ORDER
Garg, AM – This is an appeal by the assessee against the order of the AAC for the assessment year 1981-82.
2. The assessee was a partner in four firms, namely, M/s. Kamakshi Pictures, M/s. Kamakshi Chitra Prakashan, M/s. Kamakshi Chitra and M/s. Vijay Pictures. In response to a query by the WTO, it was stated by the assessee that it was not possible to furnish the overflow receipts from the various firms in which he was a partner. The WTO observed that the firms in which the assessee was a partner have distribution rights of various films and, as such, the prints were to be taken as the assets of the firms and, accordingly the share of the assessee was required to be worked out. However, in the absence of details, an amount of Rs. 1 lac was estimated and added in respect of the net wealth declared, subject to rectification of the assessment.
3. In appeal, the AAC noticed that in case of other co-partners, namely, Vijay D. Kondke and Shewantibai D. Kondke, proceedings under section 25(2) of the Wealth-tax Act were initiated by the Commissioner and for the detailed reasons set out by him in his order, it was held that the right to receive the share in the overflow from the pictures constituted an “asset” and was to be Special Bench decision of the Tribunal in the case of WTO v. Narendra Kumar Gupta [1983] 4 ITD 694 (Delhi) was invited on behalf of the assessee. The AAC, however, following the Commissioners order under section 25(2), dated 30th March, 1986, passed in the case of Vijay D. Kondke, upheld the action of the WTO in including the assessees share of the value of overflow from feature films in the net wealth of the assessee. However, with regard to the exact figure of such value to be included, he directed the WTO to reconsider the same after obtaining all the relevant details from the assessee by providing him with reasonable opportunities to rebut his case on the issue.
4. This appeal was heard along with the appeals in the other co-partners case in WTA Nos. 433 to 436/Bom/1987 and 1118 to 1120/Bom/1986, wherein by an order of even date, the Commissioners order under section 25(2) were set aside. They were the cases for inclusion of overflow rights and songs in the pictures produced by the assessee or the firms, either because the firms have not produced any picture or because the rights of the assessee in the pictures produced by them or the firms would be exempt under section 5(1) (v) of the Wealth-tax Act. In the present case, the question is not for assessing the overflow rights in the pictures produced by the firms in which the assessee is a partner. The facts are that the firms had paid certain sums of money for acquisition of distribution rights for a particular period and for a particular area or areas. The entire cost paid for such rights was charged to the profit and loss account and claimed as a deduction under Rule 9B of the Income-tax Rules end of the previous year. As the entire cost was charged to the profit and loss account, there remained nothing to be carried forward to the balance-sheet for disclosing as an item on the asset side. In these circumstances, while valuing the assessees interest in these firms, no value for the distribution rights for unexpired period of the agreement were included by the assessee. Two points arise for consideration in this appeal, namely,
(i) Whether the share of the assessee in the unexpired contractual period of distribution rights of the firm was an asset liable to wealth-tax ?
(ii) If so, whether such right was not includible in the wealth of the assessee because it could not be valued in accordance with the provisions of section 7(2) of the Act, read with the rules thereunder ?
5. There is no serious dispute in this appeal that the right in the overflow of the films for the unexpired contractual period was an asset under section 2(e) of the Wealth-tax Act. This is so held by the Special Bench of the Tribunal in the case of Narendra Kumar Gupta (supra), following the decision of the Supreme Court in the case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 – an Income-tax case wherein it was held that the value of the rights for the unexpired period would represent the closing stock and have to be taken into consideration for determining the income of the assessee. The Special Bench concluded that the right in a film in a particular territory for a particular period would be an asset and that such an asset might or might not be transferable as such or might have also some value depending on the circumstances of the case. In these circumstances, the interests of the assessee in such right is assessed under section 2(e) of the Act.
