1. The assessee is one of the partners in the firm Nainsukhdas Jainarain holding one-third share therein. The controversy involved in the present appeals concerns with the determination of the value of his share in the said firm. The said firm owns, inter alia, certain shares, the book value of which in respect of the various valuation dates was as follows : 2. The total value of all the assets of the firm on the respective valuation dates was as follows : year balance sheets of the respective years Rs. Rs. As against the above value of the assets, the capital of the partners as far as can be seen from the balance sheets in question was as follows, remaining amount being borrowings :Assessment Total capital of Borrowings Total year the partners Rs. Rs. Rs. Rs.1977-78 12,99,431 6,97,166 19,96,5971978-79 11,58,214 8,87,515 20,46,0191979-80 13,41,380 11,29,306 24,70,686 3. The WTO computed the value of the assessee's share on the basis of his capital investment in the firm plus the proportionate difference in the book value of certain assets including shares and the market value of the said assets. He did not grant to the assessee any relief in respect of the exempted assets in terms of Section 5 of the Wealth-tax Act, 1957 ('the Act') either while computing the net wealth of the firm or while computing his own net wealth. While doing so, the WTO made the following observations : Although the assets of the firm includes value of house property and of shares but no deduction under Sections 5(1)(iv) and 5(1)(xxiii) are allowed as the assessee is not the owner of the assets but the ownership lies with the firm. Besides, the assessee's interest in the firm has been computed under Rule 2(1) of the Wealth-tax Rules and there is no provision of allowing such deduction under the rules.
4. The assessee was not satisfied with the above order of the WTO and, therefore, he appealed to the learned AAC. The learned AAC directed that relief to the assessee with regard to the house property in terms of Section 5(1)(iv) be allowed following the decision of th6 Tribunal Bench 'B' in WT Appeal Nos. 671 and 672 (Cal.) of 1979, dated 16-2-1981. With regard to the shares, however, the learned AAC did not concede the assessee's request. He confirmed the order of the WTO agreeing with the reason given by him in this regard.
5. The assessee feels aggrieved of the aforesaid order of the learned AAC and it is the contention of the learned counsel for the assessee before us that following the reasoning given by the Tribunal in the case of house property in the aforementioned appeals, relief ought to have been granted to the assessee in respect of the corresponding value of the shares also.
7. We have given careful consideration to the rival submissions. The valuation of the share of a partner in a firm is governed by the statute. In terms of Clause (b) of Sub-section (1) of Section 4 of the Act, the value of the interest of a partner in the firm has to be 'determined in the prescribed manner'. Sub-section (2) of Section 4 stipulates that : In making any rules with reference to the valuation of the interest refer red to in Clause (b) of Sub-section (1), the Board shall have regard to the law for the time being in force relating to the manner in which accounts are to be settled between partners of a firm ...
on the dissolution of a firm ....
8. The provisions pertaining to the settlement of accounts amongst the partners are contained in Section 48 of the Indian Partnership Act, 1932. The said section reads as follows : 48. Mode of settlement of accounts between partners.-In setting the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed : (a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.
(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order :- (ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital ; (iii) in paying to each partner rateably what is due to him on account of capital; and (iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.
The above section is modelled on the pattern of Section 44 of the Partnership Act, 1890, of the United Kingdom. Lindley on Partnership has explained the above scheme of settling the accounts amongst the partners in the following words : It follows from the rules contained in the above section that if the assets are not sufficient to pay the debts and liabilities to non-partners, the partners must treat the difference as a loss and make it up by contributions inter se. If the assets are more than sufficient to pay the debts and liabilities of the partnership to non-partners, but are not sufficient to repay the partners, their respective advances, the amount of unpaid advances ought to be treated as a loss, to be met like other losses. In such a case the advances ought to be treated as a debt of the firm, but payable to one of the partners instead of to a stranger. If, after paying all the debts and liabilities of the firm and the advances of the partners, there is still a surplus, but not sufficient to pay each partner his capital, the balances of capitals remaining unpaid must be treated as so many losses to be met like other losses.
The above scheme, as contained in Section 48 of the partnership Act was also considered by their Lordships of the Hon'ble Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300.
Their Lordships explained the scheme of Section 48 in the following terms : From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property, of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense 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. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remains after satisfying the liabilities set out in Clause (a) and Sub-clauses (i),(ii) and (ii) of Clause (b) of Section 48. ... (p. 1303) Their Lordships approvingly quoted the following extracts from Lindley on Partnership, 12th edn. at p. 375 : What is meant by the share of a partner is his proportion of the partnership assets after they have been all realised and converted into money and all the partnership debts and liabilities have been paid and discharged. This it is and this only which on the death of a partner passes to his representatives, or to a legatee of his share...and which on his bankruptcy passes to his trustee'. (p.
1303) 9. It is the above scheme of the settlement of accounts between the partners, which has been directed by Sub-section (2) of Section 4 to be incorporated in the rules to be made in terms of Clause (b) of Sub-section (1) of Section 4 aforesaid. Rule 2 of the Wealth-tax Rules, 1957 ('the Rules') is the rule pertaining to the subject-matter.
Sub-rule (1) of the said rule reads, inter alia, as follows : The value of the interest of a person in a firm of which he is a partner ... shall be determined in the manner provided herein. The net wealth of the firm ... on the valuation date shall first be determined. That portion of the net wealth of the firm...as is equal to the amount of its capital shall be allocated amongst the partners...in the proportion in which capital has been contributed by them. The residue of the net wealth of the firm ... shall be allocated amongst 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. The sum total of the amounts so allocated to a partner...shall be treated as the value of the interest of that partner... in the firm. ....
10. A combined reading of the aforesaid provisions indicates that the share of a partner in the firm has to be determined more or less on the same principles as are contained in Section 48 even though on the valuation date the firm does not stand dissolved. The share of a partner under Section 48 does not extend to any particular asset of the firm as such, but to the excess of the value of all the assets over all the liabilities of the firm. A partner can claim his shares only in such excess. If there be no excess, he will have no share in the firm even though the assets of the firm may be numerous. The assets, no doubt, belong to all the partners jointly, but no individual asset of a firm, whether it be shares or property, would belong to a partner individually. This being so, the contention of the assessee that the shares belonged to him and that, therefore, he should be allowed exemption in respect thereto under Section 5(1)(iv) cannot be sustained. What belongs to the partners is not pro rata share in the shares of the various companies owned by the firm, but a pro rata share in the excess of the assets over the liabilities. In the present case we have noted that the assets in all the years far exceed the capital of the partners. No individual asset can be said to be belonging to any partner for if that were so, the partners would be asking for much more than what they are entitled to after paying off their liabilities of the firm. In law, it is not possible to own an asset without discharging liabilities. To say, therefore, that the assets of a firm belong to an individual partner, pro rata would be against the law. All of them belong to all the partners jointly, but none of them belongs to an individual partner individually. What belongs to an individual partner is his pro rata share in the excess of all the assets over the liabilities and not a pro rata share in each individual asset.
11. At the same time, it would not be correct to say that the relief under Section 5(1)((iv) cannot be granted to a partner in respect of the exempted assets. What all the partners are entitled in their individual capacities would be eligible to them with regard to the assets owned by them jointly also. The relief cannot be denied to them only because they owned the assets jointly and not individually. The law on this point was well brought out by their Lordships of the Hon'ble Patna High Court in the case of CWT v. Nand Lal Jalan  122 ITR 781, when they made the following observations, explaining this aspect of the law : Now, therefore, keeping in view the above discussions, it cannot but be said that even though during the subsistence of a partnership, assets thrown into the partnership by the partners get merged together and lose their identity, yet all the same, the assets as a whole do belong to the partners. In computing the net wealth of the firm by reference to Rule 2 of the Wealth-tax Rules, if a partner qualified for any of the exemptions provided under the Act, such exemptions must be taken into consideration for determining the net wealth of the firm, in terms of the said rule... (p. 788) 12. In view of the above law, we hold that while computing the net wealth of the firm the exemption available to all the partners in terms of Section 5(1)(xxiii) ought to be allowed while computing the net wealth of the firm. The shares may not belong to an individual partner, but they do belong to all the partners and, therefore, while computing the net wealth of the firm, due recognition of this joint ownership has to be taken and due relief as provided under the law has to be allowed.
The WTO was, therefore, wrong in not granting exemption in respect of the shares while computing the net wealth of the firm. He should now recompute the net wealth of the firm after deducting the exemption under Section 5(1)(xxiii) read with Section 5(1A) from the net wealth of the firm. The proportionate share of the partner will be computed with reference to such net wealth and not with reference to the net worth of the firm as was done by the WTO.13. Subject to the above observations, the appeals of the assessee are partly allowed.