Illahi Baksh and Syed Siraj Ahmed vs Commissioner of Wealth Tax

S. Rajendra Babu, J.—These reference arise under the Wealth-tax Act, 1957 (in short "the Act"). While T. R. C. Nos. 18 and 19 of 1981 are by the same assessee for the assessment years 1974-75 and 1975-76, respectively, T. R. C. No. 17 of 1981 is by another assessee for the assessment year 1975-76.

The assessee in each of these references is a partner in a firm known as Messrs. Hotel Hindustan having one-fourth share and one of the properties of the said firm is a hotel building. Each of the assessees also has one-fourth share holding as co-owner in respect of the building known as Himalaya Talkies. These assets were valued for the year ending on March 31, 1975, at Rs. 27,64,500 in respect of the hotel building and at Rs. 6,46,000 in respect for the talkies.

The Wealth-tax Officer computed the market value of these assets on the basis of the valuation report and brought to tax a sum of Rs. 1,61,500 as one-fourth share in Himalaya talkies and a sum of Rs. 3,45,024 as one-fourth value of the hotel building by name "Hotel Hindustan", in addition to what was shown by the assessees. Against the said assessment, each of these assessees filed appeals before the Appellate Assistant Commissioner who confirmed the order of the Wealth-tax Officer. When the matters were taken up in second appeals, the Tribunal accepted the valuation adopted by the lower authorities. Thus, aggrieved by the orders made by the Tribunal, at the instance of the assessees, the Tribunal has stated the case and referred for the opinion of this court the following common question of law:

"Whether, on the facts and in the circumstances of the case, the interest of a partner can be determined by applying the provisions of section 7 of the Wealth-tax Act read with rule 2 made thereunder valuing one of the assets of the firm?"

Shri Srinivasan, learned counsel appearing for the assessees, submitted that section 7 of the Act provides for valuation in respect of all assets of an assessee and prescribes two alternative modes subject to the discretion of the assessing author is either to value the assets of the business each one separately or individually or on the basis of the balance-sheet. He submitted that the assessing authority can either adopt one or the other method and not a hybrid of the two and referred to us a decision of the Supreme Court in Juggi Lal Kamlapat Bankers and Another Vs. Wealth Tax Officer, Special Circle C-Ward, Kanpur and Others, . According to Shri Srinivasan, it would not be a case of mere computation of arithmetical figures arrived at after deducting the liabilities from the assets, but the authorities will also have to take into consideration minus or plus depending upon the value of goodwill and that having not been done by the authority concerned, the whole assessment is wrong and the orders of the appellate authority as well as the Tribunal, which blindly accepted the assessment made by the first authority require reconsideration at our hands.

It is well-settled that, in matters arising under the provisions of the Act, the basis of valuation is as set out in section 7 of the Act, which is to the effect that all assets, other than cash, must be valued at market price that is the value the assets would fetch if sold in the open market. Though this is the normal rule, there are certain will-known exceptions, one of them being that, in respect of a business asset u/s 7(2)(a) of the Act, the valuation thereof must be in the light of the latest available balance-sheet of the business subject to such adjustments therein as may be prescribed. Thus, section 7 prescribes two alternative modes of valuation vesting discretion in the Assessing Officer either to value the asset each one separately or individually or on the basis of the balance-sheet u/s 7(2)(a) of the Act subject to the adjustments stated therein. The law on the point has been stated by the Supreme Court in the aforesaid Juggi Lal Kamlapat Bankers and Another Vs. Wealth Tax Officer, Special Circle C-Ward, Kanpur and Others, in the following manner (pages 495, 496):

