Case: M/s. Juggi Lal Kamlapat Vs. Wealth Tax Officer

Most of the material facts giving rise to this appeal are not in dispute and may briefly be stated as follows: Appellant No. 1 (M/s. Juggi Lal Kamlapat, Bankers) is a partnership firm. Appellant No. 2 (Padampat Singhania) was one of the partners in the firm in his capacity as a Karta of a Hindu Undivided Family upto 15-3-1972. He was being assessed to wealth tax in the status of H.U.F. and the assets so assessed for wealth tax included the interest of the family in appellant No. 1 fi rm. For the assessment years 1967-68 to 1972-73 wealth-tax returns were submitted by appellant No. 2 in the status of H.U.F. and therein the familys interest in appellant No. 1 firm was included. Since appellant No. 1 firm owned a number of buildings in Kanpur in the returns so submitted the book-value of those buildings had been adopted by appellant No.2 for valuing the interest of the family in appellant No. 1 firm. Respondent No. 1 felt that the market value of those buildings was much more than such book-value. He, therefore, referred the question of valuation of those buildings to respondents Nos. 2 and 3 (the concerned Valuation Officers) under s.16A of the Wealth Tax Act 1957 (hereinafter referred to as the Act). Respondents Nos. 2 and 3 issued notices under s. 38A (1) (b) of the Act to appellant No. 2 intimating that they would inspect the buildings for determining the fair market value thereof and requested him to afford necessary facilities for such inspection and to produce certain records connected with those buildings. On receiving the notices appellant No. 2 realised that respondent No.1 had referred the question of valuation of the concerned buildings to respondents Nos. 2 and 3 u nder s. 16A of the Act and that the notices issued by respondents Nos. 2 and 3 were in furtherance of such reference. On 9th of September, 1974 appellant No.2 addressed a letter to respondent No. 1 contending that none of the properties refe rred to the Valuation Officers belonged to him and that the reference to them was unauthorised and the same should be with-drawn. He also addressed letters to respondents Nos. 2 and 3 in which he contended that reference made to them by respondent No.1 was invalid and requested each one of them to return the reference back to the Wealth Tax Officer. Since these contentions were not accepted by the respondents, the appellants filed a writ petition in the High Court challenging the reference made by respondent No.1 as well as the notices issued by respondents Nos. 2 and 3.On behalf of the appellants the following contentions were urged in support of the writ petition:(1) For the assessment of appellant No. 2, respondent No. 1 could not refer to respondents nos. 2 and 3 the valuation of building which did not belong to him but belonged to appellant no. 1 firm:(2) the interest of a H.U.F. in a partnership firm was not exigible to wealth tax;(3) the interest of appellant no. 2 in appellant no. 1 firm had to be valued in accordance with Rule 2 of Wealth Tax Rules 1957 and hence s. 16A of the Act had no application;(4) the valuation of the concerned buildings forming part of the assets of the business of appellant no. 1 firm had to be determined in accordance with the commercial principles under s.7 (2) (a) and not under s.7 (1) of the Act and(5) the respondents nos. 2 and 3 could not issue the notices to appellant No.2 as he was neither the owner of the buildings nor was in occupation thereofIn regard to the first contention the High Court took the view that though it was true that a partner of a firm could not claim ownership in specific properties belonging to the partnership firm either during the continuance of the partnership or even on its dissolution but was entitled to get a share in the profits during its continuance and was further entitled, upon its dissolution or his retirement there-from, to the value of his share in the surplus of the partnership assets left after a deduction of liabilities and prior charges on the date of dissolution or retirement, it was clear that having regard to s. 29 of the Partnership Act (which enables a partner to transfer his interest in the partnership firm) and s.2 (e) and 4 (1) (b) of the Act the interest of a partner in the partnership firm will have to be regarded as a part of his net wealth under the Act. As regards the second contention which was elaborate d to the effect that even if the interest of an individual in a partnership firm could be regarded as an asset within the meaning of s.2(e) of the Act, the interest of a H.U.F. in the partnership firm could not be regarded as such asset and was not, therefore, exigible to wealth tax (for which reliance was placed on the circumstances that under s.4 (1) (b) of the Act provision has been made for determining the value of an individuals interest in a partnership firm but no corresponding provision obtains in the Act for inclusion of the interest of H.U.F. in a partnership firm for purposes of assessment), the High Court took