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Wealth Tax Officer/Income Tax Officer and Another v Trustees of Heh The Nizams Jewellery Trust

Income Tax Appellate Tribunal

HYDERABAD-A BENCH

12 June 1990

The Judgment was delivered by SHRI M.K. CHATURVEDI, JUDICIAL MEMBER

Per Shri M.K. Chaturvedi, Judicial MemberThese cross appeals rotate round the common issues and relate to assessment years 1980-81 to 1986-87. For the sake of convenience, these are disposed of by a consolidated order 2. Shri N.A. Palkhivala along with Sri P. Murali Krishna appeared on behalf of the assessee. The revenue was represented by S/Shri K. Rangabhashyam and I.J. Naidu. Necessary documents and papers were presented at the time of hearing in the form of paper books. Revenue filed 3 paper books and 9 paper books were submitted on behalf of the assessee

3. Various arguments placed before us by Shri Palkhivala resemble so many radii of a circle starting from different points on its circumference but all oriented towards the valuation of beneficial interest in right perspective. According to learned counsel it is only aggregate ‘beneficial interest’ that can be taxed. The beneficial interest is subjected to litigation. What value it would fetch if sold in open market ? The prospective buyer would indeed ponder over the point — what actually he is buying — jewel or litigation ? The main plank of Shri Palkhivala’s argument was in regard to seeking adjustment to the total value of the jewellery adopted by Shri Jayant N. Chowlera, the Valuation Officer. Learned Counsel did not question the valuation as such as done by Shri Chowlera but he contended for adjustment on account of uncertainties, hazards and risks of litigation. The other issues relate to the principles of assessment

4. The general conspectus of the main plank of Shri Rangabhashyam’s argument was that the valuation by Shri Chowlera was done after considering the factors like uncertainties, hazards and risks of litigation though it is not clearly discernible from the valuation report. Since these factors have already been considered no adjustment on these counts is required in arriving at the correct valuation of the jewellery. Shri K. Rangabhashyam at the time of hearing made the following prayers :–(i) that the request for adjustment by the approved valuer may be allowed and the decision on the valuation of the jewellery may be deferred

(ii) the valuation of the auctioneers is essential for determining the value of the jewellery on the respective dates in question and so the some may be called for, otherwise the decision regarding the fixation of value of jewellery may be deferred

5. We have carefully considered the prayer of learned D.R. We have given due opportunity to Shri Jayant N. Chowlera to explain his report by issuance of notice. But he asked for adjournment. The prayer for adjournment was rejected. We are reminded of the famous dictum of Lord Coke to put it in a Latin tag interest republica ut sit finis litum. Translation loses its terseness. It means that it concerns the State that law suits be not protracted otherwise great oppression might be done under the colour and pretence of law. The auctioneer’s valuation report was never placed before the lower authorities nor has it been shown that it related to relevant valuation dates. In view of this, we are not inclined to accept the prayer of the learned D.R. and we proceed to deal with the issues before us in these appeals

6. In the appeals preferred by the assessee, the issues which primarily need our attention are crystallised as under :–

(a) Valuation of jewellery

(b) Principles of assessment

(i) Whether it is open to Settlor to constitute several trusts by a single document

(ii) Applicability of provisions of section 21(1A) of the Wealth-tax Act, 1957 (hereinafter called the Act). Prince Mauzzam Jah’s Fund, Basalath Jah Bahadur’s Fund and Shahzadi Begum’s Fund wherein assessments were made by applying the provisions of section 21(4) of the Act(iii) Applicability of the provisions of sec. 21(1A) of the Act in respect of the other Funds wherein assessments were made under sec. 21(1) of the Act in respect of the ultimate beneficial interest as the entire corpus of the trust fund was distributed amongst the beneficiaries as per their entitlements from the Trust

7. The issues set out in the appeals preferred by the assessee are common in the appeals filed by the revenue also. Apropos the valuation of jewellery, the revenue raised certain incidental issues also such as the existence of open market, applicability of Promissory Estoppel Rule etc. Apart from that revenue raised contention regarding the allowability of fictional Estate duty liability

8. Before we come to grips with these issues it would be beneficial to keep in focus the factual canvas of the case. His Exalted Highness, the late Nb. Sir Mir Osman Ali Khan Bahadur created “BEH the Nizam’s Jewellery Trust” by the indenture dt. 29-3-1951. A copy of the trust-deed is placed before us. (Paper Book Volume I–Pages 1 to 88). The Settlor specified the names of the beneficiaries, their respective shares and also indicated the purpose, wherever required, for which the trust was created

9. The corpus of the trust fund was notionally divided into 16 units for creation of different trusts. The following are the particulars of trusts created by the Settlor through the above referred single deed of trust

I-Prince Azam Jah Fund (4 units, clause v) :–

Prince Azam Jah was the elder son of the Settlor. He died on 9-10-1970. 4 Units of Prince Azam Jah’s fund were further notionally divided into two equal parts. Two trusts were created in respect to this fund : One for the benefit of Prince Muffakham Jah Bahadur. Accordingly, out of the 4 units of Prince Azam Jah’s fund, two units each were to be held for the benefit of Prince Mukkarram Jah Bahadur and Prince Muffakham Jah Bahadur. As per the terms of the trust deed Prince Mukkarram Jah Bahadur and Prince Muffakham Jah Bahadur have life interest in their respective funds and on their death respective funds shall be held for the benefit of their respective children in the ratio of 2 shares for every male child and one share for every female child. Prince Mukkarram Jah Bahadur has a daughter, Princess Fauzia Fatima and a son Prince Mur Azmat Ali Khan. Prince Muffakham Jah Bahadur has two sons, viz., Prince Mir Rafat Ali Khan and Prince Mur Farhat Ali Khan. It was submitted that the provisions of section 21(1) of the Act are applicable to the two trusts created through this fund. Life interest of the immediate beneficiaries, viz., Prince Mukkarram Jah Bahadur and Prince Muffakham Jah Bahadur, is not exigible to tax as the jewellery has not been sold till date. Remainder interest of their respective children is taxable under section 21 (1) of the ActII-Prince Mauzzam Jah’s Fund (4 units, clause vi) :–

Prince Mauzzam Jah was the second son of the Settlor. He died on 14-9-1987. Prince Mauzzam Jah Bahadur was alive on each of the valuation dates upto and including the assessment year 1987-88. This fund, as per the terms of the deed, was to be notionally divided into 8 parts on the death of Prince Mauzzam Jah Bahadur, one such part shall be held for the benefit of Sb. Fatima Fauzia and another such part shall be held for the benefit of Sb. Amina Marzia, Sb. Fatima Fauzia and Sb. Amina Marzia have life interest in respect of entitlements and on their death respective corpus shall be held for the absolute benefit of their respective children in the ratio of 2 shares for every male child and one share for every female child. The balance of 6 units of this fund shall be held by the eldest male descendant in the direct male line of succession of the Settlor, according to the law of Primogeniture then living, in order to enable him as the Head of the family of the Settlor to maintain the dignity of house of Asaf Jah and the status and position of the members of the family. Thus, in all, three trusts were created in this fund

As on the valuation date, relevant for the year under consideration, Prince Mauzzam Jah Bahadur was alive. But no benefits were derived by him as the jewellery could not be sold. Nevertheless, the beneficial interest of the ultimate beneficiaries, viz., the children of Sb. Fauzia Fatima and Sb. Amina Marzia are assessable under section 21(1) of the Act

It was submitted that the provisions of section 21(4) are applicable to six parts which have to be held on trust for the eldest male descendant. Therefore, it is necessary to evaluate the ultimate beneficial interest on actuarial principles assuming the death of the immediate beneficiary Prince Mukkarram Jah Bahadur on each of the valuation dates for the purpose of assessment under section 21(4) of the Act. The provisions of sec. 21(1A) are not applicable to this portion of the separate trust created by the SettlorIII-Sb. Begum’s Fund (1 unit, clause vii) :–

Sb. Begum was a daughter of the Settlor. She died on 25-3-1985. She was alive on the valuation dates relevant for the asst. years 1980-81 to 1984-85. She had life interest in the above fund which never materialised as in the case of Prince Mauzzam Jah Bahadur. On her death, the corpus of the trust fund is to be held by the eldest male descendant on the same lines specified in relation to 6 parts of Prince Mauzzam Jah’s fund. Only one trust is created through this fund. The following are stated to be the principles of assessment

(a) The ultimate beneficial interest on actuarial principles is assessable under section 21(4) of the Act for the asst. year 1981-82 to 1984-85

(b) The total value of corpus fund is assessable under section 21(4) of the Act for the wealth-tax asst. years 1985-86 to 1986-87

According to Sri Palkhivala, provisions of section 21(1A) are not applicable to this fund

IV-Shahzada Nb. Basalath Jah Bahadur’s Fund (1 unit, clause viii) :–

Shahzada Nb. Basalath Jah Bahadur is a step brother of the Settlor. He is entitled to life interest of one unit of the 16 units of the principal fund. He is alive. After his death, the corpus of the trust fund shall be held by the eldest male descendant in the same manner specified in the Shahzad Begum’s fund. Only one trust is created through this fund. It was submitted by Sri Palkhivala that the corpus of the trust fund is assessable on actuarial principles assuming the death of the immediate beneficiary on each of the valuation dates under section 21(4) of the Act. The provisions of section 21(1A) of the Act according to learned counsel are not applicable to this fund

V-Remaining son’s fund (3 units, clause ix) :–These 3 units of the principal fund were further notionally divided into 126 units and allocated amongst the sons, grand-sons and grand-daughters of the Settlor mentioned in Part-II of the Third Schedule to the Deed of Trust. (Pages 69 and 71 of Vol. I). Thus, 20 separate trusts were created for the benefit of the sons and the grand children. As per the terms of the trust-deed, sons are entitled to life interest and on death, the corpus of their respective funds shall be distributed amongst their respective children in the ratio of two shares for every male child and one share for every female child. The trustees filed the returns distributing the corpus amongst the ultimate beneficiaries assuming the death of the immediate beneficiaries. The provisions of section 21(1) of the Act are, according to the learned counsel, applicable for assessment of the remaindermen interest of the ultimate beneficiaries

VI-Remaining daughter’s fund (3 units, clause X) :–

These 3 units of the principal fund were further notionally divided into 17 equal parts and distributed amongst the daughters of the Settlor mentioned in Part-III of the Third Schedule to the deed of trust (Page 71 of Vol.I). Thus, 17 separate trusts were created for the benefit of the daughters. As per the terms of the trust deed daughters are entitled to life interest and on the death of any, the corpus of her respective trust shall be distributed amongst her children in the ratio of 2 shares for every male child and one share for every female child

The trustees filed the return distributing the corpus amongst the ultimate beneficiaries assuming the death of the immediate beneficiary. It was submitted by Sri Palkhivala that the provisions of section 21(1) of the Act are applicable for assessment of the ultimate beneficial interest

10. The Settlor specified the names of their beneficiaries, their respective shares and also indicated the purpose wherever required for which the trust was created. In terms of the trust deed specified items of jewellery were handed over to the persons named therein and the balance 89 items of the jewellery form the “Principal fund of the Trust”. The power of the trustees to sell the jewellery is contained in clause-13 of the trust-deed. The sale of jewellery could take place only after the demise of the Settlor and his eldest son Prince Azam Jah Bahadur

11. The Settlor died in February 1967 and his eldest son Prince Azam Jah Bahadur died on 9-10-1970. The trustees have been making efforts to sell/dispose of the jewellery right from July 1972 after passing necessary resolution for disposal of the items of the jewellery of the principal fund

12. The trustees approached Mrs. Indira Gandhi, the then Prime Minister of India, in the year 1972 and requested her to acquire items of the jewellery which are of interest to the nation and allow the rest of the items for export (pages 119 to 122 of Vol. I)

13. Pursuant to the request made to the Highest Office, 4 expert committees were constituted from time to time by the Central Government and finally declared 23 items of jewellery as “Antiquities” and required some more information with regard to “Jacob Diamond” and issued non-antiquity/export certificates for 65 items of jewellery in Feb. 1978. Government decided not to purchase any items of jewellery of the trust (page 187 of Vol. I)

14. 37 items out of 65 items which were permitted to be sold outside India were put for auction in September 1979 under the directions of the Hon’ble Supreme Court

15. The Government of India interfered and stopped sale of jewellery by informing the Hon’ble Supreme Court that the Government had taken a Cabinet decision “not to allow the jewellery to go out of the country”. (page 197 of Vol. I)

16. The trustees challenged the decision of the Central Government by way of W.P. 1429/1979 before the Supreme Court. The above W.P. was heard by the Hon’ble Supreme Court and finally the same was disposed of in terms of the Compromise Agreement filed before it on 25th April, 1989. In terms of the Compromise Agreement, the matter is presently resting with the Board of Arbitration consisting of Mr. Justice V. Khalid (Retd.) and Mr. Justice H.C. Goel (Retd.)

17. In December 1984, the trustees filed the revised returns of wealth for the wealth-tax assessment years 1980-81 to 1982-83 and the regular returns were filed for the asst. years 1983-84 to 1984-85 setting out the factors that affect the valuation of the Principal Fund together with the adjustments required to be made for the purposes of arriving at the true value of the jewellery. Accordingly the value of the corpus of the Principal fund held by the trustees for the beneficial interest of the various beneficiaries was estimated as under :–

Wealth-tax Asst. Year Amount in Rs. (Crores)

1980-81 4.50

1981-82 4.25

1982-83 4.85

1983-84 3.60

1984-85 3.60

18. For the asst. years 1957-58 to 1979-80, the valuation of the jewellery of the Trust was made in consonance with the report of Shri Mahendra G. Mehta, Valuation Officer. On getting revised return for the asst. years 1981-82 to 1982-83 and the regular returns for the asst. years 1983-84 to 1984-85, the Wealth-tax Officer referred the valuation of the jewellery of this trust to registered valuer Shri Jayant N. Chowlera, Bombay, on the 4th day of March, 1985 giving reference of the value of the principal fund estimated by the trustees in the returns filed originally

19. For the asst. year 1980-81, at the time of assessment the valuation report of Shri Chowlera was not available. In the absence of valuation report the Wealth-tax Officer had fixed the value of the Principal fund at Rs. 31.56 crores as on 31-3-1980. The basis for fixing this value was the valuation made earlier by the Departmental Valuer Shri Mahendra G. Mehta. Shri Mehta valued the principal fund as on 31-5-1978 at Rs. 28 crores and as on 31-3-1979 at Rs. 29.73 crores. There was an increase of 6.17 per cent within one year. Applying the same ratio of increase the W.T.O. worked out the value as on 31-3-1980 at Rs. 31.56 crores. However, it was mentioned in the order that the correct value of the principal fund would be substituted on receiving the valuation report of the departmental valuer and the departmental actuary. In an appeal before the CWT(A) the valuation report of Shri Chowlera was placed. For the asst. year 1980-81, learned CWT(A) considered the valuation made by Shri Chowlera and being of the opinion that adjustment on account of uncertainties, hazards and risk of litigation, not being considered in the report of Shri Chowlera, learned CWT(A) directed the WTO to reduce 50 per cent of the amount taken by Shri Chowlera and to take the value of the corpus at a rounded figure of Rs. 16.20 crores

20. The trustees filed objection against the proposed valuation of Shri Chowlera. The total value of the principal fund as per the report of Shri Chowlera came to Rs. 32, 43, 27, 020. The department has also appointed an actuary Shri K.V.Y. Sastry for the purpose of determining the beneficial interest of various beneficiaries on actuary principles. The trustees brought to the notice of the departmental actuary, the various uncertainties in the matter of sale of jewellery and requested the actuary to estimate the open fair market value for the purpose of wealth-tax assessment considering the facts of the case. The departmental actuary refused to look into this aspect on the ground that the valuation made by Shri Jayant N. Chowlera is binding on him

21. It was submitted before us that the trustees intimated the valuation officer in regard to the various risks, hazards and uncertainties prevailing on each of the valuation dates. But Shri Chowlera has not discussed in his report the facts affecting the value of the items of the jewellery. He dismissed the same in his report as “unwarranted”

22. Coming now to the assessment-wise position we find that in the assessment year 1980-81, the W.T.O. passed the order dated 27-3-1985 under section 21(1A) of the Act treating the total corpus of the trust fund as a single trust and deducted therefrom the proportionate corpus that has devolved on the deceased beneficiaries and also the total remaindermen’s interest for the purpose of arriving at the residue corpus. The CWT(A) upheld the contention of the trustees and cancelled the assessment. The department is in appeal against the cancellation of the appeal made by the CWT(A) I and numbered as WTA No. 621/H/81.The W.T.O. made protective assessment under section 16(3) read with section 21(4) of the Act in respect of ultimate beneficial interest of Prince Mauzzam Jah Fund, Basalath Ali Fund and Sb. Begum Fund. The CWT(A) gave directions for the purpose of treating this protective assessment as substantive assessment in respect of the ultimate beneficial interest of the eldest male descendant in the above funds. There is no dispute about the fact that the provisions of section 21(4) of the Act are applicable to these funds. The trustees filed an appeal (WTA No. 672/H/88) contending that :–(i) The CWT(A) ought to have accepted the return filed by the trustees in evaluating the ultimate beneficial interest taking into consideration the value of the jewellery at 4.5 crores

(ii) The CWT(A) should have given direction for deduction of cumulative tax liability as per the provisions of section 2(m) of the Act

23. Similarly the department has also filed appeal against the order of the CWT(A) (WTA No. 620/Hyd/88) contending that no adjustments need be made for evaluation of ultimate beneficial interest. The main contention of the department is that as per the decision of the Supreme Court in Ahmed G.H. Ariff v. CWT 1969 Indlaw SC 114 and Purshottam N. Amarsay v. CWT 1971 Indlaw SC 423 open market has to be assumed and no adjustment need be made for risk, hazard and uncertainties prevailing on each of the valuation dates

24. Apart from the consolidated order, the WTO passed protective assessment order under section 21(1A) of the Act in respect of Prince Mauzzam Jah fund. The CWT(A) upheld this protective assessment as regular assessment and directed for computation of the residue corpus by adopting the value of the principal fund at Rs. 16.20 crores. Against this order, the trustees are in appeal before us (WTA No. 676/ H/88) on the following grounds :–

(i) The CWT(A) ought to have upheld the total value of the assets held for the beneficial interest of the beneficiaries at 4.50 crores

(ii) The provisions of section 21(1A) of the Act have no application to the facts and circumstances of the case

(iii) Deduction of cumulative tax liability under section 2(m) of the Act should have been given

25. The department is also in appeal (WTA No. 718/H/88) against the order of the CWT(A) on the following grounds

(i) Evaluation of principal fund of the trust(ii) deduction of estate duty liability, for arriving at the remaindermen’s interest

