Wealth tax---

Reassessment---Valuation of unquoted equity shares of private companies---Interpretation of R.1D by audit party---Did not constitute information---Reassessment invalid---Indian Wealth Tax Act, 1957, S. 17-- Indian Wealth Tax Rules, 1957, R.I D, Expln. II (ii)(e).

The reassessments of the wealth tax for the assessment years 1970-71 to 1972-73 came to be made on the basis of a report given by the Revenue audit party to the Assessing Officer. The Wealth Tax Officer stated, inter alia, in the reassessment order, that "at the time of the audit of the record, the Revenue audit, pointed out the resultant inadequacy in the intrinsic value of the unquoted shares due to excess deduction of liability over and above what is contemplated under Explanation II(ii)(e) of rule ID of the Wealth Tax Rules, 1957".The Tribunal concealed the reassessments relying. on the decision of the Supreme Court in Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996. On a reference:

Held, affirming the Tribunal's order on the facts of the case, that the Tribunal are not in error in upholding the assessee's objection to the reassessment on the ground that the reassessment could not have been validly made on the basis of the view communicated to the Assessing Officer by the audit party, which amounted to the interpretation of the rule, rather than merely inviting the attention of the officer to the existence of the rule.

Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC) fol.

Bharat Hari Singhania v. CWT (1994) 207 ITR I (SC) and Kalyanji Maji & Co. v. CIT (1976) 102 ITR 287 (SC) ref.

C.V. Rajan for the Commissioner.

P.P.S. Janarthana Raja, for Subbaraya Aiyar, Padmanabhan and Ramamani for the Assessees.

JUDGMENT

R. JAYASIMHA BABU, J.---The common question referred in these tax cases which relate to the three assessment years 1970-71 to 1972-73 is, "as to whether, on the facts and in the circumstances of the case the Appellate Tribunal was right in holding that the reassessment made under the Wealth Tax Act for the assessment years 1970-71 to 1972-73 are invalid in law and should, therefore, be cancelled?"

The reassessment for those years came to be made on basis of a report given by the audit party. to the Assessing Officer, and in the order of reassessment made on October 30, 1976, the Wealth Tax Officer has stated, inter alia, in the assessment order, that "at the time of the audit of the record, the Revenue audit pointed out the resultant inadequacy in the intrinsic value of the unquoted shares due to excess deduction of liability over and above what is contemplated under Explanation II(ii)(e) of Rule ID of the Wealth Tax Rules. 1957".

The inadequacy in the intrinsic value was stated by the Wealth Tax Officer to have been the result of an omission in the original order of assessment to apply rule ID, Explanation (II)(ii)(e) of the Rules correctly and the deduction of the entire liability without excluding the advance tax paid. Which resulted in the shares iii the private companies being valued at lower figure, than the figure at which they should have been valued, had the rule been correctly applied.

Though the Tribunal initially upheld the order of the Income-tax Officer, it subsequently allowed a miscellaneous petition, and, thereafter restored the appeal to its file by' setting aside its earlier order and then proceeded to allow the appeal relying on the decision of the Supreme Court in the -case of Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996, which decision of the apex Court qualified the earlier decision in the caseKalyanji Mavji & Co. v, CIT (1976) 102 ITR 287. The apex court held in the case of Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996, that although the audit party does not posses the power, to pronounce on the law, it nevertheless may draw the attention of the In tax Officer to it. The Court also pointed out that there is a distinction between the law and its communication, and if the audit party merely draws attention to the law, but does not interpret the same, that would constitute "information' for the purpose of reopening the assessment. The Court re -emphasised the fact that in every case, the Assessing Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice, he can reasonably believe that income has. escaped assessment. The opinion rendered by the audit party in regard to true law cannot, for the purpose of belief of the Assessing Officer "add to or colour the significance of such law. The true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income-tax Officer". The Tribunal was of the view that the reliance placed by the Assessing Officer on the report of the audit party which had not merely drawn the attention of the Assessing Officer to the law, but had coloured his view of the law did not constitute "information" on the basis of which, the concluded assessment could be reopened and a fresh-assessment made.

Learned counsel for the Revenue submitted that a plain reading of clause 2(e) to Explanation II in rule ID of the Rules would show that the I advance tax paid was required to be deducted from the liabilities side, for the purpose of computation to be made under -rule ID of the Rules: This is what the audit party had pointed out to the Assessing Officer, who having realised his failure on the first occasion to make computation in the manner required by the Rules had reopened the assessment. Had the rule been as plain as contended by counsel, the reassessments are certainly to be held as valid. However at the time of the original assessment. there was no guidance available to the Assessing officer by way of a ruling of the Supreme Court on the manner in which rule ID of the Rules is required to be read, and there existed more than one view of the manner in which this rule was required to be rear. After the year of assessment, this rule was considered by more than one High Court in the country, but, there was no unanimity of opinion with regard to its interpretation. This Court itself has taken the view of the rule identical to the one, adopted by the Wealth Tax Officer in the original assessment. The fact that the view of the audit party communicated to the officer, was ultimately the view upheld by the Supreme Court in the case of Bharat Hari Singhania v CWT (1994) 207 ITR I, does not lead to the conclusion that the audit party had merely drawn the attention of the Assessing Officer to the contents of the rule, and that it had not coloured his view of the rule. The view that he had adopted was the one which was found to be one which the High Court had regarded as correct, though subsequently, the Supreme Court held otherwise.

In this background, it is clear that the Wealth tax Officer had at the time of the original assessment, kept in mind the requirements of rule ID of the Rule, had interpreted the same in a certain manner and thereafter determined the value of the shares. The fact that he chanced his view after the audit party pointed out the possibility of reading rule ID in a different manner would not provide sufficient basis in law for reopening the assessment which was otherwise validly made. The action of the officer in making the reassessment falls squarely within the mischief of the rule laid down by the apex Court prescribing the limits within which the view of the audit party can be regarded as "information" for the purpose of re-opening the assessment.

Though the reassessment is in accordance with the law subsequently laid down by the apex Court, we must, having regard to the facts and in the circumstances of the case, hold that the Tribunal was not in error in upholding the assessee's objection to the reassessment on the ground that the reassessment could not have been validly made on the basis of the view communicated to the Assessing Officer by the audit party, which amounted to the interpretation of the rule, rather than merely inviting the attention of the officer to the existence of the rule.

Our answer to the question referred to its, therefore, is that the Appellate Tribunal was right in the view that the reassessment made for this year was invalid in law and was required to be cancelled. Having regard to the circumstances of the case, we do not make any order as to costs.

M.B.A./4243/FCOrder accordingly.