"On a fair reading of the aforesaid provisions, it will appear clear that the primary method of determining the value of assets for the purposes of the Act is the one indicated in section 7(1), inasmuch as it provides that the value of any asset, other than cash, for the purposes of this Act shall be estimated to be its market price on the valuation date. Then comes sub-section (2) which provides that in the case of a business for which accounts are maintained by the assessee regularly, the Wealth-tax Officer may, instead of determining separately the valuation of each asset held by the assessee in such business, determine the net value of the business as a whole, having regard to the balance-sheet of such business as on the valuation date and making such adjustment therein as may be prescribed. It is true that sub-section (2) commences with a non-obstante clause, but even so, the provision itself is an enabling one conferring discretion on the Wealth-tax Officer to determine the net value of the assets of the business as a whole having regard to its balance-sheet as on the valuation date, instead of proceeding under sub-section (1). In other words, it is optional for the Wealth-tax Officer to resort to either of the methods even in the case where the net value of the business carried on by the assessee is to be determined. Thirdly, even when he proceeds under sub-section (2), he has to determine the net value of the business as a whole having regard to the balance-sheet of such business as on the valuation date; the phrase ''having regard to the balance-sheet of such business'' as judicially interpreted means that the Wealth-tax Officer has to take into consideration or account the balance-sheet of such business for such valuation and not that such balance-sheet is conclusive or binding or decisive of the values of assets appearing therein. Fourthly, the said sub-section also says that ''the Wealth-tax Officer has to make such adjustments therein as may be prescribed'' and, in this behalf, rules 2A and 2B already quoted above indicate what adjustments the Wealth-tax Officer has to make while determining the net value of the business as a whole. Particularly, sub-rule (2) of rule 2B clearly provides that, where the market value of an asset exceeds its written down value or book value by more than 20 per cent., the value of that asset for the purposes of rule 2A shall be taken to be its market value. In other words, it is clear that even where the Wealth-tax Officer has resorted to section 7(2) for determining the value of assets of a business as a whole, the written down values or book values of specific assets as appearing in the balance-sheet are not sacrosanct and, when the market value exceeds the written down value or book value by more than 20 per cent., the Wealth-tax Officer has to adopt the market value of such assets for the purposes of this Act. This is apart from the position that the resort to section 7(2) itself is discretionary and optional, the provision being an enabling one."

In fact, in Birla Jute Manufacturing Co. Ltd. Vs. Commissioner of Wealth Tax, West Bengal, Calcutta, , the Supreme Court held that the balance-sheet is of prima facie good value. But, it is also made clear in Juggi Lal Kamlapat Bankers and Another Vs. Wealth Tax Officer, Special Circle C-Ward, Kanpur and Others, that the balance-sheet is not sacrosanct. Therefore, the balance-sheet becomes the starting point for purposes of valuation and it is permissible to value some of the assets appearing in the balance-sheet u/s 7(1) and in regard to the rest of the assets to take the balance-sheet value. Thus, the provisions of section 7 of the Act which provide for valuation on the basis of the market value as well as on the basis of the balance-sheet value are not mutually exclusive. In cases where the balance-sheet value does not represent the real or market value, the balance-sheet value may be adjusted as is clear from the decision in COMMISSIONER OF WEALTH-TAX, CALCUTTA Vs. TUNGABHADRA INDUSTRIES LTD.,

The provisions of the Wealth-tax Rules also provide for the valuation of business assets. The scheme of the Rules indicates that a business is usually valued by ascertaining the value of the assets and deducting from the total, the amount of liability excluding capital depending upon the accuracy of the figures stated in the balance-sheet from which they are taken. While the majority of the assets may have been correctly reflected in the balance-sheet, some of the items may need revaluation and, in such a case, it is permissible to value such assets appearing in the balance-sheet u/s 7(1) of the Act as stated in Juggi Lal Kamlapat Bankers and Another Vs. Wealth Tax Officer, Special Circle C-Ward, Kanpur and Others, referred to above.

In the present cases, the Wealth-tax Officer has taken has taken the figures in the balance-sheet and the adjustments made by him disclose that it is only in regard to the land and building held by the assessees and, in all other respects, the balance-sheet figures have been adopted. Therefore, we are of the view that the assessment made by the assessing authority is in accordance with the decisions of the Supreme Court referred to above. Consequently, we have got to answer the question referred for our opinion in each of these cases in the affirmative and against the assessee. Answered accordingly.