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Commissioner of Wealth-tax, Andhra Pradesh Vs. Narendra Ranjalker - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 203 of 1979 and W.T.C. Nos. 2 and 7 of 1979
Judge
Reported in[1981]129ITR203(AP)
ActsWealth Tax Act, 1957 - Sections 2, 3, 4, 4(1), 5(1), 5(1A) and 46; Wealth Tax Rule, 1957 - Rules 1A and 2
AppellantCommissioner of Wealth-tax, Andhra Pradesh;commissioner of Wealth-tax, Andhra Pradesh
RespondentNarendra Ranjalker;lillian Rodrigues
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateS. Parvath Rao, Adv.
Excerpt:
.....(1), 5 (1a) and 46 of wealth tax act, 1957 and rules 1a and 2 of wealth tax rules, 1957 - whether assessee partner entitled for exemption under section 5 (1) (xxvi) of act in respect of bank deposits made by him - net wealth of firm in which assessee has share to be computed by excluding bank deposits held by firm under section 5 (1) (xxvi) read with section 5 (1a) upto limit of rs. 1, 50, 000 - and share of assessee in assets of firm has to be ascertained - assessee will not be therefore be entitled to exemption under section 5 (1) (xxvi) in regard to his share of bank deposits held by firm. - motor vehicles act (59 of 1988)section 149 (2): [v. gopala gowda & jawad rahim, jj] insurers entitlement to defend the action joint appeal by insured and insurer - held, the language employed..........of rs. 1,50,000 there is a balance of rs. 2,64,358. since the assessee has a half share in the firm, a deduction of this amount up to a maximum of rs. 1,50,000 should also be given. that is, there should be a further deduction of rs. 1,32,179. but as the assessee had claimed only an overall exemption of rs. 1,50,000 though he would be entitled to reduce his net wealth by rs. 2,07,179 (rs. 75,000 plus rs, 1,32, 179), and as the assessee had not claimed this further exemption, the tribunal restricted the claim to rs. 1,50,000 which he claimed and allowed the assessee's appeal. 4. similarly, for the assessment year 1972-73 also, following its decision for the earlier year year 1971-72, the tribunal held that the entire claim of the assessee for deduction of rs. 1,50,000 should be.....
Judgment:

Alladi Kuppuswami, J.

1. These three cases are heard together as a common question arises for consideration.

2. R. C. No. 203/76 :

3. The assessee is an individual and a partner in the firm, M/s. Swadeshi Cloth Stores, in which he has 50 per cent. shares. The firm had deposited Rs. 4,09,704 with the Central Bank of India and Rs. 4,654 with the Bank of Maharashtra. In the wealth-tax assessment proceedings for the assessment year 1971-72 (valuation date October 29, 1970) the assessee, inter alia, claimed a deduction to the extent of Rs. 1,50,000 in the aforesaid bank balances in which he had a half share. The claim was made under s. 5(1)(xxvi) of the W. T. Act, referred to in this judgment as 'the Act'. The WTO rejected the claim on the ground that s. 5(1)(xxvi) did not cover deposits of the firm wherein the assessee was a partner. He, therefore, disallowed the deduction claimed. On appeal, the AAC observed that under r. 2(1) of the W. T. Rules, 1957, the first step that the WTO was to take was to determine the net wealth of the assessee-firm. In computing the net wealth of that firm certain assets were exempt and one such exemption was under s. 5(1)(xxvi) and this was restricted to Rs. 1.5 lakhs under s. 5(1A) of the Act. He, therefore, held that in computing the net wealth of the firm, the firm was entitled to a deduction of Rs. 1.5 lakhs. As the assessee was having a half share in the firm, he was entitled to an exemption Rs. 75,000 as the net wealth of the firm had to be first computed after allowing deductions. The assessee preferred an appeal to the Appeallate Tribunal against the said order. The Tribunal held that under r. 2, the first step was to work out the wealth of the firm treating it as if it were the net wealth of an in individual. In working out the net wealth of an individual exemption under s. 5(1)(xxvi) had to be given. Straightaway, therefore from the net assets of the firm, bank deposits to the extent of Rs. 1.5 lakhs have to be deducted as not taxable. It further held that a further deduction of Rs. 1.5 lakhs has to be given in the individual's case. In other words, after deducting the sum of Rs. 1.5 lakhs under r. 2 from the net assets of the firm if the firm still continues to held deposits in the bank covered by s. 5(1)(xxvi) in respect of individual partners such exemption should be given up to the extent of Rs. 1,50,000. In the present case, the firm has cash deposits with the bank to the extent of Rs. 4,14,358. Deducting the exemption under sub-s. (1A) of Rs. 1,50,000 there is a balance of Rs. 2,64,358. Since the assessee has a half share in the firm, a deduction of this amount up to a maximum of Rs. 1,50,000 should also be given. That is, there should be a further deduction of Rs. 1,32,179. But as the assessee had claimed only an overall exemption of Rs. 1,50,000 though he would be entitled to reduce his net wealth by Rs. 2,07,179 (Rs. 75,000 plus Rs, 1,32, 179), and as the assessee had not claimed this further exemption, the Tribunal restricted the claim to Rs. 1,50,000 which he claimed and allowed the assessee's appeal.

