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Manibhai J. Patel Vs. Wealth-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1983)6ITD326(Ahd.)
AppellantManibhai J. Patel
RespondentWealth-tax Officer
Excerpt:
.....2 to 2g of the rules contain provisions in respect of valuation of interest of a partner in a firm. rule 2c contains provisions regarding the adjustments in the value of an asset not disclosed in the balance sheet of a partnership concerned. sub-rule (b) of rule 2c provides that where a goodwill is purchased by the assessee for a price, its market value or the price actually paid by the assessee, whichever is less, is to be considered in determining the value of the interest of a partner in a firm. in the instant case, it is not in dispute that c.j. patel & co. have not purchased any goodwill for a price. in this view of the matter, we are of considered opinion that the provisions of the said sub-rule (b) are not applicable in the instant case. again it is not in dispute that.....
Judgment:
1. This is an appeal against the order of the Commissioner made under Section 25(2) of the Wealth-tax Act, 1957 ('the Act').

2. The reasons for initiating proceedings under Section 25(2) could be gathered from the following extract of the order of the Commissioner : On going through the wealth-tax assessment records of the assessee for the assessment year 1975-76, it is found that the assessee is a partner in the firm of C.J. Patel & Co., Nadiad, and the value of his share in the firm has been included in the net wealth. However, it is seen that in adopting the share, the WTO has committed a mistake inasmuch as he did not include in the assets the value of the goodwill of the firm in which he was a partner, with the result that the assessee's share in the said goodwill remained to be taxed.

The value of an asset not disclosed in the balance sheet is includible in the wealth of the assessee as provided under Rule 2C(d) of the Wealth-tax Rules, 1957.

2. It is further seen that C.J. Patel & Co., Nadiad, in which the assessee is a partner owned, inter alia, agricultural lands. While computing the net wealth of the firm, the WTO has given deduction in respect of the said land. Under Section 5(l)(i'va), agricultural land belonging to the assessee is exempt. In the instant case, the said land belongs to the firm and the firm is not an assessee under the Wealth-tax Act. As such the exemption under Section 5(1 )(iva) could not have been available to the assessee who did not own the agricultural land. The computation of the wealth made by the WTO is, therefore, wrong.

3. The assessee submitted before the Commissioner that since the good will was a self-generating asset, no value of such goodwill could be con sidered for determining the assessee's share of interest in the firm of CJ. Patel & Co. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294. As regards exemption under Section 5(1)(iva) of the Act, it was submitted that since the land in question was jointly owned by the part ners of the firm, each partner was entitled to claim exemption as contem plated under that section. The Commissioner, however, rejected the contentions of the assessee in following manner : 5. I have considered the arguments put forward by Shri Gandhi. As regards goodwill, it is seen that the firm has been in existence since 1924 and has also been deriving substantial income year after year. The average assessed income during the four years prior to the retirement of the assessee from the firm comes to about Rs. 11,29,000. Thus, it is clear that some goodwill is attached to the firm. It is well settled that goodwill is a valuable asset and the same is includible in the wealth of the assessee. I, accordingly, hold that the assessee's share in the goodwill is includible in the net wealth of the assessee and as the WTO has not included the same in the net wealth, he has committed a mistake which is prejudicial to the interest of the revenue. The decision of the Supreme Court as referred to by the counsel in the case of CIT v. B.C. Srinivasa is not at all applicable as the same related to capital gains and not wealth-tax.

6. Insofar as exclusion of the assets being agricultural land is concerned, it is an admitted fact that the said asset is the property of the firm of which the assessee is one of the partners.

Section 4(1)(b) of the Wealth-tax Act provides for inclusion of the partner's interest in the firm determined in the prescribed manner.

Rule 2(1) of the Wealth-tax Rules prescribes the manner of determination of the value of interest in partnership. Since 'firm' as such is not an assessee and there is no provision that the firm is to be deemed as an assessee for the purpose of valuation of the partner's interest in the firm as per Rule 2, the net wealth of the firm under Rule 2 is to be determined in accordance with commercial principlesCWT v v. Padampat Singhania [1973] 90 ITR 418. It remains to be seen whether the partner is entitled to any exemption under section 5(1) of the Act.

