1990 (1) TMI 98 - AT - Wealth-tax

Summary

Issues Involved:
1. Whether the share of the assessee in the unexpired contractual period of distribution rights of the firm was an asset liable to wealth-tax.
2. If so, whether such right was not includible in the wealth of the assessee because it could not be valued in accordance with the provisions of section 7(2) of the Act, read with the rules thereunder.

Issue-wise Detailed Analysis:

1. Asset Liability to Wealth-tax:
The primary issue was whether the assessee's share in the unexpired contractual period of distribution rights of the firm constituted an asset liable to wealth-tax. The Tribunal referred to the Special Bench decision in Narendra Kumar Gupta, which followed the Supreme Court's ruling in CIT v. A. Krishnaswami Mudaliar, establishing that the value of rights for the unexpired period represents closing stock and must be considered for determining the income of the assessee. Thus, the right in a film for a particular territory and period was deemed an asset under section 2(e) of the Wealth-tax Act. Consequently, the assessee's interest in such rights was assessed as an asset under the Act.

2. Includibility and Valuation of the Asset:
The second issue was whether the right was includible in the net wealth of the assessee given the valuation challenges under section 7 of the Wealth-tax Act. Section 7(1) prescribes the primary method of asset valuation as its market price on the valuation date. Section 7(2) allows the WTO to determine the net value of business assets as a whole based on the balance-sheet, making necessary adjustments as prescribed. The Tribunal highlighted that the balance-sheet is not conclusive but must be considered for valuation, as held by the Supreme Court in Juggilal Kamlapat Bankers v. WTO.

Rule 2C of the Wealth-tax Rules:
The Tribunal examined Rule 2C, which specifies how to value assets not disclosed in the balance-sheet. Clause (d) of Rule 2C states that the market value on the valuation date should be taken for any other asset not disclosed. The assessee argued that this clause did not apply as the asset was not required to be shown in the balance-sheet due to the accounting system and full cost deduction under Rule 9B of the Income-tax Rules. However, the Tribunal noted that the Special Bench's earlier decision in Narendra Kumar Gupta, which supported the assessee's view, was no longer valid following the Supreme Court's reversal of the Karnataka High Court's decision in CWT v. Vysyaraju Badreenarayana Moorthy Raju. The Supreme Court ruled that the system of accounting is irrelevant for determining an assessee's assets, emphasizing that all assets must be considered regardless of accounting practices.

Application of Rule 2C(d):
The Tribunal concluded that Rule 2C(d) was applicable, and even if not, section 7(1) would still govern the asset's valuation. The Bombay High Court in CWT v. V.M. Shah also supported this view, stating that the WTO could apply Rule 2C if an asset was not shown in the balance-sheet, irrespective of accounting principles.

Rejection of Assessee's Arguments:
The Tribunal dismissed the assessee's contentions that the Supreme Court's and Bombay High Court's decisions were inapplicable due to differences in the nature of rights (accrued vs. notional). It was held that the assessee's payment for acquiring distribution rights indicated a substantive asset, not a notional one. The argument that film rights had negligible value due to short film runs and valuation difficulties was also rejected. The Tribunal emphasized that valuation challenges do not negate the asset's inclusion in net wealth. The assessee was allowed to present material to the WTO in fresh proceedings to determine the correct value of such rights, ensuring it does not exceed the cost price for the unexpired period.

Conclusion:
The appeal was dismissed, upholding the AAC's direction to include the assessee's share in the unexpired contractual period of distribution rights in the net wealth, subject to rectification.