TMI Blog1991 (12) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... be not made afresh by withdrawing the benefit of the exemption under section 5(1)(iv) of the Act. The Commissioner of Wealth-tax, relying on the judgment of the Madras High Court reported in Purushothamdas Gocooldas v. CWT [1976] 104 ITR 608, held that deduction under section 5(1)(iv) was not allowable to a partner in a firm regarding property owned by the firm. The assessees who are partners in the said firm, Messrs. Wengers and Co., filed appeals before the Tribunal. The Tribunal, relying on the judgments of the Karnataka High Court reported in CWT v. Mrs. Christine Cardoza [1978] 114 ITR 532, of the Orissa High Court reported in CWT v. Butchi Krishna [1979] 119 ITR 8 and of the Madhya Pradesh High Court reported in Narsibhai Patel v. CWT [1981] 127 ITR 633, held that the order of the Wealth-tax Officer was correct inasmuch as it allowed the benefit of exemption under section 5(1)(iv) of the Act to the partners of the firm. Thus, the order of the Commissioner of Wealth-tax was set aside by the Tribunal. With this background, the Revenue has sought the opinion of this court on the following questions: "1. Whether, On the facts and in the circumstances of the case, the Tribunal w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation date of every individual, Hindu undivided family and company at the rate or rates specified in Schedule I. " Section 4(1). - In computing the net wealth (b) ... where the assessee is a partner in a firm or a member of an association of persons (not being a co-operative housing society), the value of his interest in the firm or association determined in the prescribed manner. " Section 5(1)(iv) " (1) Subject to the provisions of sub-section (1A), wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee - . . . (iv) one house or part of a house belonging to the assessee." Rule 2 of the Wealth-tax Rules, 1957, as it stood at the relevant time, also needs reproduction. "(1)The value of the interest of a person in a firm of which he is a partner or in an association of persons of which he is a member, shall be determined in the manner provided herein. The net wealth of the firm or the association on the valuation date shall first be determined. That portion of the net wealth of the firm or association as is equal to the amount of its capital shall be allocated among the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was the asset of the firm and not that of the individual partners. This view was upheld by the Tribunal. On a reference to the High Court at the instance of the assessee, it was held (headnote) : " (1) That, in the case of a partnership, no partner could claim to have any specific interest in its assets exclusively apart from his interest as a partner in the firm as such ; (2) the partner's interest in the house property could not also be considered as immovable property as his right is only to a share in the division of the partnership assets on dissolution ; (3) as the property was an asset of the firm, the assessees in the instant case could not claim to be entitled to any portion of the house property as exclusively belonging to them and hence were not entitled to claim exemption under section 5(1)(iv) of the Act." In deciding this case, the court mainly relied on a judgment of the Supreme Court in Addanhi Narayanappa v. Bhashara Krishnappa, AIR 1966 SC 1300. In the said case, the question for consideration before the Supreme Court was whether the interest of a partner in the partnership assets comprising movable as well as immovable property should be treated as mova ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... desh High Court. In this case, it was held that the net wealth of the firm ought to be arrived at in accordance with the provisions of the Wealth-tax Act as if the firm were an assessee. Therefore, it was held that, while computing the interest of a partner in the firm in terms of section 4(1)(b) of the Act, only the interest of the firm arrived at in accordance with the provisions of the Act, as if the firm were an assessee, shall be taken into consideration. Therefore, according to this judgment, it is the firm which is entitled to deduction on account of the exemptions granted under section 5 of the Act. The case related to exemption under section 5(1)(xxvi) read with section 5(1A) of the Act. The firm was held entitled to deduction on account of deposits in a scheduled bank to extent of Rs. 1,50,000 and it was held that the partner will not be entitled to exemption in regard to his share of the bank deposits held by the firm. At the bottom of page 212 of the report of the said judgment it has been noted that though a firm is not an assessee under the Act, still it has been held that, while computing the net wealth, the firm should be deemed to be an assessee, and the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in determining the net wealth of the firm. It follows from this judgment that it has been accepted that a firm is not an assessee under the Act and, therefore, it need not be treated as such, which is contrary to what was held in the decisions of the Andhra Pradesh High Court noted hereinbefore. It also holds that the property of the firm is really the property of the partners which is contrary to what was held by the Madras High Court in Purushothamdas Gocooldas [1976] 104 ITR 608. However, instead of granting the benefit of exemption under section 5(1)(iv) to partner who is really an assessee under the Wealth-tax Act, this judgment holds that the exemption should be taken for consideration in determining the net wealth of the firm. On the other hand, Mr. Agnihotri, learned counsel for the assessees, laid great stress on the relevant provisions of the Act itself before proceeding to cite various decisions in support of his contention. According to him, the following words in section 5(1) hold the key to the entire controversy : " Wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could have been achieved by providing for it in the rules. The rules being silent on this aspect, one need not stretch them to take the view taken by the Andhra Pradesh High Court or the Patna High Court. Further, it is urged that the procedure as per rule 2 is to be followed. Section 5 will not come into the picture till the stage of computation of the net wealth of the assessee, who is a partner in a firm, comes. The exemption under section 5 will not come into play while the net asset of the partnership firm is computed in order to ultimately find out the share of a partner in such asset. Rule 2 appears to be quite exhaustive in this behalf and whatever procedure is to be followed and benefit has to be allowed has been provided for therein. For instance, in sub-rule (3), the benefit of section 5(2) has been extended to a partner. If the benefit of section 5(1) was also to be extended, the same could have been so stated in rule 2 itself. In view Of this, it is submitted by counsel for the assessees that the benefit of the exemption under section 5(1)(iv) of the Wealth-tax Act has to be allowed to a partner at the time of his individual assessment and for his share in the house ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of his interest in the firm determined in the prescribed manner that is made includible in his net wealth. Section 3 of the Act read with the definitions of 'net wealth' as given in section 2(m) and 'assets' given in section 2(e) clearly brings out the exigibility of a partner's interest in a firm either in his individual capacity or in his capacity as the karta of a Hindu undivided family to wealth-tax under the Act." Again, after referring to the provisions of section.3, section 2(m) and section 2(e), it was observed (at page 492) : " On reading the aforesaid provisions together, it will appear clear that wealth-tax has been levied on the net wealth of an individual or Hindu undivided family, meaning thereby the aggregate value of all the assets belonging to such assessee minus all the debts owed by him. Under the definition of 'assets' property of every description, movable or immovable, is included, and since it cannot be disputed, and was not disputed before us that a partner's interest in a firm either in his individual capacity or in his capacity as the karta of an Hindu undivided family is property, the same would be includible in the expression 'assets' which will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een relied upon by the same High Court in Purushothamdas Gocooldas' case [1976] 104 ITR 608, to take a somewhat contrary view. Referring to section 14 of the Partnership Act which defines property of the firm, it was observed : "when one talks of the property of the firm, it has to be remembered that a firm as such is not a legal entity; nor can a firm as such, according to the English concept also, hold property. This is the reason why the Supreme Court in the two decisions held that, when the firm is dissolved and the partnership assets are distributed among the partners, there will be no transfer of the property of the firm in favour of the partners so as to attract the provisions of the Income-tax Act for capital gains ". The decisions of the Supreme Court referred to in this behalf are CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 and CIT v. Dewas Cine Corporation [1968] 68 ITR 240. It was further observed " as far as the individuals who make up the partners of the firm are concerned, we have no doubt that the properties, which are called the assets of the firm, really vest in the partners of the firm. This has also been said by the Supreme Court in the decision in Addanki Naraya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts and in the circumstances of the case, it is difficult to hold that the assessee was not the owner of agricultural lands so as to deny the deduction under section 5(1)(iva). Accordingly, the view taken by the Tribunal must be upheld." The court further observed (at page 538): "But it seems to us that the method of deducting a sum of Rs. 1,50,000 in the computation of the net wealth of the firm under rule 2 is not warranted by the terms of section 5(1)(iva). The deduction contemplated is in the computation of the net wealth of an assessee and not of a firm which is not the assessee. On the principle enunciated by the Supreme Court, the assessee is a person who owns the agricultural land and, therefore, deduction has to be given in his/her hands. This is what has been directed by the Tribunal." The next judgment in line is reported in CWT v. I Butchi Krishna [1979] 119 ITR 8. This judgment of the Orissa High Court fully supports the contention of learned counsel for the assessees. In this case, the Tribunal had taken the view that, on a reading of rule 2(3) of the Wealth-tax Rules, it was not necessary to comply with the provisions of section 5(1A) and the exemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6] 104 ITR 608 (Mad). Counsel for the assessee has also cited CWT v. Jose Mathew [1987] 168 ITR 46, which is a judgment of the Kerala High Court and it is really based on the Karnataka High Court decision