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TMI Blog1991 (2) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... e assets would have been the net sale proceeds as reduced by the capital gains tax. In view of this, it was contended that, while valuing the shares, the Wealth-tax Officer should have allowed deduction for notional capital gains tax in this regard. The Appellate Assistant Commissioner rejected this contention stating that any notional capital gains tax which may be payable by an assessee in the event of the assets being sold in the open market on the valuation date is not an allowable deduction. He relied on a decision of the Madras High Court in T. S. Srinivasa Iyer v. CWT [1976] 104 ITR 625 and the decision of the Allahabad High Court in Bharat Hari Singhania v CWT [1979] 119 ITR 258. In the second appeal, the Tribunal was of the view that the issue under consideration was set at rest by the decision of the Allahabad High Court in Bharat Hari singhania [1979] 119 ITR 258 and the decision of the Supreme Court in Pandit Lakshmi Kant Jha v. CWT [1973] 90 ITR 97. Accordingly, the appeal was dismissed. On these facts, the following question of law has been referred to this court: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of section 7(1) of the Act, the logical conclusion of such fiction is that capital gains liability is inherent in such notional sale and the capital gains liability attaches to the transaction as soon as the sale of such property is assumed and on the basis of such assumption, the value of the shares is made. Dr. Pal heavily relied on the decision of the Supreme Court in the case of CWT v. P. N. Sikand [1977] 107 ITR 922. There, the Supreme Court observed that what is received by the assessee on his own account is only the price less 50 per cent. of the unearned increase in the value of the land and that represents the net realisable worth of the asset in the hands of the assessee. Dr. Pal, therefore, contends that one has to consider what is the net realisable worth of the asset in the hands of the assessee. If the value of the property is to be determined on the fiction that the property is assumed to be sold in a hypothetical market to a hypothetical buyer, one has necessarily to accept the logical conclusion which follows inevitably from such fiction. If the fiction of sale is assumed, the logical conclusion which inevitably flows from such imaginary sale is a capital gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Mr. Shome, learned counsel appearing for the Revenue, however, supported the order of the Tribunal. It is his contention that there is no inconsistency between the two decisions of the Supreme Court in Pandit Lakshmi Kant Jha [1973] 90 ITR 97 and P. N. Sikand [1977] 107 ITR 922. It is his contention that the Supreme Court has categorically laid down how the valuation has to be made of an asset. He has also submitted that in Bharat Hari Singhania [1979] 119 ITR 258, an identical question was raised before the Allahabad High Court and the contentions raised before this court by Dr. Pal were duly considered by the Allahabad High Court and rightly rejected. He has also cited a few English decisions to emphasise how the valuation of an asset is made for the purpose of assessment. We have given our anxious consideration to the rival contention. Section 7, as it stood at the material time, provided that, subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date. Section 7(1), therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 'fetch' if sold in the open market at the time of the death of the deceased. This points to the price which a purchaser would pay. The net amount that a vendor would receive would be less. There would be costs of and incidental to a sale. It would seem to be harsh or even unjust that allowances cannot be made in respect of them. But the words of the statute must be followed. A valuation would be on an entirely different basis if related to such figure as would be likely to be realised in fact and in practice if there was a sale at as early a date after the death as was practicable and if the units of property comprising what had been administered as large estate could only at such time be sold to an investor or speculator." Lord Guest observed (at page 541 ) : "The terms of section 7(5) of the Finance Act, 1894, have already been quoted. The value of property under this section is to be taken to be at its market value at the date of the death of the deceased. Some things, think, are reasonably clear. The words 'price the property would fetch' in section 7(5) mean that it is not the price which the vendor would have received but what the purchaser would have paid to be put i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee claimed deduction on account of brokerage commission from the value of shares and stocks held by him for the purpose of assessment under the Wealth-tax Act. The stand which was taken by the assessee was that, as and when he sells the shares and stocks in question, he would have to pay brokerage commission and as such in computing the value of the asset, the price which it would fetch in the market should be reduced by the brokerage which would have to be paid on account of the transaction of sale. The Supreme Court, after referring to section 7(1) of the Act, rejected this contention in the following words (at page 102) : "Bare reading of the section makes it plain that subject to any rules which may be made in this behalf, the value of the assets, other than cash, has to be the price which the assets, in the opinion of the Wealth-tax Officer, would fetch in the open market on the valuation date. It would therefore, follow that in the absence of any rule prescribing a different criterion, the value of an asset, other than cash, should be taken to be the price which it would fetch if sold in the open market on the valuation date. No rules prescribing a different criterion in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from consideration. This, however, is a matter essentially for the Legislature. No resort can be made to an equitable principle for there is no equity about a tax. So far as the construction of section 7(1) of the Act is concerned, in view of its plain language, there is no escape from the conclusion that the expenses in effecting the sale of the asset in the open market cannot be deducted." (emphasis supplied) The Supreme Court was of the view that the language of section 7(1) of the Wealth-tax Act, 1957, is similar to sub-section (1) of section 36 of the Estate Duty Act. On account of the similarity in language, the value of an asset, other than cash, for the purpose of section 7(1) of the Wealth-tax