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Petitioner: COMMISSIONER OF WEALTH TAX VS Respondent: A.K. TANDON and others
Court Name: Delhi High Court Judge(s): Arun Kumar, B. N. Kirpal Title: COMMISSIONER OF WEALTH TAX vs A.K. TANDON and others Case No.:Wealth Tax with Wealth Tax References Nos.50 to 52, 90 and 91 and 100 to
JUDGMENT
Reported As: 1993 PTD 558 Result: Question answered Judgment JUDGMENT ' ARUN KUMAR, J.--- This judgment will dispose of a bunch of references under section 27 of the Wealth Tax Act, 1957, pending in this Court. ' The assessees are partners in a firm known as Messrs Wengers and Co. Which owns A-15 and A-16, Connaught Place, New Delhi, known as Wengers Building. The Wealth Tax Officer, while making the assessm ent, accepted the assessees' claim that, in respect of the assessees' share in the said immovable -property owned by the firm, they were entitled to exemption under section 5(1)(iv) of the Wealth Tax Act, 1957 (hereinafter referred to as 'the Act'). However, the Commissioner of Wealth Tax was of the opinion that the order of the Wealth Tax Officer allowing the exemption under section 5(1)(iv) to the extent of rupees one lakh was erroneous and, therefore, he served a notice on the assessees to show cause why the same should not be cancelled and the assessment be not made afresh by withdrawing the benefit of the exemption under section 5(1)(iv) of the Act. The Commissioner of Wealth tax, relying on the judgment of the Madras High Court reported in Purushothamdas Gocooldas v. C W T (1976) 104 ITR 608, held that deduction under section 5(1)(iv) was not allowable to a partner in a firm regarding property owned by the firm. The assessees who are partners in the said firm, Messrs Wengers & Co. Filed appeals before the Tribunal. The Tribunal, relying on the judgments of the Karnataka High Court reported in CWT v. Mrs. Christine Cardoza (1978) 114 ITR 532, of the Orissa High Court reported in CWT v. I. Butchi Krishna (1979) 119 ITR 8 and of the Madhya Pradesh High Court reported in Narsibhai Patel v. CWT (1981) 127 ITR 633, held that the order of the Wealth Tax Officer was correct inasmuch as it allowed the benefit of exemption under
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section,5(1)(iv) of the Act to the partners of the firm. Thus, the order of the Commissioner of Wealth tax was set aside by the Tribunal. With this background, the Revenue has sought the opinion of this Court on the following questions:-- (1) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled to exemption under section 5(1)(iv) of the Wealth Tax Act, 1957, in respect of the property belonging to the firm? (2) If the answer to question*No,1 is in the negative, was the order of the Wealth Tax Officer erroneous and prejudicial to the interest of the Revenue and was the Commissioner of Wealth tax justified in setting it aside? ' We may mention here that the Wealth Tax Officer had valued the building in question at Rs,32,80,000 and the question of valuation is not at all relevant so far as the answer to the aforesaid questions is concerned. ' In order to appreciate the controversy involved, it may be appropriate to reproduce certain provisions of the Wealth- tax Act as were in force at the relevant time: "Section 2(c).--- Assessee' means a person by whom wealth tax or any other sum of money is payable under this Act, and includes-- (i) every person in respect of whom any proceeding under this Act has been taken for the determination of wealth tax payable by him or by any other person or the amount of refund due to him or such other person; (ii) every person who is deemed to bean assessee under this Act; (iii) every person who is deemed to be an assessee in default under this Act. "Section 2(m).--- 'net wealth' means the all-out 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-- (i) debts which under section 6 are not to be taken into account; (ii) debts which are secured on, or which have been incurred in relation to, any property in respect of which wealth tax is not chargeable under this Act; and (iii) the amount of the tax, penalty or interest payable in Consequence of any order passed under or in pursuance of this Act or any law relating to taxation of income or profits, or the Estate Duty Act, 1953;... ' Section 3.--- Subject to the other provisions captained in this Act, there shall be charged for every assessm ent 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 4(1).--- In computing the net wealth-- (b) ... Where the assessee is a partner in a firm or a member of an association of persons (not being a cooperative housing society), the value of his interest in the firm or association determined in the prescribed manner. ' Section 5(1)(iv).---"(1).---Subject to the provisions of subsection (1-A), wealth tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee--... (iv) one house or part of a house belonging to the assessee." ' Rule 2 of the Wealth Tax Rules. 1957, as it stood at the relevant time, also needs reproduction: (1) The value of the interest of a person in a firm of which he is a partner or in an association of persons of which he is a member, shall be determined in the manna provided herein. The net wealth of the firm or the association on the valuation date, shall first be determined. The portion of
