1994 PLP (Trib (PTD)

"...If an assessee acquires an asset on the valuation date, it does not seem to be doubted that its value will be included in the net wealth; it will be included even though the asset was acquired in the middle of the valuation date and not at the first moment of it. If so, when as assessee parts with as asset on the valuation date, its value should not be included in the net wealth .... In 1989 PTD 10 (Tribunal) it is observed on page 15 as under: "...Thus in the light of the passage reproduced above it appears that the expression on the valuation date means on the valuation date till it expires. Reiterating over earlier decision we once again hold that we have to give last fraction of second to an assessee for working out his net wealth. Thus, it is obvious that if we place time till the last fraction of the second at the disposal of an assessee so that he could reduce the aggregate value of his assets, or increase his liabilities we will have to procrastinate the determination of net wealth which means the deduction of all the debts owed including the wealth tax liability from the aggregate value of all the assets. In our judgment if an assessee is given an opportunity till the last fraction of second to reduce his assets or increase his liability it would be more beneficial to him rather than to allow the wealth tax liability to be deducted on the last fraction of second in order to arrive at the net wealth; However, this does not seem to be the end of this controversy.." It was further observed; "

6. We can look at this issue from yet another angle. One may ask as to why the determination of net wealth at a particular point of time be not left to the option of an assessee so that the higher splitting arguments could be avoided. The question is quite pertinent and let us examine its implication also.

7. Now suppose an assessee decides to out his net wealth at 1230 p.m. of a valuation date. Further, suppose that the aggregate value of all his assets comes to 10 lac and all debts owed amount to 5 lac. Now if we deduct all the debts owed from the aggregate value of the assets, we arrive at the figure of 5 lac which would be the amount of net wealth. Now, when we have found out the amount of net wealth we can turn to the schedule of the Wealth Tax Act, so that we can find out the tax payable on it. Suppose it comes to Rs.5,

000. Thus, this amount of Rs.5,000 would become yet another debt owed and according to Mr. Pasha, the learned counsel for the appellant, it should be allowed as a deduction in the same assessment year..."

9. From reading above it would appear that net wealth of assessee is to be determined on the valuation date and the value of asset should be adopted as prevalent on that. date. This fact is not disputed that the ITO has powers to determine market value on any recognised basis and one of them being "Gross Annual Rental Value Method".

10. Mr. ZA. Qureshi, the learned counsel for the assessee has also submitted that the definition of Gross Annual Rental Value would be equal to the actual rent received by the assessee and to support the contention he has relied on a Full Bench decision 1988 PTD

585. It would, therefore, be appropriate to refer to this decision.

11. As regards to Gross Annual Rental Value it is observed on page 605 as under: "...25. The question now arises as to what course of action could be adopted by a Wealth Tax Officer. If he finds that the actual rent received is lesser than the reasonable rent because of the payment of adjustable advance rent or security deposits? Mr Muhammad Farid, the learned DR, has suggested that by adding 10% of the advance rent or security deposits to the annual rent the reasonable annual rent could easily be achieved. But, with due respect we are not prepared to concede such a power to Wealth Tax Officer without legislative authority. We, therefore, think that keeping into consideration the size, amenities available and the locality, the reasonable rent could be ascertained from parallel cases. Mr: Muhammad Farid, the learned D.R.' however asked us as to why the legislature enacted second proviso if parallel cases were to be the criterion for determining the reasonable rent. Our answer to this question, however is that the main reason for bringing second proviso on Statute Book appears to be that since there could possibly be various kinds of deposits/advance rent with different intentions and for various purposes as discussed by us in the later part of our decision, the legislature directed the Wealth Tax officer through second proviso to take them into considerations and fall back upon parallel cases if he found that the actual rent received was lesser than the reasonable rent but not otherwise. Had it been their intention of the legislature to vest the Wealth Tax Officer with the power of adding interest calculated on the amount of unadjustable deposits/advance rents or 10% thereof, it could have laid down simple formula of making such addition. In our judgment the direction to the WTO to keep into consideration the amount of unadjustable deposits or advance rent merely clarifies the power of the Wealth Tax Officer quo those cases in which the actual rent received was lasser than the reasonable rent. In such case the Wealth Tax Officer could have or could not have taken the amount of security deposits or advance rent into consideration while finding out reasonable rent. But by introducing 2nd proviso the legislature has clarified to the Wealth Tax Officer that in such cases he is left with no option but to take such unadjustable security deposits or advance rents into consideration. Let us mention here that the legislature introduced subsection (13) of section 12 of the Income Tax Ordinance when in 'its wisdom the legislature thought fit to bring to tax the amount of security deposits or advance rent which was not adjustable against the rent payable by spreading it over 10 years including the income year in which such type of provisions in the Wealth Tax Act or the Rules framed thereunder also when, in its, wisdom, it feels that the Wealth Tax Officer must add to the wealth of an assessee the amount of unadjustable security deposits or advances rent. Till such legislation is introduced, we should follow the law as it is ...." It is further observed: "

