Skip to content


Wealth-tax Officer Vs. V.V.V.A. Dinakaran - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1991)39ITD520(Mad.)
AppellantWealth-tax Officer
RespondentV.V.V.A. Dinakaran
Excerpt:
1. "do the balances standing to the credit of the current accounts of the partners constitute a debt owed by the firm to the partners in the context of the exemption available under section 5(1)(xxxii) of the wealth-tax act, 1957 ?"-this is the single common question that arises for consideration in these appeals.2. the assessees before us were, at the relevant point of time, partners in various firms. dinakaran and mahendran were partners in m/s. v.v. vanniaperumal & sons, virudhunagar. muthu was a partner in the said firm as also in the firm of m/s. v.v.v. anandam & bros., while asokan was a partner in m/s. rajendran & co. in respect of all the assessees before us, the 31st day of march each year is the relevant valuation date.3. the capital to be contributed by each of the.....
Judgment:
1. "Do the balances standing to the credit of the current accounts of the partners constitute a debt owed by the firm to the partners in the context of the exemption available under Section 5(1)(xxxii) of the Wealth-tax Act, 1957 ?"-This is the single common question that arises for consideration in these appeals.

2. The assessees before us were, at the relevant point of time, partners in various firms. Dinakaran and Mahendran were partners in M/s. V.V. Vanniaperumal & Sons, Virudhunagar. Muthu was a partner in the said firm as also in the firm of M/s. V.V.V. Anandam & Bros., while Asokan was a partner in M/s. Rajendran & Co. In respect of all the assessees before us, the 31st day of March each year is the relevant valuation date.

3. The capital to be contributed by each of the assessees to the aforesaid firms were fixed sums, as stipulated in the respective partnership deeds. The amount thus contributed stood credited to their respective Capital Accounts. They also had a current account each in the firms. Their shares in the profit of the firms were credited only to the current account. In some cases, other types of income/receipt of the partners, such as rent etc., were also credited to the current account. At times, the partners brought in money which was also credited to the current account. And, depending upon the amounts standing to the credit of the current accounts from time to time, interest was paid by the firm to the partners, which was also credited to the current account. The salient features of the relevant partnership deeds will be noticed at the appropriate time. For the nonce, however, suffice it to note that the fixed capital contributed by the partners did not carry interest, while the sums advanced by the partners to the firm over and above the fixed capital did carry interest.

4. In the course of the assessment proceedings for the assessment year 1988-89 in the case of Asokan, and for the assessment years 1986-87 and 1987-88 in the case of the others, the assessees claimed that the balances standing to the credit of their current accounts in the books of account of the firm should not be treated as debts owed by the firm to them for purposes of calculating the exemption admissible under Section 5(1)(xxxii) of the Wealth-tax Act, 1957. The Assessing Officer negatived the said claim on the ground that the amounts standing to the credit of the current accounts of the partners represented debt owed by the firm to the partners. In this regard, the Assessing Officer referred to and relied upon the Kerala High Court case of CIT v. Smt.

K.K. Yeshodhara [1987] 166 ITR 354.

5. The first appellate authority allowed the assessee's claim. In this regard, he relied on the Supreme Court case of Malabar Fisheries Co. v.CIT [1979] 120 ITR 49 for the proposition that firm as such has no legal recognition. He also relied upon the circumstance that the first appellate authority had allowed such a claim in two other cases, namely those of Smt. N. Theivajothi Ammal [WT Appeal No. 937 (Mad.) of 1989, dated 11-7-1990], and Smt. Sarojini Ammal [WT Appeal Nos. 355 to 358 (Mad.) of 1990, dated 15-11-1990].

7. Shri P.A. Iyengar, the learned Departmental Representative, strongly contended that the ruling in the Kerala case of Smt. K.K. Yeshodhara (supra) is squarely applicable to the facts of the case before us and that, therefore, the department is entitled to succeed. He also contended that the Supreme Court ruling in the case of Malabar Fisheries Co. (supra), which came to be rendered in an altogether different context, cannot avail the assessees.

