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Wealth-tax Officer Vs. Kirtichand Tauk - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Jaipur
Decided On
Judge
Reported in(1985)11ITD291(JP.)
AppellantWealth-tax Officer
RespondentKirtichand Tauk
Excerpt:
.....period the market value of the closing stock was in excess of the book value by more than 20 per cent, rule 2b(2) cannot be applied merely on the basis of the gross profit which may have been earned in respect of the exports; in particular, in the first half of the year or first three quarters of the year and in some cases there may have been no cases of transaction of sales in the last quarter at all. these are mostly cases of exporters of emeralds and exports do not take place on all the days of the year, though in respect of sales inside the country the sales may take place every day.the market rates of goods in which the assessee is dealing may have been higher in the first quarter of the year and lower in the second quarter. it may again have been higher in the third quarter and.....
Judgment:
1. All these appeals by the WTO have been consolidated and heard together and are being disposed of by this common order for the sake of convenience. The reason why these appeals are heard together is that the main point at issue in all these appeals pertains to the application of provisions of Rule 2B(2) of the Wealth-tax Rules, 1957 ('the Rules'), for valuation of closing stock of the firms in which the different assessees were partners. There are some other points which are, of course, of much less importance and they will be dealt with separately in each assessee's case.

2. So far as the application of Rule 2B(2) is concerned, the position is that the firms in which the different assessees are partners had shown gross profits in excess of 20 per cent in each of the years under appeal. The WTO was of the opinion that Rule 2B(2) would apply and he, thus, increased the valuation of closing stock by applying the said rule.

3. Against the additions made, the assessee went in appeal and the appellate authority has accepted the contention that Rule 2B(2) could not be applied merely on the basis of the rate of gross profit shown by the assessee in the income-tax assessment. In some cases, reliance was placed on the Allahabad High Court's ruling in the case of Seth Satish Kumar Modi v. WTO [1983] 139 ITR 373, for the proposition that even in wealth-tax, the valuation has to be taken at cost price in accordance with settled commercial principles. In other cases, reliance was placed on various orders of the Tribunal, wherein on similar facts, it was held that the application of Rule 2B(2) merely on the basis of a higher gross profit rate than 20 per cent was unjustified.

4. It may be pointed out that in some cases, the WTO had reopened the assessments under Section 17(1)(b) of the Wealth-tax Act, 1957 ('the Act'), while, in other cases the addition was made during the original assessment itself.

5. The department is aggrieved and is in appeal. We have heard the learned departmental representative and the counsel for the assessee at length. The learned departmental representative did not dispute that the point at issue has been resolved by various orders of the Tribunal of Jaipur Bench. The details of those orders are to be found in para 8 of the order of the learned Accountant Member reported in WTO v. Gopi Chand Rawat [1983] 5 ITD 667 (Delhi) (TM), in which there was a difference of opinion between the learned Accountant Member and the Judicial Member and the matter was finally resolved by the Third Member. The decision of the learned Third Member is to the effect that the assessee was not required to lead any evidence for the purpose of invoking Rule 2B(2) because it was never the case of the assessee that the value shown in the balance sheet of the firm did not represent the correct value. The evidence to prove the market value of the closing stock had to be led by the revenue since the revenue wanted to make adjustment under Rule 2B(2). There is no evidence or material brought on record by the revenue. The learned Third Member had held that Rule 2B(2) could not be applied, merely on the basis of the rate of gross profit shown in that year.

6. The learned departmental representative, however, pointed out that he has moved a miscellaneous application for rectification of this order because, in his opinion, the learned Third Member had wrongly placed the onus on the revenue. So far as the applicability of Rule 2B(2) for valuation of specific assets shown in the balance sheet is concerned, the learned departmental representative strongly relied on the Supreme Court's ruling in the case of Juggilal Kamlapat Bankers v.WTO [1984] 145 ITR 485 which confirmed the Allahabad High Court's ruling in Juggilal Kamlapat Bankers v. WTO [1979] 116 ITR 646. So far as the onus is concerned, the learned departmental representative relied on the Supreme Court's ruling in the case of CWT v. J.K. Cotton Mfrs. Ltd. [1984] 146 ITR 552. His contention is that by applying Sections 106 and 144 of the Indian Evidence Act, 1872, the facts regarding the valuation of closing stock being within the knowledge of the assessee, the onus would be on the assessee to disprove that the value of the closing stock was not in excess of the cost by at least the rate of the gross profit shown by the assessee.

