1. ' SALEEM AKHTAR, J.--This judgment will dispose of the following cases relating to assessment years 1966-67 and 1967-68: W.T.C. 567/72, 570/72, 571/72, 577/72, 578/72, 579/72, 580/72, 583/72, 584/72, 601/72, 602/72, 606/72, 607/72, 611/72, 612/72, 616/72 and 617/72.
2. ' In all these cases the Department has filed application under section 27(1) of the Wealth Tax Act.
3. The respondents are the partners of firm Messrs Ahmed Abdul Ghani. The main judgment of the Tribunal giving reasons and disposing of the appeals filed by the respondent is filed in I.T.C. No, 601/72.
4. ' The Respondents filed return of their next wealth which included their share in assets of the firm Messrs Ahmed Abdul Ghani. The Wealth Tax Officer accepted the trading results of the firm as disclosed in the balance-sheet but he proceeded to fix his own valuation on each assets disclosed in the return of the respondents. The respondents filed appeal before the Tribunal which was accepted with the following observation :- "We therefore, direct that in the case of the assessee as far as assessment years 1966-67 and 1967- 68 are concerned the net wealth of the registered firm Messrs Ahmed Abdul Ghani representing the various assets of the business should be computed as per the balance-sheet of the firm for the relevant assessm ent years under rule 8(9). Thereafter, the share of interest of the assessee in the said firm should be assessed as per rule 8(8) of the Wealth Tax Rules."
5. ' The Department has filed application under section 27(1) of the Wealth Tax Act raising the following questions:- ,
(1) Whether on the facts and in the circumstances of the case the Tribunal was justified in disallowing the revaluation of the closing stock of the firm made by the Wealth Tax Officer for the purpose of determining the net wealth of the assessee when admittedly the trading accounts of the firm relating to the corresponding income-tax assessment were not accepted and held unreliable and the Wealth Tax Officer had jurisdiction to revalue the same under the Wealth Tax Act and the rules in case of under-valuation of the assets ?"
(2) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that it was not open to the Wealth Tax Officer to place his own valuation on each of the assets of the assessee and proceed under section 7(1) of the Wealth Tax Act because the accounts and the trading results disclosed by the firm Messrs Ahmed Abdul Ghani were accepted, and in further directing that the share of interest of the "assessee should be assessed as per rule 8(8) of the Wealth Tax Rules?"
6. ' It is pertinent to note that the statement that the trading accounts of the firms for the assessment years 1966-67 and 1967-68 were not accepted is not correct. This has not been disputed even by the learned counsel for the Department and is borne out by the order of the Tribunal. In view of this mistake the question No, 1 has been wrongly framed. By consent of the parties the questions have been framed as follows:-
(1) Whether on the facts and in the circumstances of the case the Tribunal was justified in disallowing the revaluation of the closing stock of the firm made by the Wealth Tax Officer for the purposes of determining the net wealth of the assessee.
(2) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that it was not open to the Wealth Tax Officer to place his own valuation on each of the assets of the assessee and proceed under section 7(1) of the Wealth Tax Act, because the accounts and the trading results disclosed by the firm Messrs Ahmed Abdul Ghani were accepted ?
7. ' Mr. Waheed Faruqui the learned counsel for the Department has contended that the Wealth Tax Officer was empowered to assessee the closing stock at its market value and, therefore, the Tribunal was not justified in disallowing the revaluation.
8. ' Mr. Ali Athar, the learned counsel has contended that in view of section 7, subsection (2) of the Wealth Tax Act as the accounts maintained by the firm were accepted the net value of the assets of the business as a whole has to be determined according to the balance-sheet of the business.
9. In the circumstances of this case, therefore, according to him the assets of business as stated in the balance-sheet should have been accepted.
10. ' The value of assets is to be determined in the manner provided by section 7. Section 7(1) provides that the value of assets other than cash shall be estimated as provided by the Rules. Section 7(2) provides that where the assessee engaged in business, has maintained the accounts regularly, the Wealth Tax Officer, notwithstanding the Rules, may instead of determining separately the value of each asset in the business, determine the net value of the assets of the business, as a whole with reference to the balance-sheet of such business subject to adjustments as may be necessary. In cases where accounts are properly and regularly maintained due weight has to be given to the value of assets of business mentioned in the balance-sheet. However, in this regard the Wealth Tax Officer is empowered to make necessary adjustments in such figures if the circumstances permit.
