Monday, October 6, 2014

AO had discretionary powers to determine value of property under Rule 3 or Rule 8 for wealth tax purposes

AO had discretionary power to apply Rule 8 of schedule III of the Wealth-Tax Act, 1957 to determine value of immovable property as per Rule 20 if he found Rules 3 to 7 impracticable in the given case.


a)Assessee, who owned a residential flat at Mumbai which was being used as a guest house, filed its wealth tax return declaring net taxable wealth at Rs.1.32 crores (including value of residential flat at Rs.1.55 Lakh, which was self-assessed by assessee as per Rules 3 to 7 of Schedule III of the Wealth-Tax Act, 1957 )

b)During assessment proceedings, Assessing Officer (AO) was of opinion that value of said flat as disclosed in return (at Rs.1.55 lakhs) did not appear to be in consonance with market value for a similar sized flat in Mumbai and referred matter to Departmental Valuation Officer (DVO) under Rule 20 of Schedule III who valued flat at Rs.2.61 crores.

c)AO was of opinion that due to wide variation between alleged market value as determined by DVO and value as disclosed by assessee, it was not practicable to value property as per Rules 3 to 7, hence, Rule 8(a) was attracted and, accordingly, made addition to the assessee’s wealth by accepting the valuation made by DVO.

d)AO’s order was affirmed by the High Court and the appellate authorities.

e)Aggrieved assessee filed the instant appeal before the Supreme Court.

The Supreme Court held in favour of revenue as under-

1)A conjoint reading of the various provisions, i.e., Rules 3, 8 and 20 of Schedule III of the Wealth-Tax Act, 1957 makes it clear that the Legislature has not laid down a rigid directive for the AO that the valuation of an asset is mandatorily required to be made by applying Rule 3. The AO has the discretionary power to determine whether Rule 3 or Rule 8 would be applicable in a particular case. If the AO is of the opinion that it is not practicable to apply Rule 3, he can apply Rule 8 and value of the asset can be determined in the manner laid down in Rule 20.

2)However, the discretion to discard the value determined as per Rule 3 had to be judicially exercised by AO. It must be reasonable, based on subjective satisfaction and open to judicial scrutiny.

3)By examining the facts and circumstances of this case, the Supreme Court affirmed the order of AO as he had the following reasons to reject the self-assessment made by assessee:-

i.There was a wide variation between the market value and the valuation done by the assessee as per municipal taxes.

ii.The property was used as a guest house.

iii.The value for levy of municipal tax was very low, as the total ratable value of the asset was done by the municipal authorities at the rate of Rs.6,573 per annum.

iv.The assessee was a tenant of the property at the rental of Rs.500 per month. After purchase of the property a lot of expenditure was incurred from time-to-time on improvement of the property which was very difficult to ascertain.