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the net wealth of the firm or association as is equal to the amount of its capital shall be allocated among the partners or members in the proportion in which capital has been contributed by them. The residue of the net wealth of the firm or association shall be allocated among the partners or members in accordance with the agreement of partnership or association for the distribution of assets in the event of dissolution of the firm or association, or, in the absence of such agreement, in the proportion in which the partners or members are entitled to share profits. The sum total of the amounts so allocated to a partner or member shall be related as the value of the interest of that partner or member in the fir or association. (2) Where the net wealth of a firm or association computed in accordance with sub-rule (1) includes the value of any assets located outside India, the value of the interest of any partner or member in the assets located in India, shall be determined having regard to the proportion which the value of the assets located in India diminished by the debts relating to those assets bears to the net wealth of the firm or association. (3) Where the net wealth of a firm or association computed in accordance with sub-rule- (1) includes the value of any assets referred to in section 5(2) of the Act, the value of the interest of a partner or member .Shall be deemed to include the value of his proportionate share in the said assets, and the provisions of section 5(2) of the Act shall be applied to him accordingly. ' As it has been already noticed, the authorities below have placed reliance on certain High Court. Decisions while reaching their respective conclusions which show that the point in issue has already been the subject-matter of judicial pronouncement. However, since there is divergence of opinion between various High Courts, the matter has come up for consideration before us also. On behalf of the Revenue reliance has been placed on Prushothamdas Gocooldas v. CWT (1976) 104 ITR 608 which is a judgment of a Division Bench of the Madras High Court. In the said case the partnership in which the assessees were partners, owned a house property as one of its assets and the partners were residing in the said premises. In their return for wealth tax each of the assessees valued their share in the house property separately and claimed exemption under section 5(1)(iv) of the Act. This claim was negatived by the officer on the ground that the house property was the asset of the firm and not that of the individual partners. This view was upheld by the Tribunal. On a reference to the High Court at the instance of the assessee, it was held (headnote): "(1) 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 thee 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. ' In deciding this case, the Court mainly relied on a judgment of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. In the said case, the question for consideration before the Supreme Court was whether the interest of a partner in the partnership assets comprising movable as well as immovable property should be treated as movable or immovable property for the purposes of section 17(1) of the Registration Act, 1908. After discussing certain relevant provisions of the Partnership Act and the Registration Act, it was held that the interest of the partners in the partnership assets was movable property and the document evidencing the relinquishment of that interest was not compulsorily registrable under section 17(1) of the Registration Act. It was also observed in this context that the provisions of sections 14, 15, 29, 32, 37, 38 and 39 of the Partnership Act make it 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
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what a partner is entitled to is his share in the 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. It was further observed '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." ' Relying on the aforesaid judgment, the Madras High Court held that the assessees in this case cannot claim to be entitled to any portion of the house property as exclusively belonging to them. ' Counsel for the Revenue also referred to CWT v. Vasantha (1973) 87 ITR 17 which is again a decision of the Madras High Court. Reliance on the same in the present context we fail to appreciate. The said decision deals with the question as to whether a particular asset should be included in the assets of the firm for purposes of determining its net wealth under rule 2 of the Wealth Tax Rules, 1957. The question was whether agricultural land owned by a partnership firm was liable to be excluded from the assets in view of its express "exclusion" from the definition of assets in section 2(e) of the Act. ' Next, reliance has been placed by counsel for the Revenue on CWT v. Narendra Ranjalker (1981) 129 ITR 203, which is a judgment of the Andhra Pradesh High Court. In this case, it was held that the net wealth of the firm ought to be arrived at in accordance with the provisions of the Wealth Tax Act as if the firm were an assessee. Therefore, it was held that, while computing