GAUTAM SARABHAI D. TRUST NO. 4 v. WEALTH-TAX OFFICER
[Citation -1985-LL-0123-8]

Citation 1985-LL-0123-8
Appellant Name GAUTAM SARABHAI D. TRUST NO. 4
Respondent Name WEALTH-TAX OFFICER
Court ITAT
Relevant Act Wealth-tax
Date of Order 23/01/1985
Assessment Year 1976-77
Judgment View Judgment
Keyword Tags prejudicial to the interests of revenue • opportunity of being heard • reasonable opportunity • internal audit report • revisional proceeding • capital contribution • written down value • fair market value • valuation officer • valuation report • fresh assessment • mistake apparent • audit objection • valuation date • special bench • family trust • bank balance • remainderman • market price • tax purpose • book value • net value
Bot Summary: Counsel Mr. Mehta, the CWT is empowered to revise an order of the WTO out of the proceedings under this Act which were available before the WTO at the time of making of an assessment. Since, each year being an independent year and that under the WT Act, the valuation of an asset is to be made on a particular valuation date, the WTO had rightly not considered the Valuation Officer s report which was obtained for an earlier year under the IT Act, under s. 55A. Since this was not part of the record during the assessment proceedings for wealth tax purpose, the WTO rightly did not consider the same. Internal audit objection was subsequent to the order of the WTO. Therefore, as per Calcutta High Court decision, the CIT could not have invoked the provisions of s. 25 by taking into account the internal audit report which was subsequent to proceedings under this Act as was before the WTO. He also submitted that a similar issue had been so held by the Hon ble Gujarat High Court in 33 STC 147. Mr. V. M. Mehta, the ld Representative, submitted that where the WTO adopted the book value instead of taking the market value, then that order of the WTO is very much erroneous as well as prejudicial to the interests of the Revenue. Mr. Mehta submitted that since the WTO did not make proper enquiry in respect of the value of the shares, the CWT was fully empowered under s. 25 to direct the WTO to make a proper enquiry. The audit objection is clearly not part of the record of the assessment proceedings of the WTO. Regarding the legality of CWT action in invoking the provisions of s. 25 of the WT Act, the basic question that emerges is whether the internal audit objection could be said to be part of the record to the WTO at the time of passing of the assessment order or not. From the reply to the internal audit objection, the following fact emerges which goes to establish whether or not the WTO had applied his mine to the case and had passed the assessment order in accordance with the law: that the WTO was aware of the fact that s. 7 of the WT Act gives the primary mode regarding valuation of assets; Sec.


A. KALYANASUNDHARAM, A. M.: This appeal is by assessee for asst. yr. 1976-77 against order of CWT under s. 25 (2) of WT Act. On behalf of assessee Mr. D. A. Mehta, counsel submitted that appeal in against order of CWT under s. 25 (2) and that various grounds are: (a) proceedings initiated are without any jurisdiction, (b) there was no material on record which could have been said to be led CWT for involving provisions of s. 25 (2), (c) CWT was k in assuming jurisdiction when matter was in appeal before AAC, (d) regarding applicability of r. (2) dealt with in sub-ss. (1) and (2) of s. 7 of WT Act in respect of valuation of interest of firm M/s. Kalapi and Vyavhar. Mr. Mehta submitted by referring to p. 11 of paper book that he had stated wealth of Rs. 25,905 which included value of remainderman s interest as reversion to corpus at Rs. 22,995. particulars of corpus have been given in statement alongwith wealth-tax return. This statement, he mentioned, is also at p. 11 of paper- book. This statement clearly shows details of corpus like shareholdings, debtors, cash and bank balance, capital contribution in firm, income accrued but not received, loans and advances and also liability. net total after deduction of liabilities of corpus was Rs. 5,96,525. Mr. Mehta drew our attention to copy of assessment order that has been filed alongwith appeal. In p. 2, WTO has asked for explanation, etc., which were provided for. In Para-3, WTO had brought to notice of assessee regarding calculation of two interests, life insurance as well as remainderman s interest. WTO then had gone to question of depreciation. It was observed by WTO that in all cases assets are in form of shares, advances, etc. He also observed that these assets are not depreciable assets and, therefore, he did not allow any depreciation. assessee s submission