6. The question, therefore, is whether such a right is not includible in the net wealth of the assessee because it could not be valued under section 7 of the Wealth-tax Act read with the rules therefor. When a particular right satisfies the condition of being an asset, the same, in our opinion, has to suffer the charge of tax under section 3 of the Wealth-tax Act, inasmuch as it provides for the levy of tax on the net wealth of an assessee on the valuation date. “Net wealth” is defined in section 2(m) to mean the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under Wealth-tax Act, is in excess of the aggregate value of all the debts owned by the assessee on the valuation date other than the three types of debts enumerated therein, which are not to be taken into account and with which we are not concerned. An asset may escape tax if the same is provided in the exemption clause in section 5 of the Wealth-tax Act or under any other provision of the Act. Nothing of the sort was pointed out to us that such an asset would be entitled to exemption. The assessees case for exclusion is not because of any exemption but on its incapability of being valued under section 7 of the Act.
7. Section 7 of the Wealth-tax Act provides for the valuation of an asset to be included in the net wealth. The primary method of determining the value of an asset under section 7(1) of the Act is the market price of the asset on the valuation date. Sub-section (2) thereof provides that where an assessee is carrying on a business for which accounts are maintained regularly, the WTO may instead of determining separate value of each asset, determine the net value of the asset of the business as a whole having regard to the balance-sheet of such business and after making such adjustments therein as may be prescribed. We were addressed in this case with reference to the provisions contained in sub-section (2) of section 7 of the Act. The phrase “having regard to the balance-sheet of such business” does not mean that such balance-sheet is conclusive or binding or decisive of the value of the assets appearing therein but that the WTO has to take into consideration or account the balance-sheet of such business for valuation. This is what has been held by their Lordships of the Supreme Court in the case of Juggilal Kamlapat Bankers v. WTO [1984] 145 ITR 485/16 Taxman 1.
8. We have already indicated above that the assessees share in the unexpired contractual period distribution rights was an asset and, therefore, the asset will have to be valued for the purpose of the Act and in this behalf Rule 2 of the Wealth-tax Rules prescribes the manner of valuing such interest. Under this Rule, the net wealth of the firm is to be determined first. Such determination is governed by section 7 of the Act. The net wealth of the firm so determined is then allocated amongst the partners of the firm which allocated amount will be regarded as the value of the interests of each partner in the firm. Rule 2A provides how the value of the assets of the business as a whole is to be determined. It provides that where the WTO determines under clause (a) of sub-section (2) of section 7, the net value of the assets of the business as a whole having regard to the balance-sheet of such business, he shall make the adjustments specified in rules 2B, 2C, 2D, 2E, 2F and 2G. We are concerned in this case with Rule 2C which reads as under :
“2C. The value of an asset not disclosed in the balance-sheet shall be taken to be –
(a) in the case of a debts due to the assessee, the amount due to the assessee under that debts, and where such amount or part thereof has been allowed as a deduction under clause (vii) of such-section (1) of section 36 of the Income-tax Act, 1961, in computing the total income of the assessee for the relevant year for the purpose of assessment under that Act, the amount of the debts as reduced by the deduction to be allowed;
(b) in the case of goodwill purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less;
(c) in the case of managing agency rights purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less;
(d) in the case of any other asset, its market value on the valuation date.”
The precise contention of the assessee is that clause (d) of Rule 2C does not come into play because under the system of accounting being followed by the assessee as well as in view of the allowance of hundred per cent of the cost as revenue expenditure under Rule 9B of the Income-tax Rules, the asset was not required to be shown in the balance-sheet and, therefore, would not be subject to the provisions of clause (d), of Rule 2C. Clause (d), according to him, would come into play only when an asset is ought to have been shown in the balance-sheet or as such to be shown therein. This contention of the assessee was accepted by the Special Bench of the Tribunal in the case of Narendra Kumar Gupta (supra). However, much water has flown thereafter. The Special Bench decision relied upon its earlier decision on the subject in the case of Rajendra Kumar Tuli v. Eighth WTO [1982] 1 ITD 213 (Bom.) wherein the decision of the Karnataka High Court in the case of A. T. Mirji v. CWT [1980] 126 ITR 93 was followed. The said decision of the Karnataka High Court has been reversed by the Supreme Court in the case of CWT v. Vysyaraju Badreenarayana Moorthy Raju [1985] 152 ITR 454/21 Taxman 5. It was held by the Supreme Court that the system of accounting, mercantile or cash or hybrid, is of no relevance for the purpose of determining the assets of the assessee. That appears to be plain from the definition of the term “net wealth” which speaks of “the aggregate value…… of all the assets” belonging to the assessee on the valuation date. All the assets of the assessee barring those expressly excepted by the statute are to be taken into account, and it is immaterial whether the assessee employs one system of accounting or another. There is clear indication that the assets to be considered are not circumscribed by any consideration of the particular system of accounting adopted by the assessee. It was further observed that when one speaks of the value of a property, on a legal plane, one refers to the value of the rights in that property and it is apparent that what accrues as a right also falls to be included within the assets of an assessee under the Wealth-tax Act. That being so, the conclusion, in the opinion of their Lordships of the Supreme Court, was inescapable that even though the accounts of the assessee were maintained on cash basis, the interest due on accrual basis, though not realised, on the outstandings of the money-lending business were liable to be included in the net wealth of the assessee.