26. In the assessment year 1981-82, the WTO made a consolidated assessment under section 16(3) read with section 21(1A) of the Act on 27-3-1986 for the total corpus of the trust fund as a single trust and deducted therefrom the proportionate corpus that has devolved on the childern of the deceased beneficiaries and also the total remaindermen’s interest for the purpose of arriving at the residue corpus. The CWT(A) upheld the contention of the trustees and cancelled the assessment. The department is in appeal against the cancellation of the assessment made by the CWT(A). This appeal is numbered as 622/H/88. The department is in appeal against the order of the CWT(A) dated 25-12-1988 on identical grounds as in WTA No. 621/H/88 referred to above

27. The WTO has also passed an order under section 21(1A) of the Act in respect of Prince Mauzzam Jah fund, Mukkaram Jah fund. The CWT(A) dealt with Prince Mauzzam Jah fund in para-3 of the order dated 23-3-1988 and excluded the assessment of Prince Mukkarram Jah fund. The department has not filed any appeal against this part of the order of the CWT(A). The trustees (WTA No. 677/H/88) and the department (WTA No. 719/H/89) are in appeal against the order of the CWT(A). The grounds of the appeal of the trustees and the department are similar as in the appeal Nos. 676 and 718/H/88 for assessment year 1980-81 referred to above

28. In the assessment year 1982-83, the WTO passed a consolidated order under section 21(1A) of the Act treating the total corpus of the trust fund as a single trust and deducted therefrom the proportionate corpus that had devolved on the children of the deceased beneficiaries and also the total remaindermen’s interest for the purpose of arriving at the residue corpus. The WTO has also passed regular assessments under section 21(1A) of the Act in respect of each fund separately. Against the order of the CWT(A), the trustees have filed appeal (WTA No. 1272/H/88) contending that the CWT(A) ought to have accepted the returns filed by the trustees in the matter of valuation of assets held by the trustees for the beneficial interests of the beneficiaries. The department has also filed appeal (WTA No. 1207/H/88) against the order of the CWT(A) contending that the value of the principal fund as per the departmental valuer be upheld. However, the department did not take up any ground on the cancellation of the assessment made by the CWT(A). The additional grounds were filed by the department at the time of hearing

29. The WTO has passed separate order fund-wise and such order was passed in the case of Prince Mauzzam Jah fund under section 16(3) read with section 21(1A) of the Act dated 7-1-1987. The CWT(A) upheld the assessment but directed for the computation of the residue corpus taking 50 per cent of the value of the jewellery fixed by the departmental valuer Shri Jayant N. Chowlera. Against this order of the CWT(A) the trustees are in appeal (WTA No. 1187/H/88) on the following grounds

(i) The CWT(A) ought to have accepted the value of the assets held by the trustees for the beneficial interest of the beneficiaries at 4.50 crores

(ii) The provisions of section 21(1A) of the Act are not applicable to the facts of this case as the entire corpus of the trust-fund was distributed amongst the ultimate beneficiaries

30. The department is also in appeal (WTA No. 1228/H/88) against the valuation of the principal fund and in contending that the total value fixed by the departmental valuation officer should have been adopted for the purpose of arriving at the residue corpus assessable under section 21(1A) of the Act

31. For the assessment year 1983-84 the appeals filed by the department and the assessee are similar to the appeals filed for the assessment year 1982-83. For the assessment years 1984-85 to 1986-87, only consolidated order passed under section 21(1A) of the Act are placed before us for consideration. The grounds of the department and the trustees are similar to the appeal in WTA Nos. 1207/H/88 and 1272/H/88 for the assessment year 1982-83

32. In C.O. Nos. 21/H/89, 123/H/89 and 124/H/89, it was contended that the jewellery of this trust should be valued at 4.5 crores as per the return of wealth filed in the month of December 1984. The other grounds taken in the cross objections are similar to the grounds discussed above appropos the valuation of jewellery. We therefore propose to dispose these cross objections also by this order as the issues involved are the same

33. The various grounds taken in all these appeals and cross objections for the sake of convenience are summarised here as under :–

(i) The CWT(A) ought to have accepted the value of the assets held by the trustees for the benefit of the various beneficiaries at the value declared in the respective returns of wealth

(ii) The CWT(A) ought to have accepted the contention of the trustees that for the purpose of determination of the value of principal fund, items of jewellery which were declared as ‘art treasure’ should be exempted under section 5(1)(xii) of the Act

(iii) Applicability of the provisions of section 21(1A) of the Act

(iv) The CWT(A) ought to have directed for deduction of cumulative tax liability as per section 2(m) of the Act

34. The various contentions raised by the department, for the sake of convenience, can be epitomised as under :–

(a) The consolidated assessment under section 21(1A) in respect of the entire corpus of the trust fund should be upheld

(b) The total value of the assets held by the trustees for the finalisation of interest of the various beneficiaries should be fixed at the value determined by the departmental valuer Shri Jayant N. Chowlera

(c) The provisions of section 21(1A) of the Act are applicable even in respect of the corpus fund assessable under section 21(4) of the Act

(d) That notional estate duty liability should not be allowed as deduction on the demise of immediate life interest holder

35. Now we are coming to the various arguments placed before us by the learned counsels for the assessee as well as the learned D.Rs. All these issues were argued together

36. Shri N.A. Palkhivala submitted before us that the subject matter of assessment is not the value of jewellery but the beneficial interest in the trust. Jewellery is a burden and not a benefit. It is illusory wealth. The Wealth-tax Act contemplate assessment only in respect of true wealth existing as on the valuation date as per the scheme of the Act. The value of certain assets is includible at a value much lower than the intrinsic value of such asset. In the case of this trust, on the one hand the Central Government had not permitted the sale of the jewellery and on the other hand huge taxes have been levied upon the trust. The facts and the attendant circumstances which had resulted in irreparable loss to the trust and the beneficiaries have to be considered for the valuation of the jewellery of this trust and the same should not be included, based on the illusion that its intrinsic value is higher with the underlying assumption that the jewellery of the trust could be sold in the international market. By creating this trust, the Settlor invited calamities to his family. Considerable loss has been caused on account of the indefinite delay and the denial of benefits. Some of the beneficiaries even died without deriving any benefit from the trust. Even today, nobody knows what would be the ultimate fate, that befalls this trust

37. If the assessments were to be completed at the values fixed by the departmental valuer, without considering the various depressing factors, during the period of time not even a pie would be payable to any of the beneficiaries. This is repugnant to the basic concept of the taxation statute. The trust has been reeling under unending problems and untold hardships are being caused to the beneficiaries of the trust

38. For the purpose of determining the value of an asset it is necessary to take into consideration the risk and the time involved. Investment opportunities are available right from the year 1980 with the Government and the Public Sector undertakings at 9 to 10 per cent free of income-tax and wealth-tax. More than 4 years have elapsed since the last valuation date relevant for the assessment year 1986-87. More than 9 years have elapsed from the assessment year 1980-81. Even assuming that a higher value is realised at a later date the percentage of the same discounted at 10 per cent would come to a very nominal figure

39. Section 7 of the Act deals with the valuation of assets. The value of any asset shall be estimated by the price which in the opinion of the assessing officer it would fetch if sold in the open market on the valuation date. It does not contemplate any actual sale or the actual State of market. It assumes “willing buyer” and a “willing seller” of the asset for determination of the value of the asset. It enjoins on the assessing officer to make an objective assessment of the value if sold in the open market. It is statutory on the part of the WTO to take all the relevant facts and the material available for determination of the value which a willing buyer will pay for such an asset. The facts which have to be ignored by the WTO are contained in the Explanation of sub-section (i) of section 7 of the Act. Barring the facts which fall within the Explanation, the WTO is bound to take into account all the material factors which a willing buyer would consider while making his offer. According to learned counsel, the following factors are to be taken into account for determining the valuation of the asset :–(i) Qualitative and quantitative nature of rights owned by the assessee in relation to the assets ought to be included

(ii) risks, hazards and uncertainties prevailing on the dates of valuation in relation to the asset

(iii) restrictions imposed by the Government for alienation of the asset

(iv) litigation in courts relating to the asset

(v) possibility of actual sale of the asset

(vi) certainty of time within which the property could be actually sold or utilised for productive purposes

(vii) Cost of holding the asset and possibility of deriving income therefrom

(viii) Liquidity of the asset–how many willing buyers are in the market at any point of time is a relevant consideration while offering the price by a willing buyer

(ix) Possible interference by the Government authorities in possession and enjoyment of the property

(x) difficulties in holding the asset safely

(xi) Taxes which are liable to be imposed for holding the asset and arrears of unpaid taxes

(xii) certainty with which the property could be sold at any time

(xiii) Other general factors affecting the class of the asset

(xiv) Ease with which the asset could be exported, if it can be beneficially sold only in the international market

(xv) available investment opportunities

(xvi) socio economic conditions

40. Valuation is an art. Not an exact science. Mathematical certainties are not demanded nor indeed it is possible. It is necessary to consider the facts and circumstances of each case and allow appropriate discounts objectively for the factors affecting the valuation on each of the valuation dates

41. Valuation of any asset should be made on well established principles, taking into consideration the time value of money. Normally prudent commercial principles have to be applied for determining the value of any asset. Fancy prices which might be offered some times by the collectors are not relevant for estimating the value of the asset

42. Events subsequent to the valuation date are relevant only if there is certainty of such an event as on the valuation date relevant for the assessment year under consideration. The possibility of securing higher/lower value at a future point of time has no relevance unless there is proximity of time. Subsequent events should not affect the valuation as on the valuation date unless there is certainty and proximity

43. The valuation of any asset should be with reference to facts and circumstances of the case prevailing on the valuation date and it cannot lead to injustice

44. Different methods of valuation give range of prices and in the absence of special facts or circumstances, the minimum valuation arrived by application of relevant methods should be adopted

45. Commenting on the risk, hazards and uncertainties it was submitted by the learned counsel that :–

(i) As on the valuation dates relevant for the assessment years 1980-81 and 1981-82 no willing purchaser would offer even 10 per cent of the value of the jewellery in view of the last minute decision of the Central Government. The confidence of the willing buyers was totally shaken by the decision of the Central Government

(ii) The trustees challenged the decision of the Central Government by way of a writ petition before the Hon’ble Supreme Court only in respect of 37 items which were put up for sale in September 1979 and no one could guess the fate of rest of jewellery till a compromise agreement was entered into on 24-5-1989

(iii) The Central Government took up the plea before the Supreme Court that the items of jewellery were inspected only from the point of view of “Antiquities” and not from the point of view of “Art Treasure” under the Antiquities and Art Treasures Act, 1972 (iv) The Director General of Archeological Survey of India had appointed expert committees from time to time for determination of the items which fall within the definition of “Art Treasure” under the Act. Out of the 37 items which were put up for sale in September 1979, the nature of the jewellery had not been decided. Total uncertainty was prevailing on each of the valuation dates relevant for assessment years 1980-81 to 1986-87. Factually there were no willing buyers for they seem to think that they were purchasing litigation, whose finality was not in sight. Instead of jewellery they were purchasing litigation in view of the total uncertainty. The only willing buyers could be a few speculators who may be willing to pay a nominal price of about 25 per cent of the value of the jewellery or even less considering the total uncertainty about the nature of the items and rare chances of its export. It is not known on each of the valuation dates as to how many items of jewellery would be acquired by the Central Government. No prudent businessman would like to risk his capital and wait indefinitely for compensation which may take decades to reach finality

(v) There are about 180 ultimate beneficiaries in the trust and any willing buyer would take into consideration the possible litigation that may arise from any of the beneficiary and the time that would take in solving the litigation

(vi) The jewellery is under attachment by the Tax Recovery Officer, Bombay for recovery of wealth-tax arrears. This is a hazard, a clog or hindrance which is at present affecting the value of the jewellery

(vii) The rates of wealth-tax are subject to change from year to year and as on the valuation dates relevant for the assessment years 1980-81 to 1986-87 the maximum marginal rate of wealth-tax was 5 per cent. A willing buyer would take into consideration the risks involved as under :–(a) The rate of tax which may vary from year to year

(b) The future tax liability in view of the uncertainty of the time within which the issue relevant to the trust would be resolved

(c) The decision relating to trust are taken at the highest level in the Government from time to time and political uncertainty would adversely affect the value of the jewellery

(d) Interest on tax liability for non-payment

(e) The hazard of any likely enactment by the Parliament for acquiring the items of historical importance of the erstwhile rulers has a depressing factor on the value of the jewellery

(f) Permissions have to be obtained from the Reserve Bank of India and under the Gold Control and Customs Act for export of any items of jewellery from India and no buyer from abroad would be willing to take chances on the matter of obtaining permissions from Government agency

46. International market for items of such rare and precious stones violently fluctuates and there is no assurance of the price that could be realised. For the past two years there has been a growing importance in the international market for the items of this nature which were not existing on the valuation dates relevant for the assessment years 1980-81 to 1986-87

47. There is no time limit prescribed under various enactments, the provisions of which have to be applied by the trustees for sale of jewellery and it is anybody’s guess even today as to when the jewellery could be finally disposed of. Time is the essence of any business and no willing buyer would stake any price over 25 per cent of the value of items taking into consideration the uncertainty of time and the likely liabilities which would be incurred in the process before final disposal

48. The safe custody of the jewellery is not an easy task and the Insurance cost could run into several crores of rupees. Even today, the trustees have not been able to insure the items of jewellery

49. The matter was pending before the Hon’ble Supreme Court for about 10 years and entering into a compromise agreement covering all the items of jewellery by itself was an uncertainty

50. Physical possession of certain most valuable items of jewellery is stiff with the Finance Secretary, Union of India. The trustees have been securing permission from the Hon’ble Supreme Court even for inspecting of jewellery from time to time

51. At present there is no certainty that the jewellery of the trust would be exported. The Government of India has option to purchase all the items of the jewellery. The prices of the precious stones have been more or less stable right from the years 1979 to 1988. There had been little interests to precious stones for a considerable period

52. In regard to the cumulative deduction of liability as per section 2(m) of the Act, Shri Palkhivala submitted that section 7 and section 2(m) of the Act must be read harmoniously. According to learned counsel if there is any asset which is subject to certain hazard including the liability of certain debt to be deducted from the asset then that factor which has the effect of diminishing the market value of the asset is a relevant factor to be taken into consideration while estimating the value of the asset in the open market. Learned counsel in order to support his contention relied on the following two Supreme Court decisions :–

(i) CWT v. Maharaja Kumar Kamal Singh 1984 Indlaw SC 110 / 1984 Indlaw SC 110

(ii) CWT v. Raghubar Narain Singh 1984 Indlaw SC 108 / 1984 Indlaw SC 108

53. Learned counsel stated that if the contention of the assessee in the matter of deduction of estate duty is ultimately upheld then the tax liability to the assessment year 1979-80 is estimated at Rs. 2 crores

54. For the wealth-tax assessment years 1980-81 to 1986-87, on the basis of assessment completed in the limelight of departmental valuer Shri Chowlera’s valuation report, the position stands as under :–

Wealth-tax assessment value of jewellery Wealth-tax liability

year (Rs. in crores) (Rs. in crores)

1980-81 32.43 1.48

1981-82 32.43 1.48

1982-83 33.30 1.55

1983-84 34.18 1.62

1984-85 35.24 1.72

1985-86 35.24 1.72

1986-87 35.24 1.72

11.29

According to learned counsel the total tax liability is estimated at Rs. 13.29 crores which may go up further to Rs. 19.29 crores. Taking into consideration, the order passed by the CWT(A) on the matter of valuation of jewellery and the further relief which may be granted by the authorities concerned, the total tax liability could be estimated at Rs. 10 crores. Interest under section 31(2) of the Act is estimated at Rs. 5 crores. In fact, according to learned counsel there is a minimum tax liability of about Rs. 12 crores even after taking into consideration the possible waiver of interest etc. by the Commissioner

55. Shri Palkhivala submitted that any “work of art” belonging to the assessee and not intended for sale is exempt under section 5(1)(xii) of the Act. In case of this trust, the principal trust fund comprises items of jewellery. Some of these items are indeed works of art. 7 items have been declared as “Art treasure”. Hence the condition precedent for availing exemption under section 5(1)(xii) exists. According to Shri Palkhivala the intention of a person cannot transgress the limits of law. In the instant case, 36 valuable items of the jewellery are in the custody of the Finance Secretary as per the orders of the Hon’ble Supreme Court. The trustees cannot even think of selling any of these items. The trust is prohibited to sell any of these items and it was impossible to effect any sale as far as these 37 items are concerned. It is a much stronger situation than in a case where asset is not intended for sale for the purpose of granting exemption. Learned counsel said that the expression “not intended for sale” shall be applied to each of the valuation dates and neither events before nor the events after the valuation dates shall determine the allowability of exemption under section 5(1)(xii) of the Act. In the case of this trust, these items of jewellery are under the lock and key of Union Finance Secretary right from the year 1979 till date. Under these circumstances, it can be said that in each of the valuation dates items “were not intended for sale”. Hence all the conditions precedent for availing exemption under section 5(1)(xii) have been satisfied. Hence according to learned counsel, the assessee qualifies for exemption under section 5(1)(xii). 56According to Shri Palkhivala, learned WTO failed to understand the implication of the ratio laid down by the Hon’ble Supreme Court in Purshottam Amarsay’s case. In that case, the Hon’ble Supreme Court has held that for the purpose of valuation of an asset the WTO must assume “open market”. It does not contemplate “actual sale” or actual state of the market. While assuming open market it is essential to consider that what a willing buyer would pay, considering the qualitative and quantitative aspect of the asset in question. It was further argued that the Valuation Officer/WTO erred in determining the value of the jewellery ignoring the facts of the case by citing the decision of the Hon’ble Supreme Court in Ahmed G.H. Ariff’s case. The Hon’ble Supreme Court enunciated the principle that for the purpose of determination of the value, it is necessary to assume open market. Without such assumption, the very purpose would be defeated in some cases. This decision does not deal with the qualitative and quantitative aspects of valuation. For this purpose it is necessary to look into the following decisions of the Hon’ble Supreme Court :–

(1) CWT v. P.N. Sikand 1977 Indlaw SC 45

(2) Maharaja Kumar Kamal Singh’s case

(3) Raghubar Narain Singh’s case

(4) CWT v. K.S. Ranganatha Mudaliar 1982 Indlaw MAD 164 (Mad.)

In P.N. Sikands case it was held that for the purpose of answering the question, what would be the price which the asset would fetch if sold in the market on the valuation date ? Under section 7 of the Act, it would be necessary to answer the following questions :–

(i) What is the nature of the asset ?

