Namboodiripad, J.:— These two References under S. 156(1) of the Income-tax Act, 1961 arise out of the assessments to income-tax of a firm and one of its partners respectively for the assessment year 1967-1968; and the three common questions referred are:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in sustaining the levy of the capital gains on the registered firm?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in disallowing the benefits under S. 54(1) of the Income-tax Act, 1961 on the value of the house property purchased by one of the partners for the residence of the partner?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in disallowing the exemption in respect of Rs. 25,009/- being the general exemption granted to a registered firm and whether the interpretation placed on the Finance Act of 1967 read along with S. 114 of the Income-tax Act is in accordance with law?”

2. Two brothers, K.I Viswambharan and K.I Sukumaran, formed a partnership and carried on business in the firm name “K.I Viswambharan & Bros.”, Ernakulam. In the year 1960, a building was purchased in the name of K.I Viswambharan, one of the partners, with funds belonging to the partnership concern and both partners fixed up residence in that building. In the partnership records, the building was shown as an asset of the firm and the price paid as well as the costs incurred later on in effecting certain improvements thereto went into the partnership accounts. On 20-6-1966, the house property was sold by the firm for an amount of Rs. 45,000/-. For the purposes of the assessment for the year 1967-1768, the assessee firm estimated the cost of the building and improvements thereto at Rs. 15,000/, and deducting such outlay from the total sale consideration of Rs. 45,000/-, admitted the total “capital gains” to the tune of Rs. 30,000/-. Before the assessing authority, a further deduction of Rs. 20,000/- from the aforesaid capital gains was claimed by the assessees on the ground that subsequent to the sale, Sri K.I Sukumaran, one of the partners, purchased a residential house within the time limit specified in S. 54(i) of the Act. The Income-tax Officer rejected the claim based on S. 54(i) of the Act and found that the total cost of the building as disclosed by the records of firm was only Rs. 10,682/-. The capital gains assessable to tax was, therefore, determined at the Rs. 34,318/- and the firm's assessment for the relevant year was finalized accordingly on 23-12-1967. On the same date, the individual assessment of Sri K.I Sukumaran, one of the partners, was also made including in his total income one half of the capital gains received by the firm. Both the firm, and the partner took the matter in appeal before the Appellate Assistant Commissioner, where they contended that, in addition to the deductions claimed before the Income-tax Officer, the firm was entitled to a further deduction of Rs. 25,000/- from the capital gains as the basic exemption granted to registered firms under the Finance Act of 1967. As far as the “capital gains” was concerned, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer though he granted a marginal benefit in one case under another head. The appeals preferred before the Income-tax Appellate Tribunal also did not succeed. On motion by the assessees, the Tribunal referred the questions stated above. As far as the first question referred is concerned, the controversy lies within a narrow compass in as much as certain basic propositions relating to the assessment of registered firms are not seriously challenged before us. Under S. 4 of the Income-tax Act, the charge of income-tax is on the total income of every person. The definition of ‘person’ contained in S. 2(31) of the Act includes a ‘firm’. S. 182 of the Act, inter alia, provides that, in the case of registered firms, after assessing the total income of the firm, the income-tax payable by the firm itself shall be determined and that upto a specified limit the firm shall be liable to pay the tax which is not recoverable from a partner. The profits or gains arising from the transfer of a capital asset shall be deemed to be the income of previous year in which the transfers took place, by virtue of the provisions contained in S. 45 of the Act. In view of the combined operation of these provisions, it is clear that for purposes of assessment to tax, the Income-tax Act treats a registered firm as an entity distinct from the partners and that “capital gains” also goes as assessable income. The short point urged on behalf of the assessee is that, though under the Income-tax Act a firm may be an independent Unit for assessment, under the law relating to partnerships, the firm has no corporate existence so as to own any property in its own name, and consequently, there cannot be a transfer of any capital asset by a firm so as to attract S. 45 of the Act. This argument runs counter to certain provisions of the Partnership Act. S. 14 of the Indian Partnership Act, dealing with the property of a firm, is in the following terms:

“Subject to a contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.

Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm.”

3. S. 19(2)(f) and (g) provide that, in the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to acquire immovable property on behalf of the firm or to transfer immovable property belonging to the firm. The various provisions of the Partnership Act dealing with property of a firm came up for consideration of the Supreme Court in Narayanappa v. Bhaskara Krishnappa (A.I.R 1966 S.C 1300). The Court held:

“From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership., During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in Cl. (a) and sub-Cls. (i), (ii) and (iii) of Cl. (b) of S. 48.”

4. A firm's tax liability with respect to house property came up for consideration in S.N Syed Mohammed Saheb & Bros. v. Commr. of Income-tax (68 I.T.R 791). In that case, it was contended on behalf of the assessee that the income from house property owned by the firm should be assessed under S. 26 of the Act treating the property as owned by an association of persons. The court repelled that contention and observed as follows:

“In this case, the assessee is the firm; and admittedly, the firm is the owner of the house properties as well. Therefore, S. 26 cannot be invoked, nor can any claim be made under that section that the income should be assessed in the bands of the several partners of the firm. The assessment by the department under S. 21 of the Act including the income of the house properties in the total income of the firm appears to be correct.”

5. In view of the specific provisions of the Partnership Act relating to the property of a firm and the judicial pronouncements on the matter, there cannot be any doubt that a firm is legally competent to own or hold property and also to deal with such property. Any profit or gain derived by a firm in pursuance of the sale of a capital asset owned or held by the firm is, therefore, exigible to tax in accordance with the relevant provisions of the Income-tax Act.

