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2015 (1) TMI 1509 - AT - Income TaxCapital gains on sale of hospital land and building - taxable as short-term capital gains in the hands of the appellant-firm or in the hands of the two partners - determination of real ownership - immovable property is introduced by the partners towards their capital contribution - CIT(A) held that the capital gains on sale of hospital land and building was taxable as short-term capital gains in the hands of the appellant-firm - HELD THAT - We find that the identical issue has come for the consideration before the Hon'ble High Court of Allahabad in the case of K.D. Pandey 1977 (4) TMI 35 - ALLAHABAD HIGH COURT wherein held that the partner can bring his immovable property into the stock or capital of the firm otherwise than by means of a registered instrument of conveyance. Tribunal was not justified in holding that the business assets consisting of the Grand Hotel could be transferred to the partnership only by a registered deed and that in the absence of such deed the building remained the individual property of partner. Tribunal was not justified in holding that the entire value of the building was assessable in the hands of the assessee, individual. We, accordingly, confirm the order of the learned CIT(A) on this issue and ground Nos. 1 and 2 are dismissed. Benefit of sec 54EC - There is no dispute on the legal position that the investment made by two partners on their individual names in the notified RECL bonds is otherwise eligible investment for getting the exemption from the taxable capital gain u/s 54EC of the Act as applicable to asst. yr. 2008-09. As per facts on record, the assessee-firm has been dissolved on 2nd April, 2008 and before the dissolution the professional assets i.e. hospital building and land were sold out. Admittedly the assessee-firm has claimed the depreciation on the hospital building and hence, s. 50 is applicable. In terms of s. 50 whatever capital gain is worked out on the depreciable asset then the same is treated as short-term capital gain. Whether the assessee-firm can claim the benefit of sec 54EC which is specified for the benefit of long-term capital gain? - This issue is decided in favour of the assessee by case of CIT vs. ACE Builders (P) Ltd. 2005 (3) TMI 36 - BOMBAY HIGH COURT We, accordingly, hold that even though the assessee-firm has claimed the depreciation on the hospital building but benefit of s. 54EC can be given following the legal principles laid down (supra). We, direct the AO to give the benefit of s. 54EC to the assessee-firm subject to ceiling of Rs. 50 lacs as per proviso to s. 54EC of the Act. In the result, ground No. 4 is allowed. Addition made by the AO, on a protective basis, towards long-term capital gain on account of the assessee's 50 per cent share in sale of land and building - It was the contention of both the assessees that the hospital building and land which were otherwise the properties of the firm were claimed as having the individual ownership of those two partners and accordingly, both the assessees (partners) declared the long-term capital gain in their individual returns and also claimed the benefit by making the investment in the notified bonds under s. 54EC and also s. 54 of the Act. While completing the assessments of these two partners, the AO made the addition of capital gain on protective basis. CIT(A) deleted the addition as he upheld the addition in the hands of the firm on substantive basis. We have held that the capital gain is taxable in the hands of the firm upholding the order of the learned CIT(A) on substantive basis. Hence, the Revenue's appeals become infructuous and do not survive and hence, both the appeals of the Revenue are dismissed.
Issues Involved:
1. Taxability of short-term capital gains on the sale of hospital land and building. 2. Ownership and transfer of property within a partnership firm. 3. Eligibility for deduction under Section 54EC of the Income Tax Act. 4. Protective addition of long-term capital gains in the hands of individual partners. 5. Delay in filing cross-objections and eligibility for deductions under Sections 54, 54F, and 54EC. Detailed Analysis: 1. Taxability of Short-term Capital Gains: The primary issue was whether the short-term capital gains of Rs. 1,64,76,685 on the sale of hospital land and building should be taxed in the hands of the partnership firm or the individual partners. The learned CIT(A) held that the gains were taxable in the hands of the firm as the property belonged to the firm and was distributed among the partners under Section 45(4). 2. Ownership and Transfer of Property: The assessee-firm argued that the hospital building and land were owned by the partners individually before the formation of the firm and were introduced as capital contributions without a registered conveyance deed. The AO and CIT(A) disagreed, stating that the property was shown as an asset of the firm, and depreciation was claimed by the firm. The Tribunal upheld the CIT(A)'s decision, citing the Allahabad High Court's decision in K.D. Pandey vs. CWT, which stated that a partner can bring immovable property into the firm's stock without a registered instrument of conveyance. 3. Eligibility for Deduction under Section 54EC: The assessee-firm contended that it should be granted deduction under Section 54EC for investments made by the partners in the bonds. The Tribunal agreed, referencing the Karnataka High Court's decision in Director of IT (International Taxation) vs. Mrs. Jennifer Bhide, which held that the benefit of Section 54EC could be claimed even if the investment is made in the name of the partners, as long as the investment is from the sale consideration of the firm's assets. The Tribunal directed the AO to grant the benefit of Section 54EC to the assessee-firm, subject to the ceiling of Rs. 50 lakhs. 4. Protective Addition of Long-term Capital Gains: The Revenue's appeals concerned the deletion of the protective addition of Rs. 80,99,042 made by the AO in the hands of the individual partners. The partners had declared long-term capital gains and claimed exemptions under Sections 54 and 54EC. The CIT(A) deleted the protective addition, as the gains were taxed substantively in the hands of the firm. The Tribunal upheld this decision, rendering the Revenue's appeals infructuous. 5. Delay in Filing Cross-objections and Eligibility for Deductions: The individual partners filed cross-objections requesting deductions under Sections 54, 54F, and 54EC. The Tribunal condoned the delay in filing but dismissed the cross-objections as infructuous, given that the capital gains were not taxable in the individual partners' hands. The Tribunal had already allowed the benefit of Section 54EC to the assessee-firm. Conclusion: The Tribunal concluded that the short-term capital gains were rightly taxable in the hands of the assessee-firm. It upheld the CIT(A)'s decision and granted the benefit of Section 54EC to the firm. The Revenue's appeals were dismissed, and the cross-objections filed by the individual partners were also dismissed. The assessee's appeal was partly allowed, while the Revenue's appeals and cross-objections were dismissed.
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