7. As against this, the learned Counsel for the assessee relied on the Allahabad High Court's ruling in the case of Seth Satish Kumar Modi (supra) for the proposition that the market value has to be taken as the cost in accordance with the settled principles of accountancy. The learned Counsel for the assessee placed strong reliance on the Rajasthan High Court's ruling in the case of CWT v. Man Industrial Corpn. Ltd. [1980] 123 ITR 298 for the proposition that the onus of proving that the value mentioned in the balance sheet does not correctly represent the real value of the assets, and to what extent the value mentioned in the balance sheet should be reduced or increased for arriving at the real value of such assets would be on the party that challenges the valuation shown in the balance sheet. In the instant case, it is the revenue that challenges the valuation and the onus would, therefore, be on the revenue. The counsel for the assessee also relied on an order of the Jaipur Bench of the Tribunal in the case of WTO v. Ghyan Chand Kothari [WT Appeal No. 675 and 676 (Jp.) of 1981, dated 31-12-1983], wherein the bench quoted the order of the Third Member in the case of Gopichand Rawat (supra) and also the fact that a miscellaneous application for rectification has been moved by the department and still followed the order of the majority in that case.

8. We have considered the rival contentions. So far as the first question regarding the applicability of Rule 2B(2) is concerned, we are clearly of the opinion that the ruling which would be applicable is the Supreme Court's ruling in Juggilal Kamlapat Bankers' case (supra). In that case also, as in the case before us, the question pertained to the valuation of the share of the partner in a firm and the WTO being of the opinion that some of the properties owned by the firm had a market value in excess of the book value, referred the question of valuation to the Valuation Officer. The assessee challenged the reference before the High Court and lost in Juggilal Kamlapat Bankers' case (supra). The Supreme Court confirmed that order of the High Court and clearly held that Rule 2B(2) could be applied where the WTO was of the opinion that market value of the assets exceeds its written down value or book value by more than 20 per cent. This ruling has clearly by implication overruled the Allahabad High Court's ruling in the case of Seth Satish Kumar Modi (supra). We, therefore, hold that Rule 2B(2) can be invoked by the WTO for valuing the closing stock of the firm.

9. The question next arises as to on whom the onus of proving the fact that the necessary ingredients of Rule 2B(2) are satisfied lies. Rule 2B(2) applies where the market value of an asset exceeds its written down value or its book value or the value adopted for the purpose of assessment under the Income-tax Act, 1961, as the case may be, by more than 20 per cent. Clearly the said onus would be on the revenue because whoever contends that the market value of an asset is more than the book value must prove the same. The Rajasthan High Court had occasion to consider a more or less similar question in the case of Man Industrial Corpn. Ltd. (supra). In that case, the assessee's contention was that the value of the assets shown in the balance sheet should not be adopted when valuation is done under section l(2)(a) of the Act, but lower valuation should be taken. The Rajasthan High Court held that when the WTO proceeds to assess the value of the assets of an assessee by adopting the global method of valuation under Section 1(2)(a), the valuation of the assets given in the balance sheet of the assessee for the relevant year should normally be taken to indicate the real value of the assets for the purpose of determining the net wealth. However, the value of the assets shown in the balance sheet is subject to adjustment, on the basis of acceptable evidence produced by the assessee before the WTO. The value of fixed assets shown in the balance sheet should be considered as a primary basis or the prima facie evidence of valuation of such assets. Applying this rule, it is clear that since here the revenue is claiming that the valuation of the closing stock was in excess of the book value, the onus would squarely be on the revenue to prove the fact by acceptable evidence.

10. The question arises whether the mere fact that the gross profit exceeds 20 per cent in most of the cases, would be sufficient reason to hold that the value of the closing stock as per the balance sheet exceeds the book value by more than 20 per cent. The matter has been argued at considerable length and we have taken into consideration the arguments pro and contra. In an earlier order of the Calcutta Bench, the Tribunal had held that merely on the basis of the gross profit rate Rule 2B(2) cannot be applied. That view was taken by more than one Bench but it appears that some Benches took a contrary view also and for that the matter went finally to the Third Member. The reliance on the Supreme Court's ruling in J.K. Cotton Mfrs. Ltd.'s case (supra) by the revenue, is in our opinion quite misplaced. All that one of the Judges in that case held was that if the WTO had made some enquiries by examining the assessee with the aid of principles of Sections 106 and 114 of the Evidence Act, their Lordships would perhaps have examined whether by the principles of purposive interpretation, in order to give effect to the intention of Legislature in enacting the Wealth-tax Act and involving the scheme of settlement under Taxation on Income-tax (Investigation Commission) Act, 1947, the assessee was entitled to the deduction of these two tax liabilities. There is nothing more said on the subject than what we have stated above. All that Section 106 of the Evidence Act says is when any fact is especially within the knowledge of any person, the burden of proving that fact is upon him. Section 114 of the Evidence Act authorises a Court to presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public and private business, in their relation to facts of the particular case. In our opinion, these sections or presumptions are not of much assistance in the case before us because the assessee cannot be expected to give evidence against himself and that too voluntarily. If the WTO thought that the value of the closing stock exceeded the book value by more than 20 per cent, he could have issued notices to the assessees and examined them. Then the question of applying Sections 106 and 114 could have arisen. The WTO had not done so. The onus, in spite of all the arguments of the departmental representative and taking into account Sections 106 and 114 and the rulings already discussed, still remains on the revenue to prove that the value of the closing stock exceeded the book value by more than 20 per cent. We also agree with the learned Counsels for the assessees that merely on the basis of the gross profit rate in a particular year, it cannot be said that the market value of the closing stock exceeded the book value by more than 20 per cent.

