Madras High Court
J. K. K. Natarajah vs Wealth-Tax Officer. on 12 June, 1989
Equivalent citations: [1990]32ITD370(MAD)
ORDER
Per Shri R. Parthasarathy, Accountant Member - These forty wealth-tax appeals relating to four different assessees preferred by the department as well as the assessees are combined together and disposed of by this common order as common points relating to the valuation of the interest of these assessees in different firms are involved in all these appeals.
2. At the outset, it may be useful to record a few relevant facts. The assessment years involved in these appeals are assessment years 1975-76 to 1979-80, for which the corresponding valuation dates were 31-3-75, 31-3-76, 31-3-77, 31-3-78 and 31-3-79 respectively. The four assessees involved in these appeals were partners in different firms.
3. The first set of appeals in each case as indicated at the beginning of this order represents assessees appeals, while the second set of appeals in each case as indicated therein represents departmental appeals. The appeals have been filed against the appellate orders dt. 24-6-87 -
(i) in W. T. A. Nos. 28, 35, 44, 24 & 49/83-84 in the case of J. K. K. Natarajah
(ii) in W. T. A. Nos. 39, 36, 45, 46 & 54/84-85 in the case of J. K. S. Manickam
(iii) in W. T. A. Nos. 30, 37, 47, 48 & 51/84-85 in the case of J. K. K. Sundararajah
(iv) in W. T. A. Nos. 29, 33, 40, 41 & 52/84-85 in the case of J. K. K. Angappa Chettiar of Commissioner (A)-II, Madras.
4. The common issue involved in all these appeals relates to the valuation of the interest of the different assessees in the different firms for various years. The assessees had shown their interest in each firm on the basis of the balance sheet figures of the respective firms on the various valuation dates. But the assessing officer referred the valuation of the interest of the different assessees in various firms to the Departmental Valuation Officer under section 16A of the Act. While valuing the interests of the different assessees in various firms, in which they were partners, the Departmental Valuation Officers worked out the fair market value of (i) land and building and (ii) plant and machinery. Wherever the reports of the Departmental Valuation Officers were received prior to the date of the assessment orders, the valuation given by them were adopted and in other cases, the WTO proceeded to adopt his own values. But it has been ascertained in the course of appeal hearings that the W. T. O.s valuation even for those years were bases on the valuation reports of the Departmental Valuation Officers, though they were received subsequently and in the appeals before the Commissioner (A), the dispute regarding the valuation of the interest of the different assessees in different firms for the various years were confined only to the valuation of (a) land and building and (b) plant and machinery made by the Departmental Valuation Officers in the cases of different firms. The aforesaid valuations were contested before Commissioner (A) mainly on the ground that they had not been done on a realistic basis.
5. In the valuation of land and buildings in different cases, land was separately valued and the building was separately valued. In the case of land, prevailing market rates for land were adopted. In the case of buildings, after arriving at the value as per existing market rates, deduction was allowed towards depreciation on the basis of the building by estimating the life of the building as ranging from 45 years in respect of thatched construction to 60 years in respect of R. C. C. construction and also taking into account the age of the building on the valuation dates. No deduction was allowed either for joint ownership or for limited marketability.
6. While valuing the plant and machinery in the cases of different firms, after arriving at a particular value, the departmental valuer allowed deduction of some percentage towards limited marketability and a further deduction of some percentage for joint ownership. In some cases, the deduction on account of limited marketability was deducted first and from the resultant figure deduction for joint ownership was allowed. In some cases, the deduction on account of both items were deducted straightaway. The details in this regard are indicated below :
(i) Azhagappa Cotton Mills : From the value first worked out, 10% for joint ownership and 10% for limited marketability were allowed. In other words, 20% was straightaway deducted from the value to arrive at the fair market value.
(ii) Kandaswamy Spinning Mills, Bhavani : From the value arrived at, 10% was first deducted towards limited marketability and from the resultant figure 10% was deducted towards joint ownership to arrive at the fair market value.
(iii) Sundaram Spinning Mills : From the value arrived at, 15% for joint ownership and 15% for limited marketability or in other words 30% was straightaway deducted from the value to arrive at the fair market value.
(iv) Kandaswamy Weaving Factory : 10% for joint ownership and 15% for limited marketability i.e. 25% was straightaway deducted from the value to arrive at the fair market value.
(v) J. K. K. Textile Processing Mills : From the value arrived at, 5% was first deducted towards limited marketability and from the resultant figure 5% was deducted towards joint ownership to arrive at the fair market value.
(vi) Bell Textiles : From the value arrived at, 10% for joint ownership and 10% for limited marketability or in other words 20% was straightaway deducted from the value to arrive at the fair market value.
7. In the appeals before the Commissioner (A), regarding the valuation of land and buildings, the following objections were raised vide para 5.2 of Commissioner (A)s order dt. 24-6-87 in the case of J. K. K. Natarajah :
"At the time of hearing, the appellant has submitted a number of objections against the valuation adopted by the Valuation Officers. In the case of valuation of land and buildings, the objections are briefly as follows :
(a) The plinth area rates adopted by the Valuation Officer are highly excessive since the construction was substantially in lime mortar. Unlike ordinary house, cross walls are not necessary in a mill. Further, rubble stones, sand and country brick were readily available in the locality and these have been used for construction. These factors were not properly appreciated while adopting the rates.
