INSPECTING ASSISTANT COMMISSIONER v. SARDARMAL DHADDA/UMRAOMAL DHADDA
[Citation -1987-LL-0915]

Citation 1987-LL-0915
Appellant Name INSPECTING ASSISTANT COMMISSIONER
Respondent Name SARDARMAL DHADDA/UMRAOMAL DHADDA
Court ITAT
Relevant Act Income-tax
Date of Order 15/09/1987
Assessment Year 1975-76, 1976-77
Judgment View Judgment
Keyword Tags valuation of closing stock • opportunity of being heard • industrial undertaking • value of closing stock • voluntary disclosure • cost of acquisition • immovable property • disclosure scheme • fair market value • gross profit rate • valuation officer • cross-objection • trading account • valuation date • purchase price • special bench • market price • cost price • sale price • book value
Bot Summary: Considering the Gross Profit rate, the WTO was of the view that the market value of the closing stock of the firm in which the assessee is a partner, exceeded the value as adopted by the firm by more than 20 per cent. 6th Nov., 1979 why the Gross Profit Rate could not be taken as adequate material to come to the conclusion that market value of the stock exceeded the value as adopted by the firm by more than 20 per cent. 23rd July, 1981, a copy of which is enclosed in the paper book the Tribunal took the view that simply because the Gross Profit rate was high, the WTO was not justified in coming to the conclusion that the market value of the stock exceeded the value as adopted by the firm by more than 20 per cent. In the combined order the observation made is that WTO has not brought on record material to reach the conclusion that market value of the closing stock was more than 20 per cent of the value disclosed in the books of the firm. If you have any evidence in your possession that the fair market value of the closing stock on the valuation date was more than 20 per cent of the cost/books value you are requested to let us know the same so that evidence in rebuttal may be adduced. Another point made out is that while valuing the closing stock at market value one has to see that the goods in stock are sold out on that day in lump sum to the willing buyers and none will be willing to buy the. In all these cases with which I agree respectfully, the view taken was that a conclusion that the market value of the closing stock of the firm exceeds the book value by 20 per cent cannot be arrived at merely on the basis that the gross profit shown by the trading account was more than 20 per cent.


Om Prakash, J.M.: Revenue and assessee have filed their appeals and cross- objections respectively for asst. yrs. 1975-76 and 1976-77 against combined order of AAC. Involving common questions, both appeals and cross-objections are disposed of together by combined order. First, we take up appeals of Revenue for decisions. first contention of Revenue is that AAC erred in holding that WTO was not justified in invoking provisions of r. 2B(2) of WT Rules, 1957 (for short 'the rule 1957') for determining value of assessee's interest in firm Sardarmal Umraomal. assessee is partner having 50 per cent share in said firm. dispute relates to valuation of interest of assessee in said firm. firm purportedly valued its closing stock at cost. WTO observed that assessee showed Gross Profit rate of 29.3 per cent and 29 per cent for year under appeal respectively. Considering Gross Profit rate, WTO was of view that market value of closing stock of firm in which assessee is partner, exceeded value as adopted by firm by more than 20 per cent. He, therefore, invoked r. 2B(2) of Rules, 1957. WTO rejected contention of assessee that Gross Profit rate could not constitute good guideline to determine market value of stock as on valuation date. assessee raised several objections vide reply dt. 6th Nov., 1979 why Gross Profit Rate could not be taken as adequate material to come to conclusion that market value of stock exceeded value as adopted by firm by more than 20 per cent. WTO was not at all convinced by assessee's reply dt. 6th Nov., 1979. He, therefore, took market value of stock for purposes of assessments as against cost price shown by assessee. dispute was carried in appeal to AAC by assessee. He, having followed earlier order dt. 26 7-1980, concurred with assessee that r. 2B(2) could not be invoked simply because Gross Profit rate was 29.3 per cent and 29 per cent for years under appeal respectively. similar question came up for consideration in case of Smt. Ladkunwar Dhadda (WT Appeal Nos. 756 and 757 (Jp) of 1980) carrying on same business in asst. yr. 1975-76 