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TMI Blog1985 (8) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... ree assessees. 2. In the first appeal before the AAC, the assessee challenged the determination of the value of partners' interest in the firm on the basis adopted by the WTO and it was pointed out that in the case of Seth Rakesh Kumar Modi, who also was a partner in the above firm, the Commissioner (Appeals) had decided this issue and had deleted the addition made by the WTO. The AAC following the same order, deleted the additions made by the WTO. 3. Now the department has filed these appeals and in all the three appeals the common question is : "Whether while determining the value of partners' interest in the firm it was open to the Wealth-tax Officer to value the shares in Indofil Chemicals Ltd. by adopting their market value and for this purpose apply rule 1D of the Wealth-tax Rules, 1957 ?" 4. The matter had come up earlier before the Division Bench and at that time a reference was made to the decision of the Allahabad High Court in the case of Seth Satish Kumar Modi v. WTO [1983] 139 ITR 373 as well as another decision of the same High Court in the case of Juggilal Kamlapat Bankers v. WTO [1979] 116 ITR 646. While the revenue relied on the observations in the later ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Act nor the Rules lay down any particular procedure for calculation of the net wealth of the firm. This Court, however, has considered the matter in two cases, CWT v. Padampat Singhania [1973] 90 ITR 418 (All.) and CWT v. Laxmipat Singhania [1974] 97 ITR 188 (All.). In Padampat Singhania's case, the assessee, as karta of a Hindu undivided family, had 1/3rd share in a partnership firm and his interest in the firm had to be calculated for purposes of computing his net wealth. In computing the net wealth of the firm, the ITO ignored the arrears of income-tax due against the firm, in view of section 2(m) of the Wealth-tax Act. It was held that as the net wealth of the firm was being determined and not of the assessee, the provisions of section 2(m) of the Act could not be relied upon for excluding the income-tax liabilities. It was also laid down that the net wealth of a firm had to be calcuated under rule 2 in accordance with commercial principles, and the special provision in the Act for the computation of net wealth cannot be applied for purposes of computing the net wealth of a firm under rule 2. Same is the position in the other case. In Advanced Accountancy by Batliboi, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment in the case of Juggilal Kamlapat Bankers, the Allahabad High Court had considered the question whether while determining the value of interest of the partner in a firm, a building belonging to the firm could be separately valued at its market value and not at cost as shown in the balance sheet of the firm. The High Court held that the value of such a building or any other asset can be separately determined at market value as rule 2 and section 7 of the Act have to be read harmoniously. The High Court had also held that for the purposes of valuing such a separate asset along with the firm, the WTO can make a reference to the Valuation Officer. 7. According to the departmental representative, the decision in the case of Seth Satish Kumar Modi was only in respect of reopening the assessment and, therefore, this earlier judgment should be followed. He submitted that the decision in the case of Juggilal Kamlapat Bankers has been considered by the Supreme Court and they have upheld the decision of the Allahabad High Court in Juggilal Kamlapat Bankers' case. It was pointed out that the Supreme Court held that the interest of a partner in a firm belongs to a partner and no lega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business carried on by the assessee is to be determined. Thirdly, even when he proceeds under sub-section (2) he has to determine the net value of the business as a whole having regard to the balance sheet of such business as on the valuation date ; the phrase 'having regard to the balance sheet of such business' as judicially interpreted means that the WTO has to take into consideration or account the balance sheet of such business for such valuation and not that such balance sheet is conclusive or binding or decisive of the values of assets appearing therein. Fourthly, the said sub-section also says that the WTO has to 'make such adjustments therein as may be prescribed' and in this behalf rules 2A and 2B already quoted above indicate what adjustments the WTO has to make while determining the net value of the business as a whole. Particularly sub-rule (2) of rule 2B clearly provides that where the market value of an asset exceeds its written down value or book value by more than 20 per cent. the value of that asset for the purposes of rule 2A shall be taken to be its market value. In other words, it is clear that even where the WTO has resorted to section 7(2) for determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the decisions of the Allahabad High Court which are binding. He also pointed out that the decision of the Supreme Court in the case of CWT v. Mahadeo Jalan [1972] 86 ITR 621 related to a period when no rules had been framed and the Court hold that the yield method was the correct method for valuing the unquoted shares. 10. The learned counsel for the assessee, Dr. Debi Pal, first placed before us the decision of the Allahabad High Court in the case of Seth Satish Kumar Modi and pointed out that it was the case of the same group and the question related to the valuation of the interest in the same firm in which the present assessees were partners. He contended that the basis of the judgment in the case of Seth Satish Kumar Modi was that the net wealth of the firm could not be determined according to the provisions of the Act and the Rules but in accordance with the commercial principles. The learned counsel pointed out that the High Court had further held that taking the value at cost price was in accordance with commercial principles. The learned counsel argued that the definition of net wealth as given in the Act could not be applied to rule 2 as the firm was not an 'assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Allahabad High Court has not held rule 1D to be mandatory and what has been held in the case of Sripat Singhania is that if rule 1D was binding on the ITO it was binding on the Tribunal as well. He also pointed out that in the case of Padampat Singhania, the High Court did not decide the vires of the rule as it was a reference proceeding. According to the learned counsel, if the market value of the assets of the firm was to be taken as per rules, rule 2 itself becomes ultra vires. He pointed out that the correct method was pointed out by the Supreme Court in the case of Mahadeo Jalan where it was held that the yield method was the correct method for valuing shares. Thus, the learned counsel for the assessee submitted that the following decision of the Allahabad High Court in the case of Seth Satish Kumar Modi, it should be held that the value of the interest in partnership should be determined on the basis of the balance sheet of the firm and not on the basis of valuing any individual assets in accordance with any rules. 12. The learned counsel for the assessee also made another submission that in the case of several of the partners of the firm the assessee's plea has been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Whether the market value of the shares should be adopted on the yield basis and not in accordance with rule 1D ? 4. Whether in the present cases value of the interest of the assessee in the firm could be adopted on the basis other than what has been adopted in the cases of some of the other co-partners ? 15. Taking the first issue first, we find that there is some conflict between the observations made by the Allahabad High Court in the case of Seth Satish Kumar Modi and their observations and decision in the case of Juggilal Kamlapat Bankers. In the case of Seth Satish Kumar Modi, it is observed by the High Court that the Act or the Rules do not lay down any particular provision for calculation of net wealth of a firm. The High Court has further referred to their decision in the case of CWT v. Padampat Singhania [1973] 90 ITR 418 (All.) and held that the net wealth of a firm had to be calculated under rule 2 in accordance with commercial principles and the special provisions of the Act for the computation of the net wealth cannot be applied for the purposes of computing the net wealth of the firm under rule 2. This decision though reported in 1983 had been given in October ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TO to refer the question of valuation of one asset to the Valuation Officer. This could be possible only if one asset could be separately valued by the WTO. The Supreme Court while considering the second question referred to the various provisions in the Act and pointed out that the substance of the argument was that section 7 which enabled the WTO to determine the value of any asset at market price thereof on the valuation date was inapplicable in the case of a partner's interest in the firm. The Supreme Court held that this contention proceeded on an entire misconception of relevant provisions of the Act themselves. The Supreme Court proceeded to hold that rule 2(1) comes into picture for valuing the interest of a partner in a firm and for that the net wealth of the firm has to be determined and for this section 7 again becomes important. The Court held that the primary method of determining the value of an asset was to determine its market value on the valuation date. As far as the provisions of section 7(2) were concerned, the Supreme Court has held that even one separate asset could be valued and in this connection the Supreme Court referred to rule 2B(2). Under this rule, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up method. The case of Mahadeo Jalan was decided when the Rules were not in existence and we, therefore, do not find any observation of the Supreme Court on the applicability of valuation on yield basis as against valuation on the break-up method as adopted in the Rules. Here we are concerned with the year 1975-76 when the Rules were in operation. There is a difference of opinion between the High Courts on the question whether rule 1D is directory or mandatory. In the case of Smt. Kusumben D. Mahadevia, the Bombay High Court has held that the rule is directory and not mandatory. We have to consider this matter in the light of the decisions of the Allahabad High Court as in this case we are bound by the decision of that Court. In the case of CWT v. Laxmipat Singhania [1978] 111 ITR 272, the Allahabad High Court held that these rules were applicable to the pending proceedings as well. In the case of Sripat Singhania, the question which was referred to the Allahabad High Court was whether the Tribunal was justified in approving the assessee's method of valuation in respect of unquoted shares in preference to the valuation adopted by the wealth-tax authorities as per provision of rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hird issues are, thus, decided in favour of the department and the action of the revenue in valuing the shares under rule 1D is upheld. 20. We now come to the last issue which arises from the different modes of valuation adopted in the cases of different partners of the firm Synfibre Sales Corporation. We find that there has been no uniformity in the method of valuation adopted by the department or shown by the different assessees in their returns. In the case of one set of persons who are also partners in the same firm, the WTO himself or the Tribunal had applied the decision in the case of Seth Satish Kumar Modi and had determined the value of the shares at the figures shown in the balance sheet of the firm. In the case of the three assessees before us, however, the position is different. Whereas the matters for the years 1970-71 to 1972-73 have been reopened and the question of reopening is pending before the Delhi High Court for the years 1973-74 and 1974-75, those three assessees filed their returns on the basis adopted by the WTO, that is on the basis of rule 1D. In some cases the WTO had made additions on the basis of value under rule 1D but the appeals were not pressed be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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