S.45: Capital gains-Firm-Partner-Purchase of property by partner in personal capacity and sale thereof by
document executed in personal capacity-Shown in the balance sheet of firm-Long-term capital gains not to be
taxed in hands of firm. (S.54F)
One of the partners of the assessee-firm purchased a piece of land with money withdrawn from the Firm. The purchase deed was registered in his personal name. In the books of account of the assessee-firm the purchase of the land was shown as an asset. In the accounts of the assessee-firm, the property was shown as purchased by the firm. Accordingly, the landed property was reflected in the balance-sheet of the assessee-firm. The partner sold this property on June 17, 2005 to a third person by executing the sale document in his personal capacity. The partner purchased another property for claiming deduction under section 54F of the Income-tax Act, 1961 in respect of the capital gains arising out of the sale of the property purchased on June 17, 1999. The assessee-firm did not disclose any capital gains arising in its hands.
On the other hand, the partner offered the long-term capital gains in his personal assessment with his claim. The
Assessing Officer held that the funds necessary for purchasing the property were withdrawn by one of the partners of the assessee-firm from the partnership fund and on the sale of the property also the funds were brought back to the assessee-firm and during all the relevant period, the property was shown in the balance-sheet of the assessee-firm as its own property and in such circumstances the property was owned by the assessee-firm and accordingly brought the long term capital gains to taxation in the hands of the assessee-firm. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. On further appeal, the Tribunal held that the purchase document was registered in the name of one of the partners of the firm. The document was executed in his personal capacity and in his individual name.
There was no recital in the purchase deed that the property was being purchased for and on behalf of the firm. Likewise, the property was sold by a sale deed executed by the partner individually and in his independent capacity as the owner of the property. There was also no mention that the property belonged to the assessee-firm and the firm was actually selling the property. Even though the books of account of the assessee-firm contained entries regarding the purchase and sale of the property and the balance-sheet of the assessee-firm showed the property as its own asset for some time, the accounting entries reflected in the books of account of the assessee-firm could not undo the rule of law or the law of land. In order to bring the property into the ownership of the assessee-firm, it was necessary to have a conveyance deed registered in the name of the assessee-firm. As no such document was available, no such conveyance could be presumed and it was not possible to hold that the property was ever owned by the assessee-firm. Consequently the long-term capital gains could not be assessed in the hands of the assessee-firm. It was one of the partners of the assessee-firm, who was bound to account for the long-term capital gains arising from the transaction and the Assessing Officer as to process the return filed by him in accordance with law. The addition made in the assessment of firm was deleted. (A. Y. 2006-2007)
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