8. On his part, Shri S. Shanmughavel, the learned counsel for the assessee, strongly supported the impugned orders of the first appellate authority. He drew our attention to the fact that, in the case of Smt, Theivajothi Ammal (supra) the Tribunal had decided the matter in favour of the assessee. He drew our attention to the further fact that in the case of Smt. Sarojini Ammal (supra) the Tribunal had followed the aforesaid decision of the Tribunal in the case of Smt. Theivajothi Ammal (supra). Shri Shanmugavel, therefore, contended that the impugned orders of the first appellate authority do not invite any interference.

9. We have looked into the facts of the case. We have considered the rival submissions. In this case, two branches of law, namely the Wealth-tax Act, 1957 and the Indian Partnership Act, 1932 meet and cross.

10. We may first notice the relevant provisions of the Wealth-tax Act, 1957. Under the scheme of the Act, wealth-tax is charged on the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company. Section 2 (m) of the Act defines the term "net wealth". Broadly speaking, net wealth is the excess of the aggregate value of all the assets which come within the pale of the Act over the aggregate value of the debts (other than those specifically excluded by the Act) owed by the assessee on the valuation date.

11. Section 5 of the Act lists assets which shall not be included in the net wealth of the assessee. It also prescribes certain limits beyond which exemption is not available, but this need not detain us here.

12. It is well settled that the partner of a firm has a marketable interest in all the assets of the firm even during the subsistence of the partnership-see CED v. Mrudula Nareshchandra [1986] 160 ITR 342 (SC). Under Section 4(1)0) of the Act, such interest is to be included in the net wealth of the assessee. This is so irrespective of whether a person is a partner in a firm in his individual capacity or in his representative capacity as the Karta of a HUF-see Juggilal Kamlapat Bankers v. WTO [1984] 145 ITR 485 (SC).

13. Section 7(1) of the Act read with Rule 2 of the Wealth-tax Rules, 1957 prescribes the manner in which an assessee's interest in partnership or A.O.P. is to be valued.

(i) The net wealth of the firm/association on the valuation date (applicable to the wealth-tax assessee) is determined.

(ii) That portion of the net wealth of the firm/association as is equal to its capital (as on the valuation date applicable to the assessee, naturally is carved out of the aforesaid net wealth, and allocated amongst the partners/members in the proportion in which capital has been contributed by them.

(iii) The residue of the net wealth is thereafter allocated amongst the partners/ members in accordance with the agreement of partnership/association for the distribution of assets in the event of dissolution of the firm/association, or, in the absence of such agreement, in the proportion in which the partners/members are entitled to share the profits of the firm/association.

(iv) The sum total of the amount allocated under (ii) & (Hi) above represents the value of the assessee's interest in the firm/association.

14. Now, as a matter of State policy, and with a view to giving fillip to the development and growth of industry, Parliament have from time to time given various tax incentives, such as "Tax Holiday" (see Section 80J of the Income-tax Act, 1961). Section 5(1)(xxxii) of the Wealth-tax Act, which was inserted by Finance Act, 1972 with effect from 1-4-1973, is one such incentive in the field of wealth taxation. The scheme of the section is to exempt from wealth-tax that part of the value of interest of the assessee in certain specified assets forming part of an industrial undertaking belonging to a firm or an A.O.P., of which the assessee is a partner, or, as the case may be, a member.

15. Rule 2-I of the Rules prescribes the mode and mechanics of computing the exemption. The steps involved are:- (iii) assets in respect of which exemption has been specifically provided in any other clause of Section 5(1).

(c) Reduce the aggregate value of the assets by the value of the debts owed by the firm or association which are secured on, or which have been incurred in relation to such assets.

(d) From the figure thus obtained, deduct the capital of the Firm/Association (on the relevant valuation date applicable to the wealth-tax assessee, of course) and allocate the capital amongst the partners/members in the proportion in which capital has been contributed by them.

(e) Thereafter, allocate the residue, if any, of the net value of such assets among the partners or members in accordance with agreement of partnership/association for the distribution of assets in the event of dissolution of the firm or association, and in the absence of such agreement, in the proportion in which the partners or members are entitled to share profits.

(f) The sum total of the amounts allocated to the partner or member under the immediately preceding two steps represents the value of interest of that partner or member in the assets of the firm or association, which is eligible for exemption.