for consideration before this Bench. Vide order dt. 23rd July, 1981, copy of which is enclosed in paper book Tribunal took view that simply because Gross Profit rate was high, WTO was not justified in coming to conclusion that market value of stock exceeded value as adopted by firm by more than 20 per cent. common feature of both cases -- of assessee and Smt. Ladkunwar -- is that in both sets of cases WTO simply relied on Gross Profit rate and on no other material to invoke r. 2B(2). On these facts, decision dt. 23rd July, 1981 of Tribunal in case of Smt. Ladkunwar is squarely applicable to case of instant assessee. It has, therefore, to be held that WTO was not right in invoking r. 2B(2) to instant cases, as there was no cogent material before him to come to conclusion that market value of stock exceeded value as adopted by firm by more than 20 per cent. For these reasons, combined order of AAC on this issue is upheld. next ground is that AAC erred in holding that assessee is entitled for exemption under s. 5(1)(xxxii) in respect of investment in firm Sardarmal Umraomal. This issue also is not res integra and it has come up for hearing before this Bench as well as other Benches in several other cases in which firms carried on identical business. This Bench as well as other Benches have consistently taken view in several cases that firm carrying on this type of business is industrial undertaking within meaning of Explanation to cl. (xxxi) of s. 5(1) of WT Act, 1957. For example sake, decision of Bombay Bench 'B' Camp at Jaipur in case of Smt. Manju Devi Kothari (IT Appeal No. 224 (Jp.) of 1979 dt. 11th July, 1981) asst. yr. 1976-77 can be cited. Relying on this decision, I hold that firm in which assessee is partner, is Industrial undertaking within meaning of Explanation to cl. (xxxi) of s. 5(1) and assessee's interest In said firm is exempt under cl. (xxxii) of s. 5(1). For these reasons, order of AAC is upheld. Another ground is that AAC erred in not allowing opportunity to Valuation Officer as required by s. 23(3A)(a) of Act, 1957 and in reducing value of immovable property as made by Valuation Officer by Rs. 48,700. No material has been shown by Revenue to substantiate objection that no notice was served on Valuation Officer. Shri Swaroop, learned Sr. Departmental Representative conceded that notice had been sent by AAC to Valuation Officer. It is not contention of Revenue that notice was sent on wrong address. No affidavit has been filed by Valuation Officer to prove that notice being sent on correct address, was not served on Valuation Officer. On these facts, it has to be held that AAC got notice duly served on Valuation Officer and latter chose not to appear before former. assessee as well as Revenue agreed that discrepancy relates multiplier and deduction of repairs and collection charges. There is no other dispute regarding valuation of immovable property. First, we take up question of multiplier. WTO applied multiplier of 16.6. AAC adopted multiplier 10. We have heard representatives of both parties and Valuation Officer. No good reason has been shown to adopt multiplier as high as 16.6. AAC has discussed this issue in para 12 of his order. It appears that for adopting multiplier 10, he relied on decision dt. 1st Aug., 1980 of Jaipur Bench in WTA No. 329/JP/1979. In our opinion, AAC was right in applying capitalisation factor 10 to rented property. For repairs and collection charges, AAC allowed deduction of 18 per cent. Valuation Officer allowed repairs charges to extent of 1/10th and collection charges to extent of 4 per cent. AAC observes that repairs expenses are generally allowed at 1/6th and collection charges at 6 per cent. Valuation Officer, who appeared before us urges that under terms of rent deed, repairs were to be carried out by tenants and, therefore, nothing was allowable to assessee as he was not required to incur expenditure on repairs. We do not agree with Valuation Officer. It is duty of every landlord to maintain let out property. landlord is, therefore, entitled to repair expenses. In our opinion, AAC was right in allowing deduction of 18 per cent for repairs and collection charges. There is one more contention in appeal relating to asst. yr. 1976-77. contention is that AAC erred in allowing deduction of Rs. 47,125 in respect of tax liability, which arose as result of disclosure scheme of 1975. Admittedly, firm made disclosure and paid taxes of Rs. 94,250. assessee's share in voluntary disclosed income came to Rs. 1,75,000 and assessee's share in voluntary disclosed income came to Rs. 1,75,000 and thus assessee claimed deduction of proportionate tax liability of Rs. 47,125. WTO disallowed assessee's claim for reason that taxes had been paid after valuation date ending 1975. He was of view that such tax liability was not debt due under s. 2(m)(ii) of WT Act, 1957. careful perusal of case shows that further scrutiny is necessary on issues: (1) as to for which years disclosure was made, (2) whether assessee ever disclosed wealth to extent of Rs. 1,75,000 in his wealth-tax return for asst. yr. 1976-77, (3) if no such wealth was disclosed in view of provisions of Voluntary Disclosure Scheme whether still tax liablity of Rs. 47,125 can be characterised as 'debt owed' in view of see. 2(m)(ii) of WT Act, 1957. Thereafter he will redecide issue after giving opportunity of being heard to both parties. Next, we take up cross-objection of assessee. first common objection is that AAC erred in not accepting value of Kanota Bagh plot, Takhte Shahi Road, Jaipur. assessee returned value of his half share in said plot at Rs. 35,000 for each year. Relying on report of Valuation Officer, WTO estimated value of assessee's half share in said plot at Rs. 57,500 and Rs. 65,000 for years under appeal respectively. AAC concurred with WTO. For assessee, learned counsel Sh. Ranka urges that emergency was clamped by Government and that continued during these years. He argues that on account of emergency, prices of land had drastically gone down. valuation of assessee's shares in said plot was in dispute in asset. yrs. 1973-74 to 1974-75 also. In cross- objections of assessee, this Bench of Tribunal fixed up value of assessee's share in said plot at Rs. 49,500. question for consideration is as to what extent value of plot was increased in years under appeal as compared to asst. yr. 1974-75. On valuation of Rs. 49,500, rate works out to Rs. 65 per sq. yd. When rate of Rs. 65 per sq. yd. was applied for asst. yr. 1974-75 as per decision dt. 19th Aug., 1981 of this Bench in case of assessee, in our opinion, for years under appeal, rate of Rs. 70 per sq. yd. will be proper and reasonable. We, therefore, direct WTO to value half share of assessee @ Rs. 70 per sq. yd. for years under appeal. second common objection is that in view of s. 7(4) of WT Act, 1957, AAC should have taken same value of self-occupied property for years under appeal as taken for asst. yr. 1971-72. It was argued by Shri Ranka before us that WTO himself adopted valuation of asst. yr. 1971-72 for asst. yr. 1977-78. This fact has not been controverted by Revenue. We, therefore, accept submission of Shri Ranka and direct WTO to adopt valuation of self-occupied property of asst. yr. 1971-72 for purposes of assessment year under appeal. In result, appeal for asst. yr. 1975-76 of Revenue is dismissed and appeal for asst. yr. 1976-77 is allowed for statistical purposes and cross-objections of assessee are partly allowed. Ram Rattan, A.M.: I had benefit of going through combined order passed by learned Judicial Member. I am, in agreement with conclusion arrived at by him on all issues except in regard to r. 213(2) of WT Rules, 1957, for which I have my own reservations. dispute regarding applicability of r. 2B(2) of WT Rules, 1957 is twofold. One is legal issue whether r. 2B(2) can be invoked in valuing interest of partner in firm. other is whether on facts market value of closing stock exceeds more than 20 per cent of value adopted in case of firm for income-tax purposes. Shri N.M. Ranka, learned counsel of assessee did not (sic) or legal aspect of issue. same, therefore, calls for no consideration. I shall, however, discuss other issue in following paragraph: Rule 2B(2) provides for disturbing value of particular asset of firm if difference in market value of that asset and value appearing in balance-sheet of firm is more than 20 per cent. learned Judicial Member has held that in case of assessee difference is not more than 20 per cent. For coming to this conclusion he has relied upon earlier decision of Jaipur Bench in case of Smt. Ladkunwar Dhadda, relevant extract of which is reproduced below: "It might so happen that more valuable gems have already been sold out and what remained was inferior variety which can fetch much less profit, assessee might have had very good year but on last day value could get depressed." It is also observed that unless facts are analysed properly and positive material brought on record to show that market value was very much