Supreme Court Upholds Land and Building Method for Cinema Valuation in Wealth Tax Assessment (October 13, 2017)

Date of the Judgment: October 13, 2017
Citation: (2017) INSC 939
Judges: A.K. Sikri, J., Ashok Bhushan, J.

When assessing wealth tax, how should a cinema building be valued? Should it be based on its income or the value of the land and building? The Supreme Court of India recently addressed this question, clarifying the discretion of the Wealth Tax Officer in choosing valuation methods. This case revolves around the valuation of “Alpana Cinema,” a property owned by a partnership firm, for wealth tax purposes.

Case Background

The case involves a partnership firm, M/s. G.D. & Sons, which owned a cinema building named “Alpana Cinema” in New Delhi. The firm had purchased the land and building in a semi-constructed state on June 4, 1965, for ₹8,00,000. After completing the construction, they began operating the cinema.

During a wealth tax assessment of one of the partners, the Wealth Tax Officer referred the valuation of Alpana Cinema to the Department Valuation Officer on April 29, 1976. The Valuation Officer submitted a report on April 26, 1977, valuing the property for the assessment years 1970-71 to 1974-75. Notices were issued to the partners on March 30, 1979, under Section 17 of the Wealth Tax Act, 1957.

The assessees obtained their own valuation report from an approved valuer, using the income capitalization method. However, the Wealth Tax Officer, in March 1983, completed the assessment based on the Departmental Valuer’s report, using the land and building method. The assessees appealed this decision.

Timeline

Course of Proceedings

The assessees, dissatisfied with the assessment orders, appealed to the Appellate Assistant Commissioner of Wealth Tax, who upheld the Wealth Tax Officer’s decision to use the land and building method on January 23, 1986. The assessees then appealed to the Income Tax Appellate Tribunal (ITAT), Delhi Bench.

The ITAT sided with the assessees, stating that the income capitalization method was more appropriate for valuing a cinema building, as it could only be used for film exhibition. The Revenue, aggrieved by this decision, filed a reference application. Initially rejected, the High Court directed the Tribunal to refer the following questions:

• Whether the ITAT was correct in adopting the income capitalization method for determining the fair market value of the cinema building under Section 7(1) of the Wealth Tax Act, instead of the land and building method?
• If the answer to the above is negative, what should be the correct fair market value of the assets?

The High Court, on October 21, 2005, answered these questions in favor of the Revenue, supporting the Wealth Tax Officer’s use of the land and building method. The assessees then appealed to the Supreme Court.

Legal Framework

The core legal provision in question is Section 7 of the Wealth Tax Act, 1957, which deals with the valuation of assets.

Section 7(1) of the Wealth Tax Act, 1957 states:
“Subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price, which in the opinion of the Wealth Tax Officer it would fetch if sold in the open market on the valuation date.”

Section 7(2)(a) of the Wealth Tax Act, 1957, which begins with a non-obstante clause, states:
“Notwithstanding anything contained in sub-section (1) – (a) Where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth Tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date and making such adjustment therein as may be prescribed.”

Section 7(3) of the Wealth Tax Act, 1957 states:
“Notwithstanding anything contained in sub-Section(1), where the valuation of any asset is referred by the Wealth Tax Officer to the Valuation Officer under Section 16A, the value of such asset shall be estimated to be the price which, in the opinion of the Valuation Officer, it would fetch if sold in the open market on the valuation date.”

Section 16A of the Wealth Tax Act, 1957 allows the Wealth Tax Officer to refer the valuation of any asset to a Valuation Officer.

Arguments

The appellants argued that Section 7(2)(a) of the Wealth Tax Act, 1957, is a standalone provision that mandates the use of the income capitalization method for valuing assets of a running business. They contended that the High Court should not have interfered with the ITAT’s order, as the Tribunal is the final fact-finding authority. They also argued that if multiple valuation methods exist, the one favoring the assessee should be adopted.

