Skip to content


Commissioner of Income-tax, Bombay City-ii Vs. Jayantilal Ramanlal and Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 177 of 1971
Judge
Reported in(1982)31CTR(Bom)326; [1982]137ITR257(Bom)
ActsIncome Tax Act, 1961 - Sections 2, 2(3), 2(7), 2(31), 14, 45, 67, 67(1), 67(2), 86, 114, 182 and 183
AppellantCommissioner of Income-tax, Bombay City-ii
RespondentJayantilal Ramanlal and Co.
Excerpt:
.....- section 114 of income tax act, 1961 - whether registered firm will be liable to pay tax on capital gains under section 114 - according to tribunal tax at minimum rate ought not to be levied on registered firm because it may amount to double taxation - as per judgment rendered by another high court a firm is legally competent to own property - in such case all gains derived from such property exigible to tax under act of 1961 - held, case decided in favour of revenue in conformity with aforesaid decision. - - it was also submitted that if at all any tax was payable by the firm as well as the partners cumulatively it could not exceed 15%. the tribunal upheld the contentions of the assesse. act, 1961, as well as under the finance act. cit (headnote) :it is now well established..........a firm was registered, the firm did not itself pay the tax and the tax payable in respect of the firm's income was not determined, but each partner's share in the firm's income was added to his other income. in this case there was no double taxation. as a result of the change effected by the finance act, 1956, income-tax at a special low rate came to be assesse on registered firms, and this came to be commonly known as the 'registered firms' tax'. the partners of such a registered firm, in addition, were liable as before 1956 to be taxed in their individual assessment in respect of their share of the firm's income. the position under the i.t. act, 1961, is the same as existed under the 1922 act after 1956. thus, there was double taxation in the case of a registered firm, and to a.....
Judgment:

S.K. Desai, J.

1. In this reference the following question of law has been referred to us for our opinion by the Income-tax Appellate Tribunal (Bombay Bench 'D') :

'Whether, on the facts and in the circumstances of the case, it has been rightly held that a registered firm will not be liable to pay tax on capital gains under section 114 of the Income-tax Act, 1961 ?'

2. After arguments were concluded, Mr. Khatri on behalf of the assesse firm submitted a question to be added or substituted for the present question. After hearing arguments on Mr. Khatri's submission, we are not inclined to allow the question to be reframed. For the purpose of the record, however, we hereby indicate that Mr. Khatri submitted the following as what he called the reframed question :

'Whether, on the facts and in the circumstances of the case, a registered firm and its partners will be liable to pay tax on capital gains under section 114 of the Income-tax Act, 1961, separately and not cumulatively ?'

3. It is made clear that we propose to deal with the question as referred to us by the Tribunal only, though in the course of our judgment we will have occasion to indicate how the point involved in the reframed question arose.

4. The assesse is a registered firm. For the assessment year in question, that is, 1965-66, a sum of Rs. 40,446 was determined as capital gains obtained by it in respect of sale of machinery. These capital gains were considered to relate to assets other than short-term capital assets. There were two partners of the assesse firm, namely, P. J. Ghohel and Ramanlal Maganlal, having a 62% and 38% share respectively. The said sum of Rs. 40,446 was allocated to its two partners, and each partner seems to have been assessed in respect of capital gains allocated to his share.

5. The ITO taxed the assesse firm in respect of capital gains at the minimum rate, namely 15%. The assesse firm contended before the AAC in an appeal filed by it that it should not have been assessed to tax on the capital gains, or, alternatively, if the capital gains was rightly taxed in the hands of the appellate firm, the same should not have been apportioned among the partners and taxed in their hands. The AAC confirmed the order of the ITO, as in the opinion of the AAC the assessment had been correctly done in accordance with the provisions of ss. 67, 86(iv), 114 and 182 of the I.T. Act, 1961. It may be stated at this juncture that it would appear that the latter branch of the argument advanced on behalf of the assessefirm, namely, that the amount of capital gains should not have been apportioned among the partners and taxed in their hands, would more legitimately be considered to be an argument to be raised in the assessment of the individual partners. That, unfortunately, does not seem to have been done. We were informed at the Bar that the assessment of the partners has been completed and the partners have paid the tax on the share of the amount of capital gains allocated to them.