(b) Depreciation allowed on the basis of an estimated life of these structures ranging from 45 years in respect of thatched buildings to 60 years in respect of RCC construction is low. The buildings have developed cracks in several places due to heavy vibration of machineries and this has a negative impact on their utility, reducing the period of their useful existence.
(c) The land rates adopted are high.
(d) Appropriate reduction in value should have been allowed for the limited marketability of the land and buildings. No reduction has been allowed for joint ownership which again is an important fact or affecting the market price. For the limited marketability, a reduction of at least 30% in value should have been allowed in addition to a separate deduction for joint ownership."
Regarding the valuation of plant and machinery, following objections were raised (vide para 5.3 of CIT (A)s order in the case of J. K. K. Natarajah :
"(a) The method adopted by the Valuation Officer in estimating the replacement value of each item of machinery as on the valuation date as per prevailing price and then giving reduction for depreciation for the period of utilisation has led to a valuation of the plant and machinery at excessive values compared to their essential worth.
(b) The valuation Officer proceeded on the wrong assumption that the life of these items of machinery and plant ranged from 20 to 30 years. For Income-tax purposes depreciation is usually allowed at a rate of 10% or 15% which pre-supposes that the useful period of life for plant and machinery in general ranged from 7 to 10 years.
(c) Rapid changes are taking place in the structure and design of plant and machinery in the textile industry with the object of obtaining superior quality and maximum output. In this background, old items of plant and machinery do not enjoy any favourable market.
(d) A purchaser is least encouraged to buy old equipments for the reason that he is deprived of the tax benefits such as investment allowance available to him if he purchased new items of plant and machinery.
(e) A reduction in the value has not been given for joint ownership."
The Commissioner (A) found that the Departmental Valuation Officers had taken great pains to identify each and every item and to arrive at the value on the basis of certain norms. He found that in the case of valuation of land and building, the method was to value the buildings and land separately and opined that the same was in order. While the value adopted for land was on the basis of prevailing market prices, Commissioner (A) found that there was no apparent error in adopting the life span of the buildings as ranging from 45 to 60 years on the assumption of reasonable maintenance from year to year. In the case of plant and machinery also, he was of the opinion that the Valuation Officer had taken pains to ascertain the price prevailing on the date of valuation for the various types of machinery used in the establishment concerned and then proceeded to arrive at the value as on the valuation date after providing for depreciation. But the grievance of various assessees was that the plant and machinery employed would not have a useful period of life extending from 20 to 30 years. However, he found that the valuation officers had been able to point out some of the items of machinery valued had in fact been used for long periods. Therefore Commissioner (A) was of the opinion that by and large the methods employed by the Valuation Officers in their efforts to arrive at a value for land and buildings or plant and machinery on the various valuation dates were supported by certain reasonable assumptions. However, he noted that the grievance of the assessee was that such valuation of the Departmental Valuation Officer was excessive if the market constraints were duly considered. The Commissioner (A) then proceeded to discuss the various factors that would affect the market value of land and buildings and also plant and machinery and gave his decision. In this connection, we can do no better than reproduce below para 5.5 of the appellate order dt. 24-6-87 in the case of J. K. K. Natarajah :-
"Section 7(1) of the W. T. Act deals with determination of the value of various assets. Here, the Wealth-tax Officer or the Valuation Officer as the case may be is expected to estimate the value of any asset at the figure of a price which that asset would fetch if sold in the open market on the relevant valuation date. In other words, the value should be the price which a willing and prudent buyer will pay to a willing and prudent seller as its price on that date. The existence of a market is to be assumed, however improbable or remote would be the need for or the chances of a sale in reality. In this process, all factors affecting the market price of an asset have to be though of. It is necessary in the first place to analyse the worth of an asset by ascertaining the prevailing price of a similar asset on the valuation date and then giving deduction for the number of years for which it has been put to use. The appellants contention that the depreciation rates prescribed by the Income-tax Act are an indication of the useful life of an asset and that those rates should be adopted cannot be accepted. Such a view has not been favoured by the Courts in decision on matters relating to valuation of assets. But, at the same time, the age of an asset like a building or plant or machinery is a very important determinant of its sale price. Its utility is retarded in proportion to the numbers of years of use. Over a period of years it becomes thoroughly old fashioned and it efficiency may have dwindled considerably in comparison with the later designs and models. It may not at all be economical to employ such an asset. There are also rules and regulations against the continued use of old items of machinery. These are formidable factors having a negative impact on what the asset can fetch if sold in the open market. Added to these factors is the fact that a buyer would prefer to buy a new item of machinery for reasons of certain in-built tax benefits. It is against these several factors that the market value of an asset is to be finally evaluated. I have examined the values adopted for various items of land and buildings and plant and machinery by the Valuation Officers of the department and I notice that they have not fully appreciated the several factors that contribute to a limited marketability of the assets concerned. The limited marketability question is not much relevant for land. I notice that the values for lands have been adopted by the Valuation Officers on the basis of the prevailing market rates after giving due allowance for all attendant factors. No further deduction on account of limited marketability requires to be granted from the value of lands estimated by the Valuation Officers. But buildings, plant and machinery put to industrial use by the appellant were invariably affected by their very restricted marketability. Different Valuation Officers have taken divergent views on the matter. The reduction in the value allowed by them towards limited marketability ranged from zero to 20% and the reasons for such a differential treatment are not available in the valuation reports. Having regard to various factors adversely affecting the marketability of these assets, I hold that from the values estimated by the Valuation Officers or independently estimated by the Wealth-tax Officer and adopted in the wealth-tax assessments under appeal, a reduction for limited marketability should be allowed at 30% thereon (as reduced by any amount actually allowed on this ground by the Valuation Officer or the Wealth-tax Officer.)"
