R.S. Mukherjee vs Commissioner of Income Tax

Dipak Kumar Sen, J.—In the assessment year 1966-67 the accounting year ending on 31-3-1966 the assets of the firm Nirsa Refractory & Ceramic Works, Calcutta were transferred to a limited company, viz., Nirsa Refractory & Ceramics Works (P.) Ltd. for a consideration of Rs. 3 lakhs. Rs. 1,60,000 of the consideration was allocated towards plant, machinery, electric motors, etc., and the balance Rs. 1,40,000 was allocated towards consideration for a leasehold land belonging to the firm. Capital gains arising as a result of the transfer of the properties apart from the land were included in the income of the firm in its income tax assessment in the said assessment year and were taxed. Thereafter the capital gain which was determined to be Rs. 1,31,676 was allocated between the two partners. In the income tax assessment of R.S. Mukherji, one of the partners and the assessee, the ITO included half of the said capital gains and levied tax on the same u/s 114 of the income tax Act 1961 (''the Act'') as prevailing in the said year at the minimum rate of 15 per cent.

Being aggrieved, the assessee preferred an appeal from the said assessment to the AAC. It was contended in the appeal that the tax on capital gains in the relevant assessment year should in no case exceed 15 per cent of the net gains and as tax at the said rate has been imposed on the firm the same could not be assessed further in the hands of the partners u/s 114. It was further contended that the partners being the real owners of the property, capital gains should have been assessed in their hands and not in the hands of the firm. It was contended in the alternative, that if such capital gains were taxed in the hands of the firm the same could not be assessed in the hands of the partners.

The AAC held that the firm and the partners were separate entities and distinct assessees under the Act. He held further that u/s 67(2) of the Act, income of a firm had to be allocated to its partners under the various heads in the same manner in which income had been determined in the case of the firm and, therefore, capital gains had to be assessed both in the hands of the firm and also in the hands of the partners. Section 67 itself provided for double taxation in such cases. The contention of the assessee was rejected.

Being aggrieved, the assessee preferred a further appeal before the Tribunal. The contentions made before the AAC were reiterated before the Tribunal. The Tribunal held that u/s 182 of the Act income tax payable by a registered firm had to be determined and thereafter the share of each partner in the income of the firm had to be included in the partner''s total income and assessed to tax. Though there was double taxation, the Legislature having provided for the same in the Act, capital gains in the instant case had to be assessed in the hands of the partners also. The appeal of the assessee was dismissed.

On an application of the assessee u/s 256(1) of the Act, the following question has been referred by the Tribunal, as a question of law arising out of its order, for the opinion of this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the tax in the hands of the assessee in respect of his share of capital gains according to the provisions of section 114 of the income tax Act, 1961 when tax on capital gains had already been charged in the hands of the registered firm where the assessee was a partner?

At the hearing of this reference, the learned advocate for the assessee submitted that tax on capital gains was a special tax imposed by the Act and was distinct from other income tax as such inasmuch as the same were charged under the respective Finance Acts promulgated every year. It was contended that the Act did not contemplate that capital gains would be charged more than once under the Act. In this context he drew our attention to the relevant sections of the Act as they stood at the material time. The material portions of the said sections are set out as follows:

Charge of income tax.- (1) 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, this Act in respect of the total income of the previous year or previous years, as the case may be, of every person:

Capital gains.-(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53 and 54, be chargeable to income tax under the head ''Capital gains'', and shall be deemed to be the income of the previous year in which the transfer took place.

Method of computing a partner''s share in the income of the firm. -(1) In computing the total Income of an assessee who is a partner of a firm, whether the net result of the computation of total income of the firm is a profit or a loss, his share (whether a net profit or a net loss) shall be computed as follows:-

(2) 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.

Tax on capital gains in cases of assessees other than companies. - Where the total income of an assessee, not being a company, includes any income chargeable under the head ''Capital gains'', the tax payable by him on his total income shall be-

(a) to (b)(i) ******

(ii) the amount of income tax calculated on such part of the net capital gains, if any, relating to capital assets other than short-term capital assets, as exceeds the sum of five thousand rupees-

(2) in any other case, at one-half of the average rate of income tax...

Assessment of registered firms.- (1) Notwithstanding anything contained in sections 143 and 144 and subject to the provisions of subsection (3), in the case of a registered firm, after assessing the total income of the firm, -

(i) the income tax payable by the firm itself shall be determined; and

(ii) the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly.

Construing the said sections, the learned advocate for the assessee contended that capital gains resulted from a transfer of capital assets and tax on such capital gains could be levied only on the transfer and at one time and not subsequently when the gains resulting from transfer of capital was allocated to the partners of the firm. In support of his contentions the learned advocate for the assessee cited a decision of the Punjab and Haryana High Court in Pearl Woollen Mills v. CIT [19803 123 ITR 658. In that case during the relevant assessment year the firm concerned had sold certain capital assets and made certain gains. The said gains were duly taxed in the hands of the firm. On an appeal the AAC held that u/s 114 tax would be recoverable in respect of capital gains from the firm and its partners taken together and it could not be charged separately on the firm and also on its partners.

On an appeal by the revenue the Tribunal held that capital gains tax could be levied at the rate prescribed u/s 114 both on the firm as also on the partners.

From the said decision of the Tribunal two questions were referred to the Punjab and Haryana High Court. The first question was whether a firm could be held liable to pay capital gains tax in law on the ground that the firm was not a legal entity and was not capable of owning capital assets. The other question was whether the tax on capital gains u/s 114, could be charged both on the registered firm and its partners either separately or cumulatively.

The High Court following decisions of other High Courts held that for the purposes of the Act a firm was a legal entity and was, therefore, capable of owning capital assets and was liable to tax in respect of capital gains. On the other question it was held by the High Court on construing sections 67(2) and 182 that though in the total income of the firm the capital gains had to be included but for the purpose of taxation it was a separate head and had to be dealt with separately. It was held further that though section 67(2) provided for apportionment between the partners of the various heads of income of the firm as determined, so far as capital gain was concerned the apportionment of the same on the partners could not be legally visualised. The owner ship of the capital assets either vested in the firm or in its partners. As the firm was held to be the own3r of the property the profits or gains arising out of transfer of its capital u/s 45 of the Act had to be taxed in the hands of the firm and cannot be taxed again in the hands of the partners. The contention of the assessee that u/s 114 the tax payable meant tax was payable by the partners as well as by the firm taken together was accepted. This question was answered in favour of the assessee.

The learned advocate for the revenue contended on the other hand that the provisions of the relevant section of the Act were clear and section 182 specifically provided for double taxation. If capital gains were to be treated as income in the hands of the firm such income had to be allocated between partners u/s 67 and on such apportionment the partners would be liable to pay tax on the same over again.

The learned advocate also submitted that tax on capital gains was also provided for in the Finance Act passed each year.

In section 2(4) of the Finance Act, 1966 it was laid down that in cases to which Chapter XII of the Act applied the tax chargeable would be determined as provided in that Chapter and with reference to the rates imposed or specified in the said Chapter. It was submitted that in view of the clear provisions of section of the Act the contentions of the assessee could not be accepted. The learned advocate submitted that this Court should not follow the decision of the Punjab and Haryana High Court.

It appears to us on a plain reading of the sections involved that u/s 14 of the Act ''Capital gains'' has been distinctly specified as a separate head of income for the purpose of charge of income tax. It is also clear that u/s 182 a registered firm is held to be an assessee within the meaning of the Act and is liable to pay income- tax. It follows that in the event a registered firm transfers any capital asset, the gains arising there from have to be treated as income of the firm chargeable to tax. Section 114 is thereby attracted and the firm has to pay tax on the part of its income arising out of capital gains.

Section 182 further provides that the share of each partner in the income of the firm has to be included in his total income and assessed to tax. Therefore, if the income of the firm consists of an item under the head ''Capital gains'' the share in such item has to be included in the total income of each partner and assessed to tax. u/s 114 of the Act assessees other than companies have to pay tax on income chargeable under the head ''Capital gains'' at the rates prescribed therein.

With great respect we are unable to agree with the decision of the Punjab and Haryana High Court in Pearl Woollen Mills Ltd.''s case (supra) where it was held that when a firm is assessed to tax from income arising out of capital gains it will be deemed that both the partners and the firm are being assessed and the tax paid on the part of the firm actually allocated would be deemed to be paid both by the firm and its partners. Section 114 has to be read harmoniously with sections 67 and 182 which have been referred to earlier and on a harmonious construction, the construction adopted in Pearl Woollen Mills Ltd.''s case (supra) cannot be accepted.

In this connection, we note a decision of a Full Bench of the Kerala High Court in K. I. VISWAMBHARAN and BROTHERS AND OTHER Vs. COMMISSIONER OF Income Tax., . In this case, a firm was assessed to capital gains resulting out of sale of a house. Individual assessment was made on one of the partners where in his total income one-half of the capital gains received by the firm was included. The partner during the relevant year had purchased a residential house within the time limit specified in section 54(1) of the Act and claimed a deduction under the said section which was disallowed. On these facts, it was held by the Kerala High Court that under the Act a registered firm was an assessable entity distinct from its partners. A firm was legally competent to own or hold property or deal with such property. Profits or gains derived by a firm on transfer of capital assets owned by the firm was exigible to tax. It was further held that the individual partner was not entitled to relief u/s 54. A person claiming the benefit under the section must have realised profits or gains by the transfer of a capital asset. In this case, the capital gain accrued to the firm and, on such accrual, it became part of the firm''s total income and the partner was entitled to get at the end of the year his share in the divisible profits of the firm and not a share in each category of income derived by the firm. The Pull Bench of the Kerala High Court, however, did not consider section 67.

We note that even if we accept the contention of the assessee, that he, as a partner of the firm, could not be charged tax on capital gains inasmuch as it was the firm and not he which realised the capital gains, then u/s 182 his share of the total income of the firm has to be included with his other income and he has to be taxed on such aggregate income. In any event, it is not visualised in the Act that the income accruing in the hands of the firm as capital gains would accrue or could be allocated to the partners as tax-free income added to his other income. If income tax is payable the same may be at higher rate than prescribed u/s 114 which has been imposed in the instant case.

For the reasons above, we answer the question referred in the affirmative and in favour of the revenue.

In the facts and circumstances, there will be no order as to costs. The learned advocate for the assessee contended that a substantial question of law has arisen in the instant case and this was a case fit for appeal to the Supreme Court. The learned advocate contended that inasmuch as another High Court has taken a different) view, the matter is required to be decided finally by the Supreme Court. The prayer of the assessee is allowed. Let a certificate be issued to the effect that this is a case fit for appeal to the Supreme Court. Let the order for issue of a certificate be drawn up separately.

Bose. J. - I agree.