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Judgment
Rajesh Balia, J.—As identical question of law arises in all the three cases, we propose to decide all these three cases by this common judgment. The issue for consideration in the present case is whether value of goodwill which was not purchased for a price by the assessee and is not part of the book assets as disclosed in balance sheet is to be included while assessing the value of business assets u/s 7(2) of the Wealth-tax Act, 1957 (''the Act'') read with rule 2C of the Wealth-tax Rules, 1957. The dispute relates to the question whether value of goodwill which is generated by a person in the course of carrying on his business is to be included for computing net wealth of the assessee in terms of section 7(2). Under the scheme of the Act, section 3 of the Act provides that every individual is to be charged to wealth-tax in respect of his net wealth on the corresponding valuation date of every assessment year at the rates specified in the Schedule. Net wealth has been defined in section 2(m) of the Act generally to mean the amount by which the aggregate value, computed in accordance with the provisions of this Act, of all the assets, wherever located belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under the Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than which are not to be taken into account under the various provisions of the Act. ''Assets'' has been defined to mean u/s 2(e) of the Act to include property of every description, movable or immovable. In terms of these provisions, ordinarily, every asset belonging to the assessee on the valuation date has to be valued as per the provisions of the Act and the liability on such date has to be valued and after adjusting the aggregate value of liabilities against the aggregate value of assets net wealth is to be found out. The method and manner of determining valuation of assets has been provided u/s 7. The general rule provided u/s 7(1) is that subject to the rules made in this behalf, the value of any asset other than cash for the purposes of the Act, shall be estimated to be the price which in the opinion of the Assessing Officer, it would fetch if sold in the open market on the valuation date. Sub-section 2(a) which is relevant for our purposes provides an exception to section 7(1) and during the relevant period with which we are concerned, read as under:
(2) Notwithstanding anything contained in sub-section (1),-
(a) where the assessee is carrying on a business for which accounts are maintained by him regularly, the Assessing 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 may be prescribed;
We may notice here that the last phrase ''as may be prescribed'' had been substituted for ''as the circumstances of the case may require'' by the Wealth-tax Amendment Act, 1964 with effect from 1-4-1965. After this amendment having been made, rules 2A, 2B, 2C, 2D, 2E, 2F & 2G of the Rules came to be inserted in the Wealth-tax Rules by notification dated 4-11-1965. Explanation to rule 2E was inserted vide notification dated 28-7-1966. From the provisions of section 7 which provides for the manner and method of determining the value of assets on the valuation date ordinarily market value of any asset other than cash has to be estimated as on the valuation date by the WTO on the basis of price which in the opinion of the WTO it would fetch if sold in the open market on the valuation date. However, in the case of net assets of a business carried on by the assessee, price be determined not with reference to the price which each asset is likely to fetch if sold in the open market on the valuation date, but as one amalgamated net balance of business as a whole having regard to the balance sheet of the business on the valuation date, that is to say, instead of valuing each asset separately it is permissible to value the net value of the business as a whole taking all assets as one amalgam on the basis of balance sheet without reference to the price each asset is likely to fetch in open market. That is to say, ordinarily, in the case of WTO adopting a global value for the purpose of valuing the net asset of the business, the basis for such valuation is to be the values of assets and liabilities as disclosed in balance sheet of the business, subject, of course, to the adjustments which are permissible. Prior to its amendment in 1964, it was left to the discretion of the WTO to make such adjustments in the book value of the assets as the circumstances may require. In case no adjustment is thought fit to be made by the WTO or if no adjustment is required to be made in respect of any particular area, there could not have been any separate assessment of any asset which was not part of the balance sheet of the business.
u/s 13 of the Act all officers and other persons employed for the execution of the Act are to observe and follow the orders, instructions and directions of the Board. The Board had authority to issue such orders, instructions and directions to wealth-tax authorities as are deemed proper for the administration of the Act and execution of the Act except to interfere with the discretion of the AAC or the Commissioner (Appeals) in the exercise of his appellate function. It may be noticed that the field of making of adjustment in the net value of business disclosed in the balance sheet was formerly, that is to say, prior to insertion of the words ''as prescribed'' was left to the discretion of the individual WTO as the circumstances of each case may require, that is to say, the field of making adjustment in the net value of business by travelling outside the balance sheet was not specifically covered by the statute, but was left to the authority concerned and it was in these circumstances, the Board had thought it fit to issue guidelines regarding the circumstances in which what adjustment in the value of the business may be required to be made by the WTO for a proper and uniform execution of the Act while applying section 7(2) for the purpose of determining the net value of a business as a whole.
