Commissioner of Wealth Tax vs Kailashchandra Shankarlal Trivedi

A.R. Tiwari, J.—At the instance of the Commissioner, Bhopal, the Tribunal has stated the case and referred the undernoted question of law, arising out of the order passed in WT Appeal Nos. 173 and 174 (Indore) of 1989 on application registered as R.A. Nos. 51 and 52 (Indore) of 1990 in Misc. Civil Case No. 201 of 1991, and also stated the case and referred the under-noted questions of law, arising out of the orders passed in WT Appeal Nos. 72, 73 and 74 (Indore) of 1989 on applications registered as R.A. Nos. 53, 54 and 55 (Indore) of 1990 in Misc. Civil Case No. 202 of 1991, u/s 27(1) of the Wealth-tax Act, 1957 (''the Act'') for our opinion. In Misc. Civil Case No. 201 of 1991, the undernoted question is referred:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that rule 1D of the Wealth-tax Rules, 1957, is directory and not mandatory and, therefore, market value of the shares could be determined by yield method?

In Misc. Civil Case No. 202 of 1991, the undernoted questions are referred:

Whether, on the acts and in the circumstances of the case, the Tribunal was right in holding that rule 1D of the Wealth-tax Rules, 1957, is directory and not mandatory and, therefore, market value of the shares could be determined by yield method?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the order of the Commissioner treating the assessment orders accepting market value of shares on the basis of income capitalisation method, was wrong?

Briefly stated, the facts of the cases are that in Misc. Civil Case No. 201 of 1991 the years of assessment are 1987-88 and 1988-89, whereas in Misc. Civil Case No. 202 of 1991 the years of assessment are 1984-85, 1985-86 and 1986-87. The statement of the case in Misc. Civil Case No. 201 of 1991 is that the assessee owned 103 shares of Steel Ingots (P.) Ltd., Indore. Its equity shares are unquoted within the value of these shares on the basis of the report of the registered valuer who worked out the market value of the shares on yield basis. While doing so, he also took into consideration the financial position of the company, nature of the activities carried out and marketability of the shares. The WTO rejected the value disclosed by the assessee and determined the value of the shares in accordance with the provisions of rule 1D of the Wealth-tax Rules, 1957 at a higher figure. The assessee went in appeal before Commissioner (Appeals), who approved the method of the valuation adopted by the registered valuer. He thus allowed the appeals. The department then came in appeal before the Tribunal. The Tribunal held that rule 1D was directory and not mandatory and held that the Commissioner (Appeals) was justified in adopting the yield method for valuation of these shares. Aggrieved, the department filed the application u/s 27(1) and the Tribunal referred the aforesaid question. In Misc. Civil Case No. 202 of 1991, the statement of the case shows that the assessee owned unquoted shares of certain companies. The assessee disclosed the market value of those shares on the basis of income capitalisation method. Such valuation was accepted by the WTO. The Commissioner (Appeals) considered the order of the WTO as erroneous and prejudicial to the interest of the revenue holding that rule 1D, were mandatory not directory. He, therefore, ordered to determine the value in accordance with this rule and not on yield basis. He, therefore, revised assessment orders u/s 25(2) of the Act. The assessee came in appeal before the Tribunal. The Tribunal held that rule 1D was directory and not mandatory. The Tribunal, therefore, passed the orders in favour of the assessee. Aggrieved, the department filed the applications u/s 27(1) on which the Tribunal stated the case and referred the aforesaid questions for our opinion.

We have heard Shri D.D. Vyas, the learned counsel for the applicant- department and Shri Brajesh Pandiya, the learned counsel for the non- applicant-assessee in both these reference applications.

Placing reliance on the decision of the Apex Court in Bharat Hari Singhania and others Vs. Commissioner of Wealth Tax (Central) and others, this court in CWT. Janakraj Soni [Misc. Civil Case No. 231 of 1990, dated 16-2-1996] holding that the Tribunal committed an error of law in holding rule 1D as directory and not mandatory. Both the sides submitted before us that these questions are required to be answered in favour of the department in view of the aforesaid judgment of the Apex Court.

In the aforesaid decision of Bharat Hari Singhania''s case (supra), the Apex Court laid down as under:

The next argument that rule 1D is not mandatory but directory proceeds upon a certain misconception. A provision is said to be directory when the absence of a strict or literal compliance with it - and in some cases, even non-compliance with it - may not vitiate the thing done. On the other hand, a mandatory provision is one which has to be obeyed in its letter and spirit and anything done without such compliance stands vitiated. Counsel for the assessees, however, do not understand the said expressions in the above sense. What they really say is that following rule 1D should be optional. According to them, in all cases, except in the case of companies ripe for winding-up, rule 1D ought not to be followed and that only the yield method should be. This is really substituting a rule of the choice of the assessees in the place of the rule made by the rule-making authority u/s 46 of the Act. If the rule is good and valid, as we find it to be, it has to be followed in each and every case. It is not a matter of choice or option. The rule-making authority has prescribed only one method for valuing the unquoted equity shares. If this method were not to be followed, there is no other method prescribed by the rules. The acceptance of the assessees'' contention would mean that it would be open to the Wealth-tax Officer to adopt such other method of valuation as he thinks appropriate in the circumstances. This is bound to lead to vesting of uncalled for wide discretion in the hands of Wealth-tax Officer/valuing authorities. It would lead to uncertainty and may be arbitrariness in practice. Where there is a rule prescribing the manner in which a particular property has to be valued, the authorities under the Act have to follow it. They cannot devise their own ways and means for valuing the assets. It is equally well to remember that rule 1D does not treat the breakup value as the market value. A deduction of 15 per cent is made in the break-up value to arrive at the market value. It is equally relevant to notice that rule 1D uses the expression ''shall'', which prima facie, indicates its mandatory character.

In view of the aforesaid decision, we are satisfied that the Tribunal was not right in holding that rule 1D was directory and not mandatory and that the market value of the shares could be determined by yield method. We are also satisfied that the Tribunal was not justified in holding that the order of the Commissioner treating the assessment orders, accepting market value of the shares on the basis of income capitalisation method, was wrong. In fact, the Commissioner correctly held in both these cases that the provision was mandatory.

In view of the aforesaid position, we answer the aforesaid questions, referred to us at the instance of the department, in the negative, i.e., in favour of the department and against the assessee.

These reference applications are thus answered in terms indicated above with no orders as to costs.

Counsel fee for each side in each case is, however, fixed at Rs. 750, if certified. Retain this order in Misc. Civil Case No. 201 of 1991 and place its copy in the connected Misc. Civil Case No. 202 of 1991 for ready reference.