9911796707
TMI Blog2012 (8) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... been mentioned. The date of formation of the firm being 1.4.1976 was also mentioned, but at the same time, the assessee, as individual, had computed Long-Term Capital Gains (LTCG) chargeable to tax at Rs. 43,36,779/- and also enclosed a tax paid challan for Rs. 10 lakhs which was paid on 15.3.2007 in the Bank of Baroda in the name of the firm. At the same time, the exemption available under section 54EC was claimed and deducted. A certificate obtained in the name of Shri Jayant kumar Sharma was also enclosed with the statement. While computing capital gains, some expenditure supported by receipts obtained from advocates, brokers etc. which are in the name of Shri Jayant Kumar Sharma and some of them also in the name of the firm were enclosed. Property tax had also been paid in Madhavaram Municipality in the name of the firm. The case was scrutinized and during which certain defects in the filing of return of income were pointed out and certain particulars required for the completion of the assessment were also called for from the assessee. Meanwhile, a revised return was filed on 2.6.2009 in which NIL income was declared. A covering letter was filed alongwith this revised return s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, are also the reason for arriving at the conclusion by the Assessing Officer that the capital gain has to be assessed in the hands of the firm. On the contrary, as per Shri Jayant Kumar Sharma, the capital gains has to be treated in his hands as individual as per his letter dated 5.10.2009 because the property which was sold and which is the subject matter of capital gains was admittedly inherited and the sale deed has been executed by the legal heirs. After considering these issues, the Assessing Officer has made elaborate study and has finally confirmed that capital gains is assessable in the hands of the firm only because section 45(4) comes into play in the case of distribution of capital assets on the dissolution of the firm. It has been mentioned by the Assessing Officer that the firm came into existence somewhere in the year 1972 and the firm took over the assets of the individual business of Shri Jethalal Manekjee Sharma (J.M. Sharma) on his death on 29.8.1970. As per the copy of statement of accounts filed for assessment year 1972-73, the value of the building has been shown at Rs. 1,08,326/- and the value of the land at Rs. 34,077/-. The firm has been claiming and gett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee, this asset did not belong to the firm but to individuals. The vendees (buyers) have also confirmed this fact that the property was purchased from individuals and not from the firm. The assessee as individual had also approached the Dy. CIT, Range V, for direction u/s 144A, who, after hearing the assessee has confirmed the proposed action to assess the capital gains in the hands of the firm itself. The Assessing Officer has rejected the fact of transfer of the asset by Shri Jayant Kumar Sharma and other legal heirs by explaining it away that the observation that much importance cannot be attached to this fact because the buyer may have desired to ensure that the legal heirs and others claiming through him should also execute the Deed of Sale. Therefore, he has treated the other legal heirs as only the confirming parties. As such, the capital gain has been assessed in the hands of the firm and not in the hands of the individual. 6. The ld. CIT(A) has, on the contrary, accepted the version of the assessee as individual and has allowed the claim on the premise that the capital gain can be assessed in the hands of the real owner of the asset and not in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and J. Suryakant, respectively. By this deed, the retiring partners had released relinquishment of their rights, interests, claim in respect of the partnership business and its assets, quota rights, licences, sanctions, permits, book debts, stock-in-trade, furnitures, fixtures, pending contracts, tenancy rights, land and building of the business premises and all other trade rights in favour of the Continuing Partners. The ld. CIT(A) has considered these facts and has ignored them finding them to be irrelevant for deciding the impugned issue. 7. Regarding obtaining certificate u/s 230A from the Income-tax Department to mortgage this very property in favour of one M/s Senthil Financiers, Madras, for Rs. 20 lakhs, is concerned, it has been mentioned that this was never acted upon. 8. Regarding property tax, it was explained that the firm had paid four godown rent for the superstructure and not for the land. 9. Regarding disclosing this property in the Balance Sheet of the firm and claiming depreciation on the superstructure and also payment of property tax to the godown used by the firm were not found to be detriment factors to decide the ownership of the land. With these reasoni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of the firm. He has sternly argued that in the Balance Sheets filed alongwith the returns of the firm, for a number of years, this property has been shown as belonging to the assessee-firm and depreciation on the building and machinery has also been claimed. He has supported the rejection of the revised return as the original return was not filed u/s 139(1), but u/s 139(4) of the Act. 12. Per contra, the ld. AR has clamoured that the reasoning given by the ld. CIT(A) is correct and has to be upheld. He has also relied on his paper book. The ld. AR has placed specific reliance on the decision of Hon'ble Madras High Court rendered in the case of CIT v. Dadha & Co., [1983] 142 ITR 792/14 Taxman 219, a copy of which has been placed on record for our perusal. After going through all these records in the light of oral submissions of the parties, we have found that at no point of time, the land which was sold in this case was owned by the firm but it was always owned by the individual. On the death of Shri Jethal Manekjee Sharma, the property devolved on his wife, sons and daughters totalling to 18 in number. The following uncontroverted submission (incorporated from the ld. CIT(A)' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm the above property has been disclosed as an asset of the firm. The mere disclosure of the above property in the balance sheet of the firm, as an asset of the firm, would not vest the property in the firm. The above position is strengthened by the subsequent developments which are dealt with hereinafter. While J.M. Sharma died on the 29th August, 1970 and the firm was constituted on the 1st September, 1970, there was reconstitution of the firm in 1976. In the meanwhile, on the 25th June, 1972 Mrs. Yashodabai , wife of Late J.M. Sharma and the Three daughters of J.M. Sharma executed a Deed of release in respect of their interests in the aforesaid property in favour of the four sons of J.M. Sharma . Two of the partners retired from the partnership with effect from 30th June, 1976 and consequently under a Deed of partnership dated 5th July, 1976, Jayantkumar and Rajanikumar took over the partnership with all its assets and liabilities. While this Partnership Deed recites that the 'business has been taken over as going concern, there is nothing to indicate in the Partnership Deed that the property in question formed part of assets of the firm. While the partnership Deed between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s property at any point of time. To sum up, the various documents, some of which are registered documents, point to the following facts: I. The property was originally acquired by J.M.Sharma in his individual capacity. II. The Business of South India Pulverising Mills was, carried on by J.M. Sharma as his proprietary business. III. On the death of J.M. Sharma, his estate including the above property devolved on the legal hairs consisting of his wife, sons and daughters. IV. A partnership was constituted subsequent to the death of J.M. Sharma whereby four sons only became partners. V. At that point of time, it would not have been possible for the four sons to bring the above property into the firm, in so far as there were other owners to the property. VI. The Partnership Deed does not state anywhere that the property either in full or any interest therein was brought into the firm by partner. VII. The mere disclosure of the property in the balance sheet of the firm would not be sufficient to convert the separate property into firm's property, particularly since there were other co-owners who are not in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 firm and claiming depreciation on the superstructure and the payment of property tax (rent) for the godowns used by the assessee-firm are not determinant factors for the ownership of the property. Even if depreciation was wrongly claimed by the firm, this fact cannot override and take away the ownership rights of the assessee as individual, which are well evident from the record. The perusal of the records especially the partnership deed, dated 1.9.1970, reveals that the four partners of the firm, namely, S/Shri Chandrakant Jethalal, Suryakant Jethalal, Jayantkumar Jethalal and Rajanikumar Jethalal had contributed amounts of Rs. 60,000/- and Rs. 15,000/- each towards capital but land was not contributed by them. The Partnership-Deed dated 5.7.1976, reveals that Shri Jayantkumar Jethalal Sharma and Shri Rajanikumar Jethalal Sharma, both sons of late Shri Jethalal Manekjee Sharma, continued to be the partners of the firm; and Shri Chandrakant and Suryakant both retired. There is one more Release Deed by Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the ld. CIT(A). We also draw support from the decision of Hon'ble Madras High Court rendered in the case of Dadha & Co. (supra), the head note of which reads as under: "Capital gains - Transfer by book entries - Assessee-firm had purchased two properties income from which being assessed in the hands of the firm till asst. yr. 1964-65 -Firm removing the properties from the partnership