N.C. Sharma, J. - (1.) THIS order will decide three reference applications bearing Nos. 2 of 1989, 43 of 1989 and 44 of 1989 filed by the Commissioner of Wealth-tax, Jaipur, under Section 27(3) of the Wealth-tax Act, 1957, for directing the Income-tax Appellate Tribunal to refer certain questions of law arising out of the order of the said Tribunal.
(2.) THE Reference Application No. 2 of 1989 relates to the assessee, Shri Gopi Chand Kawat, who as specified, Hindu undivided family, is a partner of Messrs. Maliram Pooranmal, a partnership firm dealing in the business of precious and semi-precious stones, ornaments and jewellery. This assessee filed a second revised return on August 27, 1982, for the assessment year 1980-81 declaring his total wealth as Rs. 3,57,500. THE Wealth-tax Officer, Jaipur (CC-I), Jaipur, passed the assessment order on March 26, 1985. In the revised return filed by the firm, Messrs. Maliram Pooranmal showed the value of the closing stock in Jawaharat Account and the Gold Ornaments and Articles Account at Rs. 34,85,256 and Rs. 8,71,770, respectively. While computing his interest in the firm, the assessee considered the above book value of the closing stock declared by the firm in Jawaharat Account and the Gold Ornaments and Articles Account. THE audited trading account of the firm in the above accounts showed that the value of the closing stock had been taken at cost as certified by the management of the firm. THE gross profit declared in Jawaharat Account and Gold Ornaments and Articles Account was 21.05% and 41.38%, respectively. THErefore, according to the Wealth-tax Officer, this factually meant that the market value of closing stock in Jawaharat Account and Gold Ornaments and Articles Account was in excess of the book value by 27.39% and 70.59%, respectively. He also found that the value of closing stock in these items had been arrived at by the assessee after reducing the total credit side from that of debit side. THE mode adopted was that the firm first worked out its gross profit and then whatever remained of the difference between both the sides of the trading account, the same was used to present the value of the closing stock of the firm in a particular item of jewellery. THE Wealth-tax Officer was of the opinion that the provision of Rule 2B(2) of the Wealth-tax Rules, 1957, was attracted and accordingly the assessee was required to explain as to why the provisions of Rule 2B(2) be not applied and proportionate addition may not be made to his total wealth. He, therefore, sought information on various points from the assessee by his office letter dated March 5, 1985. It was urged on behalf of the assessee that although the margin of gross profit earned by the firm was more than 20% on the sales of the year, it did not mean that the fair market value of the closing stock on the valuation date was more than 20% of the book value. It was argued before the Wealth-tax Officer that precious stones had no ready market and the prices differ with different buyers. It was further contended that the closing stock also contained old, rejected and unsaleable precious stones. Some goods became obsolete with changes in fashion and the same are re-cut, re-polished and different ornaments are prepared to make them saleable. THE contentions advanced on behalf of the assessee were not accepted by the Wealth-tax Officer. According to him, the position which emerged was that the market value of the closing stock was in excess of the book value by more than 20%. THE firm, Messrs. Maliram Pooranmal, had not maintained any quantitative tally or stock register for the Jawaharat Account and Gold Ornaments and Articles Account. THEre were no details of the available stock in the firm for closing stock inventory. THE value of closing stock had only been estimated on the basis of difference between both the sides of the debits and credits of the trading account. THE firm was not able to give even the bifurcation between the local stock and stock lying abroad and its bifurcation value. THE firm was not able to trace the goods in the opening stock, purchases made during the year, sales effected during the year and closing stock. In these circumstances, the Wealth-tax Officer held that the only criteria left for measuring the market value of the closing stock was the gross profit rate achieved by the firm during the year. THE gross profit rate was an average of all transactions carried out by the firm and it could be said to be the profit rate which was operative throughout the period. THE Wealth-tax Officer, therefore, said that he had no alternative but to hold that the market value of the closing stock of the firm was in excess of its book value by more than 20% in both the accounts and, therefore, Rule 2B(2) of the Rules was applicable. He accordingly increased the value of closing stock in the aforesaid two accounts by amounts of Rs. 9,54,612 and Rs. 6,15,382, respectively, and the assessee's share being one-third, an addition of Rs. 5,23,331 was made to the total wealth of the assessee on this account. THE assessee filed an appeal before, the Appellate Assistant Commissioner of Income-tax, A-Range, Jaipur. THE Appellate Assistant Commissioner stated in his order dated March 5, 1987, that, in the assessee's own case in earlier years, the members of the Income-tax Appellate Tribunal had held that Rule 2B(2) was not applicable so far as valuation of the closing stock was concerned. Following the same, the valuation made on this account by the Wealth-tax Officer was deleted. THE Wealth-tax Officer, CC-II, Jaipur, filed an appeal before the Income-tax Appellate Tribunal pertaining to the assessment years 1980-81 and 1981-82 as against the order of the Appellate Assistant Commissioner of Income-tax. In those appeals, the Wealth-tax Officer agitated that Rule 2B(2) of the Rules was applicable in valuation of closing stock of the firm and its apportionment to the assessee proportionate to his share in the firm. THE Tribunal held that this matter had been considered in several cases and also in the case of the assessee as a whole and they were fully covered by the decision of the Special Bench in the case of Shyam Mohan Rawat in Wealth-tax Appeals Nos. 10 to 13/JPR/84, dated January 13, 1986. Following the Special Bench decision, the Tribunal confirmed the order of the first appellate authority and dismissed the departmental appeals on July 31, 1987. THE Commissioner of Wealth-tax, Jaipur, has, therefore, made the present application for reference under Section 27(3) of the Wealth-tax Act and it is submitted that the following two questions of law arise from the order of the Tribunal, namely : (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Rule 2B(2) of the Wealth-tax Rules was not applicable in the assessee's case and consequently in deleting the addition made by the Wealth-tax Officer ? (2) Whether, on the facts and in the circumstances, the Tribunal was right in holding that Messrs. Maliram Pooranmal is an industrial undertaking within the meaning of Section 5(1)(xxxii), and subsequently in holding that the value of the assessee's interest in the firm is exempt under Section 5(1)(xxxii) of the Wealth-tax Act ? Wealth-tax Reference Application No. 43 of 1989 has also been filed by the Commissioner of Wealth-tax, Jaipur, and arises in similar circumstances. In this application also, the Revenue has said that the above two questions of law arise in this case also. It may be stated that, in both the cases, the assessee had claimed a deduction under Section 5(1)(xxxii) of the Wealth-tax Act on the ground that it was an industrial undertaking and manufactures and processes good emerald from rough emerald. The Wealth-tax Officer had come to the conclusion that no manufacturing process was at all carried on by the firm. Wealth-tax Reference Application No. 43 of 1989, pertains to Shri Mohan Lal, partner in the firm of Messrs. Chandmal Poonamchand, Jaipur. This firm also carries on business in gems and precious stones. It may be mentioned here that Reference Application No. 44 of 1989 by the Commissioner of Wealth-tax, Jaipur, also pertains to Shri Mohan Lal, assessee, partner in the firm of Messrs. Chandamal Poonamchand, and involves similar points. Wealth-tax Reference Application No. 44 of 1989 pertains to the assessment year 1976-77 while Reference Application No. 43 of 1989 pertains to the assessment year 1977-78 relating to Mohan Lal. It has been stated by the Revenue in the reference applications that the book value of the closing stock had been taken at its cost price and on that basis, the market value could not be ascertained. The assessee did not produce any evidence with regard to the valuation of the stock as shown in the trading account. No details were given regarding old, rejected and unsaleable precious stones by the assessee. Even the stock list was not submitted. It was argued that the Wealth-tax Officer was, therefore, right in the circumstances to come to the conclusion that the gross profit rate was in excess of the book value of the closing stock by more than 20% and in applying Rule 2B(2) of the Rules. It was next submitted that the Wealth-tax Officer had come to the conclusion that no industrial or manufacturing process was being carried on by the firm and, therefore, exemption could not be claimed under Section 5(1)(xxxii) of the Wealth-tax Act.
