Jayantilal Amritlal Vs Commissioner of Wealth Tax

R.C. Mankad, J.@mdashThe income tax Appellate Tribunal (hereinafter referred to as "the Tribunal") has, at the instance of the assessee, referred the following two questions for our opinion u/s 27 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 Tribunal was right in holding that the assessee was the owner of the seized gold articles on each of the eight valuation dates?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cloud on ownership in the form of seizure did not reduce the value of the gold ''if sold in the open market'' for the purposes of wealth-tax assessments for the eight years?

Facts giving rise to this reference are as follows. The income tax authorities searched the premises of the assessee known as "Shree Sadan" between November 18 and November 21, 1964. In the course of this search, large quantity of gold in various forms was recovered from the strong room in the celler. The gold which was recovered was in the form of 154 gold coins and 8 gold bars. The value of the gold found was Rs. 2,83,320. The Central Excise Officials seized the gold on 17-12-1964. Proceedings under rule 126L(16) of the Defence of India (Gold Control) Rules, 1963 [Gold (Control) Rules] were initiated against the assessee. The assessee unsuccessfully challenged the seizure of the gold and the proceedings taken against him by the Central Excise Department before this Court and the Supreme Court. The Collector of Central Excise, Baroda passed the following order against the assessee on 30-9-1975 in the proceedings taken out against the assessee:

Therefore, I confiscate the 8 gold bars and 154 gold coins u/s 71 of the Gold (Control) Act, 1968 [corresponding to rule 126M of the Defence of India (Amendment) Rules, 1968]. In lieu of confiscation, the owner Shri J A. Shodhan may pay a fine of one lakh of rupees and redeem the confiscated gold, within three months of the receipt of this order, subject to the condition that, on redemption, the gold bars and coins shall be converted into ornaments within one month from the date of their redemption, in accordance with the provisions of the Gold (Control) Act, 1968, and subject to the further condition that, on conversion, the ornaments shall be duly declared u/s 16 of the said Act.

2. In his wealth-tax returns for the assessment years 1965-66 to 1972-73, which were filed after the seizure of the gold articles and initiation of the proceedings as stated above, the assessee stated the market value of the gold articles but did not include that value in his net wealth on the ground that as the gold articles were seized and proceedings were pending their value as on the relevant valuation dates was nil. In each of the returns the assessee appended the following note:

Presently, the question as regards the confiscation of the gold and mohars is under consideration of the Collector of Customs, Baroda. Efforts are being made to get released some quantity of the gold and mohars. In such a case whenever orders to that effect are received from the Collector, we hereby give an undertaking to pay tax on the value of the quantity so realised. Please note that this action of showing the value at nil should not be interpreted as concealment of wealth or fraud or gross or wilful neglect.

The WTO, however, rejected the assessee''s contention that the value of the gold articles was nil on account of their seizure and liability to confiscation. He assessed the market value of the gold bars and gold coins and included that value in the net wealth of the assessee in each of the assessment years.

The AAC and the Tribunal confirmed the view taken by the WTO in the appeals preferred by the assessee. It is in the background of these facts that the questions as set out above have been referred to us for our opinion.

3. It appears that the gold coins and gold bars were returned to the assessee on his paying Rs. 1 lakh under the order dated 30-9-1975. The main question which is raised on behalf of the assessee is with regard to the market value of the gold articles, i.e., gold bars and gold coins. Mr. J.P. Shah, learned counsel for the assessee, did not dispute that the assessee was the owner of gold articles on the relevant dates. In other words, he did not challenge the finding of the Tribunal that the assessee was the owner of the gold articles which were seized by the Central Excise officials as stated above. Therefore, Question No. 1, which is set out above, will have to be answered in the affirmative and against the assessee.

4. Grievance of Mr. Shah, however, was that the full market value of gold articles was not includible in the net or assessable wealth of the assessee. He submitted that the assessee had omitted to declare those gold articles within the prescribed period in contravention of rule 126L(I) and retained possession of the undeclared gold in contravention of rule 126L(10) of the Gold (Control) Rules. Mr. Shah contended that the result of the contravention of rule 126L(1) and (10) was that it rendered the undeclared gold articles liable to seizure under rule 126M of the Gold (Control) Rules. In this connection, Mr. Shah invited our attention to a letter Annexure "D" dated 22-5-1965 addressed to the assessee by the Superintendent of Central Excise (Gold) where in it was stated to the effect that the gold seized under the Gold (Control) Rules was liable to be confiscated. Mr. Shah submitted that since the gold articles which were seized by the central excise authorities were liable to be confiscated, their full market value cannot be included in the net wealth of the assessee for each of the year under reference. It may be recalled that it was only after 30-9-1975 that gold articles seized were realised by the central excise authority under the orders of the Collector of Central Excise adverted to above. So far as the assessment years under reference are concerned, position was that the gold articles in question were seized by the central excise authorities and no final order of confiscation or otherwise was passed. It, however, cannot be gainsaid that the gold articles were liable to be confiscated under rule 126M. It is, therefore, that the assessee contends that the full market value of the gold articles cannot be included in the net wealth of the assessee.

5. Section 7(1) of the Act provides that value of any assets, other than cash, shall be estimated to be the price which in the opinion of the WTO it would fetch if sold in the open market on the valuation date. What is the meaning to be attributed to the words "if sold in the open market" came up for consideration before the Bombay High Court in Commissioner of Wealth-tax, Bombay City II Vs. Purshottam N. Amersey and Another, . The Bombay High Court referred to the provisions of the English statute which were in pari materia and also decisions of English courts including the one by the House of Lords in Commissioner of Inland Revenue v. Crossman [1937] AC 26 and observed that when the statute uses the words "if sold in the open market", it does not contemplate any actual sale or the actual state of the market, but only enjoins that it should be assumed that there is an open market and the property can be sold in such a market and on that basis directs that the value should be found out. It is a hypothetical case which is contemplated by those words of the sub-section and the tax officer must assume that there is an open market in which the asset can be sold and proceed to value it on that basis. This decision of the Bombay High Court was approved by the Supreme Court in Ahmed G.H. Ariff and Others Vs. Commissioner of Wealth Tax, Calcutta, and later on confirmed in Purshottam N. Amarsay and Another Vs. The Commissioner of Wealth Tax, Bombay, . It is, therefore, now well-settled that the tax officer, while assessing the market value of a property, must assume that there is an open market and the property can be sold in such market and on that basis the value has to be determined. Mr. Shah also does not dispute that while valuing the gold articles, the fact that they were liable to be confiscated cannot be ignored. According to Mr. Shah, liability to be confiscated would remain attached to the gold articles when they are sold in the open market and, therefore, to that extent, their value will be diminished. Therefore, the value of the gold articles will not be equivalent to their full market value. Mr. Shah submitted that in order to determine the correct value of the gold articles, their market value will have to be appropriately reduced bearing in mind the above liability.

6. In support of his argument, Mr. Shah placed strong reliance on the decision of the House of Lords in Commissioner of Inland Revenue v. Crossman (supra). In that case, the House of Lords was called upon to construe the words "if sold in the open market" in subsection (5) of section 7 of the British Finance Act, 1894. This sub-section, which provided for valuation of property by the Commissioners, read as follows : "The principal value of any property shall be estimated to be the price which, in the opinion of the Commissioners, such property would fetch If sold in the open market at the time of the death of the deceased" (emphasis supplied). The words "if sold in the open market" are identical with the words used in section 7(1). In the case before the House of Lords, the deceased was entitled to a number of ordinary shares of � 100 in a company, the articles of association of which imposed rigid restrictions upon the alienation and transfer of those shares in the company. It was argued before the House of Lords that in view of the restrictions on alienation and transfer of the shares, no one would in fact purchase those shares, nor could they be put in the open market. In dealing with this point, Viscount Hailsham. LC pointed out that "in order to reach the right conclusion upon the construction to be placed upon the sub-section and its application to the facts of the present case, it seems to be essential to determine what is the property which has to be valued" and then he proceeds to state what that property was in the following words : "''In my view, the property which passed at the death of the deceased consisted of the shares in the company, and this is nonetheless true because the terms of the articles limited the rights of the deceased shareholder or of his executors to deal with the shares, and gave certain privileges and rights of preemption on his death. If I am right so far, it follows that the Commissioners have to estimate the price which the shares would fetch if sold in the open market at the time of the death of the deceased."

Then the House of Lords referred to the decision of Lord Blanesburgh in an Irish case Attorney-General for Ireland v. Jameson [1905] 2 IR 218, where Lord Blanesburgh had taken a view similar to the view taken in the present case by the Tribunal and commenting on that view Lord Hailsham observed : "My Lord, it seems to me that this construction involves treating the provisions of section 7, sub-section (5), as if their true effect were to make the existence of an open market a condition of liability instead of merely to prescribe the open market price as the measure of value" and in a latter passage at page 42 : "But the purpose of section 7, sub-section (5) is not to define the property in respect of which estate duty is to be levied, but merely to afford a method of ascertaining its value. If the view entertained by the Court of Appeal were correct, it would follow that any property which could not be sold in the open market would escape duty altogether. That seems to be quite an unnecessary and unnatural construction to place upon the language of the statute.... I think that full justice is done to the meaning of the sub-section if the property to be valued is determined by the earlier sections and section 7 is treated as being merely a statutory direction as to the method by which the value is to be ascertained. In order to comply with that statutory direction, it is necessary to make the assumptions which the statute directs. This is not to ignore the limitations attached to the share." It was held that the value of the shares for the purpose of estate duty was to be estimated at a price which they would fetch if sold in the open market on the terms that the purchaser should be entitled to be registered and to be regarded as the holder of the shares, and should take and hold them subject to the provisions of the articles of association, including those relating to the alienation and transfer of shares in the company.

7. Mr. Shah urged that no doubt an open market in which shares could be sold was to be presumed but what was important to bear in mind was that while estimating the value of the shares, the House of Lords had made it clear that the provisions of articles of association including those relating to alienation and transfer of shares of the company have to be taken into account. On the same principle, submitted Mr. Shah, while estimating the market value of the gold articles in question u/s 7(1), the liability of their being confiscated which was attached to them must be taken into account. Now what is important to be borne in mind is that in the case before the House of Lords (sic) against transfer of shares. The articles of association of the company imposed restriction upon alienation and transfer of the shares in the company. The restriction was real and not imaginary and it had its basis in law. The purchaser, who would purchase shares in the open market, was, therefore, bound to take into account the limitation attached to the shares while purchasing it. It is no doubt true that if there is legal bar or restriction or impediment upon alienation and transfer, such bar, restriction or impediment has to be taken into account. But if there is no such bar, restriction or impediment, there would be no fetter which would in any way affect the market value of the property in question. In the instant case, gold articles were merely seized by the excise authorities. They were not confiscated on the relevant dates though in view of the contravention of the relevant rules of the Gold (Control) Rules, they were liable to be confiscated. In our opinion, the seizure and possibility of confiscation, however, did not in any way impair the ownership of the assessee of these articles. The assessee continued to be full owner of these articles on the relevant valuation dates. Mere possibility of confiscation cannot be said to impose legal restriction, limitation or impediment on the ownership of the assessee. Therefore, in our opinion, the mere fact that the gold articles in question were liable to be confiscated, does not in any way affect the market value of the articles u/s 7(1) as urged by Mr. Shah. It was not disputed by Mr. Shah that it is to be assumed that there is an open market and gold articles could be sold in such market, and on that basis the value has to be determined. Seizure of the gold articles also did not in any way affect the ownership of the assessee. It was only temporary measure akin to attachment before judgment. If the gold articles were confiscated, the assessee would have lost his ownership over them, but till that event occurred the assessee continued to be owner thereof. There cannot be said to be any cloud over the title of the assessee over those articles unless and until they were confiscated. Mr. Shah also did not dispute that the assessee was the owner of these articles. His only contention was that in view of the possibility of the gold articles being confiscated, their value in the open market would diminish. As discussed above, we are unable to accept this argument.

8. Mr. Shah next relied upon a decision of the Supreme Court in Commissioner of Wealth Tax, New Delhi Vs. P.N. Sikand, . That was a case in which the assessee had acquired the leasehold interest in a plot of land in Delhi from the original lessee thereof let to the latter by the President of India. Clause 12 of the original agreement of lease provided that "the lessee shall before any assignment or transfer of the said premises...obtain from the lessor or such officer or body as the lessor may authorise in this behalf approval in writing of the said assignment or transfer and all such assignees and transferees and the heirs of the lessee shall be bound by all the covenants and conditions herein contained and be answerable in all respect thereof; provided also that the lessor be entitled to claim and recover a portion of the unearned increase (i.e., the difference between the premium already paid and current market value) in the value of the land at the time of transfer...the amount to be recovered being 50 percent of the unearned increase. The lessor shall have a pre-emptive right to the property after deducting 50 percent of the unearned increase." The assessee had built a house on the plot of land and the question was whether 50 percent of the unearned increase payable to the lessor was deductible in ascertaining the value of the property for the purposes of wealth-tax. On a reference, the High Court held that 50 percent of the unearned increase in the value of the land payable to the lessor at the time of the transfer had to be deducted in ascertaining the value of the property. Affirming the decision of the High Court, the Supreme Court held that in determining the value of the leasehold interest of the assessee in the land for the purpose of assessment to wealth-tax, the price which the leasehold interest would fetch in the open market were it not encumbered or affected by the burden or restriction contained in clause 13 of the lease deed, would have to be reduced by 50 percent of the unearned increase in the value of the land on the basis of the hypothetical sale or valuation date. The covenant in clause 13 was covenant running with the land and it would bind whosoever was the holder of the leasehold interest for the time being. It was a constituent part of the rights and liabilities and advantages and disadvantages which went to make up the leasehold interest and it was an incident which was in the nature of a burden on the leasehold interest. It was held that it had the effect of depressing the value which the leasehold interest would fetch if it were free from the burden of disadvantage. Therefore, when the leasehold interest in the land had to be valued, this burden or disadvantage attaching to the leasehold interest had to be duly discounted in estimating the price which the leasehold interest would fetch. Relying on this decision, Mr. Shah urged that liability to confiscation is attached to the gold articles and, therefore, it had to be discounted in estimating the value thereof. As already observed above, any legal bar, limitation, restriction or impediment has to be duly discounted in estimating the value as on the valuation date u/s 7(1). In the case before the Supreme Court, burden or disadvantage was attached to the leasehold interest under the terms of the lease deed. The lessee was bound by the terms of the lease deed. It was under these circumstances that the above observations were made by the Supreme Court. In the present case, there is no burden or disadvantage under any law or lawful agreement attached to the gold articles. By the mere fact that they were seized and were liable to be confiscated, there was no curtailment or limitation of the right of the assessee. There was no legal bar, limitation, restriction or impediment on his ownership right over the gold articles. In our opinion, therefore, the above decision of the Supreme Court does not assist the assessee.

9. In our opinion, the revenue authorities and the Tribunal were right in including the market value of the gold articles as on the relevant valuation dates in the net wealth of the assessee for the assessment years in question. There is no dispute regarding the assessment of their market value except on the grounds adverted to above. We do not find any infirmity in the view taken by the Tribunal. We, therefore, answer the second question in the affirmative and against the assessee.

10. In the result, both the questions referred to us are answered in the affirmative and against the assessee. Reference answered accordingly with no order as to costs.