revenue audit objection in this context constituted 'information' within the meaning of Section 16(1)(b) to enable the GTO to reopen the case. I am supported in my view by the Supreme Court decision in Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996. It would have been a different position if the law on the point were settled and the audit party had pointed out some Court's decision to the ITO holding that application of Rule 1D for valuation of shares under the Gift-tax Act was contrary to the provisions of Rule 10(2) of the Gift-tax Rules or Section 6(1) of the Gift-tax Act. In that case the audit party would have been only drawing the attention of the ITO to the state of law and would not have been pronouncing their opinion on the law. In such a situation the ITO could be ceased of the jurisdiction to reopen the assessment under Section 16(1)(b) on the basis of the audit objection. But such is not the case here. It has been heid by the Supreme Court in Indian & Eastern Newspaper Society's case (supra) itself that a declaration or exposition to be law, must be a creation by a formal source either legislative or judicial authority. A statement by a person or body not competent to create or define the law cannot be regarded as law. The assessee's case is also supported by the Income-tax Appellate Tribunal decisions quoted by the appellant's representative and cited in extenso in earlier paras. There is also strength in the appellant's contention that goodwill in this case was fixed after the date of the gift and could not be reckoned into the valuation of shares under Rule 1D of the Wealth-tax Act. It is not the GTO's case that in the original assessment the valuation had not been made even in accordance with Rule 1D of the Wealth-tax Act. Considering all the facts and circumstances of the case and the ratio of the decision cited by the appellant's representative quoted above, I am of the view that the GTO was not justified in reopening the appellant's case under Section 16(1)(b). Whether Rule 10(2) of the Gift-tax Rules necessarily implies adoption of market value of the assets and adding thereto the market value of the goodwill for valuing the shares on the basis of the total assets of the company is not a settled law and only a question of opinion at this stage. The GTO, having made the original assessment in accordance with the recognised method of valuation and followed the instructions of the CBDT operative throughout the relevant assessment year, it amounts to a change of the opinion on the same set of facts to now value the shares by a different method, which is not permissible under Section 16(1)(b) of the Gift-tax Act. I, therefore, hold that the GTO acted beyond his jurisdiction in reopening the assessment under Section 16(1)(b).

10. The contention of the appellant's representative that the notice was vitiated by the GTO not mentioning whether he had reopened the assessment under Section 16(1)(a) or 16(1)(b), cannot be upheld because it is a settled law that even if an assessment is reopened under Section 16(1)(a) but was within time and could be justified as valid under Section 16(1)(b), such reassessment would not be invalid in law for the simple reason of reopening under Sub-clause (a) rather than (b). The ground No. 5 of the grounds of appeal has also no substance in it because the question whether the gift in question is valid in law or not does not arise out of the reassessment as it is not the case either of the assessee or the department and the point had not been raised in the original assessment. Therefore, that point cannot be raised in the reassessment proceedings.

11. In view of the legal position discussed in earlier paras, I annul the reassessment made on 11-7-1978 being without jurisdiction and ab inito void.

5. Being aggrieved by the order of the Commissioner (Appeals), the revenue has come up in appeal before the Tribunal. The learned representative for the department vehemently argued that the Commissioner (Appeals) was not justified in annulling the assessment framed by the GTO. Inviting our attention to the decision of the Hon'ble Calcutta High Court in the case of Export Enterprises (P.) Ltd. v. ITO [1983] 142 ITR 641, the learned representative for the department submitted that since on the date of the initiation of the reassessment proceedings the ratio of the Hon'ble Supreme Court in the cases of Kalyanji Mavji & Co. (supra) and Kasturbhai Lalbhai (supra) was in force, the GTO could have initiated the proceedings under Section 16(1)(b) on the basis of the objection raised by the revenue audit. In this connection, he stated that the reassessment proceedings were initiated on 11-7-1978 while the decision of the Hon'ble Supreme Court in the case of Indian & Eastern Newspaper Society (supra) was pronounced on 31-8-1979. In other words, he wanted to impress upon us that the decision of the Hon'ble Supreme Court has no retrospective effect. He further submitted that while framing the assessment originally on 24-1-1976, since the GTO had not taken note of the circulars issued by the Board, on 29-10-1974 and 24-5-1975, he was fully justified in reopening the assessment under Section 16(1)(b), on the basis of the objection raised by the revenue audit. Inviting our attention to the assessment order dated 11-7-1978 framed under Section 15(3) read with Section 16(1)(b), the learned representative for the department highlighted the fact that in the balance sheet as on 30-6-1973, of Karamchand Premchand (P.) Ltd., there was one item of goodwill of the value of Rs. 10 crores. Since this aspect of the matter should have been considered by the GTO while valuing the shares in question under Rule 10(2) of the Gift-tax Rules, 1958 ('the Rules'), which he failed to consider, the GTO was fully justified in taking recourse to the provisions of Section 16(1)(b). He, therefore, urged that the order of the Commissioner (Appeals) should be set aside and that of the GTO should be restored.

6. The learned Counsel for the assessee, on the other hand, reiterated the submissions which were made before the Commissioner (Appeals) and contended that we should uphold his order under appeal. Relying on the decision of the Hon'ble Bombay High Court in the case of Tulsidas Kilachandv. D.R. Chawla [1980] 122 ITR 458 and that of the Hon'ble Supreme Court in the case of CIT v. Simon Carves Ltd. [1976] 105 ITR 212, the learned Counsel for the assessee submitted that the GTO could not have reopened the assessment merely on the ground that on the basis of valuing the shares in question in different way, their value would be higher than the one earlier determined by him under the provisions of Rule 1D of the Wealth-tax Rules, 1957 ('the 1957 Rules'). In other words, the learned Counsel for the assessee wanted to impress upon us that the GTO had reopened the assessment on a mere change of opinion.

At this stage, he invited our attention--[1983] 141 ITR (St.) 47--and highlighted the fact that the Hon'ble Supreme Court was pleased to dismiss the special leave petition filed by the revenue against the decision of the Bombay High Court in the case of Tulsidas Kilachand (supra). The learned Counsel for the assessee further submitted that since, while valuing the shares in question at the time of framing the assessment originally, the GTO had followed the circular issued by the Board in 1968, he cannot take action under Section 16(1)(b) on the ground that the said circular was revised subsequently by the Board.

According to the learned Counsel for the assessee, the circulars issued by the Board have no retrospective effect. For this proposition, he relied on the decision of the Hon'ble Kerala High Court in the case of CIT v. B.M. Edward, India Sea Foods [1979] 119 ITR 334 (FB). Finally, relying on the decision of the Hon'ble Mysore High Court in the case of J. Krishna Murthy (supra), the learned Counsel for the assessee submitted that since Rule 10(2) of the 1958 Rules does not prescribe any method to value the shares in question, the GTO was fully justified in valuing the said shares as per the provisions of Rule 1D of the 1957 Rules originally. In this connection, he invited our attention to the order of the GTO framed under Section 15(3) read with Section 16(1)(b) and highlighted the fact that the GTO himself had made a remark that the language of Rule 10(2) is identical to that of Section 37 of the Estate Duty Act, 1953 ('the 1953 Act'). In the case of J. Krishna Murthy (supra), the Hon'ble Mysore High Court was dealing with a case under the 1953 Act and while considering the provisions of Section 37 of that Act, the Hon'ble High Court has observed that in the absence of detailed rules under the 1953 Act, for valuation of shares, the valuation of shares under Rule 1D of the 1957 Rules, being the only statutorily recognised method, would be in order and that in such computation, the value of goodwill was not includible. Since the language of Rule 10(2) of the 1958 Rules is in pari materia with that in Section 37 of the 1953 Act, the learned Counsel for the assessee submitted that in valuing the shares in question, the value of goodwill has to be excluded. At this stage, he also highlighted the fact that since the gift in question was made on 29-3-1973, the relevant balance sheet of Karamchand Premchand (P.) Ltd. would be that as on 31-3-1972 and, therefore, the GTO was not justified in looking at the balance sheet of the said company as on 30-6-1973 for the purpose of including the value of the goodwill in estimating the value of the shares in question as on the date of the gift. In support of his various submissions, the learned Counsel for the assessee relied on the orders of the Tribunal dated 12-3-1980 and 31-8-1982 referred to above. He also invited our attention to the paper book containing various correspondence which took place between the assessee and the GTO during the course of assessment proceedings.

7. We have carefully considered the rival submissions of the parties as well as the material placed before us and we find considerable force in the submissions made on behalf of the assessee. In our view, the point at issue is covered by the decision of the Tribunal in the case of C.V.Krishnammal (supra). However, since both the parties had advanced their arguments at some length on the issue of reopening the assessment, we would like to discuss some of them. Any decision pronounced by the Hon'ble Supreme Court is the law of the land and is binding on all concerned. It may be true that when the GTO initiated the proceedings under Section 16(1)(b), the earlier decision of the Hon'ble Supreme Court in the cases of Kalyanji Mavji & Co. (supra) and Kasturbhai Lalbhai (supra) was in force. However, by its subsequent decision in the case of Indian & Eastern Newspaper Society (supra), the Hon'ble Supreme Court had held that its observations regarding 'oversight, inadvertence or mistake' in Kalyanji Mavji & Co's case (supra) were too wide. After referring to its decision in the cases of Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 and Bankipur Club Ltd. v. CIT [1971] 82 ITR 831, the Hon'ble Supreme Court went on to observe, viz., 'any observations in Kalyanji Mavji & Co.'s case (supra) suggesting the contrary do not, we say with respect. lay down the correct law'. With reference to its decision in the case of Kasturbhai Lalbhai (supra), the Hon'ble Supreme Court in Indian & Eastern Newspaper Society's case (supra) at page 1007 held that 'this Court was in error in the conclusion reached by it in . . .'. In other words, the Hon'ble Supreme Court has held that the tax officer cannot reopen the assessment on the basis of the objection of the revenue audit wherein the audit party expresses its view regarding the interpretation of the statute or the rules made thereunder. We, therefore, hold that the decision pronounced by the Hon'ble Supreme Court in the case of Indian & Eastern Newspaper Society (supra) is to be treated to be always there even when the GTO had initiated the proceedings under Section 16(1)(b).

