T.P. Mukerjee, J. - (1.) THIS reference under Section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act), raises certain important questions of law on which there have been no authoritative pronouncements so far.
(2.) THE applicant in this case is the firm styled as M/s. Ram Narain and Brothers of Lucknow, which was constituted under a deed of partnership dated June 18, 1953. It was accorded registration under Section 26A of the Act during all relevant years. THEre were seven partners including one Sri Ram Narain. THEir shares, which are unequal, are mentioned in Clause (iv) of the deed of partnership. THE business of the partnership was that of a dealer in iron and hardware goods. On October 14, 1954, the firm purchased a property consisting of certain leasehold rights in plots Nos. 90, 91 and 92 in an industrial area of Lucknow, together with the superstructure standing thereon, including a lime mill, a godown, quarters and outhouses, etc., for a sum of Rs. 27,000. In the sale deed of the said date, registered on October 16, 1954, the purchasers are shown as " M/s. Ram Narain and Brothers through Sri Ram Narain, son of Hari Ram, a partner of the said firm, resident of Aish Bagh, Lucknow ". After purchase, the income from this property was returned as the income of the firm and it was assessed as such under Section 9 of the Act up to the year 1957-58. In the assessment for the year 1958-59, this income, which amounted to Rs. 9,690, was excluded from the return of the firm and shown in the individual returns of the partners on the ground that the ownership of the property had been transferred to the individual partners by adjustments made in the relevant entries in the books of account. The debit balance relating to this property in the firm's books had been transferred to the accounts of the partners in their profit-sharing proportions. It was contended before the Income-tax Officer that by such adjustments the property which belonged to the firm had been transferred to the partners and, therefore, the income from the property could not be included in the total income of the firm. It was also contended that the firm, not being a juristic personality, could not be owner of properties in the legal sense, and, therefore, the income from the property could not be assessed in its hands under Section 9 of the Act. The Income-tax Officer rejected the claim put forward on behalf of the firm and included the amount in its total income for that year. On appeal, however, the Appellate Assistant Commissioner upheld the contention of the assessee-firm and excluded the income from property from the assessment of the firm.
(3.) FOR the next assessment year 1959-60, the income from the said property was not included by the Income-tax Officer in the total income of the firm in view of the order made by the Appellate Assistant Commissioner referred to above. The Income-tax Officer assessed the income in the hands of the partners according to their profit-sharing proportions. For the assessment year 1960-61 the Income-tax Officer again assessed the income from the said property in the total income of the firm holding that the property continued to belong to it despite the adjustments made in the book entries. There was a further contention before the Income-tax Officer that, as the partners had definite shares in the property, the provisions of Section 9(3) of the Act were attracted and, therefore, the income from the property should be assessed in the hands of the partners according to their shares. The Income-tax Officer rejected this contention holding that Section 9(3) applied only to co-owners forming an association of persons and that it did not apply to the case of co-partners of a firm. The assessee again appealed to the Appellate Assistant Commissioner who accepted the assessee's claim and allowed the appeal holding that the firm, not being a juristic entity, was not competent to hold property. The Appellate Assistant Commissioner held that the provisions of Section 9(3) were clearly applicable and it would be wrong to tax the income from the property in the hands of the firm. Against the order of the Appellate Assistant Commissioner the Income-tax Officer filed an appeal to the Appellate Tribunal. The Tribunal allowed the appeal holding that the property belonged to the firm itself and that the income therefrom was liable to tax in its hands. It also held that the provisions of Section 9(3) of the Act could not be invoked as the property was owned by the firm as such, and not by the partners as individuals having definite and ascertainable shares in the property. The Appellate Tribunal thus restored the order of the Income-tax Officer.;