(ii) What is the interest in property — qualitative as well as quantitative which the asset represents ?(iii) The Hon’ble Supreme Court held that the terms of lease had the effect of depressing the value of the property which is to be taken into consideration for the purpose of arriving at the open market value under section 7 of the Act 57

In Maharaja Kumar Kamal Singh’s case and Raghubar Narain Singh’s case, the Hon’ble Supreme Court dealt with the matter of valuation of right to receive compensation under the Bihar Land Reforms Act and the principles to be followed in evaluating such interest for determining the value of the asset includible under section 7 of the Act. In short, the following principles were laid down :–

(i) Right to receive compensation payable to the assessee under the Land Reforms Act is an asset includible in the net wealth of assessee under section 2(m) of the Act

(ii) The factor of payment of compensation over a period of time has to be taken into account and discounted

(iii) The deduction of agricultural income-tax on account of arrears is a liability, a hazard, a factor, a clog or jeopardy which detracts from the value of the asset

(iv) To what extent the hazard and factors affecting the value of the asset is a matter of quantification based on the facts and circumstances of each case

58. Regarding the applicability of provisions of section 21(1A) in the case of assessments made under section 21(1) of the Act, Shri Palkhivala submitted as under :–

(i) General provisions of section 21(1A) are applicable in the case of assessments completed under section 21(1) of the Act. However, on the facts and circumstances of this trust, the provisions of section 21(1A) have no application for the wealthtax assessment years 1980-81 to 1986-87

(ii) The provisions of section 21(1A) are applicable only if the aggregate value of the interest or interests fall short of the total corpus of the trust fund. On the facts of this trust, there was no such shortfall for the above assessment years(iii) For the purpose of ascertaining the short-fall it is necessary to determine the value of the corpus of the trust. The value of the corpus shall be decided having due regard to the facts given below :–

(a) The trustees filed returns disclosing all the material facts relating to the various items of the jewellery and valued the same in a fair manner

(b) 7 items declared as “art treasure” shall be exempted under section 5(1)(xii) of the Act. These items were prohibited for sale on the valuation dates under consideration. It was much a stronger situation than in a case where the asset was “not intended for sale” for the purpose of granting exemption

(c) Risks, hazards and uncertainties prevailing on the valuation dates are relevant for assessment years under consideration

(d) Principles of valuation of corpus consisting of jewellery are under indefinite litigation

59. Learned counsel further stated that :–

(i) The Estate Duty was abolished from 16th March, 1985. For the wealth-tax assessment years 1985-86 and 1986-87, the trustees filed the returns distributing the total corpus of the trust fund. Therefore, the provisions of section 21(1A) are inapplicable

(ii) The valuation reports of the valuers appointed by the department under section 16A of the Act are binding on the department and the same are not contested by the trustees

(iii) The matter of allowing appropriate discounts considering the nature of uncertainties, attendant circumstances and the provisions of various enactments is upto the WTO, CWT(A) and Tribunal and does not rest with the Valuation Officer

60. Regarding the applicability of provisions of section 21(1A) in case of assessments made under section 21(4) of the Act, Shri Palkhivala submitted that section 21(1A) contemplates only those cases where the value or the aggregate value of the interest or interests of the person or persons for whose benefits such assets are held is assessable under section 21(1) read with sub-section (1A) of the Act. It is a specific provision applicable only to the assessments made under section 21(1). Its scope cannot be stretched further. Section 21(4) refers to the assessment on the totality of the assets/beneficial interest. As long as the immediate beneficiary is alive it is only the ultimate beneficial interest that is assessable under section 21(4) of the Act. On the death of the immediate beneficiary, the total value of the corpus is assessable. Therefore, the provisions of section 21(1A) have no application to the assessments made under section 21(4) of the Act

61. Dealing with the principles of assessments, Shri Palkhivala stated that the Settlor created several trusts through a single document as a matter of convenience. This principle was upheld by the Hon’ble High Court of Andhra Pradesh and subsequently confirmed by the Hon’ble Supreme Court in :–

(a) CWT v. Trustees of H.E.H. Nizam’ s Family (Remainder Wealth) Trust 1977 Indlaw SC 229 at pages 579 and 580 (AP)

(b) CIT v. Trustees of H.E.H. Nizam’s Family Trust 1986 Indlaw SC 501 / 1986 Indlaw SC 501A

62. In regard to the allowance apropos the fictional estate duty liability, Shri Palkhivala invited our attention to the earlier orders of the ITAT wherein the Tribunal has allowed the Estate Duty liability as deduction of the remaindermen’s interest by fictionally assuming the debt of life tenant

63. Shri K. Rangabhashyam submitted that Shri Chowlera has duly considered in his report the various uncertainties, hazards and risks of litigation, though it is not clearly discernible from the report. According to the learned Departmental Representative this fact can be inferred with reference to the following :–

(i) In regard to 37 pieces of jewellery, Shri P.Z. Fernandez, made an offer of Rs. 20.25 crores

(ii) The Jacob Diamond was purchased in 1890 for Rs. 60 lakhs. Shri Chowlera valued it for 1980 onwards at Rs. 5 crores. According to Shri Rangabhashyam the above valuation and the factum of the offer made by Shri Fernandez transpire, inter alia, that various constraints and the other relevant factors have been duly considered while arriving at the value. Hence no further adjustment on this count is needed

64. Shri Rangabhashyam submitted that no depressing factor, as alleged by the counsel for the assessee, was existing as on the valuation date. He explained this with reference to each of the valuation dates as under :–31-3-1980

(i) 23 items of jewellery were treated as antiquities. The sale in respect of these items was prohibited outside the country. According to learned D.R. there existed “open market” in respect of these items within the country

(ii) 37 items were ordered to be auctioned by the Supreme Court on 20-9-1979. The auction was postponed at the instance of the Central Government. The Government decided to treat these 37 items as “Art treasures”

(iii) For 21 items non-antiquity certificates have been given. Renewal of the certificate is not necessary under the law

(iv) The value of “Jacob Diamond” was taken at a ridiculously low figure. This is the third largest diamond in the world and in the open market its value is much more high

31-3-1981

Same conditions were prevailing in regard to the abovenoted categories of jewelleries

31-3-1982

Same conditions were prevailing as above

31-3-1983

The Government of India issued a notification on 8-11-1982 under the Antiquities and Art Treasure Act, 1972 and declared only 7 items out of 37 items of jewellery as “art treasures” and released the remaining 30 items from the category of “art treasures”. According to learned Departmental Representative the constraints thus reduced

31-3-1984

Similar conditions prevailed as above. However, an affidavit was filed before the Hon’ble Supreme Court indicating that the petitioner was ready to sell 30 items of jewellery subject to R.B.I. permission and other formalities

31-3-1985

Similar conditions prevailed as above

65. Shri Rangabhashyam tried to demonstrate before us various mitigating factors in relation to the constraints discussed by the learned counsel for the assessee. It was contended that as on the valuation dates there existed “open market” for the sale of jewellery in question. To support the contention, Shri Rangabhashyam relied on the following two Supreme Court decisions(i) Ahmed G.H. Ariff’s case

(ii) Purshottam N. Amarsay’s case. In Ahmed G.H. Ariff’ s case it was held that when the Wealth-tax Act, 1957 uses in section 7(1) the words

“if sold in the open market it does not contemplate actual sale or the actual state of the market, but only enjoins that it should be assumed that there is an open market and the property can be sold in such a market and on that basis, the value has to be found out. It is the hypothetical case which is contemplated and the Tax Officer must assume that there is an open market in which the asset can be sold

In Purshottam N. Amarsay’s case, the Supreme Court, applied the Ahmed G.H. Ariff’s case. The High Court on a reference held that even though the estate conferred was a personal estate and it was not possible to sell the estate in the open market, yet it had to be valued on the basis of the principles of the Wealth-tax Act, 1957. On appeal, the Supreme Court, held, affirming the decision of the High Court, that even if the property, being a personal estate, was incapable of being sold in the open market, the interest of the Settlor had to be valued by the WTO

66. Shri Rangabhashyam in order to buttress his contention, stated that it was open for the assessee to invoke the doctrine of “Promissory Estoppel” against the decision of the Government as during the course of correspondence with the Government, it was promised that the Government is not interested in acquiring the jewellery. Since the legal remedy was available against the action of the Government this, according to the learned D.R., mitigates the depressing factor. On these facts, Shri Rangabhashyam submitted that the value made by the Valuation Officer ought to have been accepted. To clarify the point apropos the applicability of the “Promissory Estoppel doctrine”, reliance was placed on the ratio laid down in Motilal Padampat Sugar Mills Co. Ltd. v. State of UP 1978 Indlaw SC 56 (SC). In this case the Court granted exemption to the Mills from sales tax for a period of three years. The State Government was not allowed to resile from its promise because it worked injustice to the mills and conferred no corresponding benefit on the public

67. The learned D.R. stated that the CWT(A) relied on the evidence furnished by the counsel for the assessee regarding the correspondence with the Government of India from 1-7-1972 onwards mentioned in para 2.4 of that order. He has not mentioned whether that was additional evidence before him and how it was admitted. It is not known that whether due procedure of law was followed in consonance with the rules framed as regards the admittance of additional evidence. The counsel for the assessee has utilised this information for determining whether there were any constraints which go to depress the value of the jewellery on the various valuation dates and this correspondence is very relevant for determining whether there existed uncertainties, risks and hazards

68. Shri Rangabhashyam, further stated that, in case the additional evidence is to be admitted, in all fairness due opportunity ought to have been given to the Assessing Officer. By not giving such opportunity CWT(A) denied the right to review to make submissions in the light of the fresh evidence

69. Regarding the allowance of fictional estate duty liability the learned D.R. submitted that the ITAT has been following their own decisions and consequently allowing Estate Duty liability as deduction of the remaindermen interest by fictionally assuming the death of life tenant. However, in cases in which the Tribunal has already given such decisions, the department has not cited the case of Shri K.R. Rama Chandra Rao v. CWT reported in 1962 Indlaw MAD 116 (Mad.), at 967. In this case, their Lordships observed as under”

‘Net Wealth’ in section 2(m) of the WT Act in short, means by which the aggregate value of all the assets belonging to the assessee on the valuation date, including the assets required to be included in his net wealth, on that date under this Act, is in excess of the aggregate value of all debts owed by the assessee on the valuation dates. The short point then is whether the estate duty payable by the assessee on the death of his brother is a debt owed by the assessee on the valuation date. This expression came in for construction in TC No. 210 of 1959 — Kothari Textiles Ltd. v. CWT 1962 Indlaw MAD 120 (Mad.), where we held that a claim against the estate of an unascertained nature, cannot be regarded as the debt owed by the assessee on the valuation date. It is not disputed that in the present case the assessment to estate duty was made long subsequent to the valuation date. There was no doubt about the liability under the Estate Duty Act, but that liability was not ascertained or quantified. In the light of our decision, in the Tax case referred to above, we must hold that the amount mentioned in the second question cannot be regarded as a debt owed by the assessee and cannot, therefore, be deducted from the value of the assets.

