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TMI Blog2012 (8) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the partners in favour of the remaining partners of the erstwhile firm (Refer pages 2 & 3 of the statement of facts filed before the ld. CIT(A), copies of which is enclosed on record. 3. After examining the claim of the assessee, the Assessing Officer has concluded that the capital gain arising in this case is to be assessed in the hands of the firm and not in the hands of Shri Jayant Kumar Sharma, as individual. The main reason for coming to the above conclusion is that perusal of the returns of income filed by the firm for assessment year 2000-01 the value of the building has been shown at Rs. 57,748/- (after depreciation) and value of the land has been shown at Rs. 34,077/-. For assessment year 2004-05, the value of the building has been shown at Rs. 47,636/- (after depreciation) and value of the land at Rs. 34,077/- in the return filed by the firm. Apart from the above, acknowledgement for assessment year 2001-02 in the case of the firm, no statements are available, but a letter stating that the firm is running under loss for last several years and has no income for assessment years 2005-06 and 2006-07,which are available before the Assessing Officer, are also the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by duly sworn affidavit of Shri Rajani Kumar Sharma declaring his willingness to retire from the firm and he received a sum of Rs. 70 lakhs in consideration of relinquishment of his right, title and share in the property of the firm. The Assessing Officer has correctly mentioned that when there are two partners in a firm and one of them retires, the firm is automatically dissolved. 4. It has also been mentioned by the Assessing Officer that the firm had obtained a certificate u/s 230A from the Income-tax Department in the year 1990, to mortgage this very property in favour of one M/s Senthil Financiers, Madras for Rs. 20 lakhs. This very fact suggests that the property belong to the firm. As per the property tax paid receipts, patta of the property stands in the name of the firm. He has further mentioned that the original return being belated and filed u/s 139(4), the revised return u/s 139(5) cannot be accepted and taken cognizance thereof. Therefore, he has ignored the revised return. 5. The Assessing Officer has mentioned that Shri Jayant Kumar Sharma and other legal heirs have executed a Deed of Sale in favour of the vendees and therefore, according to the assessee, this ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hri Rajani Kumar Jethalal Sharma became the sole owners of the Schedule A property. Regarding the Dissolution Deed dated 24.6.1977 [enclosed at pages 63 to 74 of the paper book] executed between Shri Jayant Kumar Jethalal and Shri rajani Kumar Jethalal, Chandrakant Jethalal and Shri Suryakant Jethalal, who were partners of the firm, it has been observed that Shri Chandrakant Jethalal and Shri Suryakant Jethalal relinquished their shares in the firm in favour of continuing partners viz. Shri Jayant Kumar Jethalal and Shri Rajani Kumar Jethalal. Shri Jayant Kumar Jethalal and Rajani Kumar Jethalal are the same persons whose names have been mentioned hereinabove as Jayant Kumar Sharma and Shri Rajani Kumar Shama. In this Dissolution Deed, the party of the second part has expressed their desire to retire from the partnership with effect from 30.6.1976, releasing and relinquishing all their rights, interests and claims in respect of the partnership business and its assets, agency benefits and all other trade rights, land in favour of the Continuing Partners. In consideration of the same, Rs. 1,67,682-82 and Rs. 1,76,657-38 were payable to Shri J. Chandrakant (HUF) and J. Suryakant, resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been held by the Hon'ble Supreme Court in the case of Jagdish Chandra Sinha (86 Taxman 122). 2.4 The ld. CIT(A) ought to have appreciated that the purview of section 139(5) is limited to rectifying any errors or omissions in the original return of income. 2.5 The ld. CIT(A) erred in deciding that the capital gain transaction is taxable in the hands of the individual not appreciating the fact that the provisions of section 45(4) are applicable to the transaction. 2. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Commissioner of Income Tax (Appeals) may be set aside and that of Assessing Officer restored." 11. We have considered the rival submissions and have perused the entire material available on record. In effect, main issue regarding the hands in which capital gains has to be assessed -whether in the hands of the individual or in the hands of the firm is involved in this appeal. The ld. DR, while arguing the case, has mostly relied on the reasons given by the Assessing Officer to conclude that capital gains has to be assessed in the hands of the firm. He has sternly argued that in the Balance Sheets filed alongwith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise, that they are desirous of carrying on the said business in partnership, that they have invested capital in the said business and proposed to carry on this business in partnership. The partnership Deed further states that the parties have invested their separate capital with a view carryon the said business. The partnership deed does not recite that the immovable property in question or any portion thereof which have devolved on the four partners as the sons of J.M. Sharma has been brought in as their contribution of capital. The