9. It was contended by the learned counsel for the assessee that Rule 2C (d) was not considered by their Lordships of the Supreme Court and that it was a case of accrued right in the interest on Lending the money by the assessee and, therefore, that case would have no application. We, however, do not agree with contention of the assessee as well. It was held by the Bombay High Court in the case of CWT v. V. M. Shah [1987] 33 Taxman 323/ [1988] 170 ITR 17 that what has to be seen in the context of rule 2C was whether any asset has not been shown in the balance-sheet and if there is an asset as defined and it has not, for good reason or otherwise, been shown in the balance-sheet, the WTO is entitled to apply the provisions of rule 2C. The word “disclosed” therein would only mean shown and it must follow that the WTO was entitled in the case to apply the provisions of rule 2C. In the said case also, a similar contention was raised by Shri Palkhivala, appearing on behalf of the assessee, that rule 2C could only be applied in regard to an asset which ought to have been disclosed in the balance-sheet but had not been disclosed and that the word “disclosed” in his submission implied in the context that the asset ought to have been disclosed in the balance sheet according to the ordinary principles of accounting. Their Lordships rejected this contention of the learned counsel for the assessee in that case.
10. In view of these two decisions of the Supreme Court and the Bombay High Court, the Special Bench decision could no longer hold the field. Neither the system of accounting nor the requirement of showing a particular asset in the balance-sheet is relevant consideration for determining the asset of an assessee. The provisions of Rule 2C (d), in our opinion, would be applicable in the present case. In any case, the provisions of section 7(1) would still be operative for valuation of such assets even if it is assumed that such an asset was not to be taken into consideration as per Rule 2C (d) read with section 7(2) of the Wealth-tax Act, section 7(1) being the primary method of determining the valuation of an asset includible in the net wealth of the assessee, as held by the Supreme Court in the case of Juggilal Kamlapat Bankers (supra). Therefore, in our opinion, the AAC was justified in directing the WTO to include the same subject to rectification.
11. A contention was raised by the learned counsel for the assessee that the decision of the Supreme Court in the case of Vysyaraju Badreenarayana Moorthy Raju (supra) was a case of accrual of interest and before the Bombay High Court in the case of V. M. Shah (supra), it was a case for outstanding fees of a professional and the same would have no application because they were the cases where the right had accrued to the assessee whereas in the present case, there was nothing but a notional right in the distribution rights for the unexpired period. We do not find any force in this argument of the assessee as well. The assessee had paid money for acquiring such rights and, therefore, it cannot be said that the share of the assessee in such rights would be of notional character. The assessee further submitted that a film normally runs for a very short period and, therefore, the rights would not have any value in reality and, in any case, it would be difficult to value such an asset for including in the net wealth of the assessee. Alternatively, he submitted that the value of the right could not be more than the cost allocable to the unexpired period of such rights. Here also, we do not find any merit in the contention. There may be a difficulty in valuing an asset, but that would not be a fact in coming to the conclusion that the asset was not includible in the net wealth of the assessee. As the matter has been set aside to the file of the WTO by the AAC, the assessee would be at liberty to place the material before the WTO in the fresh proceedings to arrive at the correct value of such rights and to justify his contention that the value, in any case, would not be more than the cost price of such rights for the unexpired period.
12. In the result, the appeal is dismissed.