TMI Blog1983 (6) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... s.43,799 to the net wealth of the assessee. The assessee preferred an appeal before the AAC and urged that the firm was not a legal entity and that the assessee as an individual was entitled to the benefit of the exemption under section 5(1)(iv) of the W.T. Act. In the alternative, it was urged that the firm itself was entitled to the benefit of section 5(1)(iv). Both these contentions were rejected by the AAC and he affirmed the order of the WTO. The Tribunal on further appeal by the assessee held that the exemption under section 5(1)(iv) of the W.T. Act was allowable in respect of the house property and reduced the addition of Rs. 43,799 to the net wealth of the assessee. The short question before us is whether a partner in his assessment of wealth-tax is entitled to the exemption granted by section 5(1)(iv) in respect of a house belonging to the partnership. There is no dispute that the house was being used exclusively for residential purposes by the partners. The only difficulty in this case is that the house formed part of the assets of the partnership. The question, therefore, is can the house be described as " belonging to the assessees " as to enable the partners to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng for a period of more than twelve months on the valuation date. 4. Net wealth to include certain assets.-(1) In computing the net wealth of an individual, there shall be included, as belonging to that individual . ...... (b) where the assessee is a partner in a firm or a member of an association of persons, the value of his interest in the firm or association determined in the prescribed manner. 5. Exemption in respect of certain assets.-(1) 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 exclusively used by him for residential purposes: Provided that where the value of such house or part, situate in place with a population exceeding ten thousand, exceeds one lakh of rupees, the amount that shall not be included in the net wealth of an assessee under this section shall be one lakh of rupees. " It is important to note that section 5(1)(iv) originally allowed exemption only in respect of " one house belonging to the assessee ". By an amendment made by the Finance Act, 1964, the exemption was allowed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rong reliance was placed on decision of the Madras High Court in the case of Purushothamdas Gocooldas v. CWT [1976] 104 ITR 608. Reliance was also placed on the judgment of the Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300. We were referred to a large number of decisions of the various High Courts and also of the Supreme Court. We shall refer to these decisions in detail later in the judgment. It appears to us that the relief that was sought to be given to an assessee in respect of a house or part of a house used by him exclusively for the purpose of his residence under s. 5(1)(iv) cannot be denied merely on the ground that the house belonged to a partnership firm of which the assessee was a partner. The entire house was used for the residence of the partners of the firm. The W.T. Act, unlike the IT. Act, has not made the partnership an assessee. It is well-settled that " partnership " is a compendious way of describing the individuals forming the partnership. A partnership is not a legal person or juridical entity. Under the I.T. Act, the firm has been treated as an assessable entity and, for some purposes of the I.T. Act, a firm is tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et wealth, even then the exemption under s. 5(1)(iv) cannot be denied to the assessee. It is well-settled that a legal fiction must be taken to its logical conclusion and all the inevitable corollaries and consequences of the legal fiction should be given effect to. (East End Dwellings Company Limited v. Finsbury Borough Council [1952] AC 109 at page 130). Rule 2 of the W.T. Rules lays down the method of valuation of interest of a partner in a partnership firm. For this purpose, the net wealth of the firm on the valuation date has to be determined first. This can only be done by the valuation of the assets of the firm. The house which is used for the purpose of residence of the partners will have to be valued. If the assessee is entitled to any exemption in respect of the house or a part of the house, that has to be allowed. That must follow logically from the legal fiction. It has to be noted that in order to enjoy the benefit of s. 5(1)(iv), an assessee will have to establish (1) that a house or part of a house belonged to the assessee; and (2) that the house or part of the house was used by the assessee exclusively for residential purpose. The section does not require that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribed as a house or part of a house belonging to the assessee. The question is not whether the house belonged exclusively to the assessee. If the house belonged to the assessee jointly with other partners, the requirement of s. 5(1)(iv) is satisfied and the benefit of that section cannot be denied to the assessee. A partnership firm is not a distinct legal entity and the partnership property in law belongs to all partners constituting the firm. The firm, as such, has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership. When a firm is dissolved, there is no question of any