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TMI Blog1984 (2) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... - 1971-72 A.V. Reddy Trust for A.V. Seshakumar Reddy 37 to 43/83 ----- 1969-70 to 1975-76 A.V. Reddy Trust for A. Vijayakumar Reddy 44 to 50/83 42 to 48/83 1969-70 to 1975-76 A.V. Reddy Trust for A.V. Sivakumar Reddy 51 to 57/83 49 to 55/83 1969-70 to 1975-76 A. Premkumar Reddy (Indl.) 58 to 64/83 56, 57, 58, 1969-70 to 59, 61 and 1975-76 63/83 Smt. A. Saraswathy 65 to 71/83 62, 64 to 1969-70 to 69/83 1975-76 --------------------------------------------------------------------------------------------------------------------------------------------------- In WT Appeal Nos. 16 to 43 (Hyd.) of 1983 also, cross-objections had been filed numbered as CO Nos. 70 to 97 (Hyd.) of 1983, but these cross-objections were barred by limitation and as the delay was not condoned, they were dismissed in limine. 2. As it was agreed before us by both parties that the issues involved were common to all the appeals and the cross-objections, we proceed to consider in this case, which is taken as illustrative, the facts as well as the contentions of the parties before us and we would render our decision in these appeals which would be equally applicable to all other appeals als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of grease, dirt, etc., the scrap weight can be taken as 16,500 metric tonnes. This scrap accumulation can be taken as from 1970-71 and its value at Rs. 5 per kg. is Rs. 82,500. The total value of the declaration is, thus, Rs. 18,00,000. It requires a payment of Rs. 10,80,000 towards tax and Rs. 90,000 towards deposit. Since the stocks have to be converted into cash before they will be available to us in that form and since we are very much hard pressed for funds due to severe credit restrictions and high prices of raw materials all-round, we request you to please grant us time for payment until 15-3-1976 to pay these amounts. We have paid by challan a sum of Rs. 80,000 into the State Bank of India, Innespeta Branch, towards tax leaving a balance of Rs. 10,00,000 to be paid before 15-3-1976. A bank guarantee dated 21-11-1975 issued by the State Bank of India, Rajahmundry, in favour of the President of India through you, for a sum of Rs. 5,00,000, representing 50 per cent of the tax still to be paid, is enclosed herewith. For the balance of Rs. 5 lakhs, we offer you a surety, the same aluminium stocks on which we are paying these taxes and also personal guarantees of our managing d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment. All these contentions of the assessee were negatived and the WTO made reassessment again with reference to the balance sheet figures, but making one addition, viz., the income disclosed under the voluntary disclosure scheme less the amount of income-tax payable to value of assets. Advance tax paid was also deducted in each year from the provision for taxation as also excluded from the assets side. Thus, for the assessment year 1969-70, the addition on account of income disclosed under the voluntary disclosure scheme was Rs. 14,15,750 and income-tax payable excluded was Rs. 8,49,450, giving a net addition of Rs. 5,66,300. This was the starting figure for the next year and the value of stock for that year less tax attributable thereto was added to the net assets as per the balance sheet of such year. The procedure was repeated for the succeeding years. By this process, the value per share went up to the figures in each year of which we have given particulars earlier. 5. The assessee appealed to the Commissioner (Appeals) and challenged the validity of the reopening. There was challenge also on the point that from the figures of provision for taxation, advance tax paid shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there were any omissions in the balance sheet, to record any assets, the value of the shares in the hands of a shareholder would not automatically stand enhanced. 7. The Commissioner also considered that there was some force in the contention of the assessee that in view of the provisions of section 13 of the VD Act a further enhancement in the value of shares based on the declaration by the company would not be permissible. The Commissioner, therefore, gave a categoric finding that the valuation of shares was correctly done in terms of rule 1D in the original assessments by including only the assets declared in the balance sheet as on the relevant valuation dates. He further held that the WTO was not competent to reopen the assessments, because the information in his possession was not such as to enable him to believe that the value of shares had been under-assessed and further, there was no omission or failure on the part of the assessee to disclose material facts at the time the original assessments were completed. He, therefore, cancelled the reassessments for all the years under consideration. The Commissioner refrained from giving any finding on the point regarding deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if when applying the circular some modifications could be made where circumstances merited, in applying the rule also modifications could be made if circumstances necessitated the same. 9.2. Another decision which was pressed into service on behalf of the revenue was that in CWT v. Pachigolla Narasimha Rao [1982] 134 ITR 640 (AP). It was submitted that if when making a global valuation, the value of assets which were not disclosed in the balance sheet could be included and, therefore, in the present case also, the value could be included. 