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TMI Blog1987 (9) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... short the Rules, 1957. He valued the closing stock of the firm on market value and then worked out the value of the assessee's interest in the firm. On such working, the WTO made the additions of Rs. 28,560 and Rs. 22,200 for the years under appeal respectively. The assessee went up in the appeal to the AAC against the orders of the WTO. The AAC held that the WTO was not justified either in law or on facts invoking the provisions of Rule 2B (2) of the Rules, 1957 to determine the assessee's interest in the said firm. He, accordingly deleted the impugned additions of Rs. 28,400 and Rs. 22,200 made for the years under appeal by the WTO. 2. Aggrieved, the revenue has come up in appeal to the Tribunal. It is convenient to dispose of both these appeals by a common order. Similar case came up for our consideration in WTO v. Smt. Lad Kanwar Dhadda (WT Appeal No. 756 (Jp.) of 1980) and assessment year 1975-76, WTO v. Smt. Jatan Devi Dhadda (WT Appeal No. 757(Jp.) of 1980) assessment year 1975-76. In the combined order dated 23-7-1981, the Tribunal found as follows : "5. We have heard the rival submissions. There should be some positive materials with the WTO for determination of market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tedly represents the cost price, we hold that applicability of Rule 2B(2) cannot be sustained on facts themselves. Rule 2B(2) can be applied only when the market value, exceeds more than 20 per cent of the book value. The revenue having miserably failed in establishing such factual position, the closing stock of the firm could not be valued on market value and, therefore, the additions being made by the WTO, are not sustainable. 3. Another common ground being raised in both the appeals is that the AAC erred in holding the firm as an industrial undertaking and the allowing exemption under section 5(1) (xxxii) of the Wealth-tax Act, 1957 to the assessee in respect of his investments in the firm. The AAC has dealt with this ground in paragraphs Nos. 16 to 19 in his combined order. The assessee claimed that the firm M/s Sardarmal Umraomal in which he was a partner, was an industrial undertaking within meaning of the WT Act, 1957. He therefore claims exemption is 5(1) (xxxii) the meaning of Explanation to section 5(1)(xxxi), in respect of this interest in the said firm. The question is whether the firm is an industrial undertaking within the meaning of Explanation to section 5(1)(xxxi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... othari (WT Appeal Nos. 451 and 452 (Jp.) of 1980 dated 25-7-1981). 4. Following the above decision I hold that Rule 2B (2) of the Wealth-tax Rules, 1957 is undoubtedly applicable for valuing the interest of the assessee in the firm. 5. Rule 2B (2) provides for disturbing the value of particular asset of the firm if the difference in market value appearing in the Balance Sheet of the firm is more than 20 per cent. The learned Judicial Member has held that in the case of the assessee the difference is not more than 20 per cent. For coming to this conclusion he has relied upon an earlier decision of Jaipur Bench in the case of Smt. Lad Kanwar Dhadda, the relevant extract of which has been reproduced in para 2 of the combined order. The view taken is that in valuing the closing stock "It might so happen that 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 day value could not get depressed". It is also observed that unless the facts are analysed properly and positive material brought on record to shoe that market value was very much higher than the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome time the market value with reference to the valuation date may be less than the percentage of increase of the GP rate and some times it may be more than the percentage of GP The onus to dislodge this position, i.e., the apparent is not real in the case, consequently falls on the assessee by giving positive evidence that the real market value of the closing stock is lower than the increase in the GP rate. The submissions made before the WTO are hypothetical and general and not specific. Neither any basis for valuation of the closing stock has been spelt out. The submission made before the AAC were as under : "(i) that precious stones have no ready market prices differ with different buyers; (ii) the entire stock if sold in one lot would not fetch more than 15 per cent over the cost price; (iii) that the closing stock also contained old and rejected unsaleable goods which needed continued chemical treatment holding over, re-assortment and sometimes re-cutting which entailed heavy expenditure." 8. The 1st contention is too general in nature. This position will equally hold good when the goods have actually been sold during the course of the year, which have ultimately infl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (1) Initially the price is offered to the foreign party. (2) If the foreign party does not accept the offer, a counter offer is made by them resulting in the reduction in the price. (3) If the counter offer is not acceptable to the exporter, the goods are reimported. (4) The returned goods are again resorted and re-exported at different price and to different parties in some other countries. 