2023 (12) TMI 405 - AT - Income Tax

Addition u/s 56(2)(vii) - real owners - partners v/s firm - property purchased by assessee-partner less than guideline value of the property - addition made to the extent of assessee s share therein i.e., one-fourth - Assessee argued that entire amount to purchase the property was spent by the firm and the property actually belonged to the firm - as per AO the sale deed does not mention that the property was purchased in the capacity of the partners of the firm and the property was being acquired by the firm and loan was sanctioned in the name of the partners only and property was purchased in individual names only - HELD THAT - As the impugned property has been purchased in joint ownership of 4 persons all of whom happens to be partner in a firm - From the financial statements as placed on record, it emerges that the said property has been introduced by the partners in the firm and the said property is in business use of the firm. The same is also evidenced by the fact that the depreciation has also been allowed to the firm. The firm is repaying the loan installment and for all practical purposes, it is the firm only which is exclusively using the property for its business use. We also find that the provisions of Section 14 of Indian Partnership Act provide that unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm. Therefore, applying purposive construction to the facts of the present case, the property is deemed to have been acquired by the firm only and not by individual partners. Provisions of Sec.56(2)(vii)(b)(ii) could not be pressed into service since these provisions do not apply to partnership firm at the relevant point of time. Therefore, addition is not sustainable. Assessee appeal allowed.

Summary

Issues Involved:
- Interpretation of Section 56(2)(vii) of the Income-tax Act, 1961
- Application of legal principles in determining ownership of property
- Assessment of income in the hands of the real owner
- Imposition of penalty under sections 271(1)(c) of the Act

Summary:
- The appeals by different assessees for Assessment Year 2014-15 arose from separate orders of the First Appellate Authority, with identical facts and issues. The lead case involved an assessment framed by the Assessing Officer under Section 143(3) of the Act, invoking Section 56(2)(vii) of the Act. The grounds taken by the assessee challenged the application of this provision, citing legal principles and case law to support their arguments.

- The main issue for consideration was the addition made by the Assessing Officer under Section 56(2)(vii), which was contested by the appellant. The delay in filing the appeal was condoned, and arguments were presented by both parties regarding the ownership of the property and the applicability of the tax provision to a partnership firm.

- The lower authorities had added the differential amount to the income of the assessee based on the property purchase details. The firm claimed ownership of the property as it had funded the purchase and was using it for business purposes. However, the Assessing Officer disagreed, stating that the property was purchased in the individual names of the partners.

- Upon review, it was found that the property was purchased jointly by the partners who were all part of the firm, and the property was being used exclusively for the firm's business. Applying the legal principle that property acquired with firm funds is deemed to be for the firm, the addition under Section 56(2)(vii) was deemed unsustainable for a partnership firm. Therefore, the appeals were allowed, and the impugned addition was deleted.

- The appeals were allowed, and the impugned addition under Section 56(2)(vii) was deemed unsustainable for a partnership firm. The order was pronounced on 29th November 2023.