TMI Blog1979 (5) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... r the 1st proviso to section 114(b)(ii) prescribing the minimum rate of tax at 15% on net capital gains would be applicable in case of the registered firm and its partners separately or cumulatively ? The facts giving rise to this reference are under : The assessee is a firm having five partners. During the year the assessee had sold 800 spindles and had made some gains which were liable to tax under the head " Capital gains ". In the return of income filed before the ITO, the assessee did not furnish any details of the capital gains but only made a note that gains on sale of machinery may be included by negotiation and settlement. During the course of assessment proceedings also, the details of capital gains were not furnished and the ITO estimated the sale of 800 spindles at Rs. 5 lakhs and by allowing the costs amounting to Rs. 3,09,000, he worked out the capital gains at Rs. 1,91,000. The assessee had filed an appeal before the AAC on various points arising out of the assessment under s. 143(3) framed by the ITO and before the AAC the details regarding the sale proceeds of the spindles were made available. On the basis of the details available, he worked out the capital gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the questions referred to above, a brief history of the legislation as to the tax on capital gains may be necessary. It may be pointed out that the capital gains were charged for the first time by the Income-tax and Excess Profits Tax (Amendment) Act, 1947, which inserted s. 12B in the Indian I.T. Act, 1922. It taxed capital gains arising after the 31st March, 1946. The levy was virtually abolished by the Indian Finance Act, 1949, which confined the operation of s. 12B to capital gains arising before the 1st April, 1948 ; but it was revived with effect from the 1st April, 1957, by the Finance (No. 3) Act, 1956, which substituted a new s. 12B. Under s. 12B as introduced with effect from April 1, 1957, capital gains were to be deemed to be income of the previous year in which the sale, exchange or transfer took place after March 31, 1956. It may be pointed out that under s. 12B, which was introduced with effect from 1st April, 1957, the capital gains was to be computed with reference to the sale, exchange or transfer of a capital asset and the word " relinquishment " was introduced in s. 12B with effect from April 1, 1957. Section 6, which dealt with different heads of income c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of an assessee other than a company, which represented long-term capital gains. However, with effect from April 1, 1964, a proviso was added to s. 114 in these terms : " Provided that where the amount payable under sub-clause (ii) of clause (b) is less than the amount equal to fifteen per cent. of the net capital gains in respect of which tax is payable under that sub-clause, then the amount payable thereunder shall be fifteen per cent. of such net capital gains." The net result was that in respect of every assessee other than a company, under s. 114, sub-clause (b), cl. (ii), read with the first proviso, a liability arose to the payment of a minimum of 15 per cent. of the net capital gains in respect of long-term capital assets as tax on this component of the total income of the assessee. The learned counsel for the assessee vehemently argued that under s. 2(23) of the Act, " firm," " partner "and " partnership " have the meanings respectively assigned to them in the Indian Partnership Act, 1932. According to the learned counsel, a firm is not a person and as such not a legal entity under the Indian Partnership Act and is thus not capable of owning any property. It is mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the learned counsel for the assessee is that the firm as such being incapable of owning any property and having no legal status cannot be taxed on the capital gains in its hands. On the other hand, the learned counsel for the revenue referred to the definitions of " person " in s. 2(31), " assessee " in s. 2(7). " income " in s. 2(24) and of capital asset " in s. 2(14) of the Act. The whole scheme of the Indian Partnership Act, particularly ss. 14 and 15, were also relied upon. Section 4 of the Indian Partnership Act defines partnership, partner and firm name. It is provided that the partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. It is further provided that the persons who have entered into partnership with one another; will be called individually partners and collectively a firm, and the name under which their business is carried on, is called,the firm name. Under s. 14, it is provided that, subject to the contract, between the partners, the property of the firm includes all property, rights and interest in property originally brought into the stock of the firm, or acquired by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hands of the partners of the firm, and not under s. 9(1) as being in the hands of the firm, answered that the income from the immovable properties forming part of the assets of the assessee-firm falls properly to be assessed under s. 9(1) of the Indian I.T. Act, 1922, in the hands of the firm and not under s. 9(3) of the Act in the hands of the respective partners of the firm, as according to the judges constituting the Bench, it was not understandable how it can be urged in the face of various sections of the Partnership Act that the income of such property cannot be assessed in the hands of the firm as an assessee when s. 3 of the 1922 Act lays down that the firm can be an assessee. It is true that in the ultimate analysis it is the partners of the firm taken as a whole who are the owners of the property, but when these partners go by a firm-name in their collective capacity and when a particular immovable property or properties come within the ambit of s. 14 of the Partnership Act, the income from such property can be assessed under s. 9(1) of the 1922 Act. The case is New Cotton and Wool Pressing Factory v. CIT [1967] 65 ITR 662 (Raj). The case nearest to the facts of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the assessee and hold that, on the facts and in the circumstances of the case, the assessee could not, in law, deny its liability to tax in respect of capital gains on the ground that it being a firm was not a legal entity capable of owning a Capital asset. As regards the answer to the second question referred to above, i. e., whether the 1st proviso to s. 114(b)(ii) prescribing the minimum rate of tax at 15% on net capital gains would be applicable to the case of the registered firm and its partners separately or cumulatively, a reference to certain sections of the Act is necessary. According to s. 2(14), capital asset means property of any kind held by an assessee whether or not connected with his business or profession. Section 45 contemplates capital gains as any profits or gains arising from the transfer of a capital asset effected in the previous year. The argument of the learned counsel for the assessee is that the registration of the firm under the Act is for the benefit of the assessee, whereas if the firm is an unregistered one, it has not the benefits as contemplated under the Act. Thus, the 1st proviso to s. 114(b)(ii), which prescribes the minimum rate of tax at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artners separately, yet there is no escape under the Act. It may also be true that if the assessee were an unregistered firm, the tax on capital gains at the maximum rate of 15% is levied at place whereas in this case, the tax will be levied at the rate of only one 15% both in the case of the firm and its partners, but this cannot be helped. We do not agree with this contention of the learned counsel. Of course, if the Legislature specifically provides double taxation, the courts cannot avoid the same on this ground. It is true that s. 182 does provide that the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly. Similarly, s. 67(2) provides that the share of a partner in the income or loss of the firm as computed under sub-s. (1) shall, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of income. Reading the said provisions together, we are of the opinion that though in the total income of the firm, its capital gains are included therein, yet for the purposes of taxation, it is altogether a s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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