1967 (11) TMI 13 - HC - Income Tax

Firm's House Property Income Assessed under Section 22, Not 26

The court affirmed that the house property income of a firm should be assessed under section 22 of the Income-tax Act, 1961, rather than section 26. It ... Assessment of house property income in the hands of the owner-firm - assessment of house property income in the hands of partners under section 26 - association of persons versus firm as assessee - ownership and definite and ascertainable shares - correction of clerical mistake in question referredAssessment of house property income in the hands of the owner-firm - assessment of house property income in the hands of partners under section 26 - The Appellate Tribunal was right in law in holding that the income from the properties was properly assessed in the hands of the firm under section 22 rather than being assessed in the hands of the partners under section 26. - HELD THAT: - The court examined the character of the assessee (a registered firm which was the owner of the house properties) and the respective operation of the two provisions. Section 22 applies where the assessee itself is the owner of the house property and the income is to be included in the total income of that person. Section 26 operates where the assessee is an association of persons and the members constituting that association own the property in definite and ascertainable shares, so that assessment may be made in the hands of the members. In the present case the firm itself was the owner of the properties; therefore the question whether the income should be treated as assessable in the hands of individual partners under section 26 did not arise. The Tribunal's conclusion that the income was rightly included in the firm's total income and assessed under section 22 was consistent with this legal distinction and was upheld on the merits.Affirmed that the house property income was rightly assessed in the hands of the firm under section 22.Association of persons versus firm as assessee - ownership and definite and ascertainable shares - Section 26 does not apply to firms or to ordinary joint stock companies or to joint Hindu families as assessees where the firm or family itself is the owner; section 26 is confined to cases where an association of persons is the assessee and members own the property in definite and ascertainable shares. - HELD THAT: - The court rejected the contention that the principle applied in the Calcutta High Court decision concerning Dayabhaga joint families should be extended to firms. It explained that in a Dayabhaga joint family the members possess definite and ascertainable shares in family properties even though the family is regarded as owner; that factual and legal structure distinguishes such cases from firms where the firm itself is the owner. Consequently, the statutory scheme contemplates section 26 applying to associations of persons whose members hold ascertainable shares, and not to firms which are distinct persons and owners of the property.Held that section 26 is not available to treat house property income as assessable to partners of a firm where the firm is the owner; section 26 is confined to associations of persons with members holding definite shares.Correction of clerical mistake in question referred - A clerical error in the reference (mentioning section 28 instead of section 22) was corrected and the court proceeded to answer the correctly framed question. - HELD THAT: - Although the application for reference and the question framed by the Tribunal erroneously referred to section 28, the substance of the Tribunal's order revealed that the real controversy decided was whether assessment should be under section 22 or section 26. The court therefore treated the reference as mistakenly using the wrong section number and made a small correction to consider and answer the proper question on merits.Permitted correction of the mistake and answered the question as framed correctly with reference to section 22.Final Conclusion: The question referred is answered in the affirmative: the Tribunal was right in law in holding that the house property income for AY 1962-63 was properly assessed in the hands of the firm under section 22; no order as to costs. Issues:1. Interpretation of sections 22 and 26 of the Income-tax Act, 1961 regarding the assessment of house property income in the hands of a firm or its partners.Detailed Analysis:The case involved a registered firm with both business income and house property income. The dispute arose regarding the assessment of the property income for the assessment year 1962-63. The firm claimed that the income should be assessed in the hands of the partners under section 26 of the Income-tax Act, while the department contended that it should be included in the total income of the firm under section 22. The Tribunal upheld the department's claim, leading to the reference to the High Court. However, a mistake was noted in the reference application and question framed, referring to section 28 instead of the correct section 22. The court corrected this error and proceeded to consider the correct question on its merits.The primary contention of the assessee was that the house property income should have been assessed under section 26, implying that the firm is an association of persons. The court analyzed the definitions of 'person' under section 2(31) and highlighted that section 22 applies when the assessee is the owner of the house property, while section 26 applies when the assessee is an association of persons with co-ownership of the property. It was clarified that section 26 pertains to cases where the income should be included in the total income of an association of persons or assessed in the hands of its members.The counsel for the assessee relied on a Calcutta High Court decision, arguing that the principle applied to joint Hindu families should also be extended to firms. However, the court disagreed, emphasizing that section 26 does not apply to joint Hindu families, firms, or companies as owners of properties. In the present case, as the firm was the owner of the house properties, section 26 could not be invoked, and the assessment under section 22 by the department was deemed correct.Ultimately, the court answered the question in the affirmative, affirming that the income from the properties had been properly assessed in the hands of the firm under section 22 of the Income-tax Act, 1961. No costs were awarded, and a copy of the judgment was to be sent to the Tribunal as required by the Act.