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Wealth-tax Officer Vs. Mrs. Premal Kumari Jain - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Chandigarh
Decided On
Judge
Reported in(1984)8ITD897(Chd.)
AppellantWealth-tax Officer
RespondentMrs. Premal Kumari Jain
Excerpt:
.....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. (p. 609) the above came to be considered by the madhya pradesh high court in the case of narsibhai patel (supra) and their lordships distinguished the same as per headnote of the said case in the following words: though a partnership or firm is not a legal person and so cannot hold property, yet the property bought in by the partners for the partnership business cannot be without any owner. such a property really vests in the partners collectively in proportion to their.....
Judgment:
1. The two appeals by the revenue under the Wealth-tax Act, 1957 ('the Act') for the assessment years 1974-75 and 1975-76 and the two cross-objections from the assessee in respect of the very same assessment years since involved certain common issues were heard together and are disposed of by this consolidated order for the sake of convenience.

2. The common ground in both the revenue's appeals is in respect of face value of the assessee's loan advanced to Panipat Woollen Mills Ltd., Kharar, which against the value of nil shown by the assessee was taken by the WTO at Rs. 34,370 and the same was taken at one-third of the same, i.e., Rs. 11,457, by the AAC when the controversy came before him. The assessee in her cross-objections for both the assessment years under consideration has contended that even one-third of the face value of the loan should not have been ordered to be included by the AAC. The facts pertaining to the issue with submissions of the assessee are well detailed in the order of the AAC but the same may be briefly described as under. The assessee had advanced a sum of Rs. 34,370 to Panipat Woollen Mills Ltd. on 1-10-1967 against receipt No. 692 dated 1-10-1967 which was to be repaid back by the assessee in 24 instalments. The said Panipat Woollen Mills Ltd. paid only two instalments and thereafter nothing was paid not only till the loan became time barred but even afterwards. The said loan had become time barred by limitation in 1970.

The assessment year involved is 1974-75 in which the assessee has, therefor, indicated its value at nil. A petition was made by the assessee sometime in June 1977 through the Commissioner of Complaints, Government of India, which was later on rejected, as per observations of the said Commissioner of Complaints marked as "Time barred claim.

May be returned." The WTO took the stand that since the assessee was making efforts of recovery, the same was includible in the wealth of the assessee. When the issue came before the AAC, he came to the conclusion that in the light of the assessee's claim made to the Commissioner of Complaints the said loan did have some value but it should not have face value at nil and, therefore, ordered the inclusion of only one-third of the value of the loan. The revenue in its two appeals have disputed this action of the AAC whereas the assessee as a cross-objector has objected even inclusive of one-third value of the said loan.

3. The learned counsel for the assessee, Mr. K.C. Jain, submitted that simply because the assessee made an effort to revive back the dead horse could not be a base for including even value of the loan at one-third. The learned departmental representative, Mr. M. P. Singh, on the other hand, submitted that said mill was declared as sick mill as late as in June 1977 and, therefore, in 1974-75 assessment year saying that the value of the loan was nil is against facts.

4. After taking into consideration the rival submissions and looking to the facts in detail, we find that there is no dispute about the fact that the loan had become 'time barred' as early as in 1970 and any effort made by the assessee thereafter for recovery of the same was futile. Simply because subsequently in 1977 an effort was made by the assessee would not make the value of the said loan one-third of the face value because under the Act what we are concerned with is the market value of an asset. Under the circumstances where the loan had become time barred, the debtor company had defaulted continuously right from 1969 after payment of two instalments, the rigour of litigation specially places the revenue on a slippery ground and the revenue could not increase the market value of the said loan to anything more than nil. No addition, therefore, on this account to the wealth of the assessee was called for. The cross-objections of the assessee for both the years under consideration in this respect are allowed and the appeals of the revenue for these years are, thus, dismissed.

