N.C.J. Rajan Vs Commissioner of Wealth-tax

T.L. Viswanatha Iyer, J.@mdashWe shall state the facts in Income Tax References Nos. 543 to 5.46 of 1985 which arise out of assessments to wealth-tax made on the assessee, N.C.J. Rajan, for the assessment years 1969-70 to 1972-73. The following questions have been referred to this court for its opinion u/s 27(3) of the Wealth-tax Act, 1957 (hereinafter referred to as "the Act") :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the reopening of the assessment was valid, warranted and/or sustainable u/s 17(1)(a) of the Wealth-tax Act ?

2. Whether it is permissible to exclude from the provision for taxes the advance tax payments made u/s 210 of the Income Tax Act, 1961, in determining the market value of unquoted equity shares?"

2. We may at once state the second question stands concluded against the assessee by the recent decision of the Supreme Court in Bharat Hari Singhania and others Vs. Commissioner of Wealth Tax (Central) and others, . But that does not absolve us from considering the first question on the merits, for the reason that the assessments in question are all reopened ones u/s 17(1)(a) of the Act, and the validity of the reopening is in question and forms the subject-matter of the first question.

3. The assessment years concerned in these cases are 1969-70 to 1972-73 corresponding to the valuation dates March 31 of 1969, 1970, 1971 and 1972, respectively. There are three other assessments made on the assessee on similar facts for the years 1968-69, 1973-74 and 1974-75 which form the subject-matter of the references in Income Tax References Nos. 17, 18 and 19 of 1990.

4. The assessee held some shares in two private limited companies, namely, Neroth Oil Mills Co. Pvt. Ltd. and N.C. John and Sons Pvt. Ltd. He filed returns disclosing the value of the shares, by adopting the breakup value thereof computed with reference to the balance-sheets. Subsequently, he wrote a letter to the Wealth-tax Officer stating that the Central Board of Direct Taxes had issued Notification No. GSR 1536 (see [1967] 66 ITR 44) dated October 6, 1967, laying down the rules for the valuation of unquoted equity shares of companies (Rule 1D of the Wealth-tax Rules). According to the assessee, the value originally returned by him was not in order and, therefore, he had got the shares valued by an approved valuer for unquoted shares. He appended the valuation report of the said valuer, according to which, the value of the shares was far lower than the value originally returned. He sought assessment accordingly. The Wealth-tax Officer completed the assessments adopting the lower values disclosed in the revised valuation, supported by the approved valuer''s report.

5. The officer, however, had some doubts subsequently about the correctness of the valuation and by a letter dated April 17, 1976, called upon the assessee to furnish the balance-sheets for the past eight years of Neroth Oil Mills Co. Pvt. Ltd. and N.C. John and Sons Pvt. Ltd. On the basis of the balance-sheet so produced, he recorded that the shares had not been valued by the assessee as laid down in the Wealth-tax Rules. He noted that the assessee had excluded the advance Income Tax paid on the assets side, and the provision for taxation appearing on the liabilities side, in valuing the shares. The officer was of the view that the provision for taxation should have been excluded only in respect of the provision in excess of the advance tax payment already excluded. He was also of the view that the provision for payment of tax in the balance-sheet should have been a correct provision in respect of the tax payable on book profit according to law. The provision made was, however, excessive. Thus the unquoted shares held by the assessee had been grossly undervalued in the original return. There was thus an escape of assessment of the assessee''s wealth entitling the assessment to be reopened u/s 17(1)(a). Notices were issued accordingly.

6. To illustrate the Wealth-tax Officer''s view, we may mention that under the approved valuer''s report, the market value of the unquoted shares of Neroth Oil Mills Co. Pvt. Ltd. was Rs. 83.70 on March 31, 1968, while it was Rs. 310.65, adopting the correct method of valuation. It was this difference that led the Wealth-tax Officer to hold that wealth had escaped assessment.

7. The assessments were completed accordingly and they were confirmed in appeal and second appeal. The assessee had challenged both the validity of the reopening as also the mode of valuation adopted by the Wealth-tax Officer, but he did not succeed on either of these points before any of the authorities.