the view that from the said circumstances relied upon it did not follow that the interest of a H.U.F. in a partnership firm could not be regarded as a part of net wealth of such family or was not liable to wealth tax, especially when the charging provision namely, s.3 of the Act expressly levied wealth tax on the net wealth of every Hindu undivided family and there was no reason why its interest in a partnership firm, which was property, could not be regarded as a part of its assets liable to the charge under the section. With regard to the third and fourth contentions the High Court held that Rule 2, sec. 7 and sec. 16A (1) (4) (ii) had to be read harmoniously and Rule 2 did not exclude the application of secs. 7 and 16A for valuing an asset of a partner in a partnership firm and that notwithstanding the non-obstante clause contained in sec. 7 (2) it was an enabling provision giving a discretion to the Wealth Tax Officer either to value the assets of a business as a whole or valuing each asset thereof separately and in that behalf the Wealth Tax Officer had the power to refer such valuation to the Valuation Officer under sec. 16A. As regards the last contention the High Court negatived the same by observing that appellant No. 2 as a partner could be regarded as an agent of appellant No. 1 firm and the Valuation Officers could issue Notices to him requiring him to afford facilities for inspection of the concerned buildings and to produce books, documents and records relevant for the valuation of those buildings. In this view of the matter the High Court dismissed the writ petition but its decision is challenged in this appeal.

Reasoning: On a fair reading of the aforesaid provisions it will appear clear that the primary method of determining the value of assets for the purposes of the Act is the one indicated in sec. 7 (1), inasmuch as it provides that the value of any assets, other than cash, for the purposes of this Act shall be estimated to be its market price on the valuation date. Then comes sub-sec. (2) which provides that in the case of a business for which accounts are maintained by the assessee regularly the Wealth tax officer may instead of determining separately the valuation of each asset held by the assessee in such business, determine the net value of the business as a whole having regard to the balance sheet of such business as on the valuation date and making such adjustments therein as may be prescribed. It is true that sub sec. (2) commences with a non obstante clause, but even so, the provision itself is an enabling one conferring discretion on the Wealth tax officer to determine the net value of the assets of the business as a whole having regard to its balance sheets as on the valuation date, instead of proceeding under sub sec. (1). In other words, it is optional for the Wealth tax officer to resort to either of the methods even in the case where the net value of a business carried on by the assessee is to be determined. Thirdly, even when he proceeds und er sub sec. (2) he has to determine the net value of the business as a whole having regard to the balance-sheet of such business as on the valuation date; the phrase "having regard to the balance sheet of such business" as judicially interpret ed means that the Wealth tax officer has to take into consideration or account the balance-sheet of such business for such valuation and not that such balance sheet is conclusive or binding or decisive of the values of assets appearing therein . Fourthly, the said sub- section also says that the Wealth tax officer has to "make such adjustments therein as may be prescribed" and in this behalf Rule 2A and 2B already quoted above indicate what adjustments the Wealth-tax officer has to make while determining the net value of the business as a whole. Particularly sub-rule (2) of Rule 2B clearly provides that where the market value of an asset exceeds its written down value or book value by more than 20 per cent, the value o f that asset for the purposes of Rule 2A shall be taken to be its market value. In other words, it is clear that even where the Wealth-tax officer has resorted to sec. 7 (2) for determining the value of assets of a business as a whole the written down values or book values of specific assets as appearing in the balance-sheet are not sacrosanct and when the market value exceeds the written down value or book value by more than 20 per cent, the Wealth-tax officer has to adopt the market value of such assets for the purposes of this Act. This is apart from the position that the resort to sec. 7 (2) itself is discretionary and optional, the provision being an enabling one.Since in the instant case the Wealth tax officer was of the view that the book values of specific house properties as indicated in the returns filed by appellant No. 2 were far below their market values, he was justified in making a reference to the Valuation officers under sec. 16A of the Act and the notices issued by the Valuation officers in pursuance of such reference were also valid.