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Kikabhai Bhagubhai and anr. Vs. Commissioner of Wealth-tax, Gujarat - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberWealth-tax Reference No. 1 of 1967
Judge
Reported in[1969]72ITR586(Guj)
ActsWealth Tax Act, 1957 - Sections 7, 7(1), 7(2) and 27(1)
AppellantKikabhai Bhagubhai and anr.
RespondentCommissioner of Wealth-tax, Gujarat
Appellant Advocate K.H. Kaji, Adv.
Respondent Advocate G.N. Joshi, Adv.
Cases ReferredIn Macneill & Barry Ltd. v. Commissioner of Wealth
Excerpt:
.....7 - under section 7 (1) wealth-tax officer is under obligation to value asset on footing of market value on relevant valuation date - section 7 (2) provides for contingency where assets of business have to be assessed as whole - wealth-tax officer has option of either valuing each asset seperately or determining net value of all assets having regard to balance-sheet of entire business - such option can be exercised only in case assessee is carrying on business and maintains accounts regularly. - - , that the assessee had no right under section 7(2)(a) to insist on the book value of the shares being accepted instead of the market value under section 7(1). in further appeals to the tribunal, the tribunal came to the conclusions that the wealth-tax officer had the authority to..........under section 7(2)(a) to insist on the book value of the shares being accepted instead of the market value under section 7(1). in further appeals to the tribunal, the tribunal came to the conclusions that the wealth-tax officer had the authority to compute the valuation of the assets under section 7(1) and was well within his rights in doing so. we may mention at this stage that in connection with the assessee, kikabhai, valuation on the basis of the market price on the shares as of november 8, 1961, came to rs. 9,21,212 against the book value of rs. 3,10,279. in the case of the assessee, ramprasad, as on october 20, 1960, the valuation on the basis of market price came to rs. 3,25,379, a against the book valuation of rs. 1,72,334; and the appellate assistant commissioner came to.....
Judgment:

Divan, J.

1. In this reference under section 27(1) of the Wealth-tax Act 1957 (hereinafter referred to as the Act), the following question has been referred to us by the Tribunal :

'Whether, on the facts and in the circumstances of the cases and on a true interpretation of the relevant provisions of section 7 of the Wealth-tax Act, it was obligatory for the Wealth-tax Officer to determine the net value of the appellant's business as a whole in shares as provided by section 7(2)(a) of the Wealth-tax Act, 1957, having regard to the balance-sheets of such business as on the valuation date ?'

2. In this reference, cases of two different assessees have been consolidated and referred to the High Court because there is a common question between the cases of the two assessees. The assessee, Kikabhai Bhagubhai, is a dealer in shares and, so far as he is concerned, the assessment year is 1963-64, the relevant valuation date being November 8, 1961. So far as the assessee, Ramprasad Manilal Bhagat, is concerned, the assessment years are 1961-62 and 1963-64, the relevant valuation dates being October 20, 1960, and November 8, 1961, respectively. Ramprasad is also a dealer in shares. Each of these two assessees kept regular books of account for his respective share business and for other activities. So far as Kikabhai was concerned, as on the valuation date, i.e., November 8, 1961, the value of the shares in stock shown in the balance-sheet is Rs. 3,10,279 on the basis of the cost price of the shares. In the case of Ramprasad, the value of the shares in stock as on the valuation date was Rs. 1,72,334 as of October 20, 1960; and Rs. 1,52,513 as of November 8, 1961. Each of these two assessees claimed before the Wealth-tax Officer that the shares in stock should be valued on the basis of the books of account of the assessee concerned and the balance-sheet drawn in the light of those books of account and in this connection the assessee relied upon section 7(2)(a) of the Act. This contention of the assessees was not accepted by the Wealth-tax Officer in the relevant assessments and the officer valued the shares in stock at the prevalent market price as on the relevant valuation date. Thereafter, appeals were filed by the assessees against the orders of the Wealth-tax Officer; and the Appellate Assistant Commissioner confirmed the view of the Wealth-tax Officer, viz., that the assessee had no right under section 7(2)(a) to insist on the book value of the shares being accepted instead of the market value under section 7(1). In further appeals to the Tribunal, the Tribunal came to the conclusions that the Wealth-tax Officer had the authority to compute the valuation of the assets under section 7(1) and was well within his rights in doing so. We may mention at this stage that in connection with the assessee, Kikabhai, valuation on the basis of the market price on the shares as of November 8, 1961, came to Rs. 9,21,212 against the book value of Rs. 3,10,279. In the case of the assessee, Ramprasad, as on October 20, 1960, the valuation on the basis of market price came to Rs. 3,25,379, a against the book valuation of Rs. 1,72,334; and the Appellate Assistant Commissioner came to the conclusion that the valuation on the basis of the market price should be reduced by Rs. 954. For the assessment year 1962-63, i.e., as on the valuation date, November 8, 1961, according to the book value of the shares in stock of Ramprasad came to Rs. 1,15,513 and on the basis of the market value, the value came to Rs. 4,00,840.