partnership Deed does not, thus, evidence that the above immovable property was brought into the firm by the partners. In any event, since the property in question belongs not merely to the four partners but also to the other legal heirs of Late J.M. Sharma as on the date of constitution of the partnership, it would not have been possible for the partners to bring in the aforesaid land, either in whole or in part, into the partnership or constitute the same, either in whole or in part, a property of the firm. While this is so, it appears that in the balance sheet of the firm the above property has been disclosed as an asset of the firm. The mere discl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending till 2006. The firm lost the status from the date 21.04.1993 and thereafter run under individual status. On the 4th September, 2006 Rajanikumar Sharma executed a Deed of Release in favour of Jayantkumar where by he has released, in consideration of a sum of Rs. 70 Lakhs, his share in the property comprising 4.95 acres. The property is detailed in schedule "D" as 50% share therein. Subsequently, a Deed of absolute sales executed in respect of the property in question on the 4th September, 2006. The Deed is executed by Chandrakant, Jayantkumar ant the legal representatives of Suryakant. The Deed recites that Chandrakant and the legal representatives of Suryakant have been impleased by way abundant caution. This Deed also refers to the Deed of Release executed by Rajanikumar in favour of Jayantkumar. There is a recitation in the above deed that the property devolved on the legal heirs of late J.M. Sharma and that the wife and daughters have released their rights in the property in favour of three sons. There is no recitation in the aforesaid deed that the property had been converted into a firm's property at any point of time. To sum up, the various documents, some of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a family Property, subject to the various Release deeds executed by the legal heirs of J.M. Sharma. Notwithstanding that the firm disclosed the property in its balance sheet, the title continued to vest in the legal heirs of J.M. Sharma who alone had the ownership over the property. Consequently, the property continued to remain the property of the legal heirs of J.M. Sharma, subject to the release by some of them and was never the property of the firm." 13. Accordingly, we hold that the piece of land measuring 4.95 acres is owned by assessee (individual). Since the firm used the superstructure on this land for its business purposes, it might have claimed depreciation and that does not mean that the asset is owned by the firm. Making and allowance of a wrong claim cannot alter the ownership of a property or asset. It is true that the certificate u/s 230A was obtained in the name of the firm. But, it is also an undeniable fact that the mortgage deed was not registered and was not executed. The firm did not pay the property tax, it paid only the godown rent for the superstructure and did not pay land tax. We epilogue that mere disclosure of the property in the Balance Sheet of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Mr. Jayantkumar Jethalal 3. Mrs. Hansa 4. Mrs. Shilpa 5. Mr. Rajiv Dave The Sale Deed Document No. 7433/06 for 3.62 acres executed on 4th September, 2006 in favour of M/s Vardhaman Construction & Investments represented by its partner Mr.Mahesh Kumar Bhandari, S/o Shri P. Tarachand Bhandari." 14. Therefore, it becomes amply clear, from the above, that the land was sold by the individual and not by the firm and Shri Jayant Kumar Sharma was the owner of the property and all other persons were legal heirs of late Shri Jetalal Manekjee Sharma. We also confirm the following regarding the averments made in Dissolution Deed (copy placed at pages 63 to 74 of the paper book) and Release Deed dated 4.9.2006. The assessee, as individual, has already paid advance tax of Rs. 10 lakhs which is evinced from the copy of bank challan placed on record. The cumulative effect of these evidence(s) tends to tilt in favour of the assessee. The assessee has invested ? 50 lakhs in REC Bond and for the balance of Rs. 43,44,779/- advance tax has been paid. Accordingly, the capital gain has to be assessed in the hands of the individual Shri Jayantkumar Sharma. We, therefore, confirm the finding o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in property originally brought into the stock of the firm or acquired by purchase or otherwise, by the firm or for the purpose of, or in the course of business of, the firm and includes the goodwill of the business of the firm. It further provides that unless the contrary intention appears, property and rights in property acquired with money belonging to the firm are deemed to have been acquired by the firm. Sections 5, 6 and 14 give a definite idea about the factum of the existence of the firm and the determination of what is the property of the firm. The two methods by which property can be brought into the firm are : (i) The rights and interests in property could be brought into the stock of the firm by partners at the time of formation of the firm. (ii) Subsequent acquisition, by purchase or otherwise, in the course of the business of the firm for the purpose of bringing the separate property of a partner into the stock of the firm. 17. The expression 'property of the firm' refers to partnership property, partnership assets, joint stock, common stock or joint estate denoting all property rights and interests to which