have been reproduced as under: "The assessee in his written reply has replied (reproducing reply of actuary) that as corpus is payable in future or termination of prior interest and investments are in ordinary shares of companies, in advances, etc., it will be prudent for purchaser in open market while considering uncertainties involved to keep margin for future. I have assumed 20 per cent for same purpose. Even uncertainties of discretion by trustees would require higher margin than 20 per cent from point of view of willing buyer." WTO had also observed that shares were all in group of companies belonging to family. Then he had considered amount that has included in corpus as also valuation of remainderman s interest in trust property. He finally after considering all these included under head valuation of remainderman s interest as discussed above, corpus shown at Rs. 5,96,525. assessee filed appeals to AAC against inclusion of entire corpus in hands of assessee. WTO passed assessment order on 6th March, 1981. assessee was served with notice under s, 25 (2) by CIT on 18th Feb., 1981. order of CWT was passed on 2nd March, 1983. According to Mr. Mehta, since appeal as pending before AAC CWT s action was entirely without jurisdiction in setting aside assessment there by assessee is deprived of its appeal before AAC. He referred to decision of Special Bench in case of Shree Arbuda Mills Ltd. vs. ITO (1983) 3 SOT 311 (Ahd) (SB) for theory of merger of ITO s order into AAC s order. Mr. Mehta thereafter submitted that direction of CWT is rather very vague. CWT mentions in his order that WTO had adopted value of assessee s interest in said partnership at book value. But according to r. 2 of WT Rules WTO was required to ascertain market value of assessee s interest in said firm. Then he observes that WTO failed to take into account that shares which are owned by firm are in group belonging to assessee. he further observes that fair market value of these where are much more than value shown in balance sheets of firms. CWT further observes that WTO should have followed this own method by adopting fair market value of shares owned by firm on basis of what he did in case of shares directly owned by assessee. CWT, therefore, applying ruling of Hon ble Gujarat High Court in case of Addl. CIT vs. Mukur Corpn. (1978) 111 ITR 312 (Guj) stating that Wealth- tax Officer did not make proper enquiry and, therefore, he is now directing WTO to make enquiry. He observes in his order "I am inclined to hold that proper enquiry was not made by WTO and so assessment as framed was erroneous insofar as it is prejudicial to interests of Revenue". He, therefore, set aside assessment and directed WTO to make fresh assessment after making necessary enquiries and giving reasonable opportunity to assessee as indicated. According to ld. counsel Mr. Mehta, CWT is empowered to revise order of WTO out of proceedings under this Act which were available before WTO at time of making of assessment. Mr. Mehta submitted that revisional proceeding have been initiated by CIT by regular internal audit report. Mr. Mehta submitted that internal audit had raised objection in respect of valuation of shares for earlier assessment year for purpose of determining capital gains. In year under review, WTO did not make any reference to Valuation Officer. So question of considering Valuation Officer s report which was obtained was for earlier assessment year entitled under income tax for purpose of levy of capital gains tax. WTO was very much in know of this valuation report of earlier year. Since, each year being independent year and that under WT Act, valuation of asset is to be made on particular valuation date, WTO had rightly not considered Valuation Officer s report which was obtained for earlier year under IT Act, under s. 55A. Since this was not part of record during assessment proceedings for wealth tax purpose, WTO rightly did not consider same. internal audit had raised objection that WTO himself have taken into account Valuation Officer s report of earlier year as relevant for purpose of valuation shares of companies which are held by firms. This internal audit report was not available to WTO at time of original assessment and is not part of assessment proceedings. Mr. Mehta submitted that Calcutta High Court in case of Ganga Properties vs. ITO (1979) 118 ITR 447 (Cal) had occasion to consider record of ITO in relation to revisional powers of CIT under s. 263 of IT Act. In that case,. Mr. Mehta explained, ITO accepted assessee s Valuation Officer s report and made assessment. Subsequently, higher valuation report was made by Departmental Valuer. On this basis, CIT invoked s. 