(a) Wealth tax---

----Reassessment---Valuation of assets---Valuation of unquoted equity shares---Failure to comply with R. I-D for the assessment year 1972-73-- Reassessment was valid----Indian Wealth Tax Act, 1957, S.7(l)---Indian Wealth Tax Rules, 1957, R.1-D.

(b) Wealth tax---

---- Valuation of assets---Valuation of unquoted equity shares---Amount of advance tax already paid to be deducted from provision for taxation if shown as part of liability---Indian Wealth Tax Act, 1957---Indian Wealth Tax Rules, 1957, R.1-D.

In Bharat Hari Singhania v. CWT (1994) 207 ITR 1 (SC), the apex Court has ruled and declared that rule 1-D of the Wealth Tax Rules, 1957, prescribing the break-up method for valuing unquoted equity shares of a company (other than an investment company or a managing agency company) is perfectly valid and effective. It is neither inconsistent with section 7(1) of the Wealth Tax Act, 1957, nor does it travel beyond the purview of section 7(l) of the Act. The value of an asset is the price which, in the opinion of the Wealth Tax Officer, it would fetch if sold in the open market on the valuation date and this position is made specific by the rule in question.

Advance tax paid is not really an asset, but the pro forma of a balance-sheet in Schedule VI to the Companies Act, 1956, makes it obligatory that the advance tax is required to be shown as such. By reason of clause (i)(a) of Explanation II to rule 1-D of the Rules, what is done as a consequence is to remove the said amount from the list of assets. If clause (ii) (e) of Explanation II to rule 1-D is read alongwith clause (i)(a), it would be apparent that the amount which is still remaining to be paid shall be treated as a liability on the valuation date. Consequently, if in the provision for taxation made in the column of liabilities in the balance-sheet, the amount of advance tax already paid is again shown as a liability, it will not be treated as a liability under the above circumstances:

Held accordingly, that the reassessment on the ground of non -compliance with the statutory provisions of rule 1-D was valid.

Bharat Hari Singhania v. CWT (1994) 207 ITR 1 (SC) rel.

CGT v. N.J. Mathew (1997) 228 ITR 85 (Ker.); Kantamani Venkata Narayana & Sons v. First ITO (Addl.) (1967) 63 ITR 638 (SC) and Rajan (N.C.J.) v. CWT (1995) 214 ITR 507 (Ker.) ref.

C. Kochunni Nair and Dale P. Kurian for the Assessee.

P.K.R. Menon for the Commissioner.

JUDGMENT

V.V. KAMAT, J. ---We are expected to answer the following two questions :

"(1)Whether, .on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the reopening of the assessment was valid, warranted and in/or sustainable under section 17(1)(a) of the Wealth Tax Act?

(2)Whether it is permissible to exclude the advance tax payment made under section 210 of the Income-tax Act, in determining the market value of unquoted equity shares?"

They are referred to us in pursuance of the directions of this Court, dated March 8, 1984, in O.P. No.4250 of 1980. The situation takes us to the assessment year 1972-73. The first question is whether the reopening of the assessment is justified and the second question relates to the exclusion of advance tax payment under section 210 of the Income Tax Act, 1961. This is with regard to the determination of the market value of unquoted equity shares with regard to the assessment proceedings before the authorities.

After hearing counsel for the parties we find that we had an occasion to consider the position with regard to both the questions in our judgment; dated June 26, 1996, in I.T.R. No.203 of 1989 (CGT v. N.J. Mathew) (1997)- 228 ITR 85. We have held that the position is conclusively answered by the decision of the apex Court in Bharat Hari Singhania v. CWT (1994) 207 ITR 1.

The income-tax authorities---the first appellate authority---took up the question for consideration of reopening of the assessment under section 17(1)(a) of the Wealth Tax Act, 1957. The assessee---N.J. Mathew-- represents an affluent family of Alleppey with substantial agricultural income and non-agricultural assets. In the process he gets concerned with a large number of shares in several companies, amongst them illustratively, are the following companies:

(1) Neroth Oil Co. (Pvt.) Ltd.

(2) N.C. John & Sons (Pvt.) Ltd.

(3) Cochin Chemicals and Refineries Ltd

With regard to the earlier years, especially 1968-69, these equity shares were valued on the basis of the break-up value method. This break-up value method is now available in a codified form in rule 1-D of the Wealth Tax Rules, 1957. The Method deals with the position of finding out the net worth of closely held companies with reference to unquoted equity shares. Incidentally, this rule 1-D came on the statute book with effect from October 6, 1967, by Notification No.G.S.R.. 1536 (see (1967) 66 ITR (St.) 44). With regard to the assessment proceedings of 1968-69, it appears that the assessee wrote to the Wealth Tax Officer with a claim that there are unquoted equity shares in the closely held companies valued by a Valuation Officer and prayer for substitution of the valuation in the place of original valuation, which was based on the break-up value method. The Valuation Officer had also deducted advance tax paid by the companies from the value of assets and had taken the entire provision for taxation as a liability. The Wealth Tax Officer accepted the valuation made by the Valuation Officer for the purpose of completion of assessment.

However, for the subsequent years 1969-70 up to 1974-75---the assessee changed the course and valued the unquoted equity shares in these closely held companies not on the basis of the break-up value method, but on the basis of the report of the Valuation Officer. It appears that with regard to these years--1969-70 to 1974-75---Wealth Tax Officer acted on the report of valuation of the Valuation Officer in the process of completing the assessments. .

It is thereafter the Wealth Tax Officer found that this was an error obvious because it was quite contrary to the statutory provisions of rule 1-D of the Wealth Tax Rules, 1957.

The assessments were reopened under section 17(1)(a) of the Wealth Tax Act on the basis of reason to believe that by reason of the omission or failure on the part of any person to disclose fully and truly placing all material facts necessary for the assessment of his net wealth leading to the escapement of assessment in regard thereto. The assessments were opened firstly on the ground of non-compliance of the statutory provisions of rule 1-D of the Wealth Tax Rules, 1957, and secondly also on the ground of exclusion of the payment of advance tax as stated above.

The first appellate authority considered the question and held that the Wealth Tax Officer has correctly valued the unquoted shares of the appellant as per rule 1-D and passed reassessment orders.

The Income-tax Appellate Tribunal also endorsed the said conclusion with regard to both the aspect cancelling the original assessment orders.

As stated at the outset, we had ourselves an occasion to consider the declaration of law of the apex Court (Bharat Hari Singhania v. CWT (1994) 207 ITR 1). This was in connection with the process of valuation of unquoted equity shares in the context of the rigour of rule of 1-D of the Wealth Tax Rules, 1957, even though we were concerned with the aspect of cancelling the reassessment in proceedings under section 16(1)(b) of the Gift Tax Act, 1958, which are pari materia as regards the applicability of the decision of the apex Court. In Bharat Hari Singhania v. CWT (1994) 207 ITR 1 the apex Court has already ruled and declared that rule 1-D of the Wealth Tax Rules, 1957, prescribing the break-up method for valuing unquoted equity shares of a company (other than an investment company or a managing agency company) is perfectly valid and effective. It is neither inconsistent with section 7(1) of the Wealth Tax Act, 1957, nor does it travel beyond the purview of section 7(1) of the Act. The value of an asset is the price which, in the opinion of the Wealth Tax Officer, it would fetch if sold in the open market on the valuation date and this position is made specific by the rule in question. It is observed specifically that even if it is assumed that there was another method available which was more appropriate, still the method chosen cannot be faulted so long as the method chosen is one of the recognised methods, though less popular. The apex Court continues to observe that the break-up method based upon the balance -sheet of the company, incorporated in rule 1-D, is a fairly simple one. It is further specified that rule 1-D has to be followed in valuing each and every case of unquoted equity shares of a company. It is not a matter of choice or option because the rule-making authority has prescribed only one method for valuing the unquoted equity shares. If this is the method prescribed and if it is not to be followed, there is no other method prescribed by the rules. As a logical extension of the above observations the discussion further flows that where there is a rule prescribing the manner in which a particular property has to be valued, the authorities under the Act have to follow it. They cannot devise their own ways and means for valuing the assets. All that the Wealth Tax officer has to do is to take the balance-sheet, delete some items from the columns relating to assets and liabilities as directed by Explanation II and then apply the formula contained in the rule. The rule is mandatory and is exhaustive on the subject. The rule cannot be worked out in the absence of a balance-sheet and this would be the requirement of the situation that the balance-sheet drawn up on a date immediately after the valuation date could be adopted as the basis and this is the most reasonable thing to do. Once the basis of working the rule is the balance-sheet, one must necessarily have the balance-sheet and without the balance-sheet the rule cannot be worked out.

