Income Tax Appellate Tribunal - Gauhati
Income-Tax Officer vs R.K. Swamy on 11 September, 1990
Equivalent citations: [1990]35ITD331(GAU)
ORDER
Egbert Singh, Accountant Member
1. The appeals are by the revenue which are directed against the orders of the DCIT(A) by which he has deleted the income added in the assessment in respect of the capital gains on the sale of certain properties. The assessee, on the other hand, has filed cross objections to support the orders of the CIT(A) and also in order to attack the separate orders of the DCIT(A) on other points. Since the facts of the cases and the issues involved are identical and interlinked, we consolidate the appeals for disposal by this common order.
2. The facts as noted by the authorities below are that the firm M/s. T. Khanderao & Sons, Shimoga, purchased a vacant plot of land on 24-11-1970. To avoid the provisions of Karnataka VacantLands in Urban Area (Prohibition of Alienation) Act, 1975, the partners of the firm effected a partition of the vacant land amongst themselves after obtaining permission from the Government in 1982. A registered deed dated 11-8-1982 was effected to convey the shares of the partners in the property.
3. The partners in turn sold their allotted properties at a consideration. It was contended before the ITO that the amount received by the partners on the sale was not liable to tax as capital gains and even otherwise, it was a long term capital gains. The case of the assessee was that when the property was owned by the firm, it is equally owned by all the partners and that the partners were co-owners of the property. According to the assessee, Section 49(1)(iii)(b) was attracted. The ITO noted that there was no case of dissolution of the firm and, therefore, Section 49 was not attracted. The ITO rejected the contention of the assessees that they were co-owners of the property of the firm, though the firm was in existence, in view of the decision of the Hon'ble Supreme Court in the case of Addanki Narayanappa v. Bhaskar Krishnappa (AIR 1966 SC 1300, at page 1303). Amongst other things, the ITO noted that during the subsistence of the firm, no partner can deal with any portion of the property as his own and, therefore, partner cannot claim himself to be a joint owner of the property held by the firm, but only can have interest in the firm so far as share of profit is concerned during the existence of the partnership firm. He also considered the contention of the assessees regarding the passing of ownership and title to the property. He considered the facts of the case and noted that absolute ownership and title to the property was obtained by the assessees only on 11-8-1982 and the subsequent sale made by the partners on 31-12-1982 resulted in the transaction which gave rise to the short term capital gains. He worked out the capital gains (short term) on the basis of his working in the assessment orders in respect of the separate assessees which was included in the assessments.
4. Different assessees took up their appeals before the DCIT(A) reiterating the same contentions. Amongst other things, it was argued that the partners in the firm were owners of the property from the beginning when the firm acquired the property and held the same as joint owners and, therefore, the property was held by them jointly for less than thirty-six months. Further reliance was placed on the decision of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 in order to make the submissions that no liability to capital gains would arise in the hands of the partners. The assessees also submitted before the DCIT(A) that even otherwise, the cost of acquisition should have been worked out as per market value in August 1982. It was also stressed that as per Section 49, the property was obtained by succession or devolution and as such the property should be held as a long term capital asset. The DCIT(A) also referred to the decision of the Hon'ble Madhya Pradesh High Court in the case of RatansiNarayanPatelv. CIT 1987 (Taxation) 87(3)-56, portion of which was reproduced in the impugned orders of the DCIT(A). It was held in that case that the firm is not a personal and hence it cannot hold the property but the property brought in by the parnters for the partnership business cannot be without any owner. As such, the property vests in the partners collectively in proportion to their share although the right of ownership of each partner in respect of that property is restricted by the contract of partnership and that very nature an character of the collective business called die partnership business for which the property was to be utilised. It was also observed that the restriction over the right of ownership of partners do not mitigate against the legal position that the owners collectively own the property. The DCIT(A), therefore, held that the property was held by the partners from 1972 onwards and it should he held to be a long term capital gains in the hands of the partners. Accordingly, the DCIT(A) did not deal with other submissions made by the assessees in their appeals. Hence, these appeals by the revenue and the cross-objections preferred by different assessees.
5. From the orders of the authorities below, it is seen that the brief facts, amongst other things were that the assessees are partners of the firm and the firm earlier acquired a plot of land and held it as its asset. Under certain circumstances, the firm decided to distribute or partition the said plot of land amongst the partners in the way which was narrated and agreed upon and as mentioned in the deed of partition which was registered. The case of the assessee is that the property was owned by the partners jointly as they are partners in the firm and as per Partnership Act, partners are the owners of the said property and when the partition of the said property was effected, there was no transfer as such to the individual partners so as to give rise to the charge of capital gains etc. It is also the assessee's submissions that even otherwise, if capital gains has to be considered at all, it is a long term capital gains as the partners, through the firm, had acquired the property in 1970. At the same time, it is also argued that the cost of acquisition in the present case was nil as there was no consideration paid by the partners for obtaining the allotted portion of the said plot of land. It is argued that in case, this point is decided against the assessee, then cost as shown in the partition deed should have been the basis for the computation. In brief, it is urged that the DCIT(A) has partly sustained the contention of the assessee but did notallowthe assessees' genuine claim in respect of the other points taken up by the assessees in the cross objections. It is, therefore, submitted that the claims made by the different assessees may be allowed now.
