Full Judgment Text
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PETITIONER:
JUGGI LAL KAMLAPAT BANKERS & ANR.
Vs.
RESPONDENT:
WEALTH TAX OFFICER. SPECIAL CIRCLE C-WARD, KANPUR & ORS.
DATE OF JUDGMENT15/12/1983
BENCH:
TULZAPURKAR, V.D.
BENCH:
TULZAPURKAR, V.D.
ERADI, V. BALAKRISHNA (J)
MADON, D.P.
CITATION:
1984 AIR 564 1984 SCR (2) 35
1984 SCC (1) 571 1983 SCALE (2)953
ACT:
Wealth Tax Act 1957. Sections 2 (e), 2(m), 3, 4(1),
7(2) (a), 16A and 38A(1) (b).
Wealth Tax Rules 1957-Rule 2 A & Rule 2B
Wealth Tax-Assessment of-Interest of Karta of H.U.F. in
a partnership firm-Whether to be included in the net wealth
of H.U.F.
Wealth Tax Officer-Reference to Valuation Officers-When
justified.
Words & Phrases-Meaning of
’Having regard to the balance-sheet of such businesses.
7(2) (a) Wealth Tax Act 1957.
HEADNOTE:
The assessee (Appellant No. 2) who was Karta of a Hindu
Undivided Family was a partner of the family firm (Appellant
No. 1) and was being assessed to wealth tax as a HUF. For
the purpose of evaluating the interest of the family’s
interest in the firm, the assessee adopted the book value of
buildings owned by the firm.
On the view that the market value of the buildings was
much more than their book value, the Wealth Tax Officer
(Respondent No. 1) referred, under section 16A on the Wealth
Tax Act, 1957, to the Valuation Officers (Respondent Nos. 2
JUDGMENT:
Valuation Officers issued notices under section 38A(1) (b)
for inspection of buildings and records relating to them,
and the assessees objections to such procedure were
overruled.
The High Court dismissed the assessee’s writ petition
holding:
(1) having regard to section 29 of the Partnership Act
which enables a partner to transfer his interest in the
partnership firm and Section 2(e) and Section 4(1) (b) of
the Act the interest of a partner in the partnership firm
will have to be regarded as a part of his net wealth under
the Act. (2) Section 3 the charging provision expressly
levied wealth tax on the net wealth of every Hindu undivided
family, and consequently the interest of a H.U.F. in a
partnership firm, which is property, could be regarded as a
part of its assets liable to be charged under this Section.
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(3) Rule 2, section 7 and section 16A (1) (i) (ii) had
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to be read harmoniously and Rule 2 did not exclude the
application of sections 7 and 16A for valuing an asset of a
partner in a partnership firm. (4) Section 7(2) was an
enabling provision giving a discretion to the Wealth-tax
Officer either to value the assets of a business as a whole
or valuing each asset thereof separately and in that behalf
he had the power to refer such valuation to the Valuation
Officer under Section 16A. (5) Appellant No. 2 as a partner
could be regarded as an agent of appellant no. 1 firm and
the Valuation Officers could issue notices requiring
affording of facilities for inspection of buildings and
production of books, documents and records.
In the Appeal to this Court it was contended that: (1)
there was no provision for inclusion of a ’Karta’s interest
in a partnership firm in the H.U.F.’s net-wealth for wealth
tax purposes under the Act, and (2) even assuming that
appellant No.2’s interest (as a Karta of his H.U.F.) in the
appellant No.1’s firm is eligible to tax under the Act, the
valuation of such interest would be governed by section 7(2)
(a) of the Act read with rule 2A of the Wealth Tax Rules
1957 and it was not open to the Wealth Tax Officer to refer
the valuation to the valuation Officer under section 16A.
Dismissing the Appeal,
^
HELD: 1(i) Section 3 of the Act read with the
definitions of "net-wealth" as given in Section 2(m) and
"assets" given in section 2(e) clearly brings out the
exigibility of a partner’s interest in a firm either in his
individual capacity or his capacity as Karta of a H.U.F. to
wealth tax under the Act. [44 B-C]
(ii) There is no lacuna in the Act as regards the
making of a Karta’s interest (representing his H.U.F.) in
the partnership firm exigible to wealth-tax. [45 C]
(iii) Section 4 (1) deals with the computation of the
net-wealth of an individual. It enacts a deeming provision.
