Commissioner of Income Tax, Dacca

Vs.

 Adamjee Sons Ltd.

Supreme Court

Appellate Division

(Civil)

Present:

Kemaluddin Hossain CJ

Fazle Munim J

Ruhul Islam J

Badrul Haider Chowdhury J

Shahabuddin Ahmed J

Commissioner of Income Tax, Dacca ……………………….Appellant

Vs.

Adamjee Sons Ltd………………………………………..Respondents

Judgment

Oct. 22, & Dec. 2, 1981.

Cases Referred To:

Commissioner of Wealth Tax vs. K.M. Desikar 92 I.T.R. 101; Commissioner of Wealth Tax vs. Pershow Properties 1969 I. T. R. 388.

Lawyers Involved:

Mahmudur Rahman, Advocate-on-Record, instructed by Md. Sajjadul Huq, Advocate-on Record—For the Appellant.

M. Hossain. Advocate, instructed by S.M. Haque, Advocate-on-Record—For the Respon­dent.

Civil Appeal No. 51 of 1981.

On Appeal from the judgment and order dated 157. 1980 passed by the High Court Division in Appli­cation No. 9 of 1975.

Judgment:

                Badrul Haider Chowdhury J.—This appeal by special leave is directed against the judg­ment and order of the High Court Division in an application under section 27 (1) of the Wealth Tax Act, 1972. The respondent was assessed to Wealth Tax by the Wealth Tax Officer, Companies Circle (I), Dacca for the assessment year 1963/64 on a total sum of Tk. 2,96,61,282/- by an order dated 14.6 1968 as against the net sum of Tk. 1,55,93,612/-as shown  by the assesses in his return. On appeal the Appellate Assistant Commissioner allowed the appeal in part and deleted the addition made on account of revaluation of the share at market price. The department preferred an appeal before the Appellate Tribunal and the Tribunal set aside the order of the Appellate Assistant Commissioner and upheld the order of the Wealth Tax Officer. Thereafter the assessee respondent filed an application under section 27 of the Wealth Tax Act before the High Court Division. The learned Judges of the High Court Divi­sion came to the conclusion that the Wealth Tax Officer is to determine the net value of the assets of the business as a whole, as contem­plated under section 7(2) (a) Wealth Tax Act read with Rule 8(9).

2. Leave was granted to consider whether the High Court Division was correct in taking the view that the Wealth Tax Officer is requir­ed to take into account the face value of the shares as held by the assessee and they must be valid under section 7(1) of the Wealth Tax Act.

3. Mr. Mahmudur Rahman appearing for the Revenue canvassed that the learned Judges did not consider that in determining the value of the assets the Wealth Tax Officer while taking recourse to the provisions of section 7(2) (a) of the Wealth Tax Act can make such adjustment in valuation given in the balance sheet, as he thinks fit, in the facts and cir­cumstances of ‘.he case.  He further canvassed that in the instant case the valuation of the shares held by the assessee  in  other Compa­nies under section 7(1) constitutes  necessary adjustment “therein as the circumstances  of the case may require” as contemplated  under section 7 (2) (a) of the Wealth Tax Act.

4. Mr. M. Hasan appearing for the res­pondent assesses canvassed that when the Wealth Tax Officer was satisfied that the accounts kept by the assessee are reliable and there is no reason to suspect any fraud on the part of the assessee, he could deter­mine the value of the net wealth of the com­pany as per rule 8K9) putting the bulk valua­tion, of the net wealth and the Wealth Tax Officer having adapted the bulk valuation basis as per rule 8(9) read with section 7 (2) (a), he was precluded from valuing the asset separately under rule 8(2) read with section 7(1).

5. The assessee maintained accounts regularly, and Wealth Tax Officer did not suspect any fraud on the part of the assessee, now, the only question is whether the shares in question could be revalued at the market rate or at cost. Section 7 is in following terms:

7. Value of assets—how to be deter­mined :-(1) The value of any asset, other than cash, for the purpose of this Act, shall be estimated by the Wealth Tax Officer in accordance with the rule made under lection 46 of the Act.

