Mode of valuing the net wealth of a firm/association i.e. whether the net wealth of a firm is to be determined in accordance with the provisions of the wealth-tax Act or in accordance with commercial principals - Income Tax - 545/CBDT

INSTRUCTION NO. 545/CBDT Dated : May 10, 1973 Section(s) Referred: 4(1)(b) , Rule 2 of W.T. Act Statute: Wealth Tax Act, 1957 Section 4(1)(b) of the Wealth-tax Act provides that in computing the net wealth of an assessee; the value of his interest in a firm of which he is a partner or an association of which he is a member, as determined in the prescribed manner, shall be included. Rule 2 of the Wealth-tax Rules prescribes the manner and mode of valuing a partner's members interest in a partnership or an association of persons. Rule 2(1) directs that for ascertaining the value of interest of a partner in a firm or a member of an association, the net wealth of the firm or association on the valuation date shall first be determined. thereafter the net wealth of the firm the association, as the case may be, has to be allocated among the partners/members in the manner indicated in that Rule. 2. The question that arises, therefore, is the mode of valuing the net wealth of a firm/association i.e. whether the net wealth of a firm is to be determined in accordance with the provisions of the wealth-tax Act or in accordance with commercial principals. In other words, whether the term net wealth in Rule 2 means net wealth as defined in the Act or net wealth as is understood in common parlance. 3. The Madras High Court in the case of Commissioner of Wealth-tax Vs. Vasantha, Executrix to the estate of K.V.A.L.M. Ramanathan Chettiar (87 ITR 17) has held that the words "net wealth" and "valuation date" occurring in Rule 2 of the Wealth-tax Rules have to be understood in the same sense for consideration was whether the assessee's share in the agricultural lands owned by the two firms in which he was a partner was includible in the net wealth of the assessee for the assessment year 1960-61. The High Court held that the agricultural lands owned by the firms will have to be excluded in computing net wealth of the firm under Rule 2 for the purpose of ascertaining partner's interest. This was because the definition of assets in section 2(c) as it stood then, excluded agricultural lands. 4. On the contrary, the High Court of Allahabad case of Commissioner of Wealth-tax Vs. Shri Padampat is has held that net wealth under Rule 2 is to be deter in accordance with the commercial principals and not accordance with the definition given in section 2(m) Wealth-tax Act. In the case of padampat singhania the question for consideration was whether in computing the wealth of the firm in which the assessee was a partner liabilities (though contested in appeal and outstanding mere than 12 months on the valuation dates) have to be ignoring the restrictions contained in clauses (a) and (b) of section 2 (m) (iii) of the Wealth-tax Act. The High Court held that Rule 2 provides a complete mode for the determination of the net wealth of a firm and the restored contained in section 2 (m) (iii) cannot be applied. 5. The Board have accepted the decision of the Madras High Court and not the decision of the Allahabad High Court Application for leave to appeal to the Supreme Court has filed in the case of Padampat Singhania.