4. Similarly, for the assessment year 1972-73 also, following its decision for the earlier year year 1971-72, the Tribunal held that the entire claim of the assessee for deduction of Rs. 1,50,000 should be allowed. On an application for reference being made by the Commissioner, the Tribunal referred the following question for the opinion of the High Court :

'Whether, on the facts and in the circumstances of the case, the assessee partner is entitled for the exemption under section 5(1)(xxvi) of the Wealth-tax ACt. 1957, in respect of bank deposits made by the firm ?'

5. W. T. C. No. 7 of 1979 :

6. The assessee is a partner in a firm known as Rock Castle Hotel, holding 50% interest therein. For determining the interest of the assessee in the firm for the purpose of wealth-tax assessment for the assessment year 1973-74 the assessee's representative computed the net wealth of the firm and while doing so, he excluded from computation, fixed deposits and shares owned by the firm to the extent of Rs. 1,50,000. The WTO held that such exclusion in the case of the firm would result in double benefit to the assessee under s. 5(1A) of the W. T. Act since the assesses had already availed of the benefit to the extent of Rs. 1,50,000 in respect of assets owned by her individually. On appeal by the assessee, the AAC held that in arriving at the share of the assessee in the firm, fixed deposits with the banks of the firm should be excluded in computing the net wealth of the firm under r. 2 of the W. T. Rules. The AAC further held that what was included in the wealth was only the interest of the assessee in the firm and the fact that she had already availed of the benefit under s. 5(1A) in respect of certain assets owned by her, had no relevance while computing the net wealth of the firm for the purpose of determining the assessee's interest therein. On further appeal by the department, the Appellate Tribunal upheld the order of the AAC. Aggrieved by the order of the Appellate Tribunal, the department preferred an application to refer the following question of law to the High Court for its opinion :

`Whether, on the facts and in the circumstances of the case the sum of Rs. 75,000 is liable to be excluded from the computation of the net wealth for the assessment year 1973-74 by invoking the provisions of section 5(1) of the Wealth-tax Act to a fir ?'

7. The Appellate Tribunal refused to refer the question of law. Thereafter, on an application made to this court, this court directed the Tribunal to refer the question stated above for the opinion of this court.

8. W. T. C. No. 2/79 :

9. In this case the assessee is the same as in W. T. C. No. 7/70. But this relates to the wealth-tax proceedings for the assessment year 1975-76 and the same question arises for consideration in this case also.

10. Section 3 of the W. T. Act is the charging section and provides that subject to the other provisions contained in the Act, there shall be charged for every assessment year, a tax (hereinafter referred to as 'the wealth-tax') in respect of the net wealth on the corresponding valuation date of every individual, HUF and company at the rate or rates specified in in the Schedule. Section 4 deals with the computation of net wealth of an individual. Section 4(1)(b), which is the relevant provision, states that 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 not being a co-operative housing society the value of his interest in the firm or association determined in the prescribed manner. The expression 'prescribed' is defined in s. 2(n) as prescribed by rules made under this ACt. By SRO 3384 the Central Board of Revenue made rules known as the W. T. Rules in exercise of the powers conferred by s. 46 of the W. T. ACt. Rules 2 of the said Rules is in the following terms :

'The value of the interest of a person in the firm of which he is a partner or in an association of persons of which he is 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 partners or members in the proportion in which capital has been contributed by them. The residues of the net wealth of the firm or association shall be allocated among the partners or members in accordance with the agreement of partnership or association for the distribution of assets in the event of dissolution of the firm or association, or, in the absence of such agreement, in the proportion in which the partners or members are entitled to share profits. The sum total of the amounts so allocated to a partner or member shall be treated as the value of the interest of that partner or member in the firm of association.'

