Income Tax Appellate Tribunal - Madras
K. Ramu vs Assistant Commissioner Of Wealth-Tax on 4 March, 1996
Equivalent citations: [1997]60ITD415(MAD)
ORDER
G.E. Veerabhadrappa, A.M.
1. All these appeals are by two assessees and arise out of the orders of the CWT(Appeals) passed in each of these cases for the assessment years 1986-87 to 1990-91.
2. The common dispute in all these appeals relate to the valuation of the assessees' shares in the partnership firms in which they are partners. These two individuals are partners in firms known by the name, M/s. Sivaram Tea Industry, M/s. Maniklal Tea Factory and M/s. Sivaram Plywoods. The firms owned factories and are engaged in their respective businesses. In the course of the assessments under the Wealth-tax Act for each of these years it was found by the Assessing Officer that the for each of these years it was found by the Assessing Officer that the assessee's interest in partnership firms was not taken in accordance with the provisions and therefore the assessee was given an opportunity to get the valuation of all the assets of the firm done to arrive at the correct share income. The assessees got the valuation done by an approved valuer and filed revised returns in all the years based on the valuation report on 6-3-1991. The returns were again revised withdrawing the revision made in the matter relating to the valuation of the assessee's interests in the firms. According to the assessees, the valuation method should be with reference to Schedule III of the W.T. Act and in accordance with the valuer's report. The Assessing Officer applied rules 15 and 16 of the said Schedule III and determined the interest of the assessees in the partnership firms on the basis of the valuation report submitted by them. The assessee disputed the valuation before the CWT(Appeals).
3. The CWT(Appeals) upheld the order of the Assessing Officer on the reasoning that the firms in which the assessees were partner were having the factories and it was not possible to value the buildings comprised therein on the basis of the rent capitalisation method. According to him, the Panchayat valuation reflects only the rateable value and not the fair rental value of the respective building. According to the CWT(A), it was not possible and practicable to assume the standard or fair rent for different commercial or industrial buildings like tea factories, plywood factories, etc. According to him, the valuation of the factory buildings should only be done in accordance with rule 20 of the Schedule III which is the market value based on rent and building method. The assessees are aggrieved.
4. The learned counsel for the assessees argued before us that in accordance with the provisions of section 7(1) of the Wealth-tax Act the value of an asset other than cash for the purpose of wealth-tax shall be its value as on the valuation date determined in the manner laid down in Schedule-III to the Act. The learned counsel submitted that although the Schedule-III came into the statutory book with effect from 1-4-1989, nonetheless they should be applied for the purpose of valuation of the assets in respect of assessments that are finalised after 1-4-1989.
According to him, in all these cases assessments were finalised after this date and therefore the valuation should be done in accordance with Schedule-III. The learned counsel pointed out that the rules pertaining to valuation are procedural in nature and therefore should be applied to all the pending proceedings. Our attention was drawn to the decision of the Ahmedabad Bench of the Tribunal in the case of Kishandas Govindadas Parikh v. WTO and also the decision of the Supreme Court in CWT v. Sharvan Kumar Swarup & Sons [1994] 210 ITR 886 and also the decision of the Gujarat High Court in CWT v. Shri Kasturbhai Mayabhai [1987] 164 ITR 107. According to the learned counsel the valuation of the interest in the firms should be determined in accordance with rules 15 and 16 of the Schedule-III. According to him, the starting point would be to determine the net wealth of the firm on the valuation date shall first be determined as if the firm were the assessee. He further pointed out that for the purpose of determining the global valuation of the assets of the business in accordance with rule 14(1)(b), such value will have to be first determined in accordance with rule 3 which deals with the valuation of immovable property. According to him, the provisions of rules 3, 4, 5, 6 and 7 should have been applied for the purpose of arriving at the value which should be substituted for the book value while arriving at the global valuation of the business. According to the learned counsel, the CWT(A) was not justified in arriving at the value of the asset in accordance with rule 20 to the Schedule III without first getting itself excluded under the rules 3 to 7 of the same Schedule. According to him, the action of the CWT(Appeals) tantamounts to putting the horse before the cart, and, therefore, it was vehemently argued that the valuation should be in accordance with the rules 3 to 7 of the Schedule III instead of one based on rule 20.
5. The departmental representative, on the other hand, strongly supported the impugned orders. According to him, the provisions of rule 20 of the Schedule-III dispenses with the applications of rule 3 of the said Schedule. Therefore the valuation under land and building is the proper method for determining the partners' interest in the firms.
6. In reply the learned counsel for the assessee stated that the authorities below have not given reasons why the provisions of rule 3 to Schedule-III are not applicable and therefore it was again stressed that we should direct the Assessing Officer to value the asset in accordance with the rules 3 to 7 of the Schedule-III.