(3.) MR. N. M. Ranka, appearing on behalf of the assessee, in reply, contended that the Tribunal's order is based upon its own previous decision. This court has also held in a series of decisions that the finding of the question of market value arrived at by the Tribunal is one of fact and the same cannot be reopened in a reference. He also contended that the burden of proving that the market value of the closing stock in the Jawaharat Account and Gold Ornaments and Articles Account exceeded their written down value or book value or the value adopted for the purposes of assessment under the Income-tax Act, 1961, as the case may be, by more than 20% was upon the Revenue. There being no positive material to that effect, the Wealth-tax Officer could not arrive at that conclusion on the basis of mere surmises. He urged that the two questions formulated are not questions of law. They are questions of fact and no reference can be directed in relation to these questions of fact. Provisions contained in Section 7 of the Wealth-tax Act, 1957, and rules 2, 2A and 2B came up for consideration before a Division Bench of this court in CWT v. Moti Chand Daga [1988] 174 ITR 379 (D.B.W.T. Ref. No. 124 of 1982) decided on May 21, 1988. His Lordship, the Chief Justice, speaking for the Bench, laid down that Sub-section (2) of Section 7 of the Wealth-tax Act, 1957, was an enabling provision conferring discretion on the Wealth-tax Officer to determine the net value of the assets of the business as a whole having regard to the balance-sheet as on the valuation date, instead of proceeding under Sub-section (1) of Section 7. It was, therefore, optional for the Wealth-tax Officer to resort to either of the methods provided in Sub-section (1) or Sub-section (2) of Section 7. Sub-section (2) of Section 7 itself provides that, in making the valuation according to the mode prescribed therein, the Wealth-tax Officer has to make "such adjustments" therein as may be prescribed. Rule 2A of the Wealth-tax Rules, 1957, prescribes that, where determination of the net value of the assets of the business as a whole is made under Section 7(2)(a), having regard to the balance-sheet of such business, the Wealth-tax Officer shall make the adjustments specified in rules 2B, 2C, 2D, 2E, 2F and 2G. Construing Rule 2B(2) of the Rules, the Division Bench stated that, unless determination of the market value on the basis of definite material is at an amount exceeding 20% of the value disclosed in the balance-sheet, no occasion arises for invoking Rule 2B(2) and the value disclosed in the balance-sheet has to be accepted for the purpose of wealth-tax assessment. This was said to be the cumulative effect of the above statutory provisions. According to Section 2(m) of the Wealth-tax Act, 1957, in order to arrive at "net wealth", the value of the assets has to be computed in accordance with the provisions of the Act. Section 7 of the Act lays down as to in what manner the value of assets will be determined. The basic provision in this regard is contained in Section 7(1) of the Act which, inter alia, provides that the value of any asset other than cash shall 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. This is subject to any rules made in this behalf. It is clear from the language of Section 7(1) of the Act that the basic law is that the value of an asset has to be estimated at its market value on the valuation date. In our opinion, Sub-section (2)(a) of Section 7 operates as an exception or a proviso to Section 7(1) of the Act. This exception applies only where the assessee is carrying on a business and not in other cases. The basic conditions required for the applicability of Section 7(2)(a) are (i) that the assessee should be carrying on a business and (ii) accounts of that business should have been maintained by the assessee regularly. It is well-known that, if the accounts of a business are maintained regularly, they furnish a credible idea about the financial position of that business including the value of fixed and floating assets of the business. In cases, therefore, where the assessee is carrying on a business and the accounts of the business are maintained regularly by him, the Wealth-tax Officer has been given a discretion that, instead of determining separately the value of each asset of the assessee in accordance with Sub-section (1) of Section 7, he can determine the net 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 adjustment therein as may be prescribed. Obviously, therefore, it follows that, even where the assessee is carrying on a business, if he does not maintain the accounts of the business regularly, the Wealth-tax Officer cannot resort to Section 7(2)(a) because one of the basic conditions that the accounts of the business should be maintained regularly is not satisfied. Where the accounts are not maintained by the assessee regularly, even the balance-sheet of the business cannot exist to be taken into account in determining the net value of the assets. We are not inclined to agree with the judgment of the Division Bench of this court in CWT v. Motichand Daga [1988] 174 ITR 379, that it is optional for the Wealth-tax Officer to resort to either of the methods provided in sub Section (1) or Sub-section (2) to determine the net value of the assets of the assessee. We are of the opinion that, where the assessee carries on a business, but he does not maintain the accounts of the business regularly and does not strike a balance-sheet on the valuation date, the Wealth-tax Officer cannot proceed to act under Section 7(2)(a) of the Act. It has to be remembered that Section 7(2)(a), when the pre-requisite conditions of that sub-section are fulfilled, also gives the Wealth-tax Officer power to determine the net value of the assets of the business as a whole instead of what is required under Section 7(1) to determine separately the value of each asset. The net value of the assets of the business as a whole can only be determined by having regard to the balance-sheet of such business when the accounts are maintained by the assessee regularly and the balance-sheet of the business is drawn up as on the valuation date. Rule 2A of the Wealth-tax Rules, 1957, only applies where the Wealth-tax Officer determines the net value of the assets of the business as a whole, having regard to the balance-sheet of such business. The adjustments specified in Rule 2B(1) are also to be made when the Wealth-tax Officer has the jurisdiction to exercise the powers under Section 7(2)(a) of the Act and exercises the same. Sub-rule (2) of Rule 2B of the Wealth-tax Rules, 1957, is an exception to Sub-rule (1). This exception can only be applied when the net value can be and is determined under Section 7(2)(a) of the Act and on the basis of the adjustments specified in Rule 2B(1) of the Rules. ;