“70. According to the learned D.R., in view of this decision, Estate duty liability need not be allowed. As in this case neither during the relevant year nor in subsequent years, there has been any death hence assumption of fictional death on the valuation date is not called for. He further invited our attention on the following two decisions :–

(i) CED v. Smt. P. Leelavathamma 1977 Indlaw AP 34 (AP)

(ii) CED v. Estate of Late Omprakash Bajaj 1976 Indlaw AP 86 (AP)

Smt. P. Leelavathamma’s case it was the case of HUF. In this case sole survivor Hindu coparcener died leaving behind mother, wife and minor daughter. The question was whether estate duty payable was deductible from the value of the estate of the deceased. It was held that the estate duty payable was deductible from the value of the estate of the deceased. It was held that the estate duty payable cannot be deducted from the gross estate while computing net estate as it is neither a debt nor encumbrance u/s. 44 of the Estate Duty Act, nor can it be said that the market value of the property gets reduced by the estate duty payable u/s 36 of the Estate Duty Act

In the case of Estate of Late Omprakash Bajaj it was held that estate duty payable on an estate, is not a “debt or encumbrance” within the meaning of section 44 of the Estate Duty Act. Hence it is not deductible while computing the principal value of the estate. The liability for payment of the estate duty is a personal liability of the accountable person and not liability of the estate itself and hence it cannot be said that it is the debt contemplated by section 44 of the Act. Moreover u/s. 74(i) of the Act, estate duty is the first charge on the immovable property but it ranks in priority after the debts and encumbrances allowable under para 6 of the Act. It is obvious that estate duty cannot form part of those “debts and encumbrances”. Therefore, though estate duty is generally a burden on the estate and is an encumbrance in its broader meaning, it cannot be an encumbrance within the meaning of section 44 of the Act. Further, for the purpose of arriving at the market value of any property u/s. 36(1) of the Act, what has to be taken into consideration is the gross amount which the accountable person would pay without any deduction. Hence, the estate duty payable cannot be deducted while arriving at the market value

71. (a) Regarding the applicability of provisions of section 21(1A) of the Act, Shri Rangabhashyam invited our attention on the ratio laid down by the Hon’ble Supreme Court in the case of Trustees of H.E.H. Nizam’s Family (Remainder Wealth) Trust

(b) According to learned D.R., this landmark decision gives the method of assessment of trust under section 21 of the Act. Prior to this decision, modus applied by the department was as under :–

(i) Under section 21(1) or section 21(2) the assessments were made on the actuarial value of the corpus for the life tenant

(ii) The value remaining in the corpus after substracting the above value was treated as the interest of the remaindermen either under section 21(1) or section 21(4) of the Act depending upon the shares of the beneficiaries

72. According to learned D.R., the valuation on the basis of Actuary principles, created a new problem. After adding the life interest and the interest in the remaindermen there was some more corpus which remained to be taxed under the wealth-tax. On these facts, the Supreme Court has held in Trustees of H.E.H. Nizam’s Family (Remainder Wealth) Trust’s case, that there was no provision under the Act to tax this residue corpus

73. Section 21(1A) was introduced with effect from 1-4-1980. According to Shri Rangabhashyam, as long as life interest and remaindermen’s interest are calculated following the actuarial basis there will always be some corpus left over and the same can be taxed only under section 21(1A) of the Act. Learned D.R., stated that the Supreme Court in Trustees of H.E.H. Nizam’s Family (Remainder Wealth) Trust’s case laid down that actuarial principle should be adopted in the remaindermen’s interest. Hon’ble Supreme Court accepted the stand of the assessee. Now just for the sake of convenience the assessee cannot resile from their stand to the extent that the remaindermen interest will be calculated as per their shares in the corpus and not by actuarial principles

74. Shri Rangabhashyam further stated that the words “such assets” as appearing in section 21(1A) does not denote beneficial interest. The words used in the section “Aggregate value of the interest” connotes the two categories of interest, viz., beneficial interest and remaindermen interest. According to learned D.R., the term “such assets” would mean only the assets in the corpus and not beneficial interest. Learned D.R. stated that for a moment, if it is interpreted as beneficial interest of the assessee the entire section will become redundant and there will not be any residue corpus. This is so because sum total of the assets will always be equal to aggregation of interest as mentioned in the section and there will not be any residue

75. According to Shri Rangabhashyam, the Hon’ble Supreme Court in Trustees of H.E.H. Nizam’s Family (Remainder Wealth) Trust’s case has stated that beneficial interest refers to either one unit or a set of units and it must be separately assessed. According to learned D.R. Hon’ble Supreme Court has not given any finding on the fact, whether the trust deed had created several trusts or not

76. These group cases relating to the H.E.H. Nizam’s Trust were posted for final hearing before us on the 8th day of February, 1990. After the hearing was concluded, the learned D.R. brought to our notice an article said to have been reported in “India Today” issue dated 15th February, 1990. The article was captioned “The Nizam’s Jewels Treasure Hunt — Waiting to encash a legacy”. A xerox copy of the same was filed before us. Since it was placed before us when the hearing was concluded we decline to comment on the same

77. We have heard the rival submissions in the light of material placed before us and precedents relied upon. We have gone through the various arguments and papers filed in course of the hearing. Firstly, we propose to deal with the various issues connected with the scheme of assessment

78. One may notice the consequence that seem to flow from the proposition laid down in section 21(1) that the trustee is assessable in the like manner and to the same extent as the beneficiary. The consequences are threefold

(i) The amount of tax payable by the trustee would be the same as that payable by each beneficiary in respect of his beneficial interest if assessed directly

(ii) The assessment of the trustee would have to be made “in the same status as that of the beneficiary” whose interest is sought to be taxed in the hands of the trustee, and

(iii) There could be as many assessments as there are beneficiaries though there may be only one assessment order

The assessment which is contemplated to be made on trustee under section 21(1) or section 21(4) is assessment in a representative capacity. It is really the beneficiaries who were sought to be assessed in respect of their interests in the trust properties through the trustees. Shri Palkhivala has therefore rightly pointed out that what is to be taxed is not the corpus of the trust but the aggregate value of the beneficial interest of the CESTUI QUE TRUST

79. The beneficiary would always be assessable in respect of his interest in the trust properties since such interest belongs to him and the right of the revenue to make direct assessment on him in respect of such interest stands unimpaired by the provisions enabling the assessment to be made on the trustee in a representative capacity. Section 21(2) makes this clear by providing that nothing contained in section 21(1) shall prevent either the direct assessment of the beneficiary for whose benefit the trust properties are held or recovery from the beneficiary of the wealth-tax in respect of his interest in the trust properties which is assessed in the hands of the trustees. The revenue has thus two modes of assessment available for the assessment of the interest of the beneficiary in the trust properties. It may either assess such interest in the hands of the trustee in a representative capacity under section 21(1) or assess it directly in the hands of the beneficiary under section 21(2). What is important to note is that in either case, what is taxed is the interest of the beneficiary in the trust and not the corpus of the trust properties. But when beneficiaries are more than one and their shares are indeterminate or unknown the trustees would be assessable in respect of their total beneficial interest in the trust properties. Obviously, in such a case it is not possible to make direct assessment on the beneficiaries in respect of their interest in the trust properties because their shares are indeterminate or unknown and that is why it is provided that the assessment may be made on the trustee as if the beneficiaries for whose benefit the trust properties are held were an individual. The beneficial interest is treated as if it belonged to one individual and assessment is made on the assessee in the same manner and to the same extent as it would be on such fictional beneficiary. It will, therefore, be clear that it is the beneficial interest which is assessed to wealth-tax in the hands of the trustee and not the corpus of the trust properties

80. In regard to the question whether the trust-deed has created several trusts or not, it is pertinent to note that according to Sri Palkhivala, it was for the sake of convenience that the Settlor created several trusts through a single document. In the case of CIT v. Trustees of H.E.H. the Nizam’s Family Trust 1986 Indlaw SC 501 / 1986 Indlaw SC 501A at P. 290, Hon’ble Supreme Court affirming the decision of the Hon’ble A.P. High Court has held as under”