7. We have carefully considered the rival submissions in the light of the material placed before us. We find some force in the argument taken on behalf of the assessee. The matter relating to the valuation are essentially procedural and therefore amended law should be applied to all the assessment that are completed after the amendment brought into statue. In the case before us, all the assessments are done after 1-4-1989. Therefore, it would be appropriate to apply Schedule III for the purpose of valuation of the assessee's interest in the firms. References may be made to the decision of the Ahmedabad Bench of the Tribunal in the case cited supra as also the decision of the Supreme Court in Sharvan Kumar Swarup & Sons' case (supra). The Supreme Court in the case of Shravan Kumar Swarup & Sons (supra) while dealing with the rule 1BB has held that rule 1BB partakes of the character of a rule of evidence. The rule was intended to impart uniformity in valuation and to avoid vagaries and disparities resulting from application of different modes of valuation in different cases where the nature of the property is similar. The said rules were held to be procedural and is applicable to all proceedings pending on 1-4-1979 when the rule came into force. In that decision the decision of the Gujarat High Court in 164 ITR 107 was affirmed. Following these principles, we accept the first contention of the assessee that Schedule-III should be applied to all the assessment years under consideration.
8. Coming to the valuation of interest in the firms in which the assessees are partners, the said issue is dealt in rules 15 and 16 of the Schedule-III which are as follows :-
"15. The value of the interest of a person in a 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 in rule 16.
16. The net wealth of the firm or association of persons on the valuation date shall first be determined as if it were the assessee and, thereafter, -
(i) 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;
(ii) the residue of the net wealth of the firm or association shall be allocated amongst the partners or members in accordance with the agreements of partnership or association for the distribution of 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 the profits, and the sum total of amounts so allocated to a partners or members under clause (i) and clause (ii) shall be treated as the value of the interest of that partner or member in the firm or association :" [Emphasis supplied].
After giving the broad principles, the rule 14 suggests global valuation of assets of business. We are concerned with the assets of business, namely, factory building and other assets owned by the firm. The relevant provisions of rule 14(1) which relate to global valuation are as follows :-
"14(1). Where the assessee is carrying on a business for which accounts are maintained by him regularly, 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 after adjustments specified in sub-rule (2) shall be taken as the value of such assets for the purposes of this Act.
For the purposes of sub-rule (1) -
(a) the value of any asset as disclosed in the balance-sheet shall be taken to be, -
(i) in the case of an asset on which depreciation is admissible, its written-down value;
(ii) in the case of an asset on which no depreciation is admissible, its book value;
(iii) in the case of closing stock its value adopted for the purposes of assessment under the Income-tax Act for the previous year relevant to the corresponding assessment year;
(b) where the value of any of the assets referred to in clause (a), determined in accordance with the provision of this Schedule as applicable to that particular asset or if there are no such provisions, determined in accordance with rule 20, exceeds the value arrived at in accordance with clause (a) by more than 20 per cent, then the higher value shall be taken to be the value of that asset;" [Emphasis supplied] The effect of clause (b) is that in circumstances the book value is to be substituted by a different value as prescribed in the said rule. The provisions underlined in clause (b) above clearly indicates that the value of the business assets should be determined again in accordance with the provisions of Schedule-III as applicable to that particular asset. There can be no dispute that the factory buildings which are presently in dispute are immovable properties and the provisions of rules 3 to 7 clearly apply for the valuation of such immovable property. In other words, the value which is relevant for the purpose of comparison in clause (b) of rule 14(1) above is that value which is determined in accordance with rule 3 to 7. It may be mentioned that rule 8 provides that rule 3 is not to be applied in certain cases and circumstances provided therein. The aforesaid rule reads as follows :-
"8. Nothing contained in rule 3 shall apply, -
(a) where, having regard to the facts and circumstances of the case, the Assessing Officer, with the previous approval of the Deputy Commissioner, is of opinion that it is not practicable to apply the provisions of the said rule to such a case; or
(b) where the difference between the unbuilt area and the specified area exceeds twenty per cent of the aggregate area; or
(c) where the property is constructed on lease hold land and the lease expires within a period not exceeding fifteen years from the relevant valuation date and the deed of lease does not give an option to the lessee for the renewal of the lease.
and in any case referred to in clause (a) or clause (b) or clauses (c), the value of the property shall be determined in the manner laid down in rule 20."
In the case before us, the Assessing Officer has not come to an opinion that it is not practicable to apply the provisions of the said rule 3 in the case of the assessees. He could have done it with the previous approval of the Dy. Commissioner. For want of this opinion, we are unable to accept the departmental stand that rule 3 is not applicable and therefore the valuation should be in accordance with rule 20. It may be again mentioned that resort to rule 20 should be done where it is an asset which is not covered by rules 3 to 19. The department should first see whether rules 3 to 19 are applicable to any particular asset. If so, apply that rule in preference to rule 20. It is not open to the department to shut down rules 3 to 19 to the assessee and show only the rule 20 as provided in Schedule-III. We, therefore, are of the opinion that the proper method for valuation of the assessees' interest in the partnership firms should be one based on rules 3 to 7. All along the Assessing Officer, as is clear, has not applied his mind to rules 3 to 8 of the Schedule-III. We, therefore, agree with the assessee's contention in principle and restore the matter relating to the valuation back to the file of the Assessing Officer with a direction to decide the same in the light of the discussions above.
9. In the result, the appeals are allowed for statistical purposes.