Wealth-tax valuation and industrial exemption: revenue must prove market value exceeded book value, while emerald processing qualified for relief.

Rule 2B(2) of the Wealth-tax Rules cannot be invoked to enhance closing stock valuation merely because the gross profit rate exceeded 20 per cent; the statutory condition is that the market value of the asset must exceed book value by more than 20 per cent on the relevant valuation date. Where the revenue seeks to depart from the balance-sheet figure, the burden lies on it to prove that condition with acceptable evidence. The note also records that cutting and polishing rough emeralds constitutes industrial manufacture for exemption under section 5(1)(xxxii) of the Wealth-tax Act, and that tax liability arising from disclosure under the Voluntary Disclosure Scheme is deductible.

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Issues: (i) Whether rule 2B(2) of the Wealth-tax Rules, 1957 could be invoked to enhance the value of closing stock merely because the gross profit rate exceeded 20 per cent. (ii) Whether the onus to prove that the market value of the closing stock exceeded the book value by more than 20 per cent lay on the revenue. (iii) Whether manufacture of emeralds by cutting and polishing rough emeralds entitled the assessee to exemption as an industrial undertaking under section 5(1)(xxxii) of the Wealth-tax Act, 1957. (iv) Whether tax liability arising from disclosure under the Voluntary Disclosure Scheme was deductible.

Issue (i): Whether rule 2B(2) of the Wealth-tax Rules, 1957 could be invoked to enhance the value of closing stock merely because the gross profit rate exceeded 20 per cent.

Analysis: Rule 2B(2) applies only where the market value of an asset exceeds its book value by more than 20 per cent. The mere fact that a business has shown a gross profit rate above 20 per cent does not by itself establish that the closing stock on the valuation date had a market value higher than book value by the requisite margin. The valuation must be tested with reference to the relevant date and supporting material, not by a broad annual profitability comparison alone.

Conclusion: Rule 2B(2) cannot be applied merely on the basis of a gross profit rate above 20 per cent.

Issue (ii): Whether the onus to prove that the market value of the closing stock exceeded the book value by more than 20 per cent lay on the revenue.

Analysis: When the revenue seeks to depart from the balance-sheet valuation and invoke rule 2B(2), it must establish by acceptable evidence that the statutory condition is satisfied. The balance-sheet figure is the primary basis of valuation, and sections 106 and 114 of the Indian Evidence Act, 1872 do not shift the burden to the assessee in the absence of prior enquiry and material from the revenue.

Conclusion: The onus lay on the revenue, and it failed to discharge that burden.

Issue (iii): Whether manufacture of emeralds by cutting and polishing rough emeralds entitled the assessee to exemption as an industrial undertaking under section 5(1)(xxxii) of the Wealth-tax Act, 1957.

Analysis: The activity of importing rough emeralds, cutting and polishing them, and selling the finished product had already been treated by the Tribunal as industrial manufacture falling within the exemption provision. Following that view, the activity qualified for the claimed exemption.

Conclusion: The assessee was entitled to exemption under section 5(1)(xxxii) of the Wealth-tax Act, 1957.

Issue (iv): Whether tax liability arising from disclosure under the Voluntary Disclosure Scheme was deductible.

Analysis: The deduction of tax liability arising from disclosure under the Voluntary Disclosure Scheme was accepted in the light of the binding authority relied upon by the Tribunal.

Conclusion: The assessee was entitled to deduction of the tax liability arising from the Voluntary Disclosure Scheme.

Final Conclusion: The revenue failed to establish the factual basis for invoking rule 2B(2), and the assessee succeeded on the remaining substantive claims relating to exemption and deduction.

Ratio Decidendi: Where the revenue seeks to enhance valuation under rule 2B(2), it must prove with acceptable evidence that the market value exceeded book value by more than 20 per cent; gross profit rate alone is insufficient.

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