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TMI Blog1986 (1) TMI 183X X X X Extracts X X X X X X X X Extracts X X X X ..... t the firm M/s Rawat Jewellers, Jaipur was dealing in precious and semi-precious stones. The maintaining account was in Jawaharat account and in asst. yr. 1977-78 the firm had disclosed a gross profit of 21.7 per cent. The WTO further found that the firm was showing the closing stocks at cost. On this basis the WTO was of the view that the market value of the closing stock could be at least 27 per cent more than the value at cost as shown in the firm s balance sheet. The WTO further referred to some orders as passed by the Jaipur Bench and called upon the assessee to explain why the provisions of r. 2B(2) of the WT Act should not be invoked. Rule 2B(2) of the WT Rules reads as under: 2B (2) Notwithstanding anything contained in sub-r. (1) where the market value of an asset exceeds its written down value or its book value of the value adopted for purposes of assessment under the IT Act, 1961, as the case may by more than 20 per cent, the value of that asset shall, for the purposes of 2A, be taken to be its market value. The assessee wrote to the WTO that the gross profit worked out in a particular year has no nexus to assume the fair market value of the closing stock as more t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld actually be sold on one particular day. The WTO did not refer to the decision of the Tribunal relied on by the assessee as according to him each case depended on its own facts. On the basis of the extent of the gross profit disclosed the WTO held that the market value of the closing stock of the firm Rawat Jewellers. Jaipur was exceeding the cost by 27.7 per cent. On this basis the closing stock of the firm was valued at the market rate and an addition of Rs. 18,839 was made to the value of the closing stock in the firm s account by applying r. 2B (2). The share in the case of each partner was determined accordingly. 3. When the mater came before the AAC it was pointed out that in the case of Gopichand Rawat Ors. (W.T.A. Nos. 60 to 62 (Jp) 1981) the Third Member had considered the whole issue and he held that on the facts the provisions of r. 2B (2) had wrongly been applied. Following that order the AAC held that the rule had not been rightly applied in this year as will. The addition made in respect of the Rawat Jewellers, Jaipur was, therefore, deleted. 4. In respect of the two assessee who were partners in Rawats Bombay, the WTO had found that the average gross profit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not above 20 per cent of the cost and the assessee having failed to discharge this onus must take the consequence. The standing counsel relied on the decision of the Jaipur Bench in the case of WTO vs. Kirtichand Tauk (1985) 21 TTJ 552 (Jp) : (1985) 11 ITD 291 (Jp). At the same time the ld. counsel submitted that the conclusion drawn by the Bench was not correct. In that case it was held that the extent of gross profit earned in a particular year was not conclusive of the margin of difference between the cost and market rate on the valuation date. The relevant observations of that Bench are as under: "In our opinion, there is one more reason for holding that the basis of the gross profit alone to apply r. 2B (2) is not correct. We find that while the gross profit is earned over a full period of 365 days or so, the WT 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 then 20 per cent, r. 2B (2) cannot be applied merely on the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee to bring those special facts on record so as to rebut the normal resumption that the gross profit rate indicated the margin between the cost and the market rate. Further reliance was placed on the orders of the Jaipur Bench where a view favourable to revenue had been taken. 7. Shri Ranka, the ld. counsel for the assessee referred to ss. 7(1) 7(2) of the WT Act and also r. 2B of the WT Rules which provides for the adjustment in the value of an asset disclosed in the balance sheet. He pointed out that in the case of closing stock its value adopted for the purpose of IT Act has to be adopted and he pointed out that for the purpose of the IT Act the closing stock had not been disturbed. He then referred to the provision of r. 2B (2) and pointed out that this was an exception carved out to a general rule and therefore, it was for the WTO to establish that the market value of the closing stock was more than 20 per cent in excess of the cost. This onus which lay on the Revenue could not be discharged merely by referring to the extent of gross profit disclosed in the trading account. The gross profit is not earned in a day but throughout the year and there was no presumption that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue arrived at according to the IT Act should be considered as the real value of the assets. The written down value arrived at, according to the provisions of the I.T. Act, merely represents notional allowance permissible under the Act but neither as a matter of law nor of right, the assessee could claim without anything more that the same correctly represents the real value of such assets and unless the assess produces reliable material before the WTO to show that the written down value of the assets was the