1. These are appeals by the assessee arising out of her wealth-tax assessments for assessment years 1984-85 and 1985-86.
2. We have heard the learned counsel for the assessee and the learned Departmental Representative. The facts are that one Shri Jenendra Kumar Jain is a partner in a firm M/s Kishan Flour Mills, Meerut, which owns an industrial undertaking. By an agreement dated 29-6-1977 executed between the assessee, the said Jenendra Kumar Jain and S/Shri Ashok Kumar Jain and Sharad Kumar Jain, who are the wife and sons of late Shri Sumat Prasad Jain, a partnership was created in the name and style of M/s Sumat Prasad Jain & Co. By this agreement it was stated that the said Jenendra Kumar Jain has been authorised to enter into partnership in the firm M/s Kishan Flour Mills and he shall be liable to account for all the profits and gains arising to him in the said firm and such profits shall be deemed to be the profits and gains arising to the firm M/s Sumat Prasad Jain & Co. It was further agreed that all benefits, gains and rights of a partner belong to Shri Jenendra Kumar Jain as a result of his participation in the partnership firm of Kishan Flour Mills shall be owned, held and divided between the four partners of Sumat Prasad Jain & Co. in accordance with the shares specified in the document. The assessee claimed exemption under Section 5(1)(xxxii) in respect of her alleged interest in the firm M/s Kishan Flour Mills and this was allowed by the WTO. There was dispute between the assessee and the WTO about the quantum of the amount on which the aforesaid exemption was available and the assessee appealed to the AAC.3. The AAC thought that the assessee was not entitled to any exemption under Section 5(1)(xxxii) and, he, therefore, issued enhancement notices to the assessee proposing to withdraw the exemption and he ultimately withdrew the exemption. As a result the assessee is in appeal before us.
4. In these appeals the assessee re-asserts her claim for exemption under Section 5(1)(xxxii) and also contends for the enhancement of the amount of exemption from that granted by the WTO. The question of the quantification of the amount of exemption would arise only if the assessee's claim is in principle accepted and if that is so, the matter would have to be sent back to the AAC, as he has not decided that issue.
5. We have stated the facts above in some detail which make it clear that the industrial undertaking, about which the exemption is claimed, belongs to a partnership firm, M/s Kishan Flour Mills, of which the assessee is admittedly not a partner. The assessee is a partner of another partnership firm styled as M/s Sumat. Prasad Jain & Co., constituted by the assessee and her three sons, one of whom, namely, Jenendia Kumar Jain is a partner in the said Kishan Flour Mills. As per deed of partnership of M/s Sumat Prasad Jain & Co., Shri Jenendra Kumar Jain is a partner in Kishan Flour Mills as a representative of the persons constituting M/s Sumat Prasad Jain & Co. Exemption under Section 5(1)(xxxii) of the Wealth-tax Act is available to a person in respect of the value of the interest of the assessee in the assets forming part of an industrial undertaking belonging to a firm or an Association of Persons, of which the assessee is a partner, or, as the case may be, a member. The industrial undertaking admittedly belongs to M/s Kishan Flour Mills and admittedly the assessee, Smt. Rattan Mala Jain is not a partner of the firm, Kishan Flour Mills. Therefore, the view taken by the authorities below is prima facie correct.
6. The learned counsel for the assessee, however, contended that since by virtue of the agreement relating to the firm Sumat Prasad Jain & Co., Jenendra Kumar Jain is acting as a representative of the assessee and the other partners, therefore, what is held by Jenendra Kumar Jain is also held by the firm Sumat Prasad Jain & Co. and if Jenendra Kumar Jain was in his personal assessment entitled to exemption under Section 5(1)(xxxii), the present assessee would also be entitled to similar exemption. It was contended that an industrial undertaking held by a firm is held by its partners and consequently the industrial undertaking held by Shri Jenendra Kumar Jain is held by Sumat Prasad Jain & Co., of which the assessee is a partner and, therefore, the assessee is entitled to exemption. Reliance was placed on several rulings, i.e., Ratilal B. Daftari v. CIT [1959] 36 ITR 18 (Bom.), Murlidhar Himatsingka v. CIT v. 1966] 62 ITR 323 (SC), Mahesh Prasad v.CIT [l967] 66 ITR 547 (All.), Rijhumal Valiram v. CIT [1971] 80 ITR 491 (Bom.), Addl. CIT v. Degaon Gangareddy G.Ramkishan & Co. [1978] 111 ITR 93 (AP), CIT v. Mahendrasingh Mohansingh [1980] 123 ITR 938 (Guj.) and CIT v. Alisher Contractors [1986] 159 ITR 534 (Raj.).