the interest of a partner in the firm in terms of section 4(1)(b) of the 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. Therefore, according to this judgment, it is the firm which is entitled to deduction on account of the exemptions granted under section 5 of the Act. The case related to exemption under section 5(1) (xxvi) read with section 5(1-A) of the Act. The firm was held entitled to deduction on account of deposits in a scheduled bank to extent of Rs,1,50,000 and it was held that the partner will not be entitled to exemption in regard to his share of the bank deposits held by the firm. At the bottom of page 212 of the report of the said judgment it has been noted that though a firm is not an assessee under the Act, still it has been held that, while computing the net wealth, the firm should be deemed to be an assessee, and the provisions of the Act dealing with the computation of the net assets of the assessee should be applied to the firm as if it was an assessee though, in fact, it is not an assessee under the Act. ' Reliance has als-o been placed on a later decision of the same High Court reported as CWT v. B. Chandrasekhara Rao (1989) 175 ITR 66 (AP). This decision merely follows the earlier decision of the same Court referred to by us hereinbefore. Counsel for the Revenue also relied on two decisions of the Patna High Court reported in CWT v. Nand Lal Jalan (1980) 122 ITR 781 and CWT v. Radha Krishna Jalan (1984) 145 ITR 217. Since the latter decision merely follows the earlier one, it may be worthwhile to make reference only to the earlier decision. The reasoning given in.This decision is more or less on the, same lines as contained in the decisions of the Andhra Pradesh High Court referred to hereinbefore, though a slight deviation is made so far as the question of a firm being treated as an assessee is concerned. It is also significant to mention here that this judgment dissents from the judgment of the Madras High Court in Purushothamdas Gocooldas v. CWT (1976) 104 ITR 608 to which a reference has been made by us earlier. The reasoning adopted by the Madras High Court has been countered with the following observations (headnote of 122 ITR 781): "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.
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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." ' Thus, in the process, the Patna High Court also distinguished the Supreme Court judgment in Addanki Narayanappa's ease AIR 1966 SC 1300, on which strong reliance was placed by the Madras High Court in Purushothamdas Gocooldas (1976) 104 ITR 608. However, after making the aforesaid observations, the Patna High Court has proceeded to hold that, in computing the net wealth of the firm by reference to rule 2 of the Wealth Tax Rules, 1957, if an asset qualifies for exemption provided under the Act, such exemption must be taken into consideration in determining the net wealth of the firm. It follows from this judgment that it has been accepted that a firm is not an assessee under the Act and, therefore, it need not be treated as such, which is contrary to what was held in the decisions of the Andhra Pradesh High Court noted hereinbefore. It also holds that the property of the firm is really the property of the partners which is contrary to what was held by the Madras High Court in Purushothamdas Gocooldas (1976) 104 ITR 608. However, instead of granting the benefit of exemption under section 5(1)(iv) to a partner who is really an assessee under the Wealth Tax Act, this judgment holds that the exemption should be taken for Consideration in determining the net wealth of the firm. ' On the other hand, Mr. Agnihotri, learned counsel for the assessees, laid great stress on the relevant provisions of the Act itself before proceeding to cite various decisions in support of his contention. According to him, the following words in section 5(1) hold the key to the entire controversy: ' Wealth tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee. ' The emphasis is on `assessee' for the purposes of availing the exemption contained in the said provision and a firm, not being an assessee is, therefore, not entitled to any exemption. According to the definition of the word `assessee' in clause (c) of section 2, a firm is not an assessee. It is further submitted that though, under the Income Tax Act, a firm has been made an assessee, the same is not so in the case of the Wealth Tax Act. ' Section 3, which is the charging section under the Wealth Tax Act excludes a partnership firm. It levies wealth tax on the net wealth on the corresponding valuation date of every izidividual, Hindu Undivided Family and company at the rate or rates specified in Schedule I. This being the position emerging from the statutory provisions, it is urged that there is no question of exemption being allowed to a firm or a firm being treated as an assessee for the purposes of computation of its net wealth: ' Section 4(1) which deals with the computation of the net wealth of an assessee postulates the Case of an assessee being a partner in a firm in clause (b). According to clause (b), the value of the interest of such partner in the firm has to be determined in the prescribed manner and the prescribed manner is contained in rule 2 of the Wealth Tax Rules, 1957. Rule 2, sub-rule (1) provides that the net wealth of the firm as is equal to the amount of its capital shall be allocated among the partners or members in the proportion in which capital has been contributed by them. The residue of the net wealth of the firm shall be allocated among the partners or members in accordance with the agreement of partnership foil 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. Thus, sub-rule (1) of rule 2 provides the manner in which the interest of a partner in the net wealth in a firm is to be calculated so far as his interest in the firm is concerned. In the face of these clear provisions, we need not go to the extent to which the Patna High Court or the Andhra Pradesh High Court has gone. If what has been laid down in the said judgments was the intention of the statute, the same could have been achieved by providing for it
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in the rules. The rules being silent on this aspect, one need not stretch them to take the view taken by the Andhra Pradesh High Court or the Patna High Court. Further, it is urged that the procedure as per rule 2 is to be followed. Section 5 will not come into the picture till the stage of computation of the net wealth of the assessee, who is a partner in a firm, comes. The exemption under section 5 will not come into play while the net asset of the partnership firm is computed in order to ultimately find out the share of a partner in such asset. Rule 2 appears to be a quite exhaustive in this behalf and whatever procedure is to be followed and benefit has to be allowed has been provided for therein. For instance, in sub-rule (3) the benefit of section 5(2) has been extended to a partner. If the benefit of section 5(1) was also to be extended, the same could have been so stated in rule 2 itself. In view of this, it is submitted by counsel for the assessees that the benefit of the exemption under section 5(1)(iv) of the Wealth tax Act has to be allowed to a partner at the time of his individual assessment and for his share in the house property owned by the partnership firm, he will be entitled to such benefit. ' Counsel for the assessee has relied on certain rulings in support of his contentions. Reliance has been placed on Juggilal Kamlapat Bankers v. WTO (1984) 145 ITR 485, which is a judgment of the Supreme Court. It has been held in the said decision that the interest of a partner in a firm cannot be said to be not belonging to him; it, in fact, belongs to him and no legal fiction is required for treating it as belonging to him. The deeming provision in section 4(1)(b) of the Wealth tax Act is referable only to the quantification of his interest in the firm. Section 4(1)(b) only relates to the quantum of his interest as determined in the prescribed manner which is includible in the net wealth. In this case, the assessee was the Karta of the Hindu undivided family who was assessed in the status of a Hindu undivided family while he was also a partner in the firm as representing his Hindu undivided family. It was held that the assessee's interest in the firm was chargeable to wealth tax in his hands in the status of a Hindu undivided family. After making a detailed reference to the provisions of sections 4(1)(a) and 4(1)(b) of the Wealth Tax Act, their Lordships observed (at page 491): ' 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) 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 Hindu undivided family is otherwise exigible to wealth tax under the other provisions of the Act and the deeming provision contained in section 4(1)(13); 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 exigibility of a partner's interest in a firm either in his individual capacity or in his capacity as the Karta of a Hindu undivided family to wealth tax under the Act." ' Again, after referring to the provisions of section 3, section 2(m) and section 2(e), it was observed (at page 492): "On reading the aforesaid provisions together, it will appear clear that wealth tax has been levied on the net wealth of an individual or a Hindu undivided family, meaning thereby the aggregate value of all the assets belonging to such assessee minus all the debts owed by him. Under the
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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 Hindu undivided family 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 a Hindu undivided family and on such net wealth, 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 Hindu undivided family) in the partnership firm exigible to wealth tax." The next judgment cited by learned counsel for the assessees is reported in CIT v. K. Saraswathi Ammal (1981) 127 ITR 404 (Mad.). This judgment of the Madras High Court does not refer to Purushothamdas Gocooldas v. CWT (1976) 104 ITR 608 which is also a Madras High Court judgment. In this case, the firm, in which the. Assessees were partners, held certain shares in a company. It was an industrial undertaking falling under section 84 of the Income-tax Act, 1961. By virtue of section 85, the dividends received by the firm from the company were excluded in…
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