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Commissioner of Income-tax Vs. Hasanali Khanbhai and Sons - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Referene No. 36 of 1971
Judge
Reported in[1987]165ITR195(Guj)
ActsIncome Tax Act, 1961 - Sections 2, 2(24), 2(31), 4, 45, 64, 67(2), 80B, 80T, 114 and 182; Income Tax Act, 1922 - Sections 12B
AppellantCommissioner of Income-tax
RespondentHasanali Khanbhai and Sons
Appellant Advocate K.H. Kaji, Adv.
Respondent Advocate J.P. Shah, Adv.
Cases ReferredColquhoun v. Brooks
Excerpt:
(i) direct taxation - capital gains - section 114 of income tax act, 1961 - capital gains one of heads of total income of every assessee or every assessable entity - legislature object is tax on total income of assessee entity. (ii) rule of constructions - whenever language of legislature admits two constructions - court acts upon view that legislature could not have intended to bring about obvious injustice - court should accept possible interpretation which would lead to proper justice. - - 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 assesses and thus the combined effect of the removal of the bar with effect from april 1, 1956, and the introduction of capital gains with effect from april 1,.....b.j. divan, c.j.1. in reference, the following question has been referred to us by the tribunal at the instance of the revenue : 'whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the respondent was not liable to pay tax on capital gains made by its under section 114 of the income-tax act, 1961 ?'2. the assessment years in question are 1963-64 and 1964-65. the assessee is a registered firm carrying on business in grocery and fireworks. the assessee owned land and some portions of the land were sold in relevant previous years. profit on the sale of land accrued to the assessee and the income-tax officer sought to levy capital gains tax on the surplus arising out of the sale of the land by the assessee-firm. it was contended on behalf of the.....
Judgment:

B.J. Divan, C.J.

1. In reference, the following question has been referred to us by the Tribunal at the instance of the Revenue :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the respondent was not liable to pay tax on capital gains made by its under section 114 of the Income-tax Act, 1961 ?'

2. The assessment years in question are 1963-64 and 1964-65. The assessee is a registered firm carrying on business in grocery and fireworks. The assessee owned land and some portions of the land were sold in relevant previous years. Profit on the sale of land accrued to the assessee and the Income-tax Officer sought to levy capital gains tax on the surplus arising out of the sale of the land by the assessee-firm. It was contended on behalf of the assessee before the Income-tax Officer that since the assessee was a registered firm, no tax was payable on the capital gains and, therefore, the income-tax payable on its total income by itself should be computed without taking the capital gains into consideration, while arriving at the total income of the firm which was a registered firm. This contention was negatived by the Income-tax Officer and when the matter was carried in appeal before the Appellate Assistant Commissioner, this contention was rejected by the appellate officer also. Thereafter, the assessee carried the matter in further appeal to the Income-tax appellate Tribunal and the Tribunal, relying on certain observations of the High Court of Bombay in Volkart Brothers v. ITO : [1967]65ITR179(Bom) and a decision of the Income-tax Tribunal, Bombay Bench 'D' in an appeal before that Bench, held that it was not intended by the Legislature while enacting section 114 of the Act of 1961 as also section 12B of the 1922 Act that a registered firm while paying income-tax under section 182 of the 1961, Act should pay or should be made to pay income-tax on that portion of its total income which was constituted of capital gains. Thereafter, at the instance of the Revenue, the question hereinabove set out has been referred to us.

3. In view of the fact that this reference is in connection with two separate assessment years when the provisions of the law were different in respect of each of these two years, it will be necessary to refer to certain facts. For the assessment year 1963-64, the relevant Samwat year being 2018, the total profit from the business and other sources, so far as the assessee was concerned, was Rs. 43,817. The Income-tax Officer also held that the capital gains on the sale of lane in the relevant previous year came to Rs. 1,15,893 and adding the profit together, the Income-tax Officer has in his order called upon the assessee, a registered firm, to pay tax on the total income of Rs. 1,59,710. For the assessment year 1964-65, the relevant previous year being Samwat year 2019, the Income-tax Officer found that the total income of the assessee from business was Rs. 19,223 and the capital gains during the relevant previous year was Rs. 86,085. Rupees 5,000 were deducted from this total amount of capital gains under the provisions of section 114(b), sub-clause (ii), and for the purpose of computation of the income-tax, he took into consideration Rs. 81,085 as capital gains, which he included in the total income of the assessee. He therefore, held that the total income of the assessee for the purpose of the tax payable by the registered firm itself was Rs. 1,00,298. These figures have to be borne in mind while considering the contentions which were urged on both sides before us.

4. In order to appreciate the rival contentions, it must be pointed out that prior to 1956 under the provisions of the 1922 Act, there was no tax payable by a registered firm as such. Under Section 23(5)(a) of the 1922 Act, it was provide that the sum payable by the firm itself shall not be determined but the total income of each partner of the firm including therein his share of its income, profits, and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined. This position prevailed up to March 31, 1956, Because of the amendment inserted by the Finance Act, 1956, with effect from April 1, 1956, a change was effected in section 23(5)(a) with the result that where the assessee was a firm and the total income of the firm has been assessed under sub-section (1), (3) or (4), as the case might be, in the case of a registered firm, the income-tax payable by the firm itself was to be determined first and the total income of each partner of the firm including therein his share of its income, profits and gains of the previous year, were to be assessed and the sum payable by him on the basis of such assessment was to be determined. It may be pointed out that it was because of the bar created by section 23(5)(a) prior to March 31, 1956, that a registered firm was not called upon to pay any income-tax as such and it was after April 1, 1956, that the income-tax payable by the registered firm itself came to be returned. Under these scheme of the Income-tax Act, as laid down in charging section 3, a registered firm was an assessee but up to 31st March, 1956, it was not liable to pay any income-tax and the tax payable by the firm was no to be determined. After 1st April, 1956, the registered firm itself became liable to pay income-tax and the rate at which such income-tax was to be paid by the firm was fixed by the annual Finance Act in each year.

5. So far as the question of capital gains was concerned, it may be pointed out that 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 Act. It taxed capital gains arising after 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 1st April, 1948; but it was revived, with effect from 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. 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. Simultaneously, with the introduction of section 12B with effect from April 1, 1957, Simultaneously with the introduction of section 12B with effect from April 1, 1957 section 6, which dealt with different heads of income chargeable to income-tax was amended and clause (vi) which referred to the head of capital gains was shown as one of the heads of income, profits and gains. The words 'capital asset' was defined in section 2(4A) in the definition section and thus it became clear that read with charging section 2(4A) and section 6, 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 assesses and thus the combined effect of the removal of the bar with effect from April 1, 1956, and the introduction of capital gains with effect from April 1, 1957, was that from anything else, a registered firm as an assessee became liable to have included 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 was made for determination of tax payable in certain special cases and in 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 exceeded the sum of Rs. 5,000.

6. In Navinchandra Mafatlal v. CIT : [1954]26ITR758(SC) , a question of the constitutional validity of the Indian Income-tax and Excess Profits Tax (Amendment) Act (XXII of 1947) came up for consideration before the Supreme Court and it was intended before the Supreme Court that it was not competent for Parliament to enact the said Act with a view to introduce a tax on capital gains because the word 'income ' in entry 54 in List I of the Seventh Schedule to the Government of India Act, 1935, could no empower the Central Legislature to impose a tax on capital gains. This argument was repelled by the Supreme Court and it was held that the word 'income' in that entry should be given its widest connotation in view of the fact that it occurs in a legislative head conferring legislative power and it includes capital gains. It would be wrong, according to the Supreme Court, to interpret the word in the light of any supposed English legislative practice. The Supreme Court held that inasmuch as the amendment of the 1947 Act by definition of the word 'income' in section 2(6C) defined 'income' as including any capital gains chargeable under section 12B, the word 'income' would include capital gains and a new head of income was added in section 6 and, therefore, the Act XXII of 1947 was intra vires the powers of the Central Legislature acting under entry 54 in List I of the Seventh Schedule to the Government of India Act, 1935. S R. Das J. (as he then was), delivering the judgment of the Supreme Court, observed at page 764 of the report :

