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TMI Blog1995 (6) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... er under s. 25(2) of the WT Act for both the years. According to him goodwill being an asset and in this case not disclosed in the Balance Sheet its market value on the valuation date was required to be taken into consideration as per cl. (d) of r. 2C. The CWT, therefore, cancelled the orders of the WTO directing him to remake the assessments on the basis of his directions. The present appeals before the Tribunal arise from the above order of the CWT. 2. The ld. counsel for the assessee has pointed out that the assessee firm is in existence at least for 30 yrs. There is no asset such as goodwill in the balance sheet. In working out the net wealth of that assessee, who is a partner in the firm, the WTO had included the value of the interest in the partnership firm. Apparently he has proceeded under the Rules starting from r. 2. These Rules would, according to the learned counsel, certainly apply to the case because of the fiction that the net wealth to the firm is to be determined for ascertaining the interest. But at the same time r. 2C does not apply to an asset which is not disclosed in the balance sheet, if it is not required to be shown in the balance sheet according to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Bench case reported at WTO vs. Narendra Kumar Gupta (1983) 4 ITD 694 (Del) the issue of the unexploited rights in a feature film is considered. This also sheds some light on the assesse's case in her favour. According to the ld. counsel, r. 2C, a general proposition, applies only to cases of assets which are required to be disclosed by the system of accounting followed by the assessee in a particular case. Dealing with the question whether the specific excludes the general the ld. Counsel has pointed out that the totality of the situation reveals that the intention was only to bring in goodwill at the price which was paid for it and nothing more. Referring to sub-cl. (b) of the Rule, it is pointed out that the word "purchase" is a qualification of the general asset-goodwill. Cl. (d) speaks of any other asst. According to the ld. counsel, this expression cannot include goodwill already referred to as and asset in sub-cl. (b). Actually it is the nature of the asset which is important. Reference is made to the decision of the Supreme Court in the case of Nalinikant Ambala Mody vs. S. A.L. Narayan Rao, CIT Bombay City I (1966) 61 ITR 428 (SC). Stress is also laid on cl., (8) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f persons, s. 5(1) specific exemption and lastly whatever was not covered s. 45. There was no warrant while looking to the scheme of the Act for the inference that an asset like goodwill was intended to be excluded. Unlike in the case of other statutes in the WT Act, the legislature has retained for itself the power of granting exemption which ultimately is a matter of legislative policy. It the rules are allowed to be interpreted so as to permit an exemption they could become ultra vires. Such a contingency cannot be inferred from mere interpretation. On a correct interpretation of the provisos including the Rules, therefore, the conclusion is inevitable that the exemption claimed cannot be allowed. 5. Explaining the provisions of r. 2C it is pointed out that cls (a), (b) and (c) make reference to specific contingencies; whatever is not covered would come under the residuary cl. (d). Assets not disclosed in the balance sheet would refer to those for which payment was made and those for which the payments were not made. There are several categories of goodwill, but where the goodwill does not figure in the accounts, the correct way was to look at the Rules, and the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year. (2) Notwithstanding anything contained in sub-r. (1) where the market value of an asset exceeds its written down value or its book value or the value adopted for purposes of assessment under the IT Act, 1961, as the case may be, by more than 20 per cent the value of that asset shall, for the purposes of r. 2A, be taken to be its market value. Adjustments in the value of an asset not disclosed in the balance sheet. 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 cl. (vii) of sub-s. (1) of s. 36 of the IT 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be at the same figure. There are assets like securities, etc., for which no deprecations allowable but at the same time the market values fluctuates so violently that asset shown as a huge fortune in shares may be worth nothing. In our view, r. 2C do not make a provision for these contingencies. Even if an asset shown at a nominal value in the balance sheet has an extraordinary high value in the market that may not perhaps be adjusted under these Rules. On the contrary as a general proposition it would not be proper also to adjust the value of one or the other asset in the balance sheet without adjusting other assets based on this market value. It a revaluation of all the assets and liabilities in the balance sheet were to be though of—which might give an equitable value of the partner's interest—this does not clearly come within the provisions of these Rules. While, therefore, not wholly accepting the assessee's case about the accountancy angles stressed by him, the true scope of the Rule would appear to be that when the WTO knows of taxable assets belonging to the business, but not included in the balance sheet, he should have recourse to r. 2C. 8. Apart from the general scop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t value on the valuation date alone would be adopted if cl. (d) is applicable. This is clearly anomalous. We have, therefore, no hesitation in holding that where the goodwill is not purchased but is a self-generated asset as in the present case in applying r. 2C its value cannot be included in the net wealth. The CWT's order is cancelled. 