It will be pertinent to notice here that goodwill of a person, namely, whether an individual or a firm or company, vis-a-vis its business is a valuable asset. Goodwill denotes benefit arising from connection and reputation. A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. The benefit to the business varies with the nature of the business and also from one business to another. It is an intangible asset in the sense that its benefit ensures daily and with the growth or decline of the business, it is augmented or withered away with the passage of time. Therefore, it is difficult, if not impossible, to predict the value at which it can be sold.
It is keeping in view these factors as accounting principles, ordinarily no entry of self-generated goodwill finds its place in the balance sheet of any trade or business. In this connection, we may usefully refer to the opinion of some well-known accounting experts in this regard.
T.R.M. de Raula, in his book the Principles of Auditing while dealing with goodwill asserts that goodwill should not appear as an asset in a balance sheet, except in the case of purchase, when it should appear at cost. It further goes to say that the figure at which goodwill appears, in a balance sheet does not purport to show its present value, but merely the amount that has been expended in its acquisition, or in other words, the amount of capital that has been invested in this particular asset. J.O. Magee in his book, Partnership Accounts while dealing with why and when goodwill must be valued stated that goodwill will not appear as an asset in the balance sheet of business until some event has taken place which makes it necessary to place a value upon it. This can be readily appreciated if we consider the case of person who sets up a new business, i.e., where no business existed before. He invests his money (capital) in various assets such as premises, fixtures and fittings, motor van, stock, etc. Nowhere do we find him purchasing goodwill. There is no goodwill to be purchased because in circumstances such as those no established business exists. It is he who is on the point of establishing one. Five years hence, say, he may well be able to sell the business and demand a price for its goodwill as well as for the stock, fittings and other assets. But at the beginning there is no goodwill and none will appear in the books until circumstances warrant, or make it necessary for a value to be placed upon it. He further states in Partnership Accounting is the usual practice for goodwill not to appear as an asset in a firm''s books.
William Pickles in his Book of Accountancy says that the books of account may or may not record a figure for goodwill; in fact, unless arising by purchase, goodwill does not usually appear in the books, it being regarded as contrary to good accounting practice to write up a created goodwill.
Hrishikesh Chakraborty in Advanced Accountancy points out that goodwill is an intangible asset usually not shown in accounts excepts when it is brought into books due to admission, retirement, business purchase, etc.
In this connection it has also to be noticed that while adverting to the assets, the net value of business as a whole as a global value u/s 7(2), the primary emphasis is on the valuation as per accounts and not valuation of the business de hors what is reflected from the books of accounts, that is to say, ordinarily the net value of the business reflected in a properly maintained accounts is to be accepted subject only to adjustment either required as the circumstances warrant prior to the amendment of the Act or as per the adjustment specifically provided by the rules after the above-referred amendment. Therefore, while evaluating the net value of the business, there is no room for travelling beyond the books and the rules governing the adjustments to explore the includibility of the asset otherwise into the net wealth and to find out its value for that purpose. Since the net valuation of business as a whole under sub-section (2) of section 7 depends on the regularly maintained accounts, one must keep in the normal rules of accountancy prevailing in commerce and industry while accepting or rejecting the valuation arrived at on the basis of such accounts and it is in the light of such accountancy principles that the rules or the executive instructions prior to commencement of rules, if any, issued by the Board for the purpose of proper execution of the Act amounting to laying down guidelines have to be looked into. Unless there is a clear intention by the rule-making authority to give a go-by to normal rules of accountancy in providing for adjustments in the book value of the net wealth of the business, adjustments have to be treated in that light. We may notice that while dealing with the cases arising under the income tax Act, 1961, the Supreme Court approved the principle that the normal rule of accountancy should be adopted for determining the actual cost of assets in absence of any statutory definition or other indication to the contrary. Reference in this connection may be made to a decision of the Supreme Court in the case of Challapalli Sugar Ltd. Vs. The Commissioner of Income Tax, A.P., Hyderabad, .
