ORDER
N. C. SHARMA, J. :
This order will decide three reference applications bearing Nos. 2/89, 43/89 and 44/89 filed by the CWT of Jaipur, under s. 27(3) of the WT Act, 1957, for directing the Income-tax Appellate Tribunal to refer certain questions of law arising out of the order of the said Tribunal.
2. The reference application No. 2/89 relates to the assessee Shri Gopi Chand Rawat, who as specified HUF is a partner of M/s. Maliram Pooranmal, a partnership firm dealing in the business of precious and semi-precious stones, ornaments and jewellery. This assessee filed a second revised return on 27th August, 1982 for the asst. yr. 1980-81 declaring his total wealth as Rs. 3,57,500. The WTO, Jaipur (CC-1), Jaipur passed the assessment order on 26th March, 1985. In the revised return filed by firm M/s. Maliram Pooranmal it showed the value of the closing stock in Jawaharat Account and the gold ornaments & articles account of Rs. 34,85,256 and Rs. 8,71,770 respectively. While computing his interest in the firm, the assessee considered the above book value of the closing stock declared by the firm in jawaharat account and the gold ornaments & articles account. The audited trading account of the firm in the above accounts showed that the value of the closing stock had been taken at cost as certified by the management of the firm. The gross profit declared in jawaharat account and gold ornaments & articles account was 21.5% and 41.38% respectively. Therefore, according to the WTO, this factually meant that the market value of closing stock in jawaharat account and gold ornaments & articles account was in excess of the book value by 27.39% and 70.59% respectively. He also found that the value of closing stock in these items had been arrived at by the assessee, after reducing the total credit side from that of debit side. The mode adopted was that the firm first worked out its gross profit and then whatever remained, the difference of both the sides of the Trading Account, the same was used to present the value of the closing stock of the firm in a particular item of jewellery. The WTO was of the opinion that the provision of r. 2B(2) of the WT Rules, 1957 was attracted and accordingly the assessee was required to explain as to why the provisions of r. 2B(2) be not applied and proportionate advantages may not be made to his total wealth. He therefore, sought information on various points from the assessee by his office letter dt. 5th March, 1985. It was urged on behalf of the assessee that although the margin of gross profit earned by the firm was more than 20% on the sales of the year, it did not mean that the fair market value of the closing stock on the valuation date was more than 20% of the book value. It was argued before the WTO that precious stones had to ready market and the prices differ with different buyers. It was further contended that the closing stock also contained old, rejected and unsaleable precious stones. Some goods become obsolete with changes in fashion and the same are re-cut, re-polished and different ornaments are prepared to make them saleable. The contentions advanced on behalf of the assessee were not accepted by the WTO. According to him, the position emerged was that the market value of the closing stock was in excess of the book value by more than 20% The firm M/s. Maliram Pooranmal had not maintained any quantitative tally or stock register for the jawaharat account and gold ornaments & articles account. There were no details of the available stock in the form of closing stock inventory. The value of closing stock had only been estimated on the basis of difference of both the sides of the debits and credits of the trading account. The firm was not able to give even the bifurcation between the local stock and stock lying abroad and its bifurcation value. The firm was not able to trace the goods in he opening stock, purchases made during the year, sales effected during the year and closing stock. In these circumstances, the WTO held that the only criteria left for measuring the market value of the closing stock was the gross profit rate achieved by the firm during the year. The gross profit rate was an average of all transactions carried out by the firm and it could be said to be the profit rate which was operative throughout the period. The WTO, therefore, said that he had no alternative but to hold that the market value of the closing stock of the firm was in excess of its books value by more than 20% in both the accounts and, therefore, r. 2B(2) of the Rules was applicable. He accordingly, increased the value of closing stock in the aforesaid two amounts by an amount of Rs. 9,54,612 and Rs. 6,15,382 respectively and the assessees share being one-third, an addition of Rs. 5,23,331 was made to the total wealth of