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Commissioner of Wealth-tax Vs. Mira Mehta - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberMatter No. 627 of 1980
Judge
Reported in(1986)52CTR(Cal)408,[1985]155ITR765(Cal)
ActsWealth Tax Act, 1957 - Section 5(1)
AppellantCommissioner of Wealth-tax
RespondentMira Mehta
Excerpt:
- .....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 netwealth the charge of wealth-tax has been imposed under section 3. it is thus clear that there is no lacuna in the act as regards the making of a karta's interest (representing his huf) in the partnership firm exigible to wealth-tax. the first contention, therefore,.....
Judgment:

Ajit K. Sengupta, J.

1. At the instance of the Commissioner of Wealth-tax, the Tribunal has referred the following question of law to this court,for the assessment years 1976-77 and 1977-78, under Section 27(1) of the W.T. Act, 1957:

'Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction under Section 5(1)(iv) of the Wealth-tax Act, 1957, in respect of property belonging to the firm ?'

2. The facts in brief are stated hereunder : The assessee is a partner in a partnership firm. The partners originally were the members of the same family. The house property in which the partners were residing was owned by the partners. It was treated as the property of the firm which is carrying on business. In the wealth-tax assessment of the assessee, exemption was claimed in respect of the said house property on the ground that the assessee had been residing there even though the property formed a part of the assets of the partnership firm. The justification for making such a claim is that the property continued to belong to the assessee inasmuch as the partnership is nothing but a compendious name for a group of persons joining together for carrying on business and the property continued to belong to the partners.

3. The WTO denied the exemption on the ground that the property did not belong to the assessee any longer but in fact belonged to the partnership firm.

4. The AAC took a different view. This view of the AAC is assailed by the Revenue in both the appeals. It was contended on behalf of the Revenue before the Tribunal that the property vested in the partnership and it ceased to belong to any of the partners and that the partners could not be said to own the property any longer. The Tribunal held that though the property became one of the assets of the firm, the partners were residing in the house and they continued to use the house for their residential purposes. In such circumstances, it was held that the house belonged to the partners.

5. Section 4 of the W.T. Act, 1957, provides that in computing the net wealth of an individual, there shall be included, as belonging to the individual certain assets. Under Section 4(1)(b), in computing the net wealth of an individual who is a partner in a firm, the value of his interest in the firm, determined in the prescribed manner, shall be included as belonging to that individual. In a recent decision of the Supreme Court in the case of Juggilal Kamlapat Bankers v. WTO : [1984]145ITR485(SC) , the Supreme Court considered the scope of Section 4(1)(b) read with Section 7(2)(a) of the W.T. Act. There, the assessee, the karta of an HUF, who was assessed in the status of an HUF, was a partner in a firm as representing his HUF. The contention was that the building did not belong to the assessee but belonged to thefirm. Dealing with the said contention, the Supreme Court referred to the view taken by the High Court that (p. 488) :

'Though it was true that a partner of a firm could not claim ownership in specific properties belonging to the partnership firm either during the continuance of the partnership or even on its dissolution but was entitled to get a share in the profits during its continuance and was further entitled, upon its dissolution or his retirement therefrom, to the value of his share in the surplus of the partnership assets left after a deduction of liabilities and prior charges on the date of dissolution or retirement, it was clear that, having regard to Section 29 of the Partnership Act (which enables a partner to transfer his interest in the partnership firm) and Section 2(e) and Section 4(1)(b) of the Act, the interest of a partner in the partnership firm will have to be regarded as a part of his net wealth under the Act.'

6. The said view was approved by the Supreme Court. The Supreme Court observed as follows (p. 491) :

'It is true that Section 4(1) deals with the computation of the net wealth of an individual and it is also true that the same enacts a deeming provision in the sense that certain assets which do not in fact or in reality belong to that individual (the assessee) but to some one else are to be treated as belonging to that individual and are to be included in his net wealth. But, in our view, a careful reading and analysis of Clauses (a) and (b) thereof will make it clear that there is a great difference between the cases covered by Sub-clauses (i) to (v) of Clause (a) and the case covered by Clause (b). Clause (a) refers to five situations in all of which the asset is held by some one other than the individual concerned (the assessee) (e.g., held by the spouse or minor child of such individual to whom such asset has been transferred by such individual directly or indirectly otherwise than for adequate consideration, etc.) and it is provided that such asset held by that some one else also shall be treated as belonging to assessee--a deeming provision in the real sense of creating a legal fiction, while under Clause (b) it is provided that where the individual assessee is a partner in a firm, it is the value of his interest in the firm determined in the prescribed manner that is to be treated as belonging to him and is includible in his net wealth. In other words, Clause (b) is not a deeming provision in the sense in which a deeming provision is made in Clause (a). 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) ofSection 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 definition of 'net wealth' as given in Section 2(m) and 'assets ' given in Section 2(e) clearly brings out the exgibility 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. Section 3, which is the charging provision runs thus :

'3. Charge of wealth-tax.--Subject to the other provisions contained in this Act, there shall be charged for every assessment year commencing on and from the first day of April, 1957, a tax (hereinafter referred to as wealth-tax) in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in Schedule I.' Section 2(m) defines 'net wealth' thus :

'net wealth' means the amount by which the aggregate value computed in accordance with, the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than--...' (Here follow three types of debts, which are not to be reckoned, with which we are not concerned). Section 2(e) defines ' assets ' thus ;

''assets' includes property of every description, movable or immovable, but does not include--...' (Here follow certain specified properties with which we are not concerned). 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 netwealth the charge of wealth-tax has been imposed under Section 3. It is thus clear that there is no lacuna in the Act as regards the making of a karta's interest (representing his HUF) in the partnership firm exigible to wealth-tax. The first contention, therefore, must fail.'

7. Section 5 enumerates the exemptions, inter alia, of the various types of assets. Section 5(1) enumerates the assets on which wealth-tax shall not be payable and which shall not be included in the net wealth of an assessee. Section 5(1)(iv) provides exemption in respect of an asset being one house or a part of a house belonging to the assessee to the extent of the value of such asset as prescribed in Section 5(1)(iv). The question is whether the house owned by the firm belongs to the individual partner within the meaning of Section 5(1)(iv). The Supreme Court in Juggilal Kamlapat Bankers v. WTO : [1984]145ITR485(SC) held that the interest of a partner in a partnership firm belongs to him and would be includible in the expression 'asset' and will have to be taken into account while computing the net wealth of the individual. If that be the position, then the value of the interest represented by the house owned by the firm included in the net wealth of the partner, being the interest of the partner of the firm, shall be entitled to exemption to the extent allowed by Section 5(1) of the Act. In that view of the matter, in our opinion, when the interest in the assets of the firm belongs to the individual partner and is chargeable to wealth-tax, the partner will be entitled to exemption in the computation of such wealth under the W.T. Act.

8. We may mention that an identical question came up for consideration before this court in the case of CWT v. Sri Naurangrai Agarwalla (Matter No. 761 of 1979). By the judgment dated June 20, 1983 : [1985]155ITR752(Cal) , this court held that the exemption under Section 5(1)(iv) cannot be denied to the assessee who is a partner of a firm in respect of the house which forms part of the assets of the firm.

9. In the premises, we answer the question in this reference in the affirmative and in favour of the assessee.

10. There will be no order as to costs.

Dipak Kumar Sen, J.

11. I agree.


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