Dr. B.P. Saraf, J.
1. By this reference made under section 27(1) of the Wealth-tax Act, 1957, at the instance of the Revenue, the Income-tax Appellate Tribunal ('the Tribunal') has referred the following question of law to this court for opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee-Hindu undivided family was entitled to exemption under section 5(1)(iv) of the Wealth-tax Act, 1957, in respect of the properties of Mohatta Bros. Property Co. as a co-owner?'
2. The assessee is a Hindu undivided family. It had certain interest as a co-owner in the properties of Mohatta Bros. Property Co. ('Mohatta Bros.'). The share of the assessee in the said propertied on the valuation date relevant to the assessment year 1978-79 was valued at Rs. 82,256. The assessee filed its return of wealth under the Wealth-tax Act, 1957 ('the Act') for the assessment year 1977-78 on May 15, 1979, showing a net wealth of Rs. 5,53,400. In the above return, it also claimed exemption under section 5(1)(iv) of the Act in respect of its interest in the properties of Mohatta Bros. which was valued at Rs. 82,256. The Wealth-tax Officer was not the owner of the properties which was vested in the association of persons, Mohatta Bros., of which the assessee was a co-owner. According to the Wealth-tax Officer, the interest of the assessee as a co-owner in the association of persons was a movable property and hence, no exemption was available to it under section 5(1)(iv) of the Act in respect thereof. The assessee appealed to the Appellate Assistant Commissioner. It was submitted by the assessee before the Appellate Assistant Commissioner that it was entitled to exemption under section 5(1)(iv) of the Act in respect of its share in the properties of the association of persons. The Appellate Assistant Commissioner did not accept the above contention of the assessee and held that it was not entitled to exemption under section 5(1)(iv) of the Act. He, however, held that the association of persons was entitled to such an exemption. Accordingly, he directed the Wealth-tax Officer to determine the value of the assessee's interest after giving exemption under section 5(1)(iv) of the Act to the association of persons. Both the assessee as well as the Revenue were aggrieved by the above order and, hence, both of them appealed against the same to the Income-tax Appellate Tribunal ('the Tribunal'). The Tribunal held that the exemption under section 5(1)(iv) of the Act could not be allowed at the stage of computation of the value of the entire property in the hands of the association of persons. According to it, first the value of the entire property should be determined without making any such deduction, then the value of the assessee's share therein should be determined, and from the value of the assessee's share so determined, deduction should be allowed to the assessee under section 5(1)(iv) of the Act. Hence, this reference at the instance of the Revenue.
3. There is no dispute about the fact that the Wealth-tax Act provides for levy of wealth-tax in respect of net wealth of every individual, Hindu undivided family and company. Section 3 of the Act, which is the charging section, as it stood at the material time, reads :
'3. Charge of wealth-tax. - Subject to the other provisions contained in this Act, there shall be charged for every assessment year commencing on the 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.'
4. Wealth-tax is thus leviable on the 'net wealth' which has been defined in clause (m) of section 2 of the Act to mean :
'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 owned by the assessee on the valuation date other than -....'
5. 'Assets' has been defined in clause (e) of section 2 to included property of every description, movable or immovable, except those specifically excluded.
6. Section 4 provides for inclusion of certain assets in the net wealth of an individual. Clause (b) of sub-section (1) thereof deals with the case of an assessee who is a partner in a firm or a member of an association of persons. Section 4(1)(b), so far as relevant, as it stood at the material time reads :
'4. Net wealth to include certain assets. - (1) In computing the new wealth of an individual, there shall be included, as belonging to that individual -....
(b) where the assessee is a partner in a firm or a member of an association of persons (not being a co-operative housing society), the value of his interest in the firm or association determined in the prescribed manner.'
7. The manner of determination of the value of the interest of the individual in the partnership or association of persons was prescribed in rule 2 of the Wealth-tax Rules, 1957 ('the Rules'). This rule remained operative till April 1, 1989. In view of the important bearing it has on the determination of the controversy before us, it is set out below :
'Rule 2. Valuation of interest in partnership or association of persons. - (1) The value of the interest of a person in a firm of which he is a partner or an association of persons of which he is a member, shall be determined in the manner provided herein. The net wealth of the firm or the association on the valuation date shall first be determined. That portion of 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 members shall be treated as the value of the interest of that partner or member in 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.'
