1979 (9) TMI 115 - AT - Wealth-tax

Summary

Issues Involved:
1. Exemption under Section 5(1)(iv)(a) and 5(1)(xxvi) of the Wealth Tax Act, 1957.
2. Treatment of assets held by a partnership firm for wealth tax purposes.
3. Allocation of net wealth of the firm among partners.
4. Computation of net wealth of an individual partner.
5. Applicability of exemptions in the hands of the firm versus the individual partner.

Detailed Analysis:

1. Exemption under Section 5(1)(iv)(a) and 5(1)(xxvi) of the Wealth Tax Act, 1957:
The appeal by the Revenue challenges the exemption granted by the AAC under Sections 5(1)(iv)(a) and 5(1)(xxvi) of the Wealth Tax Act, 1957, to the assessee for agricultural lands and fixed deposits held by the firm in which he was a partner. The AAC granted the exemption with the rationale that the legislative intent was to encourage investments in fixed deposits and that the exemption should benefit the partner, not the firm, as the firm itself was not an assessee for Wealth Tax purposes.

2. Treatment of assets held by a partnership firm for wealth tax purposes:
The Revenue questioned whether the exemptions under Section 5(1) should be applied to the firm or to the individual partner. The Tribunal considered four scenarios:
- Double deduction for both firm and partner, which is not authorized.
- Deduction only for the firm, which is untenable as the firm is not an assessable entity under the Wealth Tax Act.
- Deduction only for the individual partner, aligning with the legislative intent and supported by the Orissa High Court in CWT vs. I. Butchi Krishna (1979) 119 ITR 8 (Ori).
- No deduction for either firm or partner, which is unsupported by the Act or Rules.

3. Allocation of net wealth of the firm among partners:
The Tribunal examined Rule 2 of the Wealth Tax Rules, which mandates that the net wealth of the firm should first be determined and then allocated among partners. The definition of "net wealth" under Section 2(m) includes all assets, including those exempt under Section 5, and the allocation should reflect the nature of the assets and liabilities.

4. Computation of net wealth of an individual partner:
The Tribunal clarified that the net wealth of the firm should include all assets, even those entitled to exemption, and then be allocated among the partners. The partner's share of the net wealth should be aggregated with his individual assets and liabilities to compute his net wealth. Exemptions under Section 5 should then be applied to the partner's net wealth.

5. Applicability of exemptions in the hands of the firm versus the individual partner:
The Tribunal rejected the Revenue's contention that the exemptions should not be available to the individual partner. It emphasized that while the firm is not a legal entity for Wealth Tax purposes, the partner's interest in the firm should be valued as if there were a dissolution on the valuation date. This approach ensures that the exemptions are properly applied to the individual partner's share of the firm's assets.

Conclusion:
The Tribunal set aside the orders of the authorities below and directed the WTO to:
1. Determine the net wealth of the firm, including the net value of exempted assets.
2. Allocate the net wealth among the partners as per Rule 2.
3. Compute the net wealth of the individual partner by aggregating all his assets and liabilities, including his share of the firm's net wealth.
4. Apply the exemptions under Section 5 to the extent the partner is entitled.

The appeal was allowed, and the WTO was instructed to reassess the taxable net wealth of the assessee accordingly.