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Pearl Woollen Mills Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 95 of 1974
Judge
Reported in(1980)14CTR(P& H)119; [1980]123ITR658(P& H)
ActsIndian Income Tax Act, 1922 - Sections 3 and 17; Income Tax Act, 1961 - Sections 4, 14, 45, 67(2), 114 and 182
AppellantPearl Woollen Mills
RespondentCommissioner of Income-tax
Appellant Advocate S.S. Ratna, Adv.
Respondent Advocate D.N. Awasthy and; B.K. Jhingan, Advs.
Cases ReferredC) and Addanki Narayanappa v. Bhaskara Krishnappa
Excerpt:
.....the revenue was directed against the aac's order only on the point of quantum of tax chargeable on capital gains. it may be pointed out that under section 3 of the act of 1922, which was the charging section under that act, a firm was one of the assessees and thus the result of the introduction of the capital gains tax with effect from april 1, 1957, was that apart from anything, else, a firm as an assessee became liable to include in the total income on which it was liable to pay income-tax by itself, a component of capital gains like every other assessee. it has been further argued that these sections also clearly establish the position that the firm is an entity known to law under the indian partnership act as well and by the said act, the firm is such an entity which is capable of..........the circumstances of the case, the assessee could, 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 ? 2. if the tax on capital gains has to be charged in the hands of the registered firm under section 114 of the income-tax act, 1961, then whether 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 ' 2. the facts giving rise to this reference are as 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.....
Judgment:

J.V. Gupta, J.

1. This reference has been made by the Income-tax Appellate Tribunal (Chandigarh Bench), under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), at the instance of the assessee, a registered firm, known as M/s. Pearl Woollen Mills, Ludhiana. The relevant assessment year is 1964-65, the accounting year is the financial year 1963-64. According to the Tribunal, the following two questions of law did arise out of its order dated 31st January, 1974, (annex. 'C'):

' 1. Whether, on the facts and in the circumstances of the case, the assessee could, 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 ?

2. If the tax on capital gains has to be charged in the hands of the registered firm under Section 114 of the Income-tax Act, 1961, then whether 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 '

2. The facts giving rise to this reference are as 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 Section 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 gains at Rs. 12,31,000. This figure was accepted by the assessee and on the computation of capital gains as such, there was no dispute before the Tribunal. The ITO had charged tax on capital gains along with other sources of income on the basis of the rates specified in Para. E, Part I of the First Schedule to the Finance Act, 1964. The AAC, however, held that the tax on capital gains was not to be charged under the provisions of the Finance Act, 1964, but was to be charged on the basis of the provisions of Section 114 of the Act. Before the AAC, the assessee had argued that the words ' the amount payable ', appearing in the first proviso to Section 114, would, in the case of a registered firm, refer to the aggregate of taxes which would be recoverable in respect of the capital gains from the firm and from its partnerstaken together. This contention of the assessee was accepted by the AAC and he held that the first proviso to Section 114 should be applied by taking the assessee-firm and its partners together.

3. Both the parties, i.e., the assessee as well as the revenue, went up in appeal before the Tribunal against the order of the AAC and whereas the assessee had assailed the order of the AAC on various grounds, the appeal filed by the revenue was directed against the AAC's order only on the point of quantum of tax chargeable on capital gains. During the course of the hearing before the Tribunal, the assessee sought permission for raising an additional ground of appeal to the effect that a registered firm was not liable to tax under Section 114 in respect of capital gains. Since the learned departmental representative did not object to this ground being entertained, being purely a legal one and as no investigation of the facts was necessary, the Tribunal admitted the same. The ground raised by the revenue, on the other hand, was that the limit of 15% laid down in the proviso to Section 114, relevant to the year, should be applied separately in the case of the firm and separately in the case of the partners. On careful consideration, the learned Tribunal held that the capital gains tax should be levied at the rate of 15% both in the case of the assessee as also in the case of the partners. In other words, the proviso to Section 114 should be applied independently to the case of the firm and independently to the case of the partners. Thus, the revenue's appeal was accepted.

4. Before dealing 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 Section 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 Section 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 Section 12B. Under Section 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 Section 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 Section 12B with effect from April 1, 1957. Section 6, which dealt with different heads of income chargeable to income-tax, was amended in 1947 and Clause (iv) which referred to the head of capital gains, was shown as one of the heads of income. The word ' capital asset' was defined in Section 2(4A) of the definition section and thus it became clear that,reading Section 2(4A) and Section 6 together, the capital gains were to be included in the total income of every assessee. It may be pointed out that under Section 3 of the Act of 1922, which was the charging section under that Act, a firm was one of the assessees and thus the result of the introduction of the capital gains tax with effect from April 1, 1957, was that apart from anything, else, a firm as an assessee became liable to include in the total income on which it was liable to pay income-tax by itself, a component of capital gains like every other assessee. Under Section 17 of the 1922 Act, a provision had been made for the determination of the tax payable in certain special cases and under Sub-section (6) of Section 17, where the total income of an assessee, not being a company, included any income chargeable under the head 'Capital gains', the tax, including super-tax, payable by him on his total income, was to be the income-tax and super-tax payable on his total income as reduced by the amount of such inclusion, had such reduced income been his total income, plus on the whole amount of such inclusion, income-tax equal to the amount which bears to the income-tax which would have been payable on his total income as reduced by 2/3rds of the amount of such inclusion the same proportion as the whole amount of such inclusion bears to such reduced total income ; provided that where the amount of such inclusion did not exceed the sum of Rs. 5,000, such income-tax was to be nil and in any other case such income-tax was not to exceed 1/2 of the amount by which the amount of such inclusion exceeds the sum of Rs. 5,000. Under the 1961 Act, until the commencement of the assessment year 1964-65, i.e., till 31st March, 1964, the position was practically the same as under the 1922 Act. Under the 1961 Act, in Section 114, a distinction was drawn for the purpose of computing income-tax in respect of capital gains, between short-term capital gains and long-term capital gains, up to April 1, 1964, and so far as long-term capital gains was concerned, no minimum was fixed for the purposes of computing the tax payable on that component of the total income 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 Section 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.'

5. The net result was that in respect of every assessee other than a company, under Section 114, Sub-clause (b), Clause (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.

6. The learned counsel for the assessee vehemently argued that under Section 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 rot capable of owning any property. It is merely an association of individuals and a firm's name is only a collective name of these individuals who constitute the firm. In other words, a firm's name is merely a compendious mode of designating the persons who have agreed to carry on the business in partnership. Thus, it is submitted that under the Indian Partnership Act, the firm has not been given any legal personality apart from its partners. The capital assets do not belong to the firm except their use by it and that being the concept of ownership, the firm, as such, cannot be its owner. Thus, a firm having no legal existence under the Indian Partnership Act cannot own any property and the partnership property, therefore, according to the counsel, will be deemed to be held by the partners in the business of the partnership. Reliance was strongly placed on the judgments of the Supreme Court in Dulichand Laxminarayan v. CIT : [1956]29ITR535(SC) and Addanki Narayanappa v. Bhaskara Krishnappa : [1966]3SCR400 , in this respect. In the latter case, their Lordships of the Supreme Court, after discussing the scheme of the Indian Partnership Act and its various provisions, observed thus (p. 1303):

' From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property, and upon dissolution of the partnership, to a share in the money representing the value of the property, No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in Clause (a) and Sub-clauses (i), (ii) and (iii) of Clause (b) of Section 48.'

