2013 (12) TMI 193 - AT - Income Tax

ITAT Chennai: Partner, Not Firm, Liable for Capital Gains on Unregistered Property Transfer

The Appellate Tribunal ITAT Chennai ruled in favor of the assessee firm in an appeal regarding the assessment year 2006-07. The dispute centered on ... Whether the long term capital gain on sale of property purchased in the name of partner taxable in the hands of assessee – The property was reflecting in the books of assessee firm as assets – Held that:- The property was not owned by the assessee-firm - The registered deed always showed that the property was purchased, held and sold by Shri Irudayaraj as the sole owner of the property - The ownership of the property cannot be assigned to the assessee-firm only on the basis of the accounting entries - To acquire right in immovable properties and releasing right in immovable properties, etc. need to be strictly construed in the light of the Indian Registration Act and the Transfer of Property Act – Following CIT v. S. Rajamani and Thangarajan Industries [1997 (11) TMI 20 - MADRAS High Court] – The immovable property cannot be transferred without registered deed of conveyance - Decided in favour of assessee. Issues involved:Whether the assessee is liable for long-term capital gains taxation on the sale of land purchased in 1999 but sold in 2005.Analysis:The judgment delivered by the Appellate Tribunal ITAT Chennai pertains to an appeal filed by an assessee firm regarding the assessment year 2006-07. The dispute arose when the Assessing Officer held that a property purchased and sold by one of the partners of the firm actually belonged to the firm, leading to the assessment of long-term capital gains in the hands of the firm. The Commissioner of Income-tax (Appeals) upheld this decision, prompting the assessee to file a second appeal.The primary issue in this case was whether the property transactions should be attributed to the assessee-firm or to the individual partner who conducted the purchase and sale. The assessee's counsel argued that the ownership of an immovable property cannot be solely determined based on accounting entries and that a registered deed of conveyance is necessary to establish ownership. Citing relevant judgments of the Madras High Court, the counsel contended that without a registered document transferring the property to the firm, the firm cannot be deemed the owner. On the other hand, the Revenue's representative asserted that the property transactions were conducted using the firm's funds and the property was always reflected as an asset of the firm, justifying the assessment of capital gains in the firm's hands.After detailed deliberation, the Tribunal analyzed the legal principles established by the Madras High Court in similar cases. It emphasized the requirement of a registered conveyance deed to transfer ownership of immovable property. The Tribunal observed that the purchase and sale documents were executed in the individual capacity of the partner, with no indication that the property belonged to the firm. Despite the property being shown as a firm asset in accounting records, the absence of a registered conveyance deed meant that the firm could not be considered the owner. Relying on the legal precedents, the Tribunal concluded that the lower authorities erred in assessing capital gains in the hands of the firm and ruled in favor of the assessee. The Tribunal directed that the individual partner, as the actual owner, should account for the capital gains, and allowed the appeal filed by the assessee.In summary, the judgment highlights the significance of registered conveyance deeds in determining ownership of immovable property and establishes that accounting entries alone are insufficient to establish ownership. The decision underscores the need for strict adherence to legal requirements in property transactions and clarifies that ownership cannot be presumed based solely on accounting records.