16. A comparison of the provisions of Section 7(1) of the Act, read with Rule 2, on the one hand, and those of Rule 2-I on the other, will make it clear that the exemption available under Section 5(\)(xxxii) can never exceed the value of the assessee's interest in partnership or association of persons. It will generally be less; though it may in certain circumstances be equal to assessee's interest in partnership or association. This is mainly due to two reasons: first, land or building, or any right in any land or building is left out of reckoning for purposes of computing the exemption; and secondly, only those debts owed by the firm or association, which are secured on or which have been incurred in relation to the assets that qualify for exemption under Section 5(1)(xxxii) are taken into account.

17. Though Rule 2-I of the Wealth-tax Rules, 1957 talks of "the debts owed by the firm or association", neither the Rules nor the Act contain any definition of the term "debt owed by the firm or association". Even so, there is no difficulty in understanding the said term in the context of the debts owed by the Firm/Association to outsiders.

Difficulties, however, arise when we consider the question whether at all a Firm/ Association can be a debtor to its partners/members and, if so, in what circumstances. It is here that the provisions of the Indian Partnership Act, 1932 come into the picture.

18. It is well settled that, unlike the Scottish Law, which invests a firm with a personality of its own, the Indian and the English Laws do not recognise a firm as an entity apart from the persons constituting it. As pointed out by the Privy Council in the case of Bhagwanji v.Alembic Chemical Works AIR 1948 PC 100, the Indian Partnership Act, 1932 goes further than the English Partnership Act, 1890 in recognizing that a firm may possess a personality distinct from the persons constituting it. The Indian law in that respect is more in accord with the Scottish Law than with the English Law. Yet, the Indian Act, like the English Act, avoids making a firm a corporate body, enjoying the right of perpetual succession.

19. In the case Jabalpur Ice Mfg. Association v. CIT [1955] 27 ITR 88, the Nagpur High Court had an occasion to consider, in the context of Section 26A of the Income-tax Act, 1922, the question whether a firm as such is entitled to enter into a partnership with another firm or individuals. On an exhaustive review of the case law on the subject, the Nagpur High Court ruled that even though the Indian Partnership Act, 1932 treats the firm as distinct from its members in certain respects, yet it does not invest the firm with a legal personality capable of entering into a partnership with another firm or individuals. In that regard the Court further ruled that the definition of the term 'person' contained in Section 3(42) of the General Clauses Act could not be imported to hold that a firm was a person, and that consequently it can enter into a partnership with another firm or individuals.

Of relevance to the purpose on hand is the fact that the High Court noticed that in the following respects the Act treated the firm as distinct from its members :- Sections 14 and 15 of the Act-The property of the firm is treated as being different from the property of the partners; Section 16 of the Act-The partner is obliged to account for the profits made by him by using the firm's funds; Section 17 of the Act-The continuity of a firm, in certain circumstances, beyond its fixed term is recognised.

20. Next in chronology is the Supreme Court decision in Dulichand Laxminarayan v. CIT [1956] 29 ITR 535. In that case also the question was whether a firm can enter into a partnership with another firm or individuals. After noticing, inter alia, the aforesaid two reported cases, the Supreme Court held that even under the Indian Partnership Act, 1932, a firm is not regarded as an entity separate and distinct from the members composing it; and that this position in law is not in any way altered merely because both the English and Indian Laws have for some specific purposes relaxed their rigid notions and extended a limited personality to a firm. The specific purposes noticed by the Supreme Court are:- Section 49 of the Indian Partnership Act-(i) Liabilities of the firm are regarded as those of the partners, only in case they cannot be met and discharged by the firm out of its assets.

(ii) Liabilities of the firm are paid out of the assets of the firm and surplus, if any, allotted amongst the partners. Such surplus can be applied in payment of the separate debt(s) of the partner(s).

(iii) Property of a partner is applied first in the payment of his separate debt(s) and surplus, if any is used to meet the debt(s) of the firm.Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300, the Supreme Court examined the question whether a document recording the factum of previous dissolution of partnership needed to be registered under the Registration Act, 1908, especially when the assets of the firm included immovable properties also. In that connection, the Supreme Court examined the scheme of Indian Partnership Act, 1932 as respects interest of a partner in partnership and after its dissolution, and on page 1304 of the Report observed: The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership. As already staled his right during 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 deduction of liabilities and prior charges. It is true that even during the subsistence of the partnership a partner may assign his share to another. In that case, what the assignee would get would be only that which is permitted by Section 29(1), that is to say, the right to receive the share of profits of the assignor and accept the account of profits agreed to by the partners.

