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Petitioner: THE COMMISSIONER OF WEALTH TAX VS Respondent: MESSRS ADAMJEE INDUSTRIES LTD.
1987 P T D 407
1987 P T D 407
[Karachi High Court]
Before Muhammad Zahoorul Haq, Nasir Aslam Zahid and Ally Madad Shah, JJ
THE COMMISSIONER OF WEALTH TAX and others
Versus
Messrs ADAMJEE INDUSTRIES LTD. and others
Wealth Tax References Nos. 169 and 598 of 1972 and Income-tax Case No. 337 of 1974, decided on 28th July, 1986.
Wealth Tax Act (XV of 1963)--
---Ss. 7, 3 & 27(1)--Wealth Tax Rules, 1963, R. 8--Value of assets other than cash for purposes of charging wealth tax--Modes of determination--Discretion of Wealth Tax Officer, nature, extent and scope of--Limitations on such discretion highlighted.
Two modes of valuation of assets, other than cash, are provided under section 7. Under subsection (1) of section 7 of the Act, the valuation of assets, other than cash, for the purpose of the Act, is to be done by the Wealth Tax Officer in accordance with the rules made under section 46 of the Act. The other mode of valuation of assets; other than cash, is contained in subsection (2) of section 7 of the Act. It provides that where the assessee is carrying on a business for which accounts are maintained by him regularly, the. Wealth Tax Officer, may, instead of determining separately the valuation of each asset held by the assessee in such business, determine the net value of the assets of the business, as a whole, having regard to the balance-sheet of the business as on the valuation date and making such adjustments therein as the circumstances of the case may require. The valuation of the assets under subsection (1) of section 7 is regulated by Rule 8 of Wealth Tax Rules, 1963 made under section 46 of the Act. It lays down that value of the assets, other than cash, is to be the price which in the opinion of the Wealth Tax Officer, each asset would fetch if sold in open market on the valuation date, except the assets mentioned in sub-rules (2), (3), (3-A), (4), (4-A), (4-C), (5), (6), (7) and (8) viz. shares /securities. Land, buildings, mortgage /property, hotel/inns; motel, etc. factories/mills/halls let out on hire, patents/copy rights/ designs/other similar assets, life tenancies, annuities and interest in partnership association of persons, the valuation of which has to be computed in the manner mentioned in respect of each of them. The mode of assessment provided under subsection (2)(a) of section 7 of the Act extends to only an assessee carrying on business and maintaining accounts regularly and valuation of his assets of such business, as a whole, may be computed on the basis of balance-sheet of the business concern. Sub-rule (9) of Rule 8 lays down the mode of 'bulk valuation' made on the basis of balance-sheet of assets of such a business concern.
Subsection (2) is in the nature of exception to subsection (1) of section 7 of the Act.
Section 7 envisages determination of value of assets other than cash, of an assessee liable to pay wealth tax under provisions of the Act. Subsection (1) enjoins that a Wealth Tax Officer shall determine value of the taxable assets in accordance with the rules made under section 46 of the Act. Rule 8 of the Rules lays down the method for valuation of items of property chargeable to Wealth tax. Except the items specified at sub-rules (2), (3), (3-A), (4), (4-A), (4-C), (5), (6), (7) and (8) all other assets, except cash, have to be valued on the basis of open market rate on the valuation date, and the value of the excepted items has to be computed in the manner provided therefor under the relevant sub-rules of Rule 8 of the rules. Subsection (2) confers powers on the Wealth Tax Officer to deviate from the obligation of determining net value of each asset in accordance with the rules made under section 46 of the Act, but only in the case of an assessee carrying on a business, for which accounts are maintained regularly, and determine the net value of the assets of such a business, as a whole, having regard to the balance-sheet of such business, as on the valuation date, by making necessary adjustments.
The significance of expression 'notwithstanding anything contained in subsection (1)', appears to be that it provides that in case of assets of a company maintaining accounts of the business regularly, the Wealth Tax Officer may, instead of making valuation of the assets in the manner provided under subsection (1-), proceed to assess the valuation of the assets in the manner laid under subsection (2). The provisions of subsection (2) of section 7 are not obligatory and they do not impose obligation on the Wealth Tax Officer that he must determine value of the assets of the company maintaining accounts regularly on the basis of the balance-sheet of the company on the valuation date.
The Wealth Tax Officer proceeding to determine the net value of the assets of the business of a company under subsection (2) of section 7 has to determine .the net value of the assets as a whole, having regard to the balance-sheet of such business as on the valuation date, subject to adjustments. The expression 'as a whole' significantly bears out that the Wealth Tax Officer has no discretion to pick and choose some items for determining their value on the basis of the balance-sheet of the business and proceed to determine value of other assets under the provisions of subsection (1). The scope of 'making such adjustments' is only to the extent circumscribed under sub-rule (9) of Rule 8 which is relatable to the valuation of the assets envisaged under subsection (2) of section 7 and that method is known as 'bulk valuation'.
Rule 8 framed under section 46 of the Act lays down the method for estimating the value of the assets chargeable to wealth tax. Sub-rules (2) to (8) thereof provide the method for the computation of the valuation of the assets in respect of different items of the assets specified therein. Sub-rule (9) of Rule 8 would not apply to valuation of asset to be made under subsection (1) of section 7 of the Act but it caters for the 'bulk valuation' provided under subsection (2) of section 7 of the Act. The text of sub-rule (9) of Rule 8 clearly relates to the method of valuation envisaged under subsection (2) of section 7 of the Act. Accordingly, the discretion for making adjustments in computation of valuation of assets under subsection (2) of section 7 of the Act of a company maintaining accounts regularly is permitted only to the extent provided in sub-rule (9) of Rule 8 of the Rules.
Held: Subsection (1) of section 7 of the Act is the main provision for determination of value of assets, other than cash, for the purpose of charging- of Wealth-tax under the Act, and subsection (2) thereof provides exceptional mode of determination, of valuation that may be adopted in the discretion of the Wealth Tax Officer and in respect of assets of an assessee carrying on a business for which accounts are maintained by the assessee regularly and, while exercising that discretion, the Wealth Tax Officer has to determine the value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as the circumstances of the case may require within the sphere of sub-rule (9) of Rule 8 of the Rules but he has no discretion to employ provisions of both the subsections of section 7 of the Act simultaneously and adopt valuation of some of the assets as disclosed in the balance-sheet as envisaged under subsection (2) and determine value of other items as laid down under subsection (1) of the act.
Waheed Farooqi for Applicants (in W.T.R. No. 169 of 1972 and I.T.C. No. 337 of 1974).
Nasrullah Awan for Applicant (in W.T.R. No. 598 of 1972).
Ali Athar for Respondents (in all three cases).
Dates of hearing: 16th and 20th February, 1986.
JUDGMENT
ALLY MADAD SHAH, J.--All the three references have been made under the provisions of section 27(1) of the Wealth Tax Act, 1963. W.T.R. Nos. 169 of 1972 and 598 of 1972 came up for hearing before a Division Bench comprising two of us (Nasir Aslam Zahid, J. and Syed Ally Madad Shah, J.), on 6-2-1984, when both of us, after hearing the learned counsel for the parties, recommended to the Hon'ble Chief Justice that a larger Bench may be constituted to answer the references as another Division Bench of this Court had earlier given its opinion on the identical issue in a Wealth Tax Case No. 601 of 1972 and the submissions made before us on behalf of the Department Portrayed a contrary view. I.T.C. No. 337 of 1974 came for hearing before another Division Bench of this Court presided by one of us, namely, Muhammad Zahoorul Haq, J and another learned Judge on 10-4-1985 when it was observed that the question referred to the High Court thereunder was identical to the questions raised in W.T.R. No. 598 of 1972 referred to the Full Bench and ordered that this matter be fixed alongwith that reference. Hence all the three matters have been heard by this Full Bench.
