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2016 (2) TMI 260 - BOMBAY HIGH COURT

2016 (2) TMI 260 - BOMBAY HIGH COURT - TMI - Determination of value of the interest of the partners in the firms on the basis of the value of the shares - it was contended that, there was no similar specific provision in the Wealth tax Act or in the Rules that while ascertaining the partner's interest - Held that:- The contention of applicant/assessee partner that value of his interest in a firm cannot be worked out on 31/03/1981 is totally erroneous in the background of scheme of the Wealth tax .....

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eded determination as per charging provision is not in dispute.

Only stand of respective assessee is in absence of a provision to compute it as on 31.3.1981, the charging section can not be invoked. We have not found any lacuna in the Act which allows such an interest of the partner to go unassessed for the period from his valuation date till the end of previous year of his firm. There is complete scheme which enables the Assessing Officer under Wealth Tax Act to proceed to ascertain .....

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1/Nag/1988 155/Nag/86 81-82 03. 142/Nag/1988 177/Nag/86 81-82 04. 143/Nag/1988 152/Nag/86 81-82 05. 144/Nag/1988 165/Nag/86 81-82 06. 145/Nag/1988 166/Nag/86 81-82 07. 146/Nag/1988 164/Nag/86 81-82 08. 147/Nag/1988 151/Nag/86 81-82 01] This reference under the Wealth tax Act, 1957 is arising out of total eight reference applications moved by different assessees after adjudication of their grievances by the Income Tax Appellate Tribunal, Nagpur Bench (hereinafter referred to as the ITAT for short .....

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the basis of the value of the shares as quoted in the market as on 31/03/1981 notwithstanding the fact that the firms' previous year ended on 30/06/1981 ? (ii) Whether on the facts and in the circumstances of the case, where the assessees' valuation date did not coincide with the valuation date of the firms in which they were partners, the Tribunal was justified in upholding the revaluation of the assets of the firms as on the valuation date of the assessees ? (iii) Whether the Tribunal .....

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method of valuation of interest of partners in the firms on the basis of value of shares as quoted in market as on 31/03/1981 or validity of its use, is not in dispute and, hence, the only issue to be gone into is Whether on 31/03/1981, when previous year of respective firms had not ended and was scheduled to end on 30/06/1981, interest of partners in such firms could have been subjected to valuation in terms of Section 7(1) of the Wealth tax Act read with Rule 2 of the Wealth tax Rules ? Answer .....

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e. on 30/06/1981, overall view of business of the firms could have been taken and then interest of partners therein could have been worked out, the exercise undertaken on these lines on 31/03/1981 is not legal. He has added that when computation provision cannot be applied in present facts, the charging section also does not apply. 04] Before proceeding further, brief mention of the facts is called for. Total eight assessees as partners filed applications before the ITAT seeking reference of abo .....

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value of shares contributed by them at costs as their capital. The Wealth tax Officer while passing assessment order substituted market value of those shares as on 31/03/1981, though firms first year of account was to end & ended only on 30/06/1981. 05] Respective assessees contended that as M/s. Anant Trading Company or M/s. Kushagra Trading Company had no previous year for the year which ended on 31/03/1981 and balancesheet of these new firms was not prepared as on 31/03/1981, the cost of .....

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in respective partnership firms, the assessees/ partners no longer remain owner of shares. The valuation of interest of partners in new firms could not have been decided at any time prior to 30/06/1981. He has invited our attention to provisions of subsection (q) of Section 2 of the Wealth tax Act, 1957, which defines valuation date and stated that it adopts definition of previous year as in Section 3 of the Incometax Act, 1961. Our attention is also drawn to Section 3(1)(f) of the Incometax Ac .....

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nce, the profits could not have been computed before said date. 08] As net wealth means the excess of assets over liabilities, he points out how Section 7 of the Wealth tax Act prescribes a procedure therefor. The rules have been framed for that purpose and the relevant rule is Rule 2 of the Wealth tax Rules, 1957. As per said rule, wealth of the firm can be determined only after its accounts are settled at the close of accounting year. Unless and until profit or loss is determined, the assets o .....

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not applicable and as such the charging provision itself is not attracted. 10] He has relied upon various judgments to substantiate his submission and we will refer to the same as and when necessary in the course of this judgment. 11] As against this, Advocate Shri Bhattad submits that judgment of the ITAT, dated 18/04/1988, out of which reference arose, thoroughly examines this contention. He points out that valuation date of assessees partners is not in dispute and the assessees do not contend .....

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th-tax Appeals) has found that case falls under Section 7(1) of the Wealth-tax Act and the assessees also do not dispute this. The provisions of Section 7(1) are subject to rules and, therefore, reference to rules also becomes necessary. As per Rule 2C(d) of the Wealth-tax Rules, market value of shares on valuation date has been rightly accepted and acted upon by respondents. He relies upon provisions of Section 3(1)(d)(i) of the Income-tax Act and submits that the assessees do not dispute that .....

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n the last date of the previous year as defined in Section 3 of the Incometax Act, if an assessment was to be made under the Incometax Act for that year. The perusal of Section 3 of the Incometax Act shows that financial year immediately preceding the assessment year qualifies as previous year. We need not go into these details in present matter, because of the fact that 31/03/1981 is the valuation date of assesses/partners for the purpose of Wealth tax Act is not in dispute. Advocate Shri Thakk .....

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he Wealth tax Act for every assessment year, a wealth tax in respect of net wealth on corresponding valuation date of every individual at the rate specified in ScheduleI is to be charged. The relevance or application of this provision in this case is not in dispute. As per Section 4 of the Wealth tax Act, the value of assets which on the valuation date are held by such assessee is liable to be included for the purpose of calculating such tax. As per Section 4(1)(b) of the Wealth tax Act, where t .....

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f interest in partnership or association of persons. As per Rule 2(1), the net wealth of the firm on the valuation date is to be first determined. That portion of net wealth of firm as is equal to the amount of its capital is to be allocated amongst the partners or members in the proportion in which capital has been contributed by them. The residue of net wealth of the firm is thereafter to be allocated amongst the partners or the members in accordance with agreement of partnership for the distr .....

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tled annually. It can also govern the situations in which the partner resigns or retires or the business of the firm is over, discontinued , dissolved etc. prior to such year end. Interest of the assessee partner may be required to be worked out prior to that date in such contingencies. 16] This mandate of Section 4(1)(b) read with Section 7(1) of the Wealth tax Act and Rule 2(1) of the Wealth tax Rules show a procedure or code within the Wealth tax Act and the Wealth tax Rules framed thereunder .....

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e into existence on 18/03/1981 may be settled and closed on 30/06/1981, but that has got no bearing on valuation date of assessees and that does not mean that assessees cease to hold an interest in the firm on valuation date i.e. 31/03/1981. Precisely, this situation is envisaged and answered in above mentioned provisions of the Wealth tax Act and Wealth tax Rules. It is the Assessing Authority, which has to find out the market value of the assets in the mode and manner laid down in Rule 2 of th .....

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xercise, therefore, is independent of & can be performed without waiting for the settlement of its account by the firm. 18] The Officer assessing wealth tax on valuation date of assessee has been given necessary powers and the parliament has also prescribed procedure to be adopted by him to ascertain value of interest of such assessee partner in the firm. 19] In this background, it will be appropriate to refer to various judgments pressed into service before us by Advocate Shri Thakkar. The .....

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id judgment does not consider the requirement of charging Wealth tax on interest of such assessee partner in the firm held by him on valuation date. The Hon'ble Apex Court has also observed that charging section and computation provisions under each head of income constitute an integrated code and when there is a case to which computation provisions cannot be applied, such a case cannot fall within the charging section. The Hon'ble Apex Court has found that for the purposes of above ment .....

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be said that computation provisions cannot be operated here. The valuation date of respective assessee is just within thirteen days of formation of firm and assessees have not pointed out any transactions affecting their contribution in the capital of firms within this short duration. 20] The judgment of the Hon'ble Apex Court reported at (1965) 56 ITR 42 in Commissioner of IncomeTax, Gujarat vs. Ashokbhai Chimanbhai is relied upon to urge that profits do not accrue from day to day. It is se .....

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cise of determining such value only on the basis of market value of shares, as undertaken by the Wealth tax Authorities, is not in dispute before us. 21] Learned Counsel Shri Thakkar has also relied upon a judgment reported at (1981)128 ITR 294 in Commissioner of IncomeTax, Bangalore vs. B.C. Srinivasa Setty to explain mutual relation between charging section and computation provisions. For the reasons already disclosed above, it is not necessary for us to delve more into this judgment. 22] Advo .....

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another Division Bench Judgment of Calcutta High Court reported at 212 ITR 252 in Khimji Hunsraj (HUF) vs. Commissioner of Wealth Tax, which is on the same lines. 23] The judgment of Division Bench of this Court reported at 170 ITR 17 in Commissioner of Wealth Tax vs. V.M. Shah, is relied upon by him to show that the assessee partner s share in outstanding fees of firm of Chartered Accountants though not shown in balancesheet is includible in his net wealth even though firm was following cash s .....

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6 observes that the system of accounting, mercantile or cash or hybrid, is of no relevance for the purposes of determining the assets of assessee. In the light of this discussions, we do not wish to go into the judgment of Hon ble Apex Court reported at (1999) 237 ITR 61 in Commissioner of Wealth Tax vs. T.S. Sundaram, where the Hon ble Apex Court held that in computing the net wealth of a firm for the purposes of Rule 2, the assets exempt under Section 5 needed to be included and then apportion .....

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