already referred to by us, reported in CWT v. Mrs. Christine Cardoza [1978] 114 ITR 532. The judgment of the Calcutta High Court reported in CWT v. Sri Naurangrai Agarwalla [1985] 155 ITR 752 is an elaborate judgment on the point discussing all the earlier cases on the subject and the relevant provisions of the Act and the Rules. It was finally held that a partnership is not a distinct legal entity and the partnership property in law belongs to all the partners constituting the firm. The Wealth-tax Act, 1957, unlike the Income-tax Act, has not made a partnership an assessee. The properties held under a firm's name will have to be assessed in the hands of the partners of the firm. The Wealth-tax Act imposes a tax on the net wealth of every individual and a Hindu undivided family. " Net wealth " has been defined to mean the aggregate value of all the assets wherever located belonging to the assessee on the valuation date. Therefore, when the total of the assets of an individual is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at is done, whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property.' I fail to see how this judgment helps the partner in the case before us. It is well-settled that no partner can claim that any portion of the partnership assets belongs to him exclusively. But can it be denied that the assets belong to the partners jointly and to nobody else ? The firm is not a juristic person. The assets belonged to the partners jointly. It was observed by Mudholkar J. (headnote) : `No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense, every partner has an interest in the property of the partnership.' "It has to be noted that in Addanki Narayanappa's case, AIR 1966 SC 1300, it was clearly stated by the Supreme Court that 'si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a partnership has to be taken into account. Under the general principles of law, the name of the firm is a compendious name for all the partners and it is not an entity in law. It is on that basis that the shares of the partners in the assets of the firm have to be considered as assets or wealth in the hands of the partners liable to be assessed to wealth-tax. The assessee was a partner in a firm having one-fifth share therein. The firm owned agricultural lands. In his return of wealth-tax, the assessee claimed exemption under section 5(1)(iva) of the Wealth-tax Act, 1957, in respect of his share of the agricultural land of the firm. The Wealth-tax Officer disallowed the claim of the assessee. The Tribunal held that the assessee was not entitled to exemption under section 5(1)(iva) in his personal assessment of wealth in respect of his share as a partner of the firm but the exemption would be taken into account while determining the net wealth of the firm. It was held that, inasmuch as a firm was not an assessee within the meaning of the Wealth-tax Act and inasmuch as the properties of a firm were treated as wealth or assets in the hands of its partners to the extent of their re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only prescribed manner is the one contained in rule 2. Rule 2 does not contain any procedure for granting exemption under section 5(1)(iv) at the time of computation of the net wealth of a firm. Rule 2 appears to be quite exhaustive and whatever procedure is to be followed and wherever exemption has to be allowed, has been provided for. In sub-rule (3), the benefit of section 5(2) has been extended to a partner. If the benefit of section 5(1) was also to be extended, the same could have been so stated in rule 2 itself. There is nothing in section 4(1)(b) or rule 2 to suggest that a firm be deemed an assessee so as to allow the benefit of exemption under section 5(1)(iv) to it. We feel that taking the view as canvassed by the Revenue will be doing violence to the statutory provisions. The concept of a partnership firm and partnership property as contained in the Partnership Act also compels us to take this view. A firm has no legal existence and as such it cannot hold any property. It is the partners who own the partnership property or assets. Therefore, it is only fair that they alone should have the benefit of the exemption under section 5(1)(iv) when their individual assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... desh High Court taking the same view as we have taken in this judgment, has already been dismissed recently. We may note here yet another aspect of the matter urged before us by counsel for the assessees. Although, as per the view we have taken already, it may not be necessary to digress on this aspect, yet since the same was urged before us, we feel it appropriate to notice the same. It has been pointed out that sub-section (4) has been added to section 5 by virtue of an amendment with effect from April 1, 1989. Sub-section (4) runs as under: "Sub-section (4). - Where the assessee is a partner of a firm or member of an association of persons, and the firm or association owns any one or more of the assets which are exempt under sub-section (1), then, for the purposes of his assessment under this Act, the value of his interest in the firm or association shall be deemed to include the value of a part of each such asset of the firm or association in the same proportion in which he is entitled to share the profits of the firm or association and the assessment shall be made after allowing the exemption under sub-section (1) in respect of those assets on the basis of such proportio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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