In W.T.R. No. 169 of 1972, Messrs Adamjee Industries Ltd., Karachi were assessed to Wealth Tax for the Assessment year 1963-64. The Wealth Tax Officer in computing the net value of assets of the assessee company accepted the company's balance-sheet figures except one item of investment in 50,000 ordinary shares of Adamjee Insurance Company Ltd., and computed their value at Rs.7,46,649 on the basis of market rate instead of Rs.5,00,000 disclosed in the balance-sheet: The Wealth Tax Officer indicated in the order that he had estimated the value of the assets of the Company in accordance with the provisions of subsection (1) of section 7 of the Act and the valuation of the shares was made as per sub-rule (2) of Rule 8 of the Wealth Tax Rules. He however, expressed' that even if it were assumed that computation was made tinder subsection (2) of section 7 of the Act, the Wealth Tax Officer had the power to make such adjustments in determining valuation of the assets as the circumstances require. The assessment so made by the Wealth Tax Officer was upheld in appeal preferred before the Appellate Assistant Commissioner, B Range, Karachi; and contention of the assessee Company that since valuation of other items of assets reflected in the balance-sheet was accepted, the valuation in respect of the shares mentioned in the balance-sheet should also have been adopted was not accepted, and a case reported as W. T.R. No. 16 of 1966-67 cited before him was not followed by him, holding the view that it was distinguishable. But the Income-tax Appellate Tribunal did not uphold the view adopted by the Wealth Tax Officer and the Appellate Assessment Commissioner and, relying on a decision of Full Bench of the Tribunal in W.T.R. No. 41 of 1967-68 (1963-64), dated 4-11-1970 and that of Dacca Bench of the Tribunal in a case reported in (1969) 20 Taxation at page 60 reversed the assessment and appellate orders, holding that where an assessee maintains accounts regularly and properly, the Assessing Officer has no choice but has to make assessment on the basis of balance-sheet under the provisions of subsection (2)(a) of section 7 of the Act. The Commissioner of Wealth Tax, Karachi East, has therefore, made reference under section 27(1) of the Act (Wealth Tax Act, 1963), for opinion on the following question:-
"Whether on the facts and in the circumstances of the case, the Tribunal was justified in directing the Wealth Tax Officer to adopt the value of shares as declared by the assessee instead of adopting on the basis of closing price of such shares quoted on the Stock Exchange on the last day of valuation date?"
In W.T.R. No. 598 of 1972, the assessee Messrs Trans-oceanic Steamship Co. Ltd., Karachi filed NIL statement for assessment under the Act of their three ships for the year 1963-64. But one of the ships was later sold for ten lac rupees. Consequently, the Wealth Tax Officer adopted that much value of that ship for the assessment and estimated value of the other two ships at twenty-five and sixteen lac rupees as their fair market value. Besides, the Wealth Tax Officer put his own estimate of valuation on some other items as well and passed the assessment order. The assessment order was appealed against before the Appellate Assistant Commissioner of Wealth Tax. It was, inter alia, contended before the Appellate Authority, that the Company was maintaining its accounts regularly and the assessment had to be made on the basis of the company's balance-sheet as provided under subsection (2) of section 7 of the Act, and the Wealth Tax Officer could not have made assessment under the provisions of subsection (1) of section 7 of the Act and fixed his own valuation. This plea was not accepted by the Appellate Authority and the assessment order was maintained with some modifications on different grounds by order, dated 5-2-1968. But the Income-tax Appellate Tribunal (Karachi Bench), by its order, dated 4-11-1970, relying upon a decision of another Bench of the Tribunal in a case reported in (1969) 20 Taxation at page 60, accepted the objection of the assessee company and held that, since the company had maintained its accounts regularly, the assessment should have been based on the balance-sheet of the Company in accordance with the provisions of subsection (2) of section 7 of the Act and not under the provisions of subsection (1) of section 7 of the Act. On an application under section 27(1) of the Wealth Tax Act, by the Department, the Income-tax Appellate Tribunal (Karachi Bench) has referred following question to this Court for opinion:
"Whether on the facts and circumstances of the case, the Tribunal was justified in holding that the Wealth Tax Officer could not proceed under section 7(1) of the Wealth Tax Act because the Accounts were regularly and properly maintained by the assessee and the special provision as provided by section 7(2)(a) in determining the net value of assets of business as a whole had to be followed."
