By TIOL News Service

NEW DELHI, OCT 13, 2017: The issue is - Whether the overriding power of the AO u/s 7(2)(a) to reject normal method of valuation in case of running businesses is a stand alone provision. NO is the answer.

Facts of the case

The assessees are the partners in a firm M/s. G.D. & Sons. One of the assets of the partnership Firm was a Cinema building known as "Alpana Cinema" situate at Model Town, New Delhi. The property was valued by assessment books of accounts. On pending assessment of Wealth Tax of one of the partners, the Wealth Tax Officer made a reference for valuation to Department Valuation Officer. Assessees had got the property valued by an approved Valuer adopting income capitalisation method. The assessment order was passed by the Wealth Tax Officer in March, 1983 making assessment for the period from 1970-71 to 1974-75. The assessment was completed as per percentage of the right of different assessees which they had in the Firm. The AO relied on the Valuation Report submitted by the Departmental Valuer. On appeal, the Appellate Authority affirmed the assessment but on the basis of valuation by land and building method. The ITAT ruled in favour of the assessees.

The question which was referred to the High Court for answer related to the correct method of the valuation of the property that is Alpana Cinema for assessment under Wealth Tax Act. And the HC favoured the view taken by the Revenue.

On reference, the Apex Court held that,

++ the language of sub-section (2) of Section 7 which provides overriding power to the Wealth Tax Officer to adopt and determining the net value of the business having regard to the balance-sheet of such business. The enabling power has been given to Wealth Tax Officer to override the normal rule of valuation of the properties that is the value which it may fetch in open market, Wealth Tax Officer can adopt in a case where he may think it fit to adopt such methodology. The appellants' submission is that the provision of Section 7(2)(a) is a stand alone provision and is to be applied in all cases where assessee is carrying on a business. We do not agree with the above submission;

++ overriding power has been provided to override the normal method of valuation of property as given by sub-section 7(1) to arm the Wealth Tax Officer to adopt the method of valuation as given in subsection (2)(a). The purpose and object of giving overriding power is not to fetter the discretion. The Wealth Tax Officer is not obliged to mandatorily adopt the method provided in Section 7(2)(a) in all cases where assessee is carrying on a business. The language of sub-section (2)(a) does not indicate that the provisions mandate the Wealth Tax Officer to adopt the method in all cases of running business. Section 7 of the Act has also come for interpretation before this Court in large number of cases;

++ the counsel for the appellants submits that reasons given by ITAT for holding that income capitalisation method is a more appropriate method has not been adverted to by the High Court. We have perused the order of the Tribunal. The Tribunal has observed that once it is accepted that the property is useable only as Cinema building then its method of valuation has to be necessarily different from the one normally adopted in the case of buildings which are capable of being used for other commercial purposes. The mere fact that the building is only for the use of Cinema exhibition does not in any manner diminish the marketable price. At the relevant period uses of building as running Cinema were no less valuable. The finding has been returned by the Appellate Authority that it has not been further challenged that the building was self-occupied and in possession of assessee with no encumbrances;

++ it is true that the High Court in so many words had not adverted to the reasons given by the ITAT. However, the High Court has expressed opinion that Wealth Tax Officer was justified in adopting the land and building method. One of the reasons given by the High Court is that if there is loss in the business or in other words there is negative income, it cannot be possible to say that the property in question has no marketable value;

++ the Wealth Tax Officer having referred the Departmental Valuer to value the property, in consequent to which reference for valuation report having already been received on 26.07.1977 which has relied in the assessment. Objections to the valuation report were considered by the Appellate Authority and having been rejected, we do not find any fault with the assessment made by the Wealth Tax Officer.

(See 2017-TIOL-388-SC-WT)