Capital gains on firm's immovable property sale: registered deed treated asset as land; LTCG taxed to firm, not partners

Capital gains from sale of an immovable property were assessable in the hands of the "right person" under the Income-tax Act. Relying on the registered sale deed, the ITAT held the firm, as vendor/owner, transferred only land and therefore the entire gain was chargeable in its hands, not in the hands of individual partners, notwithstanding any business discontinuance; partners' proportionate disclosures were contrary to law (SC: Atchaiah). Consequently, the asset was treated as land giving rise to LTCG in the firm's assessment, any proportionate LTCG offered by partners was directed to be excluded from their returns, and tax paid by partners on such wrongly offered income was to be allowed as credit to the firm (SC: Bachulal Kapoor).

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether discontinuance of the partnership business results in the firm losing its identity and the immovable property vesting in the partners collectively as an AOP/individual co-owners for purposes of taxing capital gains on sale of that property.

(ii) Whether capital gains arising from transfer of immovable property sold under a registered sale deed showing the firm as vendor-owner must be assessed only in the firm's hands (the "right person"), and not in partners' hands.

(iii) Whether the Assessing Officer was justified in bifurcating the sale consideration into long term capital gains on land and short term capital gains on building on a 90:10 basis; and whether, on the facts found from the sale deed, the transfer was only of land taxable wholly as LTCG.

(iv) Consequentially, whether capital gains wrongly returned by partners and tax paid thereon must be excluded from partners' assessments and corresponding tax credit allowed to the firm.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Effect of alleged discontinuance of business on status/ownership (firm vs AOP/partners)

Legal framework (as discussed): The Court noted the statutory requirement of intimation of discontinuance to the Assessing Officer under section 176(3), and treated the letter filed before another authority as not conclusive of discontinuance for income-tax purposes.

Interpretation and reasoning: Even assuming business discontinuance, the Court held it does not result in vesting of the firm's property in the individual partners (whether as partners or as members of an AOP). The Court rejected the attempt to extend a principle relating to assessment of rental income in certain circumstances into a proposition that ownership of the underlying property itself shifts from the firm to partners merely because business is not carried on.

Conclusion: Discontinuance of business, if any, does not transform ownership of the firm's property into ownership of partners/AOP, nor does it justify taxing capital gains as partners'/AOP's income.

Issue (ii): Correct taxable person for capital gains where the firm is vendor-owner in the registered sale deed

Interpretation and reasoning: The Court treated the registered sale deed as determinative of who transferred the property, recording that the firm was shown as vendor-owner. On that basis, capital gains from the transfer had "without any choice" to be offered and assessed in the firm's hands. Since the firm was the "right person" for assessment of that capital gain, assessment in partners' hands was impermissible.

Conclusion: Capital gains on the transfer are assessable only in the firm's hands; no part of that capital gain can be assessed in the hands of the individual partners.

Issue (iii): Validity of bifurcation into LTCG (land) and STCG (building) and characterization of the transferred asset

Interpretation and reasoning: The Court examined the registered sale deed and found that what was sold was land admeasuring 7500 sq. mtrs. for the stated consideration. Proceeding on the deed's description, the Court concluded that the firm transferred only land for the entire consideration and, therefore, the entire capital gain is chargeable as long term capital gain. Consequently, the Assessing Officer's apportionment of consideration into 90:10 between land (LTCG) and building (STCG) was not sustained on the Court's finding that the deed evidenced transfer only of land.

Conclusion: The capital gain on the sale consideration is taxable wholly as LTCG in the firm's hands; the STCG component arising from an assumed building transfer was not upheld.

Issue (iv): Consequences where partners have already offered the capital gain and paid tax; entitlement to exclusion and tax credit

Interpretation and reasoning: Since the capital gain could only be assessed in the firm's hands, partners' disclosure of proportionate capital gains and payment of tax thereon was held to be contrary to law and required correction. The Court directed: (a) exclusion of such wrongly offered capital gains from partners' returns; and (b) allowance of credit in the firm's hands for taxes paid by partners corresponding to the income wrongly disclosed by them, while computing the firm's tax liability.

Conclusion: Partners' proportionate capital gains are to be excluded from their assessments, and corresponding tax credit is to be granted to the firm as the entity correctly assessable on the capital gains.

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