6. The assesse carried the matter in appeal before the Tribunal. The Tribunal's attention as drawn to an order of another Bench of the Tribunal where on a similar point the Tribunal had upheld the contention of the assesse. It was also submitted that if at all any tax was payable by the firm as well as the partners cumulatively it could not exceed 15%. The Tribunal upheld the contentions of the assesse. Principally, it followed its earlier decision in Income-tax Application No. 10094 of 1967-68. It also added further reasons, namely, that a registered firm had to bear only the tax leviable under the Finance Act. The Tribunal also derived support from a decision of the Bombay High Court in Volkart Brothers v. ITO : [1967]65ITR179(Bom) . The Tribunal also considered the relevant statutory provisions under the I.T. Act, 1961, as well as under the Finance Act. According to the Tribunal, if the contentions of the Revenue were upheld, then in the case of a registered firm where the total income, including capital gains, was Rs. 20,000 or less, the registered firm on the basis of s. 114 of the I.T. Act, 1961, would have to suffer tax at the rate of 15% in respect of capital gains included in its total income, whilst the partners would also have to pay the same 15% minimum tax in respect of capital gains falling to their share. In the opinion of the Tribunal, this would amount to double taxation in the case of a registered firm. The Tribunal also referred to the statement of the Finance Minister whilst proposing tax on registered firms for the first time, when it had been stated that the intention was only to levy a small tax on registered firms and thereby avoid double taxation of the same income. For all these reasons the Tribunal held that registered firms would not be liable to pay any tax on capital gains under s. 114. The orders of the authorities, including the earlier order of the Tribunal in Income-tax Application No. 10094 of 1967-68 are to be found annexed to the Statement of the case.

7. Mr. Joshi referred us, in the first place, to s. 2 which is the definition section, and we were referred by him to the definitions of 'assesse' occurring in s. 2(7) and 'person' occurring in s. 2(31). There is no doubt that a firm is included within the definition of 'person', and if any tax or any other sum of money is payable by a firm, the firm would be an assesse in its own right. Our attention was then drawn to ss. 182 and 183 of the said Act, which are the principal sections pertaining to assessment of registered and unregistered firms. The position of asessment in respect of registered and unregistered firms occurring under the Indian I.T. Act, 1922, underwent a change in 1956. Prior to the amendments made by the Finance Act, 1956. Prior to the amendments made by the Finance Act, 1956, the position under the 1922 Act was that where a firm was unregistered, the tax payable by the firm itself was determined, as in the case of any other distinct entity, and levy was made on the firm itself. On the other hand, where a firm was registered, the firm did not itself pay the tax and the tax payable in respect of the firm's income was not determined, but each partner's share in the firm's income was added to his other income. In this case there was no double taxation. As a result of the change effected by the Finance Act, 1956, income-tax at a special low rate came to be assesse on registered firms, and this came to be commonly known as the 'registered firms' tax'. The partners of such a registered firm, in addition, were liable as before 1956 to be taxed in their individual assessment in respect of their share of the firm's income. The position under the I.T. Act, 1961, is the same as existed under the 1922 Act after 1956. Thus, there was double taxation in the case of a registered firm, and to a certain extent partial relief against such doubt taxation is afforded by s. 67(1)(a) of the I.T. Act, 1961 . Mr. Joshi contended that the question was concluded against the assessed by reason of two decisions, the first chronologically being that of the Full Bench of the Kerala High Court in K.I.Viswambharan & Brothers v. CIT : [1973]91ITR588(Ker) , and the other by a Division Bench of the Punjab and Haryana High Court in CIT v. Buta Ram Rup Lal [1977] 106 ITR 636.

