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TMI Blog1972 (8) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case, the Appellate Tribunal was justified in law in sustaining the levy of the capital gains on the registered firm ? (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in 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) Whether, on the facts and in the circumstances of the case, the Appellate 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? " Two brothers, K. I. Viswambharan and K.I. Sukumaran, formed a partneership and carried on business in the firm name " K. I. Viswambharan Bros.", Ernakulam. In the year 1960, a building was purchased in the name of K. I. Viswambharan, one of the partners, with funds belonging to the partnership concern and both partners fixed up residence in that buildging. In the partnership records, the buildi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax is on the total inconcome of every person. The definition of "person" contained in section 2(31) of the Act includes a " firm ". Section 182 of the Act, inter alia provides that, in the case of registered firms, after assessing the totol income of the firm, the income-tax payable by the firm itself shall be determinied and that up to a specified limit the firm shall be liable to pay the tax which is not recoverable from a partner. The profits or gains arising from the transfer of a capital asset shall be deemed to be the income of previous year in which the transfers took place, by virtue of the provisions contained in section 45 of the Act. In view of the combined operation of these provisions, it is clear that for purposes of assessment to tax, the Income-tax Act treats a registered firm as an entity distinct from the partners and that "capital gains" also goes as assessable income. The short point urged on behalf of the assessee is that, though under the Income-tax Act a firm may be an independent unit for assessment, under the law relating to partnerships, the firm has no corporate existence so as to own any property in its own name, and, consequently, there cannot be a tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (i), (ii) and (iii) of clause (b) of section 48." A firm's tax liability with respect to house property came up for consideration in S. N. Syed Mohammed Saheb Bros. v. Commissioner of Income-tax. In that case, it was contended on behalf of the assessee that the income from house property owned by the firm should be assessed under section 26 of the Act treating the property as owned by an association of persons. The court repelled that contention and observed as follows : " In this case, the assessee is the firm ; and, admittedly, the firm is the owner of the house properties as well. Therefore, section 26 cannot be invoked, nor can any claim be made under that section that the income should be assessed in the hands of the several partners of the firm. The assessment by the department under section 22 of the Act including the income of the house properties in the total income of the firm appears to be correct. In view of the specific provisions of the Partnership Act relating to the property of a firm and the judicial pronouncements on the matter, there cannot be any doubt that a firm is legally competent to own or hold property and also to deal with such property. Any pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 54(i) ; nor has there been, in this case, a subsequent purchase of a residential building by the firm, by utilising the proceeds received on the sale of its building. The question is whether, for the purposes of his individual assessment, the partner, Sri K.I. Sukumaran, can claim any deduction under section 54(i). The relief granted by section 54(i) of the Act has relevancy only in the matter of computing capital gains for the purposes of taxation. In other words, the person claiming the benefit must have realised profit or gain by the transfer of a capital asset. In this case, the capital gain accrued to the firm and, on such accrual, it became part of the firm's total income just like any other receipt that satisfies the attributes of "income" as understood in law. What the partner, Sri K.I. Sukumaran, was entitled to get at the end of the year was his share in the divisible profits of the firm, and not a share in each category of income derived by the firm. It cannot, therefore, be held that Sri K.I. Sukumaran realised any capital gains on the sale of a building used for his residence so as to attract section 54(i) of the Act; and the claim made by him for deduction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 1967-68, and the case on hand falls within that category. Section 114 provided for determination of tax on capital gains in cases of assessees other than companies. Since the assessee in this case is a firm, the provisions of section 114 undoubtedly applied. The first proviso to section 114(b)(ii) is in the following terms : " Provided that where the amount payable under sub-clause (ii) of clause (b) is less than the amount equal to fifteen per cent. of the net capital gains in respect of which tax is payable under that sub-clause, then the amount payable thereunder shall be fifteen per cent. of such net capital gains ......." By virtue of this proviso, the minimum rate at which net "capital gains" is to be taxed is fifteen per cent. and the assessee-firm has been assessed only at that rate. It is not necessary to examine in detail the method of computation specified in section 114. It follows that the assessing authorities were right in rejecting the assessees' claim for deduction of Rs. 25,000 on the basis of Paragraph C of the First Schedule to the Finance (No. 2) Act of 1967. In the result, all the three questions are answered in the affirmative and a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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