Gulati, J. - (1.) THIS is a reference under Section 27(1) of the Wealth-tax Act, 1957. It is a consolidated reference relating to several assessment years, viz., 1957-58 to 1963-64. The following common question of law has been referred for the opinion of this court: " Whether, on the facts and in the circumstances of the case, the provisions of Section 2(m) of the Wealth-tax Act, 1957, are applicable for determination of the assessee's interest in the wealth of the firm styled as M/s. J. K. Bankers for the assessment years 1957-58 to 1963-64 ? "
(2.) THE assessee is a Hindu undivided family. It holds through its karta l/3rd share in a partnership firm of the name and style of Juggilal Kamlapat Bankers (hereinafter referred to as " the firm"). While computing the net wealth of the assessee for each of the seven years, the Wealth-tax Officer had to take into consideration the assessee's share in the wealth of the firm. While computing that share the Wealth-tax Officer took the net wealth of the firm as per its books of accounts ignoring the liability of the firm on account of the outstanding income-tax. THE assessee appealed and contended, inter alia, that in order to determine the net wealth of the firm for the purposes of including l/3rd share of that wealth in the wealth-tax assessment of the assessee, it was necessary for the Wealth-tax Officer to have deducted out of the assets of the firm its outstanding income-tax liability, because net wealth had to be taken after deducting out of the gross assets of the firm its total debts and the income-tax liability was a debt outstanding against the firm, which should have been taken into consideration. THE Appellate Assistant Commissioner of Income-tax did not accept this contention. He held' that the liability on account of income-tax could not be deducted while computing the net wealth of the firm because of the provisions contained in Sub-clauses (a) and (b) of Clause (iii) of Section 2(m) of the Act. On second appeal, the Income-tax Appellate Tribunal reversed the finding of the Appellate Assistant Commissioner of Income-tax and held that Section 2(m) was not applicable in the instant case and, as such, the outstanding income-tax liability was deductible while computing the net wealth of the firm. THE Commissioner is aggrieved and has brought this reference before us. It appears that a large sum of money was due from the firm by way of income-tax. The income-tax liability was outstanding on the valuation dates of each of the assessment years in question. The firm had contested the liability by way of appeal but later on entered into a settlement with the department as a result of which the firm withdrew its appeals and the department granted instalments for the payment of the outstanding income-tax liability. Where the assessee is an individual, his net wealth is to be computed in accordance with Section 4(1)(b) of the Wealth-tax Act, which reads : " 4. Net wealth to include certain assets.--(1) In computing the net wealth of an individual, there shall be included, as belonging to that individual--...... (b) where the assessee is a partner in a firm or a member of an association of persons, the value of his interest in the firm or association determined in the prescribed manner."
(3.) THE manner for the determination of the value of the interest of an individual in a firm is contained in Rule 2 of the Wealth-tax Rules. Paragraph 1 of that rule is material and reads : "2. Valuation of interest in partnership or association of persons.--(1) THE value of the interest of a person in a firm of which he is a partner or in an association of persons of which he is a member, shall be determined in the manner provided herein. THE net wealth of the firm or the association on the valuation date shall first be determined. That portion of the net wealth of the firm or association as is equal to the amount of its capital shall be allocated among the partners or members in the proportion in which capital has been contributed by them. THE residue of the net wealth of the firm or association shall be allocated among the partners or members in accordance with the agreement of partnership or association for the distribution of assets in the event of dissolution of the firm or association, or in the absence of such agreement, in the proportion, in which the partners or members are entitled to share profits. THE sum total of the amounts so allocated to a partner or member shall be treated as the value of the interest of that partner or member in the firm or association." It is thus clear that so far as the valuation of the interest of a partner in a firm is concerned, the same has to be arrived at in accordance with Rule 2. According to that rule, first of all the net wealth of the firm on the valuation date has to be determined. Thereafter the same is to be allocated between the partners in the manner indicated in that rule. We are not concerned in this case with the manner in which the net wealth of the firm is to be allocated between the partners. All we are concerned with is to find out as to how the net wealth of the firm should have been determined.;