From the aforesaid it could well be said as a normal principle of accountancy self created goodwill does not enter the books of account as an invisible asset of any prudent businessman unless goodwill has been purchased or acquired on payment of cost. In that event, the lay out of purchase of goodwill finds its way into the accounts of the person acquiring such goodwill. Keeping this background in mind, ordinarily when a goodwill is not shown in the books of account unless there is a requirement to make adjustment by including the value of goodwill, the value of such invisible asset like goodwill not finding its place in books of account, will not be taken into consideration while taking the global value of the business. As we have noticed above, the nature of the asset and such other various unthought of consideration that go into the making or destroying it and the fact that the real question of valuing goodwill arises only when the question of transferring or sharing it arises, the question was agitating the mind of those entrusted with the execution of the Act whether any adjustment in the global value of business ought to be made on account of any value to be assigned to goodwill whether entered into books of account or not. It is now not in dispute that prior to the amendment by the Wealth-tax Amendment Act, when the issue of adjusting the global value of the net wealth of the business as disclosed by the balance sheet was to be adjusted as the circumstances warrant in each case as per the opinion of the WTO. Keeping in view the aforesaid difficulties and keeping in view the accounting principle referred to by us, the Board in exercise of its power u/s 13 had issued instructions that no attempt should be made to include the value of goodwill unless it has been actually paid for by the assessee and is also shown as an asset of the business in the balance sheet, that is to say, until the field for making adjustment in global value of a business as a whole came to be occupied by rules framed under the Act, no adjustment on account of value of the goodwill, which was self-generated, was required to be made for making adjustment in the global value of a business u/s 7(2).
The adjustments in the global value of a business as a whole were required to be made as prescribed under the rules vide amendment with effect from 1-4-1965. For the purpose rules were inserted by notification dated 4-11-1965. Rules 2A and 2C read as under:
2A. Determination of the value of assets of business as a whole. -Where the Wealth-tax Officer determines under clause (a) of sub-section (2) of section 7 the net value of the assets of the business as a whole having regard to the balance sheet of such business, he shall make the adjustments specified in rules 2B, 2C, 2D, 2E, 2F and 2G.
2C. Adjustments in the value of an asset not disclosed in the balance sheet-The value of an asset not disclosed in the balance sheet shall be taken to be-
(a) in the case of debt due to the assessee, the amount due to the assessee under that debt, and where such amount or part thereof has been allowed as a deduction under clause (vii) of sub-section (1) of section 36 of the income tax Act, 1961, in computing the total income of the assessee for the relevant year for the purposes of assessment under that Act, the amount of the debt as reduced by the deduction to be allowed;
(b) in the case of goodwill purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less;
(c) in the case of managing agency rights purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less;
(d) in the case of any other asset, its market value on the valuation date.
