Commissioner of Wealth-tax vs Parsuram Chouthmal (HUF)

A.K. Patnaik, J.—This is a reference by the Appellate Tribunal, Gauhati Bench, Guwahati, u/s 27(1) of the Wealth-tax Act, 1957, for the opinion of this court on the following question of law arising out of the order of the Appellate Tribunal dated July 27, 1988, in Wealth-tax Appeal No. 317/(Gau) of 1987 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the Wealth-tax Officer to allow exemption u/s 5(1)(iv) of the Wealth-tax Act in the hands of the assessee in determining the share of interest in the property standing in the name of the firm in which the assessee was a partner while making fresh order as per the Tribunal''s direction ?"

The brief facts of the case as stated in the statement of the case drawn up by the Appellate Tribunal are that in the course of assessment for the assessment year 1980-81, the respondent-assessee claimed exemption u/s 5(1)(iv) of the Wealth-tax Act, 1957 (for short, "the Act"), in respect of the house properties owned by a partnership firm of which the respondent-assessee was a partner. The Wealth-tax Officer rejected the said claim for the reasons mentioned in the assessment order in relation to the respondent-assessee for the assessment year 1979-80. On appeal by the assessee, the Appellate Assistant Commissioner allowed the said claim of the assessee and held that while determining the interest of the assessee in the partnership firm, exemption u/s 5(1)(iv) will be available for deduction from the total assets of the firm and directed the Wealth-tax Officer to recompute the assessee''s interest in the firm and allowed the exemption. Against the said order of the Appellate Assistant Commissioner, the Revenue went up in appeal before the Appellate Tribunal and the Tribunal found that the orders of the authorities below were short and basic facts were not available and in the circumstances set aside the said orders of the authorities below and directed that the Wealth-tax Officer pass fresh orders after bringing relevant facts on record and after taking into account the decisions of the Tribunal in other cases in which it was held that exemption should be allowed in the hands of the partner.

After the statement of the case was received by this court, on February 21, 1993, notices were issued to the parties for hearing pursuant to which the Commissioner of Wealth-tax, North-Eastern Region, Shillong, has appeared through learned standing counsel for the Income Tax Department but none appeared on behalf of the assessee when the case was heard on March 7, 1994. Mr. Talukdar, learned counsel for the Department, cited before us the decision of the Madras High Court in the case of Purushothamdas Gocooldas and Others Vs. Commissioner of Wealth-tax, to persuade us to take a view in favour of the Revenue. But we find that a Division Bench of this court in the case of Commissioner of Wealth-tax Vs. Tarachand Agarwalla, has not agreed with the said decision of the Madras High Court. In the said decision of this court, the Division Bench of this court has held (at page 237) :

"For these reasons, the net wealth of the firm should be determined including the value of the building and then it should be allocated amongst the partners indicating the nature of assets and liabilities allotted to the share of the partner and net wealth of the partner is to be determined by including the share so allotted, and only thereafter, the deduction u/s 5(1)(iv) should be allowed, i.e., deduction should be allowed u/s 5(1)(iv) in the hands of assessee-partner and not in the hands of the firm."

While agreeing with the aforesaid conclusion of the Division Bench of this court in the case of Commissioner of Wealth-tax Vs. Tarachand Agarwalla, we would like to add a few more reasons in support of the aforesaid conclusion.

The opening words of Sub-section (1) of Section 5 of the Wealth-tax Act, 1957 (for short, "the Act"), make it clear that in respect of the assets mentioned in the said sub-section, wealth-tax shall not be payable by an "assessee" and that the said assets shall not be included in the net wealth of the "assessee". The word "assessee" has been defined in Section 2(c) of the Act to mean a person by whom wealth-tax or any other sum of money is payable under the Act. The persons by whom wealth-tax is payable under the Act have been named in Section 3 of the Act which is the charging section. As per the said section, wealth-tax is payable only in respect of the net wealth of every individual, Hindu undivided family and company. Accordingly, no wealth-tax is payable under the Act by a firm and a firm is not an assessee as defined in Section 2(c) of the Act. Since the exemption under Sub-section (1) of Section 5 of the Act is available only to an "assessee" and as per the express language of the said sub-section the assets specified therein are not to be included in the net wealth of the "assessee", in our opinion, the exemption under Sub-section (1) of Section 5 in respect of the assets mentioned therein has to be worked out in the hands of the partners of the firm who are assessees under the Act and not while determining the net wealth of the firm, which is not an assessee under the Act.

