i. Section 45 – Where partners of the firm introduced land and building as their capital contribution to firm by way of transfer to partner’s capital account but not by way of registered conveyance deed, capital gains arising on sale of said property was taxable in the hands of assessee-firm.
ii. Section 54EC – Where sale consideration of property belonging to assessee-firm was credited directly in hands of partners of firm and specified bonds were also purchased in names of those partners, still assesseefirm would be entitled to claim benefit of deduction u/s. 54EC.
Facts:
i. The assessee-firm was having three partners. The land and hospital building was owned by the two partners individually before the formation of the assessee-firm in year 1992. The partners of firm introduced the said hospital building and land as their capital contribution.
The assessee-firm carried out its operation from the hospital premises after its formation. Subsequently, assessee-firm sold said land and building and earned short-term capital gain of Rs. 1,64,76,685/-.
The assessee firm contended that there was no transfer of the ownership to the assessee firm by the partners even though the land and hospital building was introduced as a capital contribution. Further, even if the immovable property is introduced by the partners towards their capital contribution but same must be by way of proper conveyance deed registered under the Indian Registration Act.
The Assessing Officer having rejected assessee’s explanation, brought to tax the short-term capital gain in the hands of the assessee-firm. The Commissioner (Appeals) confirmed the order of the Assessing Officer. Aggreived, the assessee appealed before the Tribunal.
ii. Against the capital gains which was offered to tax by the partners in their individual capacity, the exemption was claimed u/s. 54EC with respect to the investments in Rural Electrification Bonds by them. Upon shifting of taxability from partners to the partnership firm by the AO, the assessee-firm alternatively claimed that exemption u/s. 54EC be allowed to the assessee-firm.
The sale consideration received on sale of above land and building was directly credited to the Bank accounts of the two partners out of which both the partners invested the in notified bonds in terms of section 54EC. The firm, subsequent to sale of above land and building, was dissolved. Therefore, it was contended that whatever is invested by the partners on their individual names is in fact from the funds of the assets of the assessee firm which was sold out.
Held:
i. The Tribunal placed reliance on the case of K. D. Pandey vs. CWT 108 ITR 214 (All) wherein on identical issue it was observed that under the provisions of section 239 of the Indian Contract Act and section 14 of the Indian Partnership Act for the purpose of bringing the separate properties of a partner into the stock of the firm it is not necessary to have recourse to any written document at all, that as soon as a partner intends that his separate properties should become partnership properties and they are treated as such, then by virtue of the provisions of the Contract Act and the Partnership Act, the properties become the properties of the firm and that this result is not prohibited by any provision in the Transfer of Property Act or the Indian Registration Act.
Therefore the Tribunal held that Capital gains arising on sale of land and building which were introduced by the partners as their capital contribution to the assessee-firm is taxable in the hands of the firm and not in the hands of the said partners irrespective of the fact that the transfer of the said property by the partners to the assessee-firm was not made by way of registered conveyance deed.
ii. There is no dispute on the legal position that the investment made by two partners on their individual names in the notified bonds is otherwise eligible investment for getting the exemption from the taxable capital gain u/s. 54EC.
As per the well-settled law, partnership is not a legal entity in strict sense and in all the movable and immovable assets which are held by the partnership, there is an interest of every partner though not specifically defined in terms of their shares.
On perusal of the language used in section 54EC, it is provided that the assessee has to make the investment within a period of six months in the notified securities after the date of transfer of capital asset. The words used in section 54EC are – ‘the assessee has invested the whole or any part of capital gains in the long-term specified asset’. As already held that the property which was sold out, it was property of the assesseefirm and hence, the capital gain is taxable in the hands of the assessee-firm.
At the same time even though the bonds are purchased on the names of the two partners, it can be said that irrespective of the way, how the sale consideration was credited to the bank accounts of two partners, but the benefit of section 54EC cannot be deprived to the assessee-firm. As admittedly, even on the dissolution of the firm the assessee as a partner has a right to get back their capital as per the final valuation done on the date of dissolution or otherwise. Accordingly, the exemption u/s. 54EC was allowed to the assessee-firm in respect of notified bonds purchased by its partners.