26. Thus the upshot of all this discussion appears to be that whenever a Wealth Tax Officer has to determine the market value of any property he must: (1) find out the gross annual letting value of a property as discussed above on the basis of actual rent received and (2) take into consideration the amount of unadjustable security deposits/advance rent, and (3) determine its nature and intent and purpose and if the actual rent received is bound to be on lower side because of the payment of security deposits or advance rent which was not adjustable he should look for parallel cases to find out the reasonable rent, and (4) multiply the annual reasonable rent 10 tithes or more, of course with the prior approval of CBR or IAC as the case may be...:' From the above it would appear that this case-law is of no help to the assessee.

12. Mr. ZA. Qureshi, the learned counsel for the assessee has also half heartedly contended that as per proviso contained to rule 8(3) of Wealth Tax Rules, the Wealth Tax Officer was also required to obtain prior approval from the CBR if the value was determined by him at a sum higher than 10 times the Gross Annual Rental Value such property. This contention of the learned counsel for the assessee is also misconceived inasmuch as the restriction placed on the ITO by this proviso is that once he reasonably determines an ALV then he would not determine the value of property at a sum higher than ten times, the Gross Annual Rental Value. This proviso does not mean that Wealth Tax Officer is not authorised to determine the Gross Annual Rental Value or he is required to determine by value at a sum which is higher than ten times of the actual rent received by the assessee. This proposition has also been decided by the said Full Bench and it is observed on page 604: "

23. As we have held earlier, sub-rule (3) of Rule 8 deals with modes of working out the market value of a land or building and since one of the recognised modes is of obtaining it by multiplying the Gross Annual Rental Value 10 times or more, the first proviso has, therefore, merely put an embargo on the power of Wealth Tax Officer when it laid down that if he Wanted to determine the value of any property at a sum higher than ten times the Gross Annual Rental Value he should seek approval of the CBR or IAC it, therefore, necessarily means that the Wealth Tax* Officer has the power of obtaining market value by multiplying the Gross Annual Rental Value ten times or more. Had he not been enjoying such power there would not have arisen any occasion for imposing a condition of approval thus, main sub-rule (3) laid down the general power of the Wealth Tax Officer and the proviso puts a restriction before thereon."

13. The upshot of above discussion can be summarised as follows: (a) The Wealth Tax Officer has ample powers under the Wealth Tax Act to reasonably determine the Gross Annual Rental Value of a property by ignoring the actual rent received by the assessee provided he is of the opinion that the rent received is much less than the rent which could be reasonable and prevalent in that areas. (b) If the Wealth Tax Officer determines a reasonable rent then he has also been authorised to take 10 times of that value and for that he is not required to obtain any approval and the rent determined would be the rent relevant on the valuation date.

14. In our opinion, in above discussion we have also covered the argument of the learned D.R. and there is no need to mention them separately.

15. Now after having considered the facts and circumstances of the case we are of the view that the order of the learned CIT(A) was not proper and legal and the same is hereby vacated and the order of Wealth Tax Officer is restored.

16. In terms of above these departmental appeals are allowed. (Sd.) (Mirza Muhammad Wasim, Accountant Member (Sd.) (Syed Kabirul Hassan), Judicial Member (Sd.) (Rashid Ahmad Sheikh), Judicial Member

