2018 (7) TMI 1409 - HC - Income Tax

Sale of property owned exclusively by one of the partners - liability to short-term capital gains in the hands of the partnership firm as per the provisions of section 45(4) - Whether the Tribunal was correct in finding a transfer of property in favour of the partnership firm when there was no registered conveyance effected and there could be no short-term capital gains assessed in the hands of the partnership firm when the sale was made by the owner of the property ; who happened to be a partner of the firm ? Held that - In the instant case the contention of a licence granted to the partnership firm and the family arrangement has been rejected. Then the question is how the sale was effected; when the land and building was brought into the common stock, the capital of the firm; which fact has been affirmed hereinabove. If it is on dissolution of the firm then the same would be assessable under section 45(4). Even if the partner has been allotted the share, prior to dissolution, as is revealed from the facts, capital gains arise on the firm. Firm is assessable to capital gains and answer the questions against the assessee and in favour of the Revenue, upholding the order of the lower authorities. We desist from speaking on the actual computation of tax due for the reason of there being an appeal pending from the fixation of fair market value of the land at the time of sale; made on remand by the Tribunal.

Issues Involved:
1. Short-term capital gains liability on the partnership firm under Section 45(4) of the Income-tax Act, 1961.
2. Transfer of property to the partnership firm without registered conveyance.
3. Violation of principles of natural justice regarding the valuation report.
4. Assessment of income from rent as house property.

Issue-wise Detailed Analysis:

1. Short-term Capital Gains Liability on the Partnership Firm under Section 45(4):

The primary issue was whether the Tribunal was justified in affirming the Assessing Officer's finding that the sale of property, owned exclusively by one of the partners, is liable to short-term capital gains in the hands of the partnership firm under Section 45(4) of the Income-tax Act, 1961. The court analyzed that the property was brought into the partnership as a capital asset and was included in the partnership’s balance sheet, with depreciation claimed on it. The court noted that the firm was dissolved only on December 31, 2006, and the sale of the property was executed on December 20, 2006, before the dissolution. Thus, the property was part of the firm’s assets, and its sale attracted short-term capital gains tax under Section 45(4).

2. Transfer of Property to the Partnership Firm without Registered Conveyance:

The court examined whether there was a transfer of property in favor of the partnership firm without a registered conveyance. It was argued that the property was offered on a license basis and not transferred to the firm. However, the court found that the partnership deed clearly indicated the property was brought into the partnership’s common stock. The court referred to the Supreme Court’s decision in Addanki Narayanappa v. Bhaskara Krishnappa, which held that no registered conveyance is required to bring property into the common stock of a partnership. Therefore, the court concluded that the property was indeed transferred to the firm’s capital.

3. Violation of Principles of Natural Justice Regarding the Valuation Report:

The appellant raised concerns about the violation of natural justice, arguing that the valuation report was not supplied to the assessee by the Assessing Officer. The court noted that this issue had been remanded for reconsideration and was currently under appeal. Hence, the court declined to express an opinion on this matter.

4. Assessment of Income from Rent as House Property:

Another issue raised was the assessment of income from rent as house property. The court deemed this issue to be of negligible quantum and chose not to express an opinion on it.

Conclusion:

The court upheld the Tribunal’s decision that the partnership firm was liable for short-term capital gains tax on the sale of the property under Section 45(4) of the Income-tax Act. The court affirmed that the property was indeed transferred to the partnership firm’s capital without requiring a registered conveyance. The court did not address the issues related to the valuation report and the assessment of rental income due to their remand status and negligible impact, respectively. The judgment concluded with the court answering the questions against the assessee and in favor of the Revenue, upholding the lower authorities' orders.

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