263 proceedings and passed order directing ITO to adopt value as was made by Departmental Valuer. Their Lordship of Calcutta High Court held that revisional jurisdiction of CIT is confined to record as it stood when ITO passed his order. Any subsequent report cannot be basis for revision proceedings. Calcutta High Court judgement would apply aptly to assessee s case. In this case also there was no report of either of Valuation Officer of objection or direction of audit Department at time of making of original assessment. Internal audit objection was subsequent to order of WTO. Therefore, as per Calcutta High Court decision, CIT could not have invoked provisions of s. 25 (2) by taking into account internal audit report which was subsequent to proceedings under this Act as was before WTO. He also submitted that similar issue had been so held by Hon ble Gujarat High Court in (1974) 33 STC 147 (Guj). He also referred to pp. 40 to 44 of paper book wherein he had filed Gujarat High Court decision on identical situation. There also their Lordships of Gujarat High Court held that there was no material on record to WTO which was either overlooked or not applied properly by WTO which would give jurisdiction to CIT to invoke provisions of s. 23. Mr. Mehta, therefore, submitted that entire order of CWT is beyond his jurisdiction and, therefo0re, needs to be quashed. On behalf of Department. Mr. V. M. Mehta, ld Representative, submitted that where WTO adopted book value instead of taking market value, then that order of WTO is very much erroneous as well as prejudicial to interests of Revenue. He referred to decision of Gujarat High Court in case of Mukur Corpn. (1978) 111 ITR 312 (Guj). Mr. Mehta submitted that since WTO did not make proper enquiry in respect of value of shares, CWT was fully empowered under s. 25 to direct WTO to make proper enquiry. This was so held in above Gujarat High Court decision. Mr. Mehta also submitted that so long as appeal is pending before AAC, CWT can exercise his revisional jurisdiction. This was so, held in case of CIT vs. EIMCO K.C.P. Ltd. (1984) 147 ITR 609 (Mad). He also referred to decision of Supreme Court in case J. K. Bankers vs. WTO (1984) 39 CTR (SC) 47: (1984) 145 ITR 485 (SC) for proposition that valuation of interest in firm, balance sheet method was not binding or conclusive. He, therefore, submitted that order of CWT in directing WTO make proper enquiry and make assessment is fully justified. He also submitted that CWT was fully empowered to go through record of WTO and call for such record as he may thing fit. Therefore, relying on internal audit objection cannot be said to be beyond his jurisdiction. We have heard rival submissions. As regards jurisdiction of CIT while matter is pending before AAC is concerned, matter was laid at rest by Supreme Court in case of CIT vs. Amritlal Bhogilal & Co. (1958) 34 ITR 130 (SC). Their Lordships of Supreme Court have clearly laid done that CIT can exercise revisional jurisdiction on order passed by ITO which is still pending before AAC. So ground taken by assessee on this particular issue is to be decided against assessee. Now regarding material which is in shape of internal audit objection can it be said to be available before WTO at time of passing of assessment order. answer to this question is emphatically No . audit objection was some time in 1982 while WTO made assessment on 6th March, 1981. Therefore, audit objection is clearly not part of record of assessment proceedings of WTO. Regarding legality of CWT action in invoking provisions of s. 25 of WT Act, basic question that emerges is whether internal audit objection could be said to be part of record to WTO at time of passing of assessment order or not. answer has to be emphatically No. . This is because audit being post-mortem and is carried out only after completion of assessments. This being position, can CWT direct WTO to read assessment or basis of internal audit observation. answer is clearly No . reason being that internal audit objection is not part of record of assessment proceeding. Sec. 25 (2) reads as under: "25. (2) Without prejudice to provisions contained in sub-s. (1), CIT may call for and examine record of any proceeding under this Act, and if he considers that any order passed there in by Wealth tax Officer is erroneous in so far as it is prejudicial to interests of revenue, he may after giving assessee opportunity of being heard, and after making or causing to be made such inquiry as be deems necessary, pass such order thereon as circumstances of case justify, including order enhancing or modifying assessment or cancelling it and directing fresh assessment". (emphasis italicized