7. It is a well known principle of law that a partner has no right or interest in specie in any asset or property belonging to the partnership. His right merely extends to what he is entitled to after all the partnership accounts are taken and his share in the partnership is ascertained. The right of a partner before or after dissolution of a firm is always to share the profits of the firm which, in the ultimate analysis, means that the net assets of the firm. The right of a partner is not to any particular asset of the firm but only his share in the net funds, to which the assets of the firm are converted. At no time, a partner or a quondam partner could assert his right to a share in any specific property.PL. RM. Arunachalam Chettiar v. CED [1970] 75 ITR 28.

8. This being the position in law as regards the interest of a partner in a firm, the said interest computed in terms of Rule 2 cannot be said to partake the character of individual assets comprised in the firm's estate. In other words, the assessee's interest in the firm in the present case cannot be said to represent, in part, the value of immovable asset, viz., agricultural lands owned by the firm. It is clear, therefore, that the exemption allowed under Section 5(l)(iva), was an error and the order under consideration is prejudicial to the interest of revenue.

9. Since the assessment as framed by the WTO is erroneous insofar as it is prejudicial to the interest of revenue, it is hereby set aside and the WTO is directed to pass fresh order in accordance with law.

4. Being aggrieved by the order of the Commissioner, the assessee has come up in appeal before us. The learned counsel for the assessee submitted that in view of Sub-rule (b) of Rule 2C of the Wealth-tax Rules, 1957 ('the Rules') which reads as under : 2C. The value of an asset not disclosed in the balance sheet shall be taken to be (b) in the case of goodwill purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less ; Since no price was paid by the firm for the purchase of the goodwill, the same could not be considered in determining the assessee's share in the firm of C.J. Patel & Co. Relying on the aforesaid decision of the Hon'ble Supreme Court, the learned counsel for the assessee further submitted that since self-generating asset like goodwill had no value in the beginning, the same could not be considered for the purpose of tax. In this connection, the learned counsel for the assessee relied on the Commentary on Wealth-tax by Verma (Vol. II, pp. 184 & 199) and Gulanikar (p. 874). The learned counsel for the assessee further submitted that since a specific provision is made in the Rules regarding the goodwill, the same cannot be considered under the residuary Sub-rule (d) of Rule 2C, which reads as under : (d) in the case of any other asset, its market value on the valuation date.

He, therefore, urged that the order of the CWT on this point should be set aside.

5. As regards the exemption claimed under Section 5(l)(iva), the learned counsel for the assessee submitted that in view of the decision of the Hon'ble Karnataka High Court in the case of CWT v. Mrs.

Christine Cardoza [1978] 114 ITR 532, the order of the CWT was bad in law and deserves to be set aside.

6. The learned representative for the department, on the other hand, strongly supported the order of the CWT, and justified his action.

Inviting our attention to Sub-rule {b) of Rule 2C of the Wealth-tax Rules, 1957, the learned representative for the department submitted that the provisions of that sub-rule will be applicable only in a case where a goodwill has been purchased by the assessee for a price. Since in the instant case, the goodwill has not been purchased for a price, the provisions of the said sub-rule would not be attracted. According to the learned representative for the department, in the case like the one before us, the provisions of Sub-rule (d) of Rule 2C have to be applied inasmuch as the market value of the goodwill in question on the relevant valuation date has to be determined. Inviting our attention to the aforesaid decision of the Hon'ble Supreme Court, the learned representative for the department pointed out that at page 294 of the report, the Hon'ble Supreme Court had observed that the goodwill is undoubtedly an asset of business but in the context of the provisions of Section 45 of the Income-tax Act, 1961, it cannot be treat ed as an asset in working out the capital gains under the 1961 Act. He, therefore, urged that the said decision of the Hon'ble Supreme Court supports the view of the revenue and not of the assessee in the present case. He, further, submitted that since under the Wealth-tax Act, one has to determine the value of the assets on a particular valuation date, it is of no consequence whether in acquiring an asset the assessee had spent any amount or not. As regards the exemption claimed under Section 5(l)(iva), the learned representative for the department relied on the order of the Commissioner.