Certain assets which do not in fact or in reality belong to
the individual (the assessee) but some one else are to be
treated as belonging to that individual and are to be
included in his net wealth. Analysis of Clauses (a) and (b)
of section 4(1) make it clear that there is a great
difference between the cases covered by clause (b). Clause
(a) refers to five situations in all of which the asset is
held by some one other than the individual concerned (the
assessee). It is provided that such asset held by that some
one else shall be treated as belonging to the assessee.
Clause (b) provides that where the individual assessee is a
partner in a firm it is the value of his interest in the
firm determined in the prescribed manner that is to be
treated as belonging to him and is includible in his net-
wealth. [43 C-F]
(iv) It cannot be said that the interest of the partner
in a firm does not belong to him. The proper way to
interpret clause (b) would be that the deeming part of it
relates to the quantum of his interest in the firm
determined in the prescribed manner which is to be treated
as belonging to him and includible in his net-wealth. [43 F-
G]
(v) A partner’s interest in a firm, either in his
individual capacity or in his capacity as a Karta of a HUF,
is property and is otherwise exigible to wealth tax under
the other provisions of the Act. [43 H]
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2(i) Even where the Wealth-tax Officer has resorted to
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section 7(2) for determining the value of assets of a
business as a whole the written down values or book values
of specific assets as appearing in the balance-sheet are not
sacrosanct and when the market value exceeds the written
down value or book value by more than 20 per cent, the
Wealth-tax Officer has to adopt the market value of such
assets for the purposes of the Act. [49 C-D]
(ii) In order to determine the valuation of a partner’s
interest in the firm, first the net wealth of the firm has
to be determined under section 7 of the Act and Rule 2
provides that the net wealth of the firm so determined shall
be allocated among the partners of the firm, which allocated
amount will be the value of the interest of each partner in
the firm. [46 F-G]
(iii) The primary method of determining the value of
the assets for the purposes of the Act is the on indicated
in section 7(1), which provides that value of any assets,
other than cash, shall be estimated to be its market price
on the valuation date. Sub-section (2) provides that in the
case of a business for which accounts are maintained by the
assessee regularly the Wealth-tax Officer may instead of
determining separately the valuation of each asset held by
the assessee in such business, determine the net value of
the business as a whole having regard to the balance-sheet
of such business as on the valuation date and making such
adjustment to therein as may be prescribed. [48 D-F]
(iv) It is optional for the Wealth-tax Officer to
resort to either of the methods even in the case where the
net value of a business carried on by the assessee is to be
determined. Even when he proceeds under sub-section (2) he
has to determine the net value of the business as a whole
having regard to the balance-sheet of such business as on
the valuation date. [48 G-H]
(v) The phrase "having regard to the balance-sheet of
such business" as judicially interpreted means that the
Wealth-tax Officer has to take into consideration or account
the balance-sheet of such business for such valuation and
not that such balance-sheet is conclusive or binding or
decisive of the values of assets appearing therein. [48 H;
49 A]
(vi) Sub-rule (2) of Rule 2B clearly provides that
where the market value of an asset exceeds its written down
value or book value by more than 20 percent, the value of
that asset for the purposes of Rule 2A shall be taken to be
its market value. [49 B]
In the instant case, the Wealth-tax Officer was of the
view that the book values of specific house properties as
indicated in the returns filed by the appellant No. 2 were
far below their market values. He was therefore justified
in making a reference to the Valuation Officers under
section 16A and the notices issued by the Valuation Officers
were valid. [49 E]
&
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 816 of
1978.
From the Judgment and Order dated the 4th October, 1977
of the High Court of Judicature at Allahabad in Writ
Petition No. 88 (Tax) of 1975.
38
V.S. Desai, Ravindra Narain, Harish Salve, Miss Rainu
Walia and P.K. Ram, for the Appellants.
B.B. Ahuja for the Respondents.
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The Judgment of the Court was delivered by
TULZAPURKAR, J. This appeal by certificate is directed
against the judgment and order dated 4th October, 1977. of
the Allahabad High Court whereby the High Court upheld the
reference made by the Wealth Tax Officer (Respondent No. 1)
to the Valuation Officers (Respondents Nos. 2 and 3) for
valuing certain buildings belonging to the appellant No. 1
firm as well as the notices issued by the Valuation Officers
to appellant No.2 in furtherance of the Reference. The
appellants had by means of a writ petition challenged the
reference as well as the notices on certain grounds and had
prayed for a mandamus restraining respondents Nos. 2 and 3
from valuing the buildings. The writ petition having been
dismissed, the appellants have come up in appeal to this
Court.