The Revenue argued that Section 7(1)(a) of the Wealth Tax Act, 1957, gives discretion to the Wealth Tax Officer to apply the income capitalization method if they deem it fit, but it is not mandatory. They contended that the land and building method was appropriate for valuing the cinema building, as it was owned and possessed by the assessee without encumbrances and could fetch the best price in the open market.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the Income Tax Appellate Tribunal was right in law for the purpose of Section 7(1) of the Wealth Tax Act in determining the assessee’s interest in the partnership firm by adopting the fair market value of the assets in question namely, the cinema building on the income mobilization basis instead of land and building method adopted by Wealth Tax Officer?
2. If the answer to the above question is in the negative and against the assessee then what ought to be the correct fair market value of assets in question?

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Judgment

The Supreme Court held that the Wealth Tax Officer was justified in adopting the land and building method for valuing the cinema property. The Court emphasized that Section 7(2)(a) of the Wealth Tax Act, 1957, is an enabling provision, granting discretion to the Wealth Tax Officer to choose the appropriate valuation method. The Court also noted that the cinema building was self-occupied and without encumbrances, making the land and building method a suitable approach.

The Court observed that the Wealth Tax Officer had made a reference to the Departmental Valuer under Section 7(3) of the Wealth Tax Act, 1957, and the Valuation report was relied upon for the assessment.

The Supreme Court upheld the High Court’s decision, stating that the High Court did not err in interfering with the order of the ITAT.

The Court also addressed the argument that the income capitalization method should be used because the building could only be used for film exhibition. The Court stated that this did not diminish the market value of the property and that the land and building method was appropriate.

The Court also considered the argument that if there are two methods of valuation, the one which is favorable to the assessee should be adopted. The Court held that this is not applicable in the present case as the provisions of Section 7 are neither ambiguous nor lead to two constructions.

The Supreme Court dismissed all the appeals.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of Section 7 of the Wealth Tax Act, 1957. The Court emphasized the discretionary power of the Wealth Tax Officer in choosing the valuation method. The fact that the property was self-occupied and unencumbered also weighed heavily in favor of using the land and building method. The Court also considered that the income capitalization method could lead to an unrealistic valuation in cases where the business incurred losses.

Logical Reasoning

The Court emphasized that the Wealth Tax Officer’s decision to refer the valuation to the Departmental Valuer under Section 7(3) of the Wealth Tax Act, 1957, indicated a conscious decision not to resort to Section 7(2)(a).

The court also reasoned that even if the income capitalization method was used and there was a loss in the business, it would lead to a negative valuation of the property, which is far from reality.

The Supreme Court quoted the following from the judgment:

“On a fair reading of the aforesaid provisions it will appear clear that the primary method of determining the value of assets for the purposes of the Act is the one indicated in s.7(1), inasmuch as it provides that the value of any assets, other than cash, for the purposes of this Act shall be estimated to be its market price on the valuation date.”

“It is true that sub-s.(2) commences with a non obstante clause, but even so, the provision itself is an enabling one conferring discretion on the WTO to determine the net value of the assets of the business as a whole having regard to its balance sheets as on the valuation date, instead of proceeding under sub-s.(1).”

“In other words, it is optional for the WTO to resort to either of the methods even in the case where the net value of the business carried on by the assessee is to be determined…”

Key Takeaways

• The Wealth Tax Officer has the discretion to choose the method for valuing assets under the Wealth Tax Act, 1957.
• Section 7(2)(a) of the Wealth Tax Act, 1957, is an enabling provision, not a mandatory one.
• The land and building method is an appropriate valuation method for self-occupied and unencumbered properties.
• The income capitalization method is not mandatory for valuing assets of a running business.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that the Wealth Tax Officer has the discretion to choose between the land and building method and the income capitalization method for valuing assets, especially for a running business. This case clarifies that Section 7(2)(a) of the Wealth Tax Act, 1957, is an enabling provision and does not mandate the use of the income capitalization method. This reaffirms the position of law as laid down in Juggilal Kamlapat Bankers (supra) that resort to Section 7(2)(a) is discretionary and optional.

Conclusion

The Supreme Court dismissed the appeals, upholding the High Court’s decision that the Wealth Tax Officer was justified in using the land and building method to value the cinema property. The Court clarified that the Wealth Tax Officer has the discretion to choose the appropriate valuation method, and Section 7(2)(a) of the Wealth Tax Act, 1957, does not mandate the use of the income capitalization method.