the firm i.e all the partners as such, may be said to be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual asset. The mere fact that the particular person has chosen to include himself as a partner of a firm will not result in incorporation of all his individual properties as the assets of the partnership. There is no rule that whatever is brought by a partner in the partnership, and is continued to be used by the members is presumed to have become the property of the partnership. It will become so only if the partners show an intention to make it so, as where the owner of a mill agreed to carry on the manufacture in partnership with others and was credited in the accounts of the firm with the value of the mill and plant as his capital. In that case, both the mill and any subsequent additions to the site and plant were the firm's property, and any increased value obtained for them on a sale of the business was divisible as partnership profits. 20. The partner who brings in his personal asset into the capital of the partnership firm as his contribution to its capital, he reduces his exclusive right in the asset to the shared rights in it with other partners of the firm. While he does not lose his rights in the asset altogether, what he enjoys now is an abridged right which ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove property into the firm as there were other co-owners of the property. The Partnership Deed does not state anywhere that the property either in full or any interest therein was brought into the firm by the partner(s). It was only in the year 1972, subsequent to the constitution of the firm, that the Release Deed was executed by the wife and daughters in favour of four sons. Even this deed does not refer to the immovable property or any portion thereof or interest therein having been brought in as the firm's property by the partners. Again, in the year 1976, two of the partners retired from the partnership and the Deed of Dissolution or the subsequent Partnership Deed do not mention that this property or any interest therein has been brought into the partnership as firm's property. A Release Deed was executed by Shri Rajanikumar J. Sharma in favour of Shri Jayant Kumar J. Sharma and that too does not speak of this property having been held as the firm's property. A Sale Deed was executed on 4th September, 2006, where Shri Chandrakant Jethalal and the legal representatives of Suryakant Jethalal have been specifically brought into the firm that that have no interest in the propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... state were inherited by all his legal successors, i.e., his wife, his four sons and three daughters. The proprietary business of Mr. Jethalal M. Sharma was continued by his four sons, viz. Mr. Chandrakant J. Sharma, Mr. Suryakant J. Sharma, Mr. Jayantkumar J. Sharma and Mr. Rajanikumar J. Sharma by forming a partnership firm. The further fact which is not in dispute is that in the year 1972, wife of Late Jethalal M. Sharma and daughters of Late Jethalal M. Sharma released their rights over the property in question in favour of aforesaid four sons. Thus, the aforesaid four sons also became the absolute owner of the aforesaid property in question in the year 1972, who were running the business of South India Pulverising Mills in partnership. The property in question was all along utilized in the course of and for the purposes of the business of the said partnership firm. It is also an admitted fact that the property in question was declared as asset of the firm in the accounts of the said partnership firm by the aforesaid partners and even depreciation in respect of the building comprised in the said property was claimed in accounts of the said partnership firm by the said partners y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness carried on by them shows that Shri Chandrakant Jethalal and Shri Suryakant Jethalal relinquished their shares in the assessee firm in favour of the continuing partners, namely, Shri Jayanth Kumar Jethalal and Shri Rajani Kumar Jethalal. The said dissolution deed at page 1 para 2 reads as under: "WHEREAS the parties hereto have been carrying on business in partnership under the name and style of SOUTH INDIA PULVERISING MILLS at Kalpalayam, Sembiam, Red Hills Road, Madras-49, under a deed of partnership executed by them on 1-9-1970, AND WHEREAS the party of the Second part here to have expressed their desire to retire from the partnership with effect from 30-6-1976, releasing and relinquishing oil their rights, interests and claims in respect of the partnership business and its assets, agency benefits and all other trade rights, land, in favour of the Continuing Partners." 33. Again, in this same deed of dissolution of partners at page 3 para 3, it has been stated as under: "3. That in consideration of the following sums found payable to the Retiring partners on the date of dissolution viz., Rs. 1,67,682-82 payable to J. Chandrakant (HUF) Rs. 1,76,657-38 payable to J. Surya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above facts and circumstances of the case, I am of the considered opinion that the property in question (land and building in question) were owned by the assessee partnership firm and therefore, the Assessing Officer was fully justified in assessing the capital gains tax thereof in the hands of the partnership firm. 36. Further, in my considered opinion, the decision of the Hon'ble Jurisdictional High Court in the case of Dadha & Co. (supra) is clearly distinguishable on facts