9.3. The decision of the Tribunal in WTO v. Mrs. Grace Collis [1982] 1 ITD 72 (Coch.) was next adverted to and it was submitted that there were observations of the Tribunal at page 77 which showed that in appropriate circumstances, the balance sheet values could be discarded in computing the value of the shares under rule 1D. This is because, according to the learned departmental representative, the principle that was recognised, viz., adjustments were permissible in computing the value of assets in the balance sheet of the company, would be equally applicable in the case of valuation of shares of the shareholder. 9.4. The learned department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of section 17 would be attracted. For the distinction between the concepts of 'failure' and 'omission' reliance was placed on the decision of the Bombay High Court in Pannalal Nandlal Bhandari v. CIT [1956] 30 ITR 57. The learned departmental representative also stated that the Commissioner was in error in considering that there was force in the contention that the provisions of section 13 gave immunity to the assessee-shareholder. The immunity, he stated, was only to the declarant and none other. 9.6 For all the aforesaid reasons, he submitted that the Commissioner was in error in coming to the conclusion that the provisions of section 17(1) were not attracted. 9.7 In particular, the learned departmental representative stated that Shri A.V. Reddy was the managing director and he signed the returns in all cases except in the case of A. Premkumar Reddy and Smt. A. Saraswathy. Smt. A. Saraswathy was also a director and Shri A.V. Reddy and Smt. A. Saraswathy should be presumed to have direct knowledge, or at least constructive knowledge of the value of stock not being accounted for by the company and, hence, there was both failure and omission to disclose fully and truly al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef before initiating action for reopening an assessment. But, nevertheless, both the 1957 Act and the 1961 Act require that there should be reasons to believe. Therefore, the criteria for considering whether initiation of proceedings is valid or not are the same under both the Acts save for the fact that there was no requirement that there should be formal recording of reasons under the Act. The Supreme Court in the case of Ganga Saran Sons (P.) Ltd. v. ITO [1981] 130 ITR 1 has observed as under : " It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the ITO would be without jurisdiction. The important words under section 147(a) are 'has reason to believe' and these words are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn in the balance sheet and dividing the difference by the number of shares and taking 85 per cent thereof as the market value. If dividends had not been declared in earlier years, a further deduction was to be given. There is Explanation 2 under rule 1D which provides that certain amounts shown as assets in the balance sheet are not to be treated as assets and certain amounts shown as liabilities in the balance sheet are not to be treated as liabilities. The assessee had, in filing the original returns, computed the value of the shares in question strictly in accordance with the provisions of rule 1D based on the relevant balance sheet of the company and the WTO adopted such figures. The provisions of section 7, no doubt, do not override the provisions of the charging section, i.e., section 3, which prescribes that the net wealth is to be determined, and 'net wealth' as defined in section 2(m) of the Act as the aggregate value computed in accordance with the provisions of the Act of all assets as exceeds the aggregate value of all debts owed by an assessee. Therefore, we have to see what other provisions of the Act could have a bearing in determining the value of the shares. 13. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any belief that it was necessary to refer the matter to the Valuation Officer. The Valuation Officer would not perhaps have been bound by the Rules relating to the valuation of an asset. But, since there was no belief by the WTO that the matter would have to be referred to the Valuation Officer, the question that arises is whether, at the stage of initiation of proceedings, the requirement that the WTO could have had reason to believe that wealth had escaped assessment was satisfied. Under the provisions of section 7(1), which was the provision under which he proceeded both initially and later, a valuation had to be made 'subject to rules'. The operative part of rule 1D stated as under : "The market value of an unquoted equity share of any company, other than an investment company or a managing agency company, shall be determined as follows : The value of all the liabilities as shown in the balance sheet of such company shall be deducted from the value of all its assets shown in that balance sheet. The net amount so arrived at shall be divided by the total amount of its paid-up equity share capital as shown in the balance-sheet. The resultant amount multiplied by the paid-up v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions of several High Courts holding that the provisions of rule 1D are mandatory, there was the judgment of the Bombay High Court which stated that the rule was not mandatory. This decision is that of Smt. Kusumben D. Mahadevia's case. Since there was no judgment of the Andhra Pradesh High Court, we would agree with the learned departmental representative that if there is any indication to show that having regard to the ratio of the judgment of the Bombay High Court relied on by him, the WTO would have had reason to believe, the adequacy of which reason, we are conscious, we cannot go into that wealth had escaped assessment, the reopening would be in order. The judgment only stated that the provisions of rule 1D were only directory and not mandatory. The judgment pointed out with reference to the ratio of the judgment of the Supreme Court in CWT v. Mahadeo Jalan [1972] 86 ITR 621 that the normally permissible method of determining the market value in the case of unquoted shares was the yield method, though under exceptional circumstances the break-up method could also be utilised. If the break-up method was to be utilised, it was the method prescribed under the Rules. If such me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the facts and circumstances of the case, the WTO with the previous approval of the IAC is of the opinion that it would not be practicable or realistic to apply the provisions of the rule, than nothing contained in the rule would apply to the valuation of a share. It is, therefore, clear that the rule making authority itself had realised that the WTO should be given authority not to apply the rule where there were special reasons. But, the rule making authority considered that such discretion should not be untrammelled, but should be exercised only with the previous approval of the IAC. In the absence of any such provisions in the existing rules, the WTO was clearly bound by the Rules. Therefore, the WTO had to go by the balance sheet of the company and apply the provisions of rule 1D, and if this rule was applied, then as long as the balance sheet did not disclose the value of any stock left out on the particular valuation dates, the question of reworking the value of the share could not arise. 19. Looked at from another angle, even if a particular shareholder had come on record and had stated that some stocks were left out of the balance sheet of the company, as long as the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld have been information of a confidential nature which as a shareholder he would not have been bound to disclose because it was special information in his possession and such special information known to a few special people would not be relevant in determining the price which the asset would fetch, if sold in the open market as required by section 7(1). The 'open market' presumes a market where all persons including those who do not have a special information could participate. The decision of the House of Lords in Lynall v. IRC [1972] 83 ITR 563 is instructive on this point. Each of the law Lords came to the conclusion independently that confidential information known to the directors was not material in determining the market value of shares. In this regard, the observations of Viscount Dilhorne in the case of Lynall were : " On a sale in the open market is it to be assumed that possible purchasers would have information as to the contents of the reports of McLintocks and Cazenoves ? They were confidential to the directors. All the shareholders in Linread were directors but it is not to be assumed that they would disclose confidential information they possessed to the public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay. The situation differs from that in IRC v. Clay [1914] 3 KB 466, 471, where the special fact enhancing the price of property was assumed to be a matter of local knowledge. Secondly, it is said that the directors of the company might have been willing to impart the information confidentially to a chartered accountant or other expert acting as agent for a purchaser, though the information would be imparted on the terms that it would not be passed on to the purchaser himself. But in such a case the transaction would be in the nature of a private placing and not a sale in the open market such as has to be envisaged under section 7(5). In my opinion, the reasonable supposition is that the information would not be available in the hypothetical open market, and so the assessment should be pound 3 10s. and not pound 4 10s. ; and, therefore, the appeal should be allowed and the judgment of Plowman, J. should be restored. " The view expressed by the Calcutta High Court in CWT v. Smt. Chandrakala lal [1978] 111 ITR 185 that the market value cannot vary from person to person or assessee to assessee, also stems out of the aforesaid reasoning that confidential information cannot be releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1967-68 8 1967-68 44,000 M/T 1968-69 9 1968-69 32,700 M/T 1969-70 10 1969-70 28,000 M/T 1970-71 11 1970-71 11,300 M/T 1971-72 ----------------------- 2,29,000 M/T ----------------------- -------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------- If the income is represented, by cash (including bank deposits), bullion, investment in shares, debts Remarks due from other persons, commodities or any other assets ------------------------------------------------------------------------------------------------------------------------------------------------- Description Name in Amount of asset which held Rs. Asset held in Valued at 17,17,500 The stock accumulated due to kind as stocks--- Rs. 7,500 accounting for the conductor Aluminium E.C. per ton. manufactured on the basis of Wire Rods by length of conductor multiplied by The India Fruits ISS standard weight and ascer- P. Ltd. (Anam taining the aluminium content Electrical ..... X X X X Extracts X X X X X X X X Extracts X X X X
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