Ramkrishna Bajaj (HUF), Wardha and Others Vs. The Commissioner of Wealth Tax (Vidarbha) - Court Judgment

B.P. Dharmadhikari, J.

1. This reference under the Wealth-tax Act, 1957 is arising out of total eight reference applications moved by different assessees after adjudication of their grievances by the Income Tax Appellate Tribunal, Nagpur Bench (hereinafter referred to as the ITAT for short) in eight wealth tax appeals. The assessment year with which we are concerned is 1981-82. The questions referred are identical in all matters and, therefore, only one/common reference has been made, which governs the eight wealth tax matters.

2. The questions referred to by the ITAT vide its order dated 18th June, 1990, are as under :

(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the value of the interest of the partners in the firms on the basis of the value of the shares as quoted in the market as on 31/03/1981 notwithstanding the fact that the firms' previous year ended on 30/06/1981 ?

(ii) Whether on the facts and in the circumstances of the case, where the assessees' valuation date did not coincide with the valuation date of the firms in which they were partners, the Tribunal was justified in upholding the revaluation of the assets of the firms as on the valuation date of the assessees ?

(iii) Whether the Tribunal was right in holding that unlike section 3(1) (f) of the Income Tax Act, there was no similar specific provision in the Wealth-tax Act or in the Rules that while ascertaining the partner's interest, the valuation date would be the last date of the accounting year of the partner ?

3. However, during arguments, Shri Thakkar, learned Advocate appearing for the respective assessees has submitted that answer to question No.1 is sufficient to decide the entire controversy. He further stated that method of valuation of interest of partners in the firms on the basis of value of shares as quoted in market as on 31/03/1981 or validity of its use, is not in dispute and, hence, the only issue to be gone into is Whether on 31/03/1981, when previous year of respective firms had not ended and was scheduled to end on 30/06/1981, interest of partners in such firms could have been subjected to valuation in terms of Section 7(1) of the Wealth-tax Act read with Rule 2 of the Wealth-tax Rules ? Answer to this issue answers first two questions mentioned supra. We are mentioning this at the threshold, because in compilation handed over by Advocate Shri Thakkar for the applicants for consideration, if written submissions are seen, at Step-1, the challenge to correctness of valuation procedure also appears to have been raised. However, the learned Advocate has not argued it and has submitted that as profit does not accrue on day to day basis, and it is only at the end of previous year of firms i.e. on 30/06/1981, overall view of business of the firms could have been taken and then interest of partners therein could have been worked out, the exercise undertaken on these lines on 31/03/1981 is not legal. He has added that when computation provision cannot be applied in present facts, the charging section also does not apply.

4. Before proceeding further, brief mention of the facts is called for. Total eight assessees as partners filed applications before the ITAT seeking reference of above mentioned questions. On 18/03/1981, the assessees became partners either in M/s. Anant Trading Company or M/s. Kushagra Trading Company. They contributed equity shares held by them in M/s. Bajaj Tempo Limited as their capital in these new firms. These new firms closed their first account on 30/06/1981. The valuation date of assessees was 31/03/1981 and it is not in dispute even today for the assessment year 1981-82, the assessees did show their respective interest in these firms by submitting value of shares contributed by them at costs as their capital. The Wealth-tax Officer while passing assessment order substituted market value of those shares as on 31/03/1981, though firms first year of account was to end and ended only on 30/06/1981.

5. Respective assessees contended that as M/s. Anant Trading Company or M/s. Kushagra Trading Company had no previous year for the year which ended on 31/03/1981 and balance-sheet of these new firms was not prepared as on 31/03/1981, the cost of shares disclosed by them as capital in said firms should be taken as its cost value. Said contention came to be rejected through out and the ITAT has on 18/04/1988 dismissed the appeals of assesses against it. Thereafter, the assessees sought reference as mentioned supra.

6. We have heard Advocate Shri Thakkar for the partners/assesses and Advocate Shri Bhattad for Commissioner of Wealth-tax.

7. Shri Thakkar has submitted that after contributing shares of Bajaj Tempo Limited as their capital in respective partnership firms, the assessees/partners no longer remain owner of shares. The valuation of interest of partners in new firms could not have been decided at any time prior to 30/06/1981. He has invited our attention to provisions of subsection (q) of Section 2 of the Wealth-tax Act, 1957, which defines valuation date and stated that it adopts definition of previous year as in Section 3 of the Income-tax Act, 1961. Our attention is also drawn to Section 3(1)(f) of the Income-tax Act to urge that where the assessee is a partner in a firm, and the firm has been assessed as such, while finding out assessees shares in the income of the firm, the period determined as previous year for assessment of the income of the firm is relevant. Hence, for respective assessees, as their interest in partnership firms is to be found out, the relevant valuation date would be 30/06/1981 only. He emphasizes on the fact that there was no year ending of these new firms prior to 31/03/1981 and hence, the profits could not have been computed before said date.

