1967 (3) TMI 29 - HC - Income Tax

Income from immovable properties forming part of the assets of the assessee-firm falls properly to be assessed u/s. 9(1) of the IT Act, 1922, in the hands of the firm and not u/s. 9(3) of the said Act in the hands of the respective partners of the firm

Summary

Issues Involved:
1. Whether the income from immovable properties forming part of the assets of the assessee-firm should be assessed under section 9(3) of the Indian Income-tax Act, 1922, as being in the hands of the partners of the firm, or under section 9(1) as being in the hands of the firm.

Detailed Analysis:
Issue 1: Assessment of Income from Immovable Properties

Facts:
The assessee, an unregistered partnership firm named New Cotton and Wool Pressing Factory, Beawar, consists of thirteen partners. The firm owns residential buildings and godowns within its factory premises, yielding rental income. For the assessment year 1957-58, the Income-tax Officer assessed the firm's total income, including the rental income from these properties, under section 9(1) of the Indian Income-tax Act, 1922. The assessee contended that the rental income should be assessed under section 9(3) in the hands of the partners in proportion to their profit-sharing ratio.

Contentions:
- Assessee's Argument: The firm is not the owner of the immovable properties; the partners are. Therefore, the rental income should be assessed in the hands of the partners under section 9(3), not in the hands of the firm under section 9(1).
- Department's Argument: Opposed the assessee's contention, maintaining that the firm should be assessed for the rental income under section 9(1).

Legal Provisions:
- Section 9(1) of the Income-tax Act: Tax is payable by an assessee under the head "Income from property" for the annual value of property of which he is the owner.
- Section 9(3) of the Income-tax Act: If property is owned by two or more persons with definite and ascertainable shares, they should not be assessed as an association of persons, but each person's share should be included in their total income.
- Section 19 of the Indian Partnership Act: Deals with the implied authority of a partner and restrictions on acquiring or transferring immovable property on behalf of the firm.
- Sections 14 and 15 of the Indian Partnership Act: Define the property of the firm and its use exclusively for business purposes.

Court's Analysis:
- Ownership and Assessment: The court noted that under section 3 of the Income-tax Act, a firm can be treated as an assessee. The court rejected the argument that the firm could not be assessed for income from property because the firm is not the owner. Sections 14 and 15 of the Partnership Act make a clear distinction between the property of the firm and property of individual partners. The property acquired with firm funds is deemed to be for the firm.
- Implied Authority: Section 19(2) of the Partnership Act restricts a partner's authority to acquire or transfer immovable property, but this does not mean the firm cannot own property.
- Definite and Ascertainable Shares: The court held that section 9(3) applies to co-owners with definite shares, not to partners in a firm. A partner's share in the firm's property is not definite and ascertainable until the firm's accounts are settled after dissolution.

Conclusion:
The court concluded that the income from immovable properties forming part of the assets of the assessee-firm should be assessed under section 9(1) of the Indian Income-tax Act, 1922, in the hands of the firm, not under section 9(3) in the hands of the partners. The petitioner's arguments were rejected, and the firm was held liable to pay income tax on the rental income.

Final Judgment:
The income from immovable properties forming part of the assets of the assessee-firm falls properly to be assessed under section 9(1) of the Indian Income-tax Act, 1922, in the hands of the firm and not under section 9(3) in the hands of the respective partners of the firm. The petitioner is to pay the costs of the court to the non-petitioner.