Most of the material facts giving rise to this appeal
are not in dispute and may briefly be stated as follows:
Appellant No. 1 (M/s. Juggi Lal Kamlapat, Bankers) is a
partnership firm. Appellant No. 2 (Padampat Singhania) was
one of the partners in the firm in his capacity as a ’Karta’
of a Hindu Undivided Family upto 15-3-1972. He was being
assessed to wealth tax in the status of H.U.F. and the
assets so assessed for wealth tax included the interest of
the family in appellant No. 1 firm. For the assessment years
1967-68 to 1972-73 wealth-tax returns were submitted by
appellant No. 2 in the status of H.U.F. and therein the
family’s interest in appellant No. 1 firm was included.
Since appellant No. 1 firm owned a number of buildings in
Kanpur in the returns so submitted the book-value of those
buildings had been adopted by appellant No.2 for valuing the
interest of the family in appellant No. 1 firm. Respondent
No. 1 felt that the market value of those buildings was much
more than such book-value. He, therefore, referred the
question of valuation of those buildings to respondents Nos.
2 and 3 (the concerned Valuation Officers) under s.16A of
the Wealth Tax Act 1957 (hereinafter referred to as ’the
Act’). Respondents Nos. 2 and 3 issued notices under s. 38A
(1) (b) of the Act to appellant No. 2 intimating that they
would inspect the buildings for determining the fair market
value thereof and requested him to afford necessary
facilities for such inspection and to produce certain
records connected with those build-
39
ings. On receiving the notices appellant No. 2 realised that
respondent No.1 had referred the question of valuation of
the concerned buildings to respondents Nos. 2 and 3 under s.
16A of the Act and that the notices issued by respondents
Nos. 2 and 3 were in furtherance of such reference. On 9th
of September, 1974 appellant No.2 addressed a letter to
respondent No. 1 contending that none of the properties
referred to the Valuation Officers belonged to him and that
the reference to them was unauthorised and the same should
be with-drawn. He also addressed letters to respondents Nos.
2 and 3 in which he contended that reference made to them by
respondent No.1 was invalid and requested each one of them
to return the reference back to the Wealth Tax Officer.
Since these contentions were not accepted by the
respondents, the appellants filed a writ petition in the
High Court challenging the reference made by respondent No.1
as well as the notices issued by respondents Nos. 2 and 3.
On behalf of the appellants the following contentions
were urged in support of the writ petition: (1) For the
assessment of appellant No. 2, respondent No. 1 could not
refer to respondents nos. 2 and 3 the valuation of building
which did not belong to him but belonged to appellant no. 1
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firm: (2) the interest of a H.U.F. in a partnership firm was
not exigible to wealth tax; (3) the interest of appellant
no. 2 in appellant no. 1 firm had to be valued in accordance
with Rule 2 of Wealth Tax Rules 1957 and hence s. 16A of the
Act had no application; (4) the valuation of the concerned
buildings forming part of the assets of the business of
appellant no. 1 firm had to be determined in accordance with
the commercial principles under s.7 (2) (a) and not under
s.7 (1) of the Act and (5) the respondents nos. 2 and 3
could not issue the notices to appellant No.2 as he was
neither the owner of the buildings nor was in occupation
thereof.