Thus, the adjustments which are required to be made in global value in respect of asset not disclosed in the balance sheet. Sub-clause (a) of rule 2C envisages that in case of debt due to the assessee in respect of which any deduction u/s 36 of the income tax Act has been allowed on account of its having become bad or to the extent it has become irrecoverable, the value of such debt as reduced by the deductions allowed is to be included in computing the global value of the business. We may notice that sub-clause (a) deals with debt due to the assessee and does not deal with the debt due to the assessee in relation to the business in question. Therefore, this provision deals with generally the debts due to the assessee on account of business or other than business. It further provides in case of goodwill purchased by the assessee for a price, its market value or price of goodwill paid by him, whichever is less, is to be included. Clause (c) provides that in the case of managing agency rights purchased by the assessee for a price its market value or the price actually paid, whichever is less, is to be included and in the case of any other assets its market value on the valuation date is to be included. In the light of these provisions, it has been the contention of the revenue that by making this specific provision of rule 2C, whatever assets remained outside the books are to be included in the global value of the business at their market value for the purpose of section 7(2). On the other hand, the contention of the learned counsel for the assessee is that rule 2C deals with assets which are generally or ordinarily part of the books regularly maintained, but may on account of their value having been taken to nil either on account of writing them down or on some other grounds, the same have not in fact been disclosed in the balance sheet, but they did not deal with any asset which ordinarily is not to be included otherwise in the books of account or balance sheet of the business. According to the learned counsel, as adjustment is required to be made in the balance sheet, value of the business as per the ordinary business accountancy principles ought to be taken into account and effect should be given to that unless specifically excluded. It has been further contended that keeping in view the historical background as to how the question of goodwill was dealt with in relation to making adjustments to the global value of a business as disclosed through the balance sheet and contemporaneous exposition given by the Board which is also the rule-making authority and entrusted with the execution of the Act vide its circular dated 18-9-1966, has made it clear that rule-making authority had no intention of deviating from the existing guidelines contained in instructions of not making any adjustment on account of self-created or self-generated goodwill while resorting to global valuation of a business. It was also argued that as goodwill is an asset which has not been accounted for in the books of account, has specifically been dealt with under sub-clause (b) to rule 2C by necessary implication, it is excluded from sub-clause (d).
We have carefully considered the rival contentions. We have also noticed above that the controversy before us is about the adjustments that have been prescribed to be made in the balance sheet value of the business as a whole. Therefore, it is not of much relevance that goodwill created by self amounts to realisable asset and is also an asset which could be transferred by the assessee for value. Therefore, the question before us is not whether goodwill as such, whether acquired by purchase or self-generated is an asset having an assessable value to be included in the net wealth of the assessee on the valuation date, but the inquiry is limited to where the WTO decides the value of the assets of business under sub-section (2) of section 7 on the basis of balance sheet, whether goodwill which is self-generated and does not find place in the books of account has been prescribed by the rules to be adjusted for arriving at the net value of the business under sub-section (2) of section 7.
It cannot be a matter of argument nor it has been raised but for any provision under the rules, any asset of a business which is not part of the balance sheet cannot be taken into consideration unless adjustment thereof has been prescribed or to say before the amendment of section 7(2) of the Act in 1964 unless the circumstances of a particular case so warranted. In the aforesaid circumstances, it becomes imperative to note what has been prescribed by the rule-making authority for the purpose of adjusting the net value of a business as disclosed by its balance sheet. In this background, we have to gather what the rule-making authority had prescribed for the adjustment about the assets which have not been disclosed in the books to be adjusted for the purpose of arriving at global value of the business. We have noticed above that u/s 13, as was then existing, and now u/s 10 of the Act, the Board has necessary authority to issue instructions, orders or directions to other wealth-tax authorities as it deems fit and proper for the execution of the Act and such orders, instructions or directions are binding on all the wealth-tax authorities. The question of what adjustments are required, in the circumstances of a case in the matter of arriving at a global valuation, being not a subject-matter of any statutory provisions, and was a matter of applying general principles, it was within the powers of the Board without indulging into the field of interpreting the provisions of the Act to lay down generally, the principles or the guidelines concerning oft arising problems of carrying out such adjustments for the purpose of uniformity in the execution of the Act. It was in exercise of that power, that soon after the enactment of the Act, the Board had issued instructions that no attempt should be made to include the value of the goodwill unless it has been actually paid for by the assessee and is also shown as an asset of the business in the balance sheet. These instructions were binding on the wealth-tax authorities. Therefore, before the rules in question came into existence, it was uniformly accepted norm by the revenue that wherever sub-section (2) of section 7 was to be invoked for the purpose of arriving at a global value of a business, no value on account of goodwill which is self-generated was to be made. It was also clear that even in the case of a goodwill which has been acquired for a price to be included in the global valuation only in case the assessee has shown the same as an asset of the business in the balance sheet. Unless such acquired goodwill on payment of price was shown in the balance sheet of the assessee, it was also not to be included and taken into consideration for the purpose of global valuation. It was further envisaged that where the goodwill which has been paid for but has been written off in the profit and loss account, in that event, though such acquired goodwill may not find any place in the balance sheet, the market value of such goodwill on the valuation date will be included which shall not be exceeding the cost paid for it. It is abundantly clear that as on the date of rules came into force or immediately before the rules came into force, the goodwill which was self-generated was not to be adjusted in the global value of the business. We may notice here that if the goodwill has been shown in the books of account as assets in the balance sheet, really the question of determining the market value would not arise inasmuch as the value put on its goodwill by the assessee automatically goes into the formation of the global value. If it has not been shown, then no attempt is put to include the value of goodwill, in results no adjustments on that account has to be made for the purpose of arriving at the global value.