8. In Viswambharan's case : [1973]91ITR588(Ker) , the Full Bench of the Kerala High Court was considering the levy of capital gains which had been sustained by the Appellate Tribunal on a registered firm. The firm which had two brothers as partners had purchased a house in 1960 and sold it on 20th June, 1966. The two partners had an equal share in the firm. For the assessment year 1967-68, the ITO assesse the firm to capital gains, and on the same date the individual assessments of one of the partners was also made, including in his total income one-half of the capital gains received by the firm. Ignoring various other points arising for determination in the said decision, it may be noted that according to the Full Bench of the Kerala High Court the basic exemption of Rs. 25,000 granted by the Finance (No. 2) Act of 1967 would not be available to the assesse-firm. By virtue of the first proviso to s. 114(b)(ii) of the I.T. Act, 1961, the minimum rate at which net capital gains was to be taxed was 15% and the assesse-firm had been assessed only at that rate. It was urged before the Full Bench on behalf of the assesse that though under the I.T. Act, 1961, a firm may be an individual unit for assessment, under the law relating to partnership, a firm had no corporate existence so as to own any property in its own name, and consequently there cannot be a transfer of any capital asset by a firm so as to attract s. 45 of the I.T. Act, 1961. The court considered the provisions and the scheme underlying the Indian Partnership Act, 1932, and, in its opinion, in view of the specific provisions of the Partnership Act relating to the property of a firm, there cannot be any doubt that a firm is legally competent to own or hold property as also to deal with such property. In the opinion of the Full Bench, any profit or gain derived by a firm in pursuance of the sale of a capital asset owned or held by the firm was, therefore, exigible to tax in accordance with the relevant provisions of the I.T. Act, 1961. The other argument advanced on behalf of the firm before the full bench pertained to its claim to be exempted inasmuch as its income was below Rs. 25,0000, which was the basic exemption specified in Paragraph C of the First Schedule to the said Act. The Full Bench analysed the provisions of the Finance Act and observed that the provisions of the Finance Act and observed that the provisions thereof did not apply to cases covered by sub-ss. (2), (3) and (4) of s. 2, and sub-s.(3) excluded from the operation of the basic exemption cases covered by Chap. XII of the I.T. Act, 1961. Sub-section (3) provides, after incorporating the Explanation, that in respect of cases covered by Chap. XII the tax chargeable shall be determined as provided in that chapter and with reference to the rates imposed by sub-s. (1) or the rates as specified in that chapter, as the case may be. Accordingly, the view of the Full Bench was that tax was payable by a registered firm and it was liable to pay such tax at the rate of 15% which was the minimum rate as provided under Chap. XII.

9. The Full Bench decision of the Kerala High Court was referred to and relied on by the Punjab and Haryana Court in CIT v. Buta Ram Rup Lal [1977] 106 ITR 636. The Punjab and Haryana High Court was considering a reference at the instance of the Commissioner from a decision of the Tribunal. The Tribunal, after considering the question of hardship, had observed as under (p. 637) :

''However, if tax is levied on the capital gains on a registered firm, it would amount to hardship inasmuch as the partners will have to pay again tax on the capital gains allocated to their respective shares, as in the present case before us. In our opinion, this was never the intention of the Legislature while enacting section 114 of the Income-tax Act, 1961.''

10. The Tribunal accordingly had held that the Legislature never intended to impose tax on a registered firm in respect of capital gains. This view of the Tribunal did not find favor with the Division Bench of the Punjab and Haryana High Court. It considered the provisions as also the Kerala Full Bench decision. The Punjab and Haryana High Court expressed its agreement with the view of the Full Bench of the kerala High Court and answered the question in favor of the department and against the assesse. On behalf of the assesse reliance was placed on the observations to be found in Volkart Brothers v. ITO : [1967]65ITR179(Bom) . The Division Bench was principally concerned with construing the power of the ITO under s. 35 of the Indian I.T. Act, 1922, or the corresponding s. 154 of the I.T. Act, 1961, that is, rectification of mistakes which are apparent from the record. The view expressed by the Division Bench principally pertained to the nature of rectification that could be made and the limits on the power of rectification. It observed that the error may be an error of fact as also of law, but the same must be apparent on the examination of the record without entering into any fresh or additional investigation. The error must be obvious and patent from the record. It was laid down by the Division Bench that an error which can be discovered as a result of elaborate argument cannot be properly regarded as an error apparent from the record. The Division Bench, however, had also occasion to consider the applicability of s. 17(1) of the Indian I.T. Act, 1922, to registered non-resident firms, and there are undoubtedly certain observations in the said decision which go to support the contention advanced on behalf of the assesse. It would appear to us that once the limits on the power of rectification were laid down and the ITO had transgressed those limits, it would result in the rectification order being quashed, the further discussion on the scheme of s. 17 and on the liability of the registered firm to pay tax must be regarded as obiter.

11. In our opinion, the authorities directly in point, which must be accepted as construing the statutory provisions under consideration, are the Kerala and the Punjab and Haryana High Courts' decisions, earlier adverted to.

12. It would appear to us that the issue of hardship is adequately met if a latter decision of the Punjab and Haryana High Court is perused, which would confirm the earlier stand that such tax is leviable on a registered firm, but, in the view of the Punjab and Haryana High Court, double taxation in respect of the said capital gains could be avoided as indicated by the Punjab and Haryana High Court in its judgment. According to the Punjab and Haryana High Court in Pearl Woollen Mills v. CIT (headnote) :

'It is now well established that, for purposes of the I.T. Act, a firm is a legal entity. The firm is, therefore, capable of owning capital assets and is liable to tax in respect of capital gains.

