1973 (9) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Liability of a registered firm to pay tax on capital gains under Section 114 of the Income-tax Act, 1961.
2. Historical development of tax liability on registered firms and capital gains.
3. Interpretation of tax statutes and related provisions.

Detailed Analysis:

1. Liability of a Registered Firm to Pay Tax on Capital Gains:
The core issue is whether a registered firm is liable to pay tax on capital gains under Section 114 of the Income-tax Act, 1961. The Tribunal had held that the respondent firm was not liable to pay such tax, relying on observations from the High Court of Bombay in Volkart Brothers v. ITO and a decision of the Income-tax Tribunal, Bombay Bench "D". The Tribunal believed that the Legislature did not intend for a registered firm to pay income-tax on capital gains while paying tax under Section 182 of the 1961 Act.

2. Historical Development of Tax Liability on Registered Firms and Capital Gains:
- Pre-1956 Position: Under the 1922 Act, registered firms were not liable to pay tax as such. Section 23(5)(a) provided that the sum payable by the firm itself shall not be determined but the total income of each partner, including his share of the firm's income, would be assessed.
- Post-1956 Amendment: The Finance Act, 1956, changed this, making registered firms liable to pay income-tax on their total income, including capital gains, from April 1, 1956.
- Capital Gains Tax Introduction: Capital gains were first taxed by the Income-tax and Excess Profits Tax (Amendment) Act, 1947. The levy was abolished in 1949 but reintroduced from April 1, 1957, by the Finance (No. 3) Act, 1956.
- 1961 Act Provisions: The 1961 Act continued the scheme, and Section 114 introduced a minimum tax rate of 15% on long-term capital gains from April 1, 1964. This was removed with effect from April 1, 1968, when Section 80T replaced Section 114.

3. Interpretation of Tax Statutes and Related Provisions:
- Supreme Court's View on "Income": In Navinchandra Mafatlal v. CIT, the Supreme Court held that the word "income" includes capital gains, giving it the widest connotation.
- Principles of Interpretation: Courts must consider the entire statute and allied provisions to avoid absurd results. If a provision can be interpreted in two ways, the interpretation favorable to the assessee should be adopted.
- Case Law: The Tribunal's reliance on Volkart Brothers v. ITO was misplaced as the Supreme Court in T. S. Balaram, ITO v. Volkart Brothers held that the High Court's observations were obiter dicta and not binding.

Conclusion:
The High Court concluded that the Tribunal was incorrect in holding that the registered firm was not liable to pay tax on capital gains under Section 114 of the Income-tax Act, 1961. The historical development and statutory provisions indicate that capital gains are part of the total income of a registered firm, and thus, taxable. The court emphasized that hardship or potential double taxation does not negate clear statutory provisions. The judgment aligns with the Kerala High Court's Full Bench decision in K.I. Viswambharan and Bros. v. CIT, affirming that capital gains form part of the firm's total income subject to tax.

Judgment:
The question referred was answered in the negative, affirming the liability of the registered firm to pay tax on capital gains. The assessee was ordered to pay the costs of the reference to the Commissioner.