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TaxTMI 
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TaxTMI 
1987 (9) TMI 93
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....e of applicability of rule 2B (2) was considered by Rajasthan High Court in the case of CWT v. Smt. S. K. Bader [1986] 29 Taxman 343 had vide their order dated 4th September, 1985 in the abovementioned case had come to the conclusion that rule 2B (2) cannot be invoked on the basis of the gross profit rate does not indicate the difference in the value of the stock as shown by the assessee and its fair market value. He field the copy of the order of the High Court and submitted that is purely a question of fact that the adding the gross profit rate to the closing stock value it does not represent the market value and, therefore, invoking of rule 2B (2) is improper. He also placed reliance on B. Damodar & Co. v. Addl. CIT v. [1974] 97 ITR 70 (Mys.). 4. We have heard the parties. The question that were considered by their lordships of the Rajasthan High Court in the case of Smt S. K. Bader dated 4th September, 1985, copy field by the assessee, are as under : (1) Whether on the facts and in the circumstances of the case the Appellate Tribunal is justified in holding that in order to ascertain the actual market value of the closing stock of the firm for purpose of Rule 2B (2) of WT Rul....
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....the fair market value within the meaning of rule 2B (2) and, therefore, the Third Member ruled that the rule 2B (2) cannot be invoked. By a majority decision. Therefore, it was concluded that rule 2B (2) cannot be invoked by applying the g. p. rate shown by the assessee in its trading accounts. 6. What we have now to examine is to what extent the present case compares will with the decisions of the Rajasthan High Court. In the case before Rajasthan High Court, the closing stock was valued at 48 per cent than the Export Value shown. In that case the Export Invoice Value was mentioned to be anything between 20 to 30 per cent of the market value. In that case also the gross profit was much more than 20 per cent. In the instant case the gross profit shown is 25.2 per cent of its value shown in the balance sheet. The assessee before the WTO had submitted that it was prepared to sale to anyone the entire closing stock for a margin of 18 per cent. This has been so observed by the WTO in para 4 of his order. In para 5, he considered the arguments of the assessee and gave a margin of 4 per cent for the reason that some of the stock had not moved for many years and that the profit of 25 per....
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....ansactions of the year and under no circumstances it could able by an assessee as G. P. is only the result of an event and does not lead to an event. The sale price is dependent on several market conditions and the gross profit is only the result arising the an assessee on account of such a sale. Every assessee would like to maximise his profits and merely for the reason that his expected or the profit realised in a particular year is 25 per cent. It does not conclude that the stocks in hand have to be valued at 25 per cent more than the book value has been held to be a mere quotation which at most of the times could be the sale price realised subsequently also than the gross profit realised can never even be held to be an indicative of the expected sale price. When a reduction of 35 per cent from the export invoice value for arriving at the vale of closing stocks for trading account purposes has been held to be proper and that Rule 2B (2) cannot be invoked on that basis and it is purely a finding of fact. The natural corollary that follows is that the gross profit is not an indicating factor at all for invoking the provisions of Rule 2B (2). As per the WTO, the value of the stocks....
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..... Therefore, whatever be the ultimate view, the question involved in this case is a clear-cut referable question of law. According, I am of the opinion that the present references should be submitted to the Hon'ble High Court. Per Shri H. S. Ahluwalia, Judicial Member - Personally speaking I am of the opinion that in relation to the main dispute, the contrary view of the matter would be more appropriate and in accordance with the language and spirit of law. It is well established that so far as computation of total income is concerned, an assessee can value its closing stock on cost or market price whichever is less. It was not seriously disputed before us that the firm in which the assessees are partners had actually taken the value of the closing at the lesser figure, i.e. the cost. In fact, it was never disputed that the closing stock itself had been valued by the firms by deducting a certain percentage (which was less than the G. P. disclosed by the said firms) from the market price on the relevant accounting date. Consequently, the gross profit would ordinarily be less than the margin between the cost and the market. It was also not disputed that the rate of gross profit disc....