in print, supplied). record has to be construed to mean record of proceedings of WTO on basis of which he had made assessment. Since audit was done subsequent to assessment, it is extraneous to assessment proceedings and. therefore, WTO had no occasion to consider same. Therefore, on extraneous information which was not part of record of WTO, CWT cannot invoke his jurisdictional powers under s. 25. For this proposition we have placed reliance on Calcutta High Court judgement in case of Ganga Properties (1979) 118 ITR 447 (Cal), where Their Lordships had occasion to consider issue on what comprises record of ITO. Their Lordships observed thus at p. 452: "Whereas under s. 263 (1) of Act uses words "is erroneous" and not words "has become subsequently erroneous". Under this section, CIT may call for and examine "the record" of proceeding in order to consider in his revisional jurisdiction as to whether order in question by ITO "is erroneous". Therefore, he is to call for "record" of "proceeding" which was before ITO and examine it in order to consider whether on basis of materials which were before ITO and formed part of record order passed by ITO is "erroneous" and prejudicial to interests of Revenue. Therefore, materials which were not in existence at time of assessment was made but afterwards came into existence cannot form part of record of proceeding of ITO at time he passed order and, accordingly, it cannot be taken into consideration by CIT for purposes of invoking his jurisdiction under this section, for he is not appellate authority under this section and exercise only revisional jurisdiction and hence he can only take into consideration record as it stood before ITO and material in such record for purposes of ascertaining whether order in question was erroneous and prejudicial to interests of Revenue", Their Lordships of Gujarat High Court in case of CWT vs. Shri Hasmukh V. Chokshi, HUF, in W.T.A. Nos. 30 to 36 of 1982 decided on 7th April, 1983 had distinguished this Hon ble High Court decision in case of Mukur Corpn. while considering material on record and have observed that: "If, therefore, Tribunal did not find any material on record so as to warrant exercise of jurisdiction under s. 25 (2) of WT Act, we do not think that Tribunal can be said to be in error since, ultimate analysis, justification of exercise of jurisdiction under s. 25 (2) is question which depends on material on record which shows that there is prejudice to interest of Revenue". This, therefore, clearly supports our view that CWT just cannot invoke jurisdiction under s. 25 on extraneous audit objection. Therefore, on this legal question, contention of assessee must be upheld, and same is, therefore, decided against Department CWT s order under s., 25 (2) being without jurisdiction. We shall now deal on facts of this case as to whether WTO has made any error in applying provision of law or has overlooked provisions of law. From reply to internal audit objection, following fact emerges which goes to establish whether or not WTO had applied his mine to case and had passed assessment order in accordance with law: (a) that WTO was aware of fact that s. 7 (1) of WT Act gives primary mode regarding valuation of assets; (b) Sec. 7 (2) is not enabling one; (c) option of applying s. 7 (1) or s. 7 (2) is with WTO; (d) he could not have applied s. 7 (2) as difference in market value and book value of assets is below 20 per cent; and (e) further more he cannot value certain assets of balance sheet to entire exclusion of other assets. These emerge from out of his reply wherein WTO has clearly and categorically observed that in view of Bombay High Court unreported judgement in case of CWT vs. Bhiwandiwala & Co. which had followed Delhi. judgement on case of CWT vs. Mela Ram (1972) 84 ITR 323 (Del) objection of internal audit is not acceptable. In that judgement of Delhi High Court, their Lordship have held that WTO cannot pick and chose which of assets of firm to be valued excluding other assets. WTO had also pointed out that ITAT had upheld action of inclusion of entire corpus in case of another assessee of same group, Saraladevi Satabhia in W.T. A. Nos. 570 to 572 /Ahd/ 80 for asst. yrs. 1974-75 to 1976-77. WTO had also observed that even after applying principles of Supreme Court in case CWT vs. Nizam s Family Trust 1977 CTR (SC) 306: (1977) 108 ITR 555 (SC) effect on wealth would be very nominal. He had also observed course that is upon to higher authorities as under: (a) Re. Sec. 17 (1)(a) as not applicable as full declosure has been made by assessee (b) Re. Sec. 17 (1) (b) and it cannot pronounce law as per Indian & Eastern News paper Society vs. CIT (1979) 12 CTR (SC) 190: (1979) 119 ITR 996 (SC) (c) Re. Sec. 25 (2) no error of application of law and no omission of fact. (d) Re. Sec. 35 not mistake apparent from record. Supreme Court in case of J. K. Bankers, (1984) 34 CTR (SC) 47: (1984) 145 ITR 485 (SC) have clearly laid down basis of valuation. Their Lordships have observed at p. 495 thus: "On fair reading of aforesaid provisions it shall appear clear that primary method of determining value of assets for purposes of Act is one indicated in s. 7 (1), in as much as it provides that value of any assets, other than cash, for purposes of this Act shall be estimated to be its market price on valuation date. Then comes sub-s. (2) which provides that in case of business for which accounts are maintained by assessee regularly WTO may, in stead of determining separately valuation of each asset held by assessee in such business, determine net value of business as whole having regard to balance sheet of such business as on valuation date and making such adjustment therein as may be prescribed. It is true that sub-s. (2) commences with non obstiante clause, but even so, provision itself is enabling and conferring discretion on WTO to determine net value of assets of business as whole having regard to its balance sheet as on valuation date, instead of proceeding under sub-s. (1). In other words, it is optional for WTO to resort to either of methods even in case where net value of business carried on by assessee is to be determined. Thirdly, even when proceeds under sub-s. (2) he has to determine value of business as on valuation date, phrase "having regard to balance sheet of such business" as judicially interpreted means that WTO has to take into consideration or account balance sheet of such business for such valuation and not that such balance sheet is conclusive or binding or decisive of values of asset appearing therein. Fourthly, said sub-section also says that WTO has to "make much adjustments therein as may be prescribed" and in this behalf rr. 2A and 2B already quoted above indicated what adjustments WTO has to make while determining net value of business as whole. Particularly sub-r. (2) of r. 2B clearly provides that where market value of asset exceeds its written down value or book value by more than 20 per cent, value of that asset for purpose of r. 2A shall be taken to be its market value. In other words it is clear that even where WTO has resorted to s. 7 (2) for determining value of assets of business as whole written down values or book values of specific assets as appearing in balance sheet are not sacrosanct and when market value exceeds written done value or book value by more then 20 per cent, WTO has to adopt market value of such assets for purposes of this Act. This is apart from position that resort to s. 7 (2) itself is discretionary and optional, provision being enabling one". This further goes to establish that option of applying s. 7 (1) or 7 (2) is with WTO. Even in case where he wishes to apply s. 7 (2), he must necessarily follow r. 2,2A etc. He can differ from book value only in case market value of assets exceeds book value by over 20 per cent. This only means that in case difference between market value and book value is less than 20 per cent, he has to adopt book value only. From above it becomes clear that WTO has applied his mind to provisions or law and then applied it. Thus it can, therefore, be said that he had not omitted any fact or misapplied provisions of law. This, therefore, clearly establishes rule that CWT while exercising his jurisdiction of revision cannot direct WTO to do particular act what WTO could not do at time of original assessment. This has been so held by Their Lordships of Supreme Court in case of CIT vs. Kanpur Coal syndicate (1984) 53 ITR 225 (SC). At. p. 229 their Lordships observed thus: "If appeal lies, s. 31 of Act describes powers of AAC in such appeal. Under s. 31 (3) (a) in disposing of such appeal AAC may, in case of order of assessment, confirm, reduce, enhance or annul assessment, under cl. (b) thereof he may set aside assessment and direct ITO to make fresh assessment. AAC has, therefore, plenary powers in disposing of appeal. scope of his power is conterminous with that of ITO. He can do what ITO can do and also direct him to do what he has failed to do. If ITO has option to assess one or other of entities in alternative, AAC can direct him to do what he should have done in Circumstances of case". Therefore, on all counts, action of CWT for invoking provisions of s. 25 is bad in law and is accordingly quashed. assessee s appeal is fully allowed. *** GAUTAM SARABHAI D. TRUST NO. 4 v. WEALTH-TAX OFFICER
Report Error