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Smt. Vasanthakumari Vs. Third Wealth-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Bangalore
Decided On
Judge
Reported in(1984)9ITD877(Bang.)
AppellantSmt. Vasanthakumari
RespondentThird Wealth-tax Officer
Excerpt:
.....is the partners who own jointly or in common the assets of the partnership. when one talks of the firm's property or firm's assets, all that is meant is property or assets in which all partners have a joint or common interest.in cwt v. mrs. christine cardoza [1978] 114 itr 532 (kar.) the assessee and four others owned an estate in partnership. the claim of the assessee was that deduction of rs. 1,50,000 under section 5(1)(iva) of the act should be given in the partner's hands and not in the hands of the firm. this contention was accepted by the karnataka high court. it was held that it is difficult to hold that the assessee was not the owner of the agricultural lands so as to deny deduction under section 5(1)(iva). the deduction contemplated is in the computation of net wealth of an.....
Judgment:
1. The assessee, Smt. Vasanthakumari, became a partner in Alermel Technicals with 40 per cent share as per the partnership deed dated 28-3-1980. Towards her capital, she agreed to transfer her immovable property at No. 853, Indiranagar II Stage, Bangalore, to the firm which is to be taken as an asset of the firm. In the wealth-tax assessment of the assessee, she claimed exemption of her capital standing in the credit of the firm on the ground that the partnership is one at will and the property acquired has not exceeded for more than six years. The WTO did not accept this submission. He included in the net wealth the value of her share in the firm. On appeal, the AAC upheld the same.

2. The learned Counsel for the assessee strongly urged that the firm has commenced on 28-3-1980. The partnership being one at will can be terminated at any time. Hence, the property acquired was not for more than six years as the duration of the partnership being one at will.

Thus, the assessee is entitled for exemption under Section 2(e)(1)(v) of the Wealth-tax Act, 1957 ('the Act'). The learned departmental representative submitted that the interest in partnership is an asset and the value of the assessee's share in the firm is includible in her total income. He submitted that Section 2(e)(1)(v) refers to short-lived assets and that has no application to an interest in partnership. It is Section 4(1)(b) of the Act which applies. He placed reliance on few decisions.

3. We have considered the rival submissions. Section 2(m) defines 'net wealth' which means any amount by which the aggregate value of all the assets belonging to the assessee on the valuation date which is in excess of the aggregate value of all the debts owed by the assessee.

Section 2(e) defines 'assets' which includes property of every description, movable or immovable, but does not include those stated in Sub-clause (7) therein. Sub-clause (1)(v), which is relevant for our purpose, reads as under : any interest in property where the interest is available to an assessee for a period not exceeding six years from the date the interest vests in the assessee ; Under the above provision any interest in property which does not exceed six years is excluded from the definition of 'assets'. The said provision, i.e., Section 2(e)(1)(v), has no application to interest in partnership. There is no doubt that interest in partnership is an asset. It is Section 4(1)(b) which applies in the case of interest in partnership. Section 4(1)(b) reads as under : (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 (not being a co-operative housing society), the value of his interest in the firm or association determined in the prescribed manner.

Rule 2 of the Wealth-tax Rules, 1957, deals with valuation of interest of a partner in partnership. It is clear from the above provision that if an assessee is a partner in a firm, the value of his interest in the firm is includible in his/her net wealth. The value of it is determined as per Rule 2. In view of the above provision the value of the assessee's interest in the partnership is clearly includible in her net wealth. We are unable to agree with the contention that once the partnership is one at will, the interest in partnership property should be taken as available for a period not exceeding six years. Hence, Section 2(e)(1)(v) cannot be applied to the assessee's case. That provision would be applicable only where it is established that the assessee is entitled to enjoy the beneficial interest for a period not exceeding six years. Even if the partnership is one at will, it is not possible to hold that the interest of the assessee in the partnership does not exceed for six years. No material has been placed on record to prove that the assessee's interest in partnership does not exceed six years. In this connection, we may refer to a decision of the Bombay High Court in Tanil Ramdas v. CWT [1981] 132 ITR 92. The Bombay High Court considered the provisions of item (v) of Section 2(e)(1). It is observed as under : ... The learned Counsel, therefore, contended that it cannot be said with any certainty that after the vesting date the assessee would necessarily survive for a period of more than six years, and, therefore, according to the learned Counsel, the value of this contingent interest was to be excluded from the net wealth of the assessee. It is not possible for us to accept this contention. It appears to us that where the interest of the kind referred to in Clause (v) in the definition under Section 2(e)(1) is sought to be excluded for the purpose of the computation of the net wealth of the assessee, such interest does not automatically cease to be property under the general law. The provision in Clause (v) is a special provision made for the purposes of wealth-tax, and, therefore, when that provision refers to the interest being available for a period not exceeding six years, in our view, that clause will be applicable only where it is possible to be positively established on record on such material as is available, that the assessee is not entitled to enjoy the beneficial interest for a period exceeding six years. On the mere possibility of the assessee not being alive beyond six years from the vesting date provided in the trust deeds, his case will not fall within Clause (v) of Section 2(e)(1). This contention must, therefore, be rejected....

It was held therein that the said item will be applicable where it is established that the assessee is not entitled to enjoy the beneficial interest for a period exceeding six years. The above ratio squarely applies to the instant case.

4. The provisions of Sections 4(1)(b), 2(m) and 2(e) have been considered by the Supreme Court in Juggilal Kamlapat Bankers v. WTO [1984] 145 ITR 485. It was held therein that a partner's interest in a firm either in his individual capacity or as the karta of a HUF, is property or an asset liable to be included in the net wealth of the assessee and is exigible to wealth-tax. After referring to Section 4(1)(b) it was observed as under : ... It cannot be said that the interest of a partner in a firm does not belong to him ; it in fact, belongs to him and no legal fiction is required for treating it as belonging to him ; and the proper way to interpret Clause (b) would be that the deeming part of it relates to the quantum of his interest in the firm determined in the prescribed manner which is to be treated as belonging to him and includible in his net wealth. It is impossible to accept the contention that but for Clause (b) of Section 4(1) the interest of a partner (where he happens to be an individual assessee) in a firm would not have been exigible to wealth-tax under the Act. As we shall presently point out a partner's interest in a firm either in his individual capacity or in his capacity as the karta of an HUF is otherwise exigible to wealth-tax under the other provisions of the Act and the deeming provision contained in Section 4(1)(b), properly understood, must be held to be referable to the quantification 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 eligibility of a partner's interest in a firm either in his individual capacity or in his capacity as the karta of an HUF to wealth-tax under the Act....

On reading the aforesaid provisions together, it will appear clear that wealth-tax has been levied on the net wealth of an individual or an HUF, 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 HUF is property, the same would be includible in the expression 'assets' which will have to be taken into account while computing the net wealth of such individual or HUF and on such net wealth the charge of wealth-tax has been imposed under Section 3. It is thus clear that there is not lacuna in the Act as regards the making of a karta's interest (representing his HUF) in the partnership firm exigible to wealth-tax....

Thus, it has been held by the Supreme Court in the above case that the interest of a partner in a firm belongs to him and is includible in his net wealth. The above decision is directly on the point and squarely applies to the instant case.In Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300 the Supreme Court held that no doubt since a firm has no legal existence, the partnership property will vest in all the partners and in that sence every partner has an interest in the property of the partnership.

During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. His right is to obtain such profits, if any, as fallen to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities. Thus, it is clear from the above decision that the partnership property will vest in all the partners.

6. In Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 the Supreme Court held that it is the partners who own jointly or in common the assets of the partnership. When one talks of the firm's property or firm's assets, all that is meant is property or assets in which all partners have a joint or common interest.

In CWT v. Mrs. Christine Cardoza [1978] 114 ITR 532 (Kar.) the assessee and four others owned an estate in partnership. The claim of the assessee was that deduction of Rs. 1,50,000 under Section 5(1)(iva) of the Act should be given in the partner's hands and not in the hands of the firm. This contention was accepted by the Karnataka High Court. It was held that it is difficult to hold that the assessee was not the owner of the agricultural lands so as to deny deduction under Section 5(1)(iva). The deduction contemplated is in the computation of net wealth of an assessee and not a firm which is not the assessee. The above decision was rendered on the footing that the property of the firm vests in all the partners and so, deduction under Section 5(1)(iva) is allowable in the hands of the partner.

7. The principle that emerge from the above decisions is that the partnership property will vest in all the partners and every partner has an interest in the property of the partnership. The interest of a partner in a firm belongs to him and it is exigible to wealth-tax.

Section 2(e)(1)(v) will be applicable only where it is established that the assessee is not entitled to enjoy the beneficial interest for a period exceeding six years.

8. Applying the above principles, we hold that Section 4(1)(b) would be applicable and the interest of a partner in a firm is exigible to wealth-tax. The provisions of Section 2(e)(1)(v) will have no application to an interest in partnership. Section 3 of the Act and Section 4(1)(b) read with the definitions 'net wealth' as given in Section 2(m) and 'assets' given in Section 2(e) clearly brings out the exigibility of partner's interest in a firm to wealth-tax in his hands.

Thus, the lower authorities were justified in including the value of the assessee's share in the partnership in her net wealth. We uphold the order of the AAC.


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