Gauhati H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in setting aside the orders of the authorities below regarding allowability of exemption under s. 5(1)(iv) of the WT Act, 1957, at the stage of determination of net wealth of the AOP in which the assessee was a member, before its allocation amongst the members, for fresh disposal by the WTO in the light of the decision of the Tribunal (Special Bench), Pune, in the case of N.R. Karia vs. WTO (1985) 22 TTJ (Pune) (SB) 13 : (1985) 13 ITD 545 (Pune)(SB) ?

Counsel Appeared

D.K. Talukdar & B.J. Talukdar, for the Revenue : None, for the Assessee

A.K. PATNAIK, J.:

This is a reference under s. 27(1) of the WT Act, 1957, by the Tribunal, Gauhati Bench, to this Court, on the following question of law :

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in setting aside the orders of the authorities below regarding allowability of exemption under s. 5(1)(iv) of the WT Act, 1957, at the stage of determination of net wealth of the AOP in which the assessee was a member, before its allocation amongst the members, for fresh disposal by the WTO in the light of the decision of the Tribunal (Special Bench), Pune, in the case of N.R. Karia vs. WTO (1985) 22 TTJ (Pune) (SB) 13 : (1985) 13 ITD 545 (Pune)(SB) ?”

2. The brief facts of the case as stated in the statement of the case drawn up by the Tribunal and as available from the annexures to the said statement of case are that the assessees, Ramniwas Karwa and Shyam Sundar Karwa, claimed that they are entitled to exemption under s. 5(1)(iv) of the WT Act, 1957 (“the Act”) in respect of their shares in the house property of the AOP of which they are members. In the assessment orders for the years 1981- 82 and 1982-83 of the aforesaid two assessees, the aforesaid claims for exemption of the assessees were not discussed and appear to have been disallowed. Aggrieved by the assessment orders, the assessees preferred appeals before the AAC, Dibrugarh Range, who accepted the claim of the two assessees for exemption under s. 5(1)(iv) of the Act following his earlier order dt. 13th Nov., 1984, in the case of Shri Sandeep Kumar Karwa and directed the WTO to value the assessee’s interest in the property in the manner stated in the said order. In the order dt. 13th Nov., 1984, in the case of Shri Sandeep Kumar Karwa, a copy of which is annexed to the statement of the case, the AAC had directed the WTO to value the assessee’s interest strictly as per r. 2 of the WT Rules, 1957 (“the Rules”), and to allow the exemption provided under s. 5 to the extent permitted at the stage of determination of net wealth before (sic-after) its allocation amongst the members of the AOP.

Against the said orders of the AAC, Dibrugarh Range, the Revenue went up in appeal before the Tribunal, Gauhati Bench, and contended that the AAC erred in directing the WTO to value the interest of the assessees in the AOP after allowing exemption under s. 5(1)(iv) of the Act at the stage of determination of net wealth before (sic-after) its allocation amongst the members. By a common order dt. 31st Aug., 1988, in the appeals for the years 1981-82 and 1983-84 in respect of the aforesaid two assessees, the Tribunal took the view that the matter should go back to the file of the WTO for fresh disposal after bringing all the basic materials on record and to dispose of the same in the light of the Pune (Special Bench) of the Tribunal in the case of N.R. Karia (supra). A copy of the said decision of the Pune (Special Bench) of the Tribunal has also been annexed to the statement of the case drawn up by the Tribunal and a reading of the said decision would show that the Pune (Special Bench) of the Tribunal took the view that the claim for exemption under s. 5 (1)(iv) of the Act has to be considered at the stage after the share of the partner is brought into his hands and not in the hands of the firm and accordingly the allowance has to be made by the WTO in the case of each of the assessee partners to the extent admissible under s. 5(1)(iv) in respect of the share value of the property owned by the firm.

After the statement of the case was received by this Court, on 21st Jan., 1993, notices were issued the parties for hearing pursuant to which the CWT, North-East Region, Shillong, has appeared through learned standing counsel for the IT Department but none appeared on behalf of the assessee when the case was heard on 2nd March, 1994. Mr. D.K. Talukdar, learned standing counsel for the IT Department, cited before us the decision of the Madras High Court in the case of Purushothamdas Gocooldas vs. CWT 1976 CTR (Mad) 361 : (1976) 104 ITR 608 (Mad) to persuade us to answer the reference in the affirmative in favour of the Revenue. But we find that the said decision of the Madras High Court has been rendered in respect of a house property owned by a partnership firm and not in respect of a house property belonging to an AOP. We also notice that a Division Bench of this Court in the case of CWT vs. Tarachand Agarwalla (1990) 81 CTR (Gau) 79 : (1989) 180 ITR 234 (Gau) : (1989) 2 GLR 129 has not agreed with the said decision of the Madras High Court. In the said case, however, the Division Bench of this Court dealt with a case of deduction to be allowed under s. 5(1)(iv) of the Act in respect of a house property belonging to a partnership firm and not in respect of a house property belonging to an AOP. Since the present reference is in respect of a house property comprised in the assets of an AOP, we proceed to answer the reference by making a fresh analysis of the provisions of the Act and the Rules.

