1990 (9) TMI 144 - AT - Income Tax

Summary

Issues Involved:
1. Ownership and partition of property.
2. Taxation of capital gains.
3. Applicability of Section 49(1)(iii)(b).
4. Determination of cost of acquisition.
5. Classification of capital gains as short-term or long-term.

Detailed Analysis:

1. Ownership and Partition of Property:
The firm M/s. T. Khanderao & Sons, Shimoga, purchased a vacant plot of land on 24-11-1970. To avoid the provisions of the Karnataka Vacant Lands in Urban Area (Prohibition of Alienation) Act, 1975, the partners effected a partition of the vacant land amongst themselves after obtaining permission from the Government in 1982. A registered deed dated 11-8-1982 was executed to convey the shares of the partners in the property. The partners then sold their allotted properties, leading to a dispute about the nature of ownership and whether a transfer occurred.

2. Taxation of Capital Gains:
The partners contended that the amount received on the sale was not liable to tax as capital gains, or if it was, it should be considered long-term capital gains. The Income Tax Officer (ITO) rejected this, noting that during the subsistence of the firm, no partner can deal with any portion of the property as his own. Hence, the partners could not claim to be joint owners of the property held by the firm. The ITO determined that the absolute ownership and title to the property were obtained by the partners on 11-8-1982, and the subsequent sale on 31-12-1982 resulted in short-term capital gains.

3. Applicability of Section 49(1)(iii)(b):
The assessee argued that Section 49(1)(iii)(b) was applicable, suggesting that the property was obtained by succession or devolution, thus qualifying as a long-term capital asset. The ITO disagreed, noting that there was no dissolution of the firm, and therefore, Section 49 was not applicable.

4. Determination of Cost of Acquisition:
The assessees argued that the cost of acquisition should be worked out as per the market value in August 1982. The DCIT(A) held that the property was held by the partners from 1972 onwards and should be considered a long-term capital asset. However, the tribunal concluded that the cost of acquisition should be based on the cost at which the firm acquired the property, as the partners became owners only upon the partition deed's execution and registration in August 1982.

5. Classification of Capital Gains as Short-Term or Long-Term:
The DCIT(A) held that the property was a long-term capital asset in the hands of the partners. However, the tribunal determined that the partners sold their respective shares received on partition within a short period, resulting in short-term capital gains. The tribunal emphasized that the property became the partners' asset only upon the partition deed's execution and registration in August 1982, and the subsequent sale in December 1982 led to short-term capital gains.

Conclusion:
The tribunal concluded that the partners acquired the property on the date of the partition deed's execution and registration in August 1982. Since the property was sold in December 1982, it resulted in short-term capital gains. The cost of acquisition should be based on the cost at which the firm acquired the property. Consequently, the separate orders of the DCIT(A) were reversed, and the orders of assessment passed by the assessing officer were restored. The appeals by the revenue were allowed, and the cross objections by the assessees were dismissed.