COMMISSIONER OF WEALTH TAX Vs. KUNHALI VARMA

JUDGEMENT

(1.) THE Income Tax Appellate Tribunal, Cochin Bench has, under S. 27 (1)of the Wealth Tax Act, 1957, referred the following question of law for the opinion of the High Court: " Whether, on the facts and in the circumstances of the case, the assessee partner is entitled to exemption u/s. 5 (1) (iva) in respect of the agricultural properties of the firm?". THE question referred is covered by the decision of a Division Bench of this court reported in Commissioner of Wealth Tax v. Jose Mathew 1987 (2) KLT 67. But the case has come up before a Full Bench as another Division Bench felt that the decision in Jose Mathew's case requires reconsideration.

(2.) THE assessee is a partner of a firm called M/s. Koliat Estates. THE assets of the firm include agricultural lands. In computing the net wealth of the assessee his interest in the firm was taken into account as required by S. 4 (1) (b) of the Wealth Tax Act. THE assessee's claim for exemption under S. 5 (1) (iva) of the Act in respect of the value of her share of the agricultural assets of the firm was not accepted by the Wealth Tax Officer. In appeal the Appellate Assistant Commissioner allowed exemption under S. 5 (1) (iva) in computing the net wealth of the firm and directed a fresh assessment allocating the net wealth of the firm amongst the partners in accordance with the Wealth Tax Rules. In further appeal at the instance of the assessee, the Tribunal has allowed exemption under S. 5 (1) (iva) in computing the net wealth of the assessee. THE above question of law referred to this Court under S. 27 (1)of the Act arises from the common order of the Tribunal passed in respect of the assessment years 1970-71 to 1973-74.

(3.) IN Sunil Siddharthbhai v. Commissioner of INcome Tax ( (1985) 156 ITR 509) the question for decision before the Supreme Court was whether the capital contributed by a partner to a firm at an appreciated value will result in capital gains and whether the same is assessable as income in his hands. IN that case it was held that where the partner transfers certain shares held by him in limited companies as his contribution to the assets of the firm of which he is a partner, there was transfer of the capital asset within the meaning of S. 45 of the INcome Tax Act ; but since, however, the consideration received by the assessee on such transfer does not fall within the contemplation of S. 48 of the Act, no profit or gain could be said to arise and there was no capital gain exigible to tax under the INcome tax Act. IN that case the Supreme Court observed at page 516: " IN support of the submission that there is no "transfer" in the general sense of that term when a partner brings his personal assets into the firm as his contribution towards its capital, learned counsel points out that a partnership firm is not a separate legal entity and that the assets owned by the partnership are collectively owned by the partners. We have no hesitation in accepting that proposition, for, in Malabar Fisheries Co. v. CIT (1979) 120 ITR 49 (SC), this court observed (p. 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. " CWT v. Sri Naurangrai Agarwalla (1985) 155 ITR 752 (Cal) related to the case of an assessee who was a partner in a partnership firm. The firm owned a house property being used by the partners for their residence. IN his wealth tax assessment the assessee claimed exemption under S. 5 (l) (iv) of the Wealth Tax Act in respect of his share in the said house. A Division Bench of the Calcutta High Court, after construing the relevant sections of the Act and the Rules, held that the partnership firm was not a legal entity and the property of the firm in law belonged to all the partners constituting the firm. It was further held that it is only after the value of the assessee's interest in the firm had been determined under S. 4 of the Act, the question of granting exemption in respect of assets included in the valuation would arise. IN that view it was held that the assessee is entitled to exemption under the Act in respect of the assets of the firm which had been valued and a share of which had been included in the net wealth of the assessee. The same view is expressed by another Division Bench of the same High Court in C. W. T. v. Mira Mehta ( (1985) 155 I. T. R. 765 Cal. ). IN that case it is held that where the interest of an individual partner in the assets of a firm was chargeable to wealth tax, the partner would be entitled to exemption in respect of his share in a house property of the firm under S. 5 (i) (iv) of the Wealth Tax Act in the computation of his net wealth. IN C. W. T. v. Mrs. Christine Cardoza ( (1978) 114 I. T. R. 532) a Division Bench of the Karnataka High Court held that in the assessment of wealth tax of an assessee who is a partner of a firm owning agricultural land, exemption under S. 5 (l) (iva) of the Wealth Tax Act had to be allowed to the extent permitted in the computation of net wealth of the assessee. The Karnataka High Court considered and applied the principle laid down by the Supreme Court in Dulichand Laxminarayan's case (29 I. T. R. 535 ). The same view is expressed in a later decision of the Calcutta High Court in L. N. Birla v. C. W. T. ( (1987) 168 I. T. R. 86 ).