COMMISSIONER OF WEALTH TAX Vs. GOPI CHAND RAWAT

JUDGEMENT

(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 ?

(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.