3. On these facts, at the instance of the two assessees, this consolidated reference has been made by the Tribunal.

4. Section 7(1) of the Act, as it stood at the relevant time, provided :

'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 is sold in the open market on the valuation date.'

5. Sub-section (2) of section 7 provided :

'(2) Notwithstanding anything contained in sub-section (1) - (a) where the assessee is carrying on a business for which accounts are mentioned by him regularly, the Wealth-tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as the circumstances of the case may require ...'

6. Section 7(2)(b) provides for the contingency where the business is of a company not resident in India and a computation in accordance with clause (a) cannot be made by reason of the absence of any separate balance-sheet up for the affairs of such business in India. It is not necessary for the purposes of this reference to consider the provisions of section 7(2)(b). It is clear from the words of section 7(1) that ordinarily every asset other than cash has to be estimated for the purposes of the Act on the basis of the market value as estimated by the Wealth-tax Officer because the words, 'the price in the opinion of the Wealth-tax Officer it would fetch if sold in the open market' merely indicate the market value as estimated by the Wealth-tax Officer. It is obligatory on the Wealth-tax Officer under section 7(1) to estimate the value of any particular asset on the footing of the market value as on the valuation date. Having made that provision in sub-section (1) of section 7, the Legislature has provided in sub-section (2) for a contingency where the assets of a business as a whole have to be determined. Under sub-section (2)(a) of section 7, when the Wealth-tax Officer has to determine net wealth of the assets of a business, if the assessee is carrying on a business and if the accounts of the business are maintained by him regularly, then instead of determining separately the value of each asset held by the assessee in such business, the Wealth-tax Officer may determine the net value of the assets of the entire business having regard to the entire business having regard to the balance-sheet of such business as on the valuation date making such adjustments therein as the circumstances of the case may require. It is, therefore, clear that an option has been given to the Wealth-tax Officer concerned to value that net value of all the assets of the entire business instead of valuing each asset separately. Under sub-section (1) of section 7, it is the valuation of each asset held by the assessee that has to be carried out on the basis of the market value as of the valuation date. Under sub-section (2)(a) of that section option is given to the Wealth-tax Officer by using the word 'may' and also by using the words, 'instead of determining separately the value of each asset held by the assessee in such business', and also by using the words, determine the net value of the assets of the business as a whole' in section 7(2)(a), the Legislature has clearly indicated that in the case of valuation of the assets of the business as a whole, it is open to the Wealth-tax Officer to value the assets of the entire business without going into the valuation of each asset held by the assessee in respect of that business. On a plain reading of the section it is clear that section 7(2)(a) gives an option to the Wealth-tax Officer concerned, to adopt the valuation shown in the balance-sheet of the business of the assessee making such adjustments in that valuation as the circumstances of the case may require. But the Wealth-tax Officer is not bound to adopt the valuation laid down under section 7(2)(a) in case he decides to go in for the valuation of each asset in that particular business.

7. In Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, at page 792 of the report, it was pointed out by Shah J. delivering the minority judgment of the Supreme Court :

'By the first sub-section (of section 7) the Wealth-tax Officer is authorised to estimate, for the purpose of determining the value of any asset, the price which it would fetch, if sold in the open market on the valuation date. But this rule in the case of a running business may often be inconvenient and may not yield a true estimate of the net value of the total assets of the business. The Legislature has therefore provided in sub-section (2)(a) that where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth-tax Officer may determine the net value of the assets of the business as a whole, having regard to the balance-sheet of such business as on the valuation date and make such adjustments therein as the circumstances of the case may require. But the power conferred upon the tax officer by section 7(2) is to arrive at a valuation of the assets, and not to arrive at the net wealth of the assessee. Section 7(2) merely provides machinery in certain special cases for valuation of assets, and it is from the aggregate valuation of assets that the net wealth chargeable to tax may be ascertained.'