The decision in the case of Export Enterprises (P.) Ltd. (supra) relied on behalf of the revenue too will not help it as the Hon'ble High Court's attention was not invited to the decision of the Hon'ble Supreme Court in the case of Ramdas Bhikaji Chaudhari v. Sadanand AIR 1980 SC 126, wherein the Hon'ble Supreme Court has expressed its view in respect of the effect to its subsequent decision on earlier decision pronounced by it, in the following manner: ...Lastly it was argued that under Article 141 since the earlier case decided by this Court reported in [1975] 2 SCR 886 held the field, it must be held that it was the law laid down by this Court under Article 141 of the Constitution. It is well settled that whenever a previous decision is overruled by a larger Bench the previous decision is completely wiped out and Article 141 will have no application to the decision which has already been overruled, and the Court would have to decide the cases according to law laid down by the latest decision of this Court and not by the decision which has been expressly overruled ....

It is pertinent to note that the decision in the cases of Kalyanji Mavji & Co. (supra) and Kasturbhai Lalbhai (supra) was rendered by the Hon'ble Supreme Court consisting of two learned judges, while the decision in the case of Indian & Eastern Newspaper Society (supra) was of a Bench consisting of three learned judges. Therefore, applying the ratio in the case of Ramdas Bhikaji Chaudhari (supra), we hold that the law laid down in the case of Indian & Eastern Newspaper Society (supra) would have to be applied with a view to finding out whether the GTO was justified in reopening the assessment on the basis of the audit objection.

Further, it is pertinent to note that Circular No. IB/GT of 1968 issued by the Board was in force at the relevant time and it had a binding effect on all the officers of the Income-tax Department even if it contained certain instructions which are in variance with the provisions of the Act--see Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC). Therefore, if the GTO had originally valued the shares in question as per the instructions contained in that circular, he would not be justified in initiating the proceedings under Section 16(1)(b), merely on the ground that the said circular was subsequently modified or revised by the Board. The aforesaid decision of the Hon'ble Kerala High Court in B.M. Edward, India Sea Foods' case (supra), clearly supports the stand taken on behalf of the assessee on this proposition.

Further, when two methods are provided for valuing the shares in question and the GTO adopts one, he would be prevented from reopening the assessment under Section 16(1)(b), by taking recourse to the other method subsequently just because he felt that by adopting the second method more tax will be recovered from the assessee. We are fortified in our view by the aforesaid decision of the Hon'ble Bombay High Court in the case of Tulsidas Kilachand (supra) and of the Hon'ble Supreme Court in the case of Simon Carves Ltd. (supra).

For the aforesaid reasons, we entirely agree with the decision of the Commissioner (Appeals) that the GTO could not have reopened the assessment under Section 16(1)(b).

8. Apart from above, the Hon'ble Mysore High Court in the case of J.Krishna Murthy (supra) has clearly held that in the absence of detailed rules for valuation of shares under the 1953 Act, or the rules made thereunder, it would be just and proper to adopt the rules made under the 1957 Act. In this view of the matter, the Hon'ble High Court had upheld the contention of the accountable person in that case that the shares should be valued as per the provisions of Rule 1D of the 1957 Rules even under the 1953 Act. The Hon'ble High Court, therefore, held that in valuing the shares under the said rule the value of the goodwill has to be ignored. Since the provisions of Rule 10(2) of the 1958 rules are exactly identical with the provisions of Section 37 of the 1953 Act, we are of the view that the value of the goodwill could not be considered in valuing the shares in question. Apart from this, we entirely agree with the submissions made on behalf of the assessee that the GTO was not justified in taking into consideration certain events which took place after the date of the gift, viz., on 29-3-1973, or after the date of the relevant balance sheet, viz., 31-3-1972.

9. We have, therefore, no hesitation in upholding the order of the Commissioner (Appeals).


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