This passage once again highlights the fact that, insofar as partnership property is concerned, the firm is in law treated as a separate entity from its members.

22. In the case of CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292 the Supreme Court reiterated the principle that "a firm is not a legal person, even though it has some attributes of personality". In this regard, the Supreme Court underscored the fact that in Income-tax laws a firm is a unit of assessment, by special provisions.

23. We may now turn to Section 13 of the Partnership Act, which defines the mutual rights and liabilities of partners. Here, Sub-sections (c) and (d) of the section, providing as they do a study in contrast, are relevant.

Section 13(c) stipulates that where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits. The significance of the words "only out of profits" lies in the fact that, the firm being "a mere shorthand name for a collection of persons, commercially convenient but not legally recognized", a stipulation as to payment of interest on the capital contributed by a partner is in reality a mode of division of the firm's profits. It is this principle which is incorporated in Section 13(c) of the Partnership Act and emphasized by the use of the words "only out of profits".

Section I3(d), in contrast, does not contain the words "only out of profits". That the said words have been omitted from the sub-section not through oversight, will be clear when we see that the said sub-section deals with payment of interest by the firm on any payment or advance made by a partner beyond the amount of capital he has agreed to subscribe for the purposes of the business of the firm.

Thus, Section 13 itself makes a distinction between the capital contributed by the partner, on the one hand, and on the other, the sums advanced by him to the firm for the purposes of its business. As elucidated by Pollock and Mulla in their commentary on the Indian Partnership Act, the principle of Sub-section (c) of Section 13 is that a partner, as regards the capital brought by him into the business, is not a creditor of the firm but an adventurer and, therefore, any agreed interest on such capital is, unless the contrary is clearly expressed, is a payment in lieu of or on account of profits and accordingly chargeable to profits only. An advance by a partner to a firm, on the contrary, is not treated as an increase of capital. As respects the sums advanced by him to the firm, a creditor-debtor relationship is brought into being between the partner and the firm. This is precisely the reason why there is no stipulation in Section 13(d) to the effect that the interest on such advances must be paid only out of profits.

When a partner advances money to it over and above the capital he has agreed to subscribe, and when the advance is made for the purposes of its business, then, so far as the firm is concerned, the interest payable by it on the sums advanced by the partner is a regular revenue expenditure which must necessarily be taken into reckoning for the purposes of deducing its true profits.

24. A combined reading of Section 13(c) and Section 13(d) would make it clear that a partner can have a dual capacity vis-a-vis the firm. As regards the capital contributed by him he is a partner, and as regards the money advanced by him to the firm (of course, over and above the amount of capital he has agreed to subscribe), he is a creditor of the firm. In the latter case, conceptually speaking, the sums advanced by the partner to the firm is not different from the sums advanced by third parties to the firm.

25. The aforesaid dual capacity is also reflected in and recognised by Section 48, which deals with the mode of settlement of accounts between partners, and which goes by the name of "accounting clause". This section gives a special treatment to the sums advanced by a partner to the firm over and above the amount of capital he has agreed to subscribe. It lays down, in a sequential order, the manner in which, on the dissolution of the firm, the assets of the firm shall be applied.

The assets shall be applied- secondly, in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital; thirdly, in paying to each partner rateably what is due to him on account of capital; and finally, the residue, if any, will be divided amongst the partners in the proportions in which they were entitled to share the profits.

The said sequential order, it is evident, gives the creditor-partner a preferential right to be paid the advances, and ranks the right only next in order to the debts of the firm to third parties.

26. The scheme of the Partnership Act thus clearly recognises the fact that, vis-a-vis the firm, the partners may have two capacities-one that of a partner as such, and the other that of a creditor of the firm.

27. If any authority for the aforesaid proposition is needed, it is to be found in the decision of the Madras High Court in the case of C.T.Narayanan Chettiar v. CIT [1966] 60 ITR 690.

28. The same ruling was also given by the Andhra Pradesh High Court in the case of Kasamsetty Radhakrishnaiah Chetty v. CIT [1967] 64 ITR 522.