extinguishment of the firm's right in the partnership assets. The Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49, had occasion to go into the nature of the interest of partners in a partnership firm. Tulzapurkar J., after a review of a large number of cases including the case of Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, observed at page 59: " Having regard to the above discussion, it seems to us clear that partnership firm under the Indian Partnership Act, 1932, is not a dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, every partner has an interest in the property of the partnership." The property cannot remain in vacuum. It must belong to somebody. If the partnership has no legal existence, the property must in law belong to the partners. It is true that during the subsistence of the firm, no partner can deal with any of the assets of the partnership as his own. But none the less, in law, all the assets must belong to the partners jointly. The point has been placed beyond any doubt by the judgment of the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49, where it was observed at page 57: "But, speaking generally, the firm as such has no legal recognition. The law, ignoring the firm, looks to the partners composing it; any change amongst them destroys the identity of the firm; what is called the property of the firm is their property, and what are called the debts and liabilities of the firm are their debts and their liabilities. " The requirement of s. 5(1)(iv) is that the house or a part of the house must be exclusively used by the assessee for residential purpose. The requirement of the section is not that the house must exclusively belong to the assessee. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee, who was a partner in a firm which owned agricultural lands, the value of the share of the assessee in agricultural lands will have to be included in his net wealth and the full deduction under s. 5(1)(iv-a) has to be given in his hands. The Karnataka High Court, after referring to the judgment of the Supreme Court in the case of CIT v. Chidambaram Pillai [1977] 106 ITR 292, observed at page 538 : " ........ it is contended that in the light of the clear enunciation by the Supreme Court in this case explaining the scope and effect of the decision in Addanki Narayanappa's case, AIR 1966 SC 1300, the assessee owned and had interest in the agricultural land and was entitled to the deduction under section 5(1)(iv-a) of the Act. This submission for the assessee has considerable force. In the light of this pronouncement of the Supreme Court in regard to the concept of a firm and the interests that the partners have in what is called property of the firm, 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 s. 5(1)(iv-a). Accordingly, the view taken by the Tribunal must b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the assessee's net wealth and after allocation of the assessee's proportionate share in the net wealth of the firm. Our attention was drawn to the fact that some of the High Courts have taken the view that under s. 4(1)(b) of the W.T. Act, read with r. 2 of the W.T. Rules, it is incumbent on the WTO to compute the " net wealth " of a firm. It is only after the computation of the net wealth, the interest of a partner can be determined. The expression " net wealth " has to be understood in the sense it was used in the charging section and, therefore, a firm has to be treated as an assessee while computing its net wealth and all the deductions and allowances could be considered only at the stage of the computation of the firm's net wealth and not the valuation of the assessee's interest in the firm. This view was adopted by the Madras High Court in the case of CWT v. Vasantha [1973] 87 ITR 17 and also by the Andhra Pradesh High Court in the case of CWT v. Narendra Ranjalker [1981] 129 ITR 203. It has to be noted that if this view has to be adopted, even then the exemption claimed by the assessee in the case before us in respect of the house exclusively used for residential p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a partner. Section 3 brings to tax the net wealth of every individual computed in the prescribed manner. Net wealth will have to be calculated by including the aggregate value of all the assets belonging to the assessee. Section 4(1)(b) requires the value of a partner's interest in the firm to be determined in the prescribed manner for the purpose of inclusion in the net wealth of the assessee. Proportionate value of the assets of the firm is being included in the net wealth of the assessee only on the ground that the assets jointly belong to the partners. If that be the case, it follows logically that the assessee will be entitled to claim the exemptions provided by the statute in respect of the assets which have been valued and included in his net wealth on proportionate basis. The exemption under s. 5(1)(iv) is in respect of a house or part of a house belonging to an assessee and of shall not be included in the net wealth of the assessee ", if it cannot be included indirectly. Merely because the house has been valued along with other assets of the partnership under r. 2, the exemption granted by s. 5(1)(iv) cannot be denied to the assessee. Moreover, the exemption can only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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