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TMI Blog1990 (7) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment years 1983-84 to 1987-88, in each case, it is gathered that the current account balance as appearing in the relevant balance-sheets as on the 31st March preceding each of the assessment years in the name of each partner represented only Accumulated profits and not any other funds which were brought in. Thus, on 31-3-1983, each of the respondent partners had a capital account balance of Rs. 3,000 and each of the respondent partners had a current account balance of Rs. 1,31,248. The remaining partner, Vidyasagar, had a capital account balance of Rs. 1,000 and current account balance of Rs. 43,749. The current account balances, it would be seen, were those in inter se proportion to the profit sharing ratio. 2. The point in issue in each of the appeals was the quantum of relief which each assessee was entitled to under section 5(1)(xxxii). We take the figures in relation to the assessment year 1983-84 in the case of Smt. Theivajothi Ammal as an illustration on the point at issue. In the balance-sheet as on 31-3-1983, the total of the assets side came to Rs. 7,73,872. From this figure, the assessee deducted an amount of Rs. 2,42,035 appearing on the liabilities side which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,965 (Rs. 1,31,249 Rs. 75,284). 5. The assessee appealed and the Dy. Commissioner (Appeals), after examining the scope of Rule 2(1) and the ratio of the judgment in the cases of K.K. Yeshodhara and Malabar Fisheries Co. v. CIT [1979] 120 ITR 49(SC) held as under : " It is quite clear from the judgment of the Supreme Court that the firm as such has no legal entity. The partners are jointly and severally answerable to the public at large. The rule of law governs the partners as individuals jointly and severally. Under the eye of law, there is distinct entity as firm. In the case of dissolution of the firm, what a partner gets is : (i) The balance in his current account. (ii) The balance in his capital account. (iii) His share in reserves and surplus of any of the firm. (iv) His share in appreciation in market value of assets and his share in intangible wealth of the firm like goodwill. Thus, it cannot be said that the share in the credit balance of the current account in the books of the firm will be a liability to be deducted for determining the share of interest of a partner. In view of the Supreme Court's decision in Malabar Fisheries Co., I think, the Wealth-tax Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 5,22,652 Less advance tax Rs. 13,449 Less buildings Rs. 29,390 Rs. 42,839 ------------------- ---------------------- Rs. 4,79,813 Liabilities including current account etc. of partners. Rs. 3,22,652 ---------------------- Rs. 1,57,161 Assessee's share thereof 45/200= Rs. 35,361 ------------------- The assessee on the other hand submitted before the Appellate Assistant Commissioner that the current account balance of the partners amounting to Rs.2,31,482 should not be considered as capital of the partners. The Appellate Assistant Commissioner went into the question whether the amount would fall under the term ' debts owed by the firm ' as occurring in the relevant provisions. He referred to the provisions of the Partnership Act etc. and came to the conclusion the capital contributed by a partner in a firm had some element of permanency whereas the advances or loans given to the firm is a fluctuating figure. The Appellate Assistant Commissioner, therefore, agreed with the conclusion of the Wealth-tax Officer that the loans or advances given by a partner to the firm should be considered on the same footing as advances from third parties. The assessee appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets of the partner, the exemption under section 5(1) has no application whasoever. In the circumstances, we answer the question in the negative, that is, in favour of the Revenue and against the assessed." The learned Departmental Representative sought to buttress the argument of the Revenue by submitting that under the provisions of Rule 2-1 the value of the assets should first be determined in the manner laid down in Rule 2H and referring to the provisions of Rule 2H he submitted that the value has to be determined after making adjustments as specified in Rule 2G and adverting to Rule 2G which we reproduce as under : " 2G. (1) Notwithistanding anything contained in rules 2B, 2D and 2E but subject to sub-rule.(2), where the Wealth-tax Officer is of the opinion that any asset, or liability which is a debt, owed by the assessee, shown in a balance-sheet does not really pertain to the business as such, he may exclude the value of the asset or the debt for the purpose of rule 2A. (2) The value of any such asset or debt shall be taken into account for the purposes of assessment of wealth-tax under any provision of the Act other than sub-section (2) of section 7, if it so prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at is arrived at and credited to the account of the minor is only accumulated profit. Merely because the partnership deed declares that this amount should be treated as loan its character is not altered. The provisions in a partnership deed do not have such powers of alchemy. In the present case, the accumulated profits alone are the subject-matter under consideration. It is not stated that there was any other amount provided by the minors on which interest has been paid. As the amounts represented accumulated profits and as a mere provision in a partnership deed is not effective to convert it into loan or deposit, we consider that the decision of the Supreme Court would directly apply to this case. It was pointed out by the Supreme Court that the profits accumulated to the credit of the wife and minor child in that case because they did not draw their share of profits after distribution of profits took place. They merely allowed profits to remain with the firm. It was further added that there was no suggestion in that case that either the wife or the minor sons or any one on their behalf purported to enter into an agreement with the firm to keep these accumulated profits as depo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly would it represent advances made by partners which would stand on par with loans advanced by strangers. The observations also envisage the agreement to treat share of profits as loans being subsequent to the credit of their share of profits to a current account. From a comparison of relevant portion of clause 3 of the partnership deed in the case of Misrimul Sowcar and clause (7) of the partnership deed in the present case, we have to come to the conclusion that what has been credited to the current accounts of the partners in the present case is only accumulated profits and it is not in the true sense a debt owed by the firm. Clause (7) of the partnership deed in the present case does not convert the balances in the current accounts which represent purely accumulated profits into a loan advanced by the partners which would partake of the nature of a debt owed by the firm. This being the case since the amounts do not represent debts of the firm, the liability of the current accounts of the partners as appearing in the balance-sheet of the firm cannot be construed to be a debt owed by the firm and, therefore, the adjustment permitted under sec. 2G(1) cannot be made. This being s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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