11. Section 5 of the Act deals with exemption in respect of certain assets and enumerates the assets in respect of which tax shall not be payable by an assessee and such assets shall not be included in the net wealth of the assessee. One class of assets referred to in s. 5(1)(xxvi) is deposits with a banking company to which the Banking Regulation Act, 1949, applies (including any bank or banking institution referred to in s. 51 of the Act. Section 5(1A) provides that nothing contained in sub-s. (1) shall operate to exclude from the net wealth of the assessee any assets referred to in cls. (xv), (xvi), (xxii), (xxiii), (xxiv), (xxv), (xxvi), (xxvii), (xxviii) and (xxix) not being deposits under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959, to the extent the value thereof exceeds in the aggregate a sum of one hundred and fifty thousand rupees. It is, therefore, seen from a combined operation of s. 5(1)(xxvi) read with s. 5(1A) that the assessee is entitled to an exemption in respect of bank deposits, etc., not exceeding the sum of Rs. 1,50,000. The question for consideration is what is the procedure to be adopted in a case where an individual has a share in a firm which holds deposits in banks which are exempt from wealth-tax up to a limit of Rs. 1,50,000 under s. 5(1)(xxvi) of the AC The relevant provisions which have been set out above may be interpreted in three different ways leading to the following here ways of making the deductions.

1. The net wealth of the firm has to be ascertained by deducting from its assets the bank deposits to the extent of Rs. 1,50,000 and the share of the individual in the net wealth of the firm computed in the light of r. 2 of the W. T. Rules and added to his other individual assets for determining his net wealth liable total under the Act.

2. The value of the share of the individual in all the assets of the firm without making the deduction under s. 5(1)(xxvi) is ascertained in the light of r. 2 and added to the individual assets, and thereafter a deduction has to be made in respect of bank deposits under s. 5(1)(xxvi) up to a limit of Rs. 1,50,000.

3. The net wealth of the firm has to be ascertained after making the deduction under s. 5(1)(xxvi) up to a limit of Rs. 1,50,000 and it is added to the assets of the individual and again a further deduction is made in the share of the assessee in the firm's bank deposits under s. 5(1)(xxvi) read with s. 5(1A).

12. The Tribunal has adopted the third of the procedures referred to above, whereas Sri Rama Rao, counsel for the department contends that the proper procedure is the second. Sri Satyanarayana, the learned counsel for the assessee, in W. T. C. No. 2/79 submits that the first of the procedure stated above is in conformity with the provisions of the Act.

13. At first blush it appeared to us that the logical course would be to find out the net wealth of the assessee by first computing his share in the entire assets of the firm of which he is a partner, add the said assets to his individual assets and then determine to what deductions he is entitled including the deductions under s. 5(1)(xxvi) of the ACt. In this connection, we were primarily influenced by the fact that under the W. T. Act a firm is not an assessee. Under s. 3, the charging section, it is only the net wealth of an individual, or an HUF or a company, that has to be taxed. The expression 'net wealth' is also defined in s. 2(m) as the amount by which the aggregate value computed in accordance with the provisions of the Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under the Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than the debts and certain other amounts mentioned in the said provision. The learned counsel for the revenue, therefore, submitted that the computation of net wealth is only in regard to an assessee who under the W. T. Act can be only an individual or a member of an HUF or a company. The provisions, therefore, for the computation of net wealth include the provisions relating to deduction of certain assets which cannot be applied to a firm. On a proper interpretation of the provisions of the Act read with r. 2 of the W. T. Rules, he argued that the share of the individual in the entire assets of the partnership has to be ascertained with reference to r, 2 without making any deduction and after the share is ascertained and added to his individual assets, the deductions or exemptions including the exemption under s. 5(1)(xxvi) have to be made in the individual wealth to arrive at his net wealth. Though this submission appears to us on the face of it to be logical, we are afraid we cannot give effect to it in view of the clear terms of s. 4(1)(b) read with r. 2 of the W. T. Rules. As has already been noticed, under s. 4(1)(b), where the assessee is a partner in a firm, the value of his interest in the firm has to be determined in the manner prescribed by the rules. Under r. 2 the value of his interest in a firm has to be determined by first determining the net wealth of the firm on the valuation date and then that portion of the net wealth of the firm as is equal to the amount of its capital has to be allocated among the partners in proportion to the capital contributed by them. The residue of the net wealth of the firm shall be allocated among the partners in accordance with the agreement of partnership for the distribution of assets in the event of dissolution of the firm, or in the absence of such agreement in the proportion in which the partners are entitled to share profits. It is, therefore, clear from this rule that the net wealth of the firm has to be ascertained. The expression 'net wealth' has not been defined in the Rules, but r. 1A(m) provides that all other words and expressions used but not defined in the Rules and defined in the ACt, shall have the meanings respectively assigned to them in the Act. It is therefore, clear that the expression 'net wealth' in the Rules must have the same meaning as 'net wealth' used in the ACt. Under s. 2(m) 'net wealth' is defined as the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets of the assessee on the valuation date is in excess of the aggregate value of the debts owed by the assessee. It is no doubt true that the expression 'net wealth' is used only with reference to the assets of an assessee and a firm is not an assessee under the Act, but when the same expression is used in the rules and the net wealth of a firm has to be ascertained, there cannot be any doubt that the net wealth of a firm has to be ascertained as if the firm is an assessee. In the leading case of East End Dwellings Co. Ltd. v. Finsbury Borough Council [1952] AC 109 it has been observed that a deeming provision has to be carried to its logical conclusion. It was observed in the case :