Section 182 provides that the share of each partner in the income of the firm shall be included in his total income and assesse to tax accordingly. Section 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. The two provisions read together show that though capital gains are included in the total income of the firm it is dealt with separately for purposes of taxation. Capital gains is included within the term 'income' in order to make it liable for taxation. But it is a separate head of income under s. 14. Section 67(2) contemplates the apportionment under various heads of the income of the firm. As regards capital gains, the apportionment of the same to the share of each partner cannot be legally visualised. The firm is the owner of the property and if by transfer of its capital assets certain profits or gains have arisen as contemplated under s. 45 of the Act then they are to be taxed in the hands of the firm and the same cannot be taxed twice over as it cannot be held to be capital gains again in the hands of the partners. The Act deals separately with the tax on capital gains.

The word 'payable' in the proviso to s. 114 has been used in the sense of being payable by the partners as well as the firm taken together. The impact of this proviso stands exhausted if once it is found that on the same amount of capital gains, the minimum 15 per cent. is paid by the firm. Hence, when tax on capital gains is to be charged in the hands of a registered firm under s. 114, then under the first proviso to s. 114(b)(ii), it would be payable by the registered firm cumulatively with its partners at the minimum rate of 15 per cent. and not separately by each of them.'

13. In this reference we are not called upon, really, to consider whether it was right to allocate the respective share of capital gains to the two partners and, thereafter, to tax them on such capital gains at the minimum rate of 15 per cent. The Pearl Woollen Mills' case also establishes that the tax on capital gains is payable by a registered firm at the rate prescribed under s. 114 of the I.T. Act, 1961. We are really not called upon to consider forward to the individual assessments of the two partners and whether they can be taxed at all or at what rate. We have only referred to the Pearl Woollen Mills' case as offering a way out of the question of hardship and of double taxation, which has been stressed by the Tribunal and which seems to have been the main point moulding its ultimate decision. According to the Tribunal, the tax at the minimum rate ought not to be levied on the registered firm because it may amount to double taxation and it would affect a registered firm prejudicially vis-a-vis an unregistered firm, which could not have been the intention of the Legislature.

14. As stated earlier, we are not concerned with the individual assessments of the two partners constituting this registered firm and are, therefore, not called upon to consider the correctness of the approach or of the conclusions of the Punjab and Haryana High Court in Pearl Woollen Mills' case . In this connection, we may note that the reframed question suggested by Mr. Khatri, which we have extracted earlier, really seeks to derive assistance from the observations of the Punjab and Haryana High Court in Pearl Woollen Mills' case. It would appear that although at the earlier stages certain arguments, reflected in the said decision, had indeed been advanced, in our view these arguments were not appropriate in the case of the assessment of the registered firm. Hence, we have not been able to accept Mr. Khatri's submission for reframing the question. We are also not to be taken to expressly approve of the conclusions of the Punjab and Haryana High Court in Pearl Woollen Mills' case. These will be required to be considered in an appropriate reference.

15. In our opinion, therefore, the point is directly covered by the Full Bench decision of the Kerala High Court in Viswambharan's case : [1973]91ITR588(Ker) , which was followed subsequently by the Division Bench of the Punjab and Haryana High Court. It is well-settled practice of this High Court, at least as far as income-tax law is concerned, that decisions of other High Courts ought to be followed for the sake of uniformity. In Maneklal Chunilal & Sons Ltd. v. CIT : [1953]24ITR375(Bom) , Chagla C.J., has enunciated the uniform policy pursued by the Bombay High Court in such matters where the Division Bench followed the view of a Special Bench of the Madras High Court, and it is pertinent to note that that view was followed although the opposite view favourable to the assesse appealed more to the Division Bench. Observations to the same effect are to be found in CIT v. Chimanlal J. Dalal & Co. : [1965]57ITR285(Bom) . In the latter case the judgment of the Gujarat High Court in CIT v. Kantilal Nathuchand : [1964]53ITR420(Guj) was doubted but still followed for the sake of uniformity. We are aware that the practice is not uniform among the High Courts, but nevertheless we are of opinion that it is desirable one. Unless the judgment of another High Court dealing with an identical or comparable provision can be regarded as per incurium, it should ordinarily be followed. In our view, the decisions of the Kerala and the Punjab and Haryana High Courts dealing with identical provisions conclude the question in favour of the revenue and against the assesse. The considerations of hardship and of double taxation which undoubtedly weighed with the Tribunal are not decisive.

16. Accordingly, we answer the question referred to us in the negative and in favour of the revenue. In the special circumstance of the case, parties are directed to bear their own costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //