ORDER
A. Kalyanasundharam, Accountant Member
1. These are three reference applications filed by the department which according to the department arises out of one common order passed by the Tribunal dated 21-11-1983. These three persons are partners of a firm M/s. Maliram Puranmal. The question that is sought to be referred in all the three cases is as under :
Whether on the facts and in the circumstances of the case the Appellate Tribunal is justified in holding that the provisions of Rule 2B(2) of WT Rules are not applicable in determining the net wealth of the firm M/s. Maliram Puranmal and consequently in sustaining the order of the AAC deleting the addition on the asses-see’s hand ?
2. On behalf of the department it was argued that it is question of law, and, therefore, should be referred to the Hon’ble High Court of Rajasthan.
3. On the other hand, it was argued on behalf of the assessee by Mr. N.M. Ranka that the issue of applicability of Rule 2B(2) was considered by Rajasthan High Court in the case of CWT v. Smt. S.K. Bader [1986] 29 Taxman 343 had vide their order dated 4th September, 1985 in the abovementioned case had come to the conclusion that Rule 2B(2) cannot be invoked on the basis of the gross profit as the gross profit rate does not indicate the difference in the value of the stock as shown by the assessee and its fair market value. He filed the copy of the order of the High Court and submitted that is purely a question of fact that by adding the gross profit rate to the closing stock value it does not represent the market value and, therefore, invoking of Rule 2B(2) is improper. He also placed reliance on B. Damodar and Co. v. Addl. CIT [1974] 97 ITR 70 (Mys.).
4. We have heard the parties. The questions that were considered by their Lordships of the Rajasthan High Court in the case of Smt. S.K. Bader (supra) dated 4th September, 1985, copy filed by the assessee, are as under :
(1) Whether on the facts and in the circumstances of the case the Appellate Tribunal is justified in holding that in order to ascertain the actual market value of the closing stock of the firm for purposes of Rule 2B(2) of WT Rules, the export invoice value has to be reduced by 35 per cent ?
(2) Whether on the facts and in the circumstances of the case the Appellate Tribunal is justified in holding that the Export Invoice Value is not the market price but merely a quotation not standing the provisions of Section 18 of the Foreign Exchange Regulation Act ?
(3) Whether on the facts and in the circumstances of the case the Appellate Tribunal is justified in holding that the difference between the market value and the cost price of the closing stock of the firm is less than 20 per cent and, therefore, no addition on account of increased value could be made in the assessee’s net wealth under Rule 2B(2) of WT Rules ?
The facts of the case are that the assessee-firm had valued the closing stock of jewellery at Rs. 19.50 lacs and the value of semiprecious and precious stones were taken at Rs. 1.32 lacs. The export invoice value of the stock was Rs. 33.80 lacs. The WTO was of the view that since the value of the stocks as per Export Invoice Value being more than 20 per cent of the book value, he invoked the provisions of Rule 2B(2). The AAC as well as the Tribunal allowed the appeals of the assessee that the book value of the stocks have been arrived at properly by deducting 35 per cent of the Export Invoice Value. Their Lordships observed that giving deduction of 35 per cent in arriving at the book value is a finding of fact. They observed further that the Tribunal was justified in coming to the conclusion in arriving at the fair market value of the closing stock by making a deduction of 35 per cent from the Export Invoice Value. Their Lordships, therefore, came to the conclusion that in these circumstances the manner of arriving at the fair market value was one of finding of fact and does not involve any question of law.
5. In the present case the WTO had sought to invoke Rule 2B(2) on the basis that the gross profit of the assessee being 25.2 per cent, he was of the view that the closing stock was undervalued to the extent and, therefore, increased the value of stock by 25.2 per cent.
The Tribunal had relied on the Rajasthan High Court decision in CWT v. Man Industrial Corporation Ltd. [1980] 123 ITR 298 as well as other decisions of the Supreme Court which are contained in the Third Member’s order in para 10 who gave Ms conclusion that the gross profit is an indicator for arriving at the fair market value within the meaning of Rule 2B(2) and, therefore, the Third Member ruled that the Rule 2B(2) cannot be invoked. By a majority decision, therefore, it was concluded that Rule 2B(2) cannot be invoked by applying the g.p. rate shown by the assessee in its trading accounts.
6. What we have now to examine is to what extent the present case compares well with the decision of the Rajasthan High Court, (supra). In the case before Rajasthan High Court, the closing stock was valued at 48 per cent than the Export Value shown. In that case the Export Invoice Value was mentioned to be anything between 20 to 30 per cent of the market value. In that case also the gross profit was much more than 20 per cent. In the instant case the gross profit shown is 25.2 per cent and the learned Accountant Member in his order in para 11 examined the material on the basis of which the revenue argued that the market value of the closing stock of the firm is more than 20 per cent of its value shown in the balance sheet. The assessee before the WTO had submitted that it was prepared to sale to anyone the entire closing stock for a margin of 18 per cent. This has been so observed by the WTO in para 4 of his order. In para 5, he considered the arguments of the assessee and gave a margin of 4 per cent for the reason that some of the stock had not moved for many years and that the profit of 25 per cent or so was possible due to low cost and for the reason that there were several cost elements involved such as interest, etc. The real profit that is made by the assessee on the sale of those items would be lower than 25 per cent. The WTO after giving a margin of 4 per cent on the gross profit of 25.2 per cent added the difference without any other evidence in his possession to substantiate that the real market value as is envisaged in Rule 2B(2) was to that extent. The learned AAC was again covinced that the submissions about long period of holding of stocks is factually correct and also noted that the assessee was willing and prepared to sale the entire stocks at 18 per cent margin over the cost. He was also satisfied that the margin available on export sales was larger than the margin available on sales made to local persons. It was also a fact that out of total sales of Rs. 26.68 lacs, the export sales accounted for Rs. 22.21 lacs which is almost 90 per cent of the total sales. The learned Third Member in para 11 of his order was convinced about the fact that the department has not disputed that the stocks which are sold sometimes take several years before they are actually sold and that there are expenses which are spread over the years. It was also observed that if the entire stocks had to be sold in one lot in the open market it would definitely not fetch the same price which the assessee would be able to make if the sale is spread over the years. It was under these circumstances, the Third Member came to the conclusion that the gross profit is not an indication at all about the market value of the closing stock.
7. The facts in the present case are identical with those of the case decided by Their Lordships of Rajasthan High Court, supra. The similarities are the value of closing stock have been arrived at by reducing a particular percentage of expected profit from the sale price realised on similar items in the year. The second similarity is in that case also most of the sale were for exports as in the present case. In that case, even the export value has been held to be not representing the market value but a mere quotation of an expected market price. In the present case, the gross profit earned, which is 25.2 per cent represents the difference between the book value and the market value and, therefore, Rule 2B(2) is being invoked. The G.P. is the balancing figure of the purchase and sale transactions of the year and under no circumstances it could even be said that gross profit is indicative of the sale price realisable by an assessee as G.P. is only the result of an event and does not lead to an event. The sale price is dependent on several market conditions and the gross profit is only the result arising to an assessee on account of such a sale. Every assessee would like to maximise his profits and merely for the reason that his expected profit or the profit realised in a particular year is 25 per cent. It does not conclude that the stocks in hand have to be valued at 25 per cent more than the book value has been held to be a mere quotation which at most of the times could be the sale price realised subsequently also than the gross profit realised can never even be held to be an indicative of the expected sale price. When a reduction of 35 per cent from the export invoice value for arriving at the value of closing stocks for trading account purposes has been held to be proper and that Rule 2B(2) cannot be invoked on that basis and it is purely a finding of fact. The natural corollary that follows is that the gross profit is not an indicating factor at all for invoking the provisions of Rule 2B(2). As per the WTO, the value of the stocks is taken at Rs. 26.78 lakhs and it is an accepted fact that over 91 per cent of the sale is on export and from the value of stocks, a 25 per cent reduction has to be allowed for arriving at a proper gross profit then even on that basis the stock has to be of a value of Rs. 27 lakhs only which figure compares well with the figure of Rs. 27.51 lacs shown by the assessee. Notwithstanding this particular position the assessee had categorically submitted before the authorities that it was prepared to dispose of the entire stocks for a margin of 18 per cent only and the department could not bring in any trader to buy the stock at the 18 per cent margin. Therefore, even on the initial ground the department failed to establish that the market value in fact exceeded 20 per cent over the book value. Therefore, basing on the Rajasthan High Court ratio, (supra), as well as the facts of the case the question that is sought to be referred is a question of fact and the Reference Applications are accordingly rejected.
H.S. Ahluwalia, Judicial Member
1. I have had the benefit of going through the order proposed by my learned brother and with great respect to the observations made by him, I regret very much that I have been unable to persuade myself to agree with his ultimate conclusion.