17. I agree with the findings of the learned Judicial Member and would like to emphasize that the issue in the instant departmental appeal basically involves an interpretation of the first proviso to Rule 8(3) of the Wealth Tax Rules already reproduced above as is evident, the said rule 8(3) provides that for the purposes of wealth tax assessments the value of lands and buildings shall be estimated with due regard to the nature and size of the property, the amenities available and the prices of comparable property etc. In its first proviso (as it stood at the relevant time) it has, however, been further stipulated that the Wealth Tax Officer shall not except with the prior approval of the CBR, determine the value of any property at a sum higher than ten times its gross annual rental value. On the basis of this proviso it has become a common practice to value immovable property for wealth tax purposes by multiplying its gross annual rental value (based on actual rent) by ten. This method of valuation has been recognised in several decisions of the Tribunal including the Full Bench decision reported as 1988 PTD 585 quoted above. In the instant case too this method was followed in principle by the assessee AOP itself which arrived at the declared value of the property for the year 1989-90 in the following manner: Actual rent: 1-7-88 to 31-12-88 @ Rs.11,600 p.m. = Rs.66,150 1-1-89 to 28-5-89 @ Rs.11,025 p.m. = Rs.56,877 29-5-89 to 30-6-89 @ Rs.19,000 p.m. = Rs.20,000

GARV = Rs.1,43,866 Declared value (10 times of Rs.14,38,660 GARV)

18. While deciding the assessee's appeal for the assessment year 1989-90, the learned CWT(Appeals) relied squarely on the decision of the Tribunal in WTA No.6(IB) of 1982-83 (assessment year 1981-82) dated 17-12-1984, portion of which was reproduced in the appellate order as under:-- "

4. Read as a whole alongwith explanation, the rule can be construed to mean that 'the gross annual rental value would be the same sung which the property might reasonably fetch as rent from year to year. The amount actually received would, of course, be reasonable, because it was being so accepted by the owner. And this is the sum which actually goes into, his pocket. 4t can therefore serve as a basis for working out the gross annual rent.

5. The amount being charged on the date of valuation does not appear to furnish equitable basis and is likely to work hardships in many cases. This view, though slightly in different circumstances, was also endorsed in the case aforesaid by the Tribunal."

19. The learned CWT (Appeals) thus held that the actual rent of a building for the whole year was "mere representative of the ALV of a property" and directed that the declared value be accepted.

20. During the hearing of the departmental appeal by this Bench it was contended by the learned D.R. that there were a large number of decisions of the Tribunal and superior Courts in confirmation of the fact that in the wealth tax assessment for any year it was the position as on the valuation date which was relevant and not the position on any earlier or subsequent date. It was thus argued that if, for instance, a house was constructed and let out just before or on the valuation date its value would also be adopted by capitalising the actual rent as on the valuation date, though there was no rental income for the rest of the preceding year. The learned A.R. on the other hand relied on this Tribunal's decision dated 17-12-1984 which had been followed by the learned CWT (Appeals). In this connection particular significance was attached by the learned A.R. to the words "might reasonably be expected to let from year to year" appearing in the definition of "gross annual rental value" contained in the Explanation to rule 8(3) already reproduced above. It was contended that the "sum" for which the property might reasonably be expected to let `from year to year' is a national sum best represented by the actual rent earned for the entire year preceding the valuation date and not by the rental income being earned on the valuation date itself. In this connection reference was also made by the learned A.R. to a case of the Indian Jurisdiction reported as 1993 o PTD 539 (Karnataka High Court).

21. Having considered the arguments of the two sides, it does not appear to be justifiable to ignore in any way the basic principle contained in innumerable decisions of the Superior Courts and this Tribunal (including the decision at 1989 PTD 10 quoted at length above) that in wealth tax assessment it is the position, as on the valuation date (and in fact till its last moment) which is to be taken into account and not any earlier or subsequent position. Thus if the actual rent is to for the basis for valuation of a property. It must be the actual rent as on the valuation date. It may be added that though the words from year to year have been used in the Explanation to rule 8(3) mentioned above, the point of determination of the said "sum" has to be no other than the relevant valuation date. Thus the sum for which the property may be expected to be let out from year to year would be based on the actual rent as on the valuation date, which may, of course, be different a day earlier or may change a day later without altering the sum for which the property may be expected to let from year to year as determined according to the situation prevailing on the I valuation date.

22. It may also be added that the facts in the Karnataka High Court judgment cited by the learned A.R. are quite distinguishable because there the valuation of property was adopted on the basis of a combination of various methods and not exclusively according to its rental income. Thus the issue decided by the Honourable Karnataka High Court was essentially different from issue before us.

23. In the light of the above, I agree that the order of the Wealth Tax Officer for the assessment year 1989-90 would stand restored and the departmental appeal would succeed accordingly. (Sd.) (Mirza Muhammad Wasim), Accountant Member (Sd.) (Rashid Ahmad Sheikh), Judicial Member M.B.A./60/T.T. Order accordingly.