'It you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidence which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs : it does not say that having done so, you must cause or permit your imagination to boggle when it comes the inevitable corollaries of that state of affairs.'

14. The expression 'net wealth' has been deliberately used in r. 2 in connection with the assets of a firm. That expression must be understood in the light of the definition in s. 2(m) of the Act, as if the firm is an assessee though the firm is not an assessee under the Act. Otherwise there was no purpose in the Legislature using the expression 'net wealth' in the rules. If the argument of the learned counsel for revenue is accepted, that in computing the share of an individual in the firm the exemption contained in s. 5(1)(xxvi) should not be applied, then the share would be the share in the assets of the firm and not on its net wealth as provided in the Rules. We are, therefore, of the view that the first of the procedures referred to earlier in our judgment is in consonance with the provisions of the Act and the Rules.

15. The Tribunal, however, went further and held that after the deductions are made and the net wealth of the firm ascertained in accordance with the provisions of the Act and the partner's share in the net wealth is added to his individual assets, the individual is again entitled to a deduction under s. 5(1)(xxvi) from out of his share in the bank deposits held by the firm. We are unable, however, to agree with this view of the Tribunal. The legal position of the interest of a parnter was considered in detail by the Supreme Court in Narayanappa v. Bhaskara Krishnappa, : [1966]3SCR400 . It was observed (p. 1304) :

'His right during the the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges.'

16. In another part of the judgment they observed (p. 1303) :

'During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to any one.'

17. It follows, therefore, that the interest of a partner in the firm cannot be treated as part of his assets and as such it is not possible to give any deduction in terms of s. 5(1)(xxvi) read with s. 5(1A) from out of the value of that interest in computing the net wealth of the partner. The deduction has to be given only in computing the net wealth of the firm under r, 2(1).

