2012 (10) TMI 523 - AT - Income Tax

Income from surrender of tenancy rights - Tenancy rights vested with the firm or with the partners - The partners on receipt of their shares in surrender of tenancy rights, invested the same in NABARD Bonds. - Held that - if there was a partnership firm, then under all circumstances, it is the firm which shall be taxed and not the partners, as not only Partnership is a separate legislation but in the Income Tax Act, it is a distinct entity in section 2(23) and 2(31)(iv). It is the persons, legal heirs, who have continued to hold the tenancy rights and have used the name of the business only for the sake of convenience, which had been continuance from the pre partition days. Moreover, none of the partners, at no point of time have ever introduced his/her share in the tenancy as capital in the accounts of the firm. The individuals were, thus correct, who had not only taken the compensation for surrender of tenancy rights and deposited the same in NABARD Bonds - Deletion of addition made by CIT(A) at Rs. 2,50,00,000/- as long term capital gain on account of compensation received from M/s. Veera &. Gala Developers on surrender of tenancy rights is right - order of the CIT(A)is sustained - Decided in favor of assessee.

Issues Involved:
1. Whether the consideration of Rs. 2.5 crores on surrender of tenancy rights belongs to the partners or the assessee firm.
2. Whether the addition of Rs. 2.5 crores as long-term capital gain on account of compensation received from M/s. Veera & Gala Developers on surrender of tenancy rights was correctly deleted by the CIT(A).

Issue-wise Detailed Analysis:

1. Ownership of Tenancy Rights:
The primary issue was whether the tenancy rights vested with the firm or with the partners. The firm, M/s Bombay Electric Laundry (BEL), was dissolved, and the compensation for the surrendered tenancy rights was received by the partners. The Assessing Officer (AO) contended that the firm was the tenant and hence the compensation should be taxed in the hands of the firm. However, the CIT(A) concluded that the tenancy rights were originally allotted to Mr. Assandas S. Rawtani and Mrs. Vishnibai S. Rawtani in their individual capacities by the Government of India. These rights were never transferred to the firm, and the partners continued to hold these rights individually. The CIT(A) found that none of the partners had introduced their share in the tenancy rights as capital in the firm's accounts, thus supporting the claim that the tenancy rights belonged to the partners individually.

2. Deletion of Addition by CIT(A):
The AO had added Rs. 2.5 crores to the firm's income, treating it as long-term capital gain. The CIT(A) deleted this addition, reasoning that the tenancy rights were held by the partners in their individual capacity, and the compensation received was shown in their individual tax returns. The CIT(A) also noted that taxing the amount in the hands of the firm would result in double taxation. The department appealed against this deletion, arguing that the firm should be the beneficiary of the compensation as it was occupying the premises and paying rent. However, the ITAT upheld the CIT(A)'s decision, emphasizing that the tenancy rights were always with the individual partners and not with the firm. The ITAT also referenced the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947, which supported the view that tenancy rights were held by individuals who paid the rent.

Conclusion:
The ITAT concluded that the tenancy rights were indeed held by the individual partners and not the firm. Therefore, the compensation received for surrendering these rights was correctly taxed in the hands of the partners. The ITAT dismissed the department's appeal and upheld the CIT(A)'s order, which deleted the addition of Rs. 2.5 crores from the firm's income. The application under Rule 27 filed by the assessee was also dismissed as it became infructuous due to the dismissal of the department's appeal.

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