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TMI Blog1984 (8) TMI 138X X X X Extracts X X X X X X X X Extracts X X X X ..... losing stock by applying the said rule. 3. Against the additions made, the assessee went in appeal and the appellate authority has accepted the contention that rule 2B(2) could not be applied merely on the basis of the rate of gross profit shown by the assessee in the income-tax assessment. In some cases, reliance was placed on the Allahabad High Court's ruling in the case of Seth Satish Kumar Modi v. WTO [1983] 139 ITR 373, for the proposition that even in wealth-tax, the valuation has to be taken at cost price in accordance with settled commercial principles. In other cases, reliance was placed on various orders of the Tribunal, wherein on similar facts, it was held that the application of rule 2B(2) merely on the basis of a higher gross profit rate than 20 per cent was unjustified. 4. It may be pointed out that in some cases, the WTO had reopened the assessments under section 17(1)(b) of the Wealth-tax Act, 1957 ('the Act'), while, in other cases the addition was made during the original assessment itself. The department is aggrieved and is in appeal. We have heard the learned departmental representative and the counsel for the assessee at length. The learned departmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposition that the market value has to be taken as the cost in accordance with the settled principles of accountancy. The learned counsel for the assessee placed strong reliance on the Rajasthan High Court's ruling in the case of CWT v. Man Industrial Corpn. Ltd. [1980] 123 ITR 298 for the proposition that the onus of proving that the value mentioned in the balance sheet does not correctly represent the real value of the assets, and to what extent the value mentioned in the balance sheet should be reduced or increased for arriving at the real value of such assets would be on the party that challenges the valuation shown in the balance sheet. In the instant case, it is the revenue that challenges the valuation and the onus would, therefore, be on the revenue. The counsel for the assessee also relied on an order of the Jaipur Bench of the Tribunal in the case of WTO v. Ghyan Chand Kothari [WT Appeal No. 675 and 676 (Jp.) of 1981, dated 31-12-1983], wherein the bench quoted the order of the Third Member in the case of Gopichand Rawat and also the fact that a miscellaneous application for rectification has been moved by the department and still followed the order of the majority in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wealth. However, the value of the assets shown in the balance sheet is subject to adjustment, on the basis of acceptable evidence produced by the assessee before the WTO. The value of fixed assets shown in the balance sheet should be considered as a primary basis or the prima facie evidence of valuation of such assets. Applying this rule, it is clear that since here the revenue is claiming that the valuation of the closing stock was in excess of the book value, the onus would squarely be on the revenue to prove the fact by acceptable evidence. 10. The question arises whether the mere fact that the gross profit exceeds 20 per cent in most of the cases, would be sufficient reason to hold that the value of the closing stock as per the balance sheet exceeds the book value by more than 20 per cent. The matter has been argued at considerable length and we have taken into consideration the arguments pro and contra. In an earlier order of the Calcutta Bench, the Tribunal had held that merely on the basis of the gross profit rate rule 2B(2) cannot be applied. That view was taken by more than one Bench but it appears that some Benches took a contrary view also and for that the matter went ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent, in the next year the gross profit had fallen to 9 per cent only. It was, therefore, urged that taking the gross profit rate only as a basis for valuing the closing stock, would be highly fallacious and a risky proposition in the absence of any other evidence to show that the market value of closing stock exceeded the book value by more than 20 per cent. 12. In our opinion, there is one more reason for holding that the basis of gross profit alone to apply rule 2B(2) is not correct. We find that while the gross profit is earned over a full period of 365 days or so, the Wealth-tax Act takes into account only the valuation date, i.e., last day of the accounting year. Unless the WTO brings on record and material to show that on the last day of the year or near about the last day of the accounting period the market value of the closing stock was in excess of the book value by more than 20 per cent, rule 2B(2) cannot be applied merely on the basis of the gross profit which may have been earned in respect of the exports ; in particular, in the first half of the year or first three quarters of the year and in some cases there may have been no cases of transaction of sales in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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