Monday, April 20, 2015

Even investment in name of partners would provide sec. 54EC relief to partnership firm

Facts: a)Partners of assessee-firm introduced land and building as their capital contribution to firm.

b)The firm carried out its operation from such land and building after its formation. Subsequently, firm sold said land and building and earned capital gain.

c)Sale consideration of property was credited directly to bank account of partners of firm and bonds specified under Section 54EC were also purchased in names of those partners.

The issues that arose before the Tribunal were as under:-

I.Whether capital asset introduced by partners could be said to be the property of the firm and, thus, capital gain arising on sale of such building was taxable in hands of firm?

II.Whether a firm could claim exemption under section 54EC where specified bonds were purchased in name of partners?

On the first issue the Tribunal held that:

By relying upon the judgment of Allahabad High court in the case of K. D. Pandey v. CWT [1977] 108 ITR 214, it was held that where partners of firm introduced land and building as their capital contribution to firm, said land and building would become property of firm and, therefore, capital gain arising on sale of said property was taxable in hands of firm.

On the second issue the Tribunal held that:

1)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.

2)It was not disputed that the sale consideration was directly credited to the Bank accounts of the partners and firm was immediately dissolved subsequently. Therefore, whatever amount was invested by the partners in specified bonds in their individual names was, in fact, from the funds of the firm.

3)Hence, benefit of section 54EC could not be denied to the assessee-firm,even though the bonds were purchased in the name of partners- CHAKRABARTY MEDICAL CENTRE V. TRO [2015] 56 76 (Pune - Trib.)