6. The learned Departmental Representative, on the other hand, submits that the DCIT(A) erred in coming to the above conclusion as narrated by us in the preceding paragraphs. It is urged that there was a transfer and that was why a deed of partition was registered or elsewhere was the point of necessity for registration of the transaction. It is also submitted that it was the partners who sold their portion obtained by them from the firm. Broadly speaking, the learned counsel for the revenue supports the different arguments and reasonings adopted in the assessment order. Amongst other things, it is emphasised that in the present case, there was no dissolution of the firm and Section 49 would not be attracted and, therefore, cost to the partners will have to be ascertained on the basis of the cost acquired by the previous owner, i.e., the firm in the present case. It is pointed out that the property became the assets of the partners only on the basis of the deed of partition made in August 1982 and that was why, it was a short term capital gains as the property was sold in December 1982, although the cost of acquisition to the partners would have to be reckoned on the basis of the cost which the previous owner acquired. In short, it is urged that in the present appeals, there are merits in the cases of the revenue and the appeals may be allowed and the cross objections of the assessees may be rejected.
7. We have gone through the orders of the authorities below and the connected papers for our consideration. As stated earlier.the assessee's case is that the property or the asset owned by the firm is virtually the properties or assets belonging to the partners and that was the view expressed by the Hon'ble Karnataka High Court in the case as in CWT v. Mrs. Christine Cardoza [1978] 114 ITR 532. It is submitted that although that was the case of the wealth-tax matters under the wealth-tax provision but the ratio decidendi would be applicable to the present issue for adjudication. In this connection, it may be helpful to refer to a decision of the Hon'ble Punjab and Haryana High Court in the case of Pearl Woollen Mills v. CIT [1980] 123 ITR 659,m which on the facts of that case, it was held that it is now well settled that for the purpose of Income-tax Act, a firm is a legal entity and is capable of owning capital assets and is liable to tax in respect of a capital gains. In that decision, the ratio of the judgment of the Hon'ble Supreme Court in the case of Addanki Narayanappa (supra) was considered. Other decisions were also considered.
8. In this connection, it would be helpful to take into account the ratio of the decision of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai (supra), in which on the facts of that case, it was held, amongst other things, that where a partner makes over capital assets which are held by him to a firm, as his capital contribution, there was a transfer of capital asset for the purpose of Section 45. In other words, transfer was effected by a partner, thereby to a firm which is having a legal capacity to own property. As contended by the assessee's learned counsel a partner would not be liable to capital gains, if such partner takes over assets of the business but that would be correct to say in view of Section 47, when the partnership is dissolved and one partner or all partners take over any of the assets of the business from the dissolution of the partnership. For this proposition, we may refer to the decision of the Hon'ble Punjab and Haryana High Court in the case of Raman Lal Khanna v. CIT [1972] 84 ITR 217 (Mad.).
9. In the case of CIT v. Bharani Pictures [1981] 129 ITR 244 (Mad.) the Hon'ble Madras High Court on that facts of that case held that there was an element of transfer of property by a firm to a partner. In that Madras case, the property was held by the firm of two partners and one partner released the rights in the property in favour of the other partner and necessary entries were effected in the accounts of the firm and it was held that it amounted to transfer by the firm to a partner and the difference between the estimated market value and the price received was liable to capital gains, on the context of that case. In this decision, the Hon'ble Madras High Court has also considered the decision of the Hon'ble Supreme Court in the case of Addanki Narayanappa (supra).
10. In the case of CIT v. Palaniappa Enterprises [1984] 150 ITR 237, the Hon'ble Madras High Court in the context of the question referred to it held that mere agreement between the partners to divide the property of a firm without there being any registered instrument transfering the property of the firm to the individual partners, could not be taken to be sufficient to transfer the legal title from the firm to its partners. In the present case before us, the property was divided amongst the partners and the same was effected by a document as mentioned earlier which was also registered under the appropriate law.
11. In a different context under the Gift-tax Act, in the case of CGT v. Chhotalal Mohanlal [1987] 166 ITR 124, the Hon'ble Supreme Court held that the goodwill is property and when minors are admitted to the benefits of partnership in that firm and the share of an existing partner is reduced thereby, the right to the money value of the goodwill stands transferred and the transaction constitutes a "gift" under the Gift-tax Act.