8. Section 5 provides for exemption in respect of certain assets. This section, so far as relevant, as it stood at the material time, reads :
'5. Exemption in respect of certain assets. - (1) Subject to the provisions of sub-section (1A) 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 :
Provided that, where the value of such house or part exceeds one hundred thousand rupees, the amount that shall not be included in the net wealth of the assessee under this clause shall be one hundred thousand rupees.'
9. On a combined reading sections 3, 4 and 5 and definition of 'assets' in clause (m) of section 2, it becomes clear that, -
(i) Wealth-tax is levied on the net wealth of every individual, Hindu undivided family and company (section 3).
(ii) Levy of wealth-tax was discontinued in respect of the net wealth of companies for and from the assessment year 1960-61, (see section 13 of the Finance Act, 1960). Consequently, wealth-tax is now leviable only in respect of the net wealth of individuals and Hindu undivided families.
(iii) Net wealth, for the purpose of levy of wealth-tax, means the aggregate value of the assets, belonging to the assessee, completed in accordance with the provisions of the Act including assets required to be included in his net wealth under the Act minus the value of all the debts owed by the assessee.
(iv) The value of the interest of the assessee, who is a partner in a firm or a member of an association of persons, has to be included in the net wealth of such assessee. (vide section 4(1)(b)). For this purpose, the value of his interest in the firm or association, has to be determined in the prescribed manner. The manner of valuation of such interest has been prescribed by rule 2.
(v) In computing the net wealth of the assessee, one house or a part thereof is not be included in the net wealth of the assessee (subject, however, to the monetary ceiling in regard to its value) specified in the proviso to clause (iv) of section 5(1) of the Act.
10. This is the summary of the relevant provisions of the Act having a bearing on the determination of the controversy in this case. This provision has undergone a radical change with the amendments made by the Finance Act, 1992, which came into effect from April 1, 1993. As in the present case, we are dealing with a case which relates to the assessment year 1978-79, it is not necessary for us to deal with the same.
11. The only controversy that fails for determination in this case is whether the assessee, who is a member of an association of persons to whom the house belongs, is entitled to the benefit of section 5(1)(iv) of the Act or not. There is cleavage of opinion on this question between the High Courts. One view, which is the view of most of the High Courts, is that a partner of a firm or a member of an association is entitled to such exemption in respect of the value of his interest in the house determined in the manner prescribed by rule 2. The other view, which has been taken by the Madras High Court, is that a partner is not entitled to any exemption in respect of a house owned by the firm because he cannot claim any specific interest in such house, and further, his interest in the house belonging to the firm cannot be considered as immovable property. The important decisions is support of the right to get exemption are CWT v. Mrs. Christine Cardoza : [1978]114ITR532(KAR) ; CWT v. I. Butchi Krishna : [1979]119ITR8(Orissa) ; CWT v. Sri Naurangrai Agarwalla : [1985]155ITR752(Cal) ; CWT v. Smt. Kaethikamal Kumari Varma : [1989]179ITR543(Ker) ; CWT v. Tarachand Agarwalla ; CWT v. A. K. Tandon : [1992]198ITR26(Delhi) and CWT v. Vipin Kumar . This is also the view taken by this court in Wealth-tax Reference No. 60 of 1977 CWT v. Smt. Shanti R. Sharma decided by the Nagpur Bench of this court on September 23, 1992. The other view is available in Purushothamdas Gocooldas v. CWT : [1976]104ITR608(Mad) .
12. We have carefully gone through all these decisions, in particular, the decision of the Madras High Court in Purushothamdas Gocooldas v. CWT : [1976]104ITR608(Mad) . It appears that the Madras High Court based its conclusion mainly on the decision of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa, : [1966]3SCR400 . In that case, the question for determination before the Supreme Court was whether a particular document by which the interest of a partner in partnership assets comprising immovable properties was also relinquished, was compulsorily registrable under section 17(1)(c) of the Registration Act, and it was in that context that the Supreme Court held that the interest of a partner was not immovable property as such but was movable property and hence section 17(1)(c) of the Registration Act was not attracted. Other High Courts, however, felt that reliance on the above decision of the Supreme Court, without having due regard to the provisions of the Wealth-tax Act, was not justified. The opinion of these courts appears to be that in the context of the Wealth-tax Act, the assessee in deemed to have a specific interest in each of the assets of the firm and, as such, he is entitled to claim exemption under section 5(1)(iv) in respect of his interest in the house held by the firm which is included in his net wealth by virtue of section 4 of the Act.
