Partnership firm eligible for Sec. 54EC benefit despite investment in Individual name of Partners

M/s. Chakrabarty Medical Centre vs. TRO (ITAT Pune), ITA No. 2277/PN/2012, Assessment Year : 2008-09, Date of pronouncement : 30-01-2015

Issue- Whether the assessee firm can get the benefit of Sec. 54EC, even though an investment in respect of capital gain is made by the two partners individually in the notified securities e. bonds issued by the Rural Electrification Corporation Ltd. (RECL)?

The sale consideration received on the sale of hospital building and land was directly credited to the Bank accounts of the two partners i.e. Dr. Mrinmay Chakrabarty and Dr. (Mrs.) Neela Chakrabarty and there is no dispute about this fact. Both the partners made the investment in the notified bonds in terms of Sec. 54EC of the Income-tax Act as then applicable. The alternate contention of the assessee is that as the firm was immediately dissolved subsequently and whatever is invested by the partners on their individual names is in fact from the funds of the assets of the assessee firm which was sold out. The Ld. AR relied on the decision of the ITAT, B Bench, Pune in the case of Shirish Vinayak Godbole Vs. ITO ITA No. 1320/PN/2010 dated 13-02-2013.

In the case of Shirish Vinayak Godbole (supra) the assessee sold the immovable property which was a flat and made an investment towards purchase of a flat for the residence of his wife and daughter who have been separated from him as per mutual understanding. The assessee took the contention that he is entitled for the deduction u/s. 54 of the Income-tax Act in respect of the flat purchased in the name of assessee’s wife out of the capital gain on the sale of his flat in Santan Cooperative Housing Society, Erandwane, Pune-4 11004. The contention of the assessee found favour before the Tribunal and it is held that even if the property was purchased on the name of his wife the assessee can claim benefit of deduction u/s. 54(2) of the Act. The operative part of the decision is as under:

15. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. In the instant case, the assessee sold his residential property for a consideration of Rs. 50 lakhs and purchased two flats, one flat for his self occupation and another flat for a consideration of Rs. 29,60,000 in the name of his wife for the residence of his wife and daughter.

15.1 It is the submission of the learned counsel for the assessee that the amount incurred for purchasing the flat for the wife of the assessee at Rs. 29,60,000 should be allowed as an expenditure being encumbrance on the property. The alternate contention of the learned counsel for the assessee that since the property is purchased in the name of the wife, therefore, in view of the decision of Hon’ble Karnataka High Court in the case of DIT (International Taxation) Vs. Mrs. Jennifer Bhide (Supra), benefit of deduction u/s. 54(2) should be allowed to the assessee in respect of the said flat instead of the flat purchased in the name of the assessee.

15.2 Since the flat purchased in the name of the wife is higher and it is beneficial to the assessee we find the alternate contention of the learned counsel for the assessee is acceptable.

15.3 The Hon’ble Karnataka High Court in the case of DIT (International Taxation) Vs. Mrs. Jennifer Bhide (Supra) at Para 7 of the order observed as under:

“7. On careful reading of s. 54 as well as s. 54EC on which reliance is placed makes it clear that when capital gains arise from the transfer of long term capital asset to an assessee and the assessee has within the period of one year before or two years after the date on which the transfer took place purchase or has within the period of three years after the date of construction of residential house then instead of capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the provision made under the section which grants exemption from payment of capital gains as set out thereunder. Therefore, in the entire s. 54, the purchase to be made or the construction to be put up by the assessee, should be there in the name of the assessee, in not expressly stated. Similarly even in respect of s. 54EC, the assessee has at any time within a period of six months after the date of such transfer invested the whole or any part of the capital gains in the long­term specified asset then she would be entitled to the benefit mentioned in the said section. There also it is not expressly stated that the investment should be in the name of the assessee. Therefore, to attract s. 54 and s. 54EC of the Act, what is material is the investment of the sale consideration in acquiring the residential premises or constructing a residential premises or investing the amounts in bonds set out in s. 54EC. Once the sale consideration is invested in any of these manner the assessee would be entitled to the benefit conferred under this provision. In the absence of an express provision contained in these sections that the investment should be in the name of the assessee only any such interpretation were to be placed, it amounts to Court introducing the said word in the provision which is not there. It amounts Court legislating when the Parliament has deliberately not used those words in the said section. That is the view taken by the Hon’ble Madras High Court and Hon’ble Punjab & Haryana High Court and we respectfully agree with the view expressed in the aforesaid judgment.”

