TMI Blog2002 (7) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... y an instrument of partnership dated May 11, 1973, and it is unnecessary to notice the changes that took place in the constitution of the firm subsequent to the formation of the partnership, but it is, however, necessary to notice the change in the composition of the partners on September 6, 1976, when a limited company under the name and style, "Asoka Betelnut Company Private Limited" was admitted as a partner along with the assessees with the result, the firm became reconstituted with four partners. The firm was subsequently dissolved on March 31, 1977, by an instrument of dissolution dated April 11, 1977. Prior to the dissolution, an item of property known as Asoka Building which comprised land on which was situate the residential house as well as factory premises was purchased by the firm out of the funds of the firm on January 25, 1973. There is no dispute that the residential building and the land appurtenant thereto were utilised for their residential purposes by the three assessees who resided there jointly. The firm claimed depreciation with reference to the portion of the property wherein the factory building was situate and had not claimed depreciation for the remaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be owned by the assessees for a period of two years was not complied with. The Commissioner of Income-tax was of the view that though the assessees might have resided in the property even prior to the date of dissolution of the firm, it was not sufficient to claim exemption under section 54 of the Act as the assessees became the owners of the property on the date of dissolution of the firm, i.e., on April 11, 1977. He therefore held that the grant of exemption under section 54 of the Act by the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue and set aside the order of the Income-tax Officer and directed the Income-tax Officer to redo the assessment in accordance with law. The assessees carried the matter in appeal before the Income-tax Appellate Tribunal, Madras, challenging the order of the Commissioner of Income-tax. The Appellate Tribunal held that since the property became the property of each of the brothers in the manner prescribed under section 49(1), it was not a short-term capital asset and the assessees have complied with all the conditions prescribed in section 54 of the Act and therefore the assessees were entitled to exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period of two years after that date constructed, a house property for the purposes of his own residence, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say, (i) if the amount of the capital gain is greater than the cost of the new asset, the difference between the amount of the capital gain and the cost of new asset shall be charged under section 45 as the income of the previous year ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil ; or (ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45 ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain." A close read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned under section 54 of the Act are fully satisfied as it was not claimed to be a business asset of the firm. The next question is whether within two years immediately preceding the date on which the transfer took place the property was used by the assessee or a parent of his mainly for the purposes of his own or the parent's own residence. There is no dispute that the assessees were using the house property even from the date of the purchase for the purposes of residence not only prior to the date of dissolution of the firm but also subsequent to the date of dissolution of the firm. We are of the opinion that the user of the property as residence is one of the essential conditions to be fulfilled to claim exemption under section 54 of the Act. Learned counsel for the Revenue submitted that though the assessees might have used the property, they became the owner of the property subsequent to the date of dissolution of the firm and till the date of dissolution of the firm, they were not the owners of the house property and mere residence in the property without any right is not sufficient. We are unable to accept the said submission. Though under the income-tax law, a firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the property and her right to reside in the house was only as a member of the family and the property was used only by her husband mainly for the purpose of residence. Therefore, the Karnataka High Court held that the wife was not entitled to exemption under section 54 of the Act. In our view, it is not necessary to express our view on the correctness of the view taken by the Karnataka High Court in Smt. Vijayalakshmi's case [1975] 100 ITR 648, but the decision of the Karnataka High Court is distinguishable as in that case, the user of the property by the wife was held to be not in her right as an owner of the property. However, the instant case, the partners were owners of the property and they used the property for their residence in their own right. Another decision that was relied upon by learned counsel for the Revenue is the decision of this court in CIT v. K. Gangiah Chetty and Sons [1995] 214 ITR 548. The facts of that case are that the partnership firm was the assessee and a portion of the house property belonging to the firm was let out and the remaining portion was kept by the partners for their residence and the property was sold and exemption under section 54 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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