1990 (3) TMI 100 - AT - Wealth-tax

Summary

Issues:
- Interpretation of partnership deed regarding allocation of development rebate reserve
- Determination of rights of partners in unallocated profits
- Application of Indian Partnership Act in governing partnership agreements

Analysis:
1. The appeal by the Revenue challenged the CWT(A)'s order for the assessment year 1981-82, specifically regarding the direction to reduce the net wealth by the assessee's share in the development rebate reserve of a partnership firm.

2. The case involved the assessee becoming a partner in a firm with a development rebate reserve, created in the assessment year 1976-77. The allocation of the reserve was not made at the time of creation or the retirement of a partner. The dispute arose when the WTO included a portion of the reserve in the assessee's wealth, which was later deleted by the CWT(A) based on the contention that the assessee had no interest in the reserve.

3. The departmental representative argued that the assessee, as a partner, had a right to the development rebate reserve based on the Indian Partnership Act, while the assessee's counsel contended that the partnership agreement governed the rights and liabilities of the partners. The subsequent conduct of the firm and partners was crucial in determining the allocation of the reserve.

4. The Tribunal examined the provisions of the Indian Partnership Act, emphasizing the importance of the partnership agreement in defining the rights and duties of partners. The unallocated profit, represented by the development rebate reserve, was considered part of the firm's profits. The intention of the partners regarding the reserve was inferred from the assessment records and the subsequent allocation of the reserve in 1985-86.

5. The development rebate reserve was created under the IT Act and was required to be retained for a specified period for tax benefits. The allocation of the reserve to individual partners in 1985-86 indicated that the partners intended to share the reserve based on the ratio existing at the time of its creation in 1976-77. As the assessee was not a partner at that time, she was not entitled to any share in the reserve.

6. Ultimately, the Tribunal upheld the CWT(A)'s decision, ruling that the assessee had no interest in the development rebate reserve and confirming that no part of the reserve was assessable in her hands. Consequently, the appeal by the Revenue was dismissed.