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2002 (7) TMI 57

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....rised land on which was situate the residential house as well as factory premises was purchased by the firm out of the funds of the firm on January 25, 1973. There is no dispute that the residential building and the land appurtenant thereto were utilised for their residential purposes by the three assessees who resided there jointly. The firm claimed depreciation with reference to the portion of the property wherein the factory building was situate and had not claimed depreciation for the remaining portion which was utilised by the three assessees as residential building. It is also relevant to notice herein that the income from the portion used for residential purposes by the three brothers was also not shown in the hands of the firm. The firm was dissolved on April 11, 1977, and the assets were distributed among the various partners. So far as the factory building is concerned, the company partner took over the factory building and the appurtenant land valued at Rs. 20 lakhs and the residential portion of the building was taken over by the three assessees. The total value of the properties of the firm on the date of dissolution was Rs. 32 lakhs and the company partner's share in ....

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.... in accordance with law. The assessees carried the matter in appeal before the Income-tax Appellate Tribunal, Madras, challenging the order of the Commissioner of Income-tax. The Appellate Tribunal held that since the property became the property of each of the brothers in the manner prescribed under section 49(1), it was not a short-term capital asset and the assessees have complied with all the conditions prescribed in section 54 of the Act and therefore the assessees were entitled to exemption under section 54 of the Act. The Appellate Tribunal thus allowed the appeals preferred by the assessees. The Revenue has sought for a reference and the Appellate Tribunal has stated a case and referred the following question of law for our consideration: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the capital gains from the sale by the assessee of the residential house would be exempt under section 54 of the Income-tax Act and setting aside the order passed by the Commissioner under section 263 of the Act ?" Mr. T. C. A. Ramanujam, learned senior standing counsel for the Revenue submitted that the conditions pr....

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....of its purchase or construction, as the case may be, the cost shall be nil ; or (ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45 ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain." A close reading of section 54 indicates that the following conditions should be fulfilled by an assessee to claim exemption under section 54 of the Act. (i) There must be some capital gains arising from the transfer of a capital asset. (ii) The capital asset transferred must be buildings or lands appurtenant thereto and the income of which is chargeable under the head "Income from the house property". (iii) The transferred property should have been used by the assessee or his, parent for a period of two years immediately preceding the date on which the transfer took place. (iv) The capital asset should have been used by the assessee or a parent of his, mainly for the purpose of his own or the parent's own ....

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....d to claim exemption under section 54 of the Act. Learned counsel for the Revenue submitted that though the assessees might have used the property, they became the owner of the property subsequent to the date of dissolution of the firm and till the date of dissolution of the firm, they were not the owners of the house property and mere residence in the property without any right is not sufficient. We are unable to accept the said submission. Though under the income-tax law, a firm is treated as a separate assessable entity, under the general law of partnership, a firm name is a compendious mode to designate the partners. It is well settled that property of a firm is the property of partners and the use by the firm is the use by the partners. Therefore, when the assessees used the property prior to the dissolution of the firm for their residence, it must be held that they were owners of the property and they were using the property in their own right for the purpose of residence. A similar view was taken by a Bench of this court in CIT v. Kamala Devi [1997] 227 ITR 701. The question that arose before this court was whether a particular capital asset should be treated as a short-term....