assets and showing them as individual properties of the partners by means of book entries for the accounting year ended, 4 Nov. 1964 - income from properties assessed in the partners hands subsequently - Property sold to third party on 15th Oct. 1970 - Registered document is necessary for converting immovable property of the firm in favour of partners - Common properties cannot be possessed and enjoyed in severalty unless there is a document in writing -Book entries do not make any conversion known to law. Firm - assessment - House prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 entitled and in this context the assets of a firm may illustratively include benefit of a contract, benefit of lease or renewal of a lease, benefit of licence or quota, lands and buildings, etc. 18. It may be noted that the words used in section 14 are 'subject to contract between the partners' which clearly establishes that the definition of the property given in the section hold good only in the absence of contract to the contrary between the partners. 19. When one talks of the firm's property or firm's assets, all that is meant is property or assets in which all partners have a joint or common interest [Malabar Fisheries Co. v. CIT [1979] 120 ITR 49/2 Taxman 409 (SC)]. It is not necessary that every partnership for the purpose of its business should own and utilize its own partnership property only. It can utilize property owned by others for the purposes of its business. It would become the property of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital 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 cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital. When a property is made over to a partnership firm, there is no sale [CIT v. Janab N. Hyath Batcha Sahib [1969] 72 ITR 528 (Mad.), and CIT v. Abdul Khader Motor & Lorry Service [1978] 112 ITR 360 (Mad.). The capital contribution by the partner to the assets of partnership firm at an appreciated value. There is no capital gains in his hands liable to income u/s 45 of the Act because the consideration received by the partner on transfer of his shares to the partnership firm does not fall within section 48. It is true that it is the intention of the partners that results into throwing their individual assets into the pool of partnership business and converting them into partnership assets. Where 'A' who carried on business as a photographer on premises which he held on lease, invited 'B' to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 property. This implies that the parties were aware of the position in the absence of a Deed of Release executed, by them earlier and they continued to have interests in the property and consequently, it was necessary to bring them as vendors in the Sale Deed. Thus, the conduct of the parties throughout in this case in the given facts and the circumstances, clearly shows that they intend to retain the property as a family property subject to the various Release Deeds executed by the legal heirs of Shri J.M. Sharma. 22. As we have already mentioned disclosing the property by the firm in its Balance Sheet would not change the title which vested in the legal heirs of late Shri J.M. Sharma, who alone had the ownership over the property. Thus, the property continued to remain the property of the legal heirs of late Shri J.M. Sharma, subject, however, to the Release Deed by some of them and was never the property of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty 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 year after year. 28. On the above undisputed facts, the short question which requires our adjudication is that the property in question was the property of the partnership firm M/s. South India Pulverising Mills before 04.09.2006 or not. 29. I fully agree with the proposition of law stated by the learned Judicial Member in para no. 19 of his order that (i) Property belonging to the partner of a firm in his individual capacity does not become the property of the partnership firm merely because of the utilization of such property in the business of the partnership firm; (ii) It will become property of the partnership firm only if there is an agreement, expressed or implied, that the property was, under the agreement of the partnership, to be treated as property of the partnership. 30. In the instant case, Revenue has not brought on record any agreement whereby the partners had expressly agreed to treat the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Suryakant and the Continuing Partners undertakes to repay the same to the first retiring partner Shri. Chandrakant (HUF) within three years and for the second retiring partner, as and when demanded by him, the Retiring Partners acknowledges, releases and relinquishes all their rights, interests, claims in respect of the partnership business of "SOUTH INDIA PULVERISING MILLS" and its assets, goodwill, quota rights, licences, sanctions, permits, book-debts, stock-in-trade, furnitures, fixtures, pending contracts, tenancy rights; land and building of the business premises and all other trade rights in favour of the CONTINUING PARTNERS." 