JUDGEMENT
R.P. Garg, Accountant Member -
(1.)THIS is an appeal by the revenue against the order of the C.W.T. (A) for the assessment year 1981-82.
The following ground is raised in this appeal:
On the facts and in the circumstances of the case and in law, the learned Commissioner of Wealth-tax (Appeals) erred in directing the Wealth-tax Officer to reduce the net wealth by an amount of Rs. 1,12,203 which represents the assessee's share in the development rebate reserve of M/s. Associated Breweries and Distilleries.
(2.)The assessee became a partner in M/s. Associated Breweries and Distilleries with effect from 1-10-1979 by partnership deed dated 21-10-1979 with 10% share in the profit and losses. The firm had development rebate reserve of Rs. 11,22,032 which was created in assessment year 1976-77. At that time, the partners of the firm were:
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On and with effect from 1-10-1979, Miss S.M. Irani retired from the firm and the assessee became a partner.
The new shares were agreed to be:
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As the development rebate reserve was to be retained in the books of account for 8 years as required under the I.T. Act, no entries for its allocation were made either in the year of creation or on retirement of Mr. Irani. They were made in 1985-86, but in the ratio the partners had in 1976-77. In other words, no share in the development rebate reserve was given to the assessee as she was not a partner at the time of its creation. On these facts, while valuing the assessee's share of interest in the partnership, the assessee had not included any part of the development rebate reserve in her net wealth. The W.T.O., however, included 10% of the development rebate reserve of Rs. 11,22,032 in the assessee's wealth. The C.W.T.(A) deleted the same by accepting the contention of the assessee that she had no interest in the said development rebate reserve.
The learned Departmental Representative, supporting the order of the W.T.O., submitted that in the absence of any allocation in the deed for a particular mode of allocation, the assessee had a right in the development rebate reserve as per her share of profit in terms of the Indian Partnership Act. The learned counsel for the assessee, on the other hand, submitted that the partnership being a relation by agreement, the rights and liabilities of the partners are to be governed by the agreement. He brought to our notice the allocation of the development rebate reserve made in 1985-86, wherein the assessee had been given no share and the entire development rebate reserve was allocated as per the sharing ratio of the partners prevailing in the assessment year 1976-77. He also drew out attention to the computation of net wealth and the assessment order of Miss S.M. Irani wherein even after the retirement with effect from 1-10-1979, the 5% share in the development rebate reserve was declared by her for assessment year 1980-81 and assessed as such by the W.T.O. He also contended that development rebate reserve was nothing, but unallocated profits, which was to be shared only by those persons, who were the partners in the year of its creation.
(3.)WE have heard the parties and considered their rival submissions. The partnership, as defined in Section 4 of the Indian Partnership Act, 1932, is the relation between the persons, who have agreed to share the profits and losses of a business carried on by all or any of them acting for all. The mutual rights and duties of the partners of a firm may be determined by contract between them and such contract, as per Section 11 of the Indian Partnership Act, may be expressed or may be implied by a course of dealings. Such contract may also be varied by consent of all the parties, which may be expressed or may be implied by a course of dealings. Section 11 of the Partnership Act is however, subject to the other provisions of the same Act. Under Clause (b) of Section 13, the partners are entitled to share equally all the profits earned and shall contribute equally to the losses sustained by the firm. Development rebate reserve is a part of profits earned by the firm. It is separately shown under the head "development rebate reserve" because of the incentive provisions of the I.T. Act. It was held by Their Lordships of the Supreme Court in the case of P.K. Badiani v. CIT [1976] 105 ITR 642 that although it did not form part of the assessable profits, undoubtedly, it did form part of commercial profits and mere transferring of an amount from profit and loss account to development rebate reserve account did not amount to capitalisation of profit. In these circumstances, in our opinion, it remained a part of the profits of the firm. The question, therefore, is to which of the partners this unallocated profit belonged. The partnership deed is silent on this point. There is no specific provision in the Partnership Act to deal with such a situation. WE, therefore, have to gather the intention of the parties from the surrounding circumstances and their subsequent conduct. Two material pieces of evidence are available in this regard - (i) the assessment records of Miss S.M. Irani, who went out of the firm with effect from 1-10-1979, and (ii) the allocation of development rebate reserve by the firm, when it was written back in 1985-86. In the wealth-tax assessment of Miss S.M. Irani, the 5% interest in the development rebate reserve was being assessed to be belonging to her as on 31 -3-1980 even though she had retired from firm on 30-9-1979. It shows that she continued to have the share in the development rebate reserve created by the firm in 1976-77 when she was a partner.
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