1990 (7) TMI 181 - AT - Wealth-tax

Issues Involved:
1. Quantum of relief under section 5(1)(xxxii) of the Wealth-tax Act.
2. Inclusion of current account balances of partners in the computation of their interest in the firm.
3. Applicability of the Kerala High Court decision in CWT v. Smt. K.K. Yeshodhara.
4. Interpretation of Rule 2(1) and Rule 2G of the Wealth-tax Rules.

Issue-wise Detailed Analysis:

1. Quantum of Relief under Section 5(1)(xxxii):
The primary issue in these appeals was the quantum of relief each assessee was entitled to under section 5(1)(xxxii) of the Wealth-tax Act. The respondents, partners in M/s. Sudarsan Process, Sivakasi, had claimed exemptions based on their capital and current account balances. The Wealth-tax Officer (W.T.O.) initially allowed the deductions claimed by the assessees but later revised the assessments, reducing the relief by excluding the current account balances.

2. Inclusion of Current Account Balances:
The W.T.O. argued that the current account balances, which represented accumulated profits, should not be considered for relief under section 5(1)(xxxii). This view was based on the Kerala High Court's decision in CWT v. Smt. K.K. Yeshodhara, which held that accumulated undrawn profits in current accounts are not debts owed by the firm and should not be excluded in computing the interest of partners in the firm.

3. Applicability of the Kerala High Court Decision:
The Kerala High Court in Smt. K.K. Yeshodhara's case concluded that the current account balances, representing accumulated undrawn profits, were assets of the partners and not liabilities of the firm. Therefore, these amounts should be included in the computation of a partner's interest in the firm for the purpose of exemption under section 5(1)(xxxii). The Revenue cited this decision to support their argument for excluding current account balances from the relief computation.

4. Interpretation of Rule 2(1) and Rule 2G:
The Deputy Commissioner (Appeals) examined Rule 2(1) and Rule 2G of the Wealth-tax Rules and concluded that the current account balances should be included in the computation of the partners' interest in the firm. The Deputy Commissioner relied on the Supreme Court's decision in Malabar Fisheries Co. v. CIT, which emphasized that the firm has no separate legal entity, and partners are jointly and severally liable. Consequently, the current account balances could not be treated as liabilities to be deducted.

Detailed Analysis:

Relief Computation Example:
For the assessment year 1983-84, Smt. Theivajothi Ammal's balance-sheet showed total assets of Rs. 7,73,872. After deducting liabilities amounting to Rs. 2,42,035, the net assets were Rs. 5,31,838. Each partner's share was computed proportionately, and the exemption claimed was based on these computations. However, the W.T.O. later revised the assessments, excluding the current account balances, resulting in reduced relief amounts.

Deputy Commissioner's Findings:
The Deputy Commissioner (Appeals) held that the W.T.O. erred in excluding the current account balances. The Deputy Commissioner emphasized that the firm has no legal entity, and the partners' interests include their current account balances. Therefore, the balances should not be excluded from the relief computation under section 5(1)(xxxii).

Revenue's Argument:
The Revenue argued that the Kerala High Court's decision in Smt. K.K. Yeshodhara's case was applicable, and the current account balances should be excluded. They contended that Rule 2G allowed the W.T.O. to exclude assets or debts not pertaining to the business, which included the current account balances.

Assessee's Argument:
The assessee's counsel cited the Madras High Court's decision in Addl. CIT v. Misrimul Sowcar, which distinguished between accumulated profits and loans or deposits. The counsel argued that the partnership deed's clause treating accumulated profits as loans did not change their nature, and these amounts should be included in the relief computation.

Tribunal's Conclusion:
The Tribunal compared the partnership deed clauses in the present case with those in Misrimul Sowcar and concluded that the current account balances represented accumulated profits, not debts owed by the firm. Therefore, these balances should be included in the computation of the partners' interest in the firm. The Tribunal upheld the Deputy Commissioner's decision, allowing the relief claimed by the assessees and dismissing the Revenue's appeals.

Summary:
The Tribunal dismissed the Revenue's appeals, holding that the current account balances of partners, representing accumulated profits, should be included in the computation of their interest in the firm for the purpose of exemption under section 5(1)(xxxii) of the Wealth-tax Act. The Tribunal relied on the Supreme Court's decision in Malabar Fisheries Co. and the Madras High Court's decision in Misrimul Sowcar, distinguishing the Kerala High Court's decision in Smt. K.K. Yeshodhara.

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