8. As net wealth means the excess of assets over liabilities, he points out how Section 7 of the Wealth-tax Act prescribes a procedure therefor. The rules have been framed for that purpose and the relevant rule is Rule 2 of the Wealth-tax Rules, 1957. As per said rule, wealth of the firm can be determined only after its accounts are settled at the close of accounting year. Unless and until profit or loss is determined, the assets of the firm and their valuation or liabilities cannot be worked out. As this did not happen in the present matter before 30/06/1981, the wealth of the firms could not have been determined before that date and, hence, interest of assessees partners in above mentioned two firms could not have been decided as on 31/03/1981.

9. He submits that Rule 2 of the Wealth-tax Rules, 1957 is a computation provision. Here as wealth of firms cannot be determined before 30/06/1981, the computation provision is not applicable and as such the charging provision itself is not attracted.

10. He has relied upon various judgments to substantiate his submission and we will refer to the same as and when necessary in the course of this judgment.

11. As against this, Advocate Shri Bhattad submits that judgment of the ITAT, dated 18/04/1988, out of which reference arose, thoroughly examines this contention. He points out that valuation date of assessees partners is not in dispute and the assessees do not contend that it is shifted to 30/06/1981. On 31/03/1981, the assessees had a share/interest in partnership firms and, therefore, it needed to be valued. The provisions of Section 7(2) are not attracted in present facts, as here assessees are not carrying on the business of firm and are not maintaining the accounts of business of firms. The authorities, therefore, have correctly appreciated the controversy and assessment order has been passed properly. The First Appellate Authority (Commissioner of Wealth-tax Appeals) has found that case falls under Section 7(1) of the Wealth-tax Act and the assessees also do not dispute this. The provisions of Section 7(1) are subject to rules and, therefore, reference to rules also becomes necessary. As per Rule 2C(d) of the Wealth-tax Rules, market value of shares on valuation date has been rightly accepted and acted upon by respondents. He relies upon provisions of Section 3(1)(d)(i) of the Income-tax Act and submits that the assessees do not dispute that their previous year expires on 31st of March. He has also made reference to various judgments to submit that as valuation date is not in dispute, the value of interest of assesses as partners in firms as on that day was required to be determined and that has been correctly determined. We will go to the judgment cited by him little later.

12. Section 2(q) of the Wealth-tax Act defines valuation date with reference to any year for which an assessment is to be made under the Wealth-tax Act, to mean the last date of the previous year as defined in Section 3 of the Income-tax Act, if an assessment was to be made under the Income-tax Act for that year. The perusal of Section 3 of the Income-tax Act shows that financial year immediately preceding the assessment year qualifies as previous year. We need not go into these details in present matter, because of the fact that 31/03/1981 is the valuation date of assesses/partners for the purpose of Wealth-tax Act is not in dispute. Advocate Shri Thakkar had not submitted that qua the contribution as their capital in firms made by respective assessees partners on 18/03/1981, the valuation date changes.

13. The respective assessees partners have shown their contribution in the new firm, which came into existence on 18/03/1981 at cost value and not at market value. The market value as on 31/03/1981 is more by 2.5 times to 3.5 times of this cost value.

14. Section 3 of the Wealth-tax Act, 1957 stipulates that subject to the other provisions of the Wealth-tax Act for every assessment year, a wealth tax in respect of net wealth on corresponding valuation date of every individual at the rate specified in Schedule-I is to be charged. The relevance or application of this provision in this case is not in dispute. As per Section 4 of the Wealth-tax Act, the value of assets which on the valuation date are held by such assessee is liable to be included for the purpose of calculating such tax. As per Section 4(1)(b) of the Wealth-tax Act, where the assessee is a partner in a firm, value of his interest in the firm or association determined in prescribed manner is also to be included in his net wealth. The procedure for determining value of assets is given in Section 7(1) of the Wealth-tax Act. As per Section 7(1), an asset is to be valued at the price, which it would fetch if sold in open market on the valuation date. This provision in Section 7(1) is 'subject to rules'.

15. Rule 2 of Wealth-tax Rules, 1957 is on the valuation of interest in partnership or association of persons. As per Rule 2(1), the net wealth of the firm on the valuation date is to be first determined. That portion of net wealth of firm as is equal to the amount of its capital is to be allocated amongst the partners or members in the proportion in which capital has been contributed by them. The residue of net wealth of the firm is thereafter to be allocated amongst the partners or the members in accordance with agreement of partnership for the distribution of assets in the event of dissolution of the firm. If there is no such clause in agreement, then residue is to be distributed in the proportion in which partners are entitled to share profits. The sum total of amounts so allocated to a partner is recognized as the value of the interest of that partner in the firm. In the present matter, we are not concerned with other provisions. Rule 2 does not work after the date or depend on the date on which accounts of the firm are decided to be settled annually. It can also govern the situations in which the partner resigns or retires or the business of the firm is over, discontinued, dissolved etc. prior to such year end. Interest of the assessee partner may be required to be worked out prior to that date in such contingencies.

16. This mandate of Section 4(1)(b) read with Section 7(1) of the Wealth-tax Act and Rule 2(1) of the Wealth-tax Rules show a procedure or code within the Wealth-tax Act and the Wealth-tax Rules framed thereunder for finding out net wealth of the assessee, who is a partner in a firm. The Wealth-tax Act or the Wealth-tax Rules prescribe a procedure to work it out with a reference to valuation date of the assessee. There is no reference to any other date and, hence, the fact that the previous year of firm was to end on 30/06/1981 has got no relevance in this scheme. An importance is given to valuation date of the assessees and here that valuation date is 31/03/1981.

17. The accounts of new firm, which came into existence on 18/03/1981 may be settled and closed on 30/06/1981, but that has got no bearing on valuation date of assessees and that does not mean that assesses cease to hold an interest in the firm on valuation date i.e. 31/03/1981. Precisely, this situation is envisaged and answered in above mentioned provisions of the Wealth-tax Act and Wealth-tax Rules. It is the Assessing Authority, which has to find out the market value of the assets in the mode and manner laid down in Rule 2 of the Wealth-tax Rules. Such Assessing Authority has to first determine net wealth of the firm and then its portion which can be said to be equal to the amount of its capital. This amount is then to be allocated amongst various partners in the proportion in which they have contributed to the capital of the firm. Its residue can thereafter be allocated amongst the partners in same proportion as is provided for in case of dissolution of the firm or then as per their agreed profit sharing ratio. This exercise, therefore, is independent of and can be performed without waiting for the settlement of its account by the firm.

18. The Officer assessing wealth tax on valuation date of assessee has been given necessary powers and the parliament has also prescribed procedure to be adopted by him to ascertain value of interest of such assessee partner in the firm.

19. In this background, it will be appropriate to refer to various judgments pressed into service before us by Advocate Shri Thakkar. The judgment of Hon'ble Apex Court reported at (1985) 156 ITR 509 in Sunil Siddharthbhai vs. Commissioner of Income-Tax, Ahmedabad shows that when the assessee, a partner in a firm, made over to the firm certain shares in a company which were held by him, there was a transfer of the shares, though he received no consideration within the meaning of Section 48 of Income-tax Act, 1961. The Hon'ble Apex Court also points out that no profit or gain accrues for the purposes of its Section 45. The said judgment does not consider the requirement of charging wealth-tax on interest of such assessee partner in the firm held by him on valuation date. The Hon'ble Apex Court has also observed that charging section and computation provisions under each head of income constitute an integrated code and when there is a case to which computation provisions cannot be applied, such a case cannot fall within the charging section. The Hon'ble Apex Court has found that for the purposes of above mentioned provisions in the Income-tax Act, the interest of such an assessee partner cannot be evaluated immediately and it is subjected to operation or future transaction of the partnership. It may diminish in value depending on accumulating liabilities. Here, we are not concerned with any such contingency. Provisions of the Wealth-tax Act require tax to be charged on interest of a partner in firm as on valuation date and also contain a procedure for determining that interest. It, therefore, cannot be said that computation provisions cannot be operated here. The valuation date of respective assessee is just within thirteen days of formation of firm and assessees have not pointed out any transactions affecting their contribution in the capital of firms within this short duration.

20. The judgment of the Hon'ble Apex Court reported at (1965) 56 ITR 42 in Commissioner of Income-Tax, Gujarat vs. Ashokbhai Chimanbhai is relied upon to urge that profits do not accrue from day to day. It is settled proposition that unless the right to profits comes into existence, there is no accrual of profits and the destination of profits is to be determined by the title thereto on the day on which they arise. Here, the value of interest of assessee as a partner in the firm on valuation date is being subjected to wealth tax and we are not concerned with the profits of the firm as on that day. We have already at the beginning of this judgment taken into consideration the fact that propriety of exercise of determining such value only on the basis of market value of shares, as undertaken by the Wealth-tax Authorities, is not in dispute before us.

21. Learned Counsel Shri Thakkar has also relied upon a judgment reported at (1981)128 ITR 294 in Commissioner of Income-Tax, Bangalore vs. B.C. Srinivasa Setty to explain mutual relation between charging section and computation provisions. For the reasons already disclosed above, it is not necessary for us to delve more into this judgment.

22. Advocate Shri Bhattad has relied upon the Division Bench Judgment of Calcutta High Court reported at 168 ITR 208 in Commissioner of Wealth Tax vs. Surrendra Paul to submit that when assessee partner is not carrying on business of a firm and assessee is maintaining account of his business regularly, the provisions of Section 7(2) of the Wealth-tax Act and Rules 2A to 2G of the Wealth-tax Rules cannot be extended to cover the cases. Such a case is covered by Section 4(b) and Rule 2. He has relied upon another Division Bench Judgment of Calcutta High Court reported at 212 ITR 252 in Khimji Hunsraj (HUF) vs. Commissioner of Wealth Tax, which is on the same lines.

23. The judgment of Division Bench of this Court reported at 170 ITR 17 in Commissioner of Wealth Tax vs. V.M. Shah, is relied upon by him to show that the assessee partner s share in outstanding fees of firm of Chartered Accountants though not shown in balance-sheet is includible in his net wealth even though firm was following cash system of accounting. The Division Bench of Bombay High Court has looked into the provisions of Section 2(e) of the Wealth-tax Act, which defines assets . The judgment of the Hon ble Apex Court reported at (1985) 152 ITR 454 in Commissioner of Wealth Tax vs. Vysyaraju Badreenarayana Moorthy Raju shows that interest due on accrual basis though not realized by assessee on the outstanding of his money lending business, was liable to be included in his net wealth. The Hon ble Apex Court in paragraph 6 observes that the system of accounting, mercantile or cash or hybrid, is of no relevance for the purposes of determining the assets of assessee. In the light of this discussions, we do not wish to go into the judgment of Hon ble Apex Court reported at (1999) 237 ITR 61 in Commissioner of Wealth Tax vs. T.S. Sundaram, where the Hon ble Apex Court held that in computing the net wealth of a firm for the purposes of Rule 2, the assets exempt under Section 5 needed to be included and then apportioned amongst the partners for granting exemption in their individual assessment after computing their own individual net wealth. In the background of discussions supra, we find that the ITAT was justified in holding that the provisions of Rule 2 of the Wealth-tax Rules and Section 4(b) of the Wealth-tax Act were relevant in the present matter. We find that the efforts of assessee to show that there was no balance-sheet of the firm is not decisive. The ITAT has correctly appreciated the position in paragraph 6.1 and onwards where it has looked into relevance of Section 7(1) of the Wealth-tax Act and Scheme of Rule 2 of the Wealth-tax Rules and deeming provisions contained in Section 4(1)(b) of the Wealth-tax Act.

24. The contention of applicant/assessee partner that value of his interest in a firm cannot be worked out on 31/03/1981 is totally erroneous in the background of scheme of the Wealth-tax Act and Rules looked into by us supra. The ending of previous year of the firms on 30/06/1981 has got no relevance as it may show valuation of his interest in firm as on 30/06/1981 and not on 31/03/1981. The computation provisions in the Wealth-tax Act and Rules enable and empower the department to assess his interest as partner in the firm even on 31/03/1981 and there is no requirement in law to wait till 30/06/1981 for that purpose. The fact that value of partner's interest as on 31.3.1981 needed determination as per charging provision is not in dispute. Only stand of respective assessee is in absence of a provision to compute it as on 31.3.1981, the charging section can not be invoked. We have not found any lacuna in the Act which allows such an interest of the partner to go unassessed for the period from his valuation date till the end of previous year of his firm. There is complete scheme which enables the Assessing Officer under Wealth Tax Act to proceed to ascertain such valuation of partner's interest on any valuation date ignoring the date on which previous year of his firm comes to an end.

25. Accordingly, we answer above mentioned question No.1 in affirmative i.e. in favour of the revenue and against the assessee. Reference is thus answered in favour of the Wealth Tax Department.

Reference proceedings are disposed of. No costs.