TMI Blog2005 (10) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... The Income-tax Appellate Tribunal, Allahabad has made a joint reference and has referred the following question of law for the opinion of this court, under the Wealth-tax Act (hereinafter referred to as the Act): "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in applying income capitalization method on average profit for three years in valuing the cold storage in dispute and also holding that the book value of the assets is to be taken into consideration and capital in the firm is not to be added back separately?" M/s. Vishwanath Seth Cold Storage and Industries, Chandpur, Jaunpur, is a registered firm, consisting of 5 partners who are the assesses each having a 1/5th share. The dispute relates to the valuation of the 1/5th share in the said firm for the assessment years 1975-76 and 1976-77 on the valuation date in respect of each partner who are the assessees. The values as declared and assessed will be clear from the following Table: ------------------------------------------------------------ Assessment Value of 1/5th Value of 1/5th Value of 1/5th year share as share as per share as per declared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Income-tax Officer. There being no generator in the earlier years, the Appellate Assistant Commissioner took the average profit for the three years at Rs. 1,68,500 and capitalizing the same at 10 times, he arrived at the valuation of the cold storage for the assessment year 1975-76 (i.e., as on Dewali 1974) Rs. 16,23,000. The Appellate Assistant Commissioner observed that the profit for 1976-77 was Rs. 1,68,340 and so the average profit for 1974-75 to 1976-77 came to Rs. 1,50,000 and the valuation for 1976-77 (Dewali 1975) was taken at Rs. 1,50,000." All the five assessees as well as the Department preferred separate appeals before the Tribunal. The Department contended that the income capitalization method adopted by the Appellate Assistant Commissioner was not the correct method to arrive at the net wealth of the firm in which the assessees were the partners. However, this plea was rejected by the Tribunal and it was held that the income capitalization method based on the preceding three years average profit, as adopted by the Appellate Assistant Commissioner of Income-tax was correct. But the Tribunal further held that in determining the average profit of these three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timated 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. The said section is subject to any Rules framed in this behalf. Rules 1B, 1C and 1D of the Wealth-tax Rules, 1957 (hereinafter referred to as "the Rules") are the relevant rules. Rule 1B talks about valuation of life interest, rule 1C talks about the market value of unquoted shares and rule 1D is with regard to the market value of the unquoted shares of the companies other than investment companies and managing agency companies. Thus, none of these rules throws any light on the question of valuation of business assets. However, sub-section (2) of section 7 is in two parts and it provides the method for determination of the net value of the assets of the business as a whole where the assessee is carrying on the same for which accounts are maintained by him regularly. Under clause (a) of sub-section (2) of section 7 the method of determining the net value of the assets of the business as a whole is with regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as may be prescribed. Clause (b) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to the determination of value of assets as contemplated under section 7(2) of the Act. It was submitted by the assessee that he is entitled to make certain adjustments in the valuation as given in the balance-sheet. Rejecting the said contention it was held by the apex court in the case of Birla Jute Manufacturing Co. Ltd. v. CWT [1971] 82 ITR 142, AIR 1971 SC 2458 that there can be no doubt that under section 7(2)(a) of the Act contemplates that the book value in the balance-sheet should be taken as the primary basis of valuation and if any adjustment is required, it is open to the Wealth-tax Officer to make an adjustment in the valuation as given in the balance-sheet as may be necessary in the circumstances of the case. The balance-sheet gives a true and fair figure of the state of affairs as at the end of the financial year, if the assessee has shown the net value of the assets at a certain figure in the balance-sheet, the Wealth-tax Officer would be entitled to accept it on the footing that the assessee knew best what the valuation of the assets was. It was however, open to the assessee to satisfy the authorities that the said figure has been enhanced or increased or infla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what is shown in the balance-sheet. The upshot of the above discussion is that normally in the case of computation of the value of each asset held by the assessee in a business, the Wealth-tax Officer shall determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business on the valuation date, under section 7(2) (a) of the Act. As laid down by the Supreme Court in the aforementioned cases, the figures mentioned in the balance-sheet should be taken on their face value. However, it is open to the Wealth-tax Officer to make such adjustments therein "for acceptable reasons". At this juncture, it is also apt to notice the amendment made in section 7(2)(a) of the Act by Act No. 46 of 1964. By this amendment the words "the circumstances of the case may require" have been substituted by the words "may be prescribed". The aforesaid amendment was not under consideration before the Supreme Court in the above cases. However, by introducing the above amendment it appears that the intention of the Legislature is clear to remove the uncertainty and confusion in the matter. The words "as may be prescribed" obviously mean prescribed by rules mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced reliance upon a judgment of this court in the case of CIT v. Kanodia Cold Storage [1975] 100 ITR 155. We fail to understand the applicability of the case law of Kanodia Cold Storage [1975] 100 ITR 155 (All) in the facts and circumstances of the present case. In the case of Kanodia Cold Storage [1975] 100 ITR 155 (All), the High Court was called upon to decide as to whether certain expenditure incurred towards replacement of transformer-and service line in taking greater load is revenue expenditure or capital expenditure. To decide the said controversy, the High Court was of the view that the replacement of worn out parts does not by itself bring in a new asset. The productive unit to the assessee remains the same and the replacement of the existing line with a new line did not result in creation of new assets of enduring nature. In Smt Pratipal Kaur v. IAC of I.T. [1984] 145 ITR 19, it has been held by this court that the method of land and building to find out the valuation of house is a well recognised one and has been accepted for the purpose of finding out the correct value of the property. It has quoted a passage from the book Principle and Practice of Valuations IV e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the tenancy of the tenant, the building should not be valued on the basis of the market value of the property on account of the restriction imposed by the rent control laws to get the building vacated by evicting the tenant. In such cases encumbrances on the property should also be taken into account. Further in the case of CWT v. Smt. Taraben R. Patel [1992] 198 ITR 657 (Karn) it has been held that it is usual to value the property by more than one method so as to cross check and adopt an average. This is resorted to when there is yet disparity between the valuation arrived at by the different methods. We find that the Tribunal has not adopted any recognized method of valuation. The first appellate authority has held that while valuing the cold storage the following factors should be taken into account: (i) Valuation of the cold storage had to be done by income capitalization method, (ii) The average profit in three immediately preceding years should be taken into account, (iii) Only expenditure to the extent allowed by the Income-tax Officer should be allowed, (iv) Deduction for depreciation should be allowed, (v) Plant and machinery could not be separately value ..... X X X X Extracts X X X X X X X X Extracts X X X X
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