(2) Notwithstanding anything con­tained in sub-section (1) —

(a) Where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth Tax Officer 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 the circumstances of the case may require.

(b)…………………………………………

The Rules are framed under section 46 Rule 8(1) deals with the valuation of assets other than cash.

Sub-Rule (2) deals with shares and securities and how they are to be revalu­ed. Sub-Rule (9) deals with bulk valua­tion which reads thus:

(9) Bulk valua­tion— (i) Where the Wealth Tax Officer is satisfied that the accounts kept by an assessee carrying on a business are relia­ble and there is no reason to suspect any fraud on the part of the assessee, he may determine the value of the net wealth re­presenting the various assets of the business in the following manner, namely —

(i) The net wealth representing the various assets shall be taken as the sum of the paid up capital reserves and the balance to the credit of the profit and loss account.

(ii) The liabilities shown in the balan­ce sheet shall be carefully scrutinised so as to exclude every item which is not a liability proper,

(iii) If according to the accounting system followed by the assessee the ori­ginal value of the block (i.e. fixed assets) is kept unaltered and depreciation is pro­vided for by constituting a fund out of which investments are made, the value of such depreciation fund shall be exclu­ded from the computation.

(iv) If development allowance has been deducted from the value of the block, the amount of it shall be added back.

(v) Where the closing stock is under­valued, the amount representing the undervaluation shall be added back.

The working exam pies have been added to the Rules for guidance. It is further mentioned the computation of value assessed can be made in two ways—(1) on the basis of balance sheet value of the assets and (2) on the paid up capital and reserves. The wealth tax officer in this case has taken recourse to the first me­thod, that is, on the basis of the balance, sheet which specifically is authorised by section 7(2) (a) and the bulk valuation is made under sub-rule (9). Now the Wealth Tax Officer having taken this course attempted to make valuation of the shares under rule 8(2). The assessee has taken objection to this procedure contending that having taken recourse under section 7(2)(a) he could only make the bulk valuation under sub-rule 9 of rule 8 The contention of the Re­venue, on the other hand, is based on the ex­pression “making such adjustments therein as the circumstances of the case may require” occurring in section 7(2) (a) and purporting to exercise such power the Wealth Tax’ Officer can take recourse to rule 8(2),

6. This is not permissible. Sub-rule (1) of rule 8 postulates subject to the provisions of sub-rule (2), (3), (4), (5) (6), (7) and (9) the value of any asset other than cash for the purpose of assessment to wealth tax be estimated to the price which in the opinion of wealth tax officer it would fetch if sold in the market on the valuation date. In terms of this rule the tax officer can take recourse to one of the alterna­tives, namely, in this case, either en sub-rule (2) or in sub rule (9) but he cannot do both. The position will be clear if the method of computation is pursued as given in rule 8. Sec­tion 7 gives the power and it is divided into 2 sub-sections (1) and (2). He can either go for sub-section (1) or sub-section (2) but if he does the one he must follow the rule framed for the purpose. Sub-rule (2) of rule 8 is referable to sub-section (1) whereas (9) is referable to sub-section 2(a) of section 7, which says ”may instead of determining separately the value of each asset held by the assessee in such bus­iness, determining the undervalue of the assets of the business as a whole having regard to the balance sheet of such business as on the value date…………” How the officer will determine the value of the net wealth is detailed by sub-rule (9) “He may determine the value of the net wealth representing the various assets of the business in the following manner”. In other words, the wealth tax officer can take recourse to one of the methods of valuation, but not both.

7. In the case of Commissioner of Wealth Tax Vs. K. M. Desikar reported in 92  I.T.R, page 101, it has been  held that sections 7(1) and 7(2) of the Wealth Tax Act provided  two alternative modes of valuation in relation to the business assets of an assessee. If the wealth tax officer at the time of original assessment exercises his discretion by adopting the basis provided under section 7(2) (a) it is not open to him later on to re-open the assessments merely because the tax effect will be more if the, basis provided under section 7(1) is adopted, Section 7(2) (a) of the Indian Act is in the following terms:

Section 7(2)(a) runs as follows:

Notwithstanding anything contained in sub-section (1)(a) where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth Tax Officer 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 may be prescribed.” (emphasis added).

8. It is word for word for our Enactment excepting the expression that in the Indian Act the adjustments to be made “as may be prescribed” whereas in our enactment as the circumstances of the case may require.” Section 7 of the Indian Act was amended by the amendment Act 1964 by the insertion of words ‘‘subject to any rules made in this behalf in sub-section (1).” Similarly, in sub-section 2(a) the words ‘‘the circumstances of the case may require” appearing earlier were substituted by the words “may be presc­ribed” with effect from 1.4.1965. The inten­tion of the amendment was to have a uniform statutory methods of adjustment instead of different types of adjustments by different offi­cers and resulting in unnecessary and protrac­ted litigations. Under the amended provisions the valuation of assets is to be made as presc­ribed under the Rules which have the force of law.  Section 7 lays down the method of valua­tion of an asset for the purpose of computa­tion of net wealth to an assessee. The wealth tax officer is entitled to follow either of the two methods mentioned therein for the calculation of the value of the assets. In the case of an assessee carrying on business he may under sub-section (1) of the said section proceed to determine the market value or he may under sub-section (2) proceed with global valuation basis of valuing the assets of the business as a whole. The description that was conferred on the wealth tax officer was done away by the insertion of the words “as may by prescribe.” In fact, in 1965 Rules 2(A) to2 (G) were in­serted by the second amendment Rules 1965. But in our enactment the discretion to some extent has been kept with the Wealth Tax offi­cer for ”making such adjustment therein as the circumstances of the case may require”.  But that will not entitle the Wealth Tax officer to follow both the methods. In the case of Com­missioner of Wealth Tax Vs, Par show Properties, 1969 I.T.R. 388, the Patna High Court observed that-

“Having regard to the valuation as shown in the balance sheet of the business and making such adjustments therein as the circumstances of the case may require does not mean that he should proceed partly under section 7(i) and partly under section 7(2)(a). Under section 7(2) (a) the net value of the business as a whole has got to be taken as mentioned in the balance sheet whereas under section 7(i) the market value of the assets has got to be determined………..   Of course, some adjustment could be made if the circumstances of the case so   require.”

9. This decision was given under the old law before the amendment. But then the Patna High Court took the view the Wealth Tax officer must follow one of the two methods but not both. The Madras High Court, as noted in 92 I.T.R. 101, also clearly laid down that the Wealth Tax officer can follow any of the alternatives but not both only because that under sub-section (1) the tax effect  will be more. In the instant case the Wealth Tax officer observed:

“The assessee owns all the shares of M/s. Jute Fibers Ltd. and M/s. Pakistan Commodities Ltd., and in view of the reasons stated above the total value of the shares of these companies will be the total value of the assets of the Company computed on bulk valuation basis. In wealth tax I feel multiple taxation cannot be avoided.”

Herein lies the error. The Wealth Tax officer made the bulk valuation but for the reasons given by him:

But as in the balance sheet only the book value of the shares held by asse­ssee in other companies have been shown and the actual market value of the shares has not been taken into consideration. The correct value of assessee’s assets on the last day of the accounting year cannot be ascertained by account­ing the representatives interpretation of the rules, under reference.” The only question was whether to value the shares from the book value or market value. The wealth tax officer having made the bulk valuation which could only be done under sub-rule (9) of rule 8 attempted to value the shares on the market price which is authorised under sub-rule (2).

10. He could not do it both ways. The legislative scheme does not provide for such assessment. The discretion that is given “as the circumstances may requires occur in sub­section (2) and not for sub-section (1). The Wealth Tax Officer in computing under section 7(2) cannot take recourse to the dis­cretion given by the expression “as the cir­cumstances may require” for computing it under section 7(1). We are in respectful agreement with the Madras and Patna deci­sions and the conclusion is that the High Court Division has correctly formulated the law.

In this view of the matter, the opinion is that the shares in question held by the asses-see must be valued under section 7(2) (a) read with rule 8(9) and not separately under section 7(1) of the Wealth Tax Act. There is nothing to interfere.

In the result, therefore, this appeal is dis­missed without any order as to cost.

Ed.

Source: 1982, (AD)