34. It is not in dispute that apart from the property in question, there was no other land and building owned by the partnership firm. Therefore, the above facts stated in release deed dated 04.09.2006 and dissolution deed dated 24.06.1977 clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership 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 reading of section 14 of the Indian partnership Act, 1932 clearly shows that a conveyance deed is not necessary for transfer of immovable property from partners to partnership firm. The Calcutta High Court in the case of Prem Brahmin v. Bhani Ram Brahmin ILR 1946 Cal 191 (FB), on an examination of the relevant provisions of the Indian Contract Act, 1872 and the Indian Partnership Act, 1932 including section 14 of that Act, came to the conclusion that under the provisions of those two Acts, a written document and, consequently, registration is not necessary to bring in separate properties of the partners into the partnership stock. It was further held that by virtue of sections 239, 253 and 265 of the Indian Contract Act and sections 14 and 66 of the Indian Partnership Act, they become the properties of the firm as soon as the partners intend to so bring them in and treat them as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the land, which was sold, belonged to the individual Shri Jayanthkumar Jethalal, a partner of the assessee firm and, therefore, the long-term capital gain is accountable in his hands. Correspondingly, Shri Jayanthkumar Jethalal has filed his income-tax return, declaring the said amount of capital gains in his hands. The Assessing Officer, after considering the facts and circumstances of the case, held that the capital gain is taxable in the hands of the assessee firm and not in the hands of Shri Jayanth Kumar Jethalal as individual. The Assessing Officer has come to the above view on the ground that the land and buildings were shown in the balance-sheet of the firm as its assets and the assessee firm had claimed depreciation on the buildings. The owner of an asset alone can claim depreciation. By that conduct itself, the assessee has established itself as the owner of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecided 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 superstructure, are not the determining factors to decide the ownership of the property. After going through the records of the case, he found that as stated in the partnership deed dated 1-9-1970, the four partners of the firm, namely, S/Shri Chandrakanth Jethalal, Suryakanth Jethalal, Jayanth Kumar Jethalal and Rajanikumar Jethalal, had contributed amounts of Rs. 60,000/- and Rs. 15,000/- each towards capital. At the same time, the land was not contributed by them as capital of the firm. The learned Judicial Member has relied on the judgment of the Hon'ble Supreme Court in the case of Malabar Fisheries Co. (supra), to state that when one talks of the firm's property or firm's assets, all that is meant is property or assets in which all partners have a joint or common interest. It is not necessary that every partnership for the purpose of its business should own and utilize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thalal, 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 virtue of a successive appropriation of the rights in the property, the land has come into the possession of Shri Rajanikumar Jethaklal and Shri Jayanthkumar Jethalal. Thereafter, Shri Jayanthkumar Jethalal paid Rs. 70 lakhs to his brother Shri Rajanikumar Jethalal and converted the property as his individual property. A perusal of the events and the final culmination of the events transferring the ownership of the entire property into the individual hands of Shri Jayanthkumar Jethalal, will definitely show that the partnership firm as such has no role in these events by virtue of any ownership status. 11. Late J.M. Sharma expired on 29-8-1970. At that point of time there were eight legal heirs who had rights in the assets of J.M. Sharma. The business carried on by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Sharma was used. The land property belonging to his estate was not specifically assigned to the partnership firm either by act, deed or conduct. There was no such intention at all. This is clear from the fact that later on the ladies relinquished their rights in favour of the four male members of the family by executing release deeds. At least till that time the land never could be the property of the firm, as the four partners alone were not the sole owners of the property. Even thereafter, the shares of two partners were transferred to the remaining partners by stating specific consideration and finally one of the partners sold his share to the remaining partner and thereby ultimately the property came into the individual hands of Shri Jayant Kumar Jethalal. 15. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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