Sri Govind Prosad Kanodia vs Commissioner of Wealth Tax

Ajit K. Sengupta, J.—In this reference u/s 27(1) of the Wealth-tax Act, 1957 (''the Act'') the following question of law has been referred to this Court for the assessment year 1981-82:

Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption u/s 5(1)(xxxiii) of the Wealth-tax Act. 1957 in spite of not running the business by the firm and giving undertaking with its assets on leave and licence basis to another?

The facts relating to this reference shortly stated that the assessee is a partner in the firm of Kanudia Bros. The said partnership firm owned a flour mill styled as Dhanbad Flour Mill. The firm of Kanudia Bros, carried on business of flourmill up to 30-7-1975. The income was assessed in the hands of Kanudia Bros, as business income. Kanudia Bros, gave the said flour mill on leave and licence basis under an agreement dated 21-4-1976 including its assets to run for a period of three years. Kanudia Bros, received licence fee from its licensee. According to the assessee-firm, the assessee''s licence fee was assessed in the hands of the partnership firm as business for the assessment years 1976-77 to 1980-81. Subsequently, such income was assessed in the hands of the partnership firm as income from other sources and in appeal, the said firm succeeded to get the income assessed as income from business from the Commissioner (Appeals).

The assessee, as partners in the firm of Kanudia Bros., claimed exemption u/s 5(1)(xxxii) of the Act and the WTO allowed the same in the assessment order. The Commissioner scrutinised the assessment order and found that allowing exemption in the hands of the assessee was erroneous and prejudicial to the interests of the revenue. Therefore, he initiated proceedings u/s 25(2) of the Act by giving a show-cause notice to the assessee as to why the assessment made by the WTO should not be set aside and why the exemption allowed by the WTO u/s 5(1)(xxxii) should not be withdrawn. It was submitted before the Commissioner that to claim exemption u/s 5(1)(xxxii) certain conditions were required to be satisfied. Firstly, the partnership firm must be the industrial undertaking and the assets must belong to the firm. It was argued that the assets belonged to and were owned by Kanudia Bros. The assets of the industrial undertaking were shown in the balance sheet of the firm. According to the assessee, the ownership of the assets was not transferred to the licensee to whom the flour mill was given to run on leave and licence basis though the assets were given on lease to lessee. It was also contended that an industrial undertaking merely because of income from such industrial undertaking has not been assessed under the head ''Business''. It was urged that the WTO was right in allowing exemption as claimed by the assessee.

The Commissioner relied on the decision of the Madras High Court in the case of Commissioner of Wealth Tax, Tamil Nadu-IV Vs. P.T.N. Shensagamoorthy and Another, and held that the assessee was not entitled to relief u/s 5(1)(xxxii). He directed the WTO to disallow relief as claimed. The assessee being aggrieved by the order of the Commissioner brought the dispute before the Tribunal. It was urged that the conditions laid down for the claim of exemption u/s 5 were satisfied. It was also urged that the assets were owned by the firm and the leave and licence agreement dated 21-4-1976 was only to run the business of the firm for certain period. It was also contended that it was not necessary for the firm to carry on its business of manufacturing and processing of goods. The industrial undertaking belonged to the firm. The decision of the Cochin Bench of the Tribunal in the case of Smt. S. Fathimabi v. WTO [1986] 15 ITD 374 was relied upon. The Tribunal relied on the decision of the Madras High Court not to allow the exemption.

The Tribunal took into consideration that the firm of Kanudia Bros, did not run a flour mill though the same continued to be owned by it. It was run by the lessee and the firm was receiving only licence fee. The firm was not engaged in the activity of manufacture or processing of goods. The assessees have now mentioned in the statement of facts that the Tribunal did not consider the judgment of the Andhra Pradesh High Court in the case of Commissioner of Wealth Tax Vs. C.S. Rao, though it was neither cited nor relied upon at the time of the hearing of the appeals. The Tribunal arrived at a conclusion that the Commissioner''s order that assessment order was erroneous and prejudicial to the interests of the revenue was correct and dismissed the assessee''s appeal. It is this order which gave rise to the proposed question of law.

It appears that for the assessment years 1982-83 and 1983-84 an identical question was considered by the Tribunal and the Tribunal held in favour of the assessee. On a reference, at the instance of the revenue, this Court by the judgment dated 16-5-1991 answered the question in favour of the assessee which has since been reported in Commissioner of Wealth Tax Vs. Govind Prasad Kanudia,

Following the said decision, we answer the question in this reference in the affirmative and in favour of the assessee. There will be no order as to costs.

Chowdhury, J. -

I agree.