9911796707
TMI Blog1983 (8) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... are each. The group of appeals in the departmental appeals relate to the value of interest of each of the three assessees in the above firm. 3. The first and second grounds of departmental appeals which are common in the cases of the three assessees are as under : "The learned Appellate Assistant Commissioner of Wealth-tax has erred in : (i) holding that the Wealth-tax Officer was not justified in invoking the provisions of rule 2B(2) to determine the net wealth of the firm Maliram Puranchand, Jaipur, and then in making pro rata addition of Rs. 2,59,911 in the assessee's hands ; (ii) deleting the above said addition of Rs. 2,59,911." 4. The dispute relates to the applicability of rule 2B(2) of the Wealth-tax Rules, 1957. Rule 2B(2), inter alia, provides that where the market value of an asset exceeds the value adopted for the purpose of assessment under the Income-tax Act, 1961 ('the 1961 Act') by more than 20 per cent, the value of that asset, for the purpose of wealth-tax assessment, to be taken to be its market value. It is a common ground between the parties that for the assessment for the assessment year 1975-76 in the case of the firm Maliram Puranchand, Jaipur, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rked out to 33.68 per cent. The WTO then observed that from the above facts it was apparent that the provisions of rule 2B(2) applied to the case of the assessee and the assessee's representative was given an opportunity in the matter. He vide his letter, dated20-3-1979, addressed to the WTO contended as under : "(a) If the firm had earned a gross profit rate of 25 per cent in one of the years, it should not be made the basis for invoking the provisions of rule 2B(2). Further, that even in the earlier years, these provisions had not been invoked. (b) The gross profit rate during the year was, of course, more than 20 per cent. It did not, however, mean that the fair market value of the closing stock of the firm was more than 20 per cent of its book value. (c) The jewellery trade had its own peculiar features inasmuch as the goods might remain in stock for years together and may not be saleable at all. Besides, some of the goods were sold at a profit of 10 per cent while the other might be sold at a profit margin of 25 per cent. One has to take an overall view of the matter for estimating the fair market value of the closing stock. While doing so, it has also to be considered t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of thumb in enhancing the value of closing stock by the gross profit rate of the year to arrive at the so called fair market value of the same on the valuation date. 14. I have, therefore, no hesitation in holding that the learned WTO was not justified in invoking the provisions of rule 2B(2) to determine the net wealth of the firm Maliram Puranchand, Jaipur and then in making pro rata additions of Rs. 2,59,911 in the assessee's hands. The additions made by the learned WTO are deleted accordingly." 8. The revenue is aggrieved against the above findings of the learned AAC. The departmental representative supported the order of the WTO. The learned counsel of the assessee has repeated his submissions that were made before the authorities below which I have reproduced earlier. He also relied upon the decisions of the Jaipur Bench of the Tribunal in WTO v. Smt. Land Kanwar Dhadha Smt. Jatan Devi [WT Appeal Nos. 756 and 757 (Jp.) of 1980, dated 23-7-1981] and of the Calcutta Bench 'E' Camp at Jaipur in the case of IAC v. Vimal Chand Golecha [WT Appeal Nos. 778 and 779 (Jp.) of 1980 dated 28-8-1981]. It was also urged that the Calcutta Bench 'E' had followed the decision of the Smt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omers in foreign countries. It certainly stands to reason in these circumstances, that it would be a buyers market and naturally, the price, the closing stock would fetch on each of the valuation dates, would not be more than 10 per cent to 15 per cent over the cost price, keeping in view the fact that these high priced articles dealt in are to be held over for long periods before sale. The fact that unlike precious metals like gold and silver, the prices of precious stones did not register any abrupt boom during the years in appeal also cannot be ignored. Taking all these factors into consideration, I am of the view and hold, accordingly, that the market value of the closing stock of the assessee as on each of the valuation date was not above 20 per cent of the book value and as such the learned WTO was not justified in invoking the provisions of rule 2B(2) of the Wealth-tax Rules for revaluation of the closing stock. For the assessment year 1974-75 wherein the gross profit rate disclosed was only 22 per cent the WTO having himself adjusted a margin of 4 per cent. according to his unreckoning the market price of closing stock was below 20 per cent over the book value and as such t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said to be correct. It might so happen that the more valuable gems have already been sold out and what remained was the inferior variety which can fetch much less profit. The assessee might have had a very good year, but on the last date the market value could get depressed. As argued by the learned counsel for the assessee, it might so happen that the overall gross profit is high because of sale of larger number of profitable items leaving inferior material at the end of the year in the closing stock. Hence, unless the facts are analysed properly and positive material brought on record to show that the market value was very much higher than the cost price as on the last day of the accounting year, it would not be possible to uphold the WTO's action. In fact, the burden rests heavily on the WTO to show that the market value was 20 per cent higher than the value disclosed for the wealth-tax purposes before invoking rule 2B(2)." 