I.T.C. No. 337 of 1974 has arisen from assessment of Messrs Valika Investment Corporation Ltd., for the assessment year 1963-64. The assessee-company was dealing in shares in various companies. They submitted return of Wealth for the relevant year at Rs.29,21,659. They were assessed to the Wealth Tax under the provisions of subsection (1) of section 7 of the Act read with Rule 8(27) of the Wealth Tax Rules and their taxable Wealth was estimated at Rs.58,28,141. The assessee had filed return of their Wealth on the basis of book value of the assets. The Wealth Tax Officer accepted the book value of all the assets except shares in joint stock companies, the value of which was declared at Rs.16,00,344. He determined their value under Rule 8(27) of the Wealth Tax Rules, at the market rate and was worked out at Rs.45,76,702 and he assessed them to the Tax accordingly. In appeal, the Income-tax Appellate Tribunal upheld the contention of the assessee that the Wealth Tax Officer had assessed their other assets on the basis of book value reflected in the account books, as envisaged under subrule (9) of Rule 8 of the Wealth Tax Rules (hereinafter referred to as the Rules), and the shares also should have been assessed on their book value and not on the market value, and ordered that the shares also should be assessed on the book value. The Commissioner Wealth Tax/Income-tax (Central Zone), Karachi has referred for opinion, under section 27 of the Wealth Tax Act, 1963, following two questions arising from the decision of Appellate Tribunal:-
(i)???????? "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the Wealth Tax Officer to accept the value of the shares as mentioned in the books of accounts of the assessee?
(ii)??????? Whether, on the facts and in the circumstances of the case, the Wealth Tax Officer was not justified in valuing the shares under sub-rule (2) of Rule 8 of the Wealth Tax Rules?"
All the three references relate to the mode of determination of value 9f assets chargeable to Wealth Tax under the Wealth Tax Act, 1963 (hereinafter referred to as the Act). The tax is chargeable under section 3 of the Act on the net Wealth as defined in clause (m) of section 2 read with section 4 of the Act. Value of the assets, other than cash, for the purpose of charging tax is to be determined in accordance with the provisions of section 7 of the Act, reproduced herein below:-
"7. Value of assets how to be determined.--(1) The value of any assets, other than cash, or the purpose of this Act, shall be estimated by the Wealth Tax Officer in accordance with the rules under section 46 of the Act.
(2)??????? Notwithstanding anything contained in subsection (1).--
(a)??????? Where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth Tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business, as a whole having regard to the valuation date and making such adjustments therein, as the circumstances of the case may require;
?(b) Omitted."
The rules referred to in subsection (1) of section 7 of the Act ire the Wealth Tax Rules, 1963 (hereinafter mentioned as the Rules). Rule 8 relates to the valuation of assets other than cash. It is sub-divided into 9 sub-rules. Its sub-rules (1) and (9) are important for the purpose of these references and they are reproduced hereinbelow and only the headings of the other sub-rules are indicated for reference, wherever necessary.
"8. Valuation of assets other than cash. --(1) Subject to the provisions of sub-rules (2), (3), (3-A), (4-A), (4-C) (5), (6), (7), (8) and (9) the value of any asset (other than cash) shall, for the purpose of assessment to Wealth Tax, 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.
(2)??????? Shares and securities
(3)??????? Land and buildings
(4)??????? Mortgaged Property ??? ....................... ....................... .......................
(4-A)?? Hotels, Inns, Motels, etc. ................................ .......................
(4-B)? ?Factories Mills................... ....................... .......................
(4-C)? Halls let out on hire ........................................ ....................... .......................
(4-D)? Cold Storage--Omitted.
(4-E)? Cinemas--Omitted.
(5)??????? Patents, Copyrights, Designs and other similar assets...
(6) ?????? Life tenancies-- ....................... ....................... .......................
(7) ?????? Annuities-- ?????
(8)??????? Valuation of interest in partnership or association of persons--
(9)??????? Bulk valuation--
(a)??????? Where the Wealth Tax Officer is satisfied that the accounts kept by an assessee carrying on a business, are reliable and there is no reason to suspect any fraud on the part of the assessee, he may determine the value of the net wealth representing the various assets of the business in the following manner, namely:-
(f)???????? The net Wealth representing the various assets shall be taken as the sum of the paid-up capital, reserve and the balance to the credit of the profits and loss account.
(ii)??????? The liabilities shown in the balance-sheet shall be carefully scrutinised so as to exclude every item, which is not liability proper.
(iii)?????? If according to the accounting system followed by the assessee, the original value of the block (i.e. fixed assets) is kept unaltered and depreciation is provided for by constituting a fund out of which investments are made the value of such depreciation fund shall be excluded from the computation.