and is not applicable on the facts of the instant case. It may be observed that in the case before the Hon'ble High Court the issue was transfer of immovable property from partnership firm to the hands of the partners whereas in the instant case the issue involved is just opposite. The Hon'ble High Court has never held that for an immovable property belonging to partner for becoming asset of the partnership firm, conveyance deed is a must. 37. Further, I do not find any force in the contention of the assessee that in absence of a conveyance deed transferring the rights of the partners over the property in question in favour of the partnership, partners continue to be the owner of the said property. A readin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here being a difference of opinion between the Members who heard this matter, the same is being referred to the Hon'ble President with a request to nominate a Third Member to resolve the difference. The point of difference is as follows: "Whether the capital gains arising in this case is to be assessed in the hands of the firm or in the hands of Shri Jayantkumar Sharma, as individual, in the given facts and the circumstances of the case?" THIRD MEMBER ORDER Dr. O.K. Narayanan, Vice-President (As a Third Member)- This is a Third Member Case. The point of difference referred to me is: "Whether the capital gains, arising in this case is to be assessed in the hands of the firm or in the hands of Shri Jayanthkumar Sharma, as individual, in the given facts and circumstances of the case?" 2. The assessee firm had filed its return of income for the assessment year 2007-08 on a total income of Rs. 43,36,780/-. The income represented long-term capital gains generated out of sale of land. Later on, the assessee filed a revised return showing NIL income. A covering letter was enclosed alongwith the revised return, stating the reasons for filing the NIL return. The assessee explained that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty is assessable in his hands. 4. The Revenue came in appeal before the Tribunal against the order of the Commissioner of Income-tax (Appeals). The learned Judicial Member, who authored the order for the Tribunal, held that the piece of land measuring 4.95 acres was owned by Shri Jayanthkumar Jethalal as individual and the capital gain arising on the sale of the same is taxable in his hands. The learned Judicial Member held that the superstructure on the land alone was used for business purposes and depreciation might have been claimed thereon, but that does not mean that the asset was owned by the firm. He observed that making a wrong claim and allowing the same in the assessment, do not alter or decide the ownership of the property or asset. Even the issuance of certificate under section 230A in the name of the firm does not decide the issue. The ownership should be decided after examining the solid and decisive facts of the case. He observed that the firm did not pay any property tax, but paid only godown rent for the superstructure. The land tax was not paid by the firm. The mere disclosure of the property in the balance sheet of the firm and claiming depreciation on the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as four partners of M/s. South India Pulverising Mills since 1-9-1970, immediately after the demise of Shri J.M. Sharma. They contributed capital of Rs. 15,000/- each. Thereafter the wife and three daughters of late J.M. Sharma relinquished their rights in the immovable properties in favour of the four sons who are partners through a release deed dated 25-6-1972. Thereafter, the partnership was again reconstituted with the four sons as partners. There was a deed of dissolution executed on 24-6-1977 on the retirement of Shri Chandrakanth Jethalal(HUF) and Shri Suryakanth Jethalal. It is after that the agreement for sale of the building was entered into. By that time the land came into the hands of two persons, namely, Shri Jayanthkumar Jethalal and Shri Rajanikumar Jethalal, sons of late J.M. Sharma. Thereafter Shri Rajanikumar Jethalal executed a release deed in favour of Shri Jayanthkumar Jethalal on 4-9-2006 for cash settlement of Rs. 70 lakhs. 10. If the above stated events are chronologically followed, it could be seen that on execution of the release deed by Shri Rajanikumar Jethalal, the landed property has come into the possession of Shri Jayanthkumar Jethalal. Earlier, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur of the sons. At the time of the constitution of the firm at the first instance there was no mention in the partnership deed that the landed property was brought into the common hotchpotch of the firm. 13. Unless there is a clear declaration either by act, deed, intention or conduct, it is not possible to presume that the undivided family property becomes the property of the firm for the reason that some of the legal heirs have used the property to carry on the business of the firm constituted by them. The Hon'ble Supreme Court in the case of Arjun Kanoji Tankar (supra) has held, among other things, that the mere fact that a particular person has chosen to include himself as a partner of the firm will not result in incorporation of all his individual properties as the assets of the partnership. 14. The events occurred in the present case are in the following manner, if generally stated: 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. To carry on the business of that firm the estate of late J.M ..... 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