Capital gains tax on partnership property: registered firms can be taxable owners, and section 54 relief is not available to partners.
A registered firm may be treated as the owner of partnership property for income-tax purposes and can realise taxable capital gains on its sale. The residential house exemption under section 54(i) is available only to the assessee whose own capital gain is taxed and who satisfies the statutory reinvestment conditions, so a partner cannot claim it where the gain accrued to the firm. For assessment year 1967-68, a registered firm chargeable to capital gains was not entitled to the basic exemption of Rs. 25,000 under the Finance (No. 2) Act, 1967, because the special capital-gains rate provisions governed the computation.
Issues: (i) Whether a registered firm can be treated as the owner of partnership property so as to be liable to tax on capital gains arising from its sale; (ii) Whether a partner can claim the benefit of the residential house exemption under section 54(i) on the footing that the capital gain accrued to the firm; (iii) Whether a registered firm assessed to capital gains for the assessment year 1967-68 is entitled to the basic exemption of Rs. 25,000 under the Finance (No. 2) Act, 1967.
Issue (i): Whether a registered firm can be treated as the owner of partnership property so as to be liable to tax on capital gains arising from its sale.
Analysis: Under the Income-tax Act, a firm is a separate unit of assessment and its total income includes capital gains arising from transfer of a capital asset. The Partnership Act recognises that property acquired with the money of the firm or for the purposes of the business becomes firm property, and a firm is legally competent to own, hold, and deal with such property. The legal incidents of partnership property therefore do not prevent the firm from being the transferor for income-tax purposes when it sells a capital asset belonging to it.
Conclusion: The firm was liable to tax on the capital gains arising from the sale of the house property.
Issue (ii): Whether a partner can claim the benefit of the residential house exemption under section 54(i) on the footing that the capital gain accrued to the firm.
Analysis: The exemption under section 54(i) applies only where the assessee whose capital gain is taxed has transferred a qualifying residential asset and has purchased or constructed another residential house within the prescribed time. Here, the capital gain arose to the firm, not to the partner in his individual capacity. The partner was only entitled to his share in the divisible profits of the firm and did not realise the capital gain himself. The statutory condition for availing the exemption was therefore not satisfied in his individual assessment.
Conclusion: The partner was not entitled to the benefit of section 54(i).
Issue (iii): Whether a registered firm assessed to capital gains for the assessment year 1967-68 is entitled to the basic exemption of Rs. 25,000 under the Finance (No. 2) Act, 1967.
Analysis: The rate provisions in section 2 of the Finance (No. 2) Act, 1967 operate subject to cases governed by Chapter XII of the Income-tax Act. For capital gains of assessees other than companies, section 114 of the Income-tax Act governed the computation for the relevant assessment year, and its proviso fixed the minimum rate at fifteen per cent. The special rate applicable to capital gains displaced the general rate schedule and the associated basic exemption claimed by the registered firm.
Conclusion: The registered firm was not entitled to the basic exemption of Rs. 25,000.
Final Conclusion: All three referred questions were answered against the assessees, and the tax treatment adopted by the revenue authorities was upheld.
Ratio Decidendi: For income-tax purposes, a registered firm is a taxable entity capable of owning partnership property and realising capital gains, and where a special capital-gains charging provision applies, general rate or exemption provisions yielding a contrary result cannot be invoked unless their statutory conditions are independently satisfied.