2. Things can be manipulated by the assessee in the manner in which they want to, but the broad general propositions in this behalf which cannot be seriously disputed are very clear. The dispute relates to the market value of the closing stocks held by the firms in which various assessees are partners. For the purpose of income-tax assessments an assessee is entitled to value the closing stock at the cost or market price, whichever is less. The rate of gross profit is a normal index of the difference between the cost price and the market price. I had an occasion to consider this matter at length while sitting in a Special Bench in WTA Nos. 10 to 13/JP./84 dated 13-1-1986 and I was of the opinion that once it was found that the gross profit earned by the firm was higher than 20 per cent, prima facie Rule 2B(2) would be applicable. The detailed reasons for my conclusion are enclosed as Annexure-A. Although the majority has not agreed with my view, a perusal of the discussion therein will show that my conclusion was based upon the presumption laid down by Section 106 of the Indian Evidence Act. Therefore, whatever be the ultimate view, the question involved in this case is a clearcut referable question of law. According, I am of the opinion tha,t the present references should be submitted to the Hon’ble High Court.
H.S. Ahluwalia, Judicial Member
1. Personally speaking I am of the opinion that in relation to the main dispute, the contrary view of the matter would be more appropriate and in accordance with the language and spirit of law. It is well established that so far as computation of total income is concerned, an assessee can value its closing stock on cost or market price whichever is less. It was not seriously disputed before us that the firm in which the asssssees are partners had actually taken the value of the closing at the lesser figure, i.e., the cost. In fact, it was never disputed that the closing stock itself had been valued by the firms by deducting a certain percentage (which was less than the G.P. disclosed by the said firms) from the market price on the relevant accounting date. Consequently, the gross profit would ordinarily be less than the margin between the cost and the market. It was also not disputed that the rate of gross profit disclosed by the said firms was more than 20 per cent in either case.
2. My respected and learned brethren have observed that from the reading of Rule 2B(2) it is clear that it would be for the Wealth-tax Officer to show that the market value of the closing stock exceeded the value by more than 20 per cent on the relevant valuation date. Actually the language of Rule 2B itself shows that the fra-mers of this rule were alive to eases of the kind like the one in hand. Under Sub-rule (1) they laid down that the value of the assets disclosed in the balance-sheet shall be taken to be the written down value and in case of closing stock, its value adopted for the purpose of IT Act. Then they specifically incorporated Sub-rule (2) which was to apply notwithstanding anything contained in Sub-rule (1). Now as I have pointed out above, the market value of the closing stock owned by the firm certainly exceeded the value adopted for the purpose of assessment under the Income-tax Act because for the purpose of that Act, the value that has to be taken is cost or market rate whichever is less, so that there can be no dispute that there is always a difference between the cost and market value and the lesser of the two is adopted for the purpose of assessment under the IT Act. The only possible dispute is as to what would be the percentage of difference between the two. It is in this behalf that the question of onus is stated to be material. This much is not disputed that there is a difference between the cost and the market price and the lesser has been adopted under the IT Act. Now what is the percentage of difference and who is the person who knows about it ? Ordinarily the initial onus of showing the applicability of Rule 2B(2) may be on the Department, because of Sections 102 and 103 of the Evidence Act, but under Section 106 of the Evidence Act, the fact of market value of the closing stock being within the knowledge of the assessees, the burden of proving the same would be upon them and former sections would have no application to the present cases. The provisions relating to burden of proof in the Evidence Act lay down general principles of law and can certainly be considered while deciding cases under the Income-tax Act. At any rate Section 106 has been held to be applicable to the present proceedings by the Hon’ble Supreme Court in CWT v. J.K. Cotton Mfrs. Ltd. [1984] 146 TTR 552 (See page 583).
3. How can the WTO possibly find out the market value of each item of closing stock held by the firm on the relevant accounting year ? Even the detailed particulars of the closing stock of the firm may not be available with the Wealth-tax Officer, assessing the present assessees. The Wealth-tax Officer, therefore, would have to raise some kind of presumption from the available facts. The fact of the G.P. being more than 20 per cent would prima facie discharge the burden relying upon the Department and justify the WTO in raising the presumption. The actual market price of each item of closing stock was a fact within the special knowledge of the assessees because they are partners of the firms who owned the closing stocks. A partner may be different entity from a firm for the purpose of assessment under the IT Act, but a partner is an agent of the firm for all dealings with the third parties and is expected to know all facts relating to the conduct of the business by the firm so that it were the assessees who knew as to what was the actual market value of the items forming part of the closing stock. My learned brethren have accepted the proposition that for the purpose of Section 7 and the relevant rules, one has only to consider the hypothetical sales because there cannot be any actual sales on the valuation date, but they have been influenced by the fact that there would be some depreciation in the market rate by the time the goods will be actually sold, because the amount of closing stock showed that the sales of the goods in this line were rather low and it was necessary to hold goods for a considerable period. In that sense every property owned by an assessee may have to be sold at a throw away price if the assessee has to necessarily dispose it off on the relevant accounting date. In fact the immovable properties owned by the assessees are not sold for years and years altogether. There may be no immediate customer for such properties. The fact that if the owners are compelled to sell the properties on the relevant valuation dates, they may get only a throw away price would not be a ground for taking that throw away price as the market value. A hypothetical sale to a dealer may not fetch the same price which an owner can get on sales to different parties. But for the purpose of estimating the market value under Section 7 of the WT Act, it is to be presumed that there is a ready buyer for the closing stock and he would pay the price at which the stock would be sold in the normal course of business. The buyer is not presumed to be a dealer who would keep his own margin of profit while purchasing the stock. No body having disputed that the G.P. rate disclosed by the firm was higher than 20 per cent, the ITO could at least raise a presumption that the market value of the closing stocks was in excess of the cost by more than 20 per cent. In such circumstances, it was for the assessees to show that because of the fact that there were no ready buyers the goods actually forming part of the closing stock were to be held for a considerable period and that in the particular items left in the closing stock, the margin of profit by the firms was less than 20 per cent, because this was a fact within the special knowledge of the assessees.
