Where assessee's interest in a partnership firm valued by taking book value of assets, however, in valuation of another partner's interest, such assets valued, under section 16A, at higher figure, Commissioner was justified in setting aside of Wealth Tax Officer's order on the facts of the case.
1. This is an appeal filed by Shri P. Babulreddy of Hyderabad against the order of the Commissioner, under Section 25(2) of the Wealth-tax Act, 1957 ('the Act'), for the assessment year 1978-79.
2. The assessee is an individual and was assessed on his returned wealth of Rs. 2,44,472 under Section 16(1) of the Act. This wealth comprises of the assessee's interest in the firm of Siddhartha Enterprises, in which he has a 10 per cent share. It appears that the property of the firm, which consists of the land and building where Siddhartha Hotel is run, came to be valued under Section 16A of the Act in respect of the wealth-tax assessment of another partner. Since this valuation report fixed the value of the building at Rs. 59.75 lakhs as against the book value of Rs. 43 lakhs, it appears that the attention of the Commissioner was drawn to this assessment completed under Section 16(1) in the assessee's case. The Commissioner, in his notice, pointed out that Rule 2 of the Wealth-tax Rules, 1957 ('the Rules'), which requires the WTO to value the interest in a firm by making adjustment in the value of assets disclosed in the balance sheet, had been overlooked by him. Since the major part of the assets consisted of land and buildings in the case of the firm, he was of the view that the WTO's acceptance of the return was prejudicial to the interests of the revenue, since the wealth returned was based upon the book value of the assets and not with reference to the market value as on valuation date.
The land component of the hotel was also returned at an amount less than the amount fixed for earlier wealth-tax assessments in the assessee's own case when the property solely belonged to him. The valuation report in the case of a co-partner was also taken notice of.
It is clear that the Commissioner had all these facts in mind while issuing the notice. The assessee objected to the revision both on the question of jurisdiction as well as merits. The Commissioner was unable to accept the objection on jurisdiction, but was of the opinion that further enquiry is necessary on valuation. He, therefore, set aside the assessment, so that a fresh assessment could be made in accordance with law. The assessee is in second appeal.
3. The learned Counsel argued that an important single factor, which weighed with the Commissioner, was the valuation report in the co-partner's case. Reference regarding this property was not made in the assessee's case but in someone else's case. Again, this was only an opinion given by the valuation cell and cannot be considered as positive information. He claimed that this is a gross over-valuation and that, even otherwise, it cannot form a basis for any action for revision of assessment. Further, he argued that the Calcutta High Court in Ganga Properties v. ITO  118 ITR 447, while dealing with a similar power under Section 263 of the Income-tax Act, 1961 ('the 1961 Act'), had found that the valuation report without jurisdiction could not form the basis of revision of assessment, and that the Commissioner's action should be confined to the materials on record, as it stood at the time of examination by him and not on the basis of subsequent information. He pointed out that there are other provisions in law to deal with such contingencies. He also referred to a number of decisions where, on similar facts, reassessment under Section 147(b) of the 1961 Act was held barred by various High Courts on the ground that valuation report is an opinion which cannot constitute information for purposes of reassessment. He claimed that it cannot similarly be information or even a remote basis for a reasonable inference that there has been under-assessment or prejudice to the revenue.
4. The learned departmental representative, on the other hand, was at pains to take us over the facts. This is a case where the assessee is a partner in a firm which holds Siddhartha Hotel as its asset. It is a large hotel situated in an important area in the city. Even a cursory look at this information would have necessitated an enquiry on the part of the WTO. It is not a case where the return could have been accepted under Section 16(1), especially since the assessee's valuation was based upon book value and not with reference to any objective valuation or on the basis of past record. In fact, the past record itself, as pointed out by the Commissioner, was against such acceptance. He pointed out that non-enquiry, where enquiry is warranted itself, is sufficient for the inference that there has been prejudice. The Delhi High Court in Gee Vee Enterprises v. Addl. CIT  99 ITR 375, held that the Commissioner was justified in holding that the grant of registration without enquiry was prejudicial to the revenue. The Karnataka High Court in Thalibai F. Jain v. ITO  101 ITR 1, similarly held that the acceptance of a voluntary return without enquiry, on the facts and in the circumstances of that case, made the assessment one which was erroneous and prejudicial to the revenue. The Gujarat High Court, in Addl. CIT v. Mukur Corpn.  111 ITR 312, justified the action of the Commissioner in setting aside an assessment, where deductions were allowed without enquiry. In this case, the Commissioner did not give a finding that the deductions were improper, but had merely set aside. This was also held to be not a conclusion which vitiated his order. The Rajasthan High Court in Kanhaiyalal v. CIT  136 ITR 243 also held a similar view, where a return had been accepted under Section 143(1) of the 1961 Act without ascertaining the source of funds for investments made during the year.