The opening words of sub-s. (1) of s. 5 of the Act make it clear that in respect of the assets mentioned in the said sub- section, wealth-tax is not payable by an “assessee” and that the said assets shall not be included in the net wealth of the “assessee”. The word “assessee” has been defined in s. 2(c) of the Act to mean a person by whom wealth-tax is payable under the Act. The persons by whom wealth-tax is payable under the Act have been named in s. 3 of the Act, which is the charging section. As per the said section, wealth-tax is payable only in respect of the net wealth of every individual, HUF and company. Accordingly, no wealth-tax is payable under the Act by an AOP and an AOP is not an assessee as defined in s. 2(c) of the Act. Since the exemption under sub-s. (1) of s. 5 of the Act is available only to an “assessee” and as per the express language of the said sub-section the assets specifically mentioned therein are not to be included in the net wealth of the “assessee”, in our opinion, the exemption under sub-s. (1) of s. 5 in respect of the assets mentioned therein has to be worked out in the hands of the individual members of the AOP who are assessees under the Act and not while determining the net wealth of the AOP, which is not an assessee under the Act.

Our aforesaid view is reinforced and fortified by the provisions in the Act and the Rules for determination of the interest of an individual in an association of persons. According to s. 4(1)(b) of the Act, where an individual is a member of an AOP, the value of his interest in the AOP is to be determined in the manner prescribed in r. 2 of the Rules and included in computing the net wealth of the individual as belonging to that individual. Rule 2 prescribes that for determining the value of the interest of a member of an AOP, the “net wealth” of the AOP on the valuation date shall first be determined. The expression “net wealth” has not been defined in the rules but in r. 1A(m) it has been stated that words and expressions used but not defined in the rules and defined in the Act, shall have the meanings respectfully assigned to them in the Act. In s. 2(m) of the Act, the expression “net wealth” has been defined to mean the amount by which the aggregate value of all the assets on the valuation date to be computed in accordance with the provisions of the Act is in excess of the aggregate value of all the debts on the valuation date other than the debts mentioned therein. Thus the net wealth of an AOP has to be determined in accordance with the provisions of the Act, and since under sub-s. (1) of s. 5 of the Act the assets mentioned therein are to be excluded from the net wealth of an individual assessee who is a member of an AOP and not from the net wealth of an AOP which is not an assessee, the assets specified in sub-s. (1) of s. 5 of the Act have to be included in the net wealth of the AOP while determining the interest of a member in an AOP under r. 2.

On the aforesaid analysis of the provisions of the Act and the Rules, therefore, a house or a part of a house which is comprised in the assets of an AOP, is to be first included in the net wealth of the AOP for the purpose of determining the interest of the individual members of the AOP under s. 4(1)(b) of the Act r/w r. 2, and when after such determination the interest or shares of the members of the AOP are allocated to the respective members, exemption is to be granted to each such member of the AOP in his hands under sub-s. (1) of s. 5 of the Act in respect of the said house or part of the house up to the extent admissible under the proviso to cl. (iv) of the said subsection. Mr. Talukdar took us through the decisions of the Madras High Court in Purshothamdas Gocooldas (supra) to show that in that decision the property belonging to the firm was held as not belonging to the partners of the firm so as to entitle the partners to claim the exemption under s. 5 (1)(iv) of the Act. But we have no hesitation to hold that an AOP, unlike a company, has no legal personality of its own and the property that belongs to the AOP actually belongs to the members of the AOP to the extent of their respective shares or interest in the AOP.

We are supported in our aforesaid conclusions by the following observations made by the Bombay High Court in the case of CWT vs. Vasudeva V. Dempo (1981) 131 ITR 291 (Bom) : “Sec. 5, which provides for exemption in respect of certain assets, in its opening words under subs. (1), indicates that exemption is to be considered at the stage of assessment of net wealth of an assessee. We have already seen how under s. 3 of the said Act, charge of wealth-tax is made on the net wealth of an individual, HUF and company, which would mean that the assessee contemplated under s. 5(1) would be an individual and not the communion, whether a communion be regarded as a BOI or an AOP. In this view of the matter, the stage at which exemption is to be considered and allowed is the stage after the share of wealth from the communion is brought to the individual’s assessment. We find that this is clearly borne out by the statutory phraseology employed by the legislature, and in this view we find considerable support from the two decisions of the Karnataka High Court and one of the Orissa High Court, to which reference may now be made.”

9. We find that the aforesaid decision of the Bombay High Court has been followed by the Tribunal (Special Bench), Pune, in its decision in the case of N.R. Karia (supra). In the present cases, since the claims of the assessees under s. 5(1)(iv) of the Act had not been granted by the authorities below in accordance with the law as correctly decided by the Tribunal (Special Bench), Pune, in the case of N.R. Karia (supra), the Tribunal rightly set aside the orders of the authorities below and directed fresh disposal of the said claims of the assessees in the light of the said decision of the Tribunal (Special Bench), Pune.

Our answer to the question referred to us is, therefore, in the affirmative and in favour of the assessee.

No costs.

[Citation :210 ITR 1023]