2002 (1) TMI 950 - AT - Income Tax

Summary

Issues:
Determining income in the status of Body of Individuals after dissolution of a partnership firm.

Analysis:
The appeal was against the determination of income at Rs. 4,21,419 in the hands of the assessee in the status of Body of Individuals. The partnership firm "M/s. United Enterprises" was formed by five partners and purchased a piece of land. After the death of one partner, the firm stood dissolved as per the partnership deed. The co-owners of the land, including legal heirs of the deceased partner, sold the land and disclosed the profit as capital gain in their individual returns. The Assessing Officer assessed the profit in the hands of the firm M/s. United Enterprises as Body of Individuals. The counsel for the assessee argued that no AOP or BOI existed after the dissolution of the firm, as the partners did not engage in any income-producing activity. The ITAT held that the partners did not form an AOP or BOI after dissolution, as they only sold the land individually. The assessment in the hands of the assessee as a Body of Individuals was canceled.

The ITAT referred to the Indian Partnership Act, 1932, stating that a partnership firm dissolves on the death of any partner unless the partnership deed specifies otherwise. The partnership deed of M/s. United Enterprises did not have any contrary provision, leading to the dissolution of the firm upon the death of a partner. The ITAT cited a Special Bench decision in a similar case, emphasizing that after dissolution, partners hold their interests individually, not as part of an AOP. The ITAT found no evidence that the partners engaged in activities together to produce income after dissolution. As the co-owners had already disclosed and been assessed for capital gains individually, the assessment as a Body of Individuals was deemed unsustainable.

The CIT(A) had justified the assessment in the hands of Body of Individuals, but the ITAT disagreed after considering the arguments and evidence presented. The ITAT concluded that the partners did not form an AOP or BOI after the dissolution of the firm, as they only sold the land individually without engaging in any income-producing activities together. The cancellation of the assessment in the hands of the assessee as a Body of Individuals was based on the lack of evidence supporting the formation of an AOP or BOI post-dissolution and the individual disclosure and assessment of capital gains by the co-owners.