Thereafter, from the resultant value, Commissioner (A) allowed a further reduction for joint ownership of an asset as the same had an unfavourable influence on likely buyers. In this respect, Commissioner (A) directed the WTO to allow a reduction at 10% of the value as computed after giving a reduction of 30% for limited marketability, wherever the asset was under a joint ownership of two persons, and at 15% where the asset was under a joint ownership of more than two persons. However he added a rider that if, as a result of the deduction allowed towards limited] marketability and joint ownership, the value of any asset so arrived at fell below the value admitted by the assessee, then the admitted value should be adopted and included in the net wealth of the assessee.
8. Shri K. R. Ramamani, the learned representative of Shri J. K. K. Natarajah, vehemently argued that even after the order of Commissioner (A) the value arrived at was excessive. He argued that even though the reference of the valuation of the assessees interest in several firms to the departmental valuers was acceptable in principle having regard to the decision of Supreme Court in the case of Juggi Lal Kamlapat Bankers v. WTO [1984] 145 ITR 485/16 Taxman 1, it should have been appreciated that the value of a business as a whole could not be equal to the aggregate of the market value of all the individual assets valued as per Rule 2B (2) of Wealth-tax Rules. In this connection, he submitted that the words, "having regard to the balance sheet of such business" occurring in section 7(2) gave a wide scope in the matter of valuation and indicated that if due note of the same was taken, there was something overriding or implicit in section 7(2) to tone down the aggregate of the individual values of all the assets to arrive at the value of the business as a whole; thus several other considerations for arriving at the value of the business as a whole; thus several other considerations for arriving at the value of the business as a whole; thus several other considerations for arriving at the value of the business as a whole were not shut out and in fact should be taken into account. Proceeding further, regarding the valuation of plant and machinery, he pointed out that the Valuation Officer had taken the value of each item of machinery as if it was a new one on the date of valuation and had given discount towards depreciation. His case was that such a method would lead to absurd results as, for example, if a car was valued in the from of tyres, bumper, seats, engine etc. and then the value of all those items were added together to arrive at the value of the car, that would give a misleading picture. Therefore, he argued, the discount given by the Commissioner (A) in the valuation of plant and machinery was not commensurate with the real market price having regard to several factors, some of which, according to him, were as follows :
(a) depreciation provided only for historical cost and does not taken into account the replacement cost; having regard to rapid technological advancement and modernisation of textile machinery as a whole, provision for depreciation alone would not be adequate for arriving at the market value of the various machineries. A substantial reduction should be allowed for obsolescence allowance; this should be in addition to the reduction given for limited marketability and not less than 10%.
(b) The plant and machinery would not have a useful period of life as determined by the Valuation Officer.
(c) The technological advancement and modernisation of textile machinery would naturally have a depressing influence on the value of several old machineries of various firms in question. The banks and financial institutions would finance only modern machinery. Further purchase of new machineries would entitle the owner to several tax benefits. Hence no purchaser would go for old and dilapidated machinery and outdated technology. Hence there would not be a ready buyer for old mills and old machinery. This factor should not be lost sight of even while assuming a free market for the purpose of valuation.
(d) There was also a restriction in regard to transfer of Ring Frames and other machinery by the Govt. of India represented by the Textile Department. In this connection he drew our attention to page 98 of the paper bk. given by him.
(e) Most of the machineries had outlived their economic life and there was no possibility of there being a market for the machinery.
9. Shri Ramamani then dealt with the valuation of buildings under the land and building method. His case was that, in that process, valuation of land as if it was vacant and unencumbered by buildings and plant and machinery was not correct as such a land would not fetch the same value as a vacant land. Further, he contended that Commissioner (A) should have allowed a uniform discount of 15% on account of joint ownership instead of allowing 10% if there were two co-owners and 15% if there were more than two co-owners. To sum up, Shri Ramamani was fair enough to concede that Commissioner (A) was eminently fair subject to the reduction allowed by him being low as pointed out by him earlier with reasons.
10. Shri Ramgopal, the learned advocate, who appeared on behalf of J. K. K. Sundararajah & J. K. S. Manickam, even while adopting the arguments advanced by Shri Ramamani, raised some more arguments. He contended that the department should not disturb the balance sheet figures unless there was some evidence to show that market value of an asset exceeded the book value by 20%. In this connection, he cited the decision of CWT v. Moti Chand Daga [1988] 174 ITR 379/40 Taxman 350 (Raj.). In other words, his contention was that Rule 2B (2) could be invoked only if the market value exceeded the book value by more than 20%. In this connection, he cited the Tribunal order (Bombay Bench D) in the case of WTO v. Smt. V. B. Garware [1987] 61 CTR (Trib.) 51. He next contended that in a textile mill, the requirement was on modernisation to meet competition and so while for land there may be a market, there could be no market for old factory buildings and old and second-hand machineries. Further, when old machineries were replaced, only latest type of machineries could be bought. It was his case that considering the above difficulties in valuing an old factory or mill, the balance sheet figures should have been accepted. Then referring to section 36(2) of the repealed E. D. Act, 1953, which provided that while fixing the price of a property according to the market price at the time of deceaseds death, no reduction should be made in the estimate on account of the estimate being made on the assumption that the whole property was to be placed on the market at one and the same time, he vehemently contended that in the absence of such a specific provision in W. T. Act, the assessee was entitled to a substantial deduction from the whole and what was allowed by Commissioner (A) on account of limited marketability and joint ownership was not sufficient. In a nutshell, his argument was that even though the WTO has to assume an open market, it was not open to him to fix an imaginary price and he should take several factors as pointed out earlier and fix a realistic value. In this connection, he cited the decision of Supreme Court in the case of Ahmed G. H. Ariff v. CWT [1970] 76 ITR 471. It was also the case of Shri Ramgopal that the valuation as fixed by the departmental valuer was highly notional. The valuation of plant and machinery was done by the departmental Valuation Officer by taking the price of a new machinery and allowing depreciation thereon to arrive at the value of the machinery. For this purpose, the life of the machinery was taken on some notional basis. According to Shri Ramgopal, the life of a machinery could be arrived at only on the basis of depreciation rate prescribed by Income tax Rules. For this proposition, he sought to rely on the decision of the Bombay High Court in the case of CWT v. Raghuvanshi Mills Ltd. [1976] 104 ITR 544.
11. Shri T. V. Natarajan, the learned advocate, appearing for Shri J. K. K. Angappa Chettiar, adopted the arguments of Shri K. R. Ramamani and Shri Ramgopal. In addition, he submitted that the value of an asset could not be considered as equal to the aggregate of the value of the component parts making up that asset. Similarly, a second hand asset, however new it may be, would not fetch a price equal to the price of a new asset. Therefore the valuation fixed by Commissioner (A) would required some further reduction.
12. On his part, the learned Departmental Representative Shri Ravichandran argued that the allowance of deduction of 30% for limited marketability and allowance of a further deduction of 10% or 15%, as the case may be, for joint ownership were excessive. In this connection, he vehemently argued that the valuation of the interest of the assessees in various firms had been done under section 7(2) read with rule 2B (2) and the departmental Valuation Officers had taken great pains to arrive at a proper valuation of each and every item of machinery taking into account various aspects and therefore there was no case for reduction of as high a percentage as 30 for limited marketability. In this connection, he pointed out that the approach of Commissioner (A) in allowing deduction for limited marketability and joint ownership had resulted in the value in some cases being less that the value admitted by the assessees. At this stage itself, this contention can be met. The Commissioner (A) had given clear direction that if the value arrived at as per the formula given by him fell below the admitted value, then the admitted value alone should be adopted. Shri Ravichandran then argued that limited marketability and obsolescence cannot be regarded as two different considerations and limited marketability should be considered as including in it obsolescence also. Therefore the further deduction for obsolescence contended for by Shri Ramamani would not be justified when the deduction on account of limited marketability itself allowed by Commissioner (A) was being contested as excessive. He also stressed that the claim for allowing some deduction on account of obsolescence was a new case made out before the Tribunal by the assessee. Referring to the decision of the Supreme Court in the case of Ahmed G. H. Ariff (supra), he argued that a free market should be assumed for the purpose of valuation and therefore there was no substance in the arguments advanced that there was no market for second hand machinery and therefore balance sheet figures alone should be adopted without any disturbance. As regards the adoption of land values in the valuation of land and buildings, he argued that land in Komarapalayam and Bhavani are more valuable as it is in the thick of an industrial belt and therefore the land value taken by the departmental Valuation Officers was quite reasonable. As regards the argument that the life of various machineries was very much less than what had been taken by the departmental Valuation Officers for the purpose of allowing depreciation and arriving at the market value, he argued that between 1979-80 and now no sale of machinery had taken place and that showed that life of machinery as taken by the departmental Valuation Officer was quite reasonable. As regards the deduction allowed on account of joint ownership, Shri Ravichandran contended that in various firms only close relatives including the assessees in the present appeals were partners and therefore there would be absolutely no difficulty in disposing of the various assets of those firms in case the partners decided so and therefore there was no need for allowing any deduction on account of joint ownership. In this connection, he placed reliance on the observations of the Lordships of the Supreme Court in the case of CWT v. Mahadeo Jalan [1972] 86 ITR 621 occurring at page 627 (lines 16 to 26) and argued that when close relatives were holding an asset it would not be a depressing factor and therefore there was no need for giving any reduction on account of limited marketability or joint ownership and in spite of the above, when the departmental Valuation Officers had themselves given some reduction, Commissioner (A) was not justified in increasing the deductions. He further argued that at any rate the deduction allowed on account of joint ownership should be limited to 10% only. In this connection, he placed reliance on the decision of Karnataka High Court in the case of CWT v. K. N. Nagabhushana Setty (HUF) [1985] 156 ITR 484/20 Taxman 428.