higher than cost price on last day of accounting period, it would not be possible to uphold WTO's action and burden rested heavily on WTO to prove that market value was more than 20 per cent. In combined order observation made is that WTO has not brought on record material to reach conclusion that market value of closing stock was more than 20 per cent of value disclosed in books of firm. I have my own reservations on this issue. I fully endorse views that unless facts are analysed properly and positive material brought on record, value of closing stock cannot be determined. I do not agree with remaining observations. valuation of closing stock has to be as fact. It cannot be based on generalisation or on hypothetical statements. I also do not agree that onus to bring positive material on record is on WTO and not on assessee. On whom onus lies would depend on facts in each case. Coming to facts of instant case it is common ground between parties that rates of gross profits disclosed by assessee for asst. yrs. 1975-76 and 1976-77 are at 29.3 per cent and 29 per cent respectively. It is also case of assessee that closing stock In firm is valued at cost. In trading account where method of valuing closing stock is taken as cost price Gross Profit will only be difference between purchase price and sale price. Sale price is normally market value of asset on date of its sale and purchase price will be cost of acquisition of asset out of which profit has been earned. In other words, market value will be increase of Gross Profit earned over purchase price. Now percentage of Gross Profit rates are 29.3 & 29 per cent respectively. In other words, market price is more by 41.3 per cent for asst. yr. 1975-76 and 40.84 per cent for asst. yr. 1976-77 of its cost in terms of r. 2B(2) of WT Rules. This is position which emerges prima facie from trading account where method of valuing closing stock is cost price. This prima facie difference, between cost price and market value can, however, be dislodged by certain factors. After considering relevant facts sometimes market value with reference to valuation dates may be less than percentage of increase of Gross Profit rate and sometimes it may even be more than percentage of Gross Profit. onus to dislodge this position, i.e., apparent is not real consequently falls on assessee by giving positive evidence that real market value of closing stock is lower than Increase in Gross Profit rate with reference to cost. submissions made before WTO are general and not specific. Neither any basis for valuation of closing stock has been spelt out. submissions made before AAC were as under: "That gross profit during said years was more than 20 per cent. It does not mean fair market value of closing stock was more by 20 per cent of book value. We may mention that jewellery trade has its own special feature. Goods may remain in stock for years together and may not be saleable at all. Some goods may be sold at 10 per cent profit and others may be sold at 25 per cent profit also. One has to take overall view and for putting value as fair market value, one has to see that goods in stock are sold out on that day in lump sum to willing buyer on that day. None would be agreeable to book value of valuation date. Whatever stock is available with assessee on today assessee is prepared to sell it at rate above 18 per cent of its cost/books value. If you have any evidence in your possession that fair market value of closing stock on valuation date was more than 20 per cent of cost/books value you are requested to let us know same so that evidence in rebuttal may be adduced. We may mention here that normally global valuation deserves to be taken and if you want to substitute value, onus is upon you and not on assessee. Apparent position is real unless other is proved. We object to your preposition and request you to accept book value and not to adopt any other value for closing stock." first contention made on behalf of assessee is that goods may first contention made on behalf of assessee is that goods may remain in stock for years together and may not be saleable at all. This statement made on behalf of assessee is not even general statement, what to speak o f specific statement supported by any evidence. It is only hypothetical statement, surmise and conjecture. In my opinion such hypothetical statement cannot be advanced in course of law. learned counsel of assessee during course of hearing of appeal expressed his inability to furnish details of such goods so