The learned departmental representative further pointed out that the reference to a subsequent report was made merely with a view to buttress the initial inference that there was prejudice to the revenue.
Even without the valuation report, such a conclusion was inescapable.
He disputed the proposition that the Commissioner was bound by the materials on record at the time of assessment. Even if the proposition were to be correct, he argued that this is a case where prejudice was patent on the basis of record at the time of assessment, even if one were to ignore the subsequent valuation report in another partner's case. He wondered how the valuation report regarding the very property could be considered to be irrelevant merely because the reference was not made in the assessee's case. As for the argument that the valuation report overpitched the value, he pointed out that it was always open to the assessee to dispute this valuation on merits and not take shelter on a mere technicality as sought to be done in this appeal. This claim was made without prejudice to his submission that the valuation report is fair and reasonable.
5. We have carefully considered the records as well as the arguments.
The assessee is a partner in Siddhartha Enterprises. This firm has Siddhartha Hotel as its property. The assessee's interest in the partnership was worked out on the basis of the book value of the assets in the balance sheet as on the valuation date. The hotel building is a large one located in an important locality. The valuation of land component was a subject-matter of dispute in earlier years in the assessee's own case when he held the property as his own individual property. In other words, the assessee's record itself shows that there is, prima facie, a case for revaluation of the assets enjoined by Rule 2B of the Rules, read with Rule 2, which requires adjustment to be made under specified conditions. It is clear that the Commissioner had these in mind, as is evident both from his notice and his order. He also referred to the valuation report regarding the very property held by the firm, though in connection with a reference made in a co-partner's case. No doubt, the decision of the Calcutta High Court in the case of Ganga Properties (supra) limits the interpretation of the word 'record' in Section 263 to the record as it stood at the time of examination by the Commissioner for purposes of Section 263. If the inference of the Commissioner that there has been prejudice to the revenue had been based solely or substantially on the valuation report obtained in a co-partner's case, we would have probably had no difficulty in accepting the assessee's claim. However, in the assessee's case, even if we were to ignore the valuation report, the Commissioner cannot be stated to have exceeded his jurisdiction when he thought that there was, prima facie, enquiry warranted but had not been made. In the case before the Calcutta High Court, it was a case of selling certain properties. The ITO completed the assessment without awaiting the report of the Valuation Officer as to the adequacy of sale consideration. In other words, the material on record suggested clearly that the sale was in accordance with the sale documents. The question of inference that there has been understatement of sale consideration and that, therefore, the assessment was prejudicial, could not have been lightly made merely with reference to the valuation report yet to be received. It was under these peculiar facts that the decision was rendered. However, for argument's sake, we may accept that any subsequent information reaching the record should be completely ignored Even so, we would not have been able to interfere with the order of the Commissioner as he had given clear reasons both in his notice and the order to suggest that the acceptance of the return under Section 16(1) was not justified on the facts and in the circumstances of the case At any rate we find it difficult to accept that the Commissioner should completely ignore any material which may come on record. In fact, the Calcutta High Court itself pointed out at Ganga Properties' case (supra) as under: In other words, any material which comes into existence later on cannot form part of the record of the ITO for the purposes of invoking the Commissioner s power under Section 263(1) of the Act.
And it is only after the proceeding is lawfully initiated by the Commissioner on the basis of the record of the ITO that the Commissioner can take into account any material which may come into existence later on in view of the expression 'after making or causing to be made such enquiry as he deems necessary' used in the second limb of this section.
No doubt, in this case, the Commissioner referred to the valuation report even in the notice, but that, in our opinion, does not vitiate the notice itself. We are of the view that the Commissioner had ample jurisdiction to set aside the assessment. He has merely set aside the assessment for being re-done in accordance with law. Therefore, we need not go into the question of merits. We will, however, make it clear that just because we have upheld the order, it does not mean that the final assessment should be one of enhancement of the value with reference to the original assessment. It is open to the assessee to convince the authorities that the book value represents the real market value even as computed under the rules. The fact that there is a, prima facie, ground for enquiry does not always mean that in every such case, there is an under-assessment. It is well established with reference to case law on the subject, that where a provision of law has been overlooked, or the prescribed procedure has not been followed, or there is no enquiry in respect of matters where enquiry is, prima facie, warranted, the Commissioner will have jurisdiction whether it is ultimately found that there has been under-assessment or not. It is in this view, we uphold his order and dismiss the appeal.