Wealth-tax treatment of partners' current account balances: accumulated undrawn profits were held includible, not exempt.

Partners' current account balances representing accumulated undrawn profits were treated as the partners' own assets, not as firm liabilities or advances, for wealth-tax computation. The exemption under section 5(1)(xxxii) of the Wealth-tax Act, read with rule 2 of the Wealth-tax Rules, applies only to the value of the assessee's interest in the firm's assets as computed under the prescribed rules, and does not extend to retained profit credited to partners' accounts. Those balances were therefore includible in computing the partners' interest in the firm's assets, and the issue was answered against the assessee and in favour of the Revenue.

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Issues: Whether the partners' current account balances, representing accumulated undrawn profits, were to be treated as capital or as advances for the purpose of computing exemption under section 5(1)(xxxii) of the Wealth-tax Act, 1957 read with rule 2 of the Wealth-tax Rules, 1957.

Analysis: The amount standing to the credit of the partners in their current accounts was admitted to be accumulated undrawn profit. Such profit constituted assets belonging to the partners in proportion to their shares and was assessable in their hands. The exemption under section 5(1)(xxxii) applies to the value of the assessee's interest in the assets of the firm as computed under the prescribed rules, namely rule 2(1) read with rule 2-I of the Wealth-tax Rules, 1957. That exemption does not extend to amounts representing the partner's share of profits retained in the firm for distribution, since those amounts are not liabilities owed by the firm but assets belonging to the partners.

Conclusion: The current account balances were not entitled to exemption under section 5(1)(xxxii) and were rightly included in computing the partners' interest in the firm's assets; the question was answered against the assessee and in favour of the Revenue.

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