1986 (6) TMI 36 - HC - Income Tax

Summary

Issues Involved:
1. Taxation of capital gains in the hands of the firm and partners.
2. Applicability of Section 114 of the Income-tax Act, 1961.
3. Interpretation of Sections 67, 114, and 182 of the Income-tax Act, 1961.
4. Double taxation of capital gains.

Detailed Analysis:

1. Taxation of Capital Gains in the Hands of the Firm and Partners:
The assets of a firm were transferred to a limited company for Rs. 3 lakhs, with Rs. 1,60,000 allocated towards plant, machinery, etc., and Rs. 1,40,000 towards leasehold land. The capital gains of Rs. 1,31,676 were included in the firm's income and taxed. The Income-tax Officer included half of the capital gains in the partner's assessment and levied tax under section 114 of the Income-tax Act, 1961. The assessee contended that capital gains should be taxed in the hands of the partners, not the firm, or alternatively, if taxed in the firm's hands, it should not be taxed again in the partners' hands.

2. Applicability of Section 114 of the Income-tax Act, 1961:
The Appellate Assistant Commissioner upheld that under section 67(2), income of a firm must be allocated among partners in the same manner as determined for the firm, leading to double taxation as per section 67. The Tribunal affirmed this, stating that section 182 requires income-tax payable by a registered firm to be determined and the share of each partner to be included in their total income and assessed to tax.

3. Interpretation of Sections 67, 114, and 182 of the Income-tax Act, 1961:
The assessee argued that capital gains tax is a special tax and should not be charged more than once. The court examined sections 4, 45, 67, 114, and 182. Section 4 charges income-tax on total income, section 45 charges tax on capital gains, section 67 details computing a partner's share, section 114 specifies tax on capital gains for non-companies, and section 182 deals with the assessment of registered firms. The court concluded that capital gains must be included in the firm's income and taxed, and also included in the partners' total income and assessed to tax.

4. Double Taxation of Capital Gains:
The court disagreed with the Punjab and Haryana High Court's decision in Pearl Woollen Mills, which held that capital gains tax should not be charged both on the firm and its partners. The court noted that sections 67 and 182 must be read harmoniously with section 114, leading to the conclusion that capital gains should be taxed in both the firm's and partners' hands. The court referenced the Kerala High Court's decision in K. L Viswambharan & Brothers, which supported the view that a firm is distinct from its partners and can be taxed on capital gains, with partners also being taxed on their share of the firm's income.

Conclusion:
The court answered the question in the affirmative, supporting the Revenue's stance that capital gains should be taxed in both the firm's and partners' hands. The court allowed the assessee's prayer for a certificate for appeal to the Supreme Court, noting the substantial question of law and differing views of another High Court.

Separate Judgments:
Both judges concurred with the judgment, with Monjula Bose J. agreeing with the analysis and conclusion.