Vivek Industries Vs ITO (ITAT Visakhapatnam)
Capital Gains – Assessment in Hands of “Right Person” – Discontinuance of Business Does Not Transfer Ownership – Partners’ Disclosure Incorrect – Tax Credit to Follow Correct Entity
Vivek Industries, a partnership firm constituted in 2003, filed its return of income for AY 2018-19 on 11.08.2018 declaring Nil income after claiming that the long-term capital gain of Rs. 5,88,29,928 arising from sale of its property was disclosed in the hands of the individual partners. The property in question—a 7,500 sq. mtr. industrial plot at Mankhal, Ranga Reddy District—was sold through a registered sale deed dated 03.02.2018 (Sale Deed No. 1625/2018) to M/s White Cliff Tea Pvt. Ltd., Kolkata, for a total consideration of Rs. 6,50,33,500.
The assessee contended that it had discontinued its business on 06.02.2017 and thereafter functioned as an AOP, thereby enabling the partners to offer the capital gains individually. The Tribunal held that discontinuance of business does not dissolve or transform a partnership firm into an AOP, nor does it transfer ownership of firm-held property to individual partners. Since the registered sale deed clearly reflected the partnership firm as the vendor-owner, the capital gain on the transfer was legally assessable only in the hands of the firm, which was the “right person” for tax purposes.
It was further held that the partners’ act of individually offering capital gains based on profit-sharing ratios was contrary to law and such income must be excluded from their assessments. However, any tax or TDS paid by the partners on the wrongly disclosed capital gains must be granted as credit to the firm, following the principle laid down by the Supreme Court that taxes paid against wrongly assessed income should travel to the entity in whose hands the income is correctly assessable.
The Assessing Officer’s allocation of the sale consideration into Rs. 5,52,09,964 as long-term capital gain on land and Rs. 61,34,440 as short-term capital gain on building was rejected. The Tribunal observed that the sale deed evidenced transfer of land only, and no building or superstructure was part of the sale. Consequently, the entire gain of Rs. 6.50 crore was chargeable as long-term capital gain in the firm’s hands.
The assessee’s claims under Sections 54D, 54EC and 54F were also found untenable since the gains themselves were not legally assessable in the hands of partners and no conditions for exemption were satisfied.
Accordingly, the Tribunal directed that:
– the capital gains be assessed only in the hands of the partnership firm;
– the gains wrongly taxed in partners’ returns be excluded; and
– corresponding tax credits be allowed to the firm.
FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM
