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TMI Blog1991 (9) TMI 154X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Their shares in the profit of the firms were credited only to the current account. In some cases, other types of income/receipt of the partners, such as rent, etc., were also credited to the current account. At times, the partners brought in money which was also credited to the current account. And, depending upon the amounts standing to the credit of the current accounts from time to time, interest was paid by the firm to the partners, which was also credited to the current account. The salient features of the relevant partnership deeds will be noticed at the appropriate time. For the once, however, suffice it to note that the fixed capital contributed by the partners did not carry interest, while the sums advanced by the partners to the firm over and above the fixed capital did carry interest. 4. In the course of the assessment proceedings for the asst. yr. 1988-89 in the case of Asokan, and for the asst. yrs. 1986-87 and 1987-88 in the case of the others, the assessees claimed that the balances standing to the credit of their current accounts in the books of account of the firm should not be treated as debts owed by the firm to them for purposes of calculating the exemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he WT Act, 1957. Under the scheme of the Act, wealth-tax is charged on the net wealth on the corresponding valuation date of every individual, HUF and company. Sec. 2(m) of the Act defines the term "net wealth". Broadly speaking, net wealth is the excess of the aggregate value of all the assets which come within the pale of the Act over the aggregate value of the debts (other than those specifically excluded by the Act) owed by the assessee on the valuation date. 11. Sec. 5 of the Act lists assets which shall not be included in the net wealth of the assessee. It also prescribes certain limits beyond which exemption is not available, but this need not detain us here. 12. It is well settled that the partner of a firm has a marketable interest in all the assets of the firm even during the subsistence of the partnership see CED vs. Mrudula Nareshchandra (1986) 58 CTR (SC) 74 : (1986) 160 ITR 342 (SC). Under s. 4(1)(b) of the Act, such interest is to be included in the net wealth of the assessee. This is so irrespective of whether a person is a partner in a firm in his individual capacity or in his representative capacity as the Karta of an HUF see Juggilal Kamlapat Bankers Anr. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h are secured on, or which have been incurred in relation to such assets. (d) From the figure thus obtained, deduct the capital of the firm/association (on the relevant valuation date applicable to the wealth-tax assessee, of course) and allocate the capital amongst the partners/members in the proportion in which capital has been contributed by them. (e) Thereafter, allocate the residue, if any, of the net value of such assets among the partners or members in accordance with agreement of partnership/association for the distribution of assets in the event of dissolution of the firm or association, and in the absence of such agreement, in the proportion in which the partners or members are entitled to share profits. (f) The sum total of the amounts allocated to the partner or member under the immediately preceding two steps represents the value of interest of that partner or member in the assets of the firm or association, which is eligible for exemption. 16. A comparison of the provisions of s. 7(1) of the Act, read with r. 2, on the one hand, and those of r. 2-I on the other, will make it clear that the exemption available under s. 5(1)(xxxii) can never exceed the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith a legal personality capable of entering into a partnership with another firm or individuals. In that regard the Court further ruled that the definition of the term `person' contained in s. 3(42) of the General Clauses Act could not be imported to hold that a firm was a person, and that consequently it can enter into a partnership with another firm or individuals. Of relevance to the purpose on hand is the fact that the High Court noticed that in the following respects the Act treated the firm as distinct from its members: Secs. 14 and 15 of the Act The property of the firm is treated as being different from the property of the partners; 16 of the Act The partner is obliged to account for the profits made by him by using the firm's funds; Sec. 17 of the Act The continuity of a firm, in certain circumstances, beyond its fixed term is recognised. 20. Next in chronology is the Supreme Court decision in Dulichand Laxminarayan vs. CIT (1956) 29 ITR 535 (SC). In that case also the question was whether a firm can enter into a partnership with another firm or individuals. After noticing, inter alia, the aforesaid two reported cases, the Supreme Court held that even un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent of his share in the business of the partnership. As already stated, his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and, after the dissolution of the partnership, or with his retirement from partnership, of the value of his share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges. It is true that even during the subsistence of the partnership a partner may assign his share to another. In that case, what the assignee would get would be only that which is permitted by s. 29(1), that is to say, the right to receive the share of profits of the assignor and accept the account of profits agreed to by the partners." This passage once again highlights the fact that, in so far as partnership property is concerned, the firm is in law treated as a separate entity from its members. 22. In the case of CIT vs. R.M. Chidambaram Pillai 1977 CTR (SC) 71 : (1977) 106 ITR 292 (SC), the Supreme Court reiterated the principle that "a firm is not a legal person, even though it has some attributes of personality". In this regard, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney to it over and above the capital he has agreed to subscribe, and when the advance is made for the purposes of its business, then, so far as the firm is concerned, the interest payable by it on the sums advanced by the partner is a regular revenue expenditure which must necessarily be taken into reckoning for the purposes of deducing its true profits. 24. A combined reading of s. 13(c) and s. 13(d) would make it clear that a partner can have a dual capacity vis-a-vis the firm. As regards the capital contributed by him he is a partner, and as regards the money advanced by him to the firm (of course, over and above the amount of capital he has agreed to subscribe), he is a creditor of the firm. In the latter case, conceptually speaking, the sums advanced by the partner to the firm is no different from the sums advanced by third parties to the firm. 25. The aforesaid dual capacity is also reflected in and recognised by s. 48, which deals with the mode of settlement of accounts between partners, and which goes by the name of "accounting clause". This section gives a special treatment to the sums advanced by a partner to the firm over and above the amount of capital he has agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee to the two firms in which he was a partner amounted to money-lending business, the Tribunal observed: "...As far as financing of the firm was concerned, it could not be treated as part of the money-lending business, as it was in the assessee's interest as a partner to find working capital for the firms and whatever interest he received from the firms was only part of his share income." Disagreeing with the Tribunal the Court observed: "But we cannot accept this view. It is not only a matter of business practice, but also perhaps in the interest of a partner to advance moneys to the firm of which he is a partner, because as a person having control over the affairs of the firm, can expect a prompt repayment of the moneys. Sec. 13 of the Partnership Act lays down thus: ₹ 13. Subject to contract between the partners : ............ (d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of 6% per annum. Thus, the Act recognises a partner advancing moneys to the firm and being entitled to interest at 6% per annum. We do not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into being. (iv) The same result ensues (a) when the partner's share of profit is credited to his current account, and (b) when interest is credited to the current account on the balance standing to the credit of the partner in that account. 33. If, in the circumstances noticed above, as respects the amount standing to the current account of a partner, a debtor-creditor relation comes into being between the firm and the partner, the consequence, both in law and in logic, is that the amount in question is a debt owed by the firm for the purpose of its business. And, since r. 2-I(b) of the WT Rules, 1957 also talks of "debt owed by the firm", the aforesaid conclusion will be equally apposite and applicable while construing the said rule. 34. We may now examine the issue before us in the light of the foregoing legal principles. 35. We may first notice the salient features of the firms figuring in the case before us. (a) M/s V.V. Vanniaperumal Sons This is the major firm in the group. The firm used to adopt the year ending on the 12th day of February each year as its previous year. For the asst. yr. 1986-87 the relevant previous year ended on 12th Feb., 1986. For that year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom time to time, he was paid interest of Rs. 700. His share of profit was credited to the said current account and on 12th Feb., 1986 his current account showed a credit balance of Rs. 2,69,270. The stipulation as to fixed capital contribution taken in conjunction with cl. 7 of the partnership deed dt. 10th March, 1980, which authorised payment of interest on the sums advanced by the partners to the firm over and above the fixed capital, and the further fact that for the year ended 12th Feb., 1986 the firm paid him a sum of Rs. 700 as and by way of interest, would indicate that he was a creditor to the firm in a small way. But the question that then arises for consideration is whether even the small debt owed by the firm to Dinakaran was secured on or came to be incurred in connection with the specified assets. There is no evidence to that effect. On the contrary, it is a matter of record that, during the year ending 12th Feb., 1986, the firm of M/s V.V. Vanniaperumal Sons purchased assets of the aggregate value of Rs. 4 lakhs and that during the same accounting year, it had realised a sum of Rs. 5,27,155 by selling some old plant and machinery and a lorry. Having regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was credited to his current account; but no interest was due thereon. We, therefore, decline to interfere with the impugned order of the first appellate authority, again, though not for the reasons mentioned by him. (c) Muthu The same considerations will apply to the case of Muthu also. We, therefore, decline to interfere in the matter. 37. (II) Asst. yr. 1987-88 (a) Dinakaran (b) Mahendran As respects these two persons, the position obtaining in this assessment year was materially different from the one obtaining in the asst. yr. 1986-87. As pointed out earlier, both Dinakaran and Mahendran retired from the firm of M/s V.V. Vanniaperumal Sons on and from 31st Nov., 1986. On that date the accounts were settled and the moneys due to them were allowed to remain in the firm, such sums bearing interest. But the important point to be noted is that on the relevant valuation date (31st March, 1987), they were not partners of the firm. Under the scheme of the Act, the value of assessee's interest in a partnership or AOP has to be determined on the valuation date applicable to the assessee. This is also the case with exemption admissible under s. 5(1)(xxxii) of the Act. On 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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