NAMBOODIRIPAD J. - These two references under section 256(1) of the Income-tax Act, 1961, arise out of the assessments to income-tax of a firm and one of its partners respectively for the assessment year 1967-68 and the three common questions referred are :
' (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in the substaining the levy of the capital gains on the registered firm?
(2) Whether, on the facts and in the circumstances of the case, the Appllate Tribunal was justified in law in disallowing the benefits under section 54(i) of the Income-tax Act, 1961, on the value of the house property purchased by one of the partners for the residence of the partner ?
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in disallowing the exemption in respect of Rs. 25000 being the general exemption granted to a registered firm and whether the interpretation placed on the Finance (No. 2) Act of 1967 read along with section 114 of the Income-tax Act is in accordnce with law?'
Two brothers, K. I. Viswambharan and K. I. Sukumaran, formed a partnership and carried on business in the firm name 'K. I. viswambharan & Bros.' Ernakulam. In the year 1960, a building was purchased in the name of K. I. Viswambharan, one of the partners, with funds belonging to the partnership concern and both partbers fixed up residence in that building . In the partnership concern and both partners fixed up residences in that building. In the partnership records, the building was shown as an asset of the firm and the price paid was well as the costs incurred later on in effecting certain improvements thereto went into the partnership accounts. On June 20, 1966, the house property was sold by the firm for an amount of Rs. 45,000. For the purposes of the assessment for the year 1967-68, the assessee-firm estimated the cost of the building and improvements thereto at Rs. 15000, and deductiung such outlay from the total sale consideration of Rs. 45,000 admitted the total 'capita l gains' to the tune of Rs. 30,000, Before the Assessing authority, a further deduction of Rs. 20,000 from the aforesaid capital gains was claimed by the assessees on the ground that subsequent to the sale, Sr. K. I. Sukumaran, one of the partners, purchased a residential house within the time-limit specified in section 54(i) of the Act. the Income-tax Officer rejected the claim based on section 54(i) of the Act and found that the total cost of the building as disclosed by the records of the firm was only Rs. 10,682 and the firms assessment for the relevant year was finalised accordingly on December 23, 1967. On the same date, the individual assessment of Sri. K. I. Sukumaran, one of the partners, was also made including in his total income one half of the capital gains received by the firm. Both the firm and the partner took the matter in appeal before the Appellate Assostant commissioner, where they contended that, in addition to the deductions claimed before, the incom e-tax Officer, the firm was entitled to a further deduction of Rs. 25,000 from the capital gains as the basic exemption granted to registered firms under the Finance Act of 1967. As far as the 'Capital gains' was concerned, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer though he granted a marginal benefit in one case under another head. The appeals preferred before the Income-tax Appellate Tribunal also did not succeed. On motion by the assessee, the Tribunal referred the questions stated above.
As far as the first question referred is concerned, the controvery lies within a narrow compass inasmmuch as certain basic propositions relatingt to the assessment of registered firms are not seriously challenged before us. Under section 4 of the Income-tax Act, the charge of income-tax is on the total income of every person. The definition of 'person' contained in section 2(31) of the Act includes a 'Firm'. Section 182 of the Act, inter alia, provides that, in the case of registered firms, after assessing the total income of the firm, the income-tax payable by the firm itself shall be determined and that up to a specified limit the firm shall be liable to pay the tax which is not recoverable from a partner. The profits or gains arising from the transfer of a capital asset shall be deemed to be the income of previous year in which the transfers took place, by virtue of the provisions contained in section 45 of the Act. In view of the combined operation of these provisions, it is clear that for purposes of assessment to tax, the Income-tax Act treats a registered firm as an entity distinct from the partnners and that 'capital gains' also goes as assessable income, The short points urged on behalf of the assessment is that, though under the Income-tax Act a firm may be an independent unit for assessment, under the law relating to partnerships, the firm has no consequently, section 45 of the Act. This argument runs counter to certain provisions of the Partnership Act. Section 14 of the Indian Partnership Act, dealing with the property of a firm, is in the following terms :
'Subject to contract between the partners, the property of the firm includes all property any rights and interests in property originally brought into the stock of the firm or acquired, by purchases or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.
Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm.'
Section 19(2) (f) and (g) provides that, in the absence of a any usage or customs of trade to the countrary, the implied authority of a partner does not empower him to acquire imovable property of behalf of the firm or to transfer immovable property belonging to thefirm. The various provisions of the Partnership Act dealing with property of a firm came up for consideration of the Supreme Court in Narayanappa v. Bhaskara Krishnappa A. I. R. 1966 S. C. 1300, 1303. The court held :
'From the a persual of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners whent he 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 tois his share of profits, if any, accruing to 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 all the partners and in that sense every partners has an interest in the property of the partnership. During the subsisting of the partnership, however, no partner can deal with any portion of the property as his own. Nor can be 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 asse ts 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'.
A firms tax liability with respect to house property came up for consideration in S. N. Syed Mohammed Saheb & Bros. v. Commissioner of Income-tax  68 I. T. R. 791, 793 (Ker.). In that case, it was contended on behalf of the assssee that the income from house property owned by the firm should be assessed under section 26 of the Act treating the property as owned by an association of person. The court repelled that contention and observed as follows :
In this case, the assessee is the firm; and admittedly, the firm is the owner of the house properties as well. Therefore, section 26 cannot be invoked, nor can any clam be made under that section that the income should be assessed in the hands of the several partners of the firm. The assessment by the department under section 22 of the Act including the income of the house properties in the total income of the firm appears to be correct.'
In view of the specific provisions of the partnership Act relating to the property of a firm and the judicial pronouncements on the matter, there cannot be any doubt that a firm is legally competent on own or thold property and also to deal with such property. Any profit or gaind derived by a firm in pursuance of the sale of a capital asset owned or held by the firm is, therefore, exigible totax in accordance with the relevant provisions of the Income-tax Act.
K. I. VISWAMBHARAN & BROTHERS AND ANOTHER V. COMMISSIONER OF INCOME-TAX.
August 17, 1972.
After the sale of the house property belonging to the firm, Sri K. I. Sukumaran, one of the partners, purchased in his name a residential building for Rs. 20,000. It was contended before the assessing authorities that the cost of the new purchase is also deductible from the proceeds reliased by the firm on the sale of its building by virtue of section 54(i) of the Income-tax Act. We may read section 54(i) of the Act :
'Where a capital gain arises from the transfer of a capital asset to which the provisions of section 53 are not applicable, being building or lands appurtenant thereto the income of which is chargeable under the head 'income from house property, which in the two years immediately proceeding the date of which the transfer took place, was being used by the assessee or a parent of his mainly for the purpose of his own or the parents own residence, and the assessee has within a period of one year before or after that date purchased, or has within a period of two years after that date constructed, a house property for the purpose of his own residence, then, instead of a capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say, -
(i) if the amount of the capital gain is greater than the cost of the new asset, the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of therr years of its purchase or construction, as the case may be, the cost shall be nil.'
It is not quite clear from the records whether the benefit conferred by section 54(i) is claimed by the firm, or the partner, Sri. K. I. Sukumaran, or by both. It was rightly conceded by the learned counsel for the assessees that the benefit cannot be claimed for the purposes of assessment of the firm, for more reasons than one. It is not possible to envisage the usage of the building by the firm for its residence within the meaning of section 54(i); nor has there been, in this case, a subsequent purchase of a residential building by the firm, by utilising the proceeds received on the sale of its building. The question is whether, for the purpose of his individual assessment, the partner Sri. K. I. Sukumaran, can claim any deduction under section 54(i). The relief granted by section 54(i) of the Act has relevancy only in the matter of computing capital gains for the purpose of taxation. In other words, the person claiming the benefit must have realised profit or gain by the
transfer of a capital asset. In this case, the capital gain accrued to the firm and, on such accrued, it became part of the firms total income just like any other receipt that satisfies the attributes of 'income' as undestood in law. What the partner. Sri K. I. Sukumaran, was entitled to get at the end of the year was his share in the divisible profits of the firm, and not a share in ech category of income derived by the firm. It cannot, therefore, be held that Sri. K. L. Sukumaran realised any capital gains on the sale of a building used for his residences so as to attract section 54(i) of the Act; and the claim made by him for deduction of Rs. 20,000 in computing his taxable income for the relevant year has only to be repelled.
The third question which is primarily concerned with the firm arises out of the contention of the assessee that, being a registered firm, it is entitled to claim a basic exemption of Rs. 25,000 in accordance with the provision of the Finance (No. 2) Act, 1967 (XX of 1967), which admittedly applies to the assessment involved in these proceedings, Sub-section (1) of section 2 of the Finance (No. 2) Act, 1967, reads as follows :
' (1) Subject to the prvisions of sub-sections (2), (3) and (4) for the assessment year commencing on the 1st day of April, 1967, income-tax shall be charged at the rates specified in Part I of the First Schedule and, in the cases to which Paragraphs A, B, C and D of that Part apply, shall be increased by a surcharge for purposes of the Union and a special surcharge for purpose of the Union calculated in either case in the manner provided therein.'
As far as registered firms are concerned, rates are specified inparagraph C of the First Schedule. Paragraph C, no doubt, provides for a basic exemption of Rs. 25,000 and it is on that basis that he disputed claim has been made by the assessee. An Analysis of sub-section (1) of section 2 shows that the provision does not apply to cases covered by sub-sections (2) (3) and (4) of section 2. Sub-section (3), which is relevant to the matter in controversy, is in following terms :
'In cases to which Chapter XII as the Income-tax Act, 1961 (XLIII of 1961) (hereinafter referred to as the Income-tax Act) applies, the tax chargeable shall be determined as provided in that chapter, and with reference to the rates imposed by sub-section (1) or the rates as specified in that Chapter, as the case may be.'
In view of this provision, in cases to which Chapter XII of the Income-tax Act applies, the rate applicable is therate specified in that Chapter and the rates specified in sub-section (1) of section 2 can apply only if no special rate is specified in any of the provisions included in Chapter XII of the Act. Section 114 of the Income-tax Act was included in Chapter XII.. Section 114 was omitted and its place section 80T was inserted by the Finance (No. 2) Act of 1967. But, since the omission was to take effect only with effect from 1st April, 1968, section 114 applied to assessments for the the assessment year 1967-68, and the case on hands falls within that category. Section 114 provided for determination of tax on capital gains in cases of assessee other than companies. Since the assessee in this case is a firm, the proviions of section 114, undoubtedly applied. The first proviso to section 114(b)(ii) is in the following 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 there under shall be fifteen per cent of such net capital gains......'
By virtue of this proviso, the minimum rate at which net 'capital gains' is to be taxed is fifteen per cent. and the assessee-firm has been assessed only at that rate. It is not necessary to examine to detail the method of computation specified in section 114, It follows that the assessing authorities were right in rejecting the assessees claim for deduction of Rs. 25,000 on the basis of Paragraph C of the First Schedule to the Finance (No. 2) Act of 1967.
In the result, all the three questions are answered in the affirmative and against the assessee in both the referencs. In the circumstances of these cases, we make no order as to costs.
A copy of this judgment under the seal of the High Court and the Signature of the Register will be sent to the Appellate Tribunal.
Question answered in the affirmative.