6. After the sale of the house property belonging to the firm. Sri K.I Sukumaran, one of the partners, purchased in his name a residential building for Rs. 20,000/-. It was contended before the assessing authorities that the cost of the new purchase is also deductible from the proceeds realised by the firm on the sale of its building by virtue of S. 54(1) of the Income-tax Act. We may read S. 54(1) of the Act:

“Where a capital gain arises from the transfer of a capital asset to which the provisions of S. 53 are not applicable, beings or land appurtenant thereto the income of which if chargeable under the head ‘Income from house property’, which in the two years immediately preceding the date on which the transfer took place, was being used by the assessee or a parent of his mainly for the purposes of his mainly for the purposes of his own or the parent's own residence, and the assessee has within a period of one year before or after that date purchased, or has within a period of two years after that date constructed; a house property for the purposes of his own residence, then, instead of the capital gain being charged to income tax “as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that to say,—

(i) if the amount of the capital gain is greater than the cost of the new asset, the difference between the amount of the capital again and the cost of the new asset shall be charged under S. 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

7. It is not quite clear from the records whether the benefit conferred by S. 54(i) is claimed by the firm, or the partner Sri K.I Sukumaran or by both. It was rightly conceded by the learned counsel for the assessees that the benefit cannot be claimed for the purposes of assessment of the firm, for more reasons than one. It is not possible to envisage the usage of the building by the firm for its residence within the meaning of S. 54(i); nor has there been, in this case, a subsequent purchase of a residential building by the firm, by utilizing the proceeds received on the sale of its building. The question is whether, for the purposes of his individual assessment, partner Sri K.I Sukumaran can claim and deduction under S. 54(i). The relief granted by S. 54(i) of the Act has relevancy only in the matter of computing capital gains for the purposes of taxation. In other words, the person claiming the benefit must have realised profit or gain by the transfer of a capital asset. In this case, the capital gain accrued to the firm and on such accrual, it became part of the firm's total income just like any other receipt that satisfies the attributes of ‘income’ as understood in law. What the partner Sri K.I Sukumaran was entitled to get at the end of the year was his share in the divisible profits of the firm, and not a share in each category of income derived by the firm. It cannot, therefore, beheld that Sri K.I Sukumaran realised any capital gains on the sale of a building used for his residence so as to attract S. 54(i) of the Act; and the claim made by him for deduction of Rs. 20,000/- in computing his taxable income for the relevant year has only to be repelled.

8. The third question which is primarily concerned with the firm arises out of the contention of assessee that, being a registered firm, it is entitled to claim a basic exemption of Rs. 25,000/- in accordance with the provisions of the Finance (No. 2) Act, XX of 1967, which admittedly applies to the assessment involved in these proceedings. sub-section (1) of S. 2 of the Finance Act 1967 reads as follows:

“(1). Subject to the provisions of sub-sections (2), (3) and (4) for the assessment year commencing on the 1st day of April, 1967, income tax shall be charged at the rates specified in Part I of the First Schedule and, in the cases to which Paragraphs A, B, C and D of that Part apply, shall be increased by a surcharge for purposes of the Union and a special surcharge for purposes of the Union calculated in either case in the manner provided therein.”

9. As far as registered firms are concerned, rates are specified in paragraph C of the First Schedule. Paragraph C, no doubt, provides for a basic exemption of Rs. 25,000/- and it is on that basis that the disputed claim has been made by the assessees. An analysis of sub-section (1) of S. 2 shows that the provision does not apply to cases covered by sub-sections (2), (3) and (4) of S. 2. Sub-s. (3) which is relevant to the matter in controversy is in the following terms:

“In cases to which Chapter XII of the Income tax Act, 1961 (XLIII of 1961) (hereinafter referred to as the Income tax Act) applies, the tax chargeable shall be determined as provided in that Chapter, and with reference to the rates imposed by sub-s. (1) or the rates as specified in that Chapter, as the case may be.”

10. In view of this provision, in cases to which Chapter XII of the Income-tax Act applies, the rate applicable is the rate specified in that Chapter and the rates specified in sub-s. (1) of S. 2 can apply only if no special rate is specified in any of the provisions included in Chapter XII of the Act. S. 114 of the Income-tax Act was included in Chapter XII. S. 114 was omitted and in its place S. 80T was inserted by the Finance (No. 2) Act of 1967. But since the omission was to take effect only with effect from 1st April 1968, S. 114 applied to assessments for the assessment year 1967-1968, and the case on hand falls within that category. S. 114 provided for determination of tax on capital gains in cases of assessees other than companies. Since the assessee in this case is a firm, the provisions of S. 114 undoubtedly applied. The first proviso to S. 114(b)(ii)is in the following terms:

“Provided that where the amount payable under sub-clause (ii) of clause (b) is less than the amount equal fifteen per cent of the net capital gains in respect of which tax is payable under that sub-clause, then the amount payable thereunder shall be fifteen per cent, of such net capital gains.”

11. By virtue of this proviso, the minimum rate at which net ‘capital gains’ to be taxed is fifteen percent, and the assessee firm has been assessed only at that rate. It is not necessary to examine in detail the method of computation specified in S. 114. It follows that the assessing authorities were right in rejecting the assessees' claim for deduction of Rs. 25,000/- on the basis of paragraph C of the First Schedule to the Finance (No. 2) Act of 1967. In the result, all the three questions are answered in the affirmative and against the assessees in both the References. In the circumstances of these cases, we make no order as to costs.

12. A copy of this judgment under the seal of the High Court and signature of the Registrar will be sent to the Appellate Tribunal.