Capital gains on partner-contributed property were taxable in the firm's hands, and section 54EC relief was available.

Where partners had introduced hospital land and building as capital contribution and the assets were reflected and depreciated in the firm's books, the transfer was treated as effective for tax purposes and the capital gains on sale were taxable in the partnership firm's hands, not in the hands of the individual partners. The firm was also held entitled to section 54EC relief because the provision requires investment of the capital gains in specified bonds within the prescribed time, and does not insist that the bonds be purchased only in the assessee's own name. The fact that the asset sold was depreciable and the gain was computed under section 50 did not, by itself, deny the exemption, subject to the statutory ceiling.

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Issues: (i) Whether capital gains arising from sale of the hospital land and building were taxable in the hands of the partnership firm or in the hands of the individual partners; (ii) Whether the firm was entitled to exemption under section 54EC where the sale consideration was invested in bonds in the names of the partners and the asset sold was a depreciable asset.

Issue (i): Whether capital gains arising from sale of the hospital land and building were taxable in the hands of the partnership firm or in the hands of the individual partners.

Analysis: The land and building had been introduced into the firm as capital contribution by the partners and were shown and depreciated in the firm's accounts. Applying the principle that a partner may bring immovable property into the stock of the firm without a registered conveyance, the transfer to the firm was treated as effective for tax purposes. The sale took place while the firm was still in existence, so the gain arose from an asset of the firm.

Conclusion: The capital gains were taxable in the hands of the partnership firm and not in the hands of the individual partners.

Issue (ii): Whether the firm was entitled to exemption under section 54EC where the sale consideration was invested in bonds in the names of the partners and the asset sold was a depreciable asset.

Analysis: Section 54EC requires investment of the capital gains in specified bonds within the prescribed period, and the provision does not insist that the investment be made only in the assessee's own name. The fact that the asset was depreciable and the gain was treated as short-term under section 50 did not bar relief under section 54EC. Since the sale consideration was in substance invested in the notified bonds, the statutory benefit could not be denied to the firm.

Conclusion: The firm was entitled to the benefit of section 54EC, subject to the statutory ceiling.

Final Conclusion: The common order upheld taxability of the capital gains in the firm's hands while granting section 54EC relief to the firm, and the connected revenue appeals failed as they did not survive independently.

Ratio Decidendi: When partners contribute immovable property to a partnership as capital, ownership may vest in the firm without a registered conveyance, and exemption under section 54EC depends on the investment of capital gains in the specified asset rather than on the nominee name in which the bonds are purchased.

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