COMMISSIONER OF INCOME TAX Vs. KAMALA DEVI

JUDGEMENT

(1.) In compliance with the order of this Court, dt. 28th March, 1983, the Tribunal referred the following question for the opinion of this Court under s. 256(2) of the IT Act, 1961, hereinafter referred to as the "Act".

(2.) There was a partnership firm consisting of five partners, which purchased a property on 4th July, 1962 and on 14th June, 1973, the partners withdraw the property from the firm and held it as co-owners, and thereafter on 25th February, 1974 the five partners sold the property. The ITO assessed the capital gains arising from the property as short-term capital gains on the basis that it was sold in the year in which it was acquired by the partners from the firm. On appeal, the AAC also agreed with the conclusion arrived at by the ITO. On further appeal, the Tribunal found that in s. 2(42A) short-term capital gains means a capital asset held by an assessee for not more than 60 months immediately preceding the date of its transfer. Sec. 49(1)(iii)(b) referred to capital assets becoming the property of an assessee on distribution of assets on the dissolution of the firm. The Tribunal found that on the principles enunciated by the Supreme Court in the case of Malabar Fisheries Co. vs. CIT , conversion of joint property into separate property was only a matter of agreement and the individual partners were, therefore, the owners of the property from the time of purchase initially as partners of the firm and later as individuals. Therefore, it was found that the capital asset had been held by them for more than 60 months and the capital gains arising from the transfer could not, therefore, be assessed as short-term capital gains.

(3.) The learned standing counsel appearing for the Department submitted that there was no dissolution in the present case. One of the assets of the partnership firm was withdrawn by the partners and later on it was sold by them jointly. According to the learned standing counsel, as per the provisions of s. 14 of the Indian Partnership Act, the partnership firm is the owner of the property. Therefore, during the subsistence of the partnership firm, the partners cannot say that they are the owners of the properties held by the firm. Even according to the income-tax law, partnership has been considered as a separate entity and an assessable unit. Therefore, the partners, who are entitled to have the profits as per their profit sharing ratio, cannot claim to be the owner of any particular property, identifying the same as it belongs to a particular partner. Therefore, according to the learned standing counsel, the partners cannot be held to be the prior owners of the property sold by them after the said property was withdrawn from the partnership firm. Inasmuch as the property was purchased with the funds belonging to the firm, the firm alone is the owner of the property, over which the partners cannot claim their ownership during the subsistence of the partnership firm.