1980 (10) TMI 54 - HC - Wealth-tax

Summary

Issues Involved:

1. Whether the assessment made by the Wealth-tax Officer (WTO) was erroneous and prejudicial to the interests of the revenue concerning the deduction allowed u/s 5(1)(xxvi).
2. Whether a partner is entitled to exemption u/s 5(1)(xxvi) in proportion to his share in the firm when the relevant property is a partnership asset.

Summary:

Issue 1: Erroneous and Prejudicial Assessment by WTO

The court examined whether the WTO's assessment allowing deductions u/s 5(1)(xxvi) was erroneous and prejudicial to the revenue's interests. The Commissioner had revised the assessments u/s 25(2), directing fresh assessments, which was partly upheld by the Tribunal. The Tribunal concluded that the exemption u/s 5(1)(xxvi) should be applied to the net wealth of the firm, not individually to each partner. However, the court clarified that the Wealth-tax Act does not recognize a partnership firm as an assessable entity, and the net wealth of a firm should be allocated to individual partners without considering exemptions at the firm level. Thus, the assessment by the WTO was not erroneous or prejudicial to the revenue.

Issue 2: Partner's Entitlement to Exemption

The court addressed whether a partner could claim exemption u/s 5(1)(xxvi) in proportion to his share in the firm. It was established that a partnership is not a legal entity, and the property of the firm is owned collectively by the partners. The court held that deposits made by a partnership in a bank are legally held by partners in proportion to their shares. Therefore, each partner is entitled to the exemption u/s 5(1)(xxvi) in their individual assessments, up to the maximum prescribed limit. This conclusion aligns with the principles in Rule 2 of the W.T. Rules, 1957, and is supported by precedents from the Karnataka, Orissa, and Patna High Courts.

Conclusion:

1. The assessment made by the WTO was not erroneous and prejudicial to the interests of the revenue.
2. A partner is entitled to exemption u/s 5(1)(xxvi) in proportion to his share in the firm in which he is a partner.

There shall be no order as to costs of these references.