as to consider modification of valuation of closing stock in relation to such goods. other contention is that some goods may be sold at 10 per cent profit and others at 25 per cent also and market value of goods with lesser margin of profit will be less than rates of gross profit and, therefore, Gross Profit will not reflect correct market value. Here again statement made is hypothetical one and deserves to be rejected. learned counsel of assessee again expressed his inability to furnish details of such goods included in closing stock to consider modifications in value of closing stock in relation to such goods. Even though no details have been furnished, I would like to add that if margin of Gross Profit in certain goods is 10 per cent or less than 20 per cent in others it would be more than 41 per cent so as to reflect overall Gross profit rate of year at 41.3 per cent for asst. yr. 1975-76 and 40.84 per cent for asst. yr. 1976-77 as reflected in case of assessee with reference to cost price. Even if details of goods with lower margin of profit are available, same will not help assessee as same have to be considered with goods with higher margin of profit. I, therefore, do not find any merit in this contention made on behalf of assessee. With regard to other contention of assessee, I would add that Department is not purchasing agency to purchase goods at 18 per cent margin of profit. This contention, therefore, also deserves to be rejected. Another point made out is that while valuing closing stock at market value one has to see that goods in stock are sold out on that day in lump sum to willing buyers and none will be willing to buy the. entire lot on that day and, therefore, it will affect market value. I do not see any justification in this contention as well. It is not necessary to sell entire stock on single day. Purchasing and selling is continuing process in trade. value on valuation date has to be determined taking into consideration market trends on that date or near about. In fact prudent businessman would try to sell goods in piecemeal or in one lump depending upon favourable market trends. If market trends on particular date are not favourable, there is no need to sell entire lot in one lump. I have already taken similar view in my order in WTA Nos. 664 & 665/JP/80 for asst. yrs. 1973-74 and 1974-75 in case of assessee himself. Calcutta Bench of Tribunal coming at Jaipur also took similar view in case of WTO vs. Sri Chand Golecha (WT Appeal Nos. 667 and 679 (Jp.) of 1980) relating to asst. yrs. 1972-73 to 1975-76. I have pointed out above that even before us learned counsel of assessee failed to furnish exact details of goods profit which have remained in stock for years together having no market value of goods on which margin of gross profit is 10 per cent or less. In absence of these details also in view of observations made by me earlier, value of closing stock has to be estimated. WTO has already given reduction of 5 per cent out of prima facie margin of profit of 41.3 per cent & 40.84 per cent for asst. yrs. 1975-76 and 1976-77 respectively. I would say that WTO has been quite fair in allowing this reduction which is quite reasonable. I, therefore, uphold additions made by WTO and order of AAC on this point is, therefore, reversed. In result, both Departmental appeals and cross-objections of assessee are partly allowed. Om Prakash, J.M.: Revenue and assessee both have filed appeals and cross- objections respectively for asst. yrs. 1975-76 and 1976-77 against combined order of AAC. issues being raised in these appeals and cross-objections are identical to those that were raised in case of Shri Sardarmal Dhadda by Revenue and assessee in their appeals and cross-objections respectively. Combined order in appeal of Revenue and cross-objections of assessee In case of Shri Sardarmal Dhadda has since been passed which fully covers controversy arising from instant appeals and cross-objections of assessee. Following said detailed order, in case of Shri Sardarmal Dhadda, appeals of Revenue are dismissed and cross-objections of assessee are partly allowed. Ram Rattan, A.M.: I have gone through combined order passed by learned Judicial Member while disposing of appeals and cross-objections in case of assessee. He has relied upon his order in case of IAC vs. Sardarmal Dhadda (WT Appeal Nos. 6 and 7 (Jp.) of 1981) relating to same assessment years. I have passed separate order in case of Sardarmal Dhadda in WTA Nos. 6 and 7 vide my order dt. 23rd Dec., 