4. My learned brethren have observed that the WTO should have called upon the assessees to produce before him particular material and details relating to the value of the closing stock, but the Wealth-tax Officer himself did not know as to what facts should be ascertained for establishing the margin and, therefore, had not put any specific enquiries or asked the assessees to produce any specific facts. However, he had asked them to show cause as to why the closing stock should be revalued. In reply the assessees only gave general explanation and asked the Wealth-tax Officer that he should give them the basis for coming to the conclusion tha,t the margin exceeded 20 per cent. The prima facie basis was already there in the form of the G.P. earned by the firm. Nothing more was known to the WTO, but every thing was known to the assessees. They could give all the relevant facts to enable the WTO to ascertain the actual position. As I have pointed out above, the basic burden on the WTO was not as has been presumed by my learned brethren, because the WTO did not know the items of closing stocks held by the firms and the market price of each one of them. He only knew two facts, namely, that the value of the closing stock for the purpose of computation of income was taken to be the cost which was certainly less than the market value and the G.P. earned by the firm during the relevant accounting year being more than 20 per cent, this difference prima facie exceeded 20 per cent. Beyond that possibly the WTO could not know anything and how can there be an onus of proof on a public servant who does not know anything about the items of closing stock and their values. All these facts were within the special knowledge of these assessees and the onus of proving that the difference between the cost and the market was a particular percentage, ought to be placed upon the assessees. They did not give any material to the WTO to enable him to ascertain the actual market value of the closing stock. He could not seize these articles to ascertain the actual value. Therefore, he was not expected to do anything more than what he has done.
5. My learned brethren have been influenced by the observations of the Settlement Commission that the value shown for the purpose of export could not be considered as the market value and a substantial discount has to be allowed for ascertaining the market value at home. But what would be the percentage of this discount was never looked into by anybody and who knew as to what the actual deduction ought to have been. Obviously it were the assessees.
6. I am, therefore, of the opinion that the Departmental ground raised in this behalf ought to have been allowed. However, since my respected & learned brethren have taken a contrary view in accordance with the general principle of jurisprudence and the provisions of Section 255(4) of the Income-tax Act which would apply to this case, because of Section 24(11) of the Wealth-tax Act, the view of the majority in case of difference of opinion should prevail, I therefore, respectfully concur with all the ultimate conclusion arrived at by my learned brethren.
ORDER UNDER Section 24(11) OP THE WEALTH-TAX ACT, 1957 READ WITH Section 255(4) OF THE INCOME-TAX ACT
As there has been a difference of opinion, we refer the following question for the opinion of the Third Member :
Whether any reference in the matter is called for ?
THIRD MEMBER ORDER
G. Krishnamurthy, President
1. These are the reference applications filed by the Commissioner of Wealth-tax, Jaipur stating that the following common question said to be a question of law arises out of the order of the Tribunal in WTA Nos. 61, 60 & 62/JP/81 :
Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the provisions of Rule 2B(2) of WT Rules are not applicable in determining the net wealth of the firm M/s. Maliram Puranmal and consequently in sustaining the order of the AAC deleting the addition in the asses-see’s hands ?
2. The learned Members of the Jaipur Bench who heard the reference applications could not agree as to whether order of the Tribunal referred to above gave rise to a question of law or not. The learned Accountant Member who wrote the leading order held that the order of the Tribunal was concluded by pure finding of fact. On those finding of fact it did not give rise to any question of law. But the learned Judicial Member held that the interpretation of Rule 2B(2) of the WT Rules, was involved and whether the interpretation placed by the Tribunal on the applicability of that rule was correct or not gave rise to a question of law because it is now a well settled-Jaw that any interpretation of any Section of an Act or Rule or a document would always be a question of law. Thus they could not agree upon this issue, they framed the point of difference of opinion, referred it, to the President for reference to the Third Member for his opinion as provided for in Section 24(11) of the WT Act, 1957 read with Section 255(4) of the IT Act, 1961 :
Whether any reference in the matter is called for ?
I wish, the question had been a little more elaborate but any way the point for consideration is whether the order of the Tribunal gives rise to a question of law as proposed by the CWT.
3. Now let me go to the relevant facts. These three assessees S/Shri Gopichand Rawat, Ram Mohan Rawat and Shyam Mohan Rawat are all partners in a firm called M/s. Maliram Puranmal, Jaipur dealing in precious stones, jewellery, studded with precious stones, silver articles, etc. This firm was also engaged in export of jewellery. The valuation date in respect of the wealth-tax assessment year 1975-76 which is under consideration ended on 31st March, 1975. The accounts of the firm disclosed the sales of Rs. 26.67 lacs on which gross profit rate of 25.2 per cent was shown. The value of the closing stock shown by the firm as at 31st March, 1975 was Rs. 27.51 lacs. For the purpose of wealth-tax the capital standing to the credit of these three partners in the said firm as at 31st March, 1975 was disclosed as the value of their interest in the said firm. The WTO was, however, of the opinion that since the rate of gross profit shown by the firm was 25.2 per cent, it meant that the market value of the closing stock could be in excess of the book value by 20 per cent. On that basis he applied the provisions of Rule 2B(2) of the WT Rules and re-valued the closing stock and included the share of value of their interest in the net wealth of the firm. By this process the closing stock was re-valued at Rs. 36.77 lacs as a,gainst Rs. 26.67 lacs shown by the books. The question then arose as to whether the fact that the rate of gross profit is more than 20 per cent, would be sucffiient to hold that the market value of the closing stock could be taken to be more than 20 per cent of the book value so that the provisions of Rule 2B(2) could be applied. On the AAC agreeing with the assessee’s contention, the department had come up in appeal before the Tribunal. The learned Members who heard this quantum appeal originally also found it a difficult proposition and could not agree with the conclusion. The difference was quite acute, because the learned Accountant Member had framed the following three questions as his view of difference of opinion :
(i) Whether on the facts and in the circumstances of the case, the gross profit rate in the case of the firm in which the assessee is a partner at 33.68 per cent with reference to the cost price for the asstt. year 1975-76 will not prima facie show that the difference in terms of Rule 2B(2) of the WT Rules is more than 20 per cent and whether the WTO has discharged the initial burden cast on him ?
(ii) If the answer to question No. (i) is in the affirmative whether the burden shifts to the assessee to prove that the prima facie difference of 38.88 per cent is not real by leading positive evidence and whether any evidence has been adduced by the assessee to discharge its onus ?
(iii) Whether the market value of the closing stock has to be found as a fact and whether and in the absence of any details having been furnished by the assessee, the value adopted by the WTO has to be accepted or not ?
as against which the learned Judicial Member framed the point of difference of opinion as under :
Whether on the facts and in the circumstances of the case, does the gross profit rate taken in the case of the firm, constitute adequate material to come to the conclusion that market value of the closing stock of the firm exceeds the cost price as adopted by the firm by more than 20 per cent and whether merely on that basis, can the Rule 2B(2) of the Wealth-tax Rules, 1957 be invoked ?
The matter was then referred to the Third Member to resolve the difference of opinion. The Third Member in a very detailed order after referring to the various decisions of the Benches of the Tribunal, dealing with the identical point both at Delhi and Jaipur and Calcutta also referring to some High Court decisions held that to the facts of the case the provisions of Rule 2B(2) could not be applied. The reasons given by him is of some relevance and significance so I will reproduce below the significant portion of para 11 of his order :
For purposes of Rule 2B(2) only a hypothetical sale is to be considered, but even so there has to to be positive material for estalish-ing the market value of the closing stock on the valuation date. This market Value cannot just be arrived at on the basis of the rate of GP shown in this year. The value of goods involved is fairly large. The firm has to keep a large amount of goods to effect the sales in different years. The following figures will show the opening stock purchases and sales in different years :
Assessment Opening Purchases Sales
year stock
Rs. Rs. Rs.
1974-75 18,08,324 23,00,114 34,22,955
1975-76 20,31,868 25,18,184 27,57,720
1976-77 27,51,139 21,22,971 30,45,771
The amount of closing stock carried over in different years suggests that the goods in which the assessee deals the sales are slow. The sales are not the type of sales which can be expected in items of consumer goods. The investment in closing stock is large. Before the items of jewellery can be sold different permutations, combinations, settings, etc., have to be made. Some items of jewellery may be sold quickly, but for others the stock may have to be carried over a period of certain years. The coloured precious stones require treatment. It is not easy to fix the value of emeralds, rubies, saphires, etc. The rates would differ from person to person and even from place to place. If such large quantity of goods as the firm carries are to be sold on the valuation date, the buyer would in all probability be a dealer and he would certainly not pay the price which the assessee can get from sales to different parties over a period of 12 months. I have thus no hesitation in coming to the conclusion that on the basis of the mere gross profit of 25.2 per cent shown in this year, the value of the closing stock cannot be considered to be more than 20 per cent of the value shown in the books of the firm.
As I have mentioned earlier, the learned Third Member took support for his use from the orders passed by the Tribunal in various other cases which were mentioned in para 12 of his order. He also noticed that there was a differing opinion also expressed by another Bench of the Tribunal at Calcutta camping at Jaipur but he overcame that decision by pointing out that the matter there was remitted back to the AAC for fixing the exact market value of the closing stock. Thus he eventually agreed with the view of the learned Judicial Member. Thereafter the matter went back to the Bench for passing an order in accordance with the majority opinion. The majority opinion was that to the facts of the case, Rule 2B(2) was inapplicable.
4. It was from this order that the CWT raised the question referred to above as a question of law requiring the Tribunal to refer it to the High Court.
5. Now the learned Departmental Representative pointed out that an identical issue as to whether on the basis that GP is more than 20 per cent as per book, Rule 2B(2) of the WT Rules could be invoked, had come up for consideration before the Special Bench at Jaipur in the case of CWT v. Gopichand Rawat [Reference Application No. 80 (Jp.) of 1986], partner in the firm M/s. Maliram Puran-mal and in another case of CWT v. Smt. Madhuri Devi [Reference Application No. 80 (Jp.) of 1986], Jaipur and the Special Bench in those cases held that merely for the reason that the rate of GP shown in books at more than 20 per cent, it did not ipso facto mean that the market value of the closing stock shown in the balance sheet exceeded the book value by 20 per cent so that the Rule 2B(2) of the WT Rules could be applied. The CWT thereafter filed a reference application raising certain questions of law as arising out of the Special Bench order and the Special Bench by its order in the oases of CWT V. Gopichand [Reference Application No. 78 (Jp.) of 1986], CWT v. Shyam Mohan Rawat [Reference Application No. 79 (Jp.) of 1986], Smt. Madhuri Devi (supra), Gopichand Rawat (supra) and CWT v, Smt. Bhanwari Devi [Reference Application No. 82 (Jp.) of 1986] held that the order of the Tribunal did give rise to a question of law but re-framed the question and referred the re-fra,med question to the High Court for its opinion and since the re-framed question involves identical issue as arose in the present cases, it must be held that the order of the Tribunal also gave rise to a question of law. The question either as framed by the CWT or as re-framed by the Special Bench in the above case or in such other manner as the Tribunal thinks appropriate should be referred to the High Court for its opinion. He submitted that it is very incorrect to state that the orders of the Tribunal did not give rise to a question of law when the interpretation of a Rule of WT Rules is involved. He also submitted that it is not a question of fact as to appraisal of evidence, but application of the Rule, the evidence found and vice versa and which in either case gave rise to a question of law. The re-framed question by the Special Bench is as under:
Whether on the facts and circumstances of the case the Tribunal was right in holding that for the purpose of applying Rule 2B(2) of the WT Rules the onus was on the Revenue to prove that the market value of the closing stock of M/s. Maliram Puranmal exceeded the value as shown in the firm’s account by more than 20 per cent ?
The learned Advocate for the assessee Mr. N.M. Ranka on the other hand contended, that the issue involved before the Special Bench was totally different, namely, on whom does the onus lie to apply the provisions of Rule 2B(2). The issue before the Bench in these cases was not about the burden but about the adequacy of evidence. By taking me through the orders of the Bench of Third Member case, particularly the portion extracted above and the High Court decision given by the Rajasthan High Court contended that the adequacy and otherwise of the material before the Tribunal to enable it to come to a conclusion is always a question of fact. A finding of fact was given by the Tribunal on the appraisal of evidence before it and that could not finally be said to give rise to a question of law. He submitted that whether the material is adequate or not is a part of the process of appreciation of evidence and the inference so drawn from that evidence is always a question of fact. Unlike before the Special Bench, the Bench in the case did not discuss on whom the onus lies. Further, he submitted that the question as framed by the CWT is also a question of fact and this question being a question of fact is not to be referred to the High Court for its opinion. That is how his argument proceeded.
6. After considering the relevant records, orders and the arguments addressed to me at quite some length, I reached the conclusion that the order passed by the Tribunal cannot be said to give rise to a question of law referable to High Court. I do not want to repeat here all the relevant facts because to the extent they are necessary I have already referred above, several of the others were in the order which I do not think necessary to reproduce them here. The fundamental question before the Tribunal was whether the value of the closing stock as shown by the books could be enhanced under the authority of Rule 2B(2) of the WT Rules. The department considered that the mere fact that the rate of gross profit shown by the trading account is adequate enough of proof to conclude that the value of the closing stock as shown by the books was less by 20 per cent than the market value. The Tribunal considered agreeing with the view taken by the AAC that this piece of evidence alone was not sufficient. There may be myriad reasons for valuing the closing stock at a particular figure. The rate of gross profit shown by the trading account does not necessarily conclusively demonstrate that the closing stock shown by the trading account would earn the same amount of profit in the future or if sold in the market on the valuation date it will earn the same amount of profit. My learned brothers in their orders not only in these appeals but also in other appeals have given several reasons to show that the market value of the closing stock would not necessarily be the same as commensurate with the rate of gross profit shown, I entirely agree with those reasons and I have very little to add to those very reasons. The value of the closing stock is generally arrived at following a particular principle of valuation of the closing stock, namely, whether at cost or at market value whichever is lower. If the market value of the closing stock was arrived at and was included in the trading account and when that has accepted as the market value on valuation for the purpose of assessment, then that would mean that that was the market value. No further adjustment would then be called for merely because the gross profit rate was more than 20 per cent the measure referred to in Rule 2B(2). The reason is simple because the value put up on the closing stock was the market value and it was as a consequence of putting that market value on the closing stock the rate of gross profit worked out to more than 20 per cent. If the closing stock had been valued at cost and that happens to be lower than market value then the margin of gross profit would be far lower. But if the market value happens to be lower than the cost then no further adjustment as I have mentioned earlier would be called for still to arrive at a higher market value. Because the market value either for the purpose of income-tax or for the purpose of wealth-tax would conceptually and contextually be the same and further if the closing stock was valued at either cost or market value whichever was lower than that would mean a particular method of valuation but that does not necessarily mean that the items included in the closing stock were such as to get more value than shown in the closing stock if sold in the open market. A valuation placed upon the closing stock is the result of both fast and slow moving articles, obsolete articles, shop soiled articles, articles of great value, articles of low value and articles which have gone out of fashion. It is the combination of the value placed upon all these kinds of articles that would represent the value of the closing stock and the rate of gross profit shown by the trading account by such a valuation of closing stock would not therefore necessarily mean that the value of the closing stock as shown by the books would be less than the market value and would fetch as much value if sold in the open market as is equal to gross profit shown by the trading account. The rate of gross profit shown by the trading account is again an average of the profit earned over a period of year which included the marginal profit arrived on all types of articles sold depending upon the like and dislike of the customers. The very next day, after closure of the accounting year the market forces may develop in such a way that the articles may go either out of fashion or may become highly valued and commanding a higher price. There are so many variables a,nd market forces which would determine the market value of a commodity and not necessarily the rate of gross profit shown by the trading account which is no more than an indication. No doubt the rate of gross profit shown by the trading account is a strong indication about the profitability of the business, i.e., only strong indication and perhaps an invitation to the WTO to find out by other means the market value of the closing stock. For example, if the articles included in the closing stock were sold in the subsequent year at a far higher price than placed in the closing stock that may be one indication to show that the market value of a particular commodity was more than the value shown in the closing stock. Therefore, merely because the gross profit shown by the trading account appears to be more than 20 per cent, spoken of Rule 2B(2), a general conclusion that the market value is more by that per cent cannot be drawn and as I have mentioned earlier that rate of profit is only an indication but not a conclusive proof.
7. Secondly Rule 2B(2) was no doubt applied in the sense that the question whether the provisions of Rule 2B(2) were attracted or not was considered. Rule 2B(2) as it is worded is only an enabling provision empowering the WTO to disturb the valuation of the assets shown in the balance sheet subject to the satisfaction of the condition laid down in that rule. The condition is that the market value of a particular asset must exceed the book value by more than 20 per cent. The question would, therefore, arise whether the market value of the particular asset, namely, the closing stock in this case exceeded the book value by 20 per cent or not. This is essentially a question of fact, matter of appreciation of evidence. The evidence relied upon by the department to invoke this rule was the rate of gross profit shown by the books while the ITAT held that it could not be conclusive evidence, highly unsatisfactory and more unsafe. This is, therefore, a conclusion arrived at on the appreciation of the evidence that was brought on record to adjudge whether the Rule 2B(2) could be invoked or not. When the Tribunal considered that the evidence brought on record by the revenue is inadequate to invoke this rule, the conclusion arrived at by the Tribunal is only a finding of fact after a careful appraisal of the evidence on record and that conclusion, in my opinion cannot give rise to a question of law. In this manner it cannot also be said that Rule 2B(2) was interpreted by the Tribunal so as to say that, that interpretation gave rise to a question of law. All that Rule 2B(2) says is that the market value of an asset must exceed the book value by 20 per cent. The Tribunal said that the market value of the asset could not be said to have exceeded the book value by 20 per cent. This is the basic and ultimate conclusion reached by the Tribunal and this is a pure finding of fact which cannot give rise to any question of law. Whatever might have been the observation made by the learned Members of the Tribunal in coming to the conclusion to which they arrived at, the ultimate analysis, their finding was that the market value of the asset did not exceed the book value by 20 per cent. Neither any rule was interpreted nor any law was laid down except that the finding was recorded on pure questions of fact. Therefore, to my mind the order passed by the Tribunal did not give rise to any question of law.
8. The Departmental Representative very strongly relied upon the order passed by the Special Bench in the case referred to above to contend that when under similar facts a question was held to have arisen from the order of the Tribunal, the same thing should be followed here also and no different conclusion should be recorded contrary to the view taken by the Special Bench. This is a very attractive argument and perhaps in the abstract of terms it cannot be gainsaid but on a closure examination it would reveal that the issues before the Special Bench and before the Bench in the present case are different. It is no doubt true that both the Special Bench and the Bench in this case are concerned with similar situation, namely, whether the existence of a higher rate of gross profit than 20 per cent as disclosed by the trading account could be used to invoke Rule 2B(2) of the WT Rules to disturb the value of the closing stock. Both the Special Bench and this bench came to an identical conclusion that it was not sufficient to invoke the provisions of Rule 2B(2) so as to enable the WTO to disturb the valuation of the closing stock. But the Special Bench there proceeded on a particular condition, namely, whether on whom does the onus to prove that the market value exceeded the book value by 20 per cent lay. The Special Bench held that the onus lay upon the Department. It is now a very well settled law that the question as to on whom the onus of proof lays is a question of law but whether that onus has been discharged or not is a question of fact. Since the Special Bench was considering about the placement of onus and held that the onus lay on the Department, Special Bench felt that that being a question of law, should be referred to the High Court for its opinion. That was the question that the Special Bench re-framed as against the questions raised by the CIT in the reference applications filed before it. But in the case before me this Bench did not proceed on the issue of onus. The case proceeded on the assumptions that the onus always was on the Department to show that the market value exceeded the book value by 20 per cent and, therefore, the Tribunal had no occasion to consider as to on whom the onus lay. The Tribunal considered whether that particular onus had been discharged or not. The Tribunal felt that that onus had not been discharged. The finding given by the Tribunal that the burden was not discharged satisfactorily lay in the realm of question of fact and not in the realm of question of law. Therefore, merely on the ground that the Special Bench has referred a question to the High Court does not mean that this Bench should also refer the same question to the High Court particularly when that question in that form does not arise out of the order of the Tribunal. Moreover, as a Third Member my role is limited rather confined to the point of difference referred to me. My role as a Third Member is neither appellate nor revisional. I have to strictly confine to the point of difference of opinion and express my opinion thereon within facts found by the learned Members in their respective orders. Thereafter the matter will go before the regular Bench. It is for the regular Bench to pass an order in accordance with the opinion of the majority. In so doing the Bench can even if it so advised and considered desirable may re-apprise the whole issue and then consider aspects which were not considered before because the appeal cannot be considered to have been finally disposed of merely on making a reference to a Third Member on a point of difference of opinion* to him. The appeal will have to be disposed of by the regular Bench in accordance with the majority opinion after hearing the parties. Having these limitations placed upon the Third Member I have to confine myself only to the question referred to me and that is naturally with reference to the question raised by the CIT in the reference applications and that limitation also refrains me in re-framing the question so as to bring it on par with the question raised by the Special Bench referred to by the learned Departmental Representative.
9. For these reasons, I express my agreement with the opinion, expressed by the learned Accountant Member as a whole that the order passed by the Tribunal does not give rise to a question of law.
10. The matter will now go to the regular Bench for passing order in accordance with the opinion of the majority.
A. Kalyanasundharam, Accountant Member
In accordance with the majority view taken in regard to various questions raised by the revenue in the abovementioned reference applications, the view having been that the questions as raised by the revenue authorities is a finding of fact only and therefore, no referable question of law arises from out of the order of the Tribunal. Accordingly the references are rejected.