There, in the context of the assessee's claim for revenue deduction in respect of certain bad debt which, according to him, had arisen in the course of the money-lending business carried on by him, one of the questions that arose for consideration was whether or not the advances made by a person to a firm of which he is a partner constituted money-lending business. That question arise this way. The assessee's case was that he was taking interest-bearing loans and was using the sums so borrowed for making interest-bearing advances - initially to one Kotrika family and, on its partition, to the three divided brothers; and and that the said activities constituted money-lending business. The sums advanced to the three divided brothers of the Kotrika family became bad and consequently the debt in question was revenue deductible.

The assessee was unsuccessful before the Income-tax Officer, the Appellate Assistant Commissioner, and also before the Tribunal. On the question whether the sums advanced by the assessee to the two firms in which he was a partner amounted to money-lending business, the Tribunal observed: ... As far as financing of the firm was concerned, it could not be treated as part of the money-lending business, as it was in the assessee's interest as a partner to find working capital for the firms and whatever interest he received from the firms was only part of his share income.

But we cannot accept this view. It is not only a matter of business practice, but also perhaps in the interest of a partner to advance moneys to the firm of which he is a partner, because as a person having control over the affairs of the firm, can expect a prompt repayment of the money. Section 13 of the Partnership Act lays down thus: (d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent per annum.' Thus, the Act recognises a partner advancing moneys to the firm and being entitled to interest at 6 per cent per annum. We do not consider it necessary to elaborate the point any further. It is sufficient to state that we cannot accept the view of the Tribunal that in no event can a partner who advances moneys to a firm of which he is a partner occupy the position of a creditor or be said to carry on the business of money-lending.

29. Thus, the Andhra Pradesh High Court also recognised the fact that a partner, besides being a partner, can be a creditor of the firm.

Interestingly, the Madras case of C.T. Narayanan Chettiar (supra) was not cited before the learned Judges of the Andhra Pradesh High Court.

30. We may now examine the question whether, as between the firm and the partner, a debtor-creditor relationship comes into being in relation to the following items: (i) interest paid by the firm to the partner on the capital contributed by him; (iii) interest allowed by the firm on the sums advanced by the partner over and above the capital that he has agreed to contribute.

31. Partnership is a matter of agreement. Hence, the treatment to be given to items (i) and (ii) above will naturally and necessarily depend upon the terms of the agreement. If the partners have agreed to credit the aforesaid sums to their capital accounts, then we will have a case of capitalisation of the said sums. And a debtor-creditor relationship will not come into being. This is because, as pointed out earlier, partners are co-adventurers.

If, on the contrary, the said sums, by agreement, are treated as moneys advanced by the partners to the firm as and by way of loan and in the process are credited to a separate current account, then a debtor-creditor relationship comes into being.

Item (iii) clearly gives rise to a debtor-creditor relationship because the money advanced by the partner to the firm (over and above the capital he has agreed to contribute) is a loan to start with.

(i) The Indian Law does not invest the firm with a separate identity of its own.

(ii) Even so, in certain respects it treats the firm as an entity distinct from its members.

(iii) One such situation which is of relevance to the matter on hand relates to the advances made by the partner to the firm, over and above the capital he has agreed to contribute. In such a situation, as between the firm and the partner, a debtor-creditor relationship comes into being.

(iv) The same result ensues (a) when the partner's share of profit is credited to his current account, and (b) when interest is credited to the current account on the balance standing to the credit of the partner in that account.

33. If, in the circumstances noticed above, as respects the amount standing to the current account of a partner, a debtor-creditor relation comes into being between the firm and the partner, the consequence, both in law and in logic, is that the amount in question is a debt owed by the firm for the purpose of its business. And, since Rule 2-l(b) of the Wealth-tax Rules, 1957 also talks of "debt owed by the firm", the aforesaid conclusion will be equally apposite and applicable while construing the said rule.

34. We may now examine the issue before us in the light of the foregoing legal principles.

35. We may first notice the salient features of the firms figuring in the case before us: (a) M/s V.V. Vanniaperumal & Sons-This is the major firm in the group. The firm used to adopt the year ending on the 12th day of February each year as its previous year. For the assessment year 1986-87 the relevant previous year ended on 12-2-1986. For that year, the firm was governed by a partnership deed dated 10-8-1980.