11. The balance-sheet is not sacrosanct and where there are obvious accounting errors or mistakes it can be duly corrected and adjusted. It is correct that section 7(1) is of general application but it would be incorrect that it should be applied to all cases. Subsection (2) is in the nature of an exception to subsection of section 7. If section 7(1) is applicable to all cases then subsection will be completely redundant and nugatory. This is neither the intention of the legislature nor such meaning can be attributed by any rule of interpretation of statute. The legislature has provided a fair treatment to assessees who maintain their account regularly. The treatment to cases where accounts have not been accepted is covered by section 7(1).
12. ' The Wealth Tax Officer had accepted the accounts for the years 1966-67 and 1967-68 but he has placed his own independent valuation to the assets in place of the valuation disclosed in the balance-sheet and made additions in the closing stock. It is to be considered whether such step is permissible under rule 8(9). Rules 8(8) and (9) are reproduced below:- "8(8) Vaulation of interest in partnership or association of persons.--(a) The value of the interest of a person in a firm of which he is a partner or in an association of persons of which he is a member, shall be determined in the following manner, namely:-
(i) The net wealth of the firm or the association on the valuation date shall first be determined.
(ii) That portion of the net wealth of the firm or association shall be allocated among the partners or members in accordance with the agreement of partnership or association for the distribution of assets in the event of dissolution of the firm or association or in the absence of such agreement in the proportion in which the partners or members are entitled to share profits.
(iv) The sum total of the accounts so allocated to a partner or member shall be treated as the value of the interest of that partner or member in the firm or association as the case may be.
(b) Where the net wealth of a firm or association computed in accordance with clause (a) includes the value of any assets located outside Pakistan, the value of the interest of any partner or member in the assets located in Pakistan shall be determined having regard to the proportion which the value of the assets located in Pakistan diminished by the debts relating to those asset bears to the net wealth of the firm or association.
13. 8(9) Bulk valuation.-- (a) Where the Wealth-tax Officer is satisfied that the accounts kept by an assessee carrying on a business are reliable and there is no reason to suspect any fraud on the part of the assessee, he may determine the value of the net wealth representing the various assets of the business in the following manner, namely :-
(i) The net wealth representing the various assets shall be taken as the sum of the paid-up capital reserves and the balance to the credit of the profit and loss account.
(ii) The liabilities shown in the balance-sheet shall be carefully scrutinised so as to exclude every item which is not a liability proper.
(iii) If according to the eccounting system followed by the assessee the original value of the block (i,e, fixed assets) is kept unaltered and depreciation is provided for by constituting a fund out of which investments are made, the value of such depreciation fund shall be excluded from the computation.
(iv) If development allowance has been deducted from the value of the block, the amount of it shall be added back.
(v) Where the closing stock is under-valued, the amount representing the under-valuation shall be added back.
14. ' The Wealth Tax Officer while resorting to rule 8(9) should satisfy himself that the accounts of the assessee are reliable and trustworthy and there is no reason to suspect fraud by the assesse. On such satisfaction he can estimate value under rule 8(9) which inter alia provides that if the stock is under-valued the amount representing the undervaluation shall be added back. Where any amount is added back in the closing stock there should be a clear finding that it has been under- valued. According to the principles of accountancy the closing stock is to be valued at the option of the assessee either at cost or market value whichever is lower. In this regard the learned counsel for the respondent has referred to the law the practice of Income-tax by Kanga and Palkhivala where the following observation has been made:- "It is well-established, both in England and in India, that, on general principles of commercial accounting, in the profit and loss account of a merchant's or manufacturer's business the values of the trading stock in hand at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is lower--the market value being ascertained as at the close of ,the accounting year and not as at any intermediate date between the commencement and the close of the year and the cost being either the actual cost of the closing stock or the average cost of the stocks purchased.
15. ' This method of valuation of closing stock seems to be well-recognized and finds support from the following judgments: Chainrup Sampatram v. C.I.T. (1953) 24 I T R 481 (SC) Minister of National Revenue v. Anaeouda American Brass Ltd. (1956) 30 1 T R 84, C.I.T. v. Cheri Ram 1949 I T R 1, Whimster & Co. v. I T R12 T C 813 and Hughes v. B.G. Utting & Co. Ltd. 1940 I T R Suppl.
16. 57.
17. This aspect of the case does not seem to have been considered by the Wealth Tax Officer.
18. Considering the principle of valuation of closing stock, before rejecting the assessee's valuation it is necessary to ascertain on what basis it has been valued and then give a finding c how it has been under-valued. Mere statement that the closing stock has been under-valued is not sufficient to meet the requirement of law. In these cases no such finding has been given and, therefore, under rule 8(9) no addition could be made in the closing stock.
19. ' We, therefore, answer both the questions in the affirmative.