B.J.DIVAN, J. -
(1.)IN reference, the following question has been referred to us by the Tribunal at the instance of the Revenue :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the respondent was not liable to pay tax on capital gains made by its under section 114 of the Income -tax Act, 1961 ?'
(2.)THE assessment years in question are 1963 -64 and 1964 -65. The assessee is a registered firm carrying on business in grocery and fireworks. The assessee owned land and some portions of the land were sold in relevant previous years. Profit on the sale of land accrued to the assessee and the Income -tax Officer sought to levy capital gains tax on the surplus arising out of the sale of the land by the assessee -firm. It was contended on behalf of the assessee before the Income -tax Officer that since the assessee was a 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 : 65ITR179(Bom) and a 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 114 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 hereinabove set out has been referred to us.
In view of the fact that this reference is in connection with two separate assessment years when the provisions of the law were different in respect of each of these two years, it will be necessary to refer to certain facts. For the assessment year 1963 -64, the relevant Samwat year being 2018, the total profit from the business and other sources, so far as the assessee was concerned, was Rs. 43,817. The Income -tax Officer also held that the capital gains on the sale of lane in the relevant previous year came to Rs. 1,15,893 and adding the profit together, the Income -tax Officer has in his order called upon the assessee, a registered firm, to pay tax on the total income of Rs. 1,59,710. For the assessment year 1964 -65, the relevant previous year being Samwat year 2019, the Income -tax Officer found that the total income of the assessee from business was Rs. 19,223 and the capital gains during the relevant previous year was Rs. 86,085. Rupees 5,000 were deducted from this total amount of capital gains under the provisions of section 114(b), sub -clause (ii), and for the purpose of computation of the income -tax, he took into consideration Rs. 81,085 as capital gains, which he included in the total income of the assessee. He therefore, held that the total income of the assessee for the purpose of the tax payable by the registered firm itself was Rs. 1,00,298. These figures have to be borne in mind while considering the contentions which were urged on both sides before us.
(3.)IN order to appreciate the rival contentions, it must be pointed out that prior to 1956 under the provisions of the 1922 Act, there was no tax payable by a registered firm as such. Under Section 23(5)(a) of the 1922 Act, it was provide that the sum payable by the firm itself shall not be determined but the total income of each partner of the firm including therein his share of its income, profits, and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined. This position prevailed up to March 31, 1956, Because of the amendment inserted by the Finance Act, 1956, with effect from April 1, 1956, a change was effected in section 23(5)(a) with the result that where the assessee was a firm and the total income of the firm has been assessed under sub -section (1), (3) or (4), as the case might be, in 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 these 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 no 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.