1987 (9) TMI 93 - AT - Wealth-tax

Summary

Issues Involved:
1. Applicability of Rule 2B(2) of the Wealth Tax (WT) Rules.
2. Determination of market value of closing stock.
3. Onus of proof regarding market value exceeding book value by more than 20%.
4. Adequacy of evidence for invoking Rule 2B(2).

Issue-wise Detailed Analysis:

1. Applicability of Rule 2B(2) of the Wealth Tax (WT) Rules:
The primary issue was whether Rule 2B(2) of the WT Rules could be invoked to determine the net wealth of the firm M/s. Maliram Puranmal. The Tribunal had to decide if the gross profit rate shown by the assessee could justify the application of Rule 2B(2). The Tribunal concluded that Rule 2B(2) could not be invoked merely based on the gross profit rate, as it does not indicate a difference in the value of the stock and its fair market value. This conclusion was supported by the Rajasthan High Court's decision in CWT v. Smt. S. K. Bader, which held that the gross profit rate does not represent the market value, and thus invoking Rule 2B(2) was improper.

2. Determination of Market Value of Closing Stock:
The Tribunal examined whether the market value of the closing stock exceeded the book value by more than 20%. The assessee had valued the closing stock at Rs. 19.50 lacs for jewellery and Rs. 1.32 lacs for stones, while the export invoice value was Rs. 33.80 lacs. The WTO had increased the stock value by 25.2% based on the gross profit rate. However, the Tribunal held that the gross profit rate is not an indicator of the market value of the closing stock. The Tribunal noted that the actual market value should consider various factors, such as the holding period of the stock and expenses spread over the years. The Tribunal concluded that the gross profit rate could not be used to determine the market value under Rule 2B(2).

3. Onus of Proof Regarding Market Value Exceeding Book Value by More Than 20%:
The Tribunal discussed the onus of proof, emphasizing that it was the department's responsibility to prove that the market value exceeded the book value by more than 20%. The Tribunal referred to the Supreme Court's decision in CWT v. J. K. Cotton Mfrs. Ltd., which held that the burden of proving the market value lies with the department. The Tribunal concluded that the department failed to provide sufficient evidence to establish that the market value exceeded the book value by more than 20%.

4. Adequacy of Evidence for Invoking Rule 2B(2):
The Tribunal evaluated the evidence presented by the department, which relied solely on the gross profit rate. The Tribunal found this evidence inadequate and unsafe to invoke Rule 2B(2). The Tribunal emphasized that the market value of the closing stock should be determined based on positive material and not merely on the gross profit rate. The Tribunal noted that the gross profit rate is an average of profits earned over a period and does not necessarily reflect the market value of the closing stock. The Tribunal concluded that the evidence provided by the department was insufficient to justify the application of Rule 2B(2).

Separate Judgments Delivered:

Per Shri H. S. Ahluwalia, Judicial Member:
Shri H. S. Ahluwalia disagreed with the majority view, arguing that the gross profit rate is a normal index of the difference between the cost price and the market price. He believed that once the gross profit rate exceeds 20%, Rule 2B(2) should be applicable, and the onus should be on the assessee to prove otherwise. He emphasized that the market value of the closing stock should be presumed to exceed the book value by more than 20% based on the gross profit rate.

Third Member Order:
The Third Member, Shri Ch. G. Krishnamurthy, agreed with the majority view that the order of the Tribunal did not give rise to a question of law. He emphasized that the determination of market value is a question of fact and that the Tribunal's conclusion was based on the inadequacy of evidence provided by the department. He noted that the gross profit rate alone could not justify invoking Rule 2B(2) and that the market value should be determined based on positive material evidence.

Final Order:
In accordance with the majority view, the Tribunal concluded that the questions raised by the revenue were findings of fact and did not give rise to any referable question of law. Consequently, the reference applications were rejected.