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TMI Blog1996 (7) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... artners from the firm. On appeal, the Appellate Assistant Commissioner also agreed with the conclusion arrived at by the Income-tax Officer. On further appeal, the Appellate Tribunal found that in section 2(42A) short-term capital asset means a capital asset held by an assessee for not more than 60 months immediately preceding the date of its transfer. Section 49(1)(iii)(b) referred to capital assets becoming the property of an assessee on distribution of assets on the dissolution of the firm. The Appellate Tribunal found that on the principles enunciated by the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49, conversion of joint property into separate property was only a matter of agreement and the individual partners were, therefore, the owners of the property from the time of purchase initially as partners of the firm and later as individuals. Therefore, it was found that the capital asset had been held by them for more than 60 months and the capital gains arising from the transfer could not, therefore, be assessed as short-term capital gains. Learned standing counsel appearing for the Department submitted that there was no dissolution in the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the property of an assessee on distribution of the assets on the dissolution of the firm. It is the contention of learned standing counsel appearing for the Department that there was no dissolution in the present case, but there was only the withdrawing the property from the partnership asset. Therefore, the provisions of section 49(1)(iii)(b) of the Act cannot be made applicable to the facts of this case. Thus, reading the definition along with the Explanation, it is clear that the capital asset shall be treated as having been held by an assessee even during the period in which it was held by a firm in which the assessee was a partner. But, according to the Department, inasmuch as the firm was the owner of the property, prior to its withdrawal, it cannot be said that the assessees were the owners of the property, even during the period in which it was held by a firm in which the assessee was a partner. But, according to the Department, inasmuch as the firm was the owner of the property, prior to its withdrawal, it cannot be said that the assessees were the owners of the property, even during the time when the property was held by the firm as its asset. In other words, according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, upon dissolution, the firm's rights in the partnership assets are extinguished. It is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the Income-tax Act, 1961. There is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution. " This court had an occasion to consider a question of similar nature while dealing with section 5(1)(iv) of the Wealth-tax Act, 1957, in R. Venkatavaradha Reddiar R. v. CWT [1995] 214 ITR 76. In that decision, this court after considering all the decisions on this aspect, culled out the legal principles in the following manner : " (1) a firm has no legal existence and as such it cannot hold any property ; (2) it is the partners, who own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, been held for more than 60 months and consequently constituted ' long-term capital assets '. The gains were, therefore, assessable as long-term capital gains ". In CIT v. K. Saraswathi Ammal [1981] 127 ITR 404, this court, while considering the provisions of section 85 of the Income-tax Act, 1961, as modified by section 31 of the Finance Act, 1968, extracted a passage, which runs as under : " ' The property of the firm ' is statutorily defined in section 14 of the Partnership Act ; the property that has been brought in by the partners and the property that is acquired by a firm will be the property of the firm. According to section 14 of the Partnership Act, when one talks of the property of the firm, it has to be remembered that a firm as such is not a legal entity ; nor can a firm as such, according to the English concept, hold property. This is the reason why the Supreme Court in two decisions held that when the firm is dissolved and the partnership assets are distributed among the partners, there will be no transfers of the property of the firm in favour of the partners so as to attract the provisions of the Income-tax Act, for capital gains. The decisions are CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sharing ratio. In K. L. Viswambharan and Brothers v. CIT [1973] 91 ITR 588, a Full Bench of the Kerala High Court, while considering the provisions of sections 45, 54(i) and 114 of the Income-tax Act, 1961, section 2 of the Finance (No. 2) Act, 1967, and section, 14 of the Indian Partnership Act, 1932, held : " That for purposes of assessment to tax, the Income-tax Act treats a registered firm as an entity distinct from the partners. Under the specific provisions of the Partnership Act relating to the property of a firm and the judicial pronouncements on the matter, a firm is legally competent to own or hold property and also to deal with such property. Any property or gain derived by a firm in pursuance of the sale of a capital asset, owned or held by the firm is, therefore, exigible to tax in accordance with the relevant provisions of the Income-tax Act. " The matter does not rest there. What was assessed in the hands of the firm should be circulated in the assets belonging to each of the partners in accordance with the profit sharing ratio. In fact, the partnership firm itself is not a legal entity. It can act only through its partners. Even in the matter of sale of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o say that the partnership firm and the partners are different and the partners have got no right over the partnership property according to their profit sharing ratio. In the present case five of the assessees were partners in the firm. They withdrew one of the assets from the partnership firm and it was sold by all the partners. The sale proceeds were divided among themselves according to their profit sharing ratio. Therefore, the Tribunal came to the conclusion that the five partners are the owners of the property, which was withdrawn and sold from the time when the property was brought into the firm as its asset. Therefore, the partners were always owners of property, earlier as partners of the firm, and later as co-owners. Therefore, inasmuch as the asset in the present case has been held by the assessees for more than 60 months, the asset cannot be regarded as short-term capital asset. Hence, the Tribunal was of the view that the assessment of capital gains as short-term capital gains cannot be sustained. Therefore, the Tribunal set aside the order of the authority below and directed the Assessing Officer to reassess the capital gains as long-term capital gains. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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