12. In the case of CIT v. Bharat Engg. Corporation [1989] 180 ITR 32, the Hon'ble Punjab & Haryana High Court noted the facts of that case that the property of the firm was transferred to individual partners during the subsistence of the partnership and the same cannot be effected by mere entries in the books of account and mere agreement between partners treating the firm's property as individual property, has no effect unless a deed of conveyance is executed and registered. As stated earlier in the present case, the deed of partition was executed and registered by the parties concerned. A similar view was expressed by the Hon'ble Punjab and Haryana High Court in the case of CIT v. S.R. Uppal [1989] 180 ITR 285.
13. In the case of D.C. Shah v. CGT [1982] 134 ITR 492, the Hon'ble Karnataka High Court on the facts and in the context of gift-tax matter before it, noted that on the induction of new partners, a fresh deed of partnership was drawn and there was reduction of shares of erstwhile partners and allotment of shares to new partners but the new partners contributed capital and agreed to work with the firm and, therefore, the same amounted to adequate consideration. In other words, it may be stated that on allotment of shares to a partner, there was a case of transfer and in the above mentioned case, the Hon'ble High Court held that there was consideration as the new partners have contributed capital and agreed to work for the firm.
14. Thus, after going through the various contentions made by the assessee as well as by the revenue and after we have taken into account the various findings of the authorities below in their respective orders and also after we have gone through the other papers placed in the files, it is seen that the firm was the owner of the property on its acquisition or purchase which took place in April 1970. In our opinion, the firm is a legal entity for the income-tax purpose and is capable to hold property and an asset of the firm on distribution or allotment to the partners, there was a transfer from the firm to the partners. As stated earlier, in this case, necessary entries were made in the accounts and deed of partition was drawn up, executed and registered. In our opinion, the transaction is complete between the partners and the firm. In fact, the individual partners on receipt of allotted share on partition, sold them to the outside parties, in their individual capacity and there is no material to show that they have done and completed the transaction for and on behalf of the partnership firm. It may be true that the cost of the stamp duty was shown at a particular figure but that cannot be said conclusively to be the cost of acquisition to the individual partners. As stated earlier, the firm acquired the property on payment of consideration. In the present context of this case, there is no alternative but to hold a view that the cost of acquisition in the hands of the previous owner, i.e., the firm in the present case would have to be taken into account.
15. On the facts available before us, it is clear that the partners sold separately and individually their respective shares received by them on division or partition of the said property. Therefore, capital gains would arise in their respective hands only. At the same time, it is only by means of book entries and on the basis of the deed of partition drawn up, executed and registered by the partners, the partners have become the owners of the property, in the instant case, in view of the fact that prior to that date, it was the firm who held the property acquired by it during the subsistence of the partnership.
16. From the materials available before us, we do not find any cost of improvement to the asset concerned.
17. It may be mentioned that in course of hearing, it has been contended on behalf of the assessees that the partners did not make any payment or consideration for obtaining of the allotted shares of the divided property. But we cannot deny the fact that the partners obtained the allotted shares as partition only on the basis of the fact that they were partners of the firm at the relevant point of time. Besides, when an asset of a concern goes out, corollary liabilities of that concern would have a corresponding effect. In other words, capital account or the personal accounts of the partners would have to be correspondingly adjusted, as otherwise no balance-sheet could be drawn up and incongruous position would result. In fact as held in the case of Sunil Siddharthbhai (supra) that the credit made in the partners' capital account in the books of the partnership firm does not represent the true value of the consideration, on the occasion when a partner introduced personal capital asset into the partnership asset as his capital contribution. It was observed in that decision that this is a notional value only intended to be taken into account at the time of determining the value of the partners' share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend on the deduction of liabilities and prior charges existing on the date of dissolution or retirement. In the present case before us, there was no dissolution or retirement but only a partition of one of the assets of the firm amongst the partners. It is seen further that the deed of partition was drawn up, executed and registered and different shares were allotted and the plot of land was demarcated as narrated in the deed itself, having exact area or measurement and the value of such individual share, was shown to be different. Such determination in the deed of partnership must have been made invariably on the basis of the capital account or the sharing ratio etc., held by the individual partners at the relevant point of time.
18. In the circumstances, we are of the opinion that the partners had acquired the property on the date of the partition which they sold and the same was within a short period which would have to be considered and the sale proceed, if any, would have to be treated as a short term capital gains and not as a long term capital gains as argued by the assessee's learned counsel. It is seen, however, that the cost of acquisition of the assets on the basis of the papers and materials available wiil have to be taken at the cost by which the previous owner, i.e., the firm had acquired the same.
19. In view of what we have discussed above, we are of the opinion that the asset became the property or asset of the partners on the basis of the partition deed, executed and registered in August 1982 and since the property was sold by them individually sometime in December 1982, there was a short term capital gains in their separate hands. As far as the cost is concerned, we have given our opinion in the preceding paragraphs, which we need not repeat here. In respect of this contention of the assessee, the same cannot be accepted. Accordingly, the separate orders of the DCIT(A) are reversed and the orders of assessment passed by the assessing officer are restored on the point at issue.
20. The appeals by the revenue are allowed and the cross objections by the assessees are dismissed.