In regard to the first contention the High Court took
the view that though it was true that a partner of a firm
could not claim ownership in specific properties belonging
to the partnership firm either during the continuance of the
partnership or even on its dissolution but was entitled to
get a share in the profits during its continuance and was
further entitled, upon its dissolution or his retirement
there-from, to the value of his share in the surplus of the
partnership assets left after a deduction of liabilities and
prior charges on the date of dissolution or retirement, it
was clear that having regard to s. 29 of the Partnership Act
(which enables a partner to transfer his interest in the
partnership firm) and s.2 (e) and 4 (1) (b) of the Act the
interest of a partner in the partnership firm will have to
be regarded as a part
40
of his net wealth under the Act. As regards the second
contention which was elaborated to the effect that even if
the interest of an individual in a partnership firm could be
regarded as an asset within the meaning of s.2(e) of the
Act, the interest of a H.U.F. in the partnership firm could
not be regarded as such asset and was not, therefore,
exigible to wealth tax (for which reliance was placed on the
circumstances that under s.4 (1) (b) of the Act provision
has been made for determining the value of an individual’s
interest in a partnership firm but no corresponding
provision obtains in the Act for inclusion of the interest
of H.U.F. in a partnership firm for purposes of assessment),
the High Court took the view that from the said
circumstances relied upon it did not follow that the
interest of a H.U.F. in a partnership firm could not be
regarded as a part of net wealth of such family or was not
liable to wealth tax, especially when the charging provision
namely, s.3 of the Act expressly levied wealth tax on the
net wealth of every Hindu undivided family and there was no
reason why its interest in a partnership firm, which was
property, could not be regarded as a part of its assets
liable to the charge under the section. With regard to the
third and fourth contentions the High Court held that Rule
2, sec. 7 and sec. 16A (1) (4) (ii) had to be read
harmoniously and Rule 2 did not exclude the application of
secs. 7 and 16A for valuing an asset of a partner in a
partnership firm and that notwithstanding the non-obstante
clause contained in sec. 7 (2) it was an enabling provision
giving a discretion to the Wealth Tax Officer either to
value the assets of a business as a whole or valuing each
asset thereof separately and in that behalf the Wealth Tax
Officer had the power to refer such valuation to the
Valuation Officer under sec. 16A. As regards the last
contention the High Court negatived the same by observing
that appellant No. 2 as a partner could be regarded as an
agent of appellant No. 1 firm and the Valuation Officers
could issue Notices to him requiring him to afford
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facilities for inspection of the concerned buildings and to
produce books, documents and records relevant for the
valuation of those buildings. In this view of the matter the
High Court dismissed the writ petition but its decision is
challenged in this appeal.
Counsel for the appellants raised substantially two
contentions in support of the appeal. In the first place
counsel has contended that there is no provision for the
inclusion of a Karta’s interest in a partnership firm in the
H.U.F.’s net-wealth for wealth tax purposes under the Act
and this would be clear from sec. 4 of the Act. Elaborating
this contention counsel has pointed out that sec. 4 (1) is
applicable to the computation of the net-wealth of an
individual and
41
that the said provision is a deeming provision whereunder
certain tassets though held in reality by some others are to
be treated as belonging to that individual and included in
his net wealth for purposes of his wealth tax assessment and
one such deeming provision is to be found in cl. (b) thereof
which provides that where the assessee is a partner in a
firm the value of his interest in a firm determined in the
prescribed manner shall be included in computing the net-
wealth of such individual and what is urged is that there is
no provision to be found in the Act which provides for the
inclusion of Karta’s interest in a firm in the H.U.F.’s. net
wealth. Counsel strenuously urged that but for the deeming
provision which is to be found in cl. (b) even the interest
of partner (in his individual capacity) would not have
become includible in his net wealth. In otherwise, according
to counsel, there is a lacuna in the Act as regards the
inclusion of a Karta’s interest in the partnership firm in
his H.U.F.’s. net wealth and, therefore, the Department’s
attempt to include the interest of appellant No.2 (as a
Karta) in appellant No.I’s firm in the net-wealth of his
H.U.F. is not warranted by any of the provisions of the Act.
Secondly, counsel has urged that assuming that appellant
No.2’s interest (as a Karta of his H.U.F.) in appellant No.
1’s firm is exigible to the wealth-tax under the Act, the
valuation of such interest being governed by sec. 7 (2) (a)
of the Act read with Rule 2A of the wealth Tax Rules, 1957
it is not open to the Wealth Tax officer to refer the
valuation of specific house properties belonging to the firm
to the Valuation officers under s. 16A of the Act; in fact;
according to him, the valuation of the assets of the
partnership business of appellant No.1 as a whole having
regard to its balance-sheets for the concerned years ought
to have been undertaken by the Wealth Tax officer and as
such the book values of the house properties as appearing in
the Balance Sheets ought to have been accepted by him and,
therefore, the reference made by the Wealth Tax officer to
Valuation officers as well as the notices issued by the
latter being incompetent and unjustified in law, are liable
to be quashed. For the reasons which we shall presently
indicate neither of the contentions has any substance and
both are liable to be rejected.
