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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Sankar Prasad Mitra, C.J
  • Sabyasachi Mukharji, J.
Acts
  • provisions of section 9(3) of the Indian Income-tax Act, 1922,
  • sub-clauses (f) and (g) of sub-section (2) of section 19
  • provisions of the Indian Partnership Act. Section 4
  • section 66(1) of the Indian Income-tax Act, 1922,
  • section 33B of the Indian Income-tax Act, 1922,
  • SECTION 9 INDIAN INCOME TAX ACT
  • section 3(42) of the General Clauses Act
  • sub-section (3) of section 9
  • provisions of section 9(3)
  • Indian Partnership Act
  • INDIAN INCOME TAX ACT
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Sankar Prasad Mitra, C.J
  • Sabyasachi Mukharji, J.
Acts
  • provisions of section 9(3) of the Indian Income-tax Act, 1922,
  • sub-clauses (f) and (g) of sub-section (2) of section 19
  • provisions of the Indian Partnership Act. Section 4
  • section 66(1) of the Indian Income-tax Act, 1922,
  • section 33B of the Indian Income-tax Act, 1922,
  • SECTION 9 INDIAN INCOME TAX ACT
  • section 3(42) of the General Clauses Act
  • sub-section (3) of section 9
  • provisions of section 9(3)
  • Indian Partnership Act
  • INDIAN INCOME TAX ACT
See more information ...
Smart Summary

Structured Summary of the Opinion delivered by Sabyasachi Mukharji, J.

Factual and Procedural Background

The reference arises under section 66(1) of the Indian Income-tax Act, 1922, on the question whether the Tribunal was correct in holding that the assessee-firm (M/s Sarvamangala Properties) was the owner of premises No. 5, Clive Row, Calcutta, and that the provisions of section 9(3) of the Income-tax Act, 1922, had no application.

Relevant facts as stated in the opinion:

  • The assessee is a registered firm of two partners (Chhaganlal Burman and Baijnath Parasrampuria), constituted by a deed dated 6 December 1956 and deemed to have come into existence on 19 September 1958. The firm carried on property-related business among other activities under the name Sarvamangala Properties.
  • Premises No. 5, Clive Row, Calcutta, was sold in certificate proceedings; on 19 September 1956 the firm was declared highest bidder and a certificate of sale was granted on 19 December 1956 for Rs. 2,27,250.
  • For assessment years 1958–59, 1959–60 and 1960–61 (accounting years 1957–58, 1958–59 and 1959–60) the firm did not include rental income from the property in its returns. The Income-tax Officer accepted the assessee's contention that the property and its income belonged to the partners in equal shares and excluded the rental income from the firm's total income.
  • The Commissioner of Income-tax, viewing those assessment orders as erroneous and prejudicial to the revenue, issued a show-cause notice under section 33B on 23 March 1964, considered the assessee's replies, and ultimately set aside the assessments under section 33B, directing fresh assessments to include the house property's income in the firm's total income.
  • The Commissioner found that the purchase consideration was paid out of capital invested by the partners in the firm; the house property was shown as an asset in the firm's balance-sheets for the three accounting years; rental income was credited to the partnership profit & loss account, expenses debited, and net income divided and credited into partners' personal accounts.
  • The assessee appealed to the Income-tax Appellate Tribunal against the Commissioner's order; the Tribunal upheld the Commissioner's finding that the property belonged to the firm and that section 9(3) was not applicable. The Tribunal then referred the question to this Court.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee-firm was the owner of premises No. 5, Clive Row, Calcutta?
  2. Whether the provisions of section 9(3) of the Indian Income-tax Act, 1922, have any application in this case (i.e., whether the income should instead be treated as income of the partners in their individual shares)?

Arguments of the Parties

Assessee's Arguments

  • The firm is not a legal entity and thus cannot be the legal owner of immovable property; a firm is only a collective name for its partners.
  • If immovable property is held in the name of the firm, the partners are the legal owners and the shares of the partners in the property are definite and ascertainable; accordingly, rental income should be assessed in the hands of the partners under section 9 of the Income-tax Act, 1922.
  • The partners' assessments had already been completed and included their respective shares of rental income; therefore, the firm's assessment should not be reopened.
  • Counsel relied on the Supreme Court decision in Addanki Narayanappa v. Bhaskara Krishnappa (AIR 1966 S.C. 1300) as relevant to the legal position concerning partners' inter se relationship regarding ownership.