7. We have carefully considered the rival submissions of the parties and we do not find any merit in the submissions made on behalf of the assessee in respect of the inclusion of the value of godwill in determining the value of the assessee's share in the firm of C.J. Patel & Co. Wealth-tax is paid on the net wealth as computed under the Act.

Net wealth is arrived at by taking the difference between the aggregate value of the assets as computed under the provisions of the Act and the aggregate value of the debt owed by the assessee on a relevant valuation date. The expression 'asset' is defined under Section 2(e) of the Act to include property of every description movable or immovable with certain exceptions mentioned therein with which we are not concerned in the present appeal. Section 7 of the Act lays down the procedure to determine the value of assets. Rules 2 to 2G of the Rules contain provisions in respect of valuation of interest of a partner in a firm. Rule 2C contains provisions regarding the adjustments in the value of an asset not disclosed in the balance sheet of a partnership concerned. Sub-rule (b) of Rule 2C provides that where a goodwill is purchased by the assessee for a price, its market value or the price actually paid by the assessee, whichever is less, is to be considered in determining the value of the interest of a partner in a firm. In the instant case, it is not in dispute that C.J. Patel & Co. have not purchased any goodwill for a price. In this view of the matter, we are of considered opinion that the provisions of the said Sub-rule (b) are not applicable in the instant case. Again it is not in dispute that the firm had a goodwill even though not shown in the balance sheet and that the assessee had a share therein. Under the circumstances, we are of the view that such goodwill not purchased for a price would fall for consideration under Sub-rule (d) of Rule 2C and, therefore, the Commissioner was fully justified in coming to the conclusion that the WTO should have considered the value of the goodwill in determining the value of the assessee's share in the partnership assets. Again, we entirely agree with the submissions made on behalf of the revenue that the decision of the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) has no application to the facts and circumstances obtaining in the present appeal and if at all it has application, it supports the stand taken on behalf of the revenue. Suffice it to say that the concept of computing the total income, more particularly the computation of capital gains under the Income-tax Act, 1961, is quite different from computing the net wealth under the Wealth-tax Act, 1957.

The net wealth is determined with reference to the relevant valuation date and, therefore, it is of no consequence whether an asset is a self-generated asset or not. As stated above, the provisions of Sub-rule (b) of Rule 2C would come into play only when the goodwill is purchased for a price. Otherwise, the provisions of Sub-rule (d) of RSule 2C would be attracted. For all these reasons, we would uphold the order of the CWT on this point.

8. As regards the assessee's claim for exemption under Section 5(l)(iva), we find force in the submissions made on behalf of the assessee in view of the decision of the Hon'ble Karnataka High Court in the case of Christine Cardoza (supra). Further the decisions of the Hon'ble Patna High Court in the case of CWT v. Nand Lal Man [1980] 122 ITR 781, of the Hon'ble Madhya Pradesh High Court in the case of Narsibhai Patel v. CWT [1981] 127 ITR 633, of the Hon'ble Orissa High Court in the case of CWT v. /. Butchi Krishna [1979] 119 ITR 8 and of the Hon'ble Bombay High Court in the case of CWT v. Vasudeva V. Dempo [1981] 131 ITR 291 also support the stand taken on behalf of the assessee. However, the Hon'ble Madras High Court in the cases of CWT v.Vasantha [1973] 87 ITR 17 and Purushothamdas Gocooldas v. CWT [1976] 104 ITR 608 has taken a view in favour of the revenue. No decision of the Hon'ble Gujarat High Court on this point has been brought to our notice. It is well established principle of law that where two views are possible, the one in favour of the assessee should prevail. In this view of the matter, we are of the opinion that the decision of the CWT relating to the assessee's claim of exemption under section 5(l)(iva) cannot be sustained.


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