COMMISSIONER OF INCOME TAX Vs. M K CHANDRAKANTH

JUDGEMENT

(1.) THE respondents (hereinafter referred to as "the assessees") were partners in a firm manufacturing scented betel nut known as "Asoka", along with two other brothers. THE firm came into existence by an instrument of partnership dated May 11, 1973, and it is unnecessary to notice the changes that took place in the constitution of the firm subsequent to the formation of the partnership, but it is, however, necessary to notice the change in the composition of the partners on September 6, 1976, when a limited company under the name and style, "Asoka Betelnut Company Private Limited" was admitted as a partner along with the assessees with the result, the firm became reconstituted with four partners. THE firm was subsequently dissolved on March 31, 1977, by an instrument of dissolution dated April 11, 1977. Prior to the dissolution, an item of property known as Asoka Building which comprised 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 the property being 1/4th was Rs. 8 lakhs. As the company took over the factory building worth Rs. 20 lakhs, the company paid Rs. 4 lakhs to each of three assessees and each one of the assessee invested Rs. 4 lakhs in the approved securities slightly exceeding a sum of Rs. 4 lakhs and claimed exemption with reference to the investments made of Rs. 4 lakhs under Section 54A of the Income-tax Act, 1961, which was also granted. In so far as the residential house which was allotted to the assessees is concerned, one of the brothers sold his 1/3rd share in the residential property to a third party on December 1, 1978, and the third party became the joint owner of the property in the residential building and the remaining two brothers released their respective shares in the residential building in favour of a third party for consideration by document dated February 24, 1979. THEreafter, the assessees purchased a property in Coimbatore and the value of the purchase price of the property purchased for each brother came to Rs. 4 lakhs. THE assessees claimed exemption under Section 54 of the Act on the sale of the residential house on the score that capital gain was not exigible in respect of the residential house sold by them. THE Income-tax Officer, in the order of assessment passed by him, accepted the case of the assessees and granted the necessary exemption under Section 54(i) of the Act.

(2.) THE Commissioner of Income-tax, Coimbatore, in exercise of his revisional powers under Section 263 of the Act, held that the firm was the owner of the property and, hence, he held that one of the conditions prescribed in Section 54 of the Act, namely, that prior to the date of sale, the property should be owned by the assessees for a period of two years was not complied with. THE Commissioner of Income-tax was of the view that though the assessees might have resided in the property even prior to the date of dissolution of the firm, it was not sufficient to claim exemption under Section 54 of the Act as the assessees became the owners of the property on the date of dissolution of the firm, i.e., on April 11, 1977. He therefore held that the grant of exemption under Section 54 of the Act by the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue and set aside the order of the Income-tax Officer and directed the Income-tax Officer to redo the assessment in accordance with law.

(3.) WE have carefully considered the submissions made by counsel for the Revenue as well as counsel for the assessees. The question whether the assessees are entitled to exemption under Section 54 of the Act depends upon the proper interpretation of Section 54 of the Act. Section 54 of the Act, in so far as material for the purpose of the case, reads as under :