13. The departmental Valuation Officers, who were also present at the hearing, pointed out that in the valuation of land and buildings, land had been valued as if it was an agricultural land and therefore there was no justification for giving further deduction in land value. As regards the valuation of plant and machinery, the departmental Valuation Officer brought to our notice the method and rates adopted, which was as follows vide para 4 of the Valuation Report in the case of Sundaram Spinning Mills, Komarapalayam - Page 5 of paper-book given by Shri K. R. Ramamani -
"Straight line method of depreciation has been adopted for the assessment of the value of machineries on the date of valuation. A 10% scrap value has been assumed at the end of the normal useful life. Normal useful life of the machine has been ascertained from reputed dealers and adopted for calculating depreciation value from the cost of replacement of similar machineries on the date of valuation. Whenever the machineries were found to be in a very unsatisfactory working condition or were pretty old, second hand machinery rates have been enquired and adopted. The fact that there was a gradual improvement design-wise and production-wise in these textile machineries during the period of valuation has also been kept in mind and due allowance has also been made. Any obsolescence of the machine was considered when fixing the fair market value."
He also gave the following example :
Assume the cost of replacement as Rs. 110 Allowance for improvement in design Rs. 10 Cost of replacement Rs. 100 Scrap value of the machine Rs. 10 Rs. 90 Now this sum of Rs. 90 is depreciated over the economic life of the machine, e.g. We have ascertained the economic life as 20 years. Now spent life of the machine is 10 years. The depreciation allowable is 10/20 x 90 = Rs. 45 and the value of the machine is Rs. 45.
Value of the machine is Rs. 45 For reconditioning of the machine if any, special major repairs if any is to be carried out and the cost of the repair is Rs. 3.
Rs. 3 Rs. 42 The non-availability of investment allowance and institutional loans for purchase of second hand machine has been considered and further allowance of 10% is made.
Rs. 4 Rs. 38 Similarly, the constraints, the joint ownership, limited marketability are considered. In this case, 10% & 15% totalling 25% is further allowed. So the final fair market value comes to 38 - (25/100 x 38) = 28.5 As regards the deduction on account of limited marketability, it was pointed out that textile mills in Komarapalayam and Bhavani had earned a very high reputation and would command very high values and if these situations and circumstances were taken into account, it would be seen that there would be no case for allowing any deduction on account of limited marketability over and above what had been allowed by departmental valuer.
14. Before the arguments were closed, the learned representative Shri Ramamani pointed out that the decision in the case of K. N. Nagabhushana Setty (HUF) (supra) could not be considered as an authority for the extent of reduction that should be allowed on account of joint ownership. He submitted that only the principle that some reduction should be allowed on account of joint ownership was accepted in that case and so far as the extent of reduction to be allowed was concerned, it would depend upon the facts and circumstances of each case. As regards the contention of the Departmental Representative that the claim for deduction on account of obsolescence was canvassed for the first time before the Tribunal, Shri Ramamani stated that it had already been raised before the departmental valuer in a general way under several heads while giving the assessees objections to the proposed valuation and thus it was not a new case put forth before the Tribunal. In this connection, he referred to item 3 -"Triple Shift Allowance" and 4 - Economic Life & Rates in paragraph 6 : Objections & Reply in the Valuation Report of the departmental valuer in the case of M/s. Sundaram Spinning Mills, Komarapalayam (Page 6 of paper book).