'What, then, is the ordinary, natural and grammatical meaning of the word 'income' According to the dictionary, it means 'a thing that come in '. (See Oxford Dictionary, Vol No V, page 162 : Stroud, Vol. II, pages 14-16). In the United States of America and in Australia, both of which also are English speaking countries, the word 'income' is understood in a wide sense so as to include a capital gain.'

7. Then several cases from America and a case from Australia were referred to and the observation proceeds. [at p. 764]

'In each of these cases, very wide meaning was ascribed to the word 'income' as its natural meaning. The relevant observation of learned judges deciding those cases which have been quoted in the judgment of Tendolkar J. quite clearly indicate that such wide meaning was put upon the word 'income' not because of any particular legislative practice either in the United States or in the Commonwealth of Australia but because such was the normal concept and connotation of the ordinary English word 'income'. Its natural meaning embraces any profit or gain which is actually received.'

8. In view of this decision of the Supreme Court and in view of the fact that the word 'income', in the context of the income-tax law, embraces any profit or gain which is actually received, and also in view of the fact that section 2(6C) of the 1922 Act and section 6 included capital gains as one of the heads of income, profits and gains, the result of the operation of section 17(6) was that a registered firm like any other assessee other than a company became liable to have included in its total income the component of capital gains earned by it in the relevant previous year as part of the total income.

9. We must make it clear that at this stage, we are merely sitting out the historical development of the inclusion of capital gains in the total income of any assessee and also the historical background as to how a registered firm itself came to be taxed on its total income.

10. Under the 1961 Act, until the commencement of the assessment year 1964-65, i.e., till March 31, 1964, the position was practically the same as under the 1922 Act. Under the 1961 Act, 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, so far as long-term capital gains was concerned, no minimum was fixed for the purpose of computting 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 and the proviso was 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.'

11. The result was that in respect of every assessee other than a company, under section 114, sub-section (2), clause (b), a liability arose to pay a minimum of 15 per cent, of such long-term capital gain as a tax on this component of the total income of the assessee.

12. Under section 4 of the Act of 1961, provision was made for charge of income-tax and under that section, where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, the Act of 1961, in respect of the total income of the previous year or previous years, as the case may be, of every person. By section 2, clause (31), 'person' included a firm and under section 2, clause (24), 'income' included any capital gains chargeable under section 45. As is clear from the provisions of section 4, (i) income-tax is to be charged at the rate or rates fixed by the annual Finance Act; (ii) the charge is on every person including the assessable entities enumerated in section 2(31); (iii) the income that is taxed is that of the previous year and not of the year of assessment; and (iv) the levy is to be on the total income of the assessable entity computed in accordance with and subject to the provisions of the 1961 Act.

13. It is thus clear that under the general scheme of the Act of 1961, the function of the permanent Act, i.e. Indian Income-tax Act, 1961, is to provide the guidelines for computation or determination of the total income of an assessable entity and after such total income is ascertained, the income-tax which is to be charged is to be computed or calculated at the rate or rates fixed for the year in question by the annual Finance Act. When, however, one turns to the relevant Finance Act, one finds this position. The Finance (No. 2) Act, 1962, provided the rates of income-tax and super-tax for the assessment year commencing on the first of April, 1962. Under section 2(a), income-tax was to be charged at the rates specified in Part I of the First Schedule and under sub-section (4) of section 2 ([1962] 46 ITR (St) 18) :

'In cases to which Chapter XII of 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 specified in that Chapter, as the case may be.'

