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Commissioner Of Wealth-Tax, West Bengal-Xiv v. Mira Mehta
Factual and Procedural Background
The Commissioner of Wealth-tax referred a question of law to the Court under s. 27(1) of the Wealth-tax Act, 1957 for assessment years 1976–77 and 1977–78: whether the assessee was entitled to deduction under Section 5(1)(iv) of the Wealth-tax Act, 1957 in respect of property belonging to the firm.
The factual matrix stated in the reference: the assessee was a partner in a family partnership. A house in which the partners resided was owned by the partners and treated as property of the partnership carrying on business. In the assessee's wealth‑tax assessment an exemption was claimed for the house on the ground that the assessee resided there even though the property formed part of the partnership assets.
Procedurally, the Wealth-tax Officer (WTO) denied the exemption on the ground that the property belonged to the partnership firm and not to the individual partners. The Appellate Assistant Commissioner (AAC) took the opposite view and allowed the exemption. The Revenue challenged the AAC's decision before the Tribunal; the Tribunal upheld the AAC's view. The Tribunal's reference to this Court raised the single question of law framed above.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction under Section 5(1)(iv) of the Wealth-tax Act, 1957 in respect of property belonging to the firm?
Arguments of the Parties
Assessee's Arguments
- The house in which the partners (who were family members) resided should be treated as belonging to the partners (including the assessee) even though it was treated as part of the partnership assets; partnership is a compendious name for persons joining together for carrying on business and the property continued to belong to the partners.
- Because the partners continued to reside in and use the house for residential purposes, the house should be regarded as belonging to them for the purposes of s. 5(1)(iv) exemption.
Revenue's Arguments
- The property vested in the partnership firm and therefore ceased to belong to any of the partners; consequently the partners could not be said to own the property and the exemption under s. 5(1)(iv) should be denied.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Juggilal Kamlapat Bankers v. WTO, [1984] 145 ITR 485 (Supreme Court) | The Supreme Court considered s. 4(1)(b) read with s. 7(2)(a) of the Wealth-tax Act and held that a partner's interest in a firm is an asset which is includible in his net wealth; explained that cl. (b) of s. 4(1) quantifies the partner's interest (not a mere deeming fiction in the narrow sense) and that a partner's interest is exigible to wealth‑tax. | The Court relied on and applied the reasoning of Juggilal to hold that the interest of the partner in the firm's assets (including the house) is an asset belonging to the partner for wealth‑tax purposes, and thus eligible for exemption under s. 5(1)(iv) to the extent allowed. |
| CWT v. Sri Naurangrai Agarwalla (Matter No. 761 of 1979), judgment dated June 20, 1983 — [1985] 155 ITR 752 (this Court) | This Court held that the exemption under s. 5(1)(iv) cannot be denied to an assessee who is a partner in respect of a house which forms part of the assets of the firm. | The Court noted this earlier decision as an identical question previously considered and applied it in concluding the reference in favour of the assessee. |
Court's Reasoning and Analysis
The Court set out and relied upon statutory provisions and the Supreme Court's analysis in Juggilal Kamlapat Bankers. Key steps in the Court's reasoning were:
- The Court reviewed the statutory framework: s. 4(1)(b) (value of a partner's interest in the firm to be included in his net wealth), s. 3 (charging provision imposing wealth‑tax on net wealth), the definition of "net wealth" in s. 2(m) and "assets" in s. 2(e), and the exemption in s. 5(1)(iv) for one house belonging to the assessee.
- Relying on the Supreme Court's decision in Juggilal, the Court accepted that a partner's interest in a firm is property and is includible in the expression "assets" for computing net wealth. The Juggilal decision distinguished between the true deeming provisions of cl. (a) of s. 4(1) and cl. (b): cl. (b) quantifies an interest that in substance belongs to the partner and makes that quantified interest includible in net wealth.
- From the combined reading of s. 3, s. 2(m) and s. 2(e), the Court concluded there was no lacuna in the Act — a partner's interest is exigible to wealth‑tax because it is property/asset of the partner.
- The Court then addressed s. 5(1)(iv), which exempts one house (or part) belonging to the assessee. It posed the precise question whether the house owned by the firm "belongs" to the individual partner within the meaning of s. 5(1)(iv).
- Applying the principle from Juggilal — that the interest of a partner in the partnership's assets belongs to him and is includible in his net wealth — the Court held that the value of the partner's interest represented by the house included in the partner's net wealth shall be entitled to the exemption under s. 5(1)(iv) to the extent allowed by that provision.
