2009 (2) TMI 134 - HC - Wealth-tax

High Court Upholds Tribunal's Findings on Wealth-tax Rules: Onus of Proof, Exemptions, and Valuation Rules

The High Court upheld the Tribunal's findings that the onus of proof under Rule 2B(2) of the Wealth-tax Rules rests with the Revenue to demonstrate market ... Valuation of Closing Stock under rule 2B(2) of Wealth Tax Rules, 1957 – Industrail Undertaking u/s 5(1)(xxxii) of the wealth tax Act, 1957 – held that the burden was on the Revenue to prove that the valuation of the closing stock given in the balance-sheet was not the true value and that the market value of the closing stock exceeded the valuation disclosed by more than 20 per cent. Since even the very first step had not been reached in the present case, the question of attracting rule 2B(2) did not arise. – Further firm engaged in gem and jewellery business is an industrial undertaking within the meaning of the Explanation to section 5(1) (xxxi) of the Act and, consequently, the value of the assessee’s interest in the firm is exempt under section 5(1)(xxxii) of the Wealth-tax Act, 1957 Issues Involved:1. Onus of proof under Rule 2B(2) of the Wealth-tax Rules.2. Classification of firms as industrial undertakings under Section 5(1)(xxxii) of the Wealth-tax Act, 1957.3. Applicability of Rule 1BB for valuing immovable property.4. Basis for invoking Rule 2B(2) using gross profit rate.Issue-wise Detailed Analysis:1. Onus of Proof under Rule 2B(2) of the Wealth-tax Rules:The Tribunal consistently held that for applying Rule 2B(2), the onus was on the Revenue to prove that the market value of the closing stock exceeded the value shown in the firm's accounts by more than 20%. The Tribunal's conclusion was based on the principle that unless there is positive evidence or discernible material to justify the computation, Rule 2B(2) cannot be invoked. This was upheld by the High Court, referencing the decision in CWT v. Moti Chand Daga, which emphasized that the burden of proof lies with the Revenue to demonstrate that the market value exceeds the book value by more than 20%.2. Classification of Firms as Industrial Undertakings:The Tribunal upheld the finding that firms like M/s. Rawat Jewellers, M/s. Rawats Bombay, and others were industrial undertakings within the meaning of Section 5(1)(xxxii). This classification was based on the involvement in the processing of goods, which qualifies as an industrial activity. The High Court referenced the judgment in CWT v. Shyam Mohan, which clarified that firms engaged in the business of manufacture or processing of goods are considered industrial undertakings and are eligible for exemption under Section 5(1)(xxxii).3. Applicability of Rule 1BB for Valuing Immovable Property:In cases like D.B. Wealth-tax Reference Nos. 66 and 65 of 1988, the Tribunal directed the Wealth-tax Officer to apply Rule 1BB for valuing immovable property. If the value determined by Rule 1BB did not exceed the book value by more than 20%, Rule 2B(2) would not be applicable. The High Court upheld this directive, emphasizing the need for a specific method to determine the value of immovable property.4. Basis for Invoking Rule 2B(2) Using Gross Profit Rate:The Tribunal and the High Court both held that gross profit rate alone cannot be the sole basis for invoking Rule 2B(2). This was evident in cases like D.B. Wealth-tax Reference Nos. 16 and 32 of 1990, where the Tribunal found that without positive material or evidence, gross profit rate does not suffice to determine the market value of the closing stock. The High Court affirmed this view, referencing the judgment in CWT v. Moti Chand Daga, which stated that gross profit rate is not a definitive indicator of market value.Conclusion:The High Court upheld the Tribunal's findings across all issues, affirming that the onus of proof under Rule 2B(2) lies with the Revenue, firms engaged in processing goods qualify as industrial undertakings, Rule 1BB should be applied for valuing immovable property, and gross profit rate alone is insufficient for invoking Rule 2B(2). The references were answered against the Revenue and in favor of the assessee, aligning with the principles established in previous judgments such as CWT v. Moti Chand Daga and CWT v. Shyam Mohan.