Firm taxed on hospital land sale gains, not individual partners, Section 54EC exemption allowed up to Rs. 50 lakhs ceiling

ITAT PUNE held that capital gains from sale of hospital land and building were taxable as short-term capital gains in the firm's hands, not individual partners. The court confirmed that partners can contribute immovable property to firm capital without registered conveyance deed, following HC precedent. Despite property being depreciable asset under Section 50, firm was granted Section 54EC exemption benefit up to Rs. 50 lakhs ceiling, following HC ruling in ACE Builders case. Revenue's protective assessments against individual partners were deleted as gains were taxable in firm's hands on substantive basis.

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Issues Involved:
1. Taxability of short-term capital gains on the sale of hospital land and building.
2. Ownership and transfer of property within a partnership firm.
3. Eligibility for deduction under Section 54EC of the Income Tax Act.
4. Protective addition of long-term capital gains in the hands of individual partners.
5. Delay in filing cross-objections and eligibility for deductions under Sections 54, 54F, and 54EC.

Detailed Analysis:

1. Taxability of Short-term Capital Gains:
The primary issue was whether the short-term capital gains of Rs. 1,64,76,685 on the sale of hospital land and building should be taxed in the hands of the partnership firm or the individual partners. The learned CIT(A) held that the gains were taxable in the hands of the firm as the property belonged to the firm and was distributed among the partners under Section 45(4).

2. Ownership and Transfer of Property:
The assessee-firm argued that the hospital building and land were owned by the partners individually before the formation of the firm and were introduced as capital contributions without a registered conveyance deed. The AO and CIT(A) disagreed, stating that the property was shown as an asset of the firm, and depreciation was claimed by the firm. The Tribunal upheld the CIT(A)'s decision, citing the Allahabad High Court's decision in K.D. Pandey vs. CWT, which stated that a partner can bring immovable property into the firm's stock without a registered instrument of conveyance.

3. Eligibility for Deduction under Section 54EC:
The assessee-firm contended that it should be granted deduction under Section 54EC for investments made by the partners in the bonds. The Tribunal agreed, referencing the Karnataka High Court's decision in Director of IT (International Taxation) vs. Mrs. Jennifer Bhide, which held that the benefit of Section 54EC could be claimed even if the investment is made in the name of the partners, as long as the investment is from the sale consideration of the firm's assets. The Tribunal directed the AO to grant the benefit of Section 54EC to the assessee-firm, subject to the ceiling of Rs. 50 lakhs.

4. Protective Addition of Long-term Capital Gains:
The Revenue's appeals concerned the deletion of the protective addition of Rs. 80,99,042 made by the AO in the hands of the individual partners. The partners had declared long-term capital gains and claimed exemptions under Sections 54 and 54EC. The CIT(A) deleted the protective addition, as the gains were taxed substantively in the hands of the firm. The Tribunal upheld this decision, rendering the Revenue's appeals infructuous.

5. Delay in Filing Cross-objections and Eligibility for Deductions:
The individual partners filed cross-objections requesting deductions under Sections 54, 54F, and 54EC. The Tribunal condoned the delay in filing but dismissed the cross-objections as infructuous, given that the capital gains were not taxable in the individual partners' hands. The Tribunal had already allowed the benefit of Section 54EC to the assessee-firm.

Conclusion:
The Tribunal concluded that the short-term capital gains were rightly taxable in the hands of the assessee-firm. It upheld the CIT(A)'s decision and granted the benefit of Section 54EC to the firm. The Revenue's appeals were dismissed, and the cross-objections filed by the individual partners were also dismissed. The assessee's appeal was partly allowed, while the Revenue's appeals and cross-objections were dismissed.

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