- The Court further noted that an identical question had earlier been decided by this Court in CWT v. Sri Naurangrai Agarwalla, where it was held that s. 5(1)(iv) exemption cannot be denied to a partner in respect of a house forming part of the firm's assets; the present decision follows that view.
Holding and Implications
Holding: The Court answered the referred question in the affirmative and in favour of the assessee — the assessee (partner) is entitled to the exemption under Section 5(1)(iv) in respect of the house which forms part of the partnership's assets.
Implications:
- Direct effect on the parties: the assessee is entitled to the claimed exemption for the house (subject to the extent allowed by s. 5(1)(iv)).
- Costs: the Court ordered that there will be no order as to costs.
- Broader precedent: the Court's decision explicitly relies upon and applies the reasoning in Juggilal Kamlapat Bankers (Supreme Court) and the earlier decision of this Court in CWT v. Sri Naurangrai Agarwalla. The opinion itself does not state that it creates any new legal principle beyond applying those precedents; its effect as recorded is to answer the referred question in favour of the assessee in line with those authorities.
Ajit K. Sengupta, J.:— At the instance of the Commissioner of Wealth-tax, the Tribunal has referred the following question of law to this court, for the assessment years 1976–77 and 1977–78, under s. 27(1) of the W.T Act, 1957:
“Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction under Section 5(1)(iv) of the Wealth-tax Act, 1957, in respect of property belonging to the firm?”
2. The facts in brief are stated hereunder : The assessee is a partner in a partnership firm. The partners originally were the members of the same family. The house property in which the partners were residing was owned by the partners. It was treated as the property of the firm which is carrying on business. In the wealth-tax assessment of the asses-see, exemption was claimed in respect of the said house property on the ground that the assessee had been residing there even though the property formed a part of the assets of the partnership firm. The justification for making such a claim is that the property continued to belong to the assessee inasmuch as the partnership is nothing but a compendious name for a group of persons joining together for carrying on business and the property continued to belong to the partners.
3. The WTO denied the exemption on the ground that the property did not belong to the assessee any longer but in fact belonged to the partnership firm. The AAC took a different view. This view of the AAC is assailed by the Revenue in both the appeals. It was contended on behalf of the Revenue before the Tribunal that the property vested in the partnership and it ceased to belong to any of the partners and that the partners could not be said to own the property any longer. The Tribunal held that though the property became one of the assets of the firm, the partners were residing in the house and they continued to use the house for their residential purposes. In such circumstances, it was held that the house belonged to the partners.
4. Section 4 of the W.T Act, 1957, provides that in computing the net wealth of an individual, there shall be included, as belonging to the individual certain assets. Under s. 4(1)(b), in computing the net wealth of an individual who is a partner in a firm, the value of his interest in the firm, determined in the prescribed manner, shall be included as belonging to that individual. In a recent decision of the Supreme Court in the case of Juggilal Kamlapat Bankers v. WTO, [1984] 145 ITR 485, the Supreme Court considered the scope of s. 4(1)(b) read with s. 7(2)(a) of the W.T Act. There, the assessee, the karta of an HUF, who was assessed in the status of an HUF, was a partner in a firm as representing his HUF. The contention was that the building did not belong to the assessee but belonged to the firm. Dealing with the said contention, the Supreme Court referred to the view taken by the High Court that (p. 488):
“Though it was true that a partner of a firm could not claim ownership in specific properties belonging to the partnership firm either during the continuance of the partnership or even on its dissolution but was entitled to get a share in the profits during its continuance and was further entitled, upon its dissolution or his retirement therefrom, to the value of his share in the surplus of the partnership assets left after a deduction of liabilities and prior charges on the date of dissolution or retirement, it was clear that, having regard to s. 29 of the Partnership Act (which enables a partner to transfer his interest in the partnership firm) and s. 2(e) and s. 4(1)(b) of the Act, the interest of a partner in the partnership firm will have to be regarded as a part of his net wealth under the Act.”
