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TMI Blog1973 (9) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... registered firm, no tax was payable on the capital gains and, therefore, the income-tax payable on its total income by itself should be computed without taking the capital gains into consideration, while arriving at the total income of the firm which was a registered firm. This contention was negatived by the Income-tax Officer and when the matter was carried in appeal before the Appellate Assistant Commissioner, this contention was rejected by the appellate officer also. Thereafter, the assessee carried the matter in further appeal to the Income-tax Appellate Tribunal and the Tribunal, relying on certain observations of the High Court of Bombay in Volkart Brothers v. ITO [1967] 65 ITR 179 (Bom) and decision of the Income-tax Tribunal, Bombay Bench " D " in an appeal before that Bench, held that it was not intended by the Legislature while enacting section II 4 of the Act of 1961 as also section 12B of the 1922 Act that a registered firm while paying income-tax under section 182 of the 1961 Act should pay or should be made to pay income-tax on that portion of its total income which was constituted of capital gains. Thereafter, at the instance of the Revenue, the question hereinabov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of a registered firm, the income-tax payable by the firm itself was to be determined first and the total income of each partner of the firm including therein his share of its income, profits and gains of the previous year, were to be assessed and the sum payable by him on the basis of such assessment was to be determined. It may be pointed out that it was because of the bar created by section 23(5)(a) prior to March 31, 1956, that a registered firm was not called upon to pay any income-tax as such and it was after April 1, 1956, that the income-tax payable by the registered firm itself came to be returned. Under the scheme of the Income-tax Act, as laid down in charging section 3, a registered firm was an Assessee but up to 31st March, 1956, it was not liable to pay any income-tax and the tax payable by the firm was not to be determined. After 1st April, 1956, the registered firm itself became liable to pay income-tax and the rate at which such income-tax was to be paid by the firm was fixed by the annual Finance Act in each year. So far as the question of capital gains was concerned, it may be pointed out that capital gains were charged for the first time by the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such inclusion, had such reduced income been his total income, plus on the whole amount of such inclusion, income-tax equal to the amount which bears to the income-tax which would have been payable on his total income as reduced by 2/3rds, of the amount of such inclusion the same proportion as the whole amount of such inclusion bears to such reduced total income: provided that where the amount of such inclusion did not exceed the sum of Rs. 5,000, such income-tax was to be nil and in any other case, such income-tax was not to exceed 1/2 of the amount by which the amount of such inclusion exceeded the sum of Rs. 5,000. In Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 (SC), a question of the constitutional validity of the Indian Income-tax and Excess Profits Tax (Amendment) Act (XXII of 1947) came up for consideration before the Supreme Court and it was contended before the Supreme Court that it was not competent for Parliament to enact the said Act with a view to introduce a tax on capital gains because the word " income " in entry 54 in List I of the Seventh Schedule to the Government of India Act, 1935, could not empower the Central Legislature to impose tax on capital gains. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e heads of income, profits and gains, the result of the operation of section 17(6) was that a registered firm like any other assessee other than a company became liable to have included in its total income the component of capital gains earned by it in the relevant previous year as part of the total income. We must make it clear that at this stage, we are merely setting out the historical development of the inclusion of capital gains in the total income of any assessee and also the historical background as to how registered firm itself came to be taxed on its total income. Under the 1961 Act, until the commencement of the assessment year 1964-65, i.e., till March 31, 1964, the position was practically the same as under the 1922 Act. Under the 1961 Act, a distinction was drawn for the purpose of computing income-tax in respect of capital gains between short-term capital gains and long-term capital gains. Up to April 1, 1964, so far as long-term capital gains was concerned, no minimum was fixed for the purpose of computing the tax payable on that component of the total income of an assessee other than a company, which represented long-term capital gains. However, with effect from A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 2(a), income-tax was to be charged at the rates specified in Part I of the First Schedule and under sub-section (4) of section 2 : " In cases to which Chapter XII of the Income-tax Act applies, the tax chargeable shall be determined as provided in that Chapter, and with reference to the rates imposed by sub-section (1) or the rates specified in that Chapter, as the case may be. " Under Paragraph E of the First Schedule of the Finance (No. 2) Act, 1962, provision was made for rates of income-tax in the case of every registered firm, and on the first Rs. 25,000 of total income, no tax was to be payable and thereafter a provision was made for different slabs of rates of income-tax with slight variation depending upon whether the firm had less than four partners or whether the firm had five or more than five partners. This provision of section 2, sub-section (4), of the Finance (No. 2) Act, 1962, is to be found reproduced in the Finance Act of 1963, as also in the Finance Act of 1964, and it was the Finance Act of 1964, which provided the rates for the assessment year 1964-65. For the assessment year 1964-65, the rates of income-tax in the case of a registered firm were t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ril 1, 1956, regarding the income-tax payable by a registered firm on its total income continues in force and it is only because of the provisions of section II 4, as they were in existence prior to April 1, 1968, that the matter requires greater consideration. The Tribunal has rightly pointed out that the income-tax payable by a registered firm as such was in the nature of a small levy and the exemption limit was kept at Rs. 25,000. Thus, for the assessment year 1963-64, the exemption limit in respect of the total income of a registered firm was Rs. 25,000, but under section 114, the exemption limit in respect of long term capital gains was Rs. 10,000 only. Under the Act of 1961, total income includes capital gains and, according to the Tribunal, there was an apparent conflict between the exemption granted under the respective Finance Acts in relation to a registered firm and the provisions of section 114, if they were to be applied to the registered firm. The Tribunal observed that for the purpose of application of section 114 if the exemption was taken at Rs. 10,000, it will be in direct conflict with what was provided in the relevant Finance Act where the total exempted income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with law. It was so held by the Supreme Court because the phrase " error apparent from the record " was equivalent to the phrase " error apparent on the face of the record " occurring in the context of the powers of the High Court under article 226 of the Constitution. The Supreme Court held that the decision on a debatable point of law is not a mistake apparent from the record. Thus, it is obvious from this decision of the Supreme Court that the question whether a registered firm as such was liable to pay income-tax on that component of its total income which consisted of capital gains, either long-term or short-term, was left open by the Supreme Court in the case of T. S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50. Principles of interpretation which have to be applied while construing the provisions of a taxation statute are well known. We need refer to only a few of them. As far back as 1889, Lord Herschell in the House of Lords case in Colquhoun v. Brooks [1889] 2 TC 490 (at page 500) observed: " It is beyond dispute, too, that we are entitled and, indeed, bound, when construing the terms of any provision found in a statute, to consider any other parts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l-recognised principle is that, though a sense of the possible injustice of an interpretation ought not to induce judges to do violence to well-settled rules of construction, whenever the language of the Legislature admits of two constructions, the courts act upon the view that the Legislature could not have intended to bring about obvious injustice, so that the courts should accept that possible interpretation which would lead to proper justice ........" The latest pronouncement on this subject is to be found in CIT v. Naga Hills Tea Co. Ltd. [1973] 89 ITR 236. Hegde J., delivering the judgment of the Supreme Court, has observed at page 240: ".. ...... If a provision of a taxing statute can be reasonably interpreted in two ways, that interpretation which is favourable to the assessee, has got to be accepted. This is a well accepted view of law." It is in the light of these relevant principles of interpretation of tax statutes that we will consider the different provisions both of the 1922 Act and the 1961 Act. Till 1963-64, there was no question of much apparent hardship on a registered firm when income-tax payable by itself was being assessed. It is true that prior to April 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of section 114. It must be borne in mind that the same provisions regarding section 2, sub-section (4), were being reproduced in each Finance Act. For example, in Finance (No. 2) Act, 1957, which came into effect from April 1, 1957, by section 2, subsection (5), in cases to which section 17 of the Indian Income-tax Act, 1922, was to apply, the tax chargeable was to be determined as provided in that section, and with reference to the rates imposed by sub-section (1) and in accordance with the provisions of sub-sections (2), (3) and (4), wherever applicable. Thus, this concept that where provision is made for tax in special case as covered by section 17 of the 1922 Act or as covered by the provisions of Chapter XII of the 1961 Act, such special provisions were to be applied in preference to the rates prescribed by the relevant Finance Acts as a part of the regular scheme of the taxation statute, was in force from year to year right from April 1, 1957, onwards. Therefore, the conflict which apparently would arise between the provisions of the annual Finance Act of each year and the provisions of section 17, sub-section (6), of the 1922 Act or section 114 of the 1961 Act is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 1937 when the word 'income' did not include 'capital gains' and income from property was understood to be income falling under that head in section 6 of the Act. The inclusion of 'capital gains' in the definition of 'income' was for the first time enacted in 1947. It is true that, at the time when section 16(3)(a)(iii) was enacted, the definition of 'income' did not include 'capital gains' but capital gains having been brought within the meaning of 'income' in section 2(6C), the expression 'income' as used in section 16(3)(a)(iii) must be construed according to the amended definition of the word and would, therefore, include capital gains." The same reasoning which appealed to the Supreme Court in Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503 was also applied to the case of inclusion of capital gains in the definition of the word " income " with effect from April 1, 1957, and, therefore, so far as the 1922 Act was concerned, at any rate, from April 1, 1957, every assessee, other than company, including a registered firm, became liable to have included in its total income the component of capital gains whether short-term or long-term. The provisions of 1961 Act, by and large ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gains earned by the registered firm during the relevant previous year. It has also been pointed out hereinabove that those observations of the learned judges of the Bombay High Court in Volkart Brothers v. ITO [1967] 65 ITR 179 are obiter and even the Supreme Court, while deciding the appeal in that case has pointed out in T. S. Balaram, ITO v. Volkart Bros. [1971] 82 ITR 50, that the High Court was not justified in going into the merits of the case. It is not possible for us to hold that under the scheme of the Indian Income-tax Act, 1922, or of the 1961 Act at the relevant time capital gains as such was liable to a tax separate from income-tax. Under the scheme of the 1922 Act and also the scheme of the 1961 Act, capital gains was one of the heads of total income of every assessee or every assessable entity. As pointed out by the Supreme Court in Navinchandra Mafatlal v. CIT[1954] 26 ITR 758, the word " income " in the context of the constitutional entry and for the purpose of income-tax enactments has to be given the widest possible meaning. The word " income " embraces any profit or gain which is actually received. Since this is the connotation of the word " income " occu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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