2012 (8) TMI 224 - AT - Income Tax

Capital gain sale of land - whether the long-term capital gains on sale of land was to be assessed in the hands of the partnership firm or in the hands of partner of the assessee firm Held that - Late J.M. Sharma had carried on a business. On his death eight persons consisting of four sons and three daughters and his wife became the legal heirs of his estate. The business was carried on by his four sons by constituting a firm - land property belonging to his estate was not specifically assigned to the partnership firm either by act deed or conduct - shares of two partners were transferred to the remaining partners by stating specific consideration and finally one of the partners sold his share to the remaining partner and thereby ultimately the property came into the individual hands of Shri Jayant Kumar Jethalal partner of the firm - property belonged to Shri Jayanthkumar Jethalal as his individual property and therefore the capital gain is assessable to tax in his individual capacity. The long-term capital gain cannot be assessed in the hands of the firm - long term capital gain is assessable to tax in the hands of the partner - against Revenue

Issues Involved:
1. Ownership of the property and its inclusion as a partnership asset.
2. Assessment of capital gains in the hands of the firm or individual partner.
3. Validity of revised return filed by the assessee.
4. Applicability of Section 45(4) of the Income Tax Act.
5. Consideration of depreciation claims and property tax payments in determining ownership.

Issue-wise Detailed Analysis:

1. Ownership of the Property:
The property originally belonged to late J.M. Sharma and was inherited by his legal heirs, including his four sons who continued the business as a partnership firm. The property was not explicitly brought into the firm as an asset by any formal agreement. The partnership deed did not mention the land as part of the firm's capital. The firm used the property for business purposes, but this did not change the ownership status. The land was ultimately transferred to individual ownership through a series of release deeds among the heirs.

2. Assessment of Capital Gains:
The Assessing Officer concluded that the capital gains should be assessed in the hands of the firm because the property was shown in the firm's balance sheet and depreciation was claimed on the building. However, the Commissioner of Income-tax (Appeals) and the Judicial Member held that the property belonged to the individual partner, Shri Jayanthkumar Jethalal, and thus, the capital gains should be assessed in his hands. The Third Member agreed with this view, stating that the property was never intended to be a partnership asset and remained with the individual owners.

3. Validity of Revised Return:
The Assessing Officer rejected the revised return filed by the assessee under Section 139(5) because the original return was filed under Section 139(4), which does not permit a revised return. This technicality was not the primary focus of the appellate decisions, which centered more on the substantive issue of property ownership and capital gains assessment.

4. Applicability of Section 45(4):
The Assessing Officer applied Section 45(4) of the Income Tax Act, which deals with the distribution of capital assets on the dissolution of a firm. However, the appellate authorities found that this section was not applicable as the property was never a partnership asset. The dissolution and subsequent release deeds among the partners and heirs did not change the ownership status from individual to partnership.

5. Consideration of Depreciation Claims and Property Tax Payments:
The firm claimed depreciation on the building but not on the land. The Commissioner of Income-tax (Appeals) and the Judicial Member noted that claiming depreciation on the building used for business purposes did not alter the ownership of the land. The property tax payments were made for the superstructure (godown rent) and not for the land, further supporting the view that the land was not a partnership asset.

Conclusion:
The majority view, supported by the Third Member, held that the long-term capital gains from the sale of the property should be assessed in the hands of the individual partner, Shri Jayanthkumar Jethalal, and not the firm. The appeal of the Revenue was dismissed, affirming the decision of the Commissioner of Income-tax (Appeals).

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