Commissioner and Tribunal's Findings / Contentions

  • The Commissioner concluded that the property had been purchased in the name of the firm, paid for from capital invested by the partners (i.e., firm funds), and shown as an asset in the firm's balance-sheets for the relevant accounting years.
  • Rental receipts were credited to the partnership profit & loss account and related expenses were debited; net income was divided between partners via their personal accounts—indicating treatment of the property as a firm asset.
  • Under the Partnership Act (sections 4 and 14) the property of the firm includes property acquired for the purposes or in the course of the business of the firm; nothing in the Partnership Act prevents a firm from acquiring or owning immovable property.
  • Section 19(2)(f) and (g) of the Partnership Act (limiting implied authority of a partner to acquire or transfer immovable property on behalf of the firm) does not negate the capacity of the firm itself to own immovable property.
  • The Tribunal upheld the Commissioner's conclusion that section 9(3) of the Income-tax Act was not applicable and that the property must be treated as property of the firm for income-tax purposes.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Bhai Sunder Das & Sons v. Commissioner of Income-tax [1972] I.T.R. 28 (Delhi) Firm to be treated as owner of property for the purposes of section 9 of the Income-tax Act; technical nature of partnership should not defeat exigibility of tax on income from property owned by a firm; sub-section (3) of section 9 would not apply to property owned by a firm. The Court relied on this decision as supporting the proposition that a firm can be treated as owner for taxation and that s.9(3) does not apply to firm-owned property.
New Cotton and Wool Pressing Factory v. Commissioner of Income-tax (Rajasthan High Court) As cited in this opinion: supports the view that a firm can be treated as owner and taxed as such. The Court stated its view is in consonance with the Rajasthan High Court's view; used as supporting authority for the conclusion that firm ownership for tax purposes is permissible.
S.N. Syed Mohammed Saheb & Bros. v. Commissioner of Income-tax [1968] 68 I.T.R. 791 (Ker.) Kerala High Court decision consistent with treating firm as owner for tax purposes. Cited as supporting authority for the proposition that property owned by a firm is to be treated as the firm's property for taxation and that s.9(3) does not apply.
Ram Narain and Brothers v. Commissioner of Income-tax [1969] 73 I.T.R. 423 (All.) Allahabad High Court decision consonant with treating firm-owned property as property of the firm for tax purposes. Referred to as consistent authority supporting the Court's view that a firm may be taxed as owner of property and s.9(3) is inapplicable to firm-owned property.
Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 S.C. 1300 Dealt with inter se relationship between partners regarding ownership of property (a Supreme Court decision on partners' internal rights). The Court noted this decision but held it was not applicable to the proposition that a firm is not an entity capable of owning property; the decision could not be relied upon by the assessee to deny firm ownership.

Court's Reasoning and Analysis

The Court's analysis proceeded from statutory construction of the Partnership Act and the Income-tax Act and from examination of the factual matrix as recorded by the Commissioner.

  1. Statutory framework under the Partnership Act:
    • Section 4 of the Indian Partnership Act defines partnership, partner and firm name, explaining that the persons who have entered into partnership are individually partners and collectively a firm.
    • Section 14 provides that, subject to contract between partners, the property of the firm includes all property rights and interests originally brought into the firm's stock or acquired by or for the firm or for the purposes and in the course of the firm's business, and property acquired with firm money is deemed to be for the firm unless a contrary intention appears.
    • Section 19(2)(f) & (g) restrict implied authority of partners to acquire or transfer immovable property on behalf of the firm, but these limitations on implied authority do not amount to a prohibition on the firm itself owning immovable property.
  2. From these provisions the Court concluded that the firm is an entity recognised by law under the Partnership Act and that the Act contemplates that a firm can acquire and own both movable and immovable property.
  3. The Income-tax Act's recognition of the firm follows the Partnership Act's definition; additionally, the General Clauses Act (section 3(42)) defines "person" to include unincorporated associations or bodies of persons (such as a firm), supporting the proposition that a firm can be treated as a person for tax purposes and thus be taxable as the owner of property.
  4. The Court relied on earlier High Court authorities (notably Bhai Sunder Das & Sons (Delhi) and others from Rajasthan, Kerala and Allahabad) which held that property owned by a firm is to be treated as the firm's property for the purpose of section 9 and that section 9(3) does not apply to firm-owned property.
  5. The Court addressed the assessee's reliance on Addanki Narayanappa v. Bhaskara Krishnappa (AIR 1966 S.C. 1300), observing that that decision dealt with inter se relationships between partners regarding ownership and therefore could not be relied upon to support the proposition that a firm is not an entity capable of owning property.
  6. Applying these legal principles to the recorded facts (purchase in firm's name, payment from firm capital, accounting treatment as firm asset, rental credited to partnership account and division of net income in accounting), the Court sustained the Commissioner's and Tribunal's view that the property belonged to the firm and that section 9(3) did not apply.

Holding and Implications

Holding:

Answered in the affirmative: the Court held that the Tribunal was correct in holding that the assessee-firm was the owner of premises No. 5, Clive Row, Calcutta, and that the provisions of section 9(3) of the Indian Income-tax Act, 1922, had no application in this case.

Immediate consequences and implications stated in the opinion:

  • Direct effect on the parties: the property is to be treated as the firm's asset for income-tax purposes and the income from the property is taxable in the hands of the firm (consistent with the Commissioner's direction to make fresh assessments including the house property's income in the firm's total income).
  • The Court's view aligns with prior High Court decisions cited; the opinion does not purport to set out any new, broader rule beyond applying existing statutory interpretation and precedents to the facts at hand.

Costs: Each party to bear and pay their own costs (as recorded in the opinion).

This summary strictly reflects only the information contained in the provided opinion and does not infer or add information beyond that text.

Show full summary ...

    Sarvamangala Properties Ltd. v. Commissioner Of Income-Tax, West Bengal.

    The Judgment of the Court was delivered by

    Sabyasachi Mukharji, J.:— By this reference under section 66(1) of the Indian Income-tax Act, 1922, the following question has been referred to this court:

    “Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee-firm was the owner of premises No. 5, Clive Row Calcutta, and that the provisions of section 9(3) of the Indian Income-tax Act, 1922, had no application in this case?”

    2. The assessment years concerned in this reference are 1958–59, 1959–60 and 1960–61 and the corresponding accounting years being the financial years 1957–58, 1958–59 and 1959-60.

    3. The assessee is a registered firm consisting of two partners, Sri Chhaganlal Burman and Sri Baijnath Parasrampuria, with equal shares. The firm was constituted under a deed of partnership dated 6th December, 1956, the partnership having been deemed to have come into existence on and from 19th September, 1958. It is provided in the partnership deed that the partners would carry on the business of buying, selling, developing lands, building and/or letting out lands, building and also deal in shares, securities, bullion, jute and jute products, textile and other commodities from time to time under the name and style of Sarva-mangala Properties. Premises No. 5, Give Row, Calcutta, was put up for sale by the Certificate Officer, 24-Parganas in certain certificate proceedings. On the 19th September, 1956, the assessee, M/s. Sarvamangala Properties of 67B. Netaji Subhas Road, Calcutta was declared the highest bidder and purchaser for the price of Rs. 2,27,250 of the aforesaid premises and the certificate of sale to that effect was granted by the said Certificate Officer on the 19th December, 1956.. For the assessment years 1958–59, 1959–60 and 1960–61, the income from the property was not included in the returns filed by the firm and as recorded by the Commissioner in his order under section 33B, the contention of the assessee that the property and its income belonged to the partners in equal shares was accepted by the Income-tax Officer and the rental income from the property was excluded from the total income of the firm for the aforesaid three years. Thereafter on calling for and examining the records of the proceedings for the aforesaid assessment years, the Commissioner of Income-tax, West Bengal, considered the assessment orders to be erroneous and prejudicial to the interests of revenue and he issued a show-cause notice under section 33B of the Indian Income-tax Act, 1922, on 23rd March, 1964, as to why action should not be taken under the said section. The assessee showed cause. The Commissioner considered the cause shown. It was contended before the Commissioner on behalf of the assessee that a firm was not a legal entity and as such it could not be the legal owner of the immovable property. If any immovable property was acquired in the name of the firm, the partners of the firm were the legal owners thereof and as the respective shares of the partners in the aforesaid property were definite and ascertainable, the rental income could only be assessed in the hands of the partners in respect of their respective shares under section 9 of the Indian Income-tax Act, 1922. It was further contended that as the assessment of the partners had already been completed earlier and the respective shares of the partners in the rental income of the aforesaid property had been included in such assessments, the firm's assessment should not be reopened. The Commissioner, however, rejected all the contentions raised on behalf of the assessee and passed an order under section 33B, setting aside the said assessments and directing the Income-tax Officer to make fresh assessments according to law by including the income from the aforesaid house property in the total income of the firm. The Commissioner further found that the purchase consideration for the property had been paid out of capital invested by the partners in the firm and that the house property had been shown as an asset in the balance-sheet as on 31st March, 1958, 31st March, 1959, and 31st March, 1960, and that the rental income from this property had all along been credited to the partnership profit and loss account and the corresponding expenses had also been debited in the accounts and at the end of each year the net income from the property along with the income from other business activities carried on by the firm had been divided between the two partners and credited into their respective personal accounts. The Commissioner, therefore, held that, as the property had been purchased in the name of the firm, the purchase consideration had been paid by the firm out of the capital invested by the partners in the firm and the house property had been shown as an asset of the firm in the balance-sheets of the three accounting years, the property belonged to the firm. According to the Commissioner, there was nothing in the Partnership Act which precluded a firm from acquiring or owning a property. The Commissioner further held that section 9(3) was not applicable as there was nothing to show that the partners were holding an equal share in all the assets and property held by the firm. Thirdly, that the fact that the income from the house property had already been assessed in the hands of the partners, in his opinion, wrongly, would not stand in the way of assessment of the income in the hands of the firm.

    4. The assessee appealed to the Income-tax Appellate Tribunal against the aforesaid order of the Commissioner under section 33B. Same contentions were raised before the Tribunal regarding the ownership of this property by the firm. The Tribunal upheld the Commissioner's finding that the property belonged to the firm and the provisions of section 9(3) were not applicable to this case. Thereafter, the Tribunal has referred the question mentioned hereinbefore.

    5. The short question with which we are concerned in this case is whether a firm was capable of owning an immovable property. In this connection, it is necessary to refer to the relevant provisions of the Indian Partnership Act. Section 4 defines partnership, partner and firm name. It is provided that the partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. It is further provided that the persons who have entered into partnership with one another will be called individually partners and collectively a firm and the name under which their business is carried on is called the firm name. Under section 14 it is provided that subject to the contract between the partners, the property of the firm includes all property rights and interest 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. It is also provided that 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. Section 19 deals with the implied authority of the partner to act as an agent of the firm and it is provided in sub-clauses (f) and (g) of sub-section (2) of section 19 that a partner does not possess implied authority to acquire immovable property on behalf of the firm or to transfer immovable property belonging to the firm. These sections, in our opinion, clearly establish the position that the firm was an entity known to law under the Indian Partnership Act and by the said Act the firm was such an entity which was capable of acquiring property, and owning property, movable and immovable. Under the Indian Income-tax Act it has been provided that the firm has the same definition as it is provided under the Indian Partnership Act.

    6. Counsel for the assessee contended that the firm was not a separate legal entity which was capable of owning property. According to him, a firm was only a collective name of the partners themselves. That is true. But a firm is an entity which is recognised by law. The law which recognises and deals with the firm under the Indian Partnership Act, also recognises the fact that such an entity named as firm can have property both movable and immovable. The reference to the aforesaid sections, namely, sections 4, 14 and 19 will make the position clear. If that is the correct view of the law and there is nothing in law which debars a firm from owning immovable property, it should be liable to taxation. It is further necessary to refer that under the Indian Income-tax Act a person will be liable to tax and can own property. The definition of person in section 3(42) of the General Clauses Act includes unincorporated associations or body of persons like a firm. Therefore, a firm would also be a person according to the definition of the Indian Income-tax Act and would be liable to tax as the owner of the property. This view was taken by the Delhi High Court in the case of Bhai Sunder Das & Sons v. Commissioner of Income-tax [1972] I.T.R 28 Delhi., wherein it was further observed that the technical view of the nature of partnership could not be taken in applying the law of income-tax so far as exigibility of tax of the income from property owned by a firm was concerned. For the purpose of section 9 of the Indian Income-tax Act, 1922, property owned by a firm had to be treated as the property of the firm and not of its partners A firm could, it was held, therefore, be taxed as owner under section 9 in respect of the income from property owned by it. It was further held that sub-section (3) of section 9 would not apply to the case of property owned by a firm. The view we are taking in this case is in consonance with the view taken by the Rajasthan High Court in the case of New Cotton and Wool Pressing Factory v. Commissioner of Income-tax and the view of the Kerala High Court in the case of S.N Syed Mohammed Saheb & Bros. v. Commissioner of Income-tax [1968] 68 I.T.R 791 Ker.. and the Allahabad High Court in the case of Ram Narain and Brothers v. Commissioner of Income-tax [1969] 73 I.T.R 423 All...

    7. Counsel for the assessee drew our attention to a decision of the Supreme Court in the case of Addanki Narayanappa v. Bkaskara Krishnappa AIR 1966 S.C 1300.. That case, however, dealt with the problem of inter se relationship between the partners so far as the owning of property was concerned. In our opinion, the said decision cannot be relied on by the assessee in support of the proposition that a firm was not an entity known in law which was capable of owning property.

    8. In the aforesaid view we have taken, the answer to the question referred to us is in the affirmative.

    9. Each party to bear and pay their own costs.

    Sankar Prasad Mitra, C.J:— I agree.

    Question answered in the affirmative.

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    Comments

    Sarvamangala Properties Ltd. v. Commissioner Of Income-Tax, West Bengal.
    (Sep 21, 1972)