The capital gains are to be taxed in the hands of the firm and the same cannot be taxed twice over as it cannot be held to be capital gains again in the hands of the partners.

J.V.Gupta, J.

1. This reference has been made by the Income-tax Appellate Tribunal (Chandigarh Bench), under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the assessee, a registered firm, known as M/s. Pearl Woollen Mills, Ludhiana. The relevant assessment year is 1964-65, the accounting year is the financial year 1963-64. According to the Tribunal, the following two questions of law did arise out of its order dated 31st January, 1974, (annex. "C"):

" 1. Whether, on the facts and in the circumstances of the case, the assessee could, in law, deny its liability to tax in respect of capital gains on the ground that it being a firm was not a legal entity capable of owning a capital asset ?

2. If the tax on capital gains has to be charged in the hands of the registered firm under Section 114 of the Income-tax Act, 1961, then whether the 1st proviso to Section 114(b)(ii) prescribing the minimum rate of tax at 15% on net capital gains would be applicable in case of the registered firm and its partners separately or cumulatively ? "

2. The facts giving rise to this reference are as under :

The assessee is a firm having five partners. During the year the assessee had sold 800 spindles and had made some gains which were liable to tax under the head "Capital gains". In the return of income filed before the ITO, the assessee did not furnish any details of the capital gains but only made a note that gains on sale of machinery may be included by negotiation and settlement. During the course of assessment proceedings also, the details of capital gains were not furnished and the ITO estimated the sale of 800 spindles at Rs. 5 lakhs and by allowing the costs amounting to Rs. 3,09,000, he worked out the capital gains at Rs. 1,91,000. The assessee had filed an appeal before the AAC on various points arising out of the assessment under Section 143(3) framed by the ITO and before the AAC the details regarding the sale proceeds of the spindles were made available. On the basis of the details available, he worked out the capital gains at Rs. 12,31,000. This figure was accepted by the assessee and on the computation of capital gains as such, there was no dispute before the Tribunal. The ITO had charged tax on capital gains along with other sources of income on the basis of the rates specified in Para. E, Part I of the First Schedule to the Finance Act, 1964. The AAC, however, held that the tax on capital gains was not to be charged under the provisions of the Finance Act, 1964, but was to be charged on the basis of the provisions of Section 114 of the Act. Before the AAC, the assessee had argued that the words " the amount payable ", appearing in the first proviso to Section 114, would, in the case of a registered firm, refer to the aggregate of taxes which would be recoverable in respect of the capital gains from the firm and from its partners taken together. This contention of the assessee was accepted by the AAC and he held that the first proviso to Section 114 should be applied by taking the assessee-firm and its partners together.

3. Both the parties, i.e., the assessee as well as the revenue, went up in appeal before the Tribunal against the order of the AAC and whereas the assessee had assailed the order of the AAC on various grounds, the appeal filed by the revenue was directed against the AACs order only on the point of quantum of tax chargeable on capital gains. During the course of the hearing before the Tribunal, the assessee sought permission for raising an additional ground of appeal to the effect that a registered firm was not liable to tax under Section 114 in respect of capital gains. Since the learned departmental representative did not object to this ground being entertained, being purely a legal one and as no investigation of the facts was necessary, the Tribunal admitted the same. The ground raised by the revenue, on the other hand, was that the limit of 15% laid dow