1979 Supreme(All) 628

HIGH COURT OF ALLAHABAD
C.S.P. SINGH, R.R. RASTOGI, JJ.
G.N. Khanna - Appellant
Versus
Commissioner Of Wealth-Tax - Respondent
Wealth-tax Reference 602 and 603 of 1975 and 320 of 1977
Decided on : Nov 08, 1979

The dissolution of a firm does not extinguish the firm's rights in the assets of the partnership so as to constitute a transfer of assets under Section 2(47) of the I.T. Act.

Headnote:

WEALTH TAX - Development rebate reserve - Inclusion in the value of the interest of a partner in a firm - Whether the entire development rebate reserve is to be included or the tax which the firm might be called upon to pay under Section 155(5)(ii)(c) of the I.T. Act should be deducted therefrom.

Fact of the Case:

The dispute in the assessments to wealth-tax for the assessees related to the addition of their respective shares in the development rebate reserve as appearing in the books of the firm. The assessee contended that the provisions contained in Section 4(1)(b) and Section 4(2) of the Act and Rule 2(1) of the Rules being special provisions would have preference over Section 7(2)(a) read with Rules 2A to 2G of the Rules for the purpose of evaluating the interest of a partner in a partnership firm. The second submission made was that it would be Section 7(1)(a) and not Section 7(2)(a) which could be applicable and the last submission made was that for the purpose of finding the value of the interest of a partner in a firm for the purposes of assessment to wealth-tax a notional dissolution of the partnership is to be assumed and since in the event of dissolution and distribution of assets of the firm including the development rebate reserve, the firm have to pay extra tax under Section 155(5)(ii)(c) of the I.T. Act, 1961, that amount should be deducted from the development reserve with a view to arrive at the correct amount of that reserve which would be liable to be included in the hands of the partners.

Finding of the Court:

The Tribunal agreed with the assessees' contention that the value of the interest of a partner in a firm has to be included under Section 4(1)(b) of the Act in the prescribed manner. For that purpose, the Central Board of Revenue framed Rule 2 which is almost in conformity with Section 48 of the Partnership Act. On the basis of these provisions, the development rebate reserve which is neither a debt nor a liability but belongs to the partners of the firm is to be included along with the capital contributed by the partners. Thus, the proportionate share of each partner in the development rebate reserve is to be included to determine the value of the interest of the partners in the firm. The Tribunal did not, however, agree with the assessees' submission that this case was covered by Section 7(1) and not by Section 7(2) of the Act. The Tribunal also did not agree with the assessees that the tax which the firm may be called upon to pay under Section 155(5)(ii)(c) of the I.T. Act was to be taken into consideration because the fiction created by Section 4(1)(b) is only for the limited purpose of evaluating the interest of a partner in a firm as on the relevant evaluation date. Apart from this,,unless there is an order made under Section 155(5)(ii)(c) of the I.T. Act, no deduction of any such tax can be allowed and, lastly, that such deduction is not permissible in view of the decision of the Supreme Court in Pandit Lakshmi Kant Jha v. CWT [1973] 90 ITR 97 (SC).

Issues: Whether the assessee's share in the development rebate reserve of the firm, M/s. Annapurna Biscuit Mfg. Co., was includible in entirety while estimating the value of the assessees' interest in the said partnership firm for assessment years 1971-72 and 1972-73 ?

Ratio Decidendi: The Supreme Court in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 held that the dissolution of a firm does not extinguish the firm's rights in the assets of the partnership so as to constitute a transfer of assets under Section 2(47) of the I.T. Act. Therefore, Section 34(3)(b) read with Section 2(47) is not applicable to such a case and no question arises of the withdrawal of any development rebate already granted by passing an amending order under Section 155(5) of the 1961 Act.

Final Decision: The question referred by the Tribunal is answered in the affirmative, in favour of the revenue and against the assessee. In the circumstances of the case, no order as to costs is made.