8. We may point out that a case similar to the instant case came before the Allahabad High Court in Madan Gopal Radheylal v. Commissioner of Wealth-tax, where the assessee was a Hindu undivided family, dealing in shares of companies and also having income from dividends, properties and share in a partnership concern. For the relevant assessment years, the assessees valued the shares at cost price in accordance with their usual practice. The Wealth-tax Officer, however, valued the same at the market value; and the question arose whether the Wealth-tax Officer was justified in valuing the closing stock of the shares at market value instead of at cost price as shown by the assessees. The Allahabad High Court pointed out :

'The words 'may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole regard to the balance-sheet of such business' clearly show that section 7(2)(a) of the Act provides for an alternative manner for valuing the assests and not the sole method. In the present case the assessee insisted that the procedure provided by section 7(2)(a) of the Act and not that provided by section 7(1) of the Act should be followed. But it has not been shown to us that the Wealth-tax Officer was bound to follow the procedure provided in section 7(2)(a) of the Act and was not free to have recourse to the provisions of section 7(1) of the Act.

Inasmuch as we are of the opinion that the Wealth-tax Officer had a discretion in the matter and he was fully at liberty to have followed the procedure given under section 7(1) of the Act, we answer the second question in the affirmative, in favour of the department and against the assessee.'

9. Though the question of interpretation of the provisions of section 7(2)(a) as against the provisions of section 7(1) of the Act had not come up for consideration before the Allahabad High Court in the form in which it has come before us in the instant case, the Allahabad High Court has interpreted the provisions of section 7 and particularly the provisions of section 7(2); and several High Courts in India have taken the same view while dealing with different aspects arising out of valuation of assets of a business for the purposes of Wealth-tax Act.

10. In Commissioner of Wealth-tax v. Indian Standard Metal Company Ltd. at page 839 of the report, the Bombay High Court pointed out :

'Under section 7 of the Wealth-tax Act, however, the Wealth-tax Officer is entitled to follow either of the two methods mentioned therein for the calculation of the value of the assets in the case of an assess carrying on business. He may under sub-section (1) of the said section proceed to determine the market value. He may, on the other hand, under sub-section (2) of the said section, proceed on the global valuation basis of valuing the assets of the business as a whole.'

11. The same view was also taken by the Bombay High Court in Commissioner of Wealth-tax v. Standard Mills Co. Ltd., at page 292; and there it was pointed out :

'The primary mode as will be seen from sub-section (1) of section 7 is to make an estimate as to the price at which the asset would be sole and that would be the value of the asset. Sub-section (2), however, gives at option to the Wealth-tax Officer not to follow this method of valuing each asset by estimating its market price in case where the assessee is carrying on a business and the Wealth-tax Officer has to value the assets of the business belonging to the assessee.'

12. We may point out that, though in Kesoram Industries' case the Supreme Court overruled the decision of the Bombay High Court in Standard Mills' case, it was on a different and not on an interpretation of the provisions of sections 7(1) and 7(2)(a) of the Act. In that case it is only in the minority judgment of Shah J. that the provisions of section 7(1) and 7(2)(a) have been considered.

13. In Commissioner of Wealth-tax v. Raipur Manufacturing Company Limited, at page 515, it has been pointed out that the words, 'notwithstanding anything contained in sub-section (1)' clearly convey that it is open to the Wealth-tax Officer instead of proceeding to estimate the value of the assets as laid down in section 7(1), to proceed to do so under section 7(2). The conditions precedent to his acting under the requirements of section 7(2) are - (1) that the assessee must be carrying of a business and (2) that the accounts in respect of such business are maintained by him regularly.