Clause-6 of the deed stipulated that partners will contribute fixed capital. Clause-7 stipulated that the sums advanced by the partners over and above their respective fixed capital would be credited to a separate current account and that such advances would bear interest at a rate mutually agreed upon by the partners. Clause-10 stipulated that the partners' share in the profits would be credited to the current account of the partners concerned. Clause-16 stipulated that, as respects matters not covered by the deed, the provisions of the Indian Partnership Act would apply.

On 30-11-1986 a deed of retirement was executed, which witnessed the exit of Dinakaran and Mahendran from the firm from the said date.

This was followed by a new partnership deed dated 1-12-1986, which contained stipulations similar to those contained in the earlier partnership deed of 10-8-1980 and which were noticed in the immediately preceding paragraph.

(b) M/s. V.V.V. Anandam & Bros.-This firm also used to adopt year ending on the 12th day of February each year as its year of account.

Uptil 14-1-1986, it was governed by a partnership deed dated 10-8-1980, which contained stipulations similar to those contained in the deed of 10-8-1980 of the first firm. The partnership deed dated 14-1-1986 also contained similar stipulations.

(c) M/s. V.V. Rajendran & Bros.-This firm also used to close its accounts on the 12th day of February each year. Uptil 13-2-1986, it was governed by a partnership deed dated 10-8-1980, and there after by a deed dated 13-2-1986. Both the said partnership deeds contained stipulations similar to those contained in the deeds relating to M/s. V.V. Vanniaperumal & Sons.

(a) Dinakaran-He was a partner of the first firm during the entire year of account ending on 12-2-1986. His was a fixed capital contribution of Rs. 2,600. During the year of account ending on 12-2-1986, he brought in moneys aggregating Rs. 1,30,000 which was credited to his current account. It is a matter of record that he withdrew the entire money on various dates for meeting personal expenses, such as paying income-tax etc. On the small amounts that stood to the credit of the current account from time to time, he was paid interest of Rs. 700. His share of profit was credited to the said current account and on 12-2-1986 his current account showed a credit balance of Rs. 2,69,270.

The stipulation as to fixed capital contribution taken in conjunction with Clause-7 of the partnership deed dated 10-8-1980, which authorised payment of interest on the sums advanced by the partners to the firm over and above the fixed capital, and the further fact that for the year ended 12-2-1986 the firm paid him a sum of Rs. 700 as and by way of interest, would indicate that he was a creditor to the firm in a small way.

But the question that then arises for consideration is whether even the small debt owed by the firm to Dinakaran was secured on or came to be incurred in connection with the specified assets. There is no evidence to that effect. On the contrary, it is a matter of record that, during the year ending 12-2-1986, the firm of M/s V.V. Vanniaperumal & Sons purchased assets of the aggregate value of Rs. 4 lakhs and that during the same accounting year, it had realised a sum of Rs. 5,27,155 by selling some old plant and machinery and a lorry. Having regard to the fact that the funds from whichever source derived were fixed up, it would be reasonable to hold that the sale proceeds of Rs. 5,27,155 were available for investment in plant and machinery of the aggregate value of Rs. 4 lakhs. That is to say, it will be reasonable to hold that no part of the sums advanced by Dinakaran was used to purchase new plant and machinery.

It should, therefore follow that for purposes of computing the exemption under Section 5(\)(xxxii) of the Act, there is no question of deducting the balance standing to the credit of current account of Dinakaran from the value of the specified assets.

Here we may underline the fact that the line taken by us in the preceding paragraph is in consonance with the rationale behind the doctrine of attribution. In the case of Paton v. IRC 21 TC 626 Lord Wright explained it thus: ...In the ordinary course, a person paying interest does not generally appropriate the payment to income or to any particular piece of income or any specific asset: he has the general body of available funds, say his banking a/c, if he has only one, and he pays by drawings on that a/c, which may include income, borrowed money, capital and so forth. This is what is meant by payment out of a mixed fund, or payments made out of the general till, or payments made neutrally. The Revenue authorities have no right in such cases to appropriate those payments to non-taxable rather than taxable moneys. Hence the tax-payer is given the right of attribution in the way most favourable to himself. It is presumed in the absence of evidence to the Contrary that payments are made out of income.

