1980 (3) TMI 37 - HC - Wealth-tax

Issues Involved:
1. Entitlement to exemption under section 5(1)(xxvi) of the Wealth-tax Act, 1957, for bank deposits made by a firm.
2. Computation of net wealth of a firm and its impact on the wealth-tax assessment of individual partners.
3. Double benefit issue regarding the exemption under section 5(1)(xxvi) of the Wealth-tax Act.

Detailed Analysis:

Issue 1: Entitlement to Exemption under Section 5(1)(xxvi) of the Wealth-tax Act, 1957, for Bank Deposits Made by a Firm

In R.C. No. 203/76, the assessee, a partner in M/s. Swadeshi Cloth Stores, claimed a deduction of Rs. 1,50,000 in the wealth-tax assessment for bank deposits held by the firm. The Wealth-tax Officer (WTO) rejected the claim, stating that Section 5(1)(xxvi) did not cover deposits of the firm. The Appellate Assistant Commissioner (AAC) and the Tribunal, however, allowed the deduction, interpreting Rule 2(1) of the Wealth-tax Rules, 1957, to mean that the net wealth of the firm should be computed first, allowing for the exemption under Section 5(1)(xxvi). The Tribunal further held that after deducting Rs. 1.5 lakhs from the firm's net assets, any remaining bank deposits should also be exempted up to Rs. 1,50,000 in the individual partner's assessment.

Issue 2: Computation of Net Wealth of a Firm and its Impact on the Wealth-tax Assessment of Individual Partners

In W.T.C. No. 7/79 and W.T.C. No. 2/79, the issue was whether fixed deposits and shares owned by the firm should be excluded in computing the net wealth of the firm for determining the assessee's interest therein. The AAC and the Tribunal upheld that the net wealth of the firm should exclude such deposits, and the assessee's share should be computed accordingly. The Tribunal refused to refer the question of law to the High Court, but upon application, the High Court directed the Tribunal to refer the question.

Issue 3: Double Benefit Issue Regarding the Exemption under Section 5(1)(xxvi) of the Wealth-tax Act

The High Court examined three possible methods for making deductions under Section 5(1)(xxvi):
1. Deducting Rs. 1,50,000 from the firm's net wealth and then computing the individual partner's share.
2. Computing the individual partner's share in all assets without deduction and then allowing the deduction in the individual assessment.
3. Deducting Rs. 1,50,000 from the firm's net wealth and then allowing a further deduction in the individual assessment.

The Tribunal adopted the third method, but the High Court found the first method to be in consonance with the Act and Rules. The High Court emphasized that the net wealth of the firm should be computed as if the firm were an assessee, applying the definition of "net wealth" under Section 2(m) of the Act. The High Court rejected the Tribunal's view that the individual partner could claim a further deduction under Section 5(1)(xxvi) after computing the firm's net wealth.

The High Court referred to precedents, including the Supreme Court's decision in Narayanappa v. Bhaskara Krishnappa, which held that a partner's interest in a firm cannot be treated as part of his assets. The High Court also disagreed with the Orissa High Court's decision in CWT v. I. Butchi Krishna, which allowed double benefit, and preferred the Madras High Court's view in CWT v. Vasantha.

Conclusion:

The High Court concluded that the net wealth of the firm should be computed by excluding bank deposits under Section 5(1)(xxvi) up to Rs. 1,50,000, and the individual partner's share should be ascertained accordingly. The individual partner is not entitled to a further exemption under Section 5(1)(xxvi) for his share in the firm's bank deposits. The applications in W.T.C. Nos. 2 and 7/79 were dismissed, with the clarification that the assessee could claim a separate deduction for bank deposits held individually, not through the firm.

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