10. Relevant portion of the Calcutta Bench 'A' decision on the contrary reads as under : "7. So far as the actual addition to the valuation of the closing stock is concerned, prima facie, rule 2B(2) appears to be applicable to the assessee's case inas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any evidence has been adduced by the assessee to discharge this onus ? 3. Whether market value has to be found as a fact, if so what is the market value of the closing stock and the assessee's share therein ?" 12. In my opinion, the value of the closing stock has to be found as a fact. In a trading account, where the method of valuing the closing stock is taken at the cost price, the gross profit will only be a difference between the purchase price and the sale price.Saleprice is normally the market value of an asset on the date of its sale and the purchase price will be the cost of inclusion of the asset out of which profit has been earned. In other words, the market value will be the purchase price as increased by the gross profit earned thereon. Now the percentage of gross profit earned by the firm in the case before us is 25.20 per cent. In other words, the market price is more than 33.68 per cent of the cost price. This is the position which emerges prima facie from a trading account, where the method of valuing the closing stock is the cost price. This prima facie difference between the cost price and the market value can, however, be dislodged by certain factors. Depend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. Therefore, one has to take an overall view of the matter for estimating the fair market value of the closing stock. While doing so, it has also to be considered that the goods in stock if offered for sale on the last day of the year in lump sum to willing buyers, none would agree to purchase the same in entirety at a profit rate of 20 per cent of the book value. Here also I notice that hypothetical statements have been made, what to speak of a positive statement and the supporting material thereto. It is said that the goods might remain in stock for years together and may not be saleable at all. This hypothetical statement made on behalf of the assessee leads one to nowhere. If such goods which had remained in stock for years together and had no saleable value had been specified and supporting evidence given in support thereof, the assessee certainly had a case for reviewing the prima facie position with reference to the gross profit rate. No material whatsoever has been brought on behalf of the assessee on record to show that certain quantities of goods were being brought forward from year after year and had no saleable value at all. The learned counsel of the assessee during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought out and the reasons for valuing them at a lower rate have to be spelt out. There is no material to support this. 13. Another submission is that if the entire closing stock of precious stone was sold on the valuation date, the only buyers would be the fellow traders and naturally they would not pay the same price as lay customers, foreign tourists or customers in foreign countries. Further, the fact that these high priced articles are to be held over for a long period would tend to reduce the value. I have also pointed out above that it is not necessary to sell the entire commodity in one lot. A prudent businessman would try to fetch the highest price by selling it in piece-meal or even the whole lot depending upon the circumstances of each case. The valuation of the closing stock has to be made on notional basis, keeping in view the market trends for similar goods. If there is high demand of such articles by the tourist or the foreign customers, then the market value has to be judged with reference to these situations. The market value is not to be restricted to the local market but even to international market when there are no restrictions for export. Undoubtedly, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal. 14. The last submission made by the learned counsel of the assessee is that the WTO should have confronted the assessee with the material in his possession as the onus for proving that the market value of the closing stock was more than 20 per cent of the cost price. I have already held earlier that the WTO has discharged the onus upon him with reference to the gross profit rate that the market value was more than 20 per cent of the cost price. Thereafter, the onus shifts to the assessee to disprove that the apparent was not real by leading positive evidence. The assessee has miserably failed to bring any material on record to show that actual value of the closing stock was much less than the gross profit rate. He has merely made some hypothetical statement which in my opinion cannot be advanced in a Court of law. In a Court of law, what is asserted has to be substantiated. In the present case what to speak of substantiating a statement, the statements themselves are hypothetical and not positive for which no cognizance can be taken. In view of the above discussions, my findings on the questions framed earlier are as under : "1. I answer the first question in the affirmati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been extensively reproduced on pages 11 and 12 by my brother in his order. Following the said order dated 23-7-1981, I hold that the WTO was not right in invoking rule 2B(2) merely on the basis of gross profit rate shown by the assessee and without determining the value of the closing stock at the end of the year by any other cogent material. On all other points, I agree with the learned brother. 