This bring us to the question as to whether by inserting rule 2C in pursuance of amendment made in 1964 in the main provision, the prescribed authority deviated from the earlier practice adopted by it in the requirement of adjustments to be made in arriving at the global value of the business u/s 7(2). We find that u/s 46 of the Act, it is the Board which has the authority to frame rules for the purpose of the Act, that is to say, authority to issue instructions, directions or orders for proper execution of the Act as well as the authority to frame rules for the purpose of the Act vests in the same authority. The very same authority, namely, the Board was already aware about the problems of the adjustment of value on account of goodwill while taking global value of the business. It has already clarified its stand prior to the insertion of the rules. Soon after the insertion of the rule, when the prescribed rules were to replace the vagaries of the discretion of the WTO of determining the circumstances in which certain adjustments are required to be made and the Board had already issued instructions for maintaining uniformity in this regard issued explanatory note vide Circular No. 5-D (WT) of 1966, dated 18-9-1966. Preamble to the circular along with the explanatory note about rule 2C reads as under:
Adjustments to be made for ''global valuation'' under sub-section (2)(a) - Rules 2B, 2C, 2D, 2E, 2F and 2G Instructions for general guidance.
The notification containing the Wealth-tax (Second Amendment) Rules, 1965 was published in Part II - Section 3, Sub-section (1), of the Gazette of India, Extraordinary, dated 1-4-1965 as G.S.R. 1634. Explanation to rule 2E also has now been amended by the Notification containing the Wealth-tax (Amendment) Rules, 1966 published in Part II - Section 3, Sub-section (1), of the Gazette of India, Extraordinary, dated 28-7-1966 as G.S.R. 1190. Section 7(2)(a) was amended by the Wealth-tax (Amendment) Act, 1964 providing for the prescription of the adjustments to be made under that section by rules. The primary purpose of the adjustments to be made under this section is to make the global valuation as approximate to the valuation which would be arrived at by adopting the market value of assets and liabilities, as possible. The salient features of the adjustments prescribed in the rules are explained in this circular.
Section 7(2)(a) permits the valuation of the assets by ''global method'' only in the case of an assessee who carries on business for which regular accounts are maintained."
"Adjustments in the value of an asset not disclosed in the balance sheet.
Goodwill and managing agency rights - The existing instructions which are to the effect that no attempt should be made to include the value of the goodwill unless it has been actually paid for by the assessee and is also shown as an asset of the business in the balance sheet, have been incorporated in the rules. Where the goodwill, which has been paid for, has been written off through the profit and loss account, the market value of the goodwill on the valuation date will be included but not exceeding the price actually paid for [rule 2C(b)].
Similarly, managing agency rights would be treated as an asset and included only if they have been acquired by payment of consideration. In such a case, either the market value or the price paid, whichever is less, will be adopted [rule 2C(c)].
Other tangible assets - Where tangible assets are omitted from the balance sheet on the ground of the book value being nil or for any other reason, an appropriate adjustment should be made to include the market value of such assets as on the valuation date [rule 2C(d)].
