JUDGMENT B.P. Jeevan Reddy, C.J.
1. A common question is referred in all these three cases. Though the assessees are different, the relevant facts are identical. All the three assessees happened to be partners in a partnership firm, M/s. Chhittermal Ramdayal, Agra, and that is how their cases are identical so far as the question referred is concerned. The question referred under Section 27(3) of the Wealth-tax Act at the instance of the Revenue is :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally justified in its opinion that the addition made by the Wealth-tax Officer for the sustained cash credit as part of the assessee's wealth treating them as asset is incorrect ?"
2. For the sake of convenience, we may refer to the facts in W. T. R. No. 69 of 1979.
3. The assessee is a Hindu undivided family. Sri Harish Chandra Agrawal is its karta. As karta of this Hindu undivided family, he was a partner with 1/5th share in the aforesaid firm, M/s. Chittermal Ramdayal, Agra.
4. For the assessment years 1964-65 to 1969-70, the wealth of the assessee was assessed under the provisions of the Wealth-tax Act. The share of the Hindu undivided family in the aforesaid firm had also to be valued and included in the wealth of the Hindu undivided family. For that purpose, the accounts of the said firm were examined. It was found that several hundi loans entered in these books were not satisfactorily explained by the asses-see as a result of which they were treated as the income of the firm and, accordingly, the share of the assessee-Hindu undivided family was worked out.
5. The assessee filed appeals against the orders of assessment. The Appellate Assistant Commissioner accepted the genuineness of the disputed cash credits and deleted them subject to the following observation :
"It may further be added that, as already observed, the validity of these additions would depend upon the final view taken in income-tax assessments. Under the circumstances, if, as a result of any appellate order, it is held that any portion of this credit as appearing in the books of the firm did not represent genuine loans, the addition to that extent would be made while giving effect to this appellate order itself."
6. Aggrieved by the said observation, the assessees filed further appeals to the Tribunal. The Department also filed appeals against the order of the deletion of the said amounts. Both the sets of appeals were heard together by the Tribunal and all the fourteen appeals were disposed of together under the order dated June 26, 1975.
7. Pausing here, we may refer to one factual aspect. The Appellate Assistant Commissioner, while deleting the said addition, had observed that the validity of the said additions would depend upon the final view taken in the income-tax assessment. By the date of the Tribunal's order, those income-tax appeals were disposed of by the Tribunal. In those orders (under the Income-tax Act), the Tribunal held that a major portion of the credits appearing in the books for the assessment year 1964-65 were genuine. However, with respect to certain other credits, the Tribunal held that they were not proved. In this connection, the Tribunal referred to the following facts :
In the first instance, the creditors (depositors) admitted that the amount belonged to them but after raids were conducted on their premises, they came forward with a denial. The Tribunal chose to accept their later version and, on that basis, held that the said entries in the account books were not genuine. It was also found that the firm had issued cheques for the respective amounts in favour of the alleged creditors.
7. On the basis of the above facts, the Tribunal opined that merely because the said credits were not proved to be genuine, they cannot be treated as or included in the wealth of the firm. It also opined that since cheques were issued to the said creditors before the valuation date, they cannot be treated as available on the valuation date for valuing the assessee's share in the partnership firm. It is the correctness of the said opinion that is questioned in this reference by the Revenue.
8. Mr. Markandey Katju, learned counsel for Revenue, contended that once certain credit entries are found to be bogus, it must follow logically that they constitute the assets of the firm and the assessee must be deemed to have his 1/5th share therein along with other assets of the firm. The issuance of cheques to such bogus creditors cannot be taken into account nor can it be said for that reason that the said amounts were not available on the valuation date. On the other hand, Mr. Vikram Gulati, learned counsel for the assessee, submitted that merely because the entries were not proved to be genuine, it does not follow that they constitute the wealth of the firm. At any rate, it is argued, since there is no material to establish that the said amounts were put at the disposal of the partners and so long as that is not done, those amounts or any portion thereof cannot be taken into account while valuing the assessee's share in the said firm. It is also argued that just because certain amounts are available on a particular valuation date, it cannot be presumed that they continue to be available on each of the subsequent valuation dates concerned herein.
