JUDGMENT
G.G. Sohani, Actg. C.J.
1. By this reference under Section 27(1) of the Wealth-tax Act, 1957 (hereinafter referred to as “the Act”), the Income-tax Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that on the valuation date, i.e., Diwali 1963, the asset in question, i.e., 243,778 Kgs. of gold was not the assessee’s wealth for the assessment year 1964-65 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the said gold had no value for inclusion in the taxable wealth of the assessee for the assessment year 1964-65 ?
(3 ) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the cumulative tax liability of the assessee for earlier years, which is outstanding on the valuation date and is challenged by the assessee in appeal, is also deductible from the assessee’s
wealth ?”
The material facts giving rise to this reference, briefly, are as follows :
2. The assessment year in question is 1964-65, for which the valuation date, in the case of the assessee, was Diwali 1963. In June 1965, there was a search of the premises of the assessee by the Central Excise Department and gold weighing 2.297 kilograms was recovered. In another search conducted by the Central Excise Officials in the house of the assessee in August. 1965, gold weighing 240.040 kilograms was recovered. As the assessee had not made a declaration with respect to the aforesaid quantity of gold, the Collector, Central Excise, passed an order in September 1966, confiscating that gold. While framing the assessment of the assessee under
the Act for the assessment year 1964-65, the Wealth-tax Officer included the value of the aforesaid quantity of gold in computing the net wealth of the assessee. Aggrieved by that order, the assessee preferred an appeal before the Commissioner of Wealth-tax (Appeals). The contention raised on behalf of the assessee in the appeal was that as the assessee had failed to declare the gold as required by law, it was liable to confiscation and hence the assessee could not be held to be the owner of the gold on the date of valuation and that it had no market value. This contention was not upheld by the Commissioner of Wealth-tax (Appeals). The assessee, therefore, preferred a second appeal before the Tribunal. The Tribunal held that as the gold found in the possession of the assessee was a prohibited article, it could not be held to belong to the assessee and that as it had no market value, its value would be nil as on the date of valuation. The Tribunal also held that the cumulative tax liability as determined by the Wealth-tax Officer had to be deducted under Section 2(m) of the Act. In this view of the matter, the Tribunal allowed the appeal. Aggrieved by the order passed by the Tribunal, the Revenue sought reference and it is at the instance of the Revenue that the aforesaid questions of law have been referred to this court for its opinion,
3. Shri Mukati, learned counsel for the Revenue, contended that the gold in question was not confiscated in the assessment year in question and that on the valuation date, it was the property of the assessee. It was also contended that the Tribunal erred in holding that the gold in question had no market value and that the assessee was entitled to deduct the cumulative tax liability. In reply, Shri Chaphekar, learned counsel for the assessee, contended that as the assessee had failed to make a declaration, as required by the Defence of India (Amendment) Rules, 1963, relating to gold control, hereinafter referred to as “the Rules”, the assessee had lost the right to hold and enjoy the property in question on the valuation date and the same could not, therefore, be regarded as an asset of the assessee. It was also contended that as that gold could not be legally sold in the open market, its value was nil on the valuation date. As regards the finding of the Tribunal that the cumulative tax liability had to be deducted under Section 2(m) of the Act, reliance was placed on the decision in CWT v. Meghji Girdharlal [1987] 165 ITR 111 (MP) and CWT v. Shravan Kumar Patel [1988] 171 ITR 298 (MP).
4. Before we proceed to appreciate the contentions advanced on behalf of the parties, it would be useful to refer to certain relevant provisions of law. On the valuation date, i.e., Diwali 1963, the Defence of India Rules were in force. Rule 126-I required every person, not being a dealer or refiner, to make a declaration within the stipulated time as to the quantity of gold owned by him. Sub-rule (ii) of that rule provided that any person in possession or control of any gold, not being ornaments, would be presumed,
until the contrary was proved, to be the owner thereof. Rule 126L empowered seizure of gold in respect of which there was contravention of the Rules. Rule 126M provided that the gold so seized would be liable to confiscation.
5. Now, it is “not disputed in the instant case that the seizure and confiscation of the gold in question did not take place in the assessment year in question 1964-65 but long after the valuation date, which was Diwali 1963. The seizure took place in June and August 1965, when the gold in question was recovered from the possession of the assessee and confiscation took place in September, 1966. Sub-rule (ii) of Rule 126-I of the Defence of India Rules provides that any person in possession of gold shall be presumed, unless the contrary is proved, to be the owner of that gold. The fact that the assessee was in possession of the gold in question on the valuation date, was not disputed on behalf of the assessee, but it was contended that as the assessee had failed to make a declaration as required by Rule 126-I, the gold possessed by the assessee was liable to be seized and confiscated at any time and hence the gold in question was not the wealth of the assessee in the assessment year 1964-65. It is, therefore, necessary to turn to the provisions of the Act to examine the correctness of this contention advanced on behalf of the assessee.
6. Section 3, which is the charging section in the Act, provides that, subject to the other provisions contained in the Act, there shall be charged a tax, in respect of the net wealth on the corresponding valuation date of an assessee, The expression “net wealth” is defined by Section 2(m) to mean the amount by which the aggregate value computed in accordance with the provisions of the Act of all the assets belonging to the assessee on the valuation date is in excess of the aggregate value of all the debts other than those specified. “Asset”, as defined by Section 2(e), includes property of every description, movable or immovable, excluding that specified in Section 2(e). In view of these provisions, the question that arises for consideration is whether it can be said that the gold in question was not the asset of the assessee on the valuation date, because of the possibility of seizure and confiscation of that asset at some future date. In our opinion, till an asset is confiscated according to law, it would continue to be an asset belonging to an assessee. On behalf of the assessee, it was contended, relying on the decision in Sheoshankar v. State Government of Madhya Pradesh [1951] AIR 1951 Nag 58 [FB], that what had been rendered contraband, could not be an object of property. The observations in Sheoshankar’s case, AIR 1951 Nag 58, have to be read in the context that the court in that case was called upon to decide the question as to whether a noxious object could be a legitimate object of “property” for the purpose of Article 19 of the Constitution and whether the State could prohibit a person from acquiring or possessing that property. That decision cannot be
construed to lay down that when a person is found to be in possession of a contraband article, it must be held that the contraband article, not being “property”, cannot belong to that person. Such a construction will lead to strange results and would be contrary to the provisions of Rule 126-I(ii) which provides that any person in possession or control of gold, shall be presumed, until the contrary is proved, to be the owner thereof. Until the gold seized from a person is confiscated according to law, it would continue to be the asset of the person from whom it was recovered and who is unable to prove that he was not the owner of the gold so seized.
7. It was then contended that the gold in question had no value as it could not be legally sold in the open market and that under the provisions of Section 7(1) of the Act, the value of any asset would be the price which it would fetch if sold in the open market on the valuation date. In this connection, we may usefully refer to the following observations of the Bombay High Court in CWT v. Purshottam N. Amersey [1969] 71 ITR 180, 191 :
“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. 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. The use of the words ‘if sold’ creates a fictional position which the tax officer has to assume.”
8. The aforesaid observations were approved by the Supreme Court in Ahmed G.H. Ariff v. CWT [1970] 76 ITR 471, and it was observed as follows (p. 477) :
“Mr. Sen has laid emphasis on the language of Section 7(1) of the Act and has contended that the right to a share in the income is not capable of any valuation and the price which it would fetch, if sold in the open market, could not possibly be ascertained. Such an argument was fully examined in the Bombay case, CWT v. Purshottam N. Amersey [1969] 71 ITR 180, in which the High Court referred to the provisions of the English statutes, which were in pari materia, as also decisions given by the English courts including the one by the House of Lords in Commissioners of Inland Revenue v. Crossman [1937] AC 26 ; 2 EDC 537. It has been rightly observed by the High Court that when the statute uses the words ‘if sold in the open market’, it does not contemplate 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, the value has to be found out. It is a hypothetical case which is contemplated and the tax officer must assume that there
is an open market in which the asset can be sold.”
9. In Purshottam N. Amarsay v. CWT [ 1973] 88 ITR 417, the Supreme Court held that what was ruled in Ahmed G. H. Ariff v. CWT [1970] 76 ITR 471, by the Supreme Court was that oven if the property in question was incapable of being sold in the open market, in that event also, the interest of the assessee had to be valued by the Wealth-tax Officer.
10. In our opinion, therefore, the Tribunal was not justified in holding that on the valuation date, i.e., Diwali 1963, the asset in question was not the wealth of the assessee and that the said asset had no value for inclusion in the taxable wealth of the assessee.
11. As regards question No. (3), it has been held by this court in CWT v. Meghji Girdharlal [1987] 165 ITR 111, that the tax liability of the assessee, which is outstanding on the valuation date and is challenged by the assessee in appeal, is also deductible from the assessee’s net wealth. We see no reason to take a view different from that taken in [1987] 165 ITR 111.
12. For all these reasons, our answers to questions Nos. (1) and (2) are in the negative and in favour of the Revenue and our answer to question No. (3) is in the affirmative and against the Revenue. In the circumstances of the case, parties shall bear their own costs of this reference.