All these rulings are off the point and in none of them it has been held that the partners of a sub-partnership automatically become the partners of the main partnership firm. What has been held is that in such cases the partner, who represents the sub-partnership in the main partnership is not the exclusive owner of the profits and the entire amount cannot be taxed in his hands. It has been held that a sub-partner has definite enforceable rights to claim a share in the profits accrued to or received by the partner in the original partnership. Reliance was also placed on CIT v. Sakina Bai Ibrahim & Sons [1985] 154 ITR 540 (Mad.), in which the following observations were made :-- A sub-partnership is a partnership within a partnership. The vital requirement of a partnership is an agreement to divide the profits and losses by the parties to the agreement. If a partner agrees to share the profits derived by him or her from a firm with a stranger or even with his or her own children, by reason of such an agreement, the strangers or his or her children do not become partners in the firm. Such an agreement whereunder provision is made for sharing the profits earned by a partner in a firm by that partner as well as by others, be they strangers or relations, would constitute a sub-partnership, bring into existence the relationship of partners inter se amongst them, without in any manner affecting the partners of the firm. Essentially, therefore, a sub-partnership has its origin in and is traceable to an agreement, whereunder, one of the parties to the agreement, who is already a partner in a firm and is in receipt of a share of profits, agrees to divide or share such profits with the other parties to the agreement. Rights in a sub-partnership are thus referable to and based on contract only.
The above observations also do not help the assessee, as it has nowhere been indicated that the partners of a sub-partnership have the same rights qua the main partnership as the partners constituting the main partnership have.
7. As is clear from the provisions of Section 5(1)(xxxii) exemption would be available only to a person, who is a partner of the firm to which the industrial undertaking belongs. The industrial undertaking belongs to M/s Kishan Flour Mills and by no stretch of imagination it can be said that the present assessee is a partner of the firm, M/s Kishan Flour Mills.
8. In CIT v. Bagyalakshmi & Co. [1965] 55 ITR 660 (SC) a question arose, whether coparceners of Hindu undivided families, whose kartas were partners in a partnership firm could be said to be the partners of such firms. The Hon'ble Supreme Court held that the coparceners could not be the partners of the firm and it wore only the Kartas, who, having entered into the contract of partnership, were the partners. The Hon'ble Supreme Court observed as under :-- A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the karta of a joint Hindu family; he may be a trustee; he may enter into a sub-partnership with others; he may, under an agreement, express or implied, be the representative of a group of persons; he may be a benamidar for another. In all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity. The third parties, whom one of the partners represents, cannot enforce their rights against the other partners nor can the other partners do so against the said third parties.
Their right is only to a share in the profits of their partner-representative in accordance with law or in accordance with the terms of the agreement, as the case may be.
The above observations would show that irrespective of the obligations that Jenendra Kumar Jain may have towards the partners of Sumat Prasad Jain & Co., so far as the partnership firm M/s Kishan Flour Mills was concerned, he functions in his personal capacity and, therefore, he alone is a partner in the firm that owns the industrial undertaking.
The same view was repeated by Hon'ble the Supreme Court in Agarwal & Co. v. CIT [1970] 77 ITR 10. In this case also it was held that where the Karta of an HUF was a partner in a partnership firm, the coparceners of such families could not be deemed to be partners in such partnership firms. The same anology would apply to a partnership firm, which authorises one or more of its partners to enter into a partnership with others and the rest of the partners or the partnership as a body cannot, in law, be deemed to have become partners of the firm, which such partners constitute with third parties. In our view, therefore, the assessee cannot be deemed to be a partner of the firm, M/s Kishan Flour Mills to which the industrial undertaking belongs nor can the said industrial undertaking be deemed to belong to the firm M/s Sumat Prasad Jain & Co., of which the assessee is a partner. We, therefore, agree with the authorities below that the assessee was not entitled to exemption under Section 5( 1)(xxxii) of the Wealth-tax Act.
9. The assessee having failed on the main issue, the consequential contention regarding the quantification of the amount of exemption becomes redundant.