Commissioner of Wealth Tax vs Smt. K.K. Yeshodhara

T. Kochu Thommen, J.—The following question has been, at the instance of the Revenue, referred to us by the Income Tax Appellate Tribunal, Cochin. Bench :

"Whether, on the facts and in the circumstances of the case and on an interpretation of Section 5(1)(xxxii) of the Wealth-tax Act, 1957, read with Rule 2 of the Wealth-tax Rules, 1957, the Appellate Tribunal is justified in law in holding that the current account balances of the partners of the firm, amounting to Rs. 2,31,482 is to be treated as capital only, that there is no element of advance in it and that, therefore, the computation of the interest of the partners in the firm has to be enhanced by this amount for the purposes of exemption u/s 5(1)(xxxii) of the Wealth-tax Act, 1957?"

It is admitted by the assessee that the amount in question, namely, current account balance, represents accumulated undrawn profit. This amount constitutes the assets of the partners and assessable in their hands in proportion to their respective shares (see CIT v. P.R.A.L. Muthukaruppan Chettiar [1935] 3 ITR 208).

The claim of the assessee that undrawn profits are exempted u/s 5 has no merit. That section has no relevance to what is held by the firm as amounts due to the assessee-partner as his proportionate share of the profit. What is exempted under Clause (xxxii) of Section 5(1) is the value of the assessee''s interest in the assets of the firm as computed in the manner prescribed under Rule 2(1) read with Rule 2-I of the Wealth-tax Rules, 1957. The interest of the assessee in the assets of the firm is his interest to receive his proportionate share upon settlement of accounts consequent on the dissolution of the firm or on his retirement. Such interest is excluded in determining the assets of the partners for the purpose of assessment under the Wealth-tax Act.

In computing such interest, the rules speak of deduction of debts owed by the firm which are secured on, or which have been incurred in relation to, such asset thereby excluding such liability from the computation of the interest of a partner in the assets of the firm. Profits held by the firm for distribution among the partners, according to their respective shares, are not the assets of the firm, but assets which belong to the partners. What is in question in the present case is the assessee''s proportionate share of those profits. In adding that amount to the assets of the partner, the exemption u/s 5(1) has no application whatsoever.

In the circumstances, we answer the question in the negative, that is, in favour of the Revenue and against the assessee.

We direct the parties to bear their respective costs in this tax referred case.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.