This explanation, in our opinion, is a contemporaneous exposition of the rule by the rule-making authority itself. It is true that any interpretation or stand taken by those who are entrusted with the execution of a statute cannot govern the interpretation of the statute, but it is equally true that contemporaneous exposition of a statute or rule by those who are entrusted to execute or implement the statutory provisions or rules is a useful aid in interpreting the statute unless there are cogent reasons to depart from it. In this connection, we may refer to a decision in the case of K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, . For discovering the intent of the Legislature from the language used by it, the Supreme Court therein found the interpretation put by the CBDT, the highest authority under the Act as a useful and important aid when it said ''it is clear from these two circulars that the CBDT, which is the highest authority entrusted with the execution of the provisions of the Act, understood sub-section (2) as limited to cases where the consideration for the transfer has been understated by the assessee and this must be regarded as a strong circumstance supporting the construction which we are placing on that sub-section''.
This Court in All Gujarat Federation of Tax Consultants and Others Vs. Central Board of Direct Taxes and Others, observed as follows:
Therefore, circulars issued by the Board either earlier or later, do not bind the courts. However, one has to remember that under the scheme of the income tax Act, u/s 116, the Act provides various income tax authorities for the purpose of implementing the provisions of the Act. The Central Board of Direct Taxes is the apex body entrusted with the duty of implementing fiscal statutes which fall in the category of direct taxes. It has also authority to issue instructions and guidelines for proper administration of the Act which are binding on all its subordinate authorities and is a limb of the Finance Ministry which is the framer of any fiscal provisions to be enacted. ''Contemporanea Expositio'' is a well-known doctrine for interpreting statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous. The ''administrative construction'' (i.e., contemporaneous construction placed by administrative of executive officers charged with executing statute) generally should be clearly wrong before it is overturned, such a construction, commonly referred to as practical construction, although non-controlling, is nevertheless entitled to considerable weight, it is highly persuasive. A contemporaneous exposition by the administrative authorities is a very useful and relevant guide to the interpretation of the expressions used in a statutory instrument. The doctrine of contemporanea expositio is relied on to remove any possible ambiguity in the understanding of the language of the relevant statutory instrument........" (p. 289)
It is apparent that the Board which is the highest authority and entrusted with the duty of implementing the provisions of the Act prior to the insertion of the rules, clearly envisaged value of self-generated goodwill not to be considered for adjustments while resorting to global value of a business. Soon after the Board has framed rule 2C u/s 46 and again thought it fit to explain the scope and ambit of the rules by itself through the circular referred to above. The Circular makes two things abundantly clear that sub-clause (b) of rule 2C was intended to incorporate the adjustments of such goodwill as has been purchased by the assessee, but is not disclosed in the balance sheet and such adjustment was to be made not on the market value simpliciter but on the market value or the cost price, whichever is lower, and another thing which made it clear is that sub-clause (d) of rule 2C referred to tangible assets and not to intangible assets like goodwill or value of managing agents or of like nature of other assets. It needs no argument that the goodwill is not a tangible asset, but an intangible asset. Therefore, the Board made its intention clear. In its both capacities as the rule-making authority as well as the apex body entrusted with power to issue instructions which are for the implementation of the statute defined the scope and ambit of the adjustment which it intended to carry out through rule 2C while making global value of a business. In the task which the Board was carrying out by framing rules for the purpose of section 7(2) it was not interpreting the provisions of the Act in one way or the other, but was laying down what has to be adjusted in ascertaining the global value of the business and the Board itself being the rule-making authority and Chief Executive authority was in the best position to convey what it meant by providing rule 2C for the purpose of section 7(2). There is a distinction between the explanatory note issued by law implementing authority about the meaning of statute framed by Legislature and the explanatory note issued by the law-making authority itself. In the former it is an act of executive interpretation and in the latter it is explaining the meaning of its own act.
Obviously, when the object of sub-section (2) of section 7 was not to insist upon to find out the exact value of each and every asset which can be fetched if sold in the open market and broadly the total value of the business taken as a whole on the basis of accounting principle, the Board has consistently kept out the valuation of goodwill to be included in such global valuation for the obvious reason of impracticability of arriving at a consistent formula of valuing precarious asset like goodwill whose value and its growth or decline is so volatile in nature. That object cannot be said to be irrelevant for the purpose of arriving at a global value of business for the purpose of section 7(2).
