PEARL WOOLLEN MILLS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference has been made by the Income-tax Appellate Tribunal (Chandigarh Bench), under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the assessee, a registered firm, known as M/s. Pearl Woollen Mills, Ludhiana. The relevant assessment year is 1964-65, the accounting year is the financial year 1963-64. According to the Tribunal, the following two questions of law did arise out of its order dated 31st January, 1974, (annex. "C"):

(2.) THE facts giving rise to this reference are as under :

(3.) IN a nutshell, the contention of the learned counsel for the assessee is that the firm as such being incapable of owning any property and having no legal status cannot be taxed on the capital gains in its hands. On the other hand, the learned counsel for the revenue referred to the definitions of "person" in Section 2(31), "assessee" in Section 2(7), "income" in Section 2(24) and "capital asset" in Section 2(14) of the Act. The whole scheme of the INdian Partnership Act, particularly Sections 14 and 15, were also relied upon. Section 4 of the INdian Partnership Act defines partnership, partner and firm name. It is provided that the partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. It is further provided that the persons who have entered into partnership with one another will be called individually partners and collectively a firm, and the name under which their business is carried on, is called the firm name. Under Section 14, it is provided that, subject to the contract between the partners, the property of the firm includes all property, rights and interest in property originally brought into the stock of the firm, or acquired by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm and also includes the goodwill of the business. It is also provided that, unless the contrary intention appears, property and rights and interest in property acquired with the money belonging to the firm are deemed to have been acquired for the firm. Section 19 deals with the implied authority of the partner to act as an agent of the firm and it is provided in Sub-clauses (f) and (g) of Sub-section (2) of Section 19 that a partner does not possess implied authority to acquire immovable property on behalf of the firm or to transfer immovable property belonging to the firm. It has been further argued that these sections also clearly establish the position that the firm is an entity known to law under the INdian Partnership Act as well and by the said Act, the firm is such an entity which is capable of acquiring property and owning property, movable and immovable, and since under the I.T. Act, it has been provided that the firm has the same definition as is provided under the INdian Partnership Act, the firm is liable to pay tax on its capital gains as defined in Section 45 of the Act. Strong reliance in this respect has been placed on a case decided by the Supreme Court of INdia in CIT v. Kirkend Coal Co. [1969] 14 ITR 67. It has been observed therein that the INcome-tax Act recognises a firm, for purposes of assessment, as a unit independent of the partners constituting it; it invests the firm with a personality which survives reconstitution. A Full Bench of five judges of this court has also observed in the case of Nandlal Sohanlal v. CIT [1977] 110 ITR 170, that where a special provision was made in a taxing statute in derogation of the provisions of the Partnership Act, effect should be given to it and where no such provision had been made, liability for payment of tax could be determined by taking into consideration the general provisions of the Partnership Act. It was, therefore, obvious that where the provisions of the I.T. Act are clear, resort cannot be had to the provisions of another statute like the Partnership Act. The Rajasthan High Court also while dealing with a question, whether the income from immovable properties forming part of the assets of the assessee-firm, falls properly to be assessed under Section 9(3) of the INdian I.T. Act as being in the hands of the partners of the firm, and not under Section 9(1) as being in the hands of the firm, answered that the income from the immovable properties forming part of the assets of the assessee-firm falls properly to be assessed under Section 9(1) of the INdian I.T. Act, 1922, in the hands of the firm and not under Section 9(3) of the Act in the hands of the respective partners of the firm, as according to the judges constituting the Bench, it was not understandable how it can be urged in the face of various sections of the Partnership Act that the income of such property cannot be assessed in the hands of the firm as an assessee when Section 3 of the 1922 Act lays down that the firm can be an assessee. It is true that in the ultimate analysis it is the partners of the firm taken as a whole who are the owners of the property, but when these partners go by a firm-name in their collective capacity and when a particular immovable property or properties come within the ambit of Section 14 of the Partnership Act, the income from such property can be assessed under Section 9(1) of the 1922 Act. The case is New Cotton and Wool Pressing Factory v. CIT [1967] 65 ITR 662 (Raj).