In view of the foregoing, therefore, we decline to interfere with the order of the first appellate authority, though not for the reasons mentioned by him.

(b) Mahendran-Like Dinakaran's, his was a fixed capital of Rs. 2,600. He brought in during the year of account ending on 12-2-1986 an aggregate sum of Rs. 1,50,000, and, like Dinakaran, withdrew the entire sum for personal purposes. What is more significant, he was not paid any interest during the year. This would mean that during the year ending 12-2-1986 the firm of V.V. Varmiaperumal & Sons did not owe any money to him. Of Course, as in the case of Dinakaran so in the case of Mahendran, on the last day of the year of account, namely 12-2-1986, his share of profit was credited to his current account; but no interest was due thereon.

We, therefore, decline to interfere with the impugned order of the first appellate authority, again, though not for the reasons mentioned by him.

(c) Muthu-The same consideration will apply to the case of Muthu also. We, therefore, decline to interfere in the matter.

(b) Mahendran-As respects these two persons, the position obtaining in this assessment year was materially different from the one obtaining in the assessment year 1986-87. As pointed out earlier, both Dinakaran and Mahendran retired from the firm of M/s. V.V. Vanniaperumal & Sons on and from 31-11-1986. On that dale the accounts were settled and the moneys due to them were allowed to remain in the firm, such sums bearing interest. But the important point to be noted is that on the relevant valuation date (31-3-1987), they were not partners of the firm. Under the scheme of the Act, the value of assessee's interest in a partnership or A.O.P. has to be determined on the valuation date applicable to the assessee. This is also the case with exemption admissible under Section 5(1)(xxxii) of the Act. On 31-3-1987 both Dinakaran and Mahendran were not partners in the firm of M/s V.V. Vanniaperumal & Sons. Therefore, there is no question of either valuing their interest in the said firm, or allowing any exemption under Section 5(1)(xxxii) of the Act.

In view of the foregoing, therefore, we set aside the orders of the first appellate authority relating to these two persons on this issue, and restore those of the Assessing Officer. Needless to add, we are doing so not for the reasons that weighed with the Assessing Officer.

(c) Muthu-He continued to be a partner of M/s V.V. Vanniaperumal & Sons during the year of account ending on 12-2-1987. During the said year of account he did not advance any amount to the firm. His current account opened with a credit balance of Rs. 2,23,019 and was augmented by rent (Rs. 3,490), interest paid by the firm (Rs. 5,896) and share of his profits for the year ending on 12-2-1987 (Rs. 3,37,886). During the same accounting period he withdrew for personal purposes an aggregate sum of Rs. 3,20,017.

During the said year of account the firm, on 2-2-1987, purchased 17 small items of machinery, all but one of which costed the firm sums less than Rs. 5,000 each. A solitary item costed the firm Rs. 5,500.

On 27-11-1986, however, the firm had sold as many as 25 items, big and small, including a number of cars and vans, which alone fetched the firm an aggregate price of more than Rs. 3 lakhs. Therefore, it would be reasonable to hold that the assets purchased during the year of account was financed by the firm from out of the sale proceeds of the items of plant and machinery sold by it. Thus it would be seen that as regards Muthu the position obtaining in the assessment year 1987-88 is not different from the position obtaining in the assessment year 1986-87. We, therefore, decline to interfere with the order of the first appellate authority in this case.

For this assessment year we are concerned with the case of Asokan only.

He was at the relevant point of time a partner in M/s. Rajendran & Co.

During the year of account relevant to his assessment year Asokan did not advance any money to the firm. Interest of Rs. 870 was no doubt paid by the firm on the amount (that had mainly been brought forward from the immediately preceding year of accusing) standing to the credit of his current account. Hence, in this case also, applying the rationale behind the doctrine of attribution, we hold that the amount standing to the credit of his current account could not be regarded as a debt owed by the firm, which is secured on or which has been incurred in relation to specified assets of the firm. We, therefore, decline to interfere in the matter.

39. In the result, the departmental appeals stand disposed of as indicated below:-(ii) Mahendran Appeals dismissed.(iii) Muthu(i) Dinakaran Appeals allowed.(ii) Mahendran(iii) Muthu Appeal dismissed.Assessment year 1988-89


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //