Investment by firm allowable as deduction u/s. 54G to partner as per his partnership share: ITAT Rajkot

Hasmukhbhai Makanbhai Padariya Vs ITO (ITAT Rajkot)

ITAT Rajkot held that each partner is owner of the assets to the extent of his share in the partnership, hence, exemption u/s 54G of the Act, should not be denied to the assessee under consideration. Thus, investment made by firm is allowable as deduction u/s. 54G to the partner as per his share in partnership.

Facts- The assessee has filed his return of income declaring total income at Rs.4,78,670/-and claimed deduction u/s 54G of the Act, for Rs. 1,15,94,133/- on the ground that he has invested more than Rs.1,15,94,133/- in the firm of M/s Om Metal Cast and M/s Om Metal Cast has invested the said amount in Factory Building and Plant & Machinery.

AO rejected the contention of the assessee and held that assessee is individual and he shifted the undertaking from urban area to rural area, to a partnership firm, which is different entity under the Income Tax Act, therefore, the assessing officer made the addition and disallowed the claim of the assessee u/s 54G of the Act, to the tune of Rs.88,24,035/-.

CIT(A) confirmed the action of AO. Being aggrieved, the present appeal is filed.

Conclusion- Apex Court, in Juggilal Kamlapat Bankers vs. WTO, has held that the interest of a partner in a partnership firm belonged to him and would be includible in his ‘assets’ and will have to be taken into account while computing his net wealth. In this view of the matter, the assessee in the present case could be said to be having specific interest in the factory land and the building belonging to the firm and, as such, is entitled to the exemption under section 54G of the Act.

Held that each partner is owner of the assets to the extent of his share in the partnership, hence, exemption u/s 54G of the Act, should not be denied to the assessee under consideration. The primary condition is that the assessee should have made investment in the undertaking shifted in rural area, nowhere section 54G of the Act, states that asset should be acquired in the name of the assessee. Therefore, we delete the addition made by the assessing officer.

FULL TEXT OF THE ORDER OF ITAT RAJKOT

Captioned appeal filed by the assessee, pertaining to assessment year (AY) 2016-17, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals), vide order dated 23.01.2020, which in turn arises out of an assessment order passed by the Assessing Officer (in short ‘assessing officer’) u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), dated 20.12.2018.

2. The grounds of appeal raised by the assessee are as follows:

“1. That, the Ld. CIT(A) has wrongly confirmed the disallowance of the deduction u/s 54G amounting to Rs.88,24,035/- on account of shifting of undertaking in Rural area.

2. That, the Ld. CIT(A) has wrongly confirmed the interest u/s 234A, 234B, 234C and 234D of the I. T. Act, 1961.

3. That, the findings of the Ld. CIT(A) are not justified and are bad-in-law.

4. That, the assessee craves to add, amend, alter or delete any of the above grounds of appeals.”

3. The facts of the case may be briefly stated. The assessee, before us, is an Individual and has filed return of income on 16.10.2016, declaring total income at Rs.4,78,670/- and the same was processed u/s 143(1) of the The assessee’s case was selected for LIMITED scrutiny under CASS (Computer Aided Scrutiny Selection). The notice u/s 143(2) of the Act, was issued on 13.07.2017, by the Assessing Officer, and served upon the assessee electronically. The reason for selection of case under Limited scrutiny is to verify the following items:

“(i)Whether sales turnover/receipt has been correctly offered for tax,

(ii) Whether deduction from capital gains has been claimed correctly.”

The assessee is engaged in the business of manufacturing and job work of CI Casting, as a proprietor of Uttam Foundry at address: “Plot No.223/1 – D, Road T, Aji GIDC, Rajkot-360002.” The assessee has furnished audit report u/s 44AB of the Act, alongwith Balance-sheet, Profit& Loss account, copy of bank statement and computation of total income which were examined by the assessing officer.

4. On verification of the details submitted by the assessee, it was noticed by the assessing officer that assessee has furnished detailed working of income as shown in Profit& Loss account and income as shown in return of income, and assessing officer also noted that the assessee has executed deed of assignment for the land and building situated at plot No.223/1/D at Aji GIDC, Rajkot for the land admeasuring 1344.72 Sq.Meter and the land was for industrial purpose and deed of assignment was registered vide No.RKT/2/MRR/2357/20 16 dated 22.03.2016 with the Sub Registrar-2, Rajkot for consideration of Rs. 1,22,41,000/-. The said land was registered in the name of the assessee, vide lease deed for 99 years, registered at book No.1/6844 dated 09.05.2007, with Sub Registrar-2, Rajkot. It was claimed by the assessee that the said consideration received of Rs.1,22,41,000/- was invested by him as a partner of the firm, in M/s Om Metal Cast, Rajkot. The assessee has furnished a copy of partnership deed of M/s Om Metal Cast, which was came into existence with effect from 02.04.2016. The assessee has also furnished copy of lease agreement No.RKT/8/RUL/203/2016 dated 26.05.2016 vide which the firm M/s Om Metal Cast (the Lessee) has been granted a lease in respect of the premises situated at Non- Agricultural land for industrial purpose of Plot No.1 situated in Village: Jiyana’s survey No.280/1 paiki 3, area admeasuring 9054.84 Sq. Meters at Opp: Prince Villa: Kuvadava-Wakaner NH-8B, Village:Jiyana-360023. It was submitted by the assessee that the firm M/s Om Metal Cast has invested in Factory Building for Rs.70,63,913/- and invested in Plant & Machinery for Rs.4,63,14,396/- (totaling Rs.5,33,78,309/-) during the Financial Year (FY).2016-17.

5. The assessee has filed his return of income declaring total income at Rs.4,78,670/-and claimed deduction u/s 54G of the Act, for Rs. 1,15,94,133/- on the ground that he has invested more than Rs.1,15,94,133/- in the firm of M/s Om Metal Cast and M/s Om Metal Cast has invested the said amount in Factory Building and Plant & Machinery. The assessee has also furnished certificate dated 07.12.2018 from the Talati – cum-Mantri, Jiyana–Wakavad, Joint Gram Panchayat to the effect that the location of M/s Om Metal Cast comes under Jiyana village, and it is rural area as per definition of Income-tax Act, 1961. However, on further verification of the submission of the assessee, it was noticed by the assessing officer that the investment has been made by the firm and not by the assessee for claiming deduction u/s.54G of the Act. Therefore, vide show cause notice dated 08.12.2018, the assessee was requested to show cause as to why disallowance of Rs. 1,15,94,133/- u/s.54G of the Act should not be made.

6. In response to the notice of assessing officer, the assessee submitted its reply before the assessing officer, which is reproduced below:

“With reference to deduction u/s 54G of the I. T. Act, we have to state as under:

1. The assessee has been carrying out manufacturing activity since past many years at Aji GIDC, Rajkot.

2. The assessee has shifted the undertaking along with Plat & Machinery at Jiyana, Kuwadva, the said area is also notified as rural area and duly eligible for deduction u/s 54G of the I. T. Act.

3. The assessee has entered into Memorandum of Understanding (MO U) with 3 other persons to shift existing business to the rural area and also carry out expansion and also make further investment to the extent of sale proceeds received from the sale of the old land and building. The copy of MO U is enclosed on page no. 1-3.

4. In this regards, it is respectfully submitted that the assessee has shifted the existing plant & machinery along with all important business plans, goodwill to the rural area and therefore the whole of the manufacturing undertaking has been shifted to the rural area.

5. The MOU has been mainly carried out to shift the undertaking from urban area to rural area and also made further investment in the new undertaking carried out in the rural area of Rs. 1.38 crore. The copy of proof of further investment in the new undertaking is enclosed.

7. However, the assessing officer rejected the contention of the assessee and held that assessee is individual and he shifted the undertaking from urban area to rural area, to a partnership firm, which is different entity under the Income Tax Act, therefore, the assessing officer made the addition and disallowed the claim of the assessee u/s 54G of the Act, to the tune of Rs.88,24,035/-.

8. We note that the assessing officer, during the assessment proceedings, computed the correct long term capital gain (LTCG) at Rs.88,24,035/- instead of Rs.1,15,94,133/-, offered by the assessee. Hence total addition, made by the assessing officer should be treated at Rs.88,24,035/-, and the said amount is disputed by the assessee.

9. Aggrieved by the order of assessing officer, the assessee carried the matter in appeal before the Ld. CIT(A), who has confirmed the action of the assessing officer. During the appellate proceedings, before learned CIT(A), the assessee submitted that he (assessee) is a partner in a firm M/s Om Metal Cast and thereafter, he (assessee) has become partner in a new industrial undertaking, M/s Om Metal Cast. The assessee has brought in capital in a new industrial undertaking for Rs. 1,38,05,000/-. The assessee has also contended that he has followed the basic object of section 54G of the Act, which is to promote the decongestion of urban areas and also a balanced regional growth, that is to say, section 54G of the Act, duly recognizes the concept of shifting of undertaking from urban area to rural area. The assessee, submitted before ld. CIT (A) that main conditions of section 54G of the Act, has been obeyed and fulfilled by the assessee to shift the undertaking to rural area and also to make further investments, so that the object and the intention of the section 54G of the Act, are fully satisfied. However, ld CIT(A) rejected the contention of the assessee and observed that in section 54G of the Act, there is specific mention that who is eligible for claim of deduction under section 54G of the Act. The assessee, an individual person and a partnership-firm, as a person, are clearly different assessees. The case pertains to an individual assessee, whereas, Investment in the new industrial undertaking, in the rural area, is made by another assessee, a partnership- firm. Therefore, the ld. CIT(A) noted that assessee has not fulfilled the conditions of section 54G of the Act. Hence, ld.CIT(A) upheld the action of the Assessing Officer.

10. Aggrieved by the order of Ld. CIT(A), the assessee is in further appeal before us.

11. Shri Kalpesh Doshi, Learned Counsel for the assessee, pleaded that during the year consideration, the assessee has claimed exemption u/s 54G of the Act, on account of Capital Gain arising, on account of shifting of an undertaking from urban area to rural area. The assessee has executed deed of assignment for the industrial land and building situated at Aji GIDC, Rajkot, for consideration of Rs.1,22,41,000/-, as on 22/03/2016. The assessee has shifted the aforesaid undertaking along with Plant & Machinery at a small village, named Jiyana, which is a specified rural area, as per the Act. The confirmation of rural area from Gram Panchayat of Jiyanai, Talati- cum- Mantri Certificate, was furnished by the assessee. Therefore, the said area is notified as rural area and duly eligible for deduction u/s 54G of the I.T. Act. The assessing officer took the stand, that the investment made in new undertaking was not made by assessee but by way of introducing capital, as a partner of the firm, M/s Om Metal The assessee has stated that for shifting the existing undertaking to the rural area, the assessee has entered into Memorandum of Understanding (MOU) with 3 other persons and also to carry out expansion and make further investment to the extent of sale proceeds received from the sale of the old land and building. The assessee had entered into partnership firm, namely, M/s Om Metal Cast, as partner, as on 02/04/2016, and there are four partners in the firm of M/s Om Metal Cast. The copy of partnership deed was submitted before assessing officer. The number of partners and their profit sharing ratio in the firm M/s Om Metal Cast, is as under:

The assessee has invested amount of Rs. 1.22 crores in the firm as a partner and same was utilized in construction of building and purchasing of new plant and machineries. The copy of ledger of assessee, from books of M/s Om Metal Cast, was submitted before assessing officer. The capital introduced by the assessee in the partnership firm along with other partner is as under:

12. Apart from the above basic facts, the Learned Counsel stated that assessee has shifted the existing plant and machinery along with all important business plans, goodwill to the rural area and therefore the whole of the manufacturing undertaking has been shifted to the rural area. The MOU has been mainly carried out to shift the undertaking from urban area to rural area and also made further investment in the new undertaking carried out in the rural area of Rs. 1.38 crores. The copy of bills and copy of ledger of further investment in the construction of building and purchasing of plant and machineries were submitted by the assessee. The firm, M/s Om Metal Cast, has filed return of income for the year under consideration, as on 22/12/20 17. The copy of return of income along with computation was submitted before assessing officer. The copy of profit and loss account and Balance Sheet of M/s Om Metal Cast, were also submitted before assessing officer, which show the investment in building and plant and machineries, as required by section 54G of the Act. The Ld. Counsel submitted that assessee has fulfilled all the conditions mentioned in section 54G of the Act, namely: (a) purchased new machinery or plant for the purposes of business of the industrial undertaking in the area to which the said undertaking is shifted, (b) acquired building or land or constructed building for the purposes of his business in the said area, (c) shifted the original asset and transferred the establishment of such undertaking to such area, and (d) incurred expenses on such other purpose as may be specified in a scheme framed by the Central Government for the purposes of this section. Therefore, the assessee has duly complied with all the conditions as stated in section 54G of the Act and hence assessee under consideration is entitled to claim exemption.

13. The ld Counsel also stated that assessee has duly complied with all the conditions of shifting of undertaking and there is no other conditions required, as to direct investment or indirect investment. The primary condition is that the assessee should have made investment in the undertaking shifted in rural area, nowhere in the provision it is stated that asset should be acquired in the name of the assessee and for which assessee relied on various case laws of the High Courts, during the appellate proceedings, which are given below:

– DIT, International taxation v Mrs Jenifer Bhide (2012-252 CTR 444 Kamataka HC) section 54,

– CIT vs V Nataranjan (TS-5 128 HC-2006 (Madras)

– CIT vs Gurnam Singh (2008) 218 CTR 674 Punjab & Haryana HC]

– The Andhra Pradesh High Court in the case of Late Mir Gulam Ali Khan vs CIT[TS-8-HC-1984 (AP)

– In CIT vs Podar Cements (p) Ltd &etc [TS-17-SC-1997-01.

– The Supreme Court of India, in Bajaj Tempo Ltd. [TS-3-SC­1992-01

– Supreme Court of India, in Bajaj Tempo Ltd. (TS-3-SC-1992- 01

– Chakrabarty Medical Centre [2015] 56 taxmann.com 76 (Pune- trib)

– The Hon’ble ITAT has followed decision of K.D. Pandey v. CWT [1977] 108 ITR 214 (All.)

Thus, ld Counsel contended that even the investment made by the firm through the fund provided by the partner, is eligible for deduction under section 54G of the I.T. Act. Therefore, the learned Counsel for the assessee, prayed the Bench that addition made by the assessing officer may be deleted.

14. On the other hand, Learned Senior Departmental Representative (Ld. Sr. DR) for the Revenue submitted that assessee was running the industrial undertaking in his personal capacity at AJI, GIDC, Rajkot and from that area he shifted industrial undertaking to the village Jiyana to the partnership-firm, where the assessee is also a partner. Therefore, partnership- firm, to whom industrial undertakings has been shifted, is a separate legal entity and the individual is also a separate legal entity, in the context of Income Tax Act, therefore assessee is not eligible to claim deduction u/s 80G of the Act. The Ld. Sr. DR further pointed out that arguments of the assessee are that there is no difference between Individual(partner) and partnership- firm, as the partners are owners of the all assets of the partnership- firm, are applicable in general law and not under the Income Tax Act. In the Income Tax Act, the individual stated as a separate entity for taxation and partnership -firm is also stated, as a separate entity, therefore, assessee is not eligible to claim exemption u/s 54G of the Act. The Ld. Sr. DR also relied upon the following judgments:

(i) CIT vs. Nagpur Golden Transport Co., 233 ITR 389 (Delhi)

(ii) Hotel Centre Point vs. ITO, 160 com 604 (Guwahati – Trib)

15. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. We note that object of the section 54G of the Act, is to promote decongestion of urban areas, as also balanced regional growth. The Section 54G of the Act, exempts capital gains on transfer of plant, machinery, land, building etc., used for the purpose of the business of industrial undertaking. The transfer must be affected in the course of or in consequences of shifting of the industrial undertaking from an urban area to a non-urban area. The capital gain would be exempt to the extent, it is utilized within a period of one year before or three years after the date of transfer. The assessee under consideration, has complied with and satisfied the following conditions, namely: (i) Assessee has shifted the existing undertaking from urban to rural area, (ii) The assessee has transferred and installed the existing plant machinery, and other equipment in the rural area, (iii) The assessee made further investment of Rs. 1.38 crores in the newly undertaking for the expansion and investment in the foundry business, (iv) The assessee has made MoU to make expansion and investment in shifting of the business, and (v) The assessee made new investment in the firm and the assessee is a partner and therefore the assessee has total right in the investment of the firm. Hence, we note that the important conditions to comply with the object and intention of section 54G of the Act have been fulfilled by the assessee under consideration.

16. We find that assessee has invested amount of Rs. 1.22 Crores in the firm, as a partner and same was utilized in construction of building and purchasing of new plant and machineries. The assessee has shifted the existing plant and machinery, along with all important business plans, goodwill to rural area and therefore the whole manufacturing undertaking has been shifted to rural- area. Therefore, the assessee is eligible for exemption u/s 54G of the Act. The firm name is only a compendious name given to the partnership for the sake of convenience. The assets of the firm belong to and are owned by the partners of the firm as held by Hon’ble Supreme Court in the case of Khadervali Saheb & Anrs. Vs. N. Gudi Sahib, 261 ITR 1 (SC) wherein it was held as follows:

“A partnership firm is not an independent legal entity, the partners are the real owners of the assets of the partnership firm. Actually, the firm name is only a compendious name given to the partnership for the sake of convenience. The assets of the partnership belong to and are owned by the partners of the firm. So long as the partnership continues, each partner is interested in all the assets of the partnership- firm as each partner is owner of the assets to the extent of his share in the partnership. On dissolution of the partnership- firm, accounts are settled amongst the partners and the assets of the partnership are distributed amongst the partners as per their respective shares in the partnership firm. The distribution of assets may be done either by way of an arbitration award or by mutual settlement between the partners themselves. The document which recorded the settlement in instant case was an award which did not require registration under section 17 since the document did not transfer or assign interest in any assets. [Para 3]”

17. We note that on similar and identical facts, the Co-ordinate Bench of ITAT, Ahmedabad in the case of Chandra N. Jethwani, 111 com 58, held as follows:

“A partnership firm is not an independent legal entity, the partners are the real owners of the assets of the partnership firm. Actually, the firm name is only a compendious name given to the partnership for the sake of convenience. The assets of the partnership belong to and are owned by the partners of the firm. So long as the partnership continues, each partner is interested in all the assets of the partnership firm as each partner is owner of the assets to the extent of his share in the partnership. On dissolution of the partnership firm, accounts are settled amongst the partners and the assets of the partnership are distributed amongst the partners as per their respective shares in the partnership firm. From the above judgment it is clear that the partners are not separate from the partnership firms. Therefore, the income of the partner from the firm is treated as business income.”

18. On the identical facts, the Hon’ble High Court of Punjab and Haryana, in the case of CIT vs. Mohanlal Kapur, 163 taxman 575 held as follows:

“Section 5 of the Wealth-tax Act, 1957 – Exemptions – Position prior to 1-4-1993 -Assessment years 1981-82, 1983-84 to 1985-86 – Assessee was a partner in a firm – Assessee claimed deduction under section 5(1)(iv) in respect of his share of assets in immovable property held by firm – Assessing Officer rejected assessee’s claim on ground that owner of immovable property was not assessee but firm – Whether in view of decision of Punjab and Haryana High Court in CWT v. Vipin Kumar [1993] 203 ITR 941/69 Taxman 536 , assessee would be entitled to claim deduction under section 5(1 )(iv) – Held, yes”

Therefore, we note that any property owned by it is really the property of the partners and the use of expression ‘firm’ is only a compendious mode to designate the persons who have agreed to a joint venture and what is called the property of the firm is really the property of the partners. The partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. In Juggilal Kamlapat Bankers vs. WTO [1984] 145 ITR 485, the Apex Court held that the interest of a partner in a partnership firm belonged to him and would be includible in his ‘assets’ and will have to be taken into account while computing his net wealth. In this view of the matter, the assessee in the present case could be said to be having specific interest in the factory land and the building belonging to the firm and, as such, is entitled to the exemption under section 54G of the Act.

19. On the similar facts, our view is fortified by the judgment of Hon’ble jurisdictional High Court of Gujarat in the case of PCIT v. Vaidva Panalalmanilal (HUF), (2018) 98 com 189 wherein it was held as follows:

“Section Profit on sale of property used for residence 54 of the Income-tax Act, 1961 -Capital gains – Exemption of, in case of investment in residential house (HUF) -Assessment year 2009-10 – Whether where consideration that arose in hands of HUF on sale of capital asset had been invested for purchase of new residential house in name of some of its members instead of assessee (HUF), deduction under section 54F in hands of HUF would be permissible – Held, yes [Para 8]”

20. Hence, in the assessee’s case under consideration, we find that each partner is owner of the assets to the extent of his share in the partnership, hence, exemption u/s 54G of the Act, should not be denied to the assessee under consideration. The primary condition is that the assessee should have made investment in the undertaking shifted in rural area, nowhere section 54G of the Act, states that asset should be acquired in the name of the assessee. Therefore, we delete the addition made by the assessing officer.

21. In the result, the appeal of the assessee is allowed.

Order is pronounced in the open court on 06/08/2024