1987 (9) TMI 92 - AT - Wealth-tax

Issues Involved:
1. Valuation of the assessee's interest in the firm under Rule 2B(2) of the Wealth-tax Rules, 1957.
2. Classification of the firm as an industrial undertaking under Section 5(1)(xxxii) of the Wealth-tax Act, 1957.

Detailed Analysis:

1. Valuation of Assessee's Interest in the Firm:
Background:
The primary issue revolves around the valuation of the assessee's interest in the firm M/s Sardarmal Umraomal for the assessment years 1973-74 and 1974-75. The firm disclosed gross profit rates of 28% and 27% respectively for these years. The Wealth Tax Officer (WTO) invoked Rule 2B(2) of the Wealth-tax Rules, 1957, to value the closing stock at market value, resulting in additions of Rs. 28,560 and Rs. 22,200 respectively.

Tribunal's Findings:
The Tribunal, referencing a similar case (WTO v. Smt. Lad Kanwar Dhadda), held that the WTO must provide positive material to justify the market value of the closing stock exceeding the book value by more than 20%. Without such evidence, the WTO's action could not be upheld. The Tribunal confirmed the AAC's decision to delete the additions, stating, "There should be some positive materials with the WTO for determination of market value of the gems as on the valuation date."

Separate Judgment by Shri Ram Rattan:
Shri Ram Rattan disagreed with the majority view, emphasizing that Rule 2B(2) is applicable for valuing the interest of a partner in the firm. He argued that the gross profit rate (28% and 27%) should prima facie indicate that the market value of the closing stock exceeds the book value by more than 20%. He stated, "The onus to dislodge this position... falls on the assessee by giving positive evidence that the real market value of the closing stock is lower than the increase in the GP rate."

Third Member's Decision:
The President, acting as the Third Member, agreed with the Judicial Member's view that the gross profit rate alone cannot conclusively prove the market value exceeds the book value by more than 20%. The decision emphasized that "the solitary fact that higher rate of gross profit was shown by the trading account would not by itself be taken to be conclusive proof."

Conclusion:
The majority view confirmed that Rule 2B(2) cannot be invoked based solely on the gross profit rate, and the WTO's additions were not justified. The appeals were dismissed.

2. Classification as an Industrial Undertaking:
Background:
The assessee claimed that the firm M/s Sardarmal Umraomal, involved in the manufacture and processing of semi-precious and precious stones, qualified as an industrial undertaking under Section 5(1)(xxxii) of the Wealth-tax Act, 1957, and sought exemption.

Tribunal's Findings:
The AAC agreed with the assessee, noting that the firm's activities involved "cutting, shaping, chemical treatment and processing of the goods," thus qualifying as an industrial undertaking. The Tribunal upheld this view, stating, "We entirely agree with AAC that the firm in which the assessee has interest, and industrial undertaking in view of the explanation to section 5(1)(xxxii) and is entitled to exemption."

Separate Judgment by Shri Ram Rattan:
Shri Ram Rattan concurred with the majority on this issue, affirming that the firm qualifies as an industrial undertaking and the exemption under Section 5(1)(xxxii) is applicable.

Conclusion:
The Tribunal confirmed the AAC's decision to classify the firm as an industrial undertaking, allowing the exemption under Section 5(1)(xxxii).

Final Order:
The appeals by the Revenue were dismissed, confirming the AAC's decisions on both the valuation of the assessee's interest and the classification of the firm as an industrial undertaking.

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