Capital gains must be included in a registered firm's total income when the Income-tax scheme treats them as income.

Capital gains were treated as part of "income" under the charging and definitional scheme of the Income-tax Acts of 1922 and 1961, so a registered firm had to include such gains in its total income for tax computation. The statutory scheme was read as permitting assessment of the firm itself on capital gains, and the general rate provisions in the annual Finance Acts did not displace the special treatment of capital gains under the Act. Hardship to the firm or its partners did not justify exclusion where the language and scheme required inclusion.

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Issues: Whether a registered firm was liable to include capital gains in its total income and pay tax thereon under section 114 of the Income-tax Act, 1961 for the assessment years 1963-64 and 1964-65.

Analysis: Capital gains formed part of "income" under the charging and definitional scheme of the Income-tax Acts of 1922 and 1961. A registered firm was an assessable entity, and after the removal of the earlier bar and the introduction of capital gains within the income-tax framework, its total income could not be computed by excluding capital gains. The annual Finance Acts did not create any real conflict with section 114, because special provisions governing capital gains operated in preference to the general rate provisions. Hardship to the firm or its partners did not justify excluding capital gains where the statutory language and scheme indicated inclusion.

Conclusion: The registered firm was liable to pay tax on capital gains under section 114, and the Tribunal was wrong in holding otherwise.

Final Conclusion: The reference was answered against the assessee and in favour of the Revenue, affirming that capital gains formed part of the registered firm's total income for tax computation.

Ratio Decidendi: Where the statutory definition of income and the charging scheme include capital gains, a registered firm must compute its total income by including such gains for the purpose of tax payable by the firm itself.

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