High Court Of Kerala
P.P. Menon vs. CIT
Section 2(42A), 49(1)(iii)(b)
C.N. Ramachandran Nair & Harun-Ul-Rashid, JJ.
IT Appeal No. 148 of 2008
1st December, 2008
Counsel Appeared :
T.M. Sreedharan & V.P. Narayanan, for the Appellant : P.K.R. Menon & Jose Joseph, for the Respondent
JUDGMENT
C.N. ramachandran nair, J. :
The question raised in this appeal filed by the assessee is whether the assets sold by him viz., the hospital building and land on 18th April, 2001 is a short-term capital gain or a long-term capital gain as claimed by him. The hospital building and land was previously owned by a firm in which the appellant was a partner. The firm was dissolved on 15th April, 2001 and in the dissolution deed the entire assets including the hospital building and land were taken over by the assessee. We are told that the firm was subjected to levy of tax on capital gains only on the land sold and not for the hospital building. However there is no need for us to consider the liability of the firm for capital gains on the transfer of the hospital building and land to the assessee. The assessee sold the hospital building and the land for Rs. 40,12,000, after 3 days of acquiring the same for Rs. 14,82,222. According to the assessee/appellant, even though the asset was taken over by him only on 15th April, 2001 along with all other assets and liabilities of the firm and were sold along with the residential house and the hospital building on 18th April, 2001 the period of holding should be reckoned by including the period when the assessee was a co-owner of the building. If that is taken, the period of holding is more than 36 months and the capital gain is to be dealt with as “long-term capital gain”. Even though the assessee succeeded in his first appeal, on second appeal by the Revenue, the Tribunal reversed the order. This appeal is filed against the decision of the Tribunal.
2. We have heard counsel for the appellant. The counsel has relied on Expln. (b) to s. 2(42A) of the IT Act (hereinafter referred to as the IT Act) and contended that if the period of holding of the assets is more than 36 months, the capital gain is to be dealt with as “long-term capital gain”. The above section defines short-term capital asset as capital asset held by the assessee for not more than 36 months immediately preceding the date of its transfer/sale. Explanation 1(i)(b) of s. 2 (42A) of the IT Act provides certain exception to this position. It reads as follows :
“In the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-s. (1) of s. 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section.”
3. The relevant provision of s. 49(1)(iii)(b) reads as follows : “49. (1) Where the capital asset became the property of the assessee— (iii)(a) by succession, inheritance or devolution, or (b) on any distribution of assets on the dissolution of a firm, BOI, or other AOP, where such dissolution had taken place at any time before the 1st day of April, 1987. the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee as the case may be.” By virtue of the operation of s. 2(42A) r/w s. 49(1)(iii)(b) of the IT Act the previous owner of the hospital building was a partnership firm and the property was obtained by the assessee on the dissolution of the firm. However the benefit of the above section is available only if the dissolution of the firm had taken place at any time before 1st day of April, 1987. In this case the firm was dissolved on 15th April, 2001 and therefore the benefit of above sections is not available to the assessee. Therefore, the period of holding of the asset by the assessee in this case is only from the date of dissolution of the firm.
4. The next question to be considered is whether under the general law the property of the partnership later taken over by the assessee on the dissolution of the firm can be treated as the assessee’s asset for the reason that he was a partner of the said firm. Sec. 14 of the Indian Partnership Act, 1932 defines property of the firm as follows :
“Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.”
5. From the above it is clear that individual partners have no independent right over the property of the firm as long as the firm is in existence. Under s. 45(4) of the IT Act which is consistent with the provisions of the Partnership Act, capital gain arises on the dissolution of the firm and on distribution of assets. In fact the assessee himself conceded that on dissolution, the firm was also subjected to assessment of capital gains. Therefore, we hold that the assessee became the owner of the property only on taking over the property by him on the dissolution of the firm on 15th April, 2001. Since he sold the property within three days from acquiring it i.e. on 18th April, 2001 the property was treated rightly as a short-term capital asset. The Tribunal rightly held so. In the above view of the matter we answer the question raised by the appellant, in favour of the Revenue and against the appellant.
Consequently we dismiss this appeal.
[Citation : 325 ITR 122]