8. The mode of valuation of a partner's interest/share in a partnership firm is prescribed by Rule 2 of the Wealth-tax Rules, read with Section 4(1)(b) of the Act. Rule 2 says that, for valuing the interest of a partner, the net wealth of the firm must be determined first and, out of that, the amount of capital contributed by the partners shall be deducted and the residue distributed among the partners as if a dissolution has taken place on the valuation date.
10. Now take the case of valuation date relevant to the assessment year 1964-65. In the income-tax proceedings, it was found that certain credit entries were not genuine which means that they would constitute the income of the assessee. Merely because cheques are issued to those very bogus creditors, they cannot be treated as payments nor can it be said that on that account those amounts were not available on the valuation date relevant to the said assessment year. It may be that for subsequent years, the question whether the said amounts are available or not is not a matter of presumption but one of fact. So far as the assessment year 1964-65 is concerned, those amounts were definitely available and it cannot be said that merely because cheques were issued in favour of those bogus creditors, those amounts were not available. The payment must be deemed to be a make-believe in the circumstances.
11. So far as the argument of Mr. Gulati that the said amounts were not placed at the disposal of the partners are concerned, we must confess that we are not able to follow his logic. There is no question of any particular amount belonging to the firm being placed at the disposal of the partners. For that matter, all amounts of the partnership are at the disposal of the partners. The rule contained in Rule 2 says that a notional dissolution must be effected to find out the value of a partner's interest in a partnership firm. If such a dissolution is effected on the valuation date, the partner would also get a share in the amounts in question as well.
12. Learned counsel for the assessee relied upon a decision of the Kerala High Court in Annamma Paul Perincherry v. CWT [1973] 88 ITR 204. It was held in that case that it cannot be presumed that a particular income which was brought to tax during three assessment years in the hands of the assessee continued to be available as his wealth during three subsequent assessment years. It must be noticed that the assessment years concerned under the Wealth-tax Act in that case were 1961-62 and 1962-63. In the income-tax assessments for the assessment years 1957-58, 1958-59 and 1959-60, certain amounts were added under Section 68 of the Act. In those circumstances, the following observations were made by the court (p. 206) :
"From the fact that the assessee had been taxed on estimated income for the years 1957-58, 1958-59 and 1959-60, it is not possible to postulate that either at the time those assessment orders were made or at any subsequent time thereafter the assessee was possessed of the income assessed as an 'asset'. Even this is not enough for the purpose of the assessment to wealth-tax. It must be established that the assessee had assets on the valuation dates mentioned above. There is certainly no presumption that income that had accrued as long ago as three years before the valuation dates should be available as an 'asset' on that date."
13. Applying the principle of this decision, it may be that it may not be possible to say straightaway, as a matter of presumption, that the unexplained entries continued to be the wealth of the assessee for the subsequent assessment years, namely, 1965-66 onwards, but so far as the assessment year 1964-65 is concerned, there is no room for any doubt. It also appears that similar entries were also found in the previous year relevant to the assessment year 1965-66 as well. It is for the Tribunal to consider this aspect while passing final orders under Section 27(6) of the Act. The Tribunal shall examine whether the unexplained credit entries treated as the income of the firm during a particular assessment year can be treated as the wealth of the partnership firm for the subsequent years also and whether they may be taken into account while determining the value of the interest of the assessee therein. The question referred is, accordingly, answered in the following terms.
14. The additions made by the Wealth-tax Officer on account of unexplained credit entries was justified in so far as the assessment year 1964-65 is concerned. For the subsequent assessment years, the Tribunal shall pass appropriate orders in the light of the observations made herein. There shall be no order as to costs.