1981. Following my above order in case of Sardarmal Dadda, appeals of Revenue and cross-objections by assessee are partly allowed. Om Prakash, J.M.: As Members of Bench differ in opinion on following point: "Whether, on facts and in circumstances of case, does gross profit rate taken in case of firm, constitute adequate material to come to conclusion that market value of closing stock of firm exceeds cost price as adopted by firm by more than 20 per cent and whether merely on that basis, can r. 2B(2) of WT Rules, 1957 be invoked?" same is referred for hearing by Third Member in view of s. 24(11) of WT Act, 1957, r/w s. 255, sub-ss. (4), (5) of IT Act, 1961. ORDER UNDER S. 24(11) OF WT ACT, 1957 R/W S. 255(4) OF IT ACT, 1961 THIRD MEMBER ORDER Ch. G. Krishnamurthy, President: This is common difference of opinion referred to me by President under provisions of s. 24(11) of WT Act, 1957 r/w s. 255(4) of IT Act, 1961. point of difference of opinion is as under: "Whether, on facts and in circumstances of case, does gross profit rate taken in case of firm, constitute adequate material to come to conclusion that market value of closing stock of firm exceeds cost price as adopted by firm by more than 20 per cent and whether merely on that basis, can r. 2B(2) of WT Rules, 1957 be invoked?" I have had occasion to dispose of similar point of difference of opinion in several other cases today This identical point had come up for consideration before Special Bench of Tribunal in case of WTA No. 9 (Del)/1984 and before another Bench of Tribunal in case of WTA Nos. 62, 60 and 61/JP/1981. In all these cases with which I agree respectfully, view taken was that conclusion that market value of closing stock of firm exceeds book value by 20 per cent cannot be arrived at merely on basis that gross profit shown by trading account was more than 20 per cent. For those reasons which were elaborately discussed in those orders, which I do not find it necessary to reproduce them here and with which I entirely agree, I hold that view taken by learned Judicial Member appears to be correct and justifiable view. I, therefore, agree with him and hold that that circumstance of higher gross profit shown by trading account cannot be held to have proved that market value of closing stock exceeded book value by 20 per cent so that provisions of r. 2B(2) could be applied. Before I conclude, I would like to mention fact brought to my notice during course of hearing of these appeals by learned Advocate for assessee, Mr. N.M. Ranka, that huge stocks amounting to Rs. 1,65,000 were purchased either one day before closure of accounting year or on last day of accounting year which formed large chunk and which were included in closing stock at cost and in respect of which market value could not be anything other than cost at which they were purchased. article purchased on last day of accounting year will not have market value higher than cost unless it was shown by positive evidence that purchase value of that commodity or article was grossly under-valued or under-invoiced. Otherwise, normally market value of such article or commodity would be same as that of purchase price. This is also additional reason why rate of gross profit shown by trading account cannot be taken as conclusive proof that market value of closing stock would exceed book value by 20 per cent. This would again prove how fallacious, unsafe conclusion of WTO could be if reliance is to be placed all by itself on rate of gross profit disclosed by trading account. matter will now go before regular Bench so that appeal can be disposed of in accordance with opinion of majority. Y.R. Meena, J.M.: These appeals are by Revenue. only main issue for our consideration in these appeals is whether on facts and in circumstances of case CIT (A) erred in holding that WTO was not justified in invoking provisions of r. 2B(2). There was difference between Members of Bench. matter was referred to President under s. 24(11) of WT Act r/w s. 255(4) of IT Act, 1961. Hon'ble President as Third Member has agreed with view taken by Judicial Member. majority view expressed is that r. 2B(2) cannot be invoked on facts and in circumstances of case. Following majority view, we confirm view taken by CWT(A). Since there is no difference of opinion with regard to s. 5(1)(xxxii), view taken by CWT(A) is confirmed. In result appeals of Revenue are dismissed. *** INSPECTING ASSISTANT COMMISSIONER v. SARDARMAL DHADDA/UMRAOMAL DHADDA
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