true value thereof, the value mentioned in the balance sheet should be normally accepted as the real value of such assets. It has to be borne in mind that the onus is on the assessee to prove by acceptable evidence that the value mentioned in the balance sheet does not correctly represent the real value mentioned in the balance sheet should be reduced for arriving at the real value of the assets. As observed by their Lordships of the Supreme Court in the cases referred to above, the assessee is the best person to know about the real value of his assets and it is for him to adduce evidence before the WTO, if he desires to convince the authority that the value specified in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rbed the value of only one account. he submitted that this was not proper. He also pointed out that if all the trading accounts were taken together the gross profit could not be more than 16.5 per cent thus the basic presumption made by WTO would also disappear. The ld. counsel also adopted the reasons given by the Third Member in the case of WTO vs. Gopichand Rawat which is reproduced in (1983) 5 ITD 667 (Del). He also drew our attention to the submissions made before the AAC, where the various factors which may the affect market value of the closing stock were given. He relied on those argument. 10. The ld. counsel pointed out that the WTO did write the assessee about the intention to invoke the provisions of r. 2B (2). He, however, submitted that when the assessee wanted to know the material in procession of the WTO on the basis of which he was taking the value of closing stock at figure in excess by 20% the WTO did not give any reply and proceeded to adopt the gross profit as the sole basis for his inference. The counsel submitted that as the WTO failed to perform his duty in establishing the market value, he could not have invoked r. 2B (2) of the WT Rules. he also relied on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of the partners interest in the firm should be ascertained on yield basis and on that basis the value will be much lower as given by him in the paper book. He also submitted that large number of orders of the Tribunal clearly show that there was a view in favour of the assessee and even if two views were possible, the one favourable to the tax payer should be taken. For this he relied on the decision of Rajasthan High Court in the case of Mansinghka Bors. (P) Ltd. vs. CIT (1983) 37 CTR (Raj) 19 : (1984) 147 ITR 361 (Raj). The ld. counsel also submitted that there was no justification for referring to s. 18 of the Foreign Regulation Act as the WTO himself had not taken that basis in his orders. In the absence of any material that aspect could not be considered. In reply, the standing counsel as well as the Departmental Representative submitted that the gross profit as an admission of the trading results, and therefore, of the market value. It was also stated that all the materials which were necessary for establishing the market value were in possession of the assessee and, therefore, it could not be accepted that the WTO will be able to discharge his burden unless the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in the value of an asset disclosed in the balance sheet. This incorporated in r. 2B which has already been reproduced above. The r. 2B (2) provides that where the market value of an asset exceeds the value adopted for the purpose of assessment under the IT Act, 1961 by more than 20 per cent, the value of that asset shall for the purpose of r. 2A be taken to be its market value. Thus the rule does not require that in all circumstances the market value of the assets should be adopted. The market value will be ascertained and adopted only if such market value exceeds the value as shown in the books or the value adopted for the purpose of assessment buy more than 20 per cent. In a case where the market value exceeds by a smaller margin no adjustment whatsoever had to be made in respect of the assets disclosed in the balance sheet. Insofar as the closing stock is concerned, the application of r. 2B (2) is possible only if the condition given in that rule is present. Where an assessee values its closing stock at market rate the question of application of r. 2B (2) would not generally arise unless the WTO is of the view that the market value has been under stated. Where the closing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e period for which they were held, the price which might have been offered for it in the past and the general market rate at the place of business. Unless all these facts are ascertained it is not possible to come to a conclusion that the market rate was in excess of the cost by a margin of more than 20 per cent. It is, true that consistent earnings of gross profits would show that the market rate could be higher than the cost but here what we have to ascertain is the margin of excess and not merely the fact that the market rate was higher than the cost. It was true that for the purpose of s. 7 and the relevant rules one has to consider only hypothetical sale and not the actual sale on the valuation date. The fact that all these goods will be put in the market and at the same time thus depressing the market rate has also not to be taken into consideration. At the same time there has to be positive material for establishing the market value of the closing stock on the valuation date. The amount of closing stock carried from by the firm, in different years shows that in the goods in which the firm deals the sales are slow. In this line of business it is necessary to hold on certain g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the contention of the Revenue regarding export invoices and the value declared in them. We could have gone into that aspect if the WTO had gone into them in him order and had drawn any inference from them. We have already reproduced above the observations of the Settlement Commission that the value shown for the purpose of export could not be considered as the market value and a substantial discount has to be allowed for ascertaining the market value at home. We are, however, not going into that matter as that would have become necessary only if some inference would have been drawn by the WTO on that basis. 19. We do not accept the plea of the counsel of the asessee that the firm and the partners were different entities for this purpose and we consider it not necessary to go into that matter as that question does not rise for consideration in the present case and it has not been the case that the partner when called upon to give a particular fact had stated that it was in possession of the firm. We also do not accept the plea of the counsel for the assessee that it is the net profit which should be taken into consideration for ascertaining the margin between the market value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an industrial undertaking within the meaning of s. 5(1)(xxxii) of the WT Act. The AAC has relied on certain orders of the CIT(A) in the case of M/s. Maliram Puranmal as well as in the case of Premleta Navlakha. It is also pointed out before us that this matter had been considered by the Tribunal in the earlier years and it was decided that processing of goods was involved in the undertaking of this firm. As the facts remained the same we uphold the order passed by the AAC and reject the ground taken by the Department. 23. In the result the appeals are dismissed. H. S. AHLUWALIA, J. M.: Personally speaking I am of the opinion that in relation to the main dispute, the contrary view of the matter would be more appropriate and in accordance with the language and spirit of law. It is well established that so far as computation of total income is concerned, an assessee can value its closing stock on cost or market price whichever is less. It was not seriously disputed before us that the firm in which the assessees are partners had actually taken the value of the closing stock at the lesser figure i.e. the cost. In fact it was never disputed that the closing stock itself had b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the present proceedings by the Hon ble Supreme Court in CWT vs. J. K. Manufactures Ltd. Anr. (1984) 39 CTR (SC) 158 : (1984) 146 ITR 552 (SC). 3. How can the WTO possibly find out the market value of each item of closing stock held by the firm on the relevant valuation date ? Even the detailed particulars of the closing stock of the firm may not be available with the WTO assessing the present assessees. The WTO, therefore, would have to raise some kind of presumption from the available facts. The facts of the gross profit being more than 20 per cent would prima facie discharge the burden lying upon the Department and justify the WTO in raising the presumption. The actual market price of each item of closing stock was a fact within the special knowledge of the assessee because they are partners of the firms who owned the closing stocks. A partner may be different entity from a firm for the purpose of assessment under the IT Act, but a partner is an agent of the firm for all dealings with the third parties and is expected to know all facts relating to the conduct of the business by the firm as that it were the assessee who knew as to what was the actual market value of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t know as to what facts should be ascertained for establishing the margin and, therefore, had not put any specific quarries or asked the assessees to produce any specific facts. However, he had asked them to show cause as to why the closing stock should not be revalued. In reply the assessees only gave general explanation and asked the WTO that he should give them the basis for coming to the conclusion that the margin exceeded 20 per cent. The prima facie basis was already there in the form of the G. P. earned by the firm. Nothing more was known to the WTO but every thing was known to the assessee. They could give all the relevant facts to enable the WTO to ascertain the actual position. As I have pointed out above, the basic burden on the WTO was not there as has been presumed by my ld. brothers, because the WTO did not know the items of closing stocks held by the firms and the market price of each them. He only knows two facts, namely, one of that the value of the closing stock for the purpose of computation of income was taken to be the cost which was certainly less than the market value and the G. P. earned by the firm during the relevant accounting year being more than 20 per ..... X X X X Extracts X X X X X X X X Extracts X X X X
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