2. In my opinion, the three appeals of the revenue may be treated to have been allowed only for statistical purposes and, I accordingly order. THIRD MEMBER ORDER Per Shri Bishan Lal, Accountant Member -- On a difference of opinion between the learned Members of the Jaipur Bench on the following points, this case has been referred to me by the President, Tribunal. The points of difference, as stated by the learned Accountant Member vide his order dated23-12-1981 are as under : "1. Whether, on the facts and in the circumstances of the case, the gross profit rate in the case of the firm in which the assessee is a partner at 33.68 per cent with reference to the cost price for the assessment year 1975-76 will not prima facie show that the difference in terms of rule 2B(2) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resaid firm at Rs. 2,00,647. These amounts represented the capital standing to the credit of their different accounts in the books of the firm. The WTO was of the opinion that the declaration of the rate of gross profit of 25.2 per cent by the firm meant that if the cost of closing stock was Rs. 74.80, the market value would be Rs. 100 on an average. On this basis he worked out the value of the closing stock as shown by the aforesaid firm at Rs. 36,77,993 as against Rs. 27,51,139 declared. On this basis the WTO intended to apply the provisions of rule 2B(2) which provides for adjustment in the value of an asset disclosed in the balance sheet. The aforesaid rule provides that where the market value of an asset exceeds its book value for purposes of assessment under the Income-tax Act, 1961 by more than 20 per cent, the value of that asset shall, for the purpose of rule 2A of the Wealth-tax Rules, 1957 be taken to be its market value. Shri Gopi Chand Rawat in his letter dated20-3-1979made the submission that if the firm had earned the gross profit rate of 25.2 per cent, it did not mean that the provisions of rule 2B(2) should be invoked. The provisions of the rule had not been invoke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h margin of profit would not exceed even 10 per cent. The margin of profit in the business of jewellery fluctuated heavily. The rate of profit on sales to foreign tourists would be different, the margin of profit on export sales would be different and the margin of profit on sales within the country would be different. The sale to dealers did not give margin of 10 per cent to 15 per cent. The AAC held that the provisions of rule 2B(2) could not be invoked. On merits also he held that it would not be correct to apply the rule of thumb in enhancing the value of closing stock by the gross profit rate of the year to arrive at the so-called fair market value of the same on the valuation date. He then deleted the addition of Rs. 2,59,911 made in the hands of each of the three assessees. 4. Against these orders of the AAC the revenue came in appeal before the Tribunal and raised, inter alia, the following grounds of appeal which are common in all the three cases : "The learned Appellate Assistant Commissioner of Wealth-tax has erred in : (i) holding that the Wealth-tax Officer was not justified in invoking the provisions of rule 2B(2) to determine the net wealth of the firm Maliram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountant Member. Reference was also made to an order in the case of Vimal Chand Golecha pertaining to the assessment years 1973-74 and 1974-75 wherein the rates of gross profit shown by the concerned firm for the assessment years 1973-74 and 1974-75 were 29 per cent and 22 per cent, respectively, and the WTO had applied the provisions of rule 2B(2). The additions made were deleted by the AAC and his order was confirmed. During the course of this order, the aforesaid order of the Jaipur Bench of the Tribunal was followed. The learned Accountant Member did not follow these orders and he referred to an order in the case of Gyanchand Kothari pertaining to the assessment years 1974-75 and 1977-78. In that case the firm had shown the rate of gross profit at 26.8 per cent for the assessment year 1974-75 and the rate of gross profit shown for the assessment year 1977-78 was 28 per cent. It was held that so far as the actual addition to the valuation of the closing stock was concerned, prima facie rule 2B(2) appeared to be applicable to the assessee's case inasmuch as the gross profit disclosed by the assessee in both the head office and the branch was more than 20 per cent and the valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hown was 25.2 per cent for the year ending 31-3-1975, the market value of the closing stock would work out to more than 20 per cent of the book value. He submitted that it was for the assessee to produce material before the WTO to show that in the face of the gross profit rate of 25.2 per cent shown in this year, the market value of the closing stock did not exceed 20 per cent of the book value. It was also argued that by not furnishing any information on this point intentionally, the onus that lay on the assessee was not discharged and the correct market value of the closing stock was not shown. 8. The learned counsel for the assessee submitted that up to the assessment year 1974-75 the provisions of rule 2B(2) had not been invoked though the three partners of the firm were wealth-tax assessees from the assessment year 1958-59 onwards. After referring to the judgments in the cases of Kesoram Industries Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 (SC) and CWT v. Man Industrial Corpn. Ltd. [1980] 123 ITR 298 (Raj.) he submitted that the onus was on the revenue to prove that the market value of the closing stock of the firm was more than 20 per cent of its book value. He submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decisions of the Tribunal dated 23-7-1981 in WT Appeal Nos. 756 and 757 (Jp.) of 1980, (Jaipur Bench) (the rate of gross profit shown in that case was 25 per cent), dated 28-8-1982 in WT Appeal Nos.778 and 779 (Jp.) of 1980, of the Calcutta Bench 'E' Camp at Jaipur (the rates of gross profit shown by the firm were 29 per cent and 22 per cent), dated August 1981 in WT Appeal No. 429 (Jp.) of 1980 (Jaipur Bench) (the rates of gross profit shown in the subsequent years were 30 percent and 40 per cent), dated 15-9-1981 in WT Appeal No. 450 (Jp.) of 1980 (Calcutta Bench 'C' Camp at Jaipur) and dated 23-7-1981 in WT Appeal Nos. 594 to 596 (Jp.) of 1980 (Jaipur Bench), the rate of gross profit shown by the firm for one of the three years was 24 per cent). In all these cases, the additions made by the WTO were deleted by the AAC and the orders of the AAC were confirmed by the Tribunal. He submitted that there was no evidence with the department to prove that the market value of the closing stock of the firm exceeded book value by more than 20 per cent. He also submitted that there was no material for giving credit of only 4 per cent as done by the WTO. He pointed out that in the Speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion that the Special Bench order was fully applicable to this case. 10. I have carefully considered the rival submissions. Though the point of difference between the two learned members is couched in different language, but the pith and substance of the difference of opinion is whether the rate of gross profit shown by the firm constitutes adequate material to come to the conclusion that the market value of the closing stock of the firm exceeds the cost of the closing stock by more than 20 per cent and for that reason can the provisions of rule 2B(2) be invoked. It is not controverted by the learned departmental representative that the firm Maliram Puranchand values its closing stock on the basis of cost and that the value of the stock of Rs. 27,51,139 is based on cost. In the case of Man Industrial Corpn. Ltd. it has been held as under : "A review of the aforesaid decisions makes it clear that the law is now well settled that when the WTO proceeds to assess the value of the assets of the assessee, by adopting the global method of valuation under section 7(2)(a) of the Act, then the valuation of the assets given in the balance sheet of the assessee for the relevant year shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn on the following sales : Rs. Exports 22,20,659 Showroom 3,67,412 Rajasthan Handicrafts Emporium 78,102 Rajasthan State Hotel, Khasa Kothi 1,787 ------------------- 26,67,960 ------------------- The closing stock details shown in the balance sheet are as under : Rs. Head office 15,64,804 Showroom 11,86,335 ----------------- 27,51,139 ----------------- The details of the closing stock do not indicate as to goods of what value are meant for export on the valuation date. The argument of the assessee is that on exports, the firm makes good profit and for that reason the rate of gross profit shown in this year is better and the rate of gross profit cannot be uniform in different years. Without even knowing which goods are meant for export, it will be only guesswork to first imagine that a certain part of the goods are meant for export and then put some imaginary value on the goods to be exported. In K.J. Aiyer's Judicial Dictionary 'market value' has been defined as : 'The price for which the goods can be had in the market irrespective of any contract regarding the price between the parties'. For purposes of the Mysore Land Acquisition Act (IV of 1894) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal No. 450 (Jp.) of 1980 dated 15-9-1981 (Calcutta Bench 'C' Camp at Jaipur) and WT Appeal Nos. 594, 595 and 596 (Jp.) of 1980 dated 23-7-1981 (Jaipur Bench). The only decision taking a different view is in WT Appeal Nos. 451 and 452 (Jp.) of 1980 dated25-7-1981(CalcuttaBench 'A' Camp at Jaipur). In that case also, it is noticed that the matter was remitted back to the AAC, for fixing the exact market value of the closing stock. 13. The learned counsel for the assessee had referred to certain judgments for the proposition that the interest of a partner in the partnership firm should be fixed on the basis of yield. It is unnecessary to go into the details of those judgments, because it was conceded before the Bench, when the appeal was first heard, that while valuing the interest of partners in a firm rule 2B(2) could be invoked. It is also unnecessary to refer to the other judgments cited by the learned counsel for the assessee as they are not very relevant to the issue involved in this case. 14. The learned departmental representative had placed reliance on the order of the Special Bench in the case of Cosmopolitan Trading Corpn. In that case, the assessee reduced the export ..... X X X X Extracts X X X X X X X X Extracts X X X X
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