13. On a careful consideration of the various decisions referred to above, we find ourselves in agreement with all those High Courts which have taken the view that a partner of a firm is entitled to exemption in respect of his interest in the house property of the firm included in his net wealth. We are of the clear opinion that the ratio of the decision of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa, : [1966]3SCR400 , has no application in determining the controversy in regard to the claim of the assessee for exemption under section 5(1)(iv) of the Act, in view of the scheme of the Wealth-tax Act, which provides for inclusion of the value of interest of the assessee in the firm or the association of persons 'determined in the prescribed manner'. The manner of valuation is prescribed by rule 2. From the above provisions, it is obvious that the interest of a partner in a firm is determined not in accordance with the provisions of the Partnership Act, but in the manner prescribed by the Wealth-tax Act (which has been done in rule 2). Rule 2 provides that for ascertaining the value of interest in partnership or association of persons, first the net wealth of the firm or the association has to be determined. Then, the value of the interest of the partner or member has to be ascertained in the manner set out therein. Sub-rule (2) lays down the manner of determination of the interest of the assessee in the assets located outside India, if such assets are included in the net wealth of the firm or association. Sub-rule (3) prescribes the manner of determination of the interest of the assessee in assets referred to in section 5(2) of the Act, if the wealth of the firm or association includes any such asset. These provisions are clear indications that the value of interest of a partner or a member in the firm or association means his interest in each individual asset of the firm or association. The nature of an asset included in the net wealth of the firm does not change its character on allocation of its value amongst the partners or members. That being so, the value of the house included in the net wealth of the firm or association, even after allocation, will retain its character of value of house property in the hands of the partner or the member, to the extent the share of his interest in the partnership represents share in the value of the house property. Hence, the partner or a member would be entitled to exemption under section 5(1)(iv) of the Act in respect thereof in the computation of his net wealth.
14. This position has been very aptly summed up by this court in CWT v. Smt. Shanti R. Sharma (supra) by saving that the stage at which exemption under section 5(1)(iv) has to be given effect to in such a case, is the stage of computation of the net wealth of the assessee. In the words of Mohta J. (as his Lordship then was), the correct approach would be -
(a) To determine the net wealth of the firm.
(b) To allocate amongst the partners the net wealth of the firm indicating the nature of assets and liabilities.
(c) To determine the net wealth of the partner by including the said share.
(d) To determine the quantum of deductions under section 5(1) of the Act at that stage.
15. The deduction, therefore, has to be allowed in the case of the assessee-partner and not in the case of the firm.
16. Though the above decision was rendered while dealing with the entitlement of a partner of a firm to exemption under section 5(1)(iv) in respect of a house forming part of the partnership assets, the ratio of the same would apply proprio vigore to a member of an association.
17. We are also supported in our above conclusion by the ratio of the decision of the Supreme Court in Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) , where dealing with the position of the partners vis-a-vis partnership assets and the nature of their right therein in the context of the Income-tax Act, 1961, it was observed (at page 59) :
'.... it seems to us clear that a partnership-firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position, it is difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership....'
18. It appears that this position had been accepted by the Revenue itself which is evident from the circular of the Board dated March 6, 1982, (Circular No. 330 - see [1982] 135 ITR 14), where dealing with the question whether exemption under section 5(1)(iv) of the Estate Duty Act was available in respect of a house owned by a firm in which the assessee was a partner, it was stated :
'The Board are advised that a firm has no legal existence. The partnership property vests in all the partners and every partner has an interest in the property of the partnership. Since under section 33(1)(n) property belonging to the deceased will qualify for exemption and since the expression 'belong' would include cases where an interest less than full ownership exists, exemption under section 33(1)(n) would be admissible in respect of a house belonging to the firm.'
19. We fail to understand why, despite its above opinion which was communicated to all concerned by its circular, a stance contrary to and inconsistent with that view has been taken in a similar controversy arising under the Wealth-tax Act.
20. In our opinion, the above view, applies mutatis mutandis to interpretation of section 5(1)(iv) of the Act.
21. For the reasons set out above, we are of the clear opinion that the assessee-Hindu undivided family was entitled to exemption under section 5(1)(iv) of the Wealth-tax Act, 1957, in respect of the house properties of Messrs. Mohatta Bros. Property and Co. as a co-owner. Hence, the question referred to us is answered in the affirmative and in favour of the assessee.
22. In view of the facts and circumstances of the case, we make no order as to costs.