In order to deal with the first contention mentioned
above it will be necessary to set out the material
provisions of s.4 of the Act Clauses (a) (b) of sub-s. (1)
of sec. 4 run as follows:-
"Net wealth to include certain assets:-
4.(1) In computing the net wealth of an individual,
there shall be included, as belonging to that
individual-
42
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(a) the value of assets which on the valuation date
are held- -
(i) by the spouse of such individual to whom
such assets have been transferred by the
individual, directly or indirectly,
otherwise than for adequate
consideration or in connection with an
agreement to live apart, or
(ii) by a minor child, not being a married
daughter, of such individual, to whom
such assets have been transferred by the
individual, directly or indirectly,
otherwise than for adequate
consideration, or
(iii) by a person or association of persons to
whom such assets have been transferred
by the individual directly or indirectly
otherwise than for adequate
consideration for the immediate or
deferred benefit of the individual, his
or her spouse or minor child (not being
a married daughter) or both, or
(iv) by a person or association of persons to
whom such assets have been transferred
by the individual otherwise than under
an irrevocable transfer, or
(v) by the son’s wife, or the son’s minor
child, of such individual, to whom such
assets have been transferred by the
individual, directly or indirectly, on
or after the 1st day of June, 1973,
otherwise than for adequate
consideration,
whether the assets referred to in any of the sub-
clauses aforesaid are held in the form in which
they were transferred or otherwise:
Provided that where the transfer of such assets or
any part thereof is either chargeable to gift tax
under the Gift-tax Act, 1958(18 of 1958), or is
not chargeable under section 5 of that Act, for
any assessment
43
year commencing after the 31st day of March, 1964
but before the 1st day of April, 1972, the value
of such assets or part thereof, as the case may
be, shall not be included in computing the net
wealth of the individual;
(b) where the assessee is a partner in a firm or
a member of an association of persons not
being a co-operative housing society, the
value of his interest in the firm or
association determined in the prescribed
manner".
It is true that sec. 4 (1) deals with the computation
of the net-wealth of an individual and it is also true that
same enacts a deeming provision in the sense that certain
assets which do not in fact or in reality belong to that
individual (the assessee) but to some one else are-to be
treated as belonging to that individual and are to be
included in his net wealth. But, in our view, a careful
reading and analysis of cls. (a) and (b) thereof will make
it clear that there is a great difference between the cases
covered by sub-cls. (i) to (v) of cl. (a) and the case
covered by cl. (b). Cl. (a) refers to five situations in all
of which the asset is held by some one other than the
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individual concerned (the assessee) (e.g. held by the spouse
or minor child of such individual to whom such asset has
been transferred by such individual directly or indirectly
otherwise than for adequate consideration, etc.) and it is
provided that such asset held by that some one else shall be
treated as belonging to the assessee-a deeming provision in
the real sense of creating a legal fiction, while under cl.
(b) it is provided that where the individual assessee is a
partner in a firm it is the value of his interest in the
firm determined in the prescribed manner that is to be
treated as belonging to him and is includible in his net-
wealth. In other words cl. (b) is not a deeming provision in
the sense in which a deeming provision is made in cl. (a).
It cannot be said that the interest of a partner in a firm
does not belong to him; it in fact belongs to him and no
legal fiction is required for treating it as belonging to
him and the proper way to interpret cl. (b) would be that
the deeming part of it relates to the quantum of his
interest in the firm determined in the prescribed manner
which is to be treated as belonging to him and includible in
his net wealth. It is impossible to accept the contention
that but for cl. (b) of s.4 (1) the interest of a partner
(where he happens to be an individual assessee) in a firm
would not have been exigible to wealth tax under the Act. As
we shall presently point out a partner’s interest in a firm
either in his individual capacity or in his capacity as a
Karta of H.U.F is otherwise exigible
44
to wealth tax under the other provisions of the Act and the
deeming provision contained in s.4 (1) (b) properly
understood must be held to be referable to the
quantification of his interest in the firm determined in the
prescribed manner that is made includible in his net-wealth.
Section 3 of the Act read with the definitions of "net-
wealth" as given in sec. 2 (m) and "assets" given in sec. 2
(e) clearly brings out the exigibility of a partner’s
interest in a firm either in his individual capacity or his
capacity as a Karta of a H.U.F. to wealth tax under the Act.
Section 3 which is a charging provision runs thus:
"Charge of wealth-tax.