7. In a nutshell, the contention 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 theother hand, the learned counsel for the revenue referred to the definitions of 'person' in Section 2(31), 'assessee' in Section 2(7), 'income' in Section 2(24) and 'capital asset' in Section 2(14) of the Act. The whole scheme of the Indian Partnership Act, particularly Sections 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 Section 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 purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm and also includes the goodwill of the business. It is also provided that, unless the contrary intention appears, property and rights and interest in property acquired with the money belonging to the firm are deemed to have been acquired for the firm. Section 19 deals with the implied authority of the partner to act as an agent of the firm and it is provided in Sub-clauses (f) and (g) of Sub-section (2) of Section 19 that a partner does not possess implied authority to acquire immovable property on behalf of the firm or to transfer immovable property belonging to the firm. It has been further argued that these sections also clearly establish the position that the firm is an entity known to law under the Indian Partnership Act as well and by the said Act, the firm is such an entity which is capable of acquiring property and owning property, movable and immovable, and since under the I.T. Act, it has been provided that the firm has the same definition as is provided under the Indian Partnership Act, the firm is liable to pay tax on its capital gains as defined in Section 45 of the Act. Strong reliance in this respect has been placed on a case decided by the Supreme Court of India in CIT v. Kirkend Coal Co. [1969] 14 ITR 67. It has been observed therein that the Income-tax Act recognises a firm, for purposes of assessment, as a unit independent of the partners constituting it; it invests the firm with a personality which survives reconstitution. A Full Bench of five judges of this court has also observed in the case of Nandlal Sohanlal v. CIT , that where a special provision was made in a taxing statute in derogation of the provisions of the Partnership Act, effect should be given to it and where no such provision had been made, liability for payment of tax could be determined by taking into consideration the general provisions of the Partnership Act. It was, therefore, obvious that where the provisions of the I.T. Act are clear, resort cannot be had tothe provisions of another statute like the Partnership Act. The Rajasthan High Court also while dealing with a question, whether the income from immovable properties forming part of the assets of the assessee-firm, falls properly to be assessed under Section 9(3) of the Indian I.T. Act as being in the hands of the partners of the firm, and not under Section 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 Section 9(1) of the Indian I.T. Act, 1922, in the hands of the firm and not under Section 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 Section 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 Section 14 of the Partnership Act, the income from such property can be assessed under Section 9(1) of the 1922 Act. The case is New Cotton and Wool Pressing Factory v. CIT .

8. The case nearest to the facts of the present case is the one decided by the Gujarat High Court in CIT v. Hasanali Khanbhai and Sons [1974] Tax 36 4. In this case, the assessee, a registered firm, was carrying on business in grocery and fire works and also owned some land. Some portions of the land were sold in the previous years relevant to the assessment years 1963-64 and 1964-65. The profit accrued from the sale of land was sought to be taxed as capital gains by the ITO. It was pointed out by the assessee that since the assessee was a registered firm, it could not be made liable for capital gains tax. However, this was not accepted. The ITO's decision was confirmed by the AAC on appeal. But the Tribunal held that it was not the intention of the Legislature while enacting Section 12B of the 1922 Act or Section 144 of the 1961 Act, that a registered firm should pay or should be made liable to pay tax on its capital gains while paying tax under Section 182 of the 1961 Act and so the assessee was not liable to pay tax as capital gains tax on the profits realised from the sale of land. The department asked for a reference and it was held by the High Court that the Tribunal was not correct in holding that the assessee was not liable to pay tax on capital gains made by it under Section 114 of the 1961 Act. The Gujarat High Court placed reliance on the Full Bench decision of the Kerala High Court in K.L Viswambharan & Brothers v. CIT : [1973]91ITR588(Ker) . The Full Bench of the Kerala High Court held that where the capital gain accrues to the firm by reason of the sale of the building which it had purchased earlier, it becomes part of the firm's total income just like any income under the law and the partner does not realise any capital gains on such sale. It was also held by the Full Bench that Section 114 of the 1961 Act which was included in Chap. XII of the Act, applied to the assessee-firm for the assessment year 1967-68 and by virtue of the first proviso to Section 114(b)(ii), the minimum rate at which net capital gains were to be taxed was fifteen per cent. In view of such preponderance of authorities of various High Courts and none being to the contrary, we are unable to accept the contention of the learned counsel for the assessee. The authorities relied upon by the assessee, referred to above, are clearly distinguishable on facts. In this view of the matter, we answer the first question in favour of the revenue and against the assessee and hold that, on the iacts 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.