14. In Macneill & Barry Ltd. v. Commissioner of Wealth-tax, at page 212, the Calcutta High Court interpreted section 7(2)(a) as giving an option to the Wealth-tax Officer to determine the net value of the assets of the business as a whole instead of proceeding to carry on the valuation on the basis of the market value under section 7(1). The Calcutta High Court also took the same view in Commissioner of Wealth-tax v. Tungabhadra Industries Ltd. The Calcutta High Court there pointed out :

'Two courses are open to the authorities under this section. The Wealth-tax Officer may, if he chooses, value any asset, other than cash, estimating the price which in his opinion it would fetch if sold in the open market on the valuation date. In other words, it means that the market value of each asset may be taken into consideration. Sub-section (2) however provides a rough and ready method in the case of an assessee who carries on a business maintaining accounts regularly. In the case of such an assessee it is open to the Wealth-tax Officer, instead of determining separately the value of each asset held by the assessee in such business, to 'determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as the circumstances of the case may require.' This means that instead of restoring to the cumbrous process of valuing each and every asset of the business separately, he can adopt the sum total of the values given in the balance-sheet, making such adjustments as may be called for. The balance-sheet will not disclose all the different assets separately, but will show their value taken together in several distinct categories.'

15. In Commissioner of Wealth-tax v. Birla Jute ., the Calcutta High Court held as in the earlier decisions that sub-section (2) of section 7 confers a discretion on the Wealth-tax Officer to proceed on the balance-sheet.

16. In Commissioner of Wealth-tax v. Mysore Commercial Union Ltd. it was pointed out by the Mysore High Court :

'.... one method of valuation is to ascertain the market value of the assets other than cash. Section 7(2) provides for an alternative method ... The Wealth-tax Officer is not compelled to adopt that basis. It is left to his discretion to adopt that basis or not. He may, if he so chooses, proceed to value the business assets on the basis of the market value as provided under section 7(1). The basis provided under that provision can be adopted only where the assessee is carrying on a business for which accounts are maintained by him regularly. In that event, the business assets will have to be valued as a whole. In such a case the valuation may be having regard to the balance-sheet of such business as on the valuation date.'

17. In the Commissioner of Wealth-tax v. Andhra Sugars Ltd. the Andhra Pradesh High Court has pointed out that the Wealth-tax Officer has discretion either to value each of the assets of the company or to take the net value of the assets as a whole having regard to the balance-sheet of such business subject to such adjustments as he may consider necessary. If he follows the first of the methods, viz., by valuing each of the assets, he will have to determine the market value of that asset on the valuation date. If he follows the second of the methods, he will have to take the net value of the assets given in the balance-sheet and make such adjustments as the circumstances of the case may require.

18. Thus, it appears that several High Courts in India have interpreted the provisions of section 7(1) and section 7(2)(a) of the Act in the same manner in which we are doing in the instant case. No decision of any High Court has been pointed out to us where a contrary view regarding the provisions of section 7(1) and section 7(2)(a) of the Act has been taken. The connection urged on behalf of the assessee before us that the word 'may' occurring in section 7(2)(a) should be read as 'shall' cannot accepted in view of the scheme of the said section in view of the word 'instead of determining separately the value of each asset held by the assessee in such business'. It may also be pointed out that in this word section, the Legislature has used the word 'shall' indicating that obligatory on the Wealth-tax Officer, ordinarily speaking, to value and asset on the basis of the market value. In order to indicate that method of valuation on the footing of market value can be departed for in the cases of assets of a business, the opening words of sub-section are, 'Notwithstanding anything contained in sub-section (1)' : thereafter under sub-section (2), it has been provided that the Wealth-tax Officer may determine the net value of the assets of the business as a whole on the footing of the balance-sheet. Under these circumstances and also in the light of the decisions of the different High Courts in India, it is clear that the view taken by the Tribunal in the instant case is correct. It is clear that it was not obligatory for the Wealth-tax Officer to determine the net value of the business of the two assessee before us under section 7(2)(a) of the Act and that he had the option to proceed under section 7(1) to value each asset separately.

19. In the result, the question referred to us must be answered in the negative. The assessee will pay the costs of this reference to the Commissioner of Wealth-tax.

20. Before leaving this reference, we must point out that the practice which has been followed by the Tribunal in referring cases of two different assessees by a joint reference is not justified by rules of practice or procedure to dispose of the appeals before it by a common judgment, when it came to make references under section 27(1), it would have been better to have sent up two separate references, each reference dealing with the case of each individual assessee.


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