the assessee on this account. The assessee filed an appeal before the AAC, A-Range, Jaipur. The AAC stated in his order dt. 5th March, 1987 that in the assessees own case in earlier years, the members of the Tribunal had held that r. 2B(2) was not applicable so far as valuation of the closing stock was concerned. Following the same, the valuation made on this account by the WTO was deleted. The WTO, CC-II, Jaipur filed an appeal before the Tribunal pertaining to asst. yrs. 1980-81 and 1981-82 as against the order of the AAC. In those appeals, the WTO agitated that r. 2B(2) of the Rules was applicable in valuation of closing stock of the firm and its apportionment to the assessee proportionate to his share in the firm. The Tribunal held that this matter had been considered in several cases and also in the case of the assessee as a whole and they were fully covered by the decision of the Special Bench in the case of WTO vs. Shyam Mohan Rawat in WTA Nos. 10 to 13/Jpr/84 dt. 13th January, 1986. (since reported in (1986) 25TTJ (Jp) (SB) 61]. Following the Special Bench decision, the Tribunal confirmed the order of the first appellate authority and dismissed the departmental appeals on 31st July, 1987. The CWT, Jaipur has, therefore, made the present application for reference under s. 27(3) of the WT Act and it is submitted that the following two questions of law arises from the order of the Tribunal, namely : (i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that r. 2B(2) of WT Rules was not applicable in the assessees case and consequently in deleting the addition made by the WTO ? (2) Whether, on the facts and in the circumstances, the Tribunal was right in holding that M/s. Maliram Pooranmal is an industrial undertaking within the meaning of s. 5(1)(xxxii) and subsequently in holding that the value of the assessees interest in the firm is exempt under s. 5(1)(xxxii) of the WT Act ?
3. WT Ref. Appln. No. 43/89 has also been filed by the CWT, Jaipur and arises in similar circumstances. In this application also, the Revenue has said that the above two questions of law arise in this case also. It may be stated that in both the cases the assessee had claimed a deduction under s. 5(1)(xxxii) of the WT Act, on the ground that it was an industrial undertaking and manufactures and processes good emerald from rough emerald. The WTO had come to the conclusion that no manufacturing process was at all carried out by the firm.
4. WT Ref. Appln. No. 43/89 pertains to Shri Mohan Lal, partner in the firm M/s. Chandmal Poonamchand Jaipur. This firm also carries on business in gems and precious stones.
5. It may here be mentioned that Reference Appln. No. 44/89 by the CWT, Jaipur also pertains to Shri Mohan Lal, assessee, partner in the firm M/s. Chandmal Poonamchand and involves similar points. WT Ref. Appln. No. 44/89 pertains to the asst. yr. 1976-77 while Ref. Appln. No. 43/89 pertains to the asst. yr. 1977-78, relating to Mohan Lal. It has been stated by the Revenue in the reference applications that the book value of the closing stock had been taken at its cost price and on that basis, the market value could not be ascertained. The assessee did not produce any evidence with regard to the valuation of the stock as shown in the trading account. No details were given regarding old, rejected and unsaleable precious stones by the assessee. Even the stock list was not submitted. It was argued that the WTO was, therefore, right in the circumstances to come to the conclusion that the gross profit rate (sic) was in excess of the book value of the closing stock by more than 20% and in applying r. 2B(2) of the Rules. It was next submitted that the WTO had come to the conclusion that no industrial or manufacturing process was being carried out by the firm and, therefore, exemption could not be claimed under s. 5(i)(xxxii) of the WT Act.
6. Mr. N. M. Ranka appearing on behalf of the assessee, in reply, contended that the Tribunals order is based upon its own previous decision. This Court has also held in series of decisions that the finding of the question of market value arrived at by the Tribunal is one of fact and the same cannot be reopened in reference. He also contended that the burden of proving that the market value of the closing stock in jawaharat account and gold ornaments & articles account exceeded their written down value or book value or the value adopted for the purposes of assessment under the IT Act, 1961, as the case may by, more than 20% was upon the Revenue. There being no positive material to that effect, the WTO could not arrive at the conclusion on the basis of mere surmises. He urged that the two questions formulated are not questions of law. They are questions of fact and no reference can be directed in relation to these questions of fact.
7. Provisions contained in s. 7 of the WT Act, 1957 and rr. 2, 2A and 2B came up for consideration before a Division Bench of this Court in CWT vs. Moti Chand Daga (DB WT Ref. No. 124/82), decided on 21st May, 1988, [since reported at (1988) 71 CTR (Raj) 102]. His Lordship, the Chief Justice, speaking for the Bench, laid down that sub-s. (2) of s. 7 of the WT Act, 1957 was in enabling provision conferring discretion on the WTO to determine the net value of the assets of the business as a whole having regard to the balance-sheet as on the valuation date, instead of proceeding under sub-s. (1) of s. 7. It was, therefore, optional for the WTO to resort to either of the methods provided in sub-s. (1) and sub-s. (2) of s. 7. Sub-s. (2) of s. 7 itself provides that in making the valuation according to the mode prescribed therein, the WTO has to make such adjustments therein as may be prescribed; that where determination of the net vale of the assets of the business as a whole is made under s. 7(2)(a) having regard to the balance sheet of such business, the WTO shall make the adjustments specified in rr. 2B, 2C, 2D, 2E, 2F and 2G. Construing r. 2B(2) of the Rules, the Division Bench stated that unless determination of the market value on the basis of definite material is at an amount exceeding 20% of the value disclosed in the balance-sheet has to be accepted for the purpose of wealth-tax assessment. This was said to be the cumulative effect of the above statutory provisions.
8. According to s. 2(m) of the WT Act, 1957 in order to arrive at “net wealth”, the value of the assets has to be computed in accordance with the provisions of the Act. Sec. 7 of the Act lays down as to in what manner the value of assets will be determined. The basic provision in this regard is contained in s. 7(1 of the Act which inter alia provides that the value of any asset, 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. This is subject to any rules made in this behalf. It is clear from he language of s. 7(1) of the Act that the basic law is that the value of an asset has to be estimated at its market value on the valuation date. In our opinion, sub-s. (2)(a) of s. 7 operates as an exception or a proviso to s. 7(1) of the Act. This exception applies only where the assessee is carrying on a business and not in other cases. The basic conditions required for the applicability of s. 7(2)(a) are : (1) that the assessee should be carrying on a business and (ii) accounts of that business should have been maintained by the assessee regularly. It is well known that if the accounts of a business are maintained regularly they furnish a credible idea about the financial position of that business including the value of fixed and floating assets of the business. In cases, therefore, where the assessee is carrying on a business and the accounts of the business are maintained regularly by him, the WTO has been given a discretion that instead of determining separately value of each asset held by the assessee in accordance with sub-s. (1) of s. 7, he can determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date and make such adjustment therein as may be prescribed. Obviously, therefore, it follows that even where the assessee is carrying on a business, but if he does not maintain the accounts of the business regularly, WTO cannot take resort to s. 7(2)(a) because one of the basic conditions that the accounts of the business should be maintained regularly is not satisfied. Where the accounts are not maintained by the assessee regularly, even the balance-sheet of the business cannot exist to be taken into account in determining the net value of the assets. We are not inclined to agree with the judgment of the Division Bench of this Court in CWT vs. Motilal Daga (supra) that it is optional for the WTO to resort to either of the methods provided in s. (1) and sub-s. (2) to determine the net value of the assets of the assessee. We are of the opinion that where the assessee carriers on a business, but he does not maintain the accounts of the business regularly and does not strike a balance-sheet on the valuation date, the WTO cannot proceed to act under s. 7(2)(a) of the Act, it has also to be remembered that s. 7(2)(a), when the prerequisite conditions of the sub-section are fulfilled, also gives the WTO power to determine the net value of the assets of the business as a whole instead of what is required under s. 7(1) to determine separately the value of each asset. Net value of the assets of the business as a whole can only be determined having regard to the balance-sheet of such business when the accounts are maintained by the assessee regularly and balance-sheet is drawn of the business as on the valuation date. Rule 2A of the WT Rules, 1957 only applies where the WTO determine the net value of the assets of the business as a whole having regarding to the balance-sheet of such business. The adjustments specified in r. 2B(1) are also to be made when the WTO has the jurisdiction to exercise the powers under s. 7(2)(a) of the Act and exercise the same. Sub-r. (2) of r. 2B of WT Rules, 1957 is an exception to sub-r. (1). The exception can only be applied when the net value can be and is determined under s. 7(2)(a) of the Act and on the basis of the adjustments specified in r. 2B (1) of the Rules.
9. In the instant cases, there is no finding of the WTO that the assessee was maintaining his business accounts regularly and that he had drawn the balance-sheet of his business on the valuation date. On the other hand, whatsoever findings have been given by the WTO, clearly indicate that the assessee did not maintain the accounts of his business regularly and did not draw balance-sheet of the business as on the valuation date. The WTO only speaks in his assessment order of audited trading account and nowhere the balance-sheet. In mercantile system of accounting and even in traditional Indian accounting system, three sorts of accounts have to be prepared before it can be said that the accounts are maintained regularly. These three kinds of accounts are the trading account, profit & loss account and the balance-sheet with a quantitative stock tally. The WTO has stated in his order that the value of the closing stock in jawaharat account and gold ornaments & articles account had been arrived at by the firm, after reducing the total credit side from the debit side. The assessee firm first worked out its gross profit and then whatever remained the difference of both the sides of the trading account the same was used to represent the value of closing stock of the firm in a particular item of jewellery. On the basis of this finding, the WTO held that the provisions contained in r. 2B(2) of the Rules become applicable. On its very face, and on the basis of the findings arrived at by the WTO, r. 2B(2) of the Rules can have no application whatsoever. Even in preparing a trading account, first of all the opening stock on the basis of the stock register has to be entered into. Purchase made during the relevant period have to be written on the debit side and the sale proceeds on the credit side. Then first of all stock tally has to be taken of the closing stock according to the stock register maintained and its value is to be entered on the credit side of the trading account. It is only thereafter that the difference between the two sides is calculated to find the gross profit of the year. The assessee in the instant cases did not follow that procedure. He arrived at the gross profit before recording the value of the closing stock on the basis of the stock register. There is no finding that the assessee maintained the accounts of the business regularly or that he even drew the balance-sheet. In the absence of that finding, the WTO could not take the resort to and had no power to take resort to the provisions contained in s. 7(2)(a) read with r. 2B(2) of the Rules. The AAC, in our opinion although for different reasons recorded by us, rightly held that r. 2B(2) of the Rules was not applicable so far as valuation of the closing stock was concerned and the Tribunal rightly confirmed the conclusion in this regard arrived at by the AAC.
10. In the reference applications, the Revenue has stated that the provisions of r. 2B(2) of the Rules were attracted and on that basis, the first question of law specified in the application is said to arise. The findings of fact relevant to the question remain what they are and on these basis, though for reasons different than given by this Court in CWT vs. Motilal Daga (supra) and the AAC and the Tribunal, we are of the view that the question does not arise as a question of law as there is no finding of fact that the accounts of the business were maintained by the assessee regularly.
11. The WTO had not resorted in his assessment order to s. 7(1) of the Act and the Revenue, at no stage, took an alternative plea that in case s. 7(2)(a) read with r. 2B(2) of the Rules did not apply, the AAC or the Tribunal should have remanded the case to the WTO to make the valuation of the assets on the basis of the price which, in the opinion of the WTO, the assets would have fetched if sold in the open market on the valuation date.
12. So far as the findings on the question whether the firm was an industrial undertaking, in several cases and also in the case of the assessee, it had been held that it was an industrial undertaking and the exemption under s. 5(1)(xxxii) shall apply.
13. Consequently, no question of law arises from the order of the Income-tax Appellate Tribunal and it is not necessary to direct the Income-tax Appellate Tribunal to refer the two formulated questions of this Court under s. 27(3) of the WT Act, 1957.
14. All the three reference applications are accordingly dismissed.