It seems to us clear that by the deed of trust dated May 10, 1950, the Nizam created a number of separate and distinct trusts. They were created for specific and distinct purposes and although the corpus of the trust fund vested in the same trustees, the trustees nonetheless held distinct and severable portions of the corpus of the trust fund under those separate trusts. With this construction of the document accords that the intention of the Settlor is born out by the provisions of clause 4 of the trust deed which specifically provides that on the death of the Settlor, the corpus of the trust fund was to be divided or to be treated as notionally divided into 175 equal units mentioned therein for being allocated to the Settlor’s relatives specified in the Schedule 166 1/2 units being apportioned between the relatives in the proportion set out five equal units to constitute the reserve fund and the last 3 1/2 equal units to constitute the family trust expenses account. There is no doubt that separate funds were thus created even though the division of the original trust fund may have been notional. There is also no denying that it is open to Settlor to constitute two or more distinct trusts by a single document — CIT v. Manilal Dhanji 1962 Indlaw SC 331, 886 (SC)”

81. Respectfully following the decision of the Supreme Court that it is open to a Settlor to constitute two or more distinct trusts by a single document, in the present case, we find that Settlor had the intention to create a number of separate and distinct trusts and they were created by a single document

82. Coming now to the applicability of section 21(1A) of the Act, in respect of assessment made under section 21(4) of the Act it is to be noted that section 21 of the Act deals with assessment in cases where assets are held by a Court of Wards, or an Administrator General or an official trustee or any receiver or manager or any other person, by whatever name called, appointed under any order of a Court to manage property on behalf of another, or any trustee appointed under a trust declared by duly executed instrument in writing whether testamentary or otherwise. In Trustees of H.E.H. Nizam’s Family (Remainder Wealth) Trust’s case, the Supreme Court has held that since under sub-sections (1) and (4) of section 21, it is the beneficial interests which are taxable in the hands of the representative assessee, the liability of the representative assessee cannot be greater than the aggregate liability of the beneficiaries. The Supreme Court has further held that whenever an assessment is made on a representative assessee it must be made in accordance with the provisions of section 21 and accordingly the representative assessee cannot be assessed apart from and without reference to the provisions of that section. In a case where beneficiaries have life interest in the trust property and after their demise certain other beneficiaries are to acquire interest in such trust property, the assessment of the beneficiaries and the remaindermen is made on their respective interest on the valuation date. In most cases, if not all, the aggregate of the values of the life interest and the remaindermen’s interest is less than the value of the total corpus of the trust property. In view of the Supreme Court ruling cited above it was felt that the balance of the value of the corpus of the trust property would escape liability towards wealth-tax

83. In order to put a tag on this loophole the Finance (No.2) Act, 1980 has inserted a new sub-section (1A) in section 21 of the Wealth-tax Act to bring to tax the balance of the amount of the net wealth after deduction of the value of life interest and interest of the remaindermen in the hands of the trustees. The new sub-section (1A) in terms, provides that in a case where the aggregate value of the interest of the beneficiaries falls short of the value of any such asset held by representative assessee which, in addition to the wealth-tax leviable under sub-section (1), will be chargeable to wealth-tax in respect of the difference between the value of the corpus of the property and the aggregate of the values of the beneficial interests of the beneficiaries. In such a case, the tax will be leviable upon a recoverable sum from the representative assessee at the flat rate of 3 per cent or at the appropriate rate of wealth-tax which would be applicable if such excess value were the net wealth of an individual who is a citizen of India and resident in India, whichever course is more beneficial to the revenue. A suitable amendment has also been made in sub-section (4) of section 21(4)(b) to get over the difficulty resulting from the interpretation placed by the Hon’ble Supreme Court on the provision of that sub-section

84. Under section 21(4) of the Act (prior to the 1980 amendment) wealth-tax was leviable on assets settled on a private discretionary trust at an average rate of 1.5 per cent or at the appropriate rate of wealth-tax which would be applicable if such assets were held by an individual who is a citizen of India and resident in India, whichever course happens to be more beneficial to the revenue. Under this provision, the average rate of 1.5 per cent applied to the whole of the net wealth without taking into account, the initial exemption of Rs. 1 lakh available under the rate schedule of wealth-tax. This provision applies in the case of a representative assessee where the shares of the persons on whose behalf or for whose benefit any such assets are held are indeterminate or unknown

85. The Finance (No. 2) Act, 1980 had made the following amendments to section 21(4)–

(i) The Administrator trust will be liable to tax at the flat rate of 3 per cent (as against 1.5 per cent hitherto) or at the appropriate rate of wealth-tax which would be applicable if such assets were held by an individual who is a citizen of India and resident in India whichever course is more beneficial to the revenue

(ii) In case where a discretionary trust was created under a will, the net wealth of the trust was chargeable to tax at the rate applicable to an individual who is a citizen of India and resident in India and not at the flat rate of 1.5 per cent. With a view to ensuring that the provision is not misused, the Finance (No. 2) Act, 1980, has made an amendment to withdraw the benefit of concessional tax treatment in case where a person has created more than one discretionary trust by will

(iii) Under the provisions as they exist prior to the amendment made by the Finance (No. 2) Act, 1980

(iv) In order to get over the difficulty caused by the interpretation placed at section 21(4) by the Supreme Court in Trustees of H.E.H. the Nizam’s Family Trust’s case, the Finance (No. 2) Act, 1980 has amended sub-section (4) of section 21 in order to secure that the entire value of assets settled on a discretionary trust are charged to wealth-tax as one unit at the flat rate of 3 per cent or the appropriate rate applicable in the case of an individual who is a citizen of India and resident in India, whichever course is more beneficial to THE REVENUE

86. Section 21(1A) of the Act contemplates only those cases, where the value or the aggregate value of the interest of the person or persons for whose benefit “such assets” are held assessable under section 21(1) of the Act

87. Section 21(4) begins with non-obstente clause. The phrase “notwithstanding anything contained” in the sub-section is being used in contradiction to the phrase “subject to the provisions of” as used in section 21(1). As per the scheme of section 21(4), the entire value of the assets settled on a discretionary trust is charged to wealth-tax. In view of this, the scope and ambit of section 21(1A) is not wide enough to cover the assessments completed under section 21(4). Assessments made under section 21(1) of the Act, come within the ken of section 21(1A)

88. (i) In the facts and circumstances of the case and considering the rival arguments placed before us we hold that the provisions of section 21(1A) of the Act are not applicable wherein assessments were made by applying the provisions of section 21(4) of the Act

(ii) The provisions of section 21(1A) are applicable wherein assessments were made under section 21(1) of the Act

89. Dispute as regards the allowance of fictional estate duty was dicided earlier by the Tribunal. The matter is dealt elaborately in the earlier orders referred before us. The arguments of the learned D.R., that Tribunal did not consider earlier the ratio laid down in the case of R.R. Roberts v. CWT 1963 (48) ITR 958 (Mad.) does not improve the position. The ratio laid down by the Hon’ble High Court was on a different set of facts. We are concerned with the valuation of remaindermen’s interest whereas the issue decided by the Hon’ble Madras High Court in R.R. Robert’s case was on the footings that the liability of the estate duty is personal liability of an accountable person, hence it cannot be construed as debt. Following the decision of the Tribunal on this count we decide this issue in favour of the assessee

90. For the assessment year 1980-81, Shri Chowlera submitted his report subsequent upon the completion of assessment and determined the total value of the principal fund at Rs. 32.43 crores. In the absence of this report the WTO fixed the value of the principal fund at Rs. 31.56 crores. The basis of this valuation was the report of the departmental valuer Shri Mahendra G. Mehta who was appointed earlier to make valuation of the principal fund. According to Shri Mehta’s report, the valuation of principal fund as on 31-3-1978 was Rs. 28 crores and as on 1-3-1979 it was Rs. 29.73 crores, as increase in valuation of 6.17 per cent was contemplated in course of an year. Applying the same ratio of increase, the value of Rs. 31.56 crores was determined by the WTO. He observed in his order that the jewellery was of unusual variety and the correct value of the principal fund would be substituted soon after receiving the valuation of departmental valuer and departmental actuary

91. The valuation made by Shri Chowlera was placed before the CWT(A) for his consideration. The CWT(A) followed the report of Shri Chowlera in which the principal fund was taken at Rs. 32.43 crores, and he gave a reduction of 50 per cent by directing the WTO to take the value of the corpus at a rounded figure of Rs. 16.20 crores

92. The CWT(A) in WTA No. 30/1(1)/85-86 dated 25-2-1988 for the assessment year 1980-81, accepted the contentions of the trustees that a separate trust was created by late Nizam in respect of each life interest holder. Accordingly, learned CWT(A) held that the omnibus assessment aggregating the remaining corpus of the 16 parts was not justified and had cancelled the omnibus assessment for those assessment years. As a corrollary, protective assessments made by the WTO on the returns filed by the trustees in respect of residue corpus of each such fund was treated as a substantive assessment. He also fixed the value of principal corpus at 50 per cent of the value determined by Shri Chowlera

93. We have examined the report submitted by Shri Chowlera. The first thing which struck to our notice was that Shri Chowlera did not submit this report in consonance with the provisions laid down under the Wealth Tax Rules, 1957(hereinafter referred to as the Rules). This can be exemplified as under :–

(i) As per Rule 8-D, the report of valuation by a registered valuer in respect of any asset specified in column 1 of the table below shall be in form specified in corresponding entry in column 2 thereof and shall be verified in the manner indicated in such form

Table

(1) (2)

(i)

(ii)

(iii)

(viii) Jewellery Form O-8

Shri Chowlera did not submit his report on Form O-8 as required under the rule

(ii) As per clause (12) of the Form O-8, the valuer is required to discuss the special features of the jewellery, if any, such as the antique value, aesthetic value etc. No such discussions were made in the report

(iii) Even the period for which the valuation was made was not stated with reference to the date of valuation. Only the year of valuation was given on the top of the report

(iv) As noticed by CWT(A) in para-3 of the appellate order, Shri Chowlera has not indicated the principles which had been followed by him while valuing the individual items

(v) In the valuation report dated 13-3-1986, for the assessment years 1982-83 to 1985-86, the objections of the assessee had not been clearly stated and discussed. It was also not indicated that how and why he dismissed those objections as “UNWARRANTED”, vide paras 8 and 10 of his report

(vi) The various hazards and uncertainties described by the assessee had not been clearly dealt with in the report. These factors are relevant aliunde to which the value of principal fund is to be reduced. It appears from the letters given to the valuation officers by the assessee that the attention of Shri Chowlera was invited to these factors. But nothing is discernible from his report. Shri Chowlera simply discarded the objections made by the assessee as “unwarranted”

94. Justice Cardozo used to say that a liberal antidote of experience often supplied a sovereign cure for a paralysing abstraction built upon a theory. Provisions pertaining to reference as contained under section 16A of the Act proceed upon a theory of check on the fair consideration of the whole case. The foundation or bedrock of the jurisdictional facts necessary for giving jursdiction under section 16A is that the assessing officer must be seized of a return filed by the assessee containing valuation of his assets for which he has to apply his mind and adjudicate the valuation for completing the assessment [Brig. B. Lall v. WTO 1980 Indlaw RAJ 37, 322 (Raj.)]. Once the assessment is completed the assessing officer becomes, functus-officio, for the purposes of section 16A, as he is not in the process of completing any assessment, for the purposes of which he wants to check up from the valuation officer, the veracity of the valuation of the assets disclosed by the assessee in the return

95. In order to augment administrative set up of official valuation machinery, the Taxation Laws (Amendment) Act, 1972made several changes in the Act. It created Valuation Officers for the revenue and registered valuers for the taxpayers. Technical job connected with the valuation of the asset has been delegated to the Valuation Officer under the provisions of section 7(3) read with section 16A and section 38A of the Act. The report of the Valuation Officer to the extent of the valuation of the asset determined by applying his technical expertise is binding on the WTO. As per the provisions of section 7(3) of the Act, the Valuation Officer determining the value of any asset referred to by the WTO under section 16A. This value shall be the price which in the opinion of the Valuation Officer, it would fetch “IF SOLD IN THE OPEN MARKET ON THE VALUATION DATE”

96. It may be noted that wording used in sub-section (3) of section 7 in the matter of valuation of assets is identical to the provisions contained in section 7(1) of the Act. Principles to be adopted for valuation of an asset are identical excepting that the jurisdiction vests with the Valuation Officer under section 16A of the Act to the extent of reference made to him. WTO has no option except to adopt the value determined by the Valuation Officer in so far as it relates to the intrinsic value of the asset as contemplated under the Act. This provision ought not to be construed narrowly. The WTO is empowered to make certain adjustments in the value under certain circumstances. For example, if an asset is owned by more than one person, the WTO may refer the valuation of the building as a whole to the Valuation Officer. The WTO is at liberty to compute the share of co-owners in the light of valuation report and can make further adjustment taking into consideration the factum of joint ownership, which is indeed a depressing factor. In view of this, we are of the opinion that various uncertainties, risks, hazards, the burden of cumulative tax liability etc., could also be considered by the WTO since these are not the technical aspects and the WTO is positioned much better to appreciate the influence of the depressing factors upon the value of the asset

97. We have discussed in detail the rival submissions in respect of the cumulative tax liability. In our opinion, if there is any asset which is subjected to the liability of tax the incidence of unpaid tax liability indeed influences the valuation of the asset and ought to be treated as a depressing factor

98. For the valuation of an asset it is the condition precedent that the WTO/Valuation Officer must assume “open market”. It does not contemplate actual sale or actual state of the market. While assuming the open market, it is, sine qua non to consider that what a willing buyer would pay, considering the qualitative and quantitative aspect of the asset in question. In Ahmed G.H.Ariff’s case, Hon’ble Supreme Court has held that when Wealth-tax Act uses in section 7(1) the words “if sold in the open market” it does not contemplate actual sale or actual state of the market but only enjoins that it should be assumed that there is an open market and the property, can be sold in such a market and on that basis the value to be found out. It is the hypothetical case and Tax Officer must assume that there is an open market in which asset can be sold. A catena of cases in similar stream developed around this classic decision of the Supreme Court. In our opinion, the Valuation Officer failed to understand the implication of the ratio as laid down by the Hon’ble Supreme Court. The words “open market” could only be construed with reference to the context onlyThe facts of the Ahmed G.H. Ariff’ s case are different from the present case. However, the principle laid down by the Hon’ble Supreme Court is relevant in the present context to the extent that for determining the value of the jewellery “open market” can be assumed but that assumption must be in conformity with the various limitations laid down by the law in connection with the sale of jewellery. For example, if the export of the jewellery is banned, the concept of open market cannot be extended to the international market

99. In regard to the applicability of the doctrine of Promissory Estoppel rule, we are of the opinion that in the facts, it has got no nexus with the valuation of jewellery. We do not find it necessary to discuss in detail the various implications of the doctrine. But one thing is clear, assuming that an assessee intends to invoke the doctrine and for that he has to go for litigation which is again a depressing factor, hence it will again reduce the value of the property

100. The offer made by Shri P.Z. Fernandez of Rs. 20.25 crores in respect of 37 pieces of jewellery is also in our opinion, not very relevant for deciding the matter. This offer was not materialised due to the factum of joint ownership. There are about 180 beneficiaries in the trust and the matter could be put within the labyrinth of law at the instance of any of the beneficiaries. To effect actual sale this is indeed a depressing factor

101. Apropos the contention of learned D.R., that CWT(A) relied on the evidence furnished by the counsel for the assessee regarding the correspondence with the Government of India from 1-7-1972 mentioned in para-2.4 of the order, amounts to additional evidence and not to be admitted, we have gone through the records and various other aspects relating to the issue. It was for the Valuation Officer to examine all those aspects since these letters have got a bearing on the subject. In our opinion the CWT(A) has rightly appreciated this evidence and on this count his order calls for no interference

102. Although the main aim of the valuer is to provide an estimate of market value it should not be assumed that the valuer’s assessment of value and the market price or market value will always be the same. Different valuers could well place different values on a particular interest at a particular time because they are making estimate and there is normally room within certain limits for difference of opinion. It is well said that any fool can count the number of sheep going over a fence before he goes to sleep but it takes a wide awake expert to evaluate the flock and two experts might differ in considerable degree on a figure

103. In open market there are many buyers and sellers each of whom will have his own personal views, desires and judgments on what the commodity in question is worth. Thus, a market constitutes an amalgamation of individuals who will strike individual bargain so that a ‘market price’ can only represent average view of all these factors. Where the articles are subjected to the risk of litigation, hazards and uncertainties, then the problem of arriving at this average are multiplied. Where the valuer is making statutory valuation in hypothetical market it is inevitable that differences of opinion as to value will become even more marked

104. We have carefully gone through the various aspects apropos the valuation. Neither the revenue nor the learned counsel for the assessee did question the valuation as such as done by Shri Chowlera. Despite the defects in the report we find here it not necessary to tinker with the report as the valuation in the report was not disputed before us. Both the parties agreed to the valuation done by Shri Chowlera

105. Coming now to the adjustment on account of uncertainties, hazards and risk of litigation, we find that all these factors escaped the notice of Valuation Officer and Wealth-tax Officer. The Valuation Officer discarded the depressing factors brought to his knowledge by calling them “unwarranted”. The Wealth-tax Officer did not make any deduction despite the fact that these were brought to his notice. The First Appellate authority, in our opinion has correctly made a deduction for adjustment on account of uncertainties, hazards and risk of litigation. In view of the factum of joint ownership, cumulative burden of tax liabilities and various other uncertainties, hazards and risk of litigation we hold that the valuation adopted by Shri Chowlera was rightly reduced by 50 per cent on account of these depressing factors. On this count, in our opinion the order of the first appeallate authority call for no interference

106. Coming now to the exemption as contemplated under section 5(1)(xii) of the Act, we find that seven items have been declared as “art treasures”. The trust is prohibited to sell any of these items. Since the sale of these items was restricted by the provision of the Statute, it is obvious that intention of the person cannot transgress the limits of law. The condition precedent for enabling exemption is that the article must not be intended for sale. In our opinion, the intention is presumed to cause that which is the natural consequence of something consciously done or omitted. The intention of a party ought to be subservient to or in accordance with the laws, not the laws to the intention. This idea is inculcated in a well known legal dictum INTENTIO INSER VIRE LEGIEUS DEBET NON LEGES INTENTIONI. [Black’s Law Dictionary (Fifth Edition), Page 727]. Having regard to the facts of the case and after considering the various aspects, we are of the opinion that seven items declared as “art treasure” could be considered to be the work of art belonging to the assessee and not intended for sale. Therefore, these seven items qualify all the conditions precedent for enabling exemption under section 5(1)(xii) of the Act. We therefore, direct the WTO to give exemption in respect of these seven items accordingly

107. In the result, all these appeals stand partly allowed