3. Subject to the other provisions contained in
this Act, there shall be charged for every assessment
year commencing on and from the first day of April,
1957, a tax (hereinafter referred to as wealth-tax) in
respect of the net wealth on the corresponding
valuation date of every individual, Hindu undivided
family and company at the rate or rates specified in
Schedule I."
Section 2 (m) defines "net-wealth" thus:
"net wealth" means 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 this Act, is in excess of
the aggregate value of all the debts owed by the
assessee on the valuation date other than-
(here follow three types of debts which are not to be
reckoned with which we are not concerned)."
Section 2 (e) defines "assets" thus:
"assets" includes property of every description,
movable or immovable, but does not include-
(here follow certain specified properties with
which we are not concerned.)"
On reading the aforesaid provisions together it will
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appear clear that wealth tax has been levied on the net-
wealth of an individual
45
or a H.U.F. meaning thereby the aggregate value of all the
assets belonging to such assessee minus all the debts owed
by him. Under the definition of ’assets" property of every
description, movable or immovable is included, and since it
cannot be disputed and was not disputed before us that a
partner’s interest in a firm either in his individual
capacity or in his capacity as a Karta of a H.U.F. is
property. the same would be includible in the expression
"assets" which will have to be taken into account while
computing the net-wealth of such individual or H.U.F. and on
such net wealth the charge of wealth tax has been imposed
under sec. 3. It is thus clear that there is no lacuna in
the Act as regards the making of a Karta’s interest
(representing his H.U.F.) in the partnership firm exigible
to wealth-tax. The first contention, therefore, must fail.
The second contention of counsel for the appellant has
been that even if it be held that appellant No. 2’s interest
(as a Karta of his H.U.F.) in the appellant No. 1’s firm is
exigible to the tax under the Act the valuation of such
interest would be governed by sec. 7 (2) (a) of the Act read
with Rule 2A of the Wealth Tax Rules 1957 and since it is a
case of valuing such interest in the partnership business of
appellant No. 1 firm the Wealth Tax Officer while first
valuing the assets of the business should have, having
regard to the balance sheets of the said business as on the
valuation dates, accepted the book values of the specific
house properties as appearing in the balance sheets and
could not refer the valuation thereof to the Valuation
officers under sec. 16A of the Act which being inapplicable
could not be resorted to; in this connection reference was
also made by counsel to sub-s (2) of sec. 4 whereunder it is
provided that in making any rules with reference to the
valuation of the interest referred to in cl. (b) of sub-s.
(1) (being a partner’s interest in a firm) the Board shall
have regard to the law for the time being in force relating
to the manner in which accounts are to be settled between
partners of a firm on the dissolution of a firm. The
substance of the argument, in brief, has been that sec. 7
(1) which enables the Wealth-tax officer to determine the
value of any asset, other than cash, at the market price
thereof on the valuation date for the purposes of the Act is
inapplicable to the instant case and, therefore, sec. 16A is
not attracted and hence the valuation reference made by the
Wealth-tax officer to the Valuation officers regarding
specific house properties is liable to be set aside. As we
shall demonstrate presently, the contention proceeds on an
entire misconception of the relevant provisions of the Act
and the Rules.
We have already indicated above that a partner’s
interest in a
46
firm, either in his individual capacity or as a Karta of a
H.U.F., is property or asset liable to be included in the
net wealth of the concerned assessee and is exigible to
wealth-tax under the Act. Once that position is accepted it
is clear that such asset will have to be valued for the
purposes of the Act and in this behalf Rule 2 (1) of the
Wealth tax Rules, 1957 prescribes the manner of valuing such
interest, It runs thus:
"Valuation of interest in partnership or
association of persons.
2. (1) The value of the interest of a person in a
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firm of which he is a partner or in an association of
persons 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 distribution of the assets in
the event of dissolution of the firm or association,
or, in the absence of such agreement, in the proportion
in which the partners or members are entitled to share
profits. The sum total of the amounts to so allocated
to a partner or member shall be treated as the value of
the interest of that partner or member in the firm or
association."
The aforesaid rule clearly says that in order to
determine valuation of a partner’s interest in the firm,
first the net wealth of the firm has to be determined, which
determination, of course, is governed by sec. 7 of the Act
and the rule goes on to provide as to how the net wealth of
the firm so determined shall be allocated among the partners
of the firm, which allocated amount will be regarded as the
value of the interest of each partner in the firm. Coming to
the precise contention raised by counsel, the material
provisions of the Act and the Rules having a bearing thereon
would be sec. 7 (1), 7 (2) (a), 7 (3) and Rules 2A and 2B
and these are as under:
"Value of assests, how to be determined.