14. Under Paragraph E of the First Schedule of the Finance (No. 2) Act, 1962, provision was made for rates of income-tax in the case of every registered firm, and on the first Rs. 25,000 of total income, no tax was to be payable and thereafter a provision was made for different slabs of rates of income-tax with slight variation depending upon whether the firm less than four partners or whether the firm had five or more than five partners.This provision of section 2,sub-section [4], of the Finance [No. 2] Act 1962,is to be found reproduced in the Finance Act of 1963, as also in the Finance Act of 1964 which provided the rates for the assessment year 1964-65. For the assessment year 1964-65, the rates of income-tax in the case of a registerd firm were that, on the first Rs. 25,000 of the total income, no income-tax was payable and where there were different rates of tax at different slabs but no provision was made for different rates depending upon the number of partners in the registered firm, there was also a provision for surcharge for the purpose of the Union on the income-tax payable by a registered firm. To trace the historical development to its further development with effect from April 1, 1968, as a result of the provisions of the Finance (No. 2) Act, 1967, section 114 was omitted and in its place section 80T was inserted. Under section 80T which thus came into effect from April 1, 1968, where the gross total income of an assessee not being a company includes any income chargeable under the head 'Capital gains' relating to capital assets other than short-term capital assets, that is, includes long-term capital gains, in computing the total income of the assessee, provisions are made for different rates. As a result of the insertion of section 80T, capital gains relating to short-term capital assets are fully taxed at the same rates as any other income while long-term capital gains bear a lower tax burden by only a portion of them being included in the total income. For the purpose of Chapter VI-A which was introduced with effect from April 1, 1968, under section 80B, sub-section (5), 'gross total income' means the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or under section of 280-O and without applying the provisions of section 64.

15. Thus, the minimum amount of 15 per cent of the long-term capital gains which was required to be paid by every assessee, other than a company, because of the proviso to section 80T, was removed with effect from April 1, 1968, and the minimum of 15 per cent, payable by every assessee, other than a company, in respect of long-term capital gains also came to an end with effect from April 1, 1968.

16. We may also point out that under section 182 of the Act of 1961, in the case of a registered firm, after assessing the total income of the firm, the income-tax payable by the firm itself shall be determined and the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly. Thus, it is obvious that, by and large, the scheme which was in force April 1, 1956, regarding the income-tax payable by a registered firm on its total income continues in force and it is only because of the provisions of section 80T, as they were in existence prior to April 1, 1968, that the matter requires greater consideration.

17. The Tribunal has rightly pointed out that the income-tax payable by a registered firm as such was in the nature of a small levy and the exemption limit was kept at Rs. 25,000. Thus, for the assessment year 1863-64, the exemption limit in respect of the total income of a registered firm was Rs. 25,000, but under section 80T, the exemption limit in respect of long-term capital gains was Rs. 10,000 only. Under the Act of 1961, total income includes capital gains and, according to the Tribunal, there was an apparent conflict between the exemption granted under the respective Finance Acts in relations to a registered firm and the provisions of section 80T, if they were to be applied to the registered firm. The Tribunal observed that for the purpose of applications of section 80T if the exemption was taken at Rs. 10,000 it will be in direct conflict with what was provided in the relevant Finance Act where the total exempted income was kept at Rs. 25,000. It was also observed by the Tribunal that if income-tax was to be levied on capital gains also on registered firms, it would work hardship, inasmuch as the partners will have to again pay tax on the capital gains allocated to their respective shares and such allocation was contemplated under section 67(2) of the Act and the Tribunal held that this was not intended by the Legislature while enacting section 80T of the Act as also section 12B of the 1922 Act.

18. The Tribunal in this context relied upon certain observation of the High Court of Bombay in Volkart Brothers v. ITO : [1967]65ITR179(Bom) . The main question in that case before the Division Bench of the Bombay High Court was whether section 17(1) of the Act of 1922 applied to the case of a registered non-resident firm The difficulties and hardships which were likely to arise by holding that capital gains could be said to constitute one of the components of the income of the registered firm for the purpose of section 17 and also for the purpose of including section 23(5)(a) for the purpose of computing the total income of the registered firm payable by the firm itself were considered. V. S. Desai J., delivering the judgment of the Division Bench, observed at page 186 :

'...... Since capital gains cannot be regarded as accruing every year and in the case of all assesses similarly situated, it appears to us that the construction sought to be put by the Department on the provision would yield this astounding result. There can be no doubt whatsoever that the interpretation of the provision which leads to such a result has got to be avoided. Moreover, as Mr. Palkhivala argues, if such a construction is accepted, the provision may well be challenged as going beyond the ambit of the charging section.'

19. The main question before the Division Bench in that case was whether the rectification proceedings under section 35 of the Indian Income-tax Act, 1922, were maintainable and the observations of the Division Bench were obiter dicta. This matter was taken in appeal to the Supreme Court and the case in appeal is reported in T. S. Balaram, ITO v. Volkart Brothers : [1971]82ITR50(SC) . There, the Supreme Court held that rectification proceedings were not maintainable and it also observed that the High Court was not justified in going into the question, whether the original assessments were in accordance with law. It was so held by the Supreme Court because the phrase 'error apparent from the record' was eqivalennt to the phrase 'error apparent on the face of the record' occurring in the context of the powe rs of the High Court under article 226 of the Constitution. The Supreme Court held that the decision on a debatable point of law is not a mistake apparent from the record. Thus, it is obvious from this decision of the Supreme Court that the question whether a registered firm as such was liable to pay income-tax on that component of its total income which consisted of capital gains, either long-term or short-term, was left open by the Supreme Court in the case of T. S. Balaram, ITO v. Volkart Brothers : [1971]82ITR50(SC) .

20. Principles of interpretation which have to be applied while construing the provisions of a taxation statute are well known. We need refer to only a few of them. As far back as 1889, Lord Herschell in the House of Lords case in Colquhoun v. Brooks [1889] 2 TC 490 observed :

'It is beyond dispute, too, that we are entitled and, indeed, bound, when construing the terms of any provision found in a statute, to consider any other parts of the Act which throw light upon the intention of the Legislature, and which may serve to show that the particular provision ought not to construed as it would be if considered alone and apart from the rest of the Act.......'

21. Thus, a provision is not to be looked at in isolation but it has to be considered in the light of the relevant provisions and the whole Act has to be considered in its entirely while considering a particular provision under the Act, In CIT v. Kishoresinh Kalyansinh Solanki : [1960]39ITR522(Bom) , S. T. Desai J. (as he then was), delivering the judgment of the Bombay High Court on a tax reference, observed (at p. 532) :

'..... The true meaning of any passage in a statute is that which best harmonises with the object and each passage of the statute and the court should ordinarily and as far as possible see that the interpretation it puts on a particular provision makes a consistent enactment of the whole statute. Where the main object and the intention is clear, it must not be reduced to a nullity by the draftsman's unskilfulness. The court will read not only the particular provision but also allied and cognate provisions as forming a connected scheme and not treat them as detached provisions. It has been emphasised before us that we are dealing with a taxing provision and the taxing provision should receive a strict interpretation. We do not think that the observation which we have made above militate in any way against this well-established canon of construction.

Of course, a fiscal enactment should be construed strictly and in favour of the subject. Of course, again as a general rule, interpretation must depend on language of the section and not upon the consequence that may follow upon it. But this rule of interpretation of literal construction cannot be rigidly adhered to if it leads to manifest absurdity. In such a case, as it has so often been said, the court acts under the influence of an irresistible conclusion that the Legislature could not possibly have intended what its words may signify. The cardinal rule of literal construction and linguistic clearness - it does not require to be stressed - must not be pushed so far as to result in irrational or absurd conclusions......'

22. In Jai Kishan Srivastava v. ITO : [1960]40ITR222(All) , a Full Bench of the Allahabad High Court has observed at page 236 :

'..... One well-recognised principle is that, though a sense of the possible injustice of an interpretation ought not to induce judges to do violence to well-settled rules of construction, whenever the language of the Legislature admits of two constructions, the courts act upon the view that the Legislature could not have intended to bring about obvious injustice, so that the courts should accept that possible interpretation which would lead to proper justice.......'

23. The latest pronouncement on this subject is to be found in CIT v. Naga Hills Tea Co. Ltd. : [1973]89ITR236(SC) . Hegde delivering the judgment of the Supreme Court, has observed at page 240 :

'...... If a provision of a taxing statute can be reasonably interpreted in two ways, that interpretation which is favourable to the assessee, has got to be accepted. This is a well accepted view of law.'

24. It is in the light of these relevant principles of interpretation of tax statues that we will consider the different provisions both of the 1922 Act and the 1961 Act. Till 1963-64, there was no question of much apparent hardship on a registered firm when income-tax payable by itself was being assessed. It is true that prior to April 1, 1956, a registered firm by itself was not liable to pay tax on its total income. When the protection in the shape of the provisions of section 23(5)(a) was removed by amendment of section 23(5)(a), a registered firm as such became liable to pay tax on its total income. As the Tribunal has rightly pointed out with reference to the relevant Finance Acts from year to year, the income-tax payable by a registered firm was a small levy and the first Rs. 25,000 of the income of a registered firm was exempt from income-tax payable either under section 23(5)(a) or under section 182. It was only with effect from April 1, 1957, that is, with reference to an event which happened subsequently that the question whether capital gains could be included in the total income of a registered firm arose for consideration. It is true that the general principle that double taxation is to be avoided so far as the same item is concerned has to be borne in mind. But at the same time, if there are clear provisions of law, then these provisions must be given effect to. The result of the amendment of the Indian Income-tax Act, 1922, by insertion of section 2(6C) in the definition of the word 'income' and section 12B with effect from April 1, 1957, meant that every assessee, including a registered firm, became liable to pay income-tax at the rates prescribed by the relevant Finance Acts on its total income with capital gains as one of the components of such total income. It is no doubt true that there was an apparent conflict between the exemption limits mentioned in the relevant Finance Acts and the provisions of section 17(6) of the 1922 Act and section 114 of the 1961 Act, but as we have pointed out with reference to the provisions of the Finance Act for the year 1962-63 and with reference to the Finance Act for the year 1964-65, in each year the Finance Act itself made it clear that in cases falling under Chapter XII of the Act of 1961, the rates which were to prevail were the rates fixed under the relevant sections included in Chapter XII and to the extent to which the provisions of a section included in Chapter XII were applicable, the rates fixed by the annual Finance Act were not to apply. It is in the context of these provisions of section 2, sub-section (4), of the Finance Act of each year that we have to consider the impact of the provisions of the exemption limit and the provisions of section 114. It must be borne in mind that the same provisions regarding section 2, sub-section (4), were being reproduced in each Finance Act. For example, in Finance (No. 2) Act, 1957, which came into effect from April 1, 1957, by section 2, sub-section (5), in cases to which section 17 of the Indian Income-tax Act, 1922, was to apply, the tax chargeable was to be determined as provided in that section, and with reference to the rates imposed by sub-section (1) and in accordance with the provisions of sub-sections (2), (3) and (4), wherever applicable. Thus, this concept that where provision is made for tax in a special case as covered by section 17 of the 1922 Act or as covered by the provisions of Chapter XII of the 1961 Act, such special provisions were to be applied in preference to the rates prescribed by the relevant Finance Acts as a part of the regular scheme of the taxation statute, was in force from year to year right from April 1, 1957, onwards. Therefore, the conflict which apparently would arise between the provisions of the annual Finance Act of each year and the provisions of section 17, sub-section (6), of the 1922 Act or section 114 of the 1961 Act is only apparent and such conflict was avoided by enacting section 2(5) or section 2(4), as the case may be, in each year's Finance Act. Thus, it cannot be said that merely on the ground of an apparent conflict between the exemption limits prescribed by the relevant Finance Acts in the case of a registered firm and the provisions of section 114, the inference which would inevitably follow would be that the obvious result would not arise and the capital gains cannot be included in the total income of a registered firm for the purpose of arriving at the figure of income-tax payable by a registered firm as such. There is no conflict whatsoever when one bears in mind the relevant provisions of section 2, sub-section (4), of the relevant annual Finance Acts after April 1, 1957. It would not be out of place to mention at this stage that section 114 of the Act of 1961, as it stood prior to April 1, 1962, was to be found in Chapter XII of the Act of 1961.

25. The question then arises whether on the ground of hardship which would work on a registered firm and its partners, we should so interpret the provisions of the 1922 Act and the 1961 Act as to mean that so far as a registered firm was considered, capital gains could not form a component of its total income for the purpose of arriving at the amount of income-tax payable by a registered firm as such

26. In Sevantilal Maneklal Sheth v. CIT : [1968]68ITR503(SC) , the question before the Supreme Court was, whether after the transfer of assets by a husband to his wife, capital gains derived by the wife by selling the assets could be included in the income arising directly or indirectly in the assets thus transferred to the wife for the purpose of section 16(3)(a)(iii) It was contended before the Supreme Court that at the time when section 16(3)(a)(iii) was enacted, the concept of capital gains was not present in the minds of the Legislature and, therefore, capital gains could not be said to be included in the word 'income' for the purposes of section 16(3)(a)(iii) since the definition in section 2(6C)(vi) of the 1922 Act under the provisions of section 12B was introduced for the first time in 1947 and thereafter with effect from April 1, 1956. At page 507 of the report, Ramaswami J., delivering the judgment of the Supreme Court, has observed :

'...... It was argued, in the second place, that section 16(3)(a)(iii) was enacted in 1937 when the word 'income' did not include 'capital gains' and income from property was understood to be income falling under that head in section 6 of the Act. The inclusion of 'capital gains' in the definition of 'income' was for the first time enacted in 1947. It is true that, at the time when section 16(3)(a)(iii) was enacted, the definition of 'income' did not include 'capital gains' but capital gains having been brought within the meaning of 'income' in section 2(6C), the expression 'income' as used in section 16(3)(a)(iii) must be construed according to the amended definition of the word and would, therefore, include capital gains.'

27. The same reasoning which appealed to the Supreme Court in Sevantilal Maneklal Sheth v. CIT : [1968]68ITR503(SC) was also applied to the case of inclusion of capital gains in the definition of the word 'income' with effect from April 1, 1957, and, therefore, so far as the 1922 Act was concerned, at any rate, from April 1, 1957, every assessee, other than a company, including a registered firm, became liable to have included in its total income the component of capital gains whether short-term or long-term. The provisions of 1961 Act, by and large are on the same lines as the scheme of the 1922 Act. At least such scheme was followed till March 31, 1964. For the period of four years from April 1, 1964, till March 31, 1968, so far as long-term capital gains were concerned, there was the minimum of 15 per cent of such long-term capital gains under the scheme of the proviso to section 114(b), but because such minimum was provided, it does not mean that the provision of the law was unreasonable or would lead to any manifest absurdity. The resort to the argument of hardship or manifest absurdity can only be had if there are two constructions possible and both of them must be reasonable or equally possible constructions. In the light of the different provisions which we have mentioned above, and particularly in the light of the definition of the word 'person' in section 2(31) of the 1961 Act and also the definition of the word 'income' in section 2(24) read with the provisions of section 114 and section 182 of the 1961 Act and the relevant sub-section or section of the Finance Act of each year, it is obvious that when considering the total income for the purpose of arriving at the income-tax payable by a registered firm as such on its total income, the amount of capital gains must be included and no manifest absurdity is likely to arise by such inclusion. The fact that it had worked hardship on the assesses at least for the period of four years between 1964 to March 31, 1968, cannot be gainsaid. But such hardship by itself is no ground for holding that capital gains is not to be included while arriving at the figure of the total income of a registered firm when considering its total income for the purpose of section 182. Thus neither on the ground of assessable entity nor on the ground of any conflict, can it be said that in the case of a registered firm the total income does not include capital gains while considering the provisions of section 182. With respect to the learned judges who delivered the judgment of the High Court of Bombay in Volkart Brothers v. ITO : [1967]65ITR179(Bom) , we are unable to accept the conclusion reached by them that the relevant provisions of the 1922 Act which we have discussed above should be so construed as to hold that in the case of a registered firm, the total income for the purpose of computation of the income-tax payable by it would not include the component of capital gains earned by the registered firm during the relevant previous year. It has also been pointed out hereinabove that those observation of the learned judges of the Bombay High Court in Volkart Brothers v. ITO : [1967]65ITR179(Bom) are obiter and even the Supreme Court, while deciding the appeal in that case has pointed out in T. S. Balaram, ITO v. Volkart Brothers : [1971]82ITR50(SC) , that the High Court was not justified in going into the merits of the case.

28. It is not possible for us to hold that under the scheme of the Indian Income-tax Act, 1922, or of the 1961 Act at the relevant time capital gains as such was liable to a tax separate from income-tax. Under the scheme of the 1922 Act and also the scheme of the 1961 Act, capital gains was one of the heads of total income of every assessee or every assessable entity. As pointed out by the Supreme Court in Navinchandra Mafatlal v. CIT : [1954]26ITR758(SC) , the word 'income' in the context of the constitutional entry and for the purpose of income-tax enactments has to be given the widest possible meaning. The word 'income' embraces any profit or gain which is actually received. Since this is the connotation of the word 'income' occurring in the Income-tax Acts of 1922 and 1961, we cannot say that when the Legislature included capital gains as one of the components of the total income of an assessee, a separate tax on capital gains was being imposed or was to be charged. What was to be charged was a tax on the total income of the assessable entity and since income is to include capital gains, the income-tax as such would be chargeable on the total income or 'income, profits and gains', to use the words of the 1922 statute, of all assessable entities. Such income, profits or gains or the total income includes as one of its components capital gains and it is the tax on that total income or those income, profits and gains that has to be taken into consideration when considering the provisions of section 23(5)(a) of the 1922 Act after April 1, 1956, or the provisions of section 182 of the 1961 Act. Therefore, when the Legislature used the word 'income-tax' in the context of section 23(5)(a) after April 1, 1956, or in the context of section 182 of the 1961 Act, it was referring to this type of income-tax, namely, a tax on the income, profits and gains or a tax on the total income of the assessee. Such income, profits or gains or total income as one of its components has an element of capital gains. Therefore, this contention regarding income-tax excluding the concept of capital gains cannot be accepted.

29. We may point out that the Full Bench of the Kerala High Court in K. I. Viswambharan and Bros. v. CIT : [1973]91ITR588(Ker) , has come to the same conclusions as we have done, though the process of reasoning which appealed to the learned judges of the Kerala High Court was slightly different from the process of reasoning which has appealed to us. The Full Bench there has 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 Chapter 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' was to be taxed was fifteen per cent and the Full Bench also took into consideration the provisions of section 2 of the relevant Finance Act applicable to the assessment year 1967-68. We, therefore, answer the question referred to us in the negative and we hold that the Tribunal was not right in holding that the respondent was not liable to pay tax on capital gains made by it under section 114 of the Income-tax Act, 1961.

30. The assessee will pay the costs of this reference to the Commissioner.


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