9911796707
TMI Blog1995 (10) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... sponding valuation date of every assessment year at the rates specified in the Schedule. Net wealth has been defined in section 2(m) generally to mean the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under the Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than those which are not to be taken into account under the various provisions of the Act. "Assets" has been defined under section 2(e) to include property of every description, movable or immovable. In terms of these provisions, ordinarily, every asset belonging to the assessee on the valuation date has to be valued as per the provisions of the Act and the liability on such date has to be valued and after adjusting the aggregate value of the liabilities against the aggregate value of the assets the net wealth is to be found out. The method and manner of determining the valuation of assets has been provided under section 7 of the Act. The general rule provided under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ikely to fetch in the open market. That is to say, ordinarily, in the case of the Wealth-tax Officer adopting a global value for the purpose of valuing the net asset of the business, the basis for such valuation is to be the values of assets and liabilities as disclosed in the balance-sheet of the business, subject, of course, to the adjustments which are permissible. Prior to its amendment in 1964, it was left to the discretion of the Wealth-tax Officer to make such adjustments in the book value of the assets as the circumstances may require. In case no adjustment is thought fit to be made by the Wealth-tax Officer or if no adjustment is required to be made in respect of any particular area, there could not have been any separate assessment of any asset which was not part of the balance-sheet of the business. Under section 13 of the Act, all officers and other persons employed for the execution of the Wealth-tax Act are to observe and follow the orders, instructions and directions of the Board. The Board had authority to issue such orders, instructions and directions to the wealth-tax authorities as are deemed proper for the administration of the Act and the execution of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value at which it can be sold. It is keeping in view these factors as accounting principles, that ordinarily no entry of self-generated goodwill finds its place in the balance-sheet of any trade or business. In this connection, we may usefully refer to the opinion of some well-known accounting experts in this regard. F. R. M. de Paula, in his book Principles of Auditing while dealing with goodwill asserts that goodwill should not appear as an asset in a balance-sheet, except in the case of purchase, when it should appear at cost. It further goes to say that the figure at which goodwill appears, in a balance-sheet does not purport to show its present value, but merely the amount that has been expended in its acquisition, or, in other words, the amount of capital that has been invested in this particular asset. J. O. Magee in his book, Partnership Accounts, while dealing with why and when goodwill must be valued stated that goodwill will not appear as an asset in the balance-sheet of business until some event has taken place which makes it necessary to place a value upon it. This can be readily appreciated if we consider the case of a person who sets up a new business, i.e., wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merce and industry while accepting or rejecting the valuation arrived at on the basis of such accounts and it is in the light of such accountancy principles that the rules or the executive ins tructions prior to the commencement of the rules if any, issued by the Board for the purpose of proper execution of the Act amounting to laying down the guidelines have to be looked into. Unless there is a clear intention by the rule-making authority to give a go-by to normal rules of accountancy in providing for adjustments in the book value of the net wealth of the business, adjustments have to be treated in that light. We may notice that while dealing with the cases arising under the Income-tax Act, the Supreme Court approved the principle that the normal rule of accountancy should be adopted for determining the actual cost of assets in the absence of any statutory definition or other indication to the contrary. Reference, in this connection, may be made to a decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. From the aforesaid it could well be said, as a normal principle of accountancy that created goodwill does not enter the books of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 2C read as under : " 2A. Where the Wealth-tax Officer determines under clause (a) of sub-section (2) of section 7, the net value of the assets of the business as a whole having regard to the balance-sheet of such business, he shall make the adjustments specified in rules 2B, 2C, 2D, 2E, 2F and 2G. " " 2C. The value of an asset not disclosed in the balance-sheet shall be taken to be-- (a) in the case of a debt due to the assessee, the amount due to the assessee under that debt, and where such amount or part thereof has been allowed as a deduction under clause (vii) of sub-section (1) of section 36 of the Income-tax Act, 1961, in computing the total income of the assessee for the relevant year for the purposes of assessment under that Act, the amount of the debt as reduced by the deduction to be allowed ; (b) in the case of goodwill purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less ; (c) in the case of managing agency rights purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less ; (d) in the case of any other asset, its market value on the valuation date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will was dealt with in relation to making adjustments to the global value of a business as disclosed through the balance-sheet and contemporaneous exposition given by the Board which is also the rule-making authority and entrusted with the execution of the Act, vide its circular dated September 18, 1966, has made it clear that the rule-making authority had no intention of deviating from the existing guidelines contained in instructions of not making any adjustment on account of self-created or self-generated goodwill while resorting to global valuation of a business. It was also argued that as goodwill as an asset which has not been accounted for in the books of account, has specifically been dealt with under clause (b) to rule 2C by necessary implication, it is excluded from clause (d). We have carefully considered the rival contentions. We have also noticed above that the controversy before us is about the adjustments that have been prescribed to be made in the balance-sheet value of the business as a whole. Therefore, it is not of much relevance that goodwill created by self amounts to a realisable asset and is also an asset which could be transferred by the assessee for value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter the enactment of the Act, the Board had issued instructions that no attempt should be made to include the value of the goodwill unless it has been actually paid for by the assessee and is also shown as an asset of the business in the balance-sheet. These instructions were binding on the wealth-tax authorities, therefore, before the rules in question came into existence, it was a uniformly accepted norm by the Revenue that wherever sub-section (2) of section 7 was to be invo ked for the purpose of arriving at the global value of a business, no value on account of goodwill which is self-generated was to be made. It was also clear that even in the case of goodwill which has been acquired for a price it is to be included in the global valuation only in case the assessee has shown the same as an asset of the business in the balance-sheet. Unless such acquired goodwill on payment of price was shown in the balance-sheet of the assessee, it was also not to be included and taken into consideration for the purpose of global valuation. It was further envisaged that where the goodwill has been paid for but has been written off in the profit and loss account, in that event, though such acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e notification containing the Wealth-tax (Second Amendment) Rules, 1965, was published in Part II--Section 3, sub-section (i), of the Gazette of India, Extraordinary, dated November 4, 1965, as G. S. R. No. 1634. The Explanation to rule 2E also has now been amended by the notification containing the Wealth-tax (Amendment) Rules, 1966, published in Part II-Section 3, sub-section (1), of the Gazette of India, Extraordinary, dated July 28, 1966, as G. S. R. No. 1190. Section 7(2)(a) was amended by the Wealth-tax (Amendment) Act, 1964, providing for the prescription of the adjustments to be made under that section by rules. The primary purpose of the adjustments to be made under this section is to make the global valuation as approximate to the valuation which would be arrived at by adopting the market value of the assets and liabilities, as possible. The salient features of the adjustments prescribed in the rules are explained in this circular. Section 7(2)(a) permits the valuation of the assets by 'global method' only in the case of an assessee who carries on business for which regular accounts are maintained." " Adjustments in the value of an asset not disclosed in the balance s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276 observed as follows (page 289) : " Therefore, circulars issued by the Board either earlier or later, do not bind the courts. However, one has to remember that under the scheme of the Income-tax Act, under section 116, the Act provides for various income-tax authorities for the purpose of implementing the provisions of the Act. The Central Board of Direct Taxes is the apex body entrusted, with the duty of implementing fiscal statutes which fall in the category of direct taxes. It has also authority to issue instructions and guidelines for proper administration of the Act which are binding on all its subordinate authorities and is a limb of the Finance Ministry which is the framer of any fiscal provisions to be enacted. 'Contemporanea expositio' is a well-known doctrine for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous. The 'administrative construction' (i.e., contemporaneous construction placed by administrative or executive officers charged with executing the statute) gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e authority was in the best position to convey what it meant by providing rule 2C for the purpose of section 7(2). There is a distinction between the explanatory note issued by the law implementing authority about the meaning of the statute framed by the Legislature and the explanatory note issued by the law making authority itself. In the former it is an act of executive interpretation and in the latter it is explaining the meaning of its own act. Obviously, when the object of sub-section (2) of section 7 was not to insist upon finding out the exact value of each and every asset which can be fetched if sold in the open market and broadly the total value of the business taken as a whole on the basis of accounting principles, the Board has consistently kept out the valuation of goodwill to be included in such global valuation for the obvious reason of impracticability of arriving at a consistent formula of valuing a precarious asset like goodwill whose value and its growth or decline is so volatile in nature. That object cannot be said to be irrelevant for the purpose of arriving at a global value of business for the purpose of section 7(2). We also find force in the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the plain negative. If, on ordinary principles, an asset is not to find place in the balance-sheet, by rule 2C, it cannot be said that the rule-making authority intended to make certain adjustments into the balance-sheet even in respect of such assets which ordinarily would not find place in the balance-sheet. This is further strengthened from the fact that the three assets specifically dealt with for different treatment in the matter of valuation are all such assets which ordinarily would have found place in the balance-sheet unless their value has been brought to nil or has been written off in the books of account for one or the other reason. In that view of the matter, taking the popular meaning of the balance sheet and keeping in mind the relevant accounting principles as what ought to be included and ought not to be included in the balance-sheet, we are of the opinion that the adjustment provided for by the rules can only be linked with such assets which normally ought to be or could be included in the balance-sheet, but does not relate to such assets which even on normal accounting principles should not be included in the balance-sheet for the purpose of making adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The goodwill was sought to be assessed as part of the global value of the business carried on by the assessee. It was in this context, the assessee had raised three-fold contentions before the wealth-tax authorities. To keep out the value of his half-share in the goodwill of the firm of which he was an erstwhile partner, viz., it was claimed that the right of the assessee to receive Rs. 50,000 per annum for use was nothing but an annuity not commutable and, therefore, exempt from wealth-tax under section 2(e)(iv) of the Wealth-tax Act, that is to say, it was excluded from the definition of asset. Secondly, it was contended that the assessee's right was only to receive Rs. 50,000 per annum and in fact when the assessee retired without taking any cash, the entire goodwill became goodwill of the firm which continued to carry on the business and nothing more than Rs. 50,000 received by the assessee could be added. Lastly, it was contended that since the goodwill has not been purchased for a price, it cannot be valued as an asset in view of rule 2C(b) of the Wealth-tax Rules, 1957, read with Circular No. 5-D/(WT) of 1966, dated September 18, 1966. As we have noticed above, here we ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