This view is further reinforced and fortified by the provisions in the Act and the Wealth-tax Rules, 1957 (for short, "the Rules"), for determination of the interest of the individual assessee in a firm. According to Section 4(1)(b) of the Act, where an individual is a partner of a firm the value of his interest in the firm is to be determined in the manner prescribed in Rule 2 of the Rules and included in computing the net wealth of the individual as belonging to that individual. Rule 2 prescribes that for determining the value of interest of a partner of a firm, the "net wealth" of the firm on the valuation date shall first be determined. The expression "net wealth" has not been defined in the Rules but in Rule 1A(m), it has been stated that words and expressions used but not defined in the Rules and defined in the Act, shall have the meanings respectively assigned to them in the Act. In Section 2(m) of the Act, the expression "net wealth" has been defined to mean the amount by which the aggregate value of all assets on the valuation date to be computed in accordance with the provisions of the Act is in excess of the aggregate value of all the debts on the valuation date other than the debts mentioned therein. Thus, the net wealth of a firm has to be determined in accordance with the provisions of the Act, and since under Sub-section (1) of Section 5 of the Act the assets mentioned therein are to be excluded from the net wealth of an individual assessee who is a partner of a firm and not from the net wealth of a firm which is not an assessee, the assets specified in Sub-section (1) of Section 5 of the Act have to be included in the net wealth of the firm while determining the interest of a partner in the firm under Rule 2.

On the aforesaid analysis of the provisions of the Act and the Rules, therefore, a house or a part of a house which is comprised in the assets of a firm is to be first included in the net wealth of the firm for the purpose of determining the interest of the partners u/s 4(1)(b) of the Act read with Rule 2 and when after such determination the interest or shares of the partners of the firm are allocated to the respective'' partners, exemption is to be granted to each such partner of the firm under Sub-section (1) of Section 5 of the Act in respect of the said house or part of the house up to the extent admissible under the proviso to Clause (iv) of the said sub-section.

In the decision of the Madras High Court in Purushothamdas Gocooldas and Others Vs. Commissioner of Wealth-tax, relied upon by Mr. Talukdar, the aforesaid provisions of the Act and the Rules as analysed by us have not been dealt with at length and on the basis of the decision of the Supreme Court in the case of Addanki Narayanappa and Another Vs. Bhaskara Krishtappa and Others, the Madras High Court held that a properly belonging to a firm does not belong to the partners during the subsistence of the firm and accordingly the exemption u/s 5(1)(iv) which is available only in respect of a house or part of a house belonging to the "assessee" is not available to such partners in respect of a house property which belongs to a firm. But the said decision of the Supreme Court in the case of Addanki Narayanappa and Another Vs. Bhaskara Krishtappa and Others, has been explained by the Supreme Court in a subsequent decision in the case of Commissioner of Income Tax, Madras Vs. R.M. Chidambaram Pillai and Others, In the said later decision at pages 297, 298 and 299, the Supreme Court has held that u/s 3 of the Indian Partnership Act, 1932, a firm is not a person, but a relationship among the persons and has further quoted the following lines from Lindley on Partnership, 12th edition :

"The firm is not recognised by English lawyers as distinct from the members composing it. In taking partnership accounts and in administering partnership assets, courts have to some extent adopted the mercantile view, and actions may now, speaking generally, be brought by or against partners in the name of their firm ; but, speaking generally, the firm as such has no legal recognition. The law, ignoring the firm, looks to the partners composing it ; any change amongst them destroys the identity of the firm ; what is called the property of the firm is their property, and what are called the debts and liabilities of the firm are their debts and their liabilities. In point of law, a partner may be the debtor or the creditor of his co-partners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for a man cannot be his own employer."

In the said decision, the Supreme Court has also extracted the observation of the apex court in Dulichand Lakshminarayan Vs. The Commissioner of Income Tax, Nagpur, to the effect that our partnership law is based on the English law and has observed that in Addanki Narayanappa and Another Vs. Bhaskara Krishtappa and Others, the view taken by this court accords with the position above stated. In view of the aforesaid law as clarified by the apex court in Commissioner of Income Tax, Madras Vs. R.M. Chidambaram Pillai and Others, we are of the view that a firm unlike a company has no legal personality of its own and the property that belongs to the firm actually belongs to the partners constituting the firm to the extent of their respective shares in the firm.

In the present case since the authorities below had not granted the exemption claimed by the assessee u/s 5(1)(iv) of the Act in accordance with the aforesaid law stated by us, we are of the opinion that the Tribunal was justified in directing the Wealth-tax Officer to allow the said exemption in the hands of the assessee in determining the share of his interest in the property standing in the name of the firm of which he is a partner. The reference is accordingly answered in the affirmative and in favour of the assessee. No costs.