15.4 Respectfully following the decision of the Hon’ble Karnataka high Court cited (Supra), we are of the considered opinion that the flat purchased by the assessee in the name of his wife out of the sale consideration of flat in the name of the assessee should be considered as allowable deduction u/s.54(2) of the Income Tax Act. Since in the instant case the flat in the name of the assessee was sold on 08-05-2006 for Rs. 50 lakhs and since flat in the name of the wife and daughter has been purchased on 22-03-2006 for a consideration of Rs. 28 lakhs, plus registration expenses etc, therefore, the assessee is entitled to benefit of deduction u/s.54(2) in respect of the property purchased in the name of his wife. However, since the total cost of the property including stamp duty and registration expenses is not verifiable, we deem it proper to restore the issue to the file of the AO with a direction to verify the details and allow the deduction accordingly in respect of the flat purchased by the assessee in the name of his wife instead of the flat purchased in his name. We hold & direct accordingly.

There is no dispute on the legal position that the investment made by two partners on their individual names in the notified RECL bonds is otherwise eligible investment for getting the exemption from the taxable capital gain u/s. 54EC of the Act as applicable to A.Y. 2008-09. As per facts on record, the assessee firm has been dissolved on 02-04-2008 and before the dissolution the professional assets i.e. hospital building and land were sold out. As per the well settled law, partnership is not a legal entity in strict sense and in all the movable and immovable assets which are held by the partnership, there is an interest of every partner though not specifically defined in terms of their shares. On perusal of the language used in Sec. 54EC, it is provided that the assessee has to make the investment within a period of six months in the notified securities after the date of transferred of capital asset. The words used in Sec. 54EC are – “the assessee has invested the whole or any part of capital gains in the long-term specified asset”. As we have held that the property which was sold out, it was property of the assessee firm and hence, the capital gain is taxable in the hands of the assessee firm. At the same time even though the bonds are purchased on the names of the two partners, it can be said that irrespective of the way, how the sale consideration was credited to the bank accounts of two partners, but the benefit of Sec. 54EC cannot be deprived to the assessee firm. As admittedly, even on the dissolution of the firm the assessee as a partner has a right to get back their capital as per the final valuation done on the date of dissolution or otherwise. In fact, for taking said view we get the support from the decision in the case of DIT (International Taxation) Vs. Mrs. Jennifer Bhide 252 CTR 444 (Kar). In the said case Sec. 54 as well as Sec. 54EC were before the Hon’ble High Court. The operative part of the finding of the High Court is as under:

“7. On careful reading of s. 54 as well as s. 54EC on which reliance is placed makes it clear that when capital gains arise from the transfer of long term capital asset to an assessee and the assessee has within the period of one year before or two years after the date on which the transfer took place purchase or has within the period of three years after the date of construction of residential house then instead of capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the provision made under the section which grants exemption from payment of capital gains as set out thereunder. Therefore, in the entire s. 54, the purchase to be made or the construction to be put up by the assessee, should be there in the name of the assessee, in not expressly stated. Similarly even in respect of s. 54EC, the assessee has at any time within a period of six months after the date of such transfer invested the whole or any part of the capital gains in the long-term specified asset then she would be entitled to the benefit mentioned in the said section. There also it is not expressly stated that the investment should be in the name of the assessee. Therefore, to attract s. 54 and s. 54EC of the Act, what is material is the investment of the sale consideration in acquiring the residential premises or constructing a residential premises or investing the amounts in bonds set out in s. 54EC. Once the sale consideration is invested in any of these manner the assessee would be entitled to the benefit conferred under this provision. In the absence of an express provision contained in these sections that the investment should be in the name of the assessee only any such interpretation were to be placed, it amounts to Court introducing the said word in the provision which is not there. It amounts Court legislating when the Parliament has deliberately not used those words in the said section. That is the view taken by the Hon’ble Madras High Court and Hon’ble Punjab & Haryana High Court and we respectfully agree with the view expressed in the aforesaid judgment.”

In the present case, there is another angle to look into. Admittedly the assessee firm has claimed the depreciation on the hospital building and hence, Sec. 50 is applicable. In terms of Sec. 50 whatever Capital Gain is worked out on the depreciable asset then the same is treated as Short Term Capital Gain. The next question before us is whether the assessee firm can claim the benefit of Sec. 54EC which is specified for the benefit of Long Term Capital Gain. This issue is decided in favour of the assessee by the Hon’ble High Court of Bombay in the case of CIT Vs. ACe Builders (P) Ltd. 281 ITR 210. We, accordingly, hold that even though the assessee firm has claimed the depreciation on the hospital building but benefit of Sec. 54EC can be given following the legal principles laid down by the Hon’ble Bombay High Court in the case of ACE Builders (P) Ltd. (supra). We, accordingly, direct the Assessing Officer to give the benefit of Sec. 54EC to the assessee firm subject to ceiling of Rs.50 Lacs as per proviso to Sec. 54EC of the Act.

 

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