2014 (7) TMI 543 - SC - Wealth-tax

Valuation of assets being a residential flat - Rule 3 to 7 of Schedule III of the Wealth-Tax Act, 1957 - scope of the term practicable - wide variation between alleged market value as determined by the Departmental Valuation Officer and the value as disclosed by the assessee - Held that - the word practicable is to be construed widely - if in the opinion of the AO, if the value determined by the tax payer on the basis of Rules 3 to 7 is absurd or has no correlation to the fair market value or otherwise not practicable, in such a case, it is open to the AO to invoke Rule 8 of Schedule III and determine the value of the asset either under Rule 20 or refer under Section 16A, for determination of the valuation of the asset. It is true that the invocation of Rule 8(a) cannot based on ipsi dipsi of the AO. The discretion vested in the AO to discard the value determined as per Rules 3 has to be judicially exercised. It must be reasonable, based on subjective satisfaction; the power must be shown to be objectively exercised and is open to judicial scrutiny. In the present case, the AO refused to accept self assessment for the following reasons - (i) There is a wide variation between the market value and the valuation done by the assessee as per municipal taxes. - (ii) The property is used as a guest house. - (iii) The value for levy of municipal tax is very low, as the total ratable value of the assessee is done by the municipal authorities @ ₹ 6,573/- per annum. - (iv) The assessee was a tenant of the property @ ₹ 500/- per month. After purchase of the property a lot of expenditure was incurred from time to time on improvement of the property which is very difficult to ascertain. - (v) The value of the building is grossly understated as the assessee himself entered into an agreement to sell the same in the year 1995 for a sum of ₹ 10,26,00,000/-. Considering the above factors, the AO assessed the value of the property at ₹ 2,60,73,000/- as valued by the Departmental Valuation Officer. AO was justified in holding that it was not practicable to apply Rule 3 in the instant case and rightly referred the matter to the Valuation Officer under Section 16A for determination of value of the asset. The AO, thereafter, has rightly assessed the wealth tax on the basis of such value determined by the Valuation Officer. - Decided against the assessee.

Summary

Issues Involved:

1. Dispute over the valuation of property for wealth tax purposes.
2. Applicability of Rule 3 versus Rule 8(a) of Schedule III of the Wealth-Tax Act, 1957.
3. Justification of the Assessing Officer's (AO) decision to refer the property valuation to the Departmental Valuation Officer under Rule 20.
4. Judicial scrutiny of the AO's discretion in applying Rule 8(a).

Issue-wise Detailed Analysis:

1. Dispute over the valuation of property for wealth tax purposes:
The appellant-assessee filed a wealth-tax return for the Assessment Year 1993-94, declaring taxable wealth at Rs. 1,31,76,000/-. The assessment was completed at a net wealth of Rs. 3,90,93,800/-, primarily due to a dispute over the valuation of a residential flat in Worli, Bombay, used as a guest house. The AO, finding the declared value of Rs. 1,55,139/- inconsistent with market values, referred the matter to the Departmental Valuation Officer, who valued the flat at Rs. 2,60,73,000/-. The AO also considered an agreement to sell the flat for Rs. 10,26,000/- dated 15th September 1995.

2. Applicability of Rule 3 versus Rule 8(a) of Schedule III of the Wealth-Tax Act, 1957:
The crux of the dispute was whether Rule 3 or Rule 8(a) should be applied for property valuation. Rule 3 provides a method based on net maintainable rent, while Rule 8(a) allows deviation if the AO, with Joint Commissioner's approval, deems it impracticable to apply Rule 3. The AO found that the property's declared value did not reflect its true market value and thus invoked Rule 8(a), referring the valuation to the Departmental Valuation Officer under Rule 20.

3. Justification of the AO's decision to refer the property valuation to the Departmental Valuation Officer under Rule 20:
The AO justified the reference to the Departmental Valuation Officer based on several factors:
- Significant variation between market value and the value declared by the assessee.
- The property was used as a guest house.
- The municipal tax valuation was very low.
- The property had undergone substantial improvements, making its valuation complex.
- The property's sale agreement indicated a much higher value.

The AO's decision was upheld by the Commissioner of Wealth-tax (Appeals), the Income Tax Appellate Tribunal (ITAT), and the High Court.

4. Judicial scrutiny of the AO's discretion in applying Rule 8(a):
The court emphasized that the AO's discretion to invoke Rule 8(a) must be judicially exercised, reasonable, and based on objective satisfaction. The AO's decision was deemed justified due to the impracticability of applying Rule 3, given the significant discrepancies in valuation and the property's use and improvements. The AO's subsequent assessment based on the Valuation Officer's determination was upheld as valid.

Conclusion:
The Supreme Court dismissed the appeal, affirming that the AO was justified in invoking Rule 8(a) and referring the valuation to the Departmental Valuation Officer. The valuation determined by the Valuation Officer was deemed appropriate for assessing wealth tax.