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2015 (1) TMI 1510 - 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 - real ownership - Immovable property as introduced by the partners towards their capital contribution - HELD THAT - Tribunal in K. D. Pandey 1977 (4) TMI 35 - ALLAHABAD HIGH COURT held that there was no effective transfer of the building from the assessee to the partnership firm and that he continued to be the owner of the hotel building and that the entire value thereof should be included in his net wealth. The matter was further carried to the Hon'ble Allahabad High Court by the assessee 1977 (4) TMI 35 - ALLAHABAD HIGH COURT wherein as Lordship referred to Sec. 14 of the Indian Partnership Act, 1932, Sec. 5 of the Transfer of Property Act, 1882 and Sec. 17(1)(b) of the Registration Act, 1908 and 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. And as as soon as a partner intends that his separate properties should become partnership properties and they are treated as such, then by virtue of the provisions of the Contract Act and the Partnership Act, the properties become the properties of the firm and that this result is not prohibited by any provision in the Transfer of Property Act or the Indian Registration Act. Whether the assessee firm can get the benefit of Sec. 54EC, even though an investment in respect of capital gain is made by the two partners individually in the notified securities i.e. bonds issued by the Rural Electrification Corporation Ltd. (RECL) - the assessee firm has been dissolved on 02-04-2008 and before the dissolution the professional assets i.e. hospital building and land were sold out - On perusal of the language used in Sec. 54EC, it is provided that the assessee has to make the investment within a period of six months in the notified securities after the date of transferred of capital asset. The words used in Sec. 54EC are - the assessee has invested the whole or any part of capital gains in the long-term specified asset . As we have held that the property which was sold out, it was property of the assessee firm and hence, the capital gain is taxable in the hands of the assessee firm. At the same time even though the bonds are purchased on the names of the two partners, it can be said that irrespective of the way, how the sale consideration was credited to the bank accounts of two partners, but the benefit of Sec. 54EC cannot be deprived to the assessee firm. As admittedly, even on the dissolution of the firm the assessee as a partner has a right to get back their capital as per the final valuation done on the date of dissolution or otherwise. In fact, for taking said view we get the support from the decision in the case of DIT (International Taxation) Vs. Mrs. Jennifer Bhide 2011 (9) TMI 161 - KARNATAKA HIGH COURT . In the present case, there is another angle to look into. Admittedly the assessee firm has claimed the depreciation on the hospital building and hence, Sec. 50 is applicable. In terms of Sec. 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 Sec. 54EC can be given following the legal principles laid down by the Hon'ble Bombay High Court in the case of ACe Builders (P) Ltd. (supra). We, accordingly, direct the Assessing Officer to give the benefit of Sec. 54EC to the assessee firm subject to ceiling of Rs. 50 Lacs as per proviso to Sec. 54EC of the Act. In the result, Ground No. 4 is allowed.
Issues Involved:
1. Taxability of capital gains on the sale of hospital land and building. 2. Whether the capital gains should be taxed as short-term or long-term. 3. Eligibility for deduction under Section 54EC of the Income Tax Act. 4. Protective assessment of capital gains in the hands of individual partners. Detailed Analysis: 1. Taxability of Capital Gains on the Sale of Hospital Land and Building: The primary issue was whether the capital gains of Rs. 1,64,76,685/- from the sale of hospital land and building should be taxed in the hands of the assessee firm or the individual partners. The assessee firm argued that the property was owned by the partners and introduced as capital contribution without formal transfer, thus the gains should be taxed in the hands of the partners. The Assessing Officer (AO) contended that since the property was shown as an asset of the firm and depreciation was claimed, the gains should be taxed in the firm's hands. The Tribunal upheld the AO's view, confirming that the capital gains arising from the sale of the property should be taxed in the hands of the firm. 2. Whether the Capital Gains Should Be Taxed as Short-Term or Long-Term: The assessee firm argued that the proportionate capital gains on the sale of land should be taxable as long-term capital gains. However, since the firm had claimed depreciation on the hospital building, the capital gains were treated as short-term under Section 50 of the Income Tax Act. The Tribunal upheld this treatment, confirming that the capital gains should be taxed as short-term. 3. Eligibility for Deduction Under Section 54EC of the Income Tax Act: The assessee firm sought deduction under Section 54EC for investments made in bonds by the partners from the capital gains taxed in its hands. The Tribunal referenced the case of DIT (International Taxation) Vs. Mrs. Jennifer Bhide, which held that the investment need not be in the name of the assessee to claim the benefit of Section 54EC. The Tribunal allowed the deduction under Section 54EC to the firm, subject to the ceiling of Rs. 50 lakhs as per the proviso to Section 54EC, despite the investments being made by the partners individually. 4. Protective Assessment of Capital Gains in the Hands of Individual Partners: The AO had made a protective assessment of the capital gains in the hands of the individual partners, who had declared long-term capital gains and claimed exemptions under Sections 54 and 54EC. The CIT(A) deleted these protective additions, as the gains were substantively taxed in the firm's hands. The Tribunal confirmed this decision, rendering the Revenue's appeals on this issue infructuous. Conclusion: The Tribunal's judgment clarified that the capital gains from the sale of the hospital property were taxable in the hands of the firm as short-term capital gains, given the depreciation claimed on the building. The firm was entitled to the deduction under Section 54EC for investments made by the partners in eligible bonds. The protective assessments in the hands of the individual partners were dismissed. The assessee's appeal was partly allowed, and the Revenue's appeals and Cross Objections were dismissed.
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