We also find force in the submission of the learned counsel for the assessee that the accounting principles have not been given go-by while permitting adjustment for the purpose of arriving at a global value of a business and unless there is compelling reason for us to take a view different from what the Board of Direct Taxes has taken of its rule, the Courts ought not to ordinarily depart from such accepted interpretation. Moreover, the words used in fiscal law are to be understood, in the absence of any definition, in popular sense and in the sense which the relevant word is normally understood. It has rightly been pointed out that when in the context of global value, the balance sheet is the foundation for the purpose of determining the net value and adjustments are also permissible to the extent provided under the rules, they must necessarily relate to the assets which must otherwise ordinarily form part of the balance sheet. From rule 2C, we find that as far as clauses (a), (b) and (c) are concerned, all the three deal with the asset which on normal accountancy principle would be part of balance sheet. Clause (a) deals with debt in respect of which deduction has been claimed u/s 36 of the income tax Act by writing it off, that is to say, the debt which is ordinarily a part of balance sheet does not find it in the balance sheet because the same has been written off. Clause (b) deals with goodwill purchased by the assessee for a price and clause (c) deals with the case of managing agency, rights purchased by the assessee for a price. In view of the aforesaid three specific assets covered by clauses (a), (b) and (c) where a different mode of valuation has been provided by directing to include market value on the valuation date or the cost price to be included or adjusted debt in the net wealth, it does not stand to reason that by introducing clause (d), the rule-making authority intended to make adjustment of certain assets which ordinarily otherwise become part of balance sheet. One may ask a question to oneself, that if the abovesaid provisions are not made and left it that all assets which have not been included in the books of account should be assessed at market value, could an asset like goodwill be included in the adjustment sought to be made under rule 2C. Considering the accounting principles which were referred to above, our answer is in plain negative. If, on ordinary principle, an asset is not to find place in the balance sheet, by rule 2D, it cannot be said that the rule-making authority intended to make certain adjustments into the balance sheet even in respect of such assets which ordinarily would not find place in the balance sheet. This is further strengthened from the fact that the three assets specifically dealt with for different treatment in the matter of valuation are all such assets which ordinarily would have found place in the balance sheet unless its value has been brought to nil or has been written off in the books of account for one or the other reason.
In that view of the matter, taking the popular meaning of the balance sheet and keeping in mind the relevant accounting principles as what ought to be included and ought not to be included in the balance sheet, we are of the opinion that the adjustment provided by the rules can only be linked with such assets which normally ought to be or could be included in the balance sheet, but does not relate to such assets which even on normal accounting principle should not be included in the balance sheet for the purpose of making adjustment in the global value as disclosed in the balance sheet. We do not find that rule 2C expressly or by necessary implication provides anything to take a different view. This view, as discussed above, is further strengthened by the contemporaneous exposition of the rule made by the Board, the rule-making authority itself.
In view of the above discussion, the third argument of the learned counsel for the assessee, namely, the express provisions in the rules and excludes applicability of the general provision does not call for further discussion in this case. However, prima facie, we are of the opinion that the said rule is not applicable to the interpretation of rule 2C.