15. We have carefully considered the rival submissions. On the facts brought out earlier, we are satisfied that the WTO was justified in making a reference under section 16A of the Act for the valuation of the interests of the assessees in different firms. According to section 16A (1) (b) (i), in a case where no valuation report of a registered valuer was given by an assessee to support the value of the asset as returned, reference to the Valuation Officer can be made by the WTO if he is of the opinion that the fair market value of the asset exceeds the value of asset as returned by more than such percentage of the value of the asset as returned or by more than such amount as may be prescribed in this behalf. According to Rule 3B of W. T. Rules, 1957, the prescribed percentage is 33 1/3 and the prescribed amount is Rs. 50,000. The formation of the opinion by the WTO should be a fair and reasonable one and having regard to the facts and circumstances of the case, we do not consider that the opinion formed by the WTO for making the reference to the Valuation Officer was not a fair and reasonable one. As regards the contention that there is no ready market for a second-hand mill or more precisely for the land and buildings and plant and machinery of a mill and therefore the balance-sheet figures should not be disturbed, the same has to be rejected because according to section 7(1) of the Act, the existence of an open market in place of a narrow or restricted market should be assumed. The expression "estimated to be the price which... it would fetch if sold in the open market..." occurring in section 7(1) involves the hypothesis or fiction that even though the asset is not being sold actually, it shall be deemed that it is being offered for sale. By judicial pronouncements, the concept of a willing seller and willing purchaser is introduced in the process of arriving at the estimated price. As regards the contention that while invoking the provisions of section 7(2) (a) of the Act and making a global valuation on the basis of the balance-sheet as on the valuation date in the case of a business, for which accounts are maintained by the assessee regularly, the balance-sheet figures should not be disturbed has to be rejected because section 7(2) (a) itself provides that such adjustments to the balance-sheet as may be prescribed can be made by using the expression "making such adjustments therein as may be prescribed" at the end of that section. Therefore, even while making a global valuation under section 7(2) (a) of the Act, value of particular assets can be disturbed. But then, higher values as compared to the values shown in the balance-sheet in the case of any asset can ultimately be adopted if an only if the condition laid down in Rule 2B (2) of the W. T. Rules, 1957 is satisfied or in other words, the market value of an asset exceeds its written down value or its book value by more than 20%. In this connection, the market value to be compared with the book value for the purpose of finding out the 20% excess referred to in Rule 2B (2) would be the value before allowing any reduction from the same on account of other factors like limited marketability, joint ownership etc., which can be said to be outside the provisions of section 7 read with W. T. Rules. Support for this view could be derived from certain observations made by their Lordships of the Karnataka High Court in the case of K. N. Nagabhushana Setty (HUF) (supra). In that case, the valuation of immovable property was involved. After arriving at the value of the immovable property on the basis of rent capitalisation method, the assessee in that case wanted a deduction on account of the fact that he had only a share in the immovable property. The Tribunal held that even when valuation was made on rent capitalisation method, a 10% reduction had to be allowed because the asset to be valued represented a share of a co-owner in a property. The department took the matter further in reference to the High Court. Before the High Court, it was contended by the department that when once the rent was ascertained and a proper multiple was employed, the fair market value determined thereon for the purpose of section 7 could not further be reduced by 10% merely because the assessee was a co-owner. The High Court examined this contention and after observing that arriving at the value of an immovable property by rent capitalisation method has been generally accepted as the correct method of determining the fair market value of an immovable property, remarked that method did not permit any other deduction in the value so determined. Afterwards, their Lordships considered the question whether 10% deduction should be allowed if the asset to be valued represented a share of a co-owner and, if so, on what principle should it be allowed. Thereafter the following observations were made :-
"By capitalisation of rental income, the fair market value of the property belonging to all the co-owners is first determined and then it is apportioned corresponding to the share of each co-owner for the purpose of section 7. But the purchaser of a share in a property is not as comfortable as a purchaser of an absolute ownership. There are inherent disadvantages and difficulties of enjoying a co-owners share by the purchaser if it is sold in the open market."
Proceeding further, their Lordships finally observed as follows :-
"Since there are difficulties inherent in the enjoyment of undivided share in property purchased in the open market, courts and text-book writers have permitted allowance or deduction of at least 10 per cent from estimated value of the share. This is an universally accepted principle in respect of which no legitimate objection can be taken by the Revenue."
Thus, in the present case, the value to be compared with the book value of land and buildings and plant and machinery for the purpose of invoking section 2B (2) of Wealth-tax Rules, 1957 would be the value before allowing deduction on account of limited marketability and joint ownership. Viewed from this angle, having regard to the facts and circumstances of the case, Rule 2B (2) can be said to have been fully satisfied in the valuation of land and buildings and plant and machinery of the various firms as made out by the Valuation Officers and adopted by the WTO. In making the valuation of land and buildings and plant and machinery, as rightly pointed out by Commissioner (A), the Officers had taken great pains to identify each and every item and to arrive at a value on certain reasonable norms. In the case of land, the valuation had been done as if they were agricultural lands. Therefore there is no case for interference in the valuation of either land or buildings in the valuation of land and buildings. In the valuation of plant and machinery, a contention was raised that the estimated life of plant and machinery had been assumed by Valuation Officers at a higher figure than would be the case in reality. As pointed out by Commissioner (A), the Valuation Officers had considered all aspects before estimating the life of a particular plant or machinery. This would also be clear from para 4 of the valuation report in the case of Sundaram Spinning Mills, Komarapalayam, which had been extracted in paragraph 13 of this order. In this connection, another contention had also been raised that the life of the plant and machinery should have been taken on the basis of the rates of depreciation provided under I. T. Rules in the depreciation schedule and reliance for the same was placed on the decision of the Bombay High Court in the case of Raghuvanshi Mills Ltd. (supra). But then, we do not find any such ratio having been laid down in that decision. Apart from this, it would also be interesting to note that in the valuation of plant and machinery, the Valuation Officers had adopted the straight line method for depreciation, whereas the I. T. Act provides for depreciation on the basis of written down value. The number of years involved in the latter method is more than the number of years involved in the former method and, therefore, there should not be any grievance for the assessees in this regard. As already stated, in estimating the life of any plant or machinery for the purpose of valuation, the valuation officers had taken all the relevant factors and therefore there should not be any grievance in this regard. Thus, considering all the facts and circumstances of the case, the valuation of land and buildings and the valuation of plant and machinery in the case of various firms, in which the assessees were partners, was eminently fair and reasonable subject to the deduction to be allowed on account of limited marketability, obsolescence and joint ownership. As a matter of fact, Shri Ramamani, the learned representative of J. K. K. Natarajah, was fair enough to concede that Commissioner (A) was eminently fair subject to the deduction on account of the above factors allowed by him being low as pointed out by Shri Ramamani earlier with reasons. (please see para 9 of this order). Therefore, for the purpose of disposing of these appeals, it would be sufficient if the reasonableness or otherwise of the deductions allowed by Commissioner (A) on account of limited marketability, obsolescence and joint ownership is alone considered.
16. As regards limited marketability, Commissioner (A) had allowed a deduction of 30% from the value arrived at by the departmental Valuation Officer. While the assessees contended that this was not sufficient, the Departmental Representative had argued that the same was excessive. Having regard to the various contentions urged before us in this behalf, we consider that the deduction of 30% by Commissioner (A) on account of limited marketability was eminently fair and reasonable and does not call for any interference. As regards the deduction to be allowed on account of obsolescence as canvassed by Shri Ramamani directly and as canvassed by the other representatives in a general way, having regard to the facts and circumstances of the case, we find that this issue had not been raised for the first time before the Tribunal as was contended by the departmental representative. In the objections to the proposed valuation of the Departmental Valuation Officers, this issue had been raised in a general way under several heads as mentioned earlier in this order. Hence, the contention that obsolescence factors had not been specifically considered or taken into account, while allowing deduction on account of limited marketability has to be conceded. In textile industry, rapid technological advances are taking place every day. Financial institutions come forward readily for providing funds for purchase of new machineries. Further, tax benefits like investment allowance, additional depreciation etc. have been provided in the I. T. Act for new machineries. In view of the above reasons, there is a greater demand for new machinery as compared to old machinery. Further, by experience, it had been found that even when some parts of old machineries are to be replaced, new and advanced varieties of such parts alone are available and parts exactly similar to the old ones are no longer available. Precisely for this reason, in many cases even when such advanced parts were utilised for replacing old parts in old machineries and the same resulted in improvements, the expenditure had been considered to be revenue expenditure only and not capital expenditure so long as the capacity remained the same as before. In the light of the above, certainly a deduction on account of obsolescence was called for and very much necessary for setting right the distortion in values arrived at without taking into account the same. Therefore, we hold that it would be fair and reasonable to allow further deduction of 10% over and above the dedu ction allowed on account of limited marketability from the value arrived at before such deductions.
17. That would leave for consideration the reasonableness or otherwise of the deduction to be allowed on account of joint ownership. The Commissioner (A) had allowed a reduction of 10% if the co-owners were only two and 15% if the co-owners were more than two. On behalf of the assessees, it had been contended that a uniform deduction of 15% should be allowed irrespective of the number of joint owners or co-owners of any property. On the other hand, the Departmental Representative had argued that under no circumstances the deduction to be allowed should exceed 10%. In this connection, we agree with the contention of Shri Ramamani that the decision in K. N. Nagabhushana Setty (HUF)s case (supra) only laid down the principle that a deduction should be allowed in case of co-owners and it was not as if the maximum that should be allowed was laid down in that case. Actually, the deduction to be allowed on account of joint ownership would depend upon the facts and circumstances of each case, the nature of the asset and several other factors. Therefore, we hold that the direction of Commissioner (A) that a deduction of 15% should be allowed in case the number of co-owners, was more than two quite fair and reasonable and does not call for any interference. As regards the contentions on behalf of the assessees that a uniform deduction of 15% should be allowed irrespective of the number of co-owners, we consider that the same cannot be accepted. After all, if the number of co-owners is only two, the would be purchaser had to deal with only two persons for purchasing the entire property, whereas if the number of co-owners is more than two, he has to deal with several persons. The difficulties involved in the former case are obviously less than the difficulties involved in the latter case. Therefore, we hold that Commissioner (A) was eminently fair and reasonable in allowing a deduction of 10% on account of joint ownership in case the number of co-owners was two and 15% in case the number of co-owners was more than two.
18. To sum up, we hold that from the values arrived at by the Departmental Valuation Officers before allowing deduction on account of limited marketability and joint ownership, in addition to 30% on account of limited marketability as allowed by Commissioner (A), a further deduction of 10% should be allowed on account of obsolescence and from the resultant figure, deduction on account of joint ownership at 10% or 15%, as the case may be, should be allowed depending upon the number of co-owners involved. The assessing officers are directed to give effect to this order and modify the valuations of land and buildings and plant and machineries on the above basis.
19. We would however make it clear that if as a result of the reduction now allowed by us towards limited marketability, obsolescence and joint ownership, the value of any asset worked out on the basis of that formula fell below the value admitted by the assessees, then the admitted value should be adopted and included in the net wealth of the assessees.
20. In the result, the departmental grounds relating to the deduction on account of limited marketability and joint ownership is dismissed, while the assessees ground relating to further deduction on account of limited marketability for covering obsolescence factor is allowed and the assessees ground relating to the deduction on account of joint ownership is dismissed.
21. One more ground is there in the departmental appeals relating to the case of J. K. K. Sundararajah, Komarapalayam. It has been contended on behalf of the department that the learned CWT (Appeals) erred in directing to exclude the value of the share of assets belonging to the assessees son Shri J. K. S. Manickam by over-riding title and that the decision of the Madras High Court on this point has not become final. From the note to the assessment order for asst. year 1975-76, it was seen that the assessee had claimed as in earlier years half of the net wealth as belonging to his son J. K. S. Manickam by virtue of the over-riding title and therefore 50% of the assessees wealth should be excluded. Even though the said claim was decided in favour of the assessee by the High Court in the income-tax assessments, the WTO disallowed the assessees claim in order to keep the matter alive on the ground that the departmental had taken up the matter to the Supreme Court. In appeal, Commissioner (A) directed the WTO to exclude his share of assets belonging to Shri J. K. S. Manickam by overriding title as High Court had already taken a decision in favour of the assessee. The department has come up in appeal against the aforesaid decision of Commissioner (A) in order to keep the issue alive. Following the High Court order for the earlier years, we uphold the orders of the Commissioner (A) and dismiss this ground of the department.
22. One more ground is there in the departmental appeals relating to J. K. S. Manickam. It has been contended on behalf of the department that the learned CWT (Appeals) erred in holding that assessees share of value of assets belonging to Shri J. K. K. Sundararajah by overriding title will be modified in accordance with the appellate decision in the case of Shri J. K. K. Sundararajah and that the decision has not become final. In the assessment order for the assessment year 1975-76, it had been stated as follows :-
"50% share of assets of firms belonging to assessees father Shri J. K. K. Sundararajah admitted by the assessee as belonging to him by overriding title. Without prejudice to the stand of the Department that this belongs only to the assessees father, Shri J. K. K. Sundararajah, the value of the assets will be included and assessed as assessees wealth as a protective measure."
In appeal, Commissioner (A) held that any modifications in the values of land and buildings and plant and machinery of the various firms, in which Shri J. K. K. Sundararajah, father of Shri J. K. S. Manickam, was a partner, as a result of the appellate decisions in that case would naturally vary the value of such assets adopted in the case of the appellant also and accordingly directed the WTO to adopt the correct value of those assets on the basis of the appellate decision in the case of J. K. K. Sundararajah. The department has come up in appeal against the aforesaid decision of Commissioner (A) only because the High Court decision that 50% of the share of J. K. K. Sundararajah in various firms should be excluded in the hands of J. K. K. Sundararajah because of over-riding title had not been accepted by the department and the matter has been taken further to the Supreme Court in appeal. Following the High Courts order in the case of J. K. K. Sundararajah, we uphold the order of Commissioner (A) in this regard and dismiss this ground of the department.
23. One more ground in the departmental appeals relating to J. K. K. Angappa Chettiar is that the Commissioner (A) erred in directing to exclude the share of assets belonging to his two sons viz. J. K. A. Asokan and J. K. A. Kandasamy from his net wealth and that the decision of Madras High Court in the case of CWT v. J. K. K. Angappa Chettiar [Tax Case No. 497 of 1974] has not become final and an appeal is pending before the Supreme Court. In the assessment order relating to the assessment year 1975-76, the Wealth-tax Officer has stated as follows :-
"The assessee has claimed that by virtue of an overriding title obtained by his two sons as a result of partition on 31-3-1961, the accumulations to his wealth after the date of partition belong to his sons and since the assessee and his sons held the shares as tenants in common, there is justification to exclude the sons 2/3rd share of the assets in determining the assessees net wealth. In CWT v. J. K. K. Angappa Chettiar [Tax Case No. 497 of 1974], the High Court of Madras has decided this issue in favour of the assessee. The Department, however, has taken this judgment in appeal before the Supreme Court. In view of this, the assessees claim to exclude a portion of the value of the assets has not been considered with a view to keep the issue alive. The assessment, so far as this issue is concerned, is made only as a protective measure. Collection of tax relating to the portion of assessees net wealth claimed as belonging to his sons will be held in abeyance." In appeal following the judgment of the Madras High Court in favour of the assessee, Commissioner (A) directed the WTO to exclude the shares belonging to the assessees sons from the assessees net wealth. Against the aforesaid decision of Commissioner (A), the department has come up in appeal only to keep the issue alive. Following the decision of the Madras High Court in the case of the assessee for earlier years, we uphold the order of the Commissioner (A) and dismiss this ground of the department.
24. In the result, the assessees appeals in all the cases are allowed in part, while the departmental appeals in all the cases are dismissed.