2013 (9) TMI 476 - AT - Income Tax

Capital gain - Sale of property - defunct firm / dissolution of firm - Whether the property/plot of land in question was distributed or transferred by the assessee on 10-04-2000 when the deed of dissolution was executed - Held that - The core issue before us is whether the property/plot of land in question was distributed or transferred by the assessee on 10-04-2000 when the deed of dissolution was executed and our answer is no as per the document on record. We find that the said property remained to be the property of the dissolved firm and it was sold by the assessee firm on 27-03-2003. The law is well settled that the firm in the eyes of law is not a separate legal entity but ultimately the rights or vested in the partners only. The Indian Partnership Act provides the effect on the dissolution of the firm by incorporating the different provisions like Sections 46, 47, 48, 49 and 50 etc. In fact the assessee s case is supported by the sale deed of the said property dated 29-03-2003 in which the assessee firm is shown as seller no. 1 alongwith the partners. It is seen that the Assessing Officer has wrongly applied Sec. 2(47) (v) of the Income-tax Act by observing that the partners by executing the deed of dissolution have become absolutely owners one of the share of the property. Both the parties below have misinterpreted the provisions of law and by discarding the factual aspect taxed capital gain in A.Y. 2001-02. We therefore hold that the Assessing Officer was not justified to bring to tax the capital gain in hands of the assessee firm in the A.Y. 2001-02. We further hold that the property was sold by the assessee firm in the A.Y. 2003-04 and so far as the present property is concerned the said was not transferred to the partners at any time. As transfer contemplates the transferring the title and interest in the said property. - Decided in favor of assessee.

Issues Involved:

1. Taxability of capital gains in the hands of the dissolved firm for the Assessment Year (A.Y.) 2001-02.
2. Taxability of capital gains in the hands of the individual partners for A.Y. 2003-04.
3. Legality of reopening assessments under Section 147 of the Income Tax Act.
4. Liability to pay interest under Sections 234-A, 234-B, and 234-C of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Taxability of Capital Gains in the Hands of the Dissolved Firm for A.Y. 2001-02:

The primary issue was whether the capital gains arising from the sale of a property by the dissolved firm should be taxed in A.Y. 2001-02 or A.Y. 2003-04. The firm was dissolved on 01-04-2000, and the property in question was sold on 29-03-2003. The Assessing Officer issued a notice under Section 148 and brought the capital gains to tax for A.Y. 2001-02. The firm contended that the property was not transferred upon dissolution and should be taxed in A.Y. 2003-04 when the actual sale occurred. The Tribunal held that the property remained with the firm post-dissolution and was sold in A.Y. 2003-04. Therefore, the capital gains should be taxed in A.Y. 2003-04, not A.Y. 2001-02.

2. Taxability of Capital Gains in the Hands of the Individual Partners for A.Y. 2003-04:

The Assessing Officer taxed the capital gains in the hands of the individual partners for A.Y. 2003-04, arguing that the property was distributed to them upon dissolution. The partners contended that the property was sold by the firm in A.Y. 2003-04, and thus, the capital gains should be taxed in the hands of the firm. The Tribunal agreed with the partners, stating that the property was not distributed to the partners upon dissolution but remained with the firm until its sale in A.Y. 2003-04. Consequently, the capital gains should not be taxed in the hands of the individual partners.

3. Legality of Reopening Assessments under Section 147:

The partners challenged the reopening of assessments under Section 147, arguing that there was no escapement of income as the capital gains were assessable in the hands of the firm. Given the Tribunal's decision that the capital gains should be taxed in the hands of the firm for A.Y. 2003-04, the issue of reopening under Section 147 became moot. The Tribunal did not find it necessary to adjudicate this ground further.

4. Liability to Pay Interest under Sections 234-A, 234-B, and 234-C:

The firm and the partners also contested their liability to pay interest under Sections 234-A, 234-B, and 234-C. The Tribunal noted that the interest liability is consequential and dependent on the principal tax liability. Since the primary issue of taxability was decided in favor of the firm and the partners, the interest liability would also be adjusted accordingly.

Conclusion:

The Tribunal allowed all three appeals, holding that the capital gains should be taxed in the hands of the firm for A.Y. 2003-04 and not in the hands of the individual partners. The reopening of assessments under Section 147 was not adjudicated further due to the decision on the merits. The interest liabilities under Sections 234-A, 234-B, and 234-C were deemed consequential and adjusted based on the principal tax liability.

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