18. The view similar to the one which we have taken has been accepted by the Madras High Court in CWT v. Vasantha [1973] ITR 17. In that case the assessee was a partner in two firm whose assets consisted of agricultural lands. In computing the value of the net wealth, the assessee did not take into account the value of the share of the partner in the agricultural lands owned by the firms. It was held that in computing the value of the net wealth of the assessee who was a partner in two firm the value of the agricultural lands will have to be excluded. It was observed that the words 'net wealth' not having been defined in the W. T. Rules, it will have to be understood in the same sense as in the W. T. Act both by reason of the specific r. 1A(m) of the W. T. Rules, 1957, as well as by reason of the well-established rules of interpretation. Hence, under r. 2(1) in ascertaining the net wealth there should be an aggregation of the value of all the assets, but excluding the agricultural lands as they have been specifically excluded from the definition of 'assets' in s. 2(3). The learned counsel for the revenue drew our attention to CWT v. I. Butchi Krishna : [1979]119ITR8(Orissa) where the Orissa High Court took the view that deduction has to be made from out of the share of the individual in the deposits held by the firm; whereas the WTO in that case held that the exemption should be effected in the hands of the firm and the net wealth of the firm should thereafter be calculated. In coming to this conclusion they were influenced by the submission that if they procedure adopted by the WTO in that case is accepted, the partner of a firm would get double benefit, in the sense that, first, in the determination of the net wealth of the firm, the benefit of s. 5(1A) of the Act should be given and, secondly, in the hands of the partner, the same benefit would be extended with reference to the assets held by him in respect of which wealth-tax was not payable. But as we have already observed the individual is not entitled to claim again exemption under s. 5(1)(xxvi) in his share in the bank deposits held by the firm after the net wealth of the firm is ascertained after giving exemption under the said section. We are, therefore, unable to agree with the decision of the Orissa High Court in CWT v. I. Buthci Krishna : [1979]119ITR8(Orissa) . In Purshottamdas Gocooldas v. CWT : [1976]104ITR608(Mad) , where the partnership in which the assessees were partners owned a house property as one of its assets it was held that as the property was an asset of the firm, the assesses could not claim to be entitled to any portion of the house property as exclusively belonging to them and hence they were not entitled to claim exemption under s. 5(1)(iv) of the Act. Relying upon the decision in Addanki Narayanappa v. Bhaskara Krishnappa, : [1966]3SCR400 , they observed 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. Another decision that was relied on by the learned counsel for the revenue is CWT v. Padampat Singhania : [1973]90ITR418(All) . In that case the assessee was an HUF who had one-third share in a partnership. The tribunal held that the income-tax liability of the firm was deductible while computing the net wealth of the firm for determining the wealth of the assessee. The Allahabad High Court held that in computing the net wealth of the firm for the purpose of finding out the assessee's share in it, sub-cls. (a) and (b) of s. 2(m), which provides that the amount of income-tax outstanding for a period of more than twelve months shall not be deductible as a debt from the value of the assets, will not apply. It was observed that the firm was not the assessee or that the net wealth of the firm is not to be assessed. The assessee was the karta of an HUF and in computing his net wealth, any income-tax liability outstanding against him may not be deducted. But the income-tax liability of a firm of which he is a partner cannot be left out of consideration by virtue of the said provision. The net wealth under r. 2 has to determined in accordance with commercial principles and when so done, all the debts owed by a firm of whatever nature and whatever duration have to be deducted so long as the debts are legally enforceable against the firm. We express our respectful dissent from this decision. As we have stated already, the expression 'net wealth' has been advisedly used in r. 2 and carries the same meaning as in the Act. Therefore, in computing the net wealth, the firm should be deemed to be an assessee and all the provisions of the Act dealing with the computation of the assets of an assessee should be applied to the firm as if it were an assessee, though in fact it is not an assessee under the Act. In CWT v. Mrs. Christine Cardoza : [1978]114ITR532(KAR) , it was held that where agricultural land is owned on a partnership, in computing the net wealth of a partner, the method of deducting the sum of Rs. 1,50,000 in the computation of the net wealth of the firm under rule 2 of the W. T. Rules is not warranted by the terms of s. 5(1)(vi)(a) of the W. T. Act. The deduction contemplated by that provision is in the computation of the net wealth of an assessee-partner and not the firm which is not an assessee. Hence, in computing the net wealth of an assessee, 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.

19. For the reasons already stated, we prefer to follow the view expressed in CWT v. Vasantha : [1973]87ITR17(Mad) by the Madras High Court.

20. For the above reasons, we answer the question referred to us in R. C. No. 203/76, as follows :

21. The net wealth of the firm in which the assessee has a share has to be computed under r. 2 by excluding the bank deposits held by the firm under s. 5(1)(xxvi) read with s. 5(1A) up to the limit of Rs. 1,50,000 and the share of the assessee in the assets of the firm has to be ascertained. The assessee will not thereafter be entitled to exemption under s. 5(1)(xxvi) in regard to his share of the bank deposits held by the firm.

22. W. T. C. Nos. 2 and 7of 79

23. In view of what we have decided above it follows that the decision of the Tribunal in W. T. A. No. 577/76 is correct, as the Tribunal has stated that the deduction has to be made only from out of the assets of the firm in order to arrive at the net wealth of the firm. Sri Rama Rao drew our attention to the observation in the order of the WTO that such an exclusion in the case of the firm would result in double benefit to the assessee since the assessee availed to the extent of Rs. 1,50,000 in respect of the assets owned by her individually. He apprehends that the assessee might have obtained a deduction from out of her share in the firm in respect of the deposits held by the firm. But Sri Satyanarayana Rao, learned counsel for the assessee, submits that the deduction claimed by the assessee was only in respect of bank deposits held by her individually and not by way of a share in the firm. It is made clear that it is open to the assessee to claim separate deduction in respect of deposits held by her individually other than by way of a share in the firm. She cannot claim deduction once again from out of the deposits held by the firm. Subject to these observations, the applications in W. T. C. Nos. 2 and 7/79, are dismissed.


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