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TMI Blog1986 (8) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... m, exemption clauses should be given effect to in computing the net wealth of the firm and then divide it amongst the partners in the prescribed manner or whether the net wealth of the firm should first be ascertained and the proportionate share of the partners should be taken in their respective assessments and the effect to the various exemption clauses should be given in the individual assessment of the partners. The assessee's case is that the effect to the various exemption clauses, particularly, clause (iv) of sub-section (1) of section 5 of the Wealth-tax Act, 1957 ('the Act') should be given in the case of the firm while working out its net wealth in terms of rule 2 of the Wealth-tax Rules, 1957, and the share of the partner in such net wealth should be included in his wealth. The department's case, on the other hand, is that the individual partners alone are assessees under section 3 of the Act, and, therefore, the effect to the various exemption clauses can be given in their hands only because the said exemption clauses are available only to the assessee and not to any other entity. The firm is not taxable entity and an assessee. Under the Act, therefore, the exemption un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issolution of a firm.....' 8. The provisions pertaining to the settlement of accounts amongst the partners are contained in section 48 of the Indian Partnership Act, 1932. The said section reads as follows : '48. Mode of settlement of accounts between partners.---In settling the accounts of a firm after dissolution, the following rules, shall subject to agreement by the partners, be observed : (a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits. (b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order :--- (i) in paying the debts of the firm to third parties; (ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital; (iii) in paying to each partner rateably what is due to him on account of capital; and (iv) the residue, if any, shall be divided among the partners in the proportions of which they were entitled to share profits.' The above sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remains after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48.....'. Their Lordships approvingly quoted the following extracts from Lindley on Partnership, 12th edn. at page 375 : 'What is meant by the share of a partnership assets after they have been all realised and converted into money, and all the partnership debts and liabilities have been paid and discharged. This it is, and this only which on the death of a partner passes to his representatives, or to a legatee of his share... and which on his bankruptcy passes to his trustee.' 9. It is the above scheme of the settlement of accounts between the partners, which has been directed by sub-section (2) of section 4 to be incorporated in rules to be made in terms of clause (b) of sub-section (1) of section 4 aforesaid. Rule 2 of the Wealth-tax Rules, 1957 '(the Rules)' is the rule pertaining to the subject-matter. Sub-rule (1) of the said rule reads, inter alia, as follows : 'The value of the interest of a person in a firm of which he is a partner... sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rata would be against the law. All of them belong to all the partners jointly, but none of them belongs to an individual partner individually. What belongs to an individual partner in his pro rata share in the excess of all the assets over the liabilities and not a pro rata share in each individual asset. 11. At the same time, it would not be correct to say that the relief under section 5(1)(iv) cannot be granted to a partner in respect of the exempted assets. What all the partners are entitled in their individual capacities would be eligible to them with regard to the assets owned by them jointly also. The relief cannot be denied to them only because they owned the assets jointly and not individually. The law on this point was well brought out by their Lordships of the Hon'ble Patna High Court in the case of CIT v. Nand Lal Jalan [1980] 122 ITR 781, when they made the following observations, explaining this aspect of the law : 'Now, therefore, keeping in view the above discussions, it cannot but be said that even though during the subsistence of the partnership, assets thrown into the partnership by the partners get merged together and lose their identity, yet all the same, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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