8. The assessee had claimed that he had filed the balance-sheets of these companies before the Wealth-tax Officer even at the time of the original assessments, which were thus completed after adverting to them. This was disputed by the Department. The Tribunal, therefore, called for the miscellaneous records of assessment to verify whether the balance-sheets of the private limited companies had, as a matter of fact, been produced at the time of the original assessments. After scrutiny, the Tribunal found that the balance-sheets of these companies relevant for the assessment years 1968-69 and 1969-70 had been filed by the assessee, N.C.J. Rajan, as also by two other related assessees, N.C. John and N.J. Joseph, whose cases were also before the Tribunal and were disposed of by their common order along with those of some other related assessees. The Tribunal also found that in respect of the other years and in respect of the other assessees, the balance-sheets of these companies had not been produced at the time of the original assessments. The Tribunal held that when the valuation was made in terms of Rule 1D on the basis of the balance-sheets and those balance-sheets were produced before the Wealth-tax Officer, there was no non-disclosure of material facts by the assessee. At the same time, in cases where the balance-sheets were not produced, the Wealth-tax Officer could not check the calculation of the break-up value to be made under Rule 1D in the approved valuer''s report. The balance-sheets were thus considered to be material facts necessary to be disclosed to the Wealth-tax Officer. The reopening was, therefore, valid in respect of those years and those assessees who had not produced the balance-sheets at the time of the original assessments. Accordingly, it was held that the reopening was illegal in the case of N.C.J. Rajan, N.C. John and N.J. Joseph for the assessment years 1968-69 and 1969-70, but valid in relation to these assessees for the other years, and for the other assessees in respect of all the years.

9. The Tribunal then went into the question whether the valuation of the shares had been made in accordance with Rule 1D, and held that the expression "tax payable" occurring therein can only mean the total tax according to the book profits less the advance tax paid. The appeals were, therefore, substantially dismissed, except for some directions to rectify some mistakes in the orders of assessment. It is consequent thereon that the aforesaid questions have been referred for our decision.

10. The case of the other assessees, as mentioned earlier, is similar and covered by the above statement of facts. Similar questions have been raised therein. Since the second question stands covered by the decision in Bharat Hari Singhania and others Vs. Commissioner of Wealth Tax (Central) and others, , the only question requiring consideration is the first one, regarding the validity of the reopening of the assessments. The question which loomed large before us at the time of the hearing was whether the balance-sheets of the private limited companies were material facts, the failure to produce which before the Wealth-tax Officer could be treated as failure to disclose fully and truly material facts necessary for assessment, justifying the reopening thereof u/s 17(1)(a). It is now well-established that the reasons for the belief entertained by the assessing authority for the reopening of an assessment must be based on the materials before him, which can reasonably lead to the belief that wealth had escaped assessment. Section 17(1)(a) also requires that the escape of assessment was by reason of the failure of the assessee to disclose truly and fully the materials necessary for the assessment. There should be a nexus between the non-disclosure and the escape of wealth from assessment.

11. The assessee before us had originally filed returns disclosing a higher value based on the balance-sheets of the private limited companies, but changed it to a lower figure by producing an approved valuer''s report. Counsel for the assessee was at great pains to point out that the form of return prescribed by Rule 3 of the Rules does not oblige the assessee to produce the balance-sheets of the companies, the only occasion where a balance-sheet is required to be produced being where the assessee himself is carrying on business, in which event a copy of his own balance-sheet is required to be produced along with the return. It was also pointed out that valuation by an approved valuer is an accepted mode of valuation of an asset u/s 34AB. Sub-section (4) of this section provides for the report of valuation by the registered valuer to be in the prescribed form and verified in the prescribed manner. Rule 8A prescribes the qualifications to be possessed by registered valuers, including valuers of shares. Form No. 0.6 is the form in which the valuer''s report is to be made in respect of shares of companies, among others, but that does not require a copy of the balance-sheet to be annexed to the report. But it does require the registered valuer to discuss in detail the different factors which have been taken into account in arriving at the value of the shares. It also requires that where the valuation is made in accordance with the Wealth-tax Rules, the particular rule in terms of which the valuation is made and the full computation in terms of the said rule should be indicated. Counsel contends that the assessee had disclosed the number of shares held by him and the companies in which the shares were held besides supporting his stand, with the valuer''s report. These were the primary material facts, the disclosure of which precluded action u/s 17(1)(a).

12. What are material facts necessary for an assessment will depend on the facts of each case. The ratio of the decision in Calcutta Discount Company Limited Vs. Income Tax Officer, Companies District, I and Another, is that the material facts contemplated by Section 34(1)(a) of the Indian Income Tax Act, 1922, corresponding to Section 17(1)(a) of the Act, are the primary facts which would enable the Income Tax Officer to arrive at the true income of the assessee and in the case of wealth-tax, to arrive at the true wealth of the assessee. The duty of disclosure cast on the assessee does not extend beyond full and truthful disclosure of all primary facts. The duty ends with the disclosure of the primary facts, and he is not bound to inform the Assessing Officer about the inference to be drawn from those facts.

