P.P. Menon vs Commissioner of Income Tax

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 18-4-2001 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 15-4-2001 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 15-4-2001 along with all other assets and liabilities of the firm and were sold along with the residential house and the hospital building on 18-4-2001 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.

We have heard counsel for the appellant. The counsel has relied on Explanation (b) to Section 2(42A) of the Income Tax 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 (i)(b) of Section 2(42A) of the Income Tax 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-section (1) of Section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section.

The relevant provision of Section 49(1)(iii)(b) reads as follows:

Cost with reference to certain modes of acquisition.--(1) Where the capital asset became the property of the assessee--

(i) & (ii)**

(iii) (a) by succession, inheritance or devolution, or

(b) on any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1 st 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 Section 2(42A) read with Section 49(1)(iii)(b) of the Income Tax 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 sections 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 15-4-2001 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.

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. Section 14 of the Indian Partnership Act, 1932 defines property of the firm as follows :

The Property of the firm.--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.

From the above it is clear that the individual partners have no independent right over the property of the firm as long as the firm is in existence. u/s 45(4) of the Income Tax Act which is consistent with the provisions of the Partnership Act, Capital gains 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 15-4-2001. Since he sold the property within three days from acquiring it ie., on 18-4-2001, the property was treated rightly, as a short-term capital asset. The Appellate 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.