1979 (5) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee, a firm, can deny its liability to tax on capital gains on the ground that it is not a legal entity capable of owning a capital asset.
2. Whether the 1st proviso to s. 114(b)(ii) prescribing the minimum rate of tax at 15% on net capital gains applies to the registered firm and its partners separately or cumulatively.

Summary:

Issue 1: Liability of Firm to Tax on Capital Gains
The assessee, M/s. Pearl Woollen Mills, Ludhiana, argued that as a firm, it is not a legal entity capable of owning property and thus cannot be taxed on capital gains. The Tribunal admitted this ground but ultimately held that the firm is liable to tax on capital gains. The High Court upheld this view, stating that under the Income-tax Act, a firm is recognized as an independent unit for assessment purposes and can own property. The Court referenced several cases, including CIT v. Kirkend Coal Co. and Nandlal Sohanlal v. CIT, to support the position that a firm can be taxed on capital gains. Thus, the answer to the first question is in favor of the revenue and against the assessee.

Issue 2: Application of Minimum Tax Rate on Capital Gains
The second issue was whether the minimum tax rate of 15% on net capital gains, as per the 1st proviso to s. 114(b)(ii), should be applied separately to the firm and its partners or cumulatively. The Tribunal had held that the tax should be levied at 15% both on the firm and its partners separately. However, the High Court disagreed, stating that the tax should be applied cumulatively. The Court reasoned that taxing the firm and its partners separately would result in double taxation, which is not the intention of the Act. The Court referenced sections 182, 67(2), and 86 of the Act, and concluded that the minimum tax rate of 15% should be applied cumulatively to the firm and its partners. Thus, the answer to the second question is in favor of the assessee and against the revenue.

Conclusion:
The High Court ruled that the firm is liable to tax on capital gains, rejecting the argument that a firm cannot own property. However, it held that the minimum tax rate of 15% on net capital gains should be applied cumulatively to the firm and its partners, not separately. The parties were left to bear their own costs.