1996 (1) TMI 13 - SC - Wealth-tax

In computing the net wealth of a firm under rule 2 of the Wealth-tax Rules, the assets exempt under section 5 should be included and then apportioned among the partners for granting exemption in their individual assessments after computing their own individual net wealth - held that the exemption can be given only in the hands of the individual partner

Summary

Issues:
1. Interpretation of Wealth-tax Act regarding the treatment of exempt assets in computing the net wealth of a firm.
2. Conflict between Karnataka and Patna High Courts on whether assets exempt under section 5 should be excluded or included in the net wealth of a firm.

Analysis:
The Tribunal referred a question of law to the Supreme Court regarding the computation of the net wealth of a firm under the Wealth-tax Act. The specific issue was whether assets exempt under section 5 should be excluded or included in the net wealth of a firm and then apportioned among the partners for granting exemption in their individual assessments. The conflicting views of the Karnataka and Patna High Courts prompted this reference for clarification.

In the case at hand, the Hindu undivided family had an interest in a firm and claimed exemption for assets held by the firm under sections 5(1)(xxvi) and 5(1)(iv)(a) of the Wealth-tax Act. The Wealth-tax Officer rejected the claim, stating that the firm was not a separate entity. However, the Appellate Assistant Commissioner allowed the claim, leading to an appeal by the Revenue. The Tribunal directed the Wealth-tax Officer to determine the net wealth of the firm, allocate it among the partners, and compute the net wealth of each partner considering the exempted assets.

The Supreme Court, after considering the arguments, upheld the Tribunal's view. The Court emphasized that the net wealth of a firm, as per rule 2 of the Wealth-tax Rules, must include assets exempt under section 5. The Court highlighted the importance of apportioning assets and liabilities among partners for individual assessments. Referring to the definition of 'net wealth' in the Act, the Court concluded that exempt assets must be included in the net wealth of the firm before apportioning them among partners for granting exemptions in their individual assessments.

The Court resolved the conflict between the Karnataka and Patna High Courts by endorsing the Karnataka High Court's stance, which aligned with the Tribunal's decision. The Court affirmed that assets exempt under section 5 should be included in the net wealth of a firm and then apportioned among partners for granting exemptions in their individual assessments. The Tribunal's direction, as quoted earlier, was deemed correct in such circumstances.

In conclusion, the Supreme Court clarified that in computing the net wealth of a firm under rule 2 of the Wealth-tax Rules, assets exempt under section 5 must be included and then apportioned among the partners for granting exemption in their individual assessments after computing their own individual net wealth.