9. As regards the answer to the second question referred to above, i. e., whether the 1st proviso to Section 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 Section 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 Section 114(b)(ii), which prescribes the minimum rate of tax at 15% on net capital gains could not be made applicable in the case of the registered firm and its partners separately. If that were to be so the minimum tax on net capital gains as contemplated by the proviso to Section 114(b)(ii) be 30% instead of 15% thereof. Under the Act 15% is the tax payable on net capital gains and since capital gains cannot be regarded as accruing every year, it appears that if the firm and the partners are to be assessed separately, it would yield to double taxation on capital gains. Reference in this respect has been made to a case of the Supreme Court in ITO v. Bachu Lal Kapoor : [1966]60ITR74(SC) , wherein their Lordships have observed:

' It is true that the Act does not envisage taxation of the same income twice over on one passage of money in the form of one sort of income.'

10. It was further argued by the learned counsel for the assessee that Sections 4 and 182 of the Act are not to be read when proviso to Section 114 is attracted. For the purposes of tax on capital gains the charging Section 4 read with the Finance Act, 1964, is to be excluded, particularly in the present case, where the assessee had no other income to be assessed except the capital gains. It has further been pointed out that Chap. XII of the Act deals with the determination of tax in certain special cases and the tax on capital gains in the case of firms is covered by Section 114 which is a part of this Chapter. It has further been submitted that according to the rules of interpretation, express mention of one person or thing implies the exclusion of other persons or things (Expressio unius est exclusio alterius).

11. In reply to these arguments, the learned counsel for the revenue has drawn our attention to Sections 182, 67(2) and 86 of the Act. Attention has also been drawn to Section 2(24), where the word ' income ' has been denned, which, inter alia, includes any capital gains chargeable under Section 45. In Section 14, where heads of income are given, ' capital gains ' is one of them. Under Section 86 provisions have been made as to exclude certain assessees such as partners of unregistered firm, etc., and the omission therein of the partners of a registered firm is significant. Keeping in view these various provisions of the Act, an argument has been made that though it may be a case of double taxation, if the capital gains are to be taxed both in the hands of the firm and in the hands of its partners 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 only one place whereas in this case, the tax will be levied at the rate of 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 Section 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, Section 67(2) provides that the share of a partner in the income or loss of the firm as computed under Sub-section (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 separate head, and, therefore, is dealt with separately for the purposes of taxing the same. To include capital gains within the term 'income' was necessary in order to make it liable for taxation under the Act. But how to tax the same, i.e., the capital gains, is altogether a separate head of income as contemplated by Section 14 also. Moreover, Section 67(2) contemplates the apportionment under the various heads of income of the firm as determined under each head of income. As regards the capital gains under the head 'income', the apportionment ofthe same as to the share of each partner could not be legally visualised. Even Section 48 of the Indian Partnership Act provides that capital assets of the firm shall be applied first in paying the debts of the firm to third parties, etc., before the same can be divided amongst the partners. The ownership of the capital assets either vests in the firm or in its partners. If the firm is the owner of the property as held earlier, and by transfer of its capital assets, certain profits or gains have arisen as contemplated under Section 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. Even after the introduction of double taxation in the case of a registered firm, the main burden of tax on the income earned by a firm is borne by its partners and the tax levied on the income of the firm is only of a token nature. However, the Act deals separately under Chap. XII of the Act as to how to tax the capital gains. The word ' payable ' in the first proviso to Section 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% is paid by the firm. In this view of the matter, the answer to question No. 2 is in favour of the assessee and against the revenue. It is held that when the tax on capital gains is to be charged in the hands of the registered firm under Section 114 of the Act, then under the 1st proviso to Section 114(b)(ii), it would be payable in the case of a registered firm cumulatively with its partners at the minimum rate of 15% of the net capital gains and not separately. Thus the answer to question No. 1, as posed, is in the negative, i. e., against the assessee and in favour of the revenue, whereas the answer to question No. 2 is in the affirmative, i. e., against the revenue and in favour of the assessee. The parties are, however, left to bear their own costs in this petition.

Rajendra Nath Mittal, J.

12. I agree.


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