5. The said view was approved by the Supreme Court. The Supreme Court observed as follows (p. 491):
“It is true that s. 4(1) deals with the computation of the net wealth of an individual and it is also true that the same enacts a deeming provision in the sense that certain assets which do not in fact or in reality belong to that individual (the assessee) but to some one else are to be treated as belonging to that individual and are to be included in his net wealth. But, in our view, a careful reading and analysis of els. (a) and (b) thereof will make it clear that there is a great difference between the cases covered by sub-cls. (i) to (v) of cl. (a) and the case covered by cl. (b). Clause (a) refers to five situations in all of which the asset is held by some one other than the individual concerned (the assessee) (e.g, held by the spouse or minor child of such individual to whom such asset has been transferred by such individual directly or indirectly otherwise than for adequate consideration, etc.) and it is provided that such asset held by that some one else also shall be treated as belonging to assessee—a deeming provision in the real sense of creating a legal fiction, while under cl. (b) it is provided that where the individual assessee is a partner in a firm, it is the value of his interest in the firm determined in the prescribed manner that is to be treated as belonging to him and is includible in his net wealth. In other words, cl. (b) is not a deeming provision in the sense in which a deeming provision is made in cl. (a). It cannot be said that the interest of a partner in a firm does not belong to him; it, in fact, belongs to him and no legal fiction is required for treating it as belonging to him; and the proper way to interpret cl. (b) would be that the deeming part of it relates to the quantum of his interest in the firm determined in the prescribed manner which is to be treated as belonging to him and includible in his net wealth. It is impossible to accept the contention that but for cl. (b) of 768 s. 4(1), the interest of a partner (where he happens to be an individual assessee) in a firm would not have been exigible to wealth-tax under the Act. As we shall presently point out, a partner's interest in a firm either an his individual capacity or in his capacity as the karta of an HUF is otherwise exigible to wealth-tax under the other provisions of the Act and the deeming provision contained in s. 4(1)(b), properly understood, must be held to be referable to the quantification of his interest in the firm determined in the prescribed manner that is made includible in his net wealth.
6. Section 3 of the Act read with the definition of ‘net wealth’ as given in s. 2(m) and ‘assets’ given in s. 2(e) clearly brings out the exgibility of a partner's interest in a firm either in his individual capacity or in his capacity as the karta of an HUF to wealth-tax under the Act. Section 3, which is the charging provision runs thus:
‘3. Charge of wealth-tax.—Subject to the other provisions contained in this Act, there shall be charged for every assessment year commencing on 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.’
7. Section 2(m) defines ‘net wealth’ thus:
‘net wealth’ means 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 owed by the assessee on the valuation date other than—…” (Here follow three types of debts, which are not to be reckoned, with which we are not concerned).
8. Section 2(e) defines “assets” thus:
“‘assets’ includes property of every description, movable or immovable, but does not include—…” (Here follow certain specified properties with which we are not concerned).
On reading the aforesaid provisions together, it will appear clear that wealth-tax has been levied on the net wealth of an individual or an HUF, meaning thereby the aggregate value of all the assets belonging to such assessee minus all the debts owed by him. Under the definition of ‘assets’ property of every description, movable or immovable, is included, and since it cannot be disputed and was not disputed before us that a partner's interest in a firm either in his individual capacity or in his capacity as the karta of an HUF is property, the same would be includible in the expression ‘assets’ which will have to be taken into account while computing the net wealth of such individual or HUF and on such net wealth the charge of wealth-tax has been imposed under s. 3. It is thus clear that there is no lacuna in the Act as regards the making of a karta's interest (representing his HUF) in the partnership firm exigible to wealth-tax. The first contention, therefore, must fail.”
9. Section 5 enumerates the exemptions, inter alia, of the various types of assets. Section 5(1) enumerates the assets on which wealth-tax shall not be payable and which shall not be included in the net wealth of an assessee. Section 5(1)(iv) provides exemption in respect of an asset being one house or a part of a house belonging to the assessee to the extent of the value of such asset as prescribed in s. 5(1)(iv). The question is whether the house owned by the firm belongs to the individual partner within the meaning of s. 5(1)(iv). The Supreme Court in Juggilal Kamlapat Bankers v. WTO, [1984] 145 ITR 485 held that the interest of a partner in a partnership firm belongs to him and would be includible in the expression “asset” and will have to be taken into account while computing the net wealth of the individual. If that be the position, then the value of the interest represented by the house owned by the firm included in the net wealth of the partner, being the interest of the partner of the firm, shall be entitled to exemption to the extent allowed by s. 5(1) of the Act. In that view of the matter, in our opinion, when the interest in the assets of the firm belongs to the individual partner and is chargeable to wealth-tax, the partner will be entitled to exemption in the computation of such wealth under the W.T Act.
10. We may mention that an identical question came up for consideration before this court in the case of CWT v. Sri Naurangrai Agarwalla (Matter No. 761 of 1979). By the judgment dated June 20, 1983.—[1985] 155 ITR 752, this court held that the exemption under s. 5(1)(iv) cannot be denied to the assessee who is a partner of a firm in respect of the house which forms part of the assets of the firm.
11. In the premises, we answer the question in this reference in the affirmative and in favour of the assessee. There will be no order as to costs.
Dipak Kumar Sen, J.:— I agree.
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