13. The question for consideration is whether the assessee was bound to produce the balance-sheets, on the basis of which the valuation of the unquoted shares could be arrived at, and whether failure to do so amounts to failure to disclose fully and truly material facts necessary for the assessment. The decision in Acchut Kumar S. Inamdar Vs. P.R. Hajarnavis and Another, of the Bombay High Court relied on by the assessee is not on point, but it does lay down that there is no provision in the Act requiring the assessee to produce his evidence along with the return. The other two decisions cited by the assessee are more relevant. In Sohan Singh Basi Vs. Union of India and others, , a case of valuation of unquoted shares in a private company governed by Rule 1D, the assessee disclosed the value of the shares at their face value and the assessment was completed on that basis. The assessment was sought to be reopened on the ground that the break-up value of the shares was much more, leading to escape of assessment. A Division Bench of the Delhi High Court held that as far as the value of shares is concerned, for including in the net wealth, all that is relevant is for the assessee to show the company whose shares are held, and the number of shares held by the assessee. The assessee is also required to value the shares. All these three things had been done by the assessee and, therefore, there was no ground for reopening the assessment u/s 17(1)(a). Smt. Rajeshwari Birla Vs. Wealth Tax Officer, ''H'' Ward and Others, was also a case of unquoted shares where the assessment was reopened mainly because the assessee did not furnish any basis for the value disclosed by her and did not furnish any material particulars relevant for establishing that value. The Revenue relied on the balance-sheet of the company to contend that there was no true or full disclosure of material facts by the assessee. The Calcutta High Court did not accept these facts as sufficient to sustain the reopening and held it to be a mere change of opinion. It is pertinent to note that no emphasis was laid on the non-production of the balance-sheets by the assessee at the time of the original assessment.

14. The assessee before us had disclosed the requisite materials. He had disclosed the names of the companies whose shares he held, the number of shares and the value thereof. He had even filed the returns on the basis of the balance-sheets, but resiled from them, because of the approved valuer''s report. The valuation made by the approved valuer is relevant under the provisions of the Act and could form the basis of an assessment. It must also be noted that till the Supreme Court rendered its decision in Bharat Hari Singhania and others Vs. Commissioner of Wealth Tax (Central) and others, there was conflict of opinion between the various High Courts as to whether Rule 1D should be treated as mandatory, and should be the sole mode of valuation of unquoted shares. Various courts including this court had taken the view that the rule was not mandatory. It could not in the circumstances be stated that the assessee had omitted to fully and truly disclose material facts, or that he had an obligation to produce a copy of the balance-sheet in support of his valuation. As stated in Acchut Kumar S. Inamdar Vs. P.R. Hajarnavis and Another, , the assessee is under no obligation to produce evidence along with the return.

15. It is true as contended by standing counsel for the Revenue and as held by the Supreme Court in Bharat Hari Singhania and others Vs. Commissioner of Wealth Tax (Central) and others, , that the break-up method contained in Rule 1B takes the balance-sheet of the company as the basis for working the rule, and that the rule cannot be worked in the absence of the balance-sheet. It is also true that once the basis of working of the rule is the balance-sheet, one must necessarily have the balance-sheet, and without it, it cannot be worked. But then, these observations of the Supreme Court are not made in the context of a provision for reopening u/s 17(1)(a), but while considering whether it is obligatory to follow Rule 1D when the date of the balance-sheet of a company is earlier to the valuation date of the assessee. While the balance-sheet constitutes valid material for making an assessment under Rule 1D, it could not be said that failure to produce the same attracts Section 17(1)(a). The balance-sheet constitutes at best an item of evidence in relation to the fixation of the value of ''unquoted shares, but the law does not oblige the assessee to produce an item of evidence before the Wealth-tax Officer, unless called upon to do so. It was for the Wealth-tax Officer in this case with two conflicting versions of value before him, to call for the balance-sheets, if he entertained any doubts about the valuation effected by the approved valuer, and verify the matter himself. His failure to do so cannot be treated as an omission on the part of the assessee to disclose material facts fully and truly. The decision in Kantamani Venkata Narayana and Sons Vs. First Additional Income Tax Officer, Rajahmundry, turned on the provisions of the Explanation to Section 34(1)(a) of the Indian Income Tax Act, 1922, when the Supreme Court held that the terms of the Explanation are too plain to brook any argument that the duty of disclosure of the assessee stood discharged when he produced the books of account. We cannot, therefore, agree with the Appellate Tribunal in its conclusion that the balance-sheets of the private limited companies constituted material facts, and that non-production of the same by the assessee at the time of the original assessments justified the reopening of the assessments u/s 17(1)(a). The answer to the first question has, therefore, to be in the negative, that is, against the Revenue and in favour of the assessee.

16. This will dispose of Income Tax References Nos. 543 to 546 of 1985. The other cases are of related assessees, in which the Appellate Tribunal has applied the decision in this case and held against the respective assessees. In the light of our decision in the main case which has to be applied in all the other cases as well, the first question referred in those cases must be answered against the Revenue and in favour of the assessee.

17. Accordingly, we dispose of the references as follows. Question No. 1 is answered in favour of the assessee and against the Revenue. Question No. 2 is answered in favour of the Revenue and against the assessee. But that will not make any impact on the ultimate decision in the case as we are not upholding the reopening of the assessment.

18. Communicate a copy of this judgment under the seal of this court and the signature of the Registrar to the Income Tax Appellate Tribunal, Cochin Bench, for information.