9. One more point requires to be clarified. It was pointed out that the provisions of ss. 4(1)(b) and 4(2) read with the Rules made thereunder do not admit of the conclusion above reached. The point canvassed is that inherent in the rule is the requirement that a position as on the dissolute of the firm has to be envisaged before applying the Rules. At the time of dissolution goodwill always exists as an asset. Whatever be the manner in which it was acquired it definite existence at the time of the dissolution requires it to be included as an asset in terms of the rules. While it cannot perhaps be urged that the rules to some extent are inconsistent with the provisions of the section, especially in the light of the argument advanced on behalf of the Revenue, a harmonious construction of the Section and the Rules has to be made which makes it im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement. Inherent in this is the further requirement. That the value of such interest cannot be put at a figure higher than the market value as this is the higher mandate of the charging section and s. 7 Rules are made to make this contribution or inclusion easier; s. 4(1)(b) is also directed towards the end. Lest the basic rules of partnership laws or contractual adjustments authorised thereunder should be ignored or frustrated, s. 4(2) mandates that in making the rules such provisions of the partnership law should not be overlooked. Since valuation of the interests is to be made on a particular day viz. the valuation date of the assessee, the contemplated settlement of accounts should also relate to that date. What we want to emphasise is that the contemplated manner of settlement of accounts should in any case be as on the valuation date. 12. Two things inevitably follow from the above. The provisions of s. 4(2) are directed to the rule-making authority setting a limit to their power. They should not ignore any provisions with regard to the settlement of accounts on the dissolution of the firm. Secondly the directive thus clearly stops short of requiring the authority to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r s. 2C(b) is accepted, the above purpose would be thwarted. A contingency would arise where even the market value lead to the anomaly referred to in paragraph 8 above. From a general analysis and construction of the provisions of the Act, and the rules made thereunder also, we come to the same conclusion viz. that where goodwill is purchased by the assessee for a price, no value for the same much less a market value which is the maximum value that can be put on any asset, can be adopted. 14. The appeals are allowed. U.T. SHAH, J. M.: I have carefully gone through the order of my learned brothers. However, I have not been able to take the same view as they have proposed in their order. Since the point involved in these appeals is of great importance and having far reaching consequences, I would like to deal with the same in some great detail instead of following the order of the Tribunal in the case of Manubhai J. Patel vs. WTO (1983) 6 ITD 326 (Ahd) to which I was a party. 2. As noted in the order of my learned brothers, the issue involved in these appeals is whether in valuing the share of interest of the assessee in the firm in which she is a partner, the value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by him regularly, the WTO may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance sheet of such business as on the valuation date and making such adjustments therein as 19 [may be prescribed 20]". 7. Now let us look at the relevant Rules contained in the WT Rules, 1957 (hereinafter referred to as the 'Rules'). R. 2, captioned as "valuation of interest in partnership or AOP reads as under: "(2) (1) The value of the interest of a person in firm of which he is a partner or in an AOP of which he is a member, shall be determined in the manner provided herein. The net wealth of the firm or the association on the valuation date shall first be determined. That portion of the net wealth of the firm or association as is equal to the amount of its capital shall be allocated among the partners or members in the proportion in which capital has been contributed by them. The residue of the net wealth of the firm or association shall be allocated among the partners or members in accordance with the agreement of partnership or association for the distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "net wealth" is very wide for it means the amount by which aggregate value of all the assets, wherever located, belonging to the assessee is in excess of the aggregate value of all the debts owed by the assessee on the valuation date. However, wherever the Parliament thought of granting exemption/concessions, it is stipulated in the Act, itself, as for example, as s. 5, 6 and 45 of the Act, Therefore, where there is no ambiguity in the provisions of the statue, it is not possible to apply any consideration based on the provisions being so applied as to be more advantageous to the assessee or to give the assessee a kind of choice in the matter of adjustment. In this view of the matter, it is not possible to accept the stand taken on behalf of the assessee. It is pertinent to note that a firm is not an assessee under the Act, but it is treated as such under r. 2 of the Rules for a limited purpose of determining the value of partner's interest in the firm. Sub-s. (2) of s. 4 of the Act, stipulates that in making any rules with reference to the valuation of the interest referred to in cl. (b) of sub-s. (1) of that section, the Board shall have regard to the law for the time being in ..... 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