TMI Blog1992 (8) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment order on March 26, 1985. In the revised return filed by the firm, Messrs. Maliram Pooranmal showed the value of the closing stock in Jawaharat Account and the Gold Ornaments and Articles Account at Rs. 34,85,256 and Rs. 8,71,770, respectively. While computing his interest in the firm, the assessee considered the above book value of the closing stock declared by the firm in Jawaharat Account and the Gold Ornaments and Articles Account. The audited trading account of the firm in the above accounts showed that the value of the closing stock had been taken at cost as certified by the management of the firm. The gross profit declared in Jawaharat Account and Gold Ornaments and Articles Account was 21.05% and 41.38%, respectively. Therefore, according to the Wealth-tax Officer, this factually meant that the market value of closing stock in Jawaharat Account and Gold Ornaments and Articles Account was in excess of the book value by 27.39% and 70.59%, respectively. He also found that the value of closing stock in these items had been arrived at by the assessee after reducing the total credit side from that of debit side. The mode adopted was that the firm first worked out its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an average of all transactions carried out by the firm and it could be said to be the profit rate which was operative throughout the period. The Wealth-tax Officer, there, fore, said that he had no alternative but to hold that the market value of the closing stock of the firm was in excess of its book value by more than 20% in both the accounts and, therefore, rule 2B(2) of the Rules was applicable. He accordingly increased the value of closing stock in the aforesaid two accounts by amounts of Rs. 9,54,612 and Rs. 6,15,382, respectively, and the assessee's share being one-third, an addition of Rs. 5,23,331 was made to the total wealth of the assessee on this account. The assessee filed an appeal before the Appellate Assistant Commissioner of Income tax, A-Range, Jaipur. The Appellate Assistant Commissioner stated in his order dated March 5, 1987, that, in the assessee's own case in earlier years, the members of the Income-tax Appellate Tribunal had held that rule 2B(2) was not applicable so far as valuation of the closing stock was concerned. Following the same, the valuation made on this account by the Wealth-tax Officer was deleted. The Wealth-tax Officer, CC-II, Jaipur, filed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chandmal Poonamchand, Jaipur. This firm also carries on business in gems and precious stones. It may be mentioned here that Reference Application No. 44 of 1989 by the Commissioner of Wealth-tax, Jaipur, also pertains to Shri Mohan Lal, assessee, partner in the firm of Messrs. Chandamal Poonamchand, and involves similar points. Wealth-tax Reference Application No. 44 of 1989 pertains to the assessment year 1976-77 while Reference Application No. 43 of 1989 pertains to the assessment year 1977-78 relating to Mohan Lal. It has been stated by the Revenue in the reference applications that the book value of the closing stock had been taken at its cost price and on that basis, the market value could not be ascertained. The assessee did not produce any evidence with regard to the valuation of the stock as shown in the trading account. No details were given regarding old, rejected and unsaleable precious stones by the assessee. Even the stock list was not submitted. It was argued that the Wealth-tax Officer was, therefore, right in the circumstances to come to the conclusion that the gross profit rate was in excess of the book value of the closing stock by more than 20% and in applyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de under section 7(2)(a), having regard to the balance-sheet of such business, the Wealth-tax Officer shall make the adjustments specified in rules 2B, 2C, 2D, 2E, 2F and 2G. Construing rule 2B(2) of the Rules, the Division bench stated that, unless determination of the market value on the basis of definite material is at an amount exceeding 20% of the value disclosed in the balance-sheet, no occasion arises for invoking rule 2B(2) and the value disclosed in the balance-sheet has to be accepted for the purpose of wealth-tax assessment. This was said to be the cumulative effect of the above statutory provisions. According to section 2(m) of the Wealth-tax Act, 1957, in order to arrive at "net wealth", the value of the assets has to be computed in accordance with the provisions of the Act. Section 7 of the Act lays down as to in what manner the value of assets will be determined. The basic provision in this regard is contained in section 7(1) of the Act which, inter alia, provides that the value of any asset other than cash shall be estimated to be the price which, in the opinion of the Wealth-tax Officer, it would fetch if sold in the open market on the valuation date. This is sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Wealth-tax Officer cannot proceed to act under section 7(2)(a) of the Act. It has to be remembered that section 7(2)(a), when the pre-requisite conditions of that sub-section are fulfilled, also gives the Wealth-tax Officer power to determine the net value of the assets of the business as a whole instead of what is required under section 7(1) to determine separately the value of each asset. The net value of the assets of the business as a whole can only be determined by having regard to the balance-sheet of such business when the accounts are maintained by the assessee regularly and the balance-sheet of the business is drawn up as on the valuation date. Rule 2A of the Wealth-tax Rules, 1957, only applies where the Wealth-tax Officer determines the net value of the assets of the business as a whole, having regard to the balance-sheet of such business. The adjustments specified in rule 2B(1) are also to be made when the Wealth-tax Officer has the jurisdiction to exercise the powers under section 7(2)(a) of the Act and exercises the same. Sub-rule (2) of rule 2B of the Wealth-tax Rules, 1957, is an exception to sub-rule (1). This exception can only be applied when the net value ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t follow that procedure. He arrived at the gross profit before recording the value of the closing stock on the basis of the stock register. There is no finding that the assessee maintained the accounts of the business regularly or that he even drew up the balance-sheet. In the absence of that finding, the Wealthtax Officer could not resort to and had no power to resort to the provisions contained in section 7(2)(a) read with rule 2B(2) of the Rules. The Appellate Assistant Commissioner of income-tax, in our opinion, although for different reasons from those recorded by us, rightly held that rule 2Be2) of the Rules was not applicable so far as valuation of the closing stock was concerned and the Tribunal rightly confirmed the conclusion in this regard arrived at by the Appellate Assistant Commissioner. In the reference applications, the Revenue has stated that the provisions of rule 2B(2) of the Rules were attracted and on that basis, the first question of law specified in the application is said to arise. The findings of fact relevant to the question remain what they are and on this basis, though for reasons different than given by this court in CWT v. Motichand Daga [1988] 174 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X
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