5. Now what survives for our consideration is the first ground in cross-objection of the assessee pertaining to the assessment year 1974-75, which is in respect of the action of the AAC upholding the disallowance of claim of Rs. 19,760 being the value of exempted assets from the share capital of the firm in which the assessee cross-objector was a partner on the ground that the assets for which exemption was claimed was held by the firm. The facts pertaining to the issue in the background are in short compass. The assessee was a partner in the firm styled as Pritam Preet Mohinder Singh Jain & Co. and her share capital was Rs. 94,786. The firm had certain exempted assets standing in its name such as fixed deposit receipts and other deposits. The WTO added the assessee's share capital at Rs. 94,786 but did not allow the benefit of exemption in respect of exempted assets to the assessee which was Rs. 19,760. When it came before the AAC, he observed that the partner's interest in a firm is always a movable asset. So long as the firm subsists he cannot claim any specific interest or right in a particular asset owned by the firm. It was in these circumstances that the action of the WTO rejecting the assessee's claim came to be confirmed by the AAC.6. While disputing this action of the AAC, the learned counsel for the assessee relied on Sections 7(1) and 4(1)(b) of the Act, Rule 2 of the Wealth-tax Rules, 1957 ('the rules') and on the cases of Narsibhai Palel v. CWT [1981] 127 ITR 633 (MP), CWT v. Narendra Ranjalker [1981] 129 ITR 203 (AP) and CWT v. Nand Lal Man [1980] 122 ITR 781 (Pat.) against which the learned departmental representative beside relying on the order of the AAC relied on the cases of Addanki Narayanappa v.Bhaskara Krishnappa AIR 1966 SC 1300 and Purushothamdas Gocooldas v.CWT [1916] 104 ITR 608 (Mad.).

7. After taking into consideration the rival submissions and going through the said Sections relied upon by the learned counsel for the assessee, we are unable to confirm the action of the AAC in this regard as well. There is no dispute about the fact that the assessee was a partner in the firm styled as Pritam Preet Mohinder Singh Jain & Co. in which share capital of the assessee was Rs. 94,786 and her share was one-third. There is no dispute about the fact that the said firm held FDRS and other exempted assets in a sum of Rs. 57,000 and odd. The two cases relied upon by the learned departmental representative having not only been distinguished but dissented by subsequent decisions with which we will be dealing with afterwards. Undoubtedly it was the case of Addanki Narayanappa (supra) which was applied by their Lordships of the Madras High Court in the case of Purushothamdas Gocooldas (supra) in which it was held 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. (p.

609) The above came to be considered by the Madhya Pradesh High Court in the case of Narsibhai Patel (supra) and their Lordships distinguished the same as per headnote of the said case in the following words: Though a partnership or firm is not a legal person and so cannot hold property, yet the property bought in by the partners for the partnership business cannot be without any owner. Such a property really vests in the partners collectively in proportion to their shares in the firm although the right of ownership of each partner in respect of that property is restricted by the contract of partnership and the very nature and character of the collective business called the partnership business for which the property is to be utilised. Therefore, the deposits made by a partnership in a bank are in law held by the partners in proportion to their shares in the partnership and each partner is entitled to the benefit of the exemption contained in Section 5(1)(xxvi) of the W.T. Act, 1957, in his individual assessment to the extent of the maximum prescribed by Section 5 (1 A).

This view is also supported by Rule 2 of the Wealth-tax Rules, 1957, which directs the determination of the net wealth of the firm and then the allocation of that net wealth to the individual partners.

The expression 'net wealth' as used in Rule 2 has to be understood in the sense as defined in Section 2(m). Rule lA(m) expressly provides that expressions not defined in the Rules have the same meaning as assigned to them in the Act. There is no definition of the expression 'net wealth' in the Rules and, therefore, the definition as contained in Section 2(m) has to be applied and that definition does not bring in the exemption contained in Section 5.

The determination of the net wealth of the firm for purposes of Rule 2 will, therefore, not take into account the exemptions contained in Section 5. (p. 633) Similarly the Patna High Court distinguished the case of Addanki Narayanappa (supra) and dissented from the case of Purushothamdas Gocooldas (supra) and the headnote of the case of Nand Lal Jalan (supra) read as under: The assessee, an individual, was one of the two partners of a firm.

The value of his interest in the firm had to be included in his net wealth. Besides other assets, the firm owned a house, which was used by both the partners for the purpose of their residence. The value of the interest of the assessee in the firm had to be determined under Rule 2 of the Wealth-tax Rules, 1957. That rule required the net wealth of the firm to be determined and allocated to the partners, according to their shares in the capital. The assessee claimed that in computing the net wealth of the firm under Rule 2, the sum of Rs. 1 lakh had to be deducted from the value of the house in accordance with Section 5(1)(iv) of the Wealth-tax Act, 1957. The Tribunal accepted the claim of the assessee. On a reference: Held, that in determining, for the purpose of the net wealth of the assessee, the net wealth of the firm by reference to Rule 2, the exemption under Section 5(1)(iv) was admissible.

A firm is not a legal entity even though it has some attributes of personality. 'Firm' is a compendious expression to designate an entity, not a person. What is called property of the firm is the property of the partners and what are called debts and liabilities of the firm are their debts and liabilities. During the subsistence of the partnership, assets thrown into the partnership by the partners get merged together and lose their identity. All the same, the assets as a whole belong to the partners. In computing the net wealth of the firm by reference to Rule 2, if a partner qualifies for any exemption provided under the Act, such exemption must be taken into consideration in determining the net wealth of the firm.

Where a firm owns a house and a partner resides in a portion of the house, the exemption provided by Section 5(1)(iv) should be taken into consideration in determining the net wealth of the firm. It is a simple formula that if a thing is available to all jointly, the pro rata share of each one individually cannot be denied to the individual. (p. 781) Their Lordships of the Andhra Pradesh High Court in the case of Narendra Ranjalker (supra) while dealing with the expression 'net wealth' in Rule 2 as per its headnote held as under: The expression 'net wealth' in Rule 2 of the Wealth-tax Rules, 1957, which prescribes the manner of computation of the value of the interest of a partner in the firm, as understood in the light of the definition in Section 2(m) of the Wealth-tax Act, 1957, means the total amount of net wealth of the firm arrived at in accordance with the provisions of the Wealth-tax Act, as if the firm were an assessee. Therefore, while computing the interest of a partner in the firm in terms of Section 4(1)(6) of the Wealth-tax 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. The expression 'net wealth' has been deliberately used in Rule 2 of the Wealth-tax Rules, 1957. If the intention were otherwise, the rule making authority could have said that the interest of the partners in the assets of the partnership firm shall be included in the net wealth of the firm in accordance with the profit sharing ratio or as per the shares prescribed in the partnership deed. Therefore, where the partnership firm invests in fixed deposits in a scheduled bank, before computing the interest of a partner in such a partnership firm, under Section 4(1)(6) of the Act, the net wealth of the firm must be computed, and in so computing the net wealth of the firm, the firm is entitled to deduction of deposits in a scheduled bank to an extent of Rs. 1,50,000 under Section 5(1)(xxvi) read with Section 5(1A) of the Act. The partner will not thereafter be entitled to exemption in regard to his share of the bank deposits held by the firm.

It is, however, open to the partner to claim a separate deduction in respect of deposits held by the partner individually other than by way of a share in the firm. (p. 204) In this case as well the cases of Purushothamdas Gocooldas and Addanki Narayanappa (supra) were considered.

With the above cases in favour of the assessee, on the one hand, and reading of Sections 7(1), 4(1)(6) and Rule 2, it convinces us to accept the contention of the assessee. The CO of the assessee is, therefore, allowed.

8. In the result, the revenue's appeals are dismissed and the assessee's cross-objections are allowed.


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