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TMI Blog1986 (6) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said capital gains and levied tax on the same under section 114 of the Income-tax Act, 1961, as prevailing in the said year at the minimum rate of 15%. Being aggrieved, the assessee preferred an appeal from the said assessment to the Appellate Assistant Commissioner. It was contended in the appeal that the tax on capital gains in the relevant assessment year should in no case exceed 15% of the net gains and as tax at the said rate has been imposed on the firm, the same could not be assessed further in the hands of the partners under section 114 of the Act. It was further contended that the partners being the real owners of the property, capital gains should have been assessed in their hands and not in the hands of the firm. It was contended, in the alternative, that if such capital gains were taxed in the hands of the firm, the same could not be assessed in the hands of the partners. The Appellate Assistant Commissioner held that the firm and the partners were separate entities and distinct assessees under the Income-tax Act. He held further that under section 67(2) of the Income-tax Act, 1961, income of a firm had to be allocated among its partners under the various he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or previous years, as the case may be, of every person. " Section 45. " Capital gains.-(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53 and 54, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place. " Section 67. " Method of computing a Partner's share in the income of the firm.-(1) In computing the total income of an assessee who is a partner of a firm, whether the net result of the computation of total income of the firm is a profit or a loss, his share (whether a net profit or a net loss) shall be computed as follows :... (2) The share of a partner in the income or loss of the firm, as computed under sub-section (1) shall, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of income. " Section 114. " Tax on capital gains in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax on capital gains under section 114 of the Income-tax Act, 1961, could be charged both on the registered firm and its partners either separately or cumulatively. The High Court following the decisions of other High Courts held that for the purpose of the Income-tax Act, a firm was a legal entity and was, therefore, capable of owning capital assets and was liable to tax in respect of capital gains. On the other question, it was held by the High Court on construing sections 67(2) and 182 of the Income-tax Act, 1961, that though in the total income of the firm the capital gains had to be included for the purpose of taxation, it was a separate head and had to be dealt with separately. It was held further that though section 67(2) of the Act provided for apportionment between the partners of the various heads of income of the firm as determined, so far as capital gain was concerned, the apportionment of the same on the partners could not be legally visualised. The ownership of the capital assets either vested in the firm or in its partners. As the firm was held to be the owner of the property, the profits or gains arising out of transfer of its capital assets under section 45 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed to tax. Under section 114 of the Act, assessees other than companies have to pay tax on income chargeable under the head " Capital gains " at the rates prescribed therein. With great respect, we are unable to agree with the decision of the Punjab and Haryana High Court in Pearl Woollen Mills [1980] 123 ITR 658, when it was held that when a firm is assessed to tax from income arising out of capital gains, it will be deemed that both the partner and the firm are being assessed and the tax paid on the part of the firm actually allocated would be deemed to be paid both by the firm and its partners. Section 114 has to be read harmoniously with sections 67 and 182 which have been referred to earlier and on a harmonious construction the construction adopted in Pearl Woollen Milk [1980] 123 ITR 658 (P H), cannot be accepted. In this connection, we note a decision of a Full Bench of the Kerala High Court in K. L Viswambharan Brothers v. CIT [1973] 91 ITR 588. In this case, a firm was assessed to capital gains resulting out of sale of house. Individual assessment was made on one of the partners where in his total income one-half of the capital gains received by the firm was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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