10. For arriving at the cost price the asking price is taken as the market value and out of that certain percentage of GP is reduced. A further reduction is made at the rate of 1 to 2 per cent on account of fluctuation, on account of reduction in the asking price, i.e., reimports, reassortments, etc. In other words, to arrive at the cost price, deduction made from the asking price is more than the rate of GP. To illustrate this proposition, we may say that where GP rate disclosed is 27 per cent, for the purpose of arriving at the cost price, deduction will be made at the rate of 28 percent or 29 per cent instead of 27 per cent. If the asking price is Rs. 100, the cost price will be fixed around Rs. 72 or Rs. 71. This exercise on the contrary shows that the increase in the market val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition to the valuation of the closing stock is concerned prima facie Rule 2B (2) appears to be applicable to the assessee's case in as much as the gross profit disclosed by the assessee in both the head Office and the Branch Office is more than 20 per cent and the valuation of the closing stock according to the WTO has been taken at cost so that the value can exceed the written down value or the book value adopted for the purpose of assessment of income-tax by more than 20 per cent. However, since the actual manner of valuation of the closing stock was not available before us and the AAC has made some general observations in the case of Dhanwar Singh, that realisation of higher profits would be the result of export sales tourists, matching, designing, repeated assortment, chemical treatment, etc. It would have to be found out as a fact as to what more expenses had to be incurred before the closing stock would be ready for sale and what was its market value on the relevant date involved in each case. The AAC has accepted the assessee's contention on the basis of some general arguments advanced on its behalf without actually coming to any conclusion about the exact market value of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock, in the firm in which the assessee is a partner. According to the assessee the closing stock for the purpose of IT Act was valued at cost. The issue, therefore, is whether the market value of the closing stock was more than 20 per cent of the cost price. It is agreed between the parties that G. P. rate for the assessment years 1973-74 1974-75, in the case of the firm is at 28 per cent and 27 per cent respectively. These rates are with reference to sales but according to Rule 2B(2) the difference of 20 per cent is to be taken with reference to cost. Where the G. P. rate is 28 per cent and 27 per cent the cost price would be Rs. 72 and Rs. 73 respectively against sale price of Rs. 100. The difference of Rs. 28 and Rs. 27 has to worked with reference to the cost price. The difference with reference to cost, therefore, works out to 38.88 per cent for the assessment year 1973-74 and 37 per cent for the assessment year 1974-75. Against such vast difference (against 20 per cent provided in rule 2B (2)), the value of closing stock has to be considered. For considering this issue a question would arise on whom the onus lies and to what extent and also the type of material for deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 1973-74 and at 37 per cent for the assessment year 1974-75 will not prima facie show that the difference as provided under Rule 2B(2) is more than 20 per cent and the WTO has discharged the initial burden cast on him ? 2. If the answer to question No. 1 is in the affirmative, whether the burden shifts to the assessee to prove that the prima facie difference of 38.88 per cent and 37 percent for the assessment years 1973-74 and 1974-75 is not real, by leading positive evidence particularly when he is in possession of evidence like vouchers, books of account, inventory of closing stock, etc., and not by hypothetical general statements ? 3. Whether any evidence has been adduced by the assessee to discharge the above burden ? 4. Whether market value of the closing stock has to be found as a fact, and whether any value has been fixed by the AAC of wealth-tax : if not, whether the issue regarding actual market value of the closing stock should be restored to the file of the AAC for fresh determination ?" Question by learned judicial Member : "1. Whether, on the facts and in the circumstances of the case, the G. P. rate being taken in the case of the firm constitutes ade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is WTO v. Gopi Chand Rawat (1983) 5 ITD 667 (Delhi). The learned Advocate submitted that following the order passed by the Tribunal in the case of another co-partner, it must be held that the view taken by the learned Judicial Member is the correct view. I am in agreement with this issue. Not only in the case of Umrao Mal Dhadda another co-partner the same view as I have just mentioned was taken but also in the Special Bench as will as in the other cases. Therefore, this is an additional reason why I am in agreement with the view expressed by the learned Judicial Member. 4, The matter will now go before the regular Bench so that the appeal can be disposed of in accordance with the opinion of the majority. ORDER UNDER SECTION 24(11) OF THE WEALTH-TAX ACT, 1957. Per Shri Y. R. Meena, Judicial Member- These appeals are by the Revenue. The only main issue for our consideration in these appeals are whether on the facts and in the circumstances of the case the Commissioner (Appeals) erred in holding that the WTO was not justified in invoking the provisions of rule 2B(2). There was a difference between the Members of the Bench. The matter was referred to the President under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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