The learned counsel for the revenue placed strong reliance in the case of Parmanandbhai Patel Vs. Commissioner of Wealth-tax, . The learned counsel for the revenue pointed out that the question raised therein was similar question before us in this case and that has been answered in favour of the revenue and against the assessee. Apparently, the decision appears to assist the revenue. However, on close scrutiny of the report, we find that it was not a case in which the Court was concerned with adjustment of goodwill for arriving at the global value of a business. The facts of the case reveal that when the assessee was appointed as Minister of Cabinet of Madhya Pradesh, he decided to retire from the firm of which he was a partner. Under an agreement, it was agreed that the business of the firm shall be carried on by the remaining two partners and the assets and liabilities of the firm shall be the assets and liabilities of the continuing partners. However, it was agreed that notwithstanding the retirement of the assessee from the partnership business, he shall continue to own half-share of the goodwill of the firm. A right was also reserved in the assessee to rejoin the firm as a partner with the same share due to change of circumstances. Because of this, the assessee was not paid anything on account of goodwill nor was he to be charged on his re-entry as a partner. But as the assessee was the owner of half-share of the goodwill, it was agreed that the firm will pay to the assessee a sum of Rs. 50,000 per year in respect of the use of the goodwill. It was on the premise of this agreement, the value of half share of goodwill of the firm was sought to be taxed in the hands of assessee as his asset. The goodwill sought to be assessed as part of global value of business carried on by the assessee. It was in this context, the assessee had raised three-fold contentions before the wealth-tax authorities. To keep out the value of his half share in the goodwill of the firm of which he was erstwhile partner, viz., it was claimed that right of the assessee to receive Rs. 50,000 per annum from the use was nothing but an annuity not commutable and, therefore, exempt from wealth-tax u/s 2(e) (iv), that is to say, it was excluded from the definition of the asset. Secondly, it was contended that the assessee''s right was only to receive Rs. 50,000 per annum and in fact when the assessee retired without taking any cash, the entire goodwill became goodwill of the firm which continue to carry on the business and nothing more than Rs. 50,000 received by the assessee, could be added. Lastly, it was contended that since the goodwill has not been purchased for a price, it cannot be valued as an asset in view of rule 2C(b) read with Circular No. 5-D (WT) of 1966, dated 18-9-1966.
As we have noticed above, here we are not concerned with the valuation of an asset for the purpose of determining the net wealth u/s 7(1) by resorting to the meaning of asset u/s 2(e), but only concerned with the adjustments to be made in the balance sheet under the rules. This distinction was clearly noticed by the learned Judges when they said that these provisions laid down certain norms for determination of net worth of the assets of the business as a whole u/s 7(2)(a) and provide for certain adjustments and are to be read in that context. From these provisions, it cannot be inferred that if the goodwill has not been purchased for price, then it cannot be included in the net wealth of an assessee. From this, it is clear that the circular or rule 2C or the existing instructions prior to insertion of rule 2C which was also in relation to adjustment of global value u/s 7(2)(a) are of little help in determining the issue as distinct from determining whether it is an asset within the meaning of section 2(e) and falls for determination of valuation u/s 7(1) in respect of any assessee. Therefore, in our opinion, as far as the present controversy is concerned, the decision relied on by the learned counsel offers little assistance.
As a result of the aforesaid discussion, our answer to the questions raised in each of the references are as under:
Reference No. 24 of 1984:
At the instance of the assessee, following question of law has been referred for our opinion by the Tribunal:
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that goodwill which was not purchased for a price by the firm will be covered by clause (d) of rule 2C of the Wealth-tax Rules, 1957?
Our answer to this question is in negative, that is to say, in favour of the assessee and against the revenue.
Reference No. 33 of 1984:
The following question of law has been referred to this Court for its opinion for the assessment year 1975-76:
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding the goodwill which was not purchased for a price by the firm will be covered by clause (d) of rule 2C of the Wealth-tax Rules, 1957?
Answer to this question is in negative, that is to say, in favour of the assessee and against the revenue.
Reference No. 17 of 1986:
The question referred to in this reference reads as under:
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the goodwill of Gujarat Pharmaceuticals & Chemicals Works had not to be considered for determining the value of the assessee''s share of interest in the said firm and consequently, the Commissioner of Wealth-tax was not justified in passing order u/s 25(2) of the Wealth-tax Act, 1957?
In view of the aforesaid discussion, we hold that the Tribunal was justified in holding that the goodwill of Gujarat Pharmaceuticals & Chemicals Works was not to be considered for determining the value of the assessee''s share of interest in the said firm and consequently, the Commissioner was not justified in passing the order u/s 25(2) of the Act. All the three references stand disposed of accordingly. There shall be no order as to costs.