11. We may point out that Shri N.M. Ranka, the learned Counsel for the assessee, in WT Appeal No. 604 (Jp.) of 1981 stated that while in the assessment year 1975-76 the gross profit shown was 27 per cent, in the next year the gross profit had fallen to 9 per cent only. It was, therefore, urged that taking the gross profit rate only as a basis for valuing the closing stock, would be highly fallacious and a risky proposition in the absence of any other evidence to show that the market value of closing stock exceeded the book value by more than 20 per cent.

12. In our opinion, there is one more reason for holding that the basis of gross profit alone to apply Rule 2B(2) is not correct. We find that while the gross profit is earned over a full period of 365 days or so, the Wealth-tax Act takes into account only the valuation date, i.e., last day of the accounting year. Unless the WTO brings on record and material to show that on the last day of the year or near about the last day of the accounting period the market value of the closing stock was in excess of the book value by more than 20 per cent, Rule 2B(2) cannot be applied merely on the basis of the gross profit which may have been earned in respect of the exports; in particular, in the first half of the year or first three quarters of the year and in some cases there may have been no cases of transaction of sales in the last quarter at all. These are mostly cases of exporters of emeralds and exports do not take place on all the days of the year, though in respect of sales inside the country the sales may take place every day.

The market rates of goods in which the assessee is dealing may have been higher in the first quarter of the year and lower in the second quarter. It may again have been higher in the third quarter and may have fallen in the fourth quarter. These facts could have been enquired into by the WTO, but he did not do so. By looking at the books of the assessee and by examining the partners, the WTO may be able to make a case sometime that the market value of the closing stock exceeded the book value by more than 20 per cent but merely on the basis of gross profit rate, the said conclusion would not be justified as the Calcutta Bench had held in another case that such a conclusion, merely on the empirical reasoning, is not justified. Therefore, taking into account all the arguments advanced before us, we having independently come to the conclusion that the revenue has not discharged its onus of proving that the market value of the closing stock exceeded the book value by more than 20 per cent. We also respectfully follow the majority view in the case of Gopi Chand Rawat (supra) and uphold the order of the AAC in this regard.

13. The next ground in WT Appeal No. 212 (Jp.) of 1981 pertains to the claim of exemption under Section 5(1)(xxxii) of the Act in respect of the business of manufacture of emeralds. The various Benches of the Tribunal have taken the view that the manufacturers of emeralds who import rough emeralds, cut it, polish it and then sell it, are entitled to exemption under Section 5(\)(xxxii) as an industrial undertaking. We may cite just one order in WT Appeal No. 224 (Jp.) of 1979 dated 11-7-1980 in the case of Smt. Manju Devi Kothari. Respectfully following that order, we uphold the order of the AAC.14. The last ground in WT Appeal No. 212 (Jp.) of 1981 pertains to the tax liability, which arose as a result of disclosure made by the assessee under the Voluntary Disclosure Scheme. The Supreme Court has held in the case of CWT v. Vadilal Lallubhai [1984] 145 ITR 7 that the assessee is entitled for deduction of tax liability as a result of disclosure under the Voluntary Disclosure Scheme. We, therefore, uphold the order of the AAC in WT Appeal 212 (Jp.) of 4981. The departmental appeal fails.

15. In WT Appeal Nos. 193, 207, 219 and 269 (Jp.) of 1981, the only ground pertains to the application of Rule 2B(2) and the departmental appeals are dismissed.

16. In WT Appeal Nos. 206, 208 and 209 (Jp.) of 1981, the only point at issue besides the application of Rule 2B(2) is regarding legality of reopening the assessment under Section 17(1)(b). In view of the fact that we have held in favour of the assessee, on merits, we do not find it necessary to go into the question of validity of reopening. Since on merits the reopening was not justified, the appeals are dismissed.

17. In WT Appeal Nos. 213, 214 and 215 (Jp.) of 1981 besides the application of Rule 2B(2), the other grounds in these appeals pertain to exemption under Section 5(1)(xxxii) and the allowance of tax liability under the Voluntary Disclosure Scheme. For reasons already given above, these appeals are dismissed.


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