Judgment:
1. In all these appeals the grounds raised are common. They were, therefore, heard together and are being disposed of by combined order for the sake of convenience. Grounds in the case of IT Appeal No. 309 (Delhi) of 1985 which reflect the grounds in other appeals also read as under : I. That the learned Wealth-tax Officer and the learned Appellate Assistant Commissioner have erred in law and in not allowing exemption under Section 5(1)(iv) of the Wealth-tax Act, 1957, while computing interest of assessee in the partnership firms Jivan Corpn., Roop Industries & Khanna Poultry Farm as required by Section 4(1)(b) in accordance with Rule 2D(c)of the Wealth-tax Rules, 1957.
II. That it is prayed that justice be done to the appellant and necessary relief on the above ground be please ordered to be allowed.
2. The short controversy raised before us was whether, while computing the interest of a partner in a firm, exemption clauses should be given effect to in computing the net wealth of the firm and then divide it amongst the partners in the prescribed manner or whether the net wealth of the firm should first be ascertained and the proportionate share of the partners should be taken in their respective assessments and the effect to the various exemption clauses should be given in the individual assessment of the partners. The assessee's case is that the effect to the various exemption clauses, particularly, Clause (iv) of Sub-section (1) of Section 5 of the Wealth-tax Act, 1957 ('the Act') should be given in the case of the firm while working out its net wealth in terms of Rule 2 of the Wealth-tax Rules, 1957, and the share of the partner in such net wealth should be included in his wealth. The department's case, on the other hand, is that the individual partners alone are assessees under Section 3 of the Act, and, therefore, the effect to the various exemption clauses can be given in their hands only because the said exemption clauses are available only to the assessee and not to any other entity. The firm is not taxable entity and an assessee. Under the Act, therefore, the exemption under Section 5(1)(iv) cannot be given in the hands of the firm. Besides, it is pointed out that the maximum amount of relief admissible under Section 5(1)(iv) has already been granted in the case of all the assessee-appellants and so more relief than admissible under Section 5(1)(iv) cannot be given to them through the computation of their interest in the firm's net wealth.
3. On behalf of the assessees reliance is placed on the following decisions : CWT v. Vasantha [1973] 87 ITR 17 (Mad.), Purushothamdas Gocooldas v. CWT [1976] 104 ITR 608 (Mad.) and CWT v. Narendra Ranjalker [1981] 129 ITR 203 (AP). Besides the order of the Tribunal, Calcutta Bench 'C' in the case of Premnarain Praveen Kumar v. WTO [1985] Taxation 76(6)-21 a copy of which has been placed on record and is also cited in support of the above reasonings. Reference is also made to the decisions of the Hon'ble Supreme Court in the cases of Juggilal Kamlapat Bankers v. WTO [1984] 145 ITR 485 and Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 in support of the proposition that the firm has an independent status with regard to the assets owned by it vis-a-vis its partners and the wealth of the firm cannot be regarded as wealth of the partners.
4. In support of the departmental stand reliance was placed on the following decisions-CWT v. Mrs. Christine Cardoza [1978] 114 ITR 532 (Kar.), CWT v. I. Butchi Krishna [1979] 119 ITR 8 (Ori.), Narsibhai Patel v. CWT [1981] 127 ITR 633 (MP), CWT v. Sri Naurangrai Agarwalla [1985] 155 ITR 752 (Cal.) and CWT v. Mira Mehta [1985] 155 ITR 765 (Cal).
5. We have carefully gone through the facts of the case and the rival submissions.
6. In Premnarain Praveen Kumar's case {supra) this is what the Tribunal had stated in paragraphs 7 to 12 thereof: 7. We have given careful consideration to the rival submissions. The valuation of the share of a partner in a firm is governed by the statute. In terms of Clause (b) of Sub-section (1) of Section 4 of the Act, the value of the interest of a partner in the firm has to be 'determined in the prescribed manner'. Sub-section (2) of Section 4 stipulates that: In making any rules with reference to the valuation of the interest referred to in Clause (b) of Sub-section (1), the Board shall have regard to the law for the time being in force relating to the manner in which accounts are to be settled between partners of a firm ...
on the dissolution of a firm....
8. The provisions pertaining to the settlement of accounts amongst the partners are contained in Section 48 of the Indian Partnership Act, 1932. The said section reads as follows : 48. Mode of settlement of accounts between partners.-In settling the accounts of a firm after dissolution, the following rules, shall subject to agreement by the partners, be observed : (a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.
(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order :- (ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital ; (iii) in paying to each partner rateably what is due to him on account of capital; and (iv) the residue, if any, shall be divided among the partners in the proportions of which they were entitled to share profits.
The above section is modelled on the pattern of Section 44 of the Partnership Act, 1890, of the United Kingdom. Lindley on Partnership has explained the above scheme of settling the accounts amongst the partners in the following words : It follows from the rules contained in the above section that if the assets are not sufficient to pay the debts and liabilities to non-partners, the partners must treat the difference as a loss and make it up by contributions inter se. If the assets are more than sufficient to pay the debts and liabilities of the partnership to non-partners, but are not sufficient to repay the partners, their respective advances, the amount of unpaid advances ought to be treated as a loss, to be met like other losses. In such a case the advances ought to be treated as a debt of the firm, but payable to one of the partners instead of to a stranger. If, after paying all the debts and liabilities of the firm and the advances of the partners, there is still a surplus, but not sufficient to pay each partner his capital, the balances of capitals remaining unpaid must be treated as so many losses to be met like other losses.
The above scheme, as contained in Section 48 of the Partnership Act was also considered by their Lordships of the Hon'ble Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. Their Lordships explained the scheme of Section 48 in the following terms : From a perusal of these provisions it would be abundantly 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 what a partner is entitled to his share of profits, if any, accruing to the partnership from the realisation of the property, and upon dissolution of the partnership to a share in the money representing the value of the property. 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 at his own. Nor can he assign his interest in a specific item of the partnership property to any one. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remains after satisfying the liabilities set out in Clause (a) and Sub-clauses (i), (ii) and (iii) of Clause (b) of Section 48...(page 1303).
Their Lordships approvingly quoted the following extracts from Lindley on Partnership, 12th edn. at page 375 : What is meant by the share of a partnership assets after they have been all realised and converted into money, and all the partnership debts and liabilities have been paid and discharged. This it is, and this only which on the death of a partner passes to his representatives, or to a legatee of his share ... and which on his bankruptcy passes to his trustee.(p. 1303) 9. It is the above scheme of the settlement of accounts between the partners, which has been directed by Sub-section (2) of Section 4 to be incorporated in rules to be made in terms of clause {b) of Sub-section (1) of Section 4 aforesaid. Rule 2 of the Wealth-tax Rules, 1957 '(the Rules)' is the rule pertaining to the subject-matter. Sub-rule (1) of the said rule reads, inter alia, as follows : The value of the interest of a person in a firm of which he is a partner . .. shall be determined in the manner provided herein. The net wealth of the firm . . . on the valuation date shall first be determined. The portion of the net wealth of the firm ... as is equal to the amount of its capital shall be allocated amongst the partners ... in the proportion in which capital has been contributed by them. The residue of the net wealth of the firm . . . shall be allocated amongst the partners ... in accordance with the agreement of partnership . . . for 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 . . .
10. A combined reading of aforesaid provisions indicates that the share of a partner in the firm has to be determined more or less on the same principles as are contained in Section 48 even though on the valuation date the firm does not stand dissolved. The share of a partner under Section 48 does not extend to any particular asset of the firm as such, but to the excess of the value of all the assets over all the liabilities of the firm. A partner can claim his shares only in such excess. If there be no excess, he will have no share in the firm even though the assets of the firm may be numerous. The assets, no doubt, belong to all the partners jointly, but no individual asset of a firm, whether it be shares or property, would belong to a partner individually. This being so, the contention of the assessee that the shares belonged to him and that, therefore, he should be allowed exemption in respect thereto under Section 5(1)(iv) cannot be sustained. What belongs to the partners is not pro rata share in the shares of the various companies owned by the firm, but a pro rata share in the excess of the assets over the liabilities. In the present case we have noted that the assets in all the years far exceed the capital of the partners. No individual asset can be said to be belonging to any partner for if that were so, the partners would be asking for much more than what they are entitled to after paying off their liabilities of the firm. In law, it is not possible to own an asset without discharging liabilities.
To say, therefore, that the assets of a firm belong to an individual partner, pro rata would be against the law. All of them belong to all the partners jointly, but none of them belongs to an individual partner individually. What belongs to an individual partner in his pro rata share in the excess of all the assets over the liabilities and not a pro rata share in each individual asset.
11. At the same time, it would not be correct to say that the relief under Section 5(1)(iv) cannot be granted to a partner in respect of the exempted assets. What all the partners are entitled in their individual capacities would be eligible to them with regard to the assets owned by them jointly also. The relief cannot be denied to them only because they owned the assets jointly and not individually. The law on this point was well brought out by their Lordships of the Hon'ble Patna High Court in the case of CIT v. Nand Lal Jalan [1980] 122 ITR 781, when they made the following observations, explaining this aspect of the law : Now, therefore, keeping in view the above discussions, it cannot but be said that even though during the subsistence of the partnership, assets thrown into the partnership by the partners get merged together and lose their identity, yet all the same, the assets as a whole do belong to the partners. In computing the net wealth of the firm by reference to Rule 2 of the Wealth-tax Rules, if a partner qualified for any of the exemptions provided under the Act, such exemptions must be taken into consideration for determining the net wealth of the firm, in terms of the said rule . . . . (p. 788) 12. In view of the above law, we hold that while computing the net wealth of the firm the exemption available to all the partners in terms of Section 5{1)(xxiii) ought to be allowed while computing the net wealth of the firm. The shares may not belong to an individual partner, but they do belong to all the partners and, therefore, while computing the net wealth of the firm, due recognition of this joint ownership has to be taken and due relief as provided under the law has to be allowed. The WTO was, therefore, wrong in not granting exemption in respect of the shares while computing the net wealth of the firm. He should now recompute the net wealth of the firm after deducting the exemption under Section 5(1){xxiii), read with Section 5(1A) from the net wealth of the firm. The proportionate share of the partner will be computed with reference to such net wealth and not with reference to net worth of the firm as was done by the WTO.The proper inference to be drawn from the above discussion would be to hold that the exemption under Section 5(1)(iv) is available only to the assessee-partners, and not to the firm, because the firm is not an assessee. It is one of the modes of giving due relief under Section 5(1)(iv) to the partners, with regard to the assets jointly owned by them as partners and not by any one of them, that the relief in question has to be taken into account, while computing net wealth of the firm as explained in paragraphs 11 and 12 of the aforesaid order.
If, however, it could be shown, as is the position, in the present case, that the maximum exemption available under Section 5(1)(iv) has already been granted to the partners, it would, in our opinion, be going against the specific provision of the law to direct that exemption higher than the maximum limit be granted to the assessee through the instrumentality of the firm. Therefore, in a case where maximum benefit has already been availed of by a partner under Section 5(1)(iv), it would not be correct to grant further relief to him in violation of the statute, purportedly in terms of Rule 2, no rule can be interpreted to override the specific provision of the statute to give effect to which the said rule is made. In this view of the matter, we are unable to interfere with the orders of the learned AAC in the present case.