7. (1) Subject to any rules made in this behalf the
value
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of any asset, other than cash, for the purposes of this
Act, shall be estimated to the price which in the
opinion of the Wealth tax Officer it would fetch if
sold in the open market on the valuation date.
(Explanation...................................... )
(2) Notwithstanding any thing 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.
(3) Notwithstanding any thing contained in sub
section (1), where the valuation of any asset is
referred by the Wealth tax officer to the Valuation
officer under section 16A, the value of such asset
shall be estimated to be the price which, in the
opinion of the Valuation Officer, it would fetch if
sold in the open market on the valuation date, or, in
the case of an asset being a house referred to in sub
section (4), the valuation date referred to in that sub
section."
Rules 2A and 2B run thus:
"Determination of the net value of assets of
business as a whole.
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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."
"Adjustments in the value of an asset disclosed in the
balance sheet.
2B. (1) The value of an asset disclosed in the Balance
sheet shall be taken to be-
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(a) in the case of an asset on which depreciation
is admissible, its written down value;
(b) in the case of an asset on which no
depreciation is admissible, its book value;
(c) in the case of closing stock, its value
adopted for the purposes of assessment under
the Income tax Act, Act, 1961, for the
previous year relevant to the corresponding
assessment year.
(2) Not withstanding any thing containing in sub-
rule (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 Income tax
Act, 1961, as the case may be, by more than 20 per
cent, the value of that asset shall, for the purposes
of rule 2A, be taken to be its market value."
On a fair reading of the aforesaid provisions it will
appear clear that the primary method of determining the
value of assets for the purposes of the Act is the one
indicated in sec. 7 (1), inasmuch as it provides that the
value of any assets, other than cash, for the purposes of
this Act shall be estimated to be its market price on the
valuation date. Then comes sub-sec. (2) which provides that
in the case of a business for which accounts are maintained
by the assessee regularly the Wealth tax officer may instead
of determining separately the valuation of each asset held
by the assessee in such business, determine the net value 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. It is true that
sub sec. (2) commences with a non obstante clause, but even
so, the provision itself is an enabling one conferring
discretion on the Wealth tax officer to determine the net
value of the assets of the business as a whole having regard
to its balance sheets as on the valuation date, instead of
proceeding under sub sec. (1). In other words, it is
optional for the Wealth tax officer to resort to either of
the methods even in the case where the net value of a
business carried on by the assessee is to be determined.
Thirdly, even when he proceeds under sub sec. (2) he has to
determine the net value of the business as a whole having
regard to the balance-sheet of such business as on the
valuation date; the phrase "having regard to the balance
sheet of such business" as judicially interpreted means that
the Wealth tax officer has to take into consideration or
account the balance-
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sheet of such business for such valuation and not that such
balance sheet is conclusive or binding or decisive of the
values of assets appearing therein. Fourthly, the said sub-
section also says that the Wealth tax officer has to "make
such adjustments therein as may be prescribed" and in this
behalf Rule 2A and 2B already quoted above indicate what
adjustments the Wealth-tax officer has to make while
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determining the net value of the business as a whole.
Particularly sub-rule (2) of Rule 2B clearly provides that
where the market value of an asset exceeds its written down
value or book value by more than 20 per cent, the value of
that asset for the purposes of Rule 2A shall be taken to be
its market value. In other words, it is clear that even
where the Wealth-tax officer has resorted to sec. 7 (2) for
determining the value of assets of a business as a whole the
written down values or book values of specific assets as
appearing in the balance-sheet are not sacrosanct and when
the market value exceeds the written down value or book
value by more than 20 per cent, the Wealth-tax officer has
to adopt the market value of such assets for the purposes of
this Act. This is apart from the position that the resort to
sec. 7 (2) itself is discretionary and optional, the
provision being an enabling one.
Since in the instant case the Wealth tax officer was of
the view that the book values of specific house properties
as indicated in the returns filed by appellant No. 2 were
far far below their market values, he was justified in
making a reference to the Valuation officers under sec. 16A
of the Act and the notices issued by the Valuation officers
in pursuance of such reference were also valid.
In the result the appeal fails and is dismissed with
costs.
N. V. K. Appeal dismissed,
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