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....] 146 ITR 552. 3. How can the WTO possibly find out the market value of each item of closing stock held by the firm on the relevant accounting year ? Even the detailed particulars of the closing stock of the firm may not be available with the Wealth-tax Officer, assessing the present assessees. The Wealth-tax Officer, therefore, would have to raise some kind of presumption from the available facts. have to raise some kind of presumption from the available facts. The fact of the G. P. being more than 20 per cent would prima facie discharge the burden relaying upon the Department and justify the WTO in raising the presumption. The actual market price of each item of closing stock was a fact within the special knowledge of the assessees because they are partners of the firms who owned the closing stocks. A assessment under the IT Act, but a partner is an agent of the firm for all dealings with the third parties and is expected to know all facts relating to the conduct of the business by the firm so that it were the assessees who knew as to what was the actual market value of the items forming part of the closing stock. My learned brethren have accepted the proposition that for the pu....
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.... that the WTO should have called upon the assessees to produce before him particular material and details relating to the value of the closing stock, but the Wealth-tax Officer himself did not know as to what facts should be ascertained for establishing the margin and, therefore, had not put any specific enquiries or asked the assessees to produce any specific facts. However, he had asked them to show cause as to why the closing stock should be revalued. In reply the assessees only gave general explanation and asked the Wealth-tax Officer that he should give them the basis for coming to the conclusion that the margin exceeded 20 per cent. The prima facie basis was already there in the form of the G. P. earned by the firm. Nothing more was known to the WTO, but every thing was known to the assessees. They could give all the relevant facts to enable the WTO to ascertain the actual position. As I have pointed out above, the basis burden on the WTO was not as has been presumed by may learned brethren, because the WTO did not know the items of closing stocks held by the firms and the market price of each one of them. He only knew two facts, namely, that the value of the closing stock fo....
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....e a question of law arise out of the order of the Tribunal in WTA Nos. 61, 60 & 62/JP/81 : "Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the provisions of Rule 2B (2) of WT Rules are not applicable in determining the net wealth of the firm M/s. Maliram Puranmal and consequently in sustaining the order of the AAC deleting the addition in the assessee's hands ?" 2. The learned Members of the Jaipur Bench who heard the reference application could not agree as to whether order of the Tribunal referred to above gave rise to a question of law or not. The learned Accountant Member who wrote the leading order held that the Tribunal was concluded by pure finding of fact. On those finding of fact it did not give rise to any question of law. But the learned Judicial member held that the interpretation of Rule 2B (2) of the WT Rules, was involved and whether the interpretation placed by the Tribunal on the applicability of that rule was correct or not gave rise to a question of law because it is now a well settled law that any interpretation of any section of an Act or Rule or a document would always be a question of law. Thus....
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.... with the conclusion. The difference was quite acute, because the learned Accountant Member had framed the following three questions as his view of difference of opinion : "(i) Whether on the facts and in the circumstances of the case, the gross profit rate in the case of the firm in which the assessee is a partner at 33.68 per cent with reference to the cost price for the asstt. year 1975-76 will not prima facie show that the difference in terms of Rule 2B (2) of the WT Rules is more than 20 per cent and whether the WTO has discharged the initial burden cast on him ? (ii) If the answer to question No. (i) is in the affirmative whether the burden shifts to the assessee to prove that the prima facie difference of 38.88 per cent is not real by leading positive evidence and whether any evidence has been adduced by the assessee to discharge its onus ? (iii) Whether the market value of the closing stock has to be found as a fact, and whether and in the absence of any details having been furnished by the assessee, the value adopted by the WTO has to be accepted or not ?" as against which the learned Judicial Member framed the point of difference of opinion as under : "Whether on the....