Act, should be the same as its value for purposes of section 36(1) of the Estate Duty Act. Section 36(1) of the Estate Duty Act was based upon section 7(5) of the U. K. Finance Act, 1894. In all these cases, the principal value of any property shall be estimated to be the price which it would fetch if sold in the open market on the material date, in the case of wealth-tax, the valuation date and, in the case of estate duty, the date of death of the deceased. The Supreme Court also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sitaldas Tirathdas [1961] 41 ITR 367 (SC). Dr. Pal has also sought to distinguish the decision in Pandit Lakshmi Kant Jha [1973] 90 ITR 97 (SC), on the ground that the expenses on account of brokerage and commission for effectuating the sale depended on the volitional act of the party and such expenses were not incurred on account of meeting any overriding statutory liability as in the present case. Dr. Pal heavily relied on the decision of the Supreme Court in P. N. Sikand [1977] 107 ITR 922, support of his contention that the Supreme Court has laid down the principle that it is the net realisable worth of an asset to the assessee which is the decisive factor. There, the asset consisted of a leasehold interest of the assessee in the land together with the building constructed upon it. The building having been constructed by the assessee, the determination of its valuation was to be made on the basis of recognised methods of valuation of buildings. The question was only with regard to the valuation of the leasehold interest of the assessee in the land. The Supreme Court observed that the price which this asset, that is to say, the leasehold interest in the land would fetch, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the lease deed and the inquiry has, therefore, to be directed to the question as to what is the price which this asset would fetch if sold in the open market. What would be the realisable value of this asset ? It would indeed be difficult to speculate as to what the leasehold interest in the land would fetch in the open market when it is affected by the burden or restriction contained in clause (13) of the lease deed. If the leasehold interest were free from this burden or restriction, it would be comparatively easy to determine its market value, for there are recognised methods of valuation of leasehold interest, but where the leasehold interest is cut down by this burden or restriction and some right or interest is abstracted from it, the problem of valuation becomes a difficult one and some method has to be evolved for resolving it. The only way it can be done in a case of this kind is by taking the market value of the leasehold interest as if it were unencumbered or unaffected by the burden or restriction of clause (13) and deducting from it, 50 per cent. of the unearned increase in the value of the land on the basis of the hypothetical sale, as representing the value of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. of the unearned increase in the value of the land which belongs to the lessor can be regarded as part of the wealth of the assessee. The position would undoubtedly be different where a payment is made by an assessee which is an application of a part of the price received by him. Where such is the case, the whole of the price would represent the net realisable worth of the asset in the hands of the assessee and what is paid out by the assessee would be merely a disbursement made after the price reaches the assessee as his own property. That was the position in Pandit Lakshmi Kant Jha v. CWT [1973] 90 ITR 97 (SC), where the question arose whether the expenditure in connection with brokerage, commission or other expenses which would be liable to be incurred by the assessee in effectuating a sale would be deductible from the market value of the shares in determining their value for the purpose of assessment to wealth-tax. This court held that in computing the value of the shares, the assessee is not entitled to deduction of brokerage and commission from the valuation of the shares as given in the stock exchange quotations or quotations furnished by well-known brokers. It was point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise. Dr. Pal relied on the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. [1966] 59 ITR 767 to emphasise that the liability for capital gains arises as soon as the transfer takes place. Accordingly, this should be deducted from the price the buyer would offer. This case has no application inasmuch as it does not deal with the question of valuation of an asset. It is concerned with the liability that may be allowed as a "debt owed" on the valuation date. It has nothing to do with the method of valuation. That apart, the "debt owed" would, come for deduction only after the price is determined and it extends to the actual debt and not a notional debt. Apart from the fact that the capital gains may not arise in all cases and that capital gains may be avoided by investing the full consideration in specified securities, it is not an element in determining the price that may be fetched in an open market. In the case of a leasehold interest where the lessee's interest is sold in the open market, the purchaser has to take into account all the restrictions and disadvantages and what the lessee would be entitled to get for the unexpired period of the lease. This c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be an unreal estimate. This chance and hazard must influence all buyers. There are two different stages. One is the estimation of the value of the assets and the other deduction therefrom of the debts owed by the assessee. In the last mentioned stage, surely in view of the provisions of section 2(m), the debt in respect of income-tax which is outstanding for more than 12 months cannot be deducted. But, in estimating the value of the assets, this possibility which is indeed in the nature of an obligation of the Compensation Officer is a hazard, a clog or a hindrance which, if a proper estimate is made under section 7(1) by the Wealth-tax Officer, he has to take into consideration. It is not a question of deducting the debt but question of estimation of the value of the asset in question." No such question arises in the case before us where the shares have been valued. There is no hindrance, liability, hazard, clog or a jeopardy which detracts from the value of the asset. It is, therefore, evident that it is the price that a purchaser would pay which is the decisive factor and not what the vendor would realise upon such sale. It is not the price which would fetch to the asse ..... 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