1972 (8) TMI 26 - HC - Income Tax

Whether Tribunal was justified in law in sustaining the levy of the capital gains on the registered firm - Whether Tribunal was justified in law in disallowing the benefits under section 54(i) on the value of the house property purchased by one of the partners for the residence of the partner - Whether Tribunal was correct in law in disallowing the exemption in respect of Rs. 25,000 being the general exemption granted to a registered firm and whether the interpretation placed on the Finance (No. 2) Act of 1967 read along with section 114 of the Income-tax Act is in accordance with law

Summary

Issues Involved:
1. Sustaining the levy of capital gains on the registered firm.
2. Disallowing the benefits under section 54(i) of the Income-tax Act, 1961, on the value of the house property purchased by one of the partners for the residence of the partner.
3. Disallowing the exemption in respect of Rs. 25,000 being the general exemption granted to a registered firm and the interpretation of the Finance (No. 2) Act of 1967 read along with section 114 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Sustaining the Levy of Capital Gains on the Registered Firm:
The court addressed whether the Appellate Tribunal was justified in law in sustaining the levy of capital gains on the registered firm. The key legal provisions considered were section 4, section 2(31), section 182, and section 45 of the Income-tax Act, 1961. The court noted that the Income-tax Act treats a registered firm as an entity distinct from its partners, and "capital gains" are assessable income. The argument that a firm cannot transfer a capital asset under the Partnership Act was countered by referencing section 14 of the Indian Partnership Act, which states that property acquired with firm funds is deemed to be acquired for the firm. The Supreme Court's decision in Narayanappa v. Bhaskara Krishanappa was cited to reinforce that a firm can own property and any profit from the sale of such property is taxable. The court concluded that the firm is legally competent to own and sell property, making the capital gains taxable.

2. Disallowing Benefits under Section 54(i) of the Income-tax Act:
The court examined whether the benefits under section 54(i) of the Income-tax Act, 1961, could be claimed for the value of the house property purchased by one of the partners for his residence. Section 54(i) provides tax relief for capital gains if the proceeds are reinvested in a residential property. The court clarified that the benefit cannot be claimed by the firm because the firm did not purchase a new residential building for its own residence. The court further noted that the partner, Sri K. I. Sukumaran, could not claim the benefit for his individual assessment because the capital gain accrued to the firm, not to him personally. The court concluded that the partner's claim for a deduction under section 54(i) was invalid.

3. Disallowing the Exemption of Rs. 25,000 for the Registered Firm:
The court analyzed whether the firm was entitled to a basic exemption of Rs. 25,000 under the Finance (No. 2) Act, 1967. The relevant provisions included section 2(1) of the Finance Act and section 114 of the Income-tax Act. The court noted that sub-section (3) of section 2 of the Finance Act specifies that in cases covered by Chapter XII of the Income-tax Act, the tax rate specified in that Chapter applies. For the assessment year 1967-68, section 114 was applicable, which provided for a minimum tax rate of fifteen percent on net capital gains. The court concluded that the assessing authorities correctly rejected the firm's claim for a Rs. 25,000 deduction based on Paragraph C of the First Schedule to the Finance (No. 2) Act, 1967.

Conclusion:
The court answered all three questions in the affirmative, ruling against the assessees in both references. The firm was liable for capital gains tax, the partner could not claim benefits under section 54(i) for his individual assessment, and the firm was not entitled to a Rs. 25,000 exemption under the Finance (No. 2) Act, 1967. No order as to costs was made, and a copy of the judgment was to be sent to the Appellate Tribunal.