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....7 27,51,139 21,22,971 30,45,771 The amount of closing stock carried over in different years suggests that goods in which the assessee deals the sales are slow. The sales are not the type of sales which can be expected in items of consumer goods. The investment in closing stock is large. Before the items of jewellery can be sold different permutations, combination, settings, etc., have to be made. Some items of jewellery may be sold quickly, but for other the stock may have to be carried over a period of certain years. The coloured precious stones require treatment. It is not easy to fix the value of emeralds, rubies, saphires, etc. The rates would differ from person to person and even from place to place. If such large quantity of goods as the firm carries are to be sold on the valuation date, the buyer would in all probability be a dealer and he would certainly not any the price which the assessee can get from sales to different parties over a period of 12 months. I have thus no hesitation in comi....
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....question of law but re-framed the question and referred the re-framed question to the High court for its opinion and since the re-framed question involves identical issue as arose in the present cases, it must be held that the order or the Tribunal also gave rise to a question of law. The question either as framed by the CWT or as re-framed by the Special Bench in the above case or in such other manner as the Tribunal thinks appropriate should be referred to the High Court for its opinion. He submitted that it is very incorrect to state that the order of the Tribunal did not give rise to a question of law when the interpretation of a rule of WT Rules is involved. He also submitted that it is not a question of fact as to appraisal of evidence, but application of the rule, the evidence found and vice versa, and which in either case gave rise to a question of law. The re-framed question by the Special Bench is as under : "Whether on the facts and circumstances of the case the Tribunal was right in holding that for the purpose of applying rule 2B (2) of the WT Rules the onus was on the Revenue to prove that the market value of the closing stock of M/s. Maliram Puranmal exceeded the va....
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....easons for valuing the closing stock at a particular figure. The rate of gross profit shown by the trading account does not necessarily conclusively demonstrate that the closing stock shown by the trading account would earn the same amount of profit in the future or if sold in the market on the valuation date it will earn the same amount of profit. My learned brothers in their orders not only in these appeals but also in other appeals have given several reasons to show that the market value of the closing stock would not necessarily be the same as commiserate with the rate of gross profit shown, I entirely agree with those reasons and I have very little to add to those very reasons. The value of the closing stock is generally arrived at following a particular principle of valuation of the closing stock, namely, whether at cost or at market value which ever is lower. If the market value of the closing stock was arrived at and was included in the trading account and when that has accepted as the market value on valuation for the purpose of assessment, then that would mean that that was the market value. No further adjustment would then be called for merely because the gross profit ra....
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.... more than an indication. No doubt the rate of gross profit shown by the trading account is a strong indication about the profitability of the business, i, e., only strong indication and perhaps an invitation to the WTO to find out by other means the market value of the closing stock. For example, if the articles included in the closing stock were sold in the subsequent year at a far higher price than placed in the closing stock that may be one indication to show that the market value of a particular commodity was more than the value shown in the closing stock. Therefore, merely because the gross profit shown by the trading account appears to be more than 20 per cent, spoken of rule 2B (2), a general conclusion that the market value is more by that per cent cannot be drawn and as I have mentioned earlier that rate of profit is only an indication but not a conclusive proof. 7. Secondly rule 2B (2) was no doubt applied in the sense that the question whether the provisions of rule 2B (2) were attracted or not was considered. Rule 2B (2) as it is worded is only an enabling provision empowering the WTO to disturb the valuation of the assets shown in the balance sheet subject to the sat....
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....different conclusion should be recorded contrary to the view taken by the Special Bench. This is a very attractive argument and perhaps in the abstract of terms it cannot be gainsaid but on a closure examination it would reveal that the issues before the Special Bench and before the Bench in the present case are different. It is no doubt true that both the Special Bench and the Bench in this case are concerned with similar situation, namely, whether the existence of a higher rate of gross profit than 20 per cent as disclosed by the trading account could be used to invoke rule 2B (2) of the WT Rules to disturb the value of the closing stock. Both the Special Bench and this bench came to an identical conclusion that it was not sufficient to invoke the provisions of rule 2B (2) so as to enable the WTO to disturb the valuation of the closing stock. But the Special Bench there proceeded on a particular condition, namely, whether on whom does the onus to prove that the market value exceeded the book value by 20 per cent lay. The Special Bench held that the onus lay upon the Department. It is now a very well settled law that the question as to on whom the onus of proof lays is a question ....