1972 (9) TMI 21 - HC - Income Tax

Whether the Tribunal was correct in holding that the assessee-firm was the owner of premises No. 5, Clive Row, Calcutta, and that the provisions of section 9(3) of the Indian Income-tax Act, 1922, had no application in this case - Counsel for the assessee drew our attention to a decision of the Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa. That case, however, dealt with the problem of inter se relationship between the partners so far as the owning of property was concerned. In our opinion, the said decision cannot be relied on by the assessee in support of the proposition that a firm was not an entity known in law which was capable of owning property - Question answered in the affirmative

Summary

Issues:
Ownership of immovable property by a firm under the Indian Income-tax Act, 1922.

Detailed Analysis:

The case involved a reference under section 66(1) of the Indian Income-tax Act, 1922, regarding the ownership of premises by an assessee-firm and the applicability of section 9(3) of the Act. The firm, constituted under a partnership deed, acquired a property in Calcutta, and the income from it was excluded from the firm's returns based on the partners' contention that they were the legal owners in equal shares. However, the Commissioner, after examining the records, found the assessments erroneous and directed fresh assessments, including the property income in the firm's total income. The Commissioner reasoned that as the property was purchased in the firm's name using capital from partners, shown in balance sheets, and income accounted for in partnership accounts, the property belonged to the firm. The Commissioner also held that a firm could own property and section 9(3) did not apply if partners' shares were not equal in all assets.

The assessee appealed to the Income-tax Appellate Tribunal, which upheld the Commissioner's decision that the property belonged to the firm, and section 9(3) was not applicable. The Tribunal then referred the question of ownership to the High Court for consideration. The High Court analyzed the relevant provisions of the Indian Partnership Act, emphasizing that a firm is a recognized legal entity capable of owning property, as per sections 4, 14, and 19 of the Act. The Court noted that the Indian Income-tax Act defines a firm similarly to the Partnership Act, making a firm liable to tax and able to own property. Citing precedents, the Court affirmed that a firm could be taxed as the owner of property it owned, and section 9(3) did not apply to firm-owned property.

The Court rejected the contention that a firm was not a legal entity capable of owning property, emphasizing that a firm is recognized by law and can own both movable and immovable property. It cited the General Clauses Act's definition of a person to include unincorporated associations like firms, making them liable to tax as property owners. The Court distinguished a Supreme Court decision on inter se partner relationships from the issue of firm ownership. Ultimately, the Court answered the question in the affirmative, affirming that a firm could own immovable property and be taxed accordingly.

In conclusion, the High Court's judgment clarified that a firm, as a recognized legal entity under the Partnership Act, can own property, including immovable property, and is liable to taxation as the property owner under the Indian Income-tax Act. The Court's decision aligned with precedents and legal provisions, establishing the firm's capacity to own property and be taxed accordingly.