The apex Court takes up the discussion with regard to the problem of exclusion of advance tax. It is observed that if in the case of the balance -sheet of the company the amount of tax paid, which is shown as an asset and has to be deducted from the value of the assets as required by clause (i)(a) of Explanation II to rule 1 D, is also shown as a liability, i.e, if that amount is included in the amount set apart as provision towards taxation, the result would be that it would obviously have to be deleted from the column of liabilities and this is also what clause (ii)(e) conveys. The said clause is in a sense complementary to clause (i)(a). The real situation that gets revealed would be that the advance tax paid is not really an asset, but the pro forma of the balance-sheet in Schedule VI to the Companies Act makes it obligatory that the advance tax is required to be shown as such. By reason of clause (i)(a) of rule 1-D what is done as a consequence is to remove the said amount from the list of assets. If clause (ii)(e) is read with clause (i)(a), it would be apparent that the amount which is still remaining to be paid shall be treated as a liability on the valuation date. Consequently, if in the provision for taxation made in the column of liabilities in the balance-sheet, the amount of advance tax already paid is again-shown as a liability, it will not be treated as a liability under the above circumstances. When this elucidation of the true function is considered, exclusion of advance tax cannot get any support from the text of rule 1-D. This is what is ruled by the apex Court. In I.T.R. No.203 of 1989 (CGT v. N.J. Mathew (1997) 228 ITR 85), we had an occasion to observe that the balance -sheet of the company would constitute the basis for working the rule and the rule for ascertainment of the valuation of unquoted shares would not be workable without the balance-sheet and if the date of the balance-sheet and that of the valuation are the same the problem would not arise at all.

In the context learned counsel for the assessee placed reliance on the decision of this Court in M.C.J. Rajan v. CWT (1995) 214 ITR 507. On going through the judgment we find that the position gets ruled by the decision of the apex Court in the decision of Bharat Hari Singhania's case (1994) 207 ITR 1. The observations of the apex Court are more specific and unambiguous and it is not possible to see that the balance-sheet constitutes at best an item of evidence in the light of the observations of the Supreme Court.

Learned senior tax counsel submitted that although rule 1-D came on the statute book, with reference to the Explanation, on and from October 6, 1967, the position, if considered on pari materia basis with the aid of the provisions of the Income Tax Act, 1961 (sic). This is with reference to Explanation 2 to section 147 requiring to place on the statute the situations spelling out escapement of assessment. Learned counsel urged that mere production of the books of account or other evidence would not be enough to attribute lack of due diligence to discover and failure to make proper assessment thereby on the part of the authority. It is submitted that this situation of passive concealment has been recognised even in the absence of a statutory provision. The Assessing Officer has always been justified in making a reassessment. Learned Counsel submitted that the statutory provision of Explanation II is only a fortiori situation. Even earlier escapement was not linked with any kind of inadvertence or negligence or failure to examine properly the account books by the Assessing Officer. In support learned counsel placed reliance on the decisions, especially the decision of the apex Court in Kantamani Venkata Narayana & Sons v. First Addl. ITO (1967) 63 ITR.638, in regard to which proper emphasis has been given to the discharge of duty by the assessee to disclose fully and truly material facts necessary for the assessment which is not fulfilled or satisfied by merely producing the books of account or other evidence. The apex Court has an occasion to observe and learned senior counsel relies on it that the assessee has to bring to the notice of the Income Tax Officer necessary particulars of items in the books of account or portions of documents which are really relevant and in regard thereto it cannot be assumed that the Income Tax Officer has to be circumspect to find out the truth by fathoming into the material that is produced, the assessee falling short of the required duty in regard thereto. It is in this context, counsel urged, that the statutory provision only bring on the statute what is obvious by way of the requirement as regards the removal of uncertainty or unsettled position in regard thereto. In this context Explanation II with reference to section 34 of the Indian Income-tax Act, 1922, only places on record that production of account books and other evidence by itself cannot be understood to amount necessarily to disclosure within the meaning of the statutory requirement. It is in this context learned counsel brought to our attention the decision of the apex Court and also a passage relating to Explanation 11 to section 147 in the standard treatise. The Law and Practice of Income Tax, Kanga and Palkhivala, 8th Edition, Vo1.I at page 1198, summarised hereinbefore. In our judgment, the detailed consideration and consequent declaration of the apex Court in Bharat Hari Singhania's case (1994) 207 ITR 1, effectively answer both the questions. It is not possible to say that the situation is governed by the decision relied upon by learned counsel for the assessee.

For the above reasons question No. l is answered in the affirmative, the reopening was valid---in favour of the Revenue and against the assessee. Question No.2 is answered in the negative, it is not permissible to exclude the advance tax, in favour of the Revenue and against the assessee.

A Copy of this judgment under the seal of the Court and signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.

M.B.A./1864/FCOrder accordingly.