(iv)?????? If development allowance has been deducted from the value of the block, the amount of it shall be added-back.
(v)??????? Where the closing stock is under-valued the amount representing the under-valuation shall be added-back.
The following working examples will illustrate the aforesaid provisions : - ??????????? ....................... ....................... ??????????? ....................... ....................... ??????????? ....................... .......................
(b)??????? Where the date on which a balance-sheet has been drawn up is different from the valuation date, the Wealth Tax Officer shall not, except with the prior approval of the Inspecting Assistant Commissioner Wealth Tax, adopt a value different from the value as on the date of the balance-sheet as the value of the assets of the business on the valuation date.
(c)??????? In computing the net Wealth in the manner specified in clause (a), deduction on account of depreciation allowance shall be made at the normal rate only specified in Rule 9 of the Income-tax Rules.
(d)??????? Where, as a result of the method of accounting followed by an assessee, certain assets are omitted from the balance-sheet altogether, the Wealth Tax Officer shall make an appropriate adjustment in the value determined in the manner specified in clause (a)."
It would appear from the text of section 7 of the Act that two modes of valuation of assets, other than cash, are provided thereunder. Under subsection (1) of section 7 of Act, the valuation of assets, other than cash, for the purpose of the Act, is to be done by the Wealth Tax Officer in accordance with the rules made under section 46 of the Act. The other mode of valuation of assets, other than cash, is contained in subsection (2) of section 7 of the Act. It provides that where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth Tax Officer, may instead of determining separately the valuation of each asset held by the assessee in such business, determine the net value of the assets of the business, as a whole, having regard to the balance sheet of the business as on the valuation date and making such adjustments therein as the circumstances of the case may require. The valuation of the assets under subsection (1) of the section 7 is regulated by rule 8 of Wealth Tax Rules, 1963 made under section 46 of the Act. It lays down that value of the assets, other than cash, is to be the price which, in the opinion of the Wealth Tax Officer, each asset would fetch if sold in open market on the valuation date, except the assets mentioned in sub-rules (2). (3), (3-A), (4), (4-A), (4-C), (5), (6), (7) and (8) viz. shares /securities, land, buildings, mortgage/ property, hotel/inns/ motel, etc, Factories /Mills Halls let out on hire, patents/copy rights/ designs/other similar assets, Life tenancies, Annuities and interest in partnership association of persons, the valuation of which has to be computed in the manner mentioned in respect of each of them. The mode of assessment provided under subsection (2)(a) of section 7 of the Act extends to only an assessee carrying on business and maintaining accounts regularly and valuation of his assets of such business, as a whole, may be computed on the basis of balance-sheet of the business concern. Sub-rule (9) of rule 8 lays down the mode of "bulk valuation" made on the basis of balance-sheet of assets of such a business concern. The controversy is over the adoption of either of the modes contained in section 7 of the Act for determining the value of assets of an assessee company maintaining accounts regularly. The learned Counsel for the department has advanced the argument that the mode of valuation provided under subsection (1) of section 7 is obligatory and that provided under subsection (2)(a) of section 7 is optional. He has laid emphasis on the terms "shall" employed in subsection (1), and "may" mentioned in subsection (2). According to him, it is the choice of the Wealth Tax Officer to adopt either of the modes of computation of value of the assets, other than cash, of an assessee carrying business and maintaining accounts regularly. He has placed reliance on the following cases:
Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax (Central), Calcutta (1966) 59 I T R 767, Commissioner of Wealth Tax, West Bengal II v. Hadra Industries Ltd. (1970) 75 I T R 169, Calcutta Electric Supply Corporation v. Commissioner Wealth Tax, West Bengal 82(1971) I T R (S C India) 154.
In the case at serial No. 1 (Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax (Central), Calcutta), the questions in controversy 'were more than one, but one of the contentions was whether section 7 of the Wealth Tax Act, 1957 (India), (which corresponds to section 7 of the Act of 1963), authorizes the Wealth-tax Officer to determine net wealth of an assessee and it was held that the section 7 empowers a Wealth Tax Officer to make computation of the value of the assets but does not envisage determination of net wealth, which needs consideration of some other factors, such as liabilities of the assessee, etc. This case,…
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