M.K. CHANDRAKANT v. INCOME TAX OFFICER
[Citation -1985-LL-0225-3]

Citation 1985-LL-0225-3
Appellant Name M.K. CHANDRAKANT
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 25/02/1985
Assessment Year 1979-80
Judgment View Judgment
Keyword Tags short-term capital asset • benefits of partnership • long-term capital gain • residential building • sale consideration • sale of property • dissolution deed • land appurtenant • notional income • purchase price • erstwhile firm • house property • new asset
Bot Summary: Kuppuraj showed the value of the released property at Rs. 3,30,000 and Ananthakumar showed the value of the released property at Rs. 3,30,000. The brothers had purchased jointly a property known as 'Hawarden Bungalow' in Coimbatore shortly thereafter and the value of purchase price of each brother came to about Rs. 4 lakhs. The objection of the CIT to the grant of exemption under s. 54 was that the house property in which the brothers were residing was not owned by them for more than two years, since the property was obtained only on 1st April, 1977 by them, when the firm, in which they were partners and which firm owned the property, was dissolved. Though the partners were staying in the said property earlier, as observed in the order of the CIT, he also did not consider that the requirement of their stay in the property for two years prior to its transfer was satisfied since they became owners only w.e.f. 1st April, 1977 and the stay prior to that period was not as owners since at the material time prior to 1st April, 1977, it was the firm which was the owner. Another objection which the CIT found was that the income from this property had not been offered for tax as income from house property. Each of the brothers was a partner in the erstwhile firm, which owned the property. The property became the property of each of the brothers in the manner prescribed under s. 49(1)(iii)(b) of the Act.


assessees, whose appeals for asst. yr. 1979-80 are dealt with by this consolidated order, are three brothers. eldest of them is M.K. Kuppuraj, second brother is M.K. Chandrakant and third brother is Ananthakumar. Together with three minors, who were admitted to benefits of partnership, three brothers by partnership deed dt. 14th April, 1970 were partners in business manufacturing scented betel nuts known as 'Asoka'. By subsequent deed dt. 13th April, 1972, there was change in inter se shares. further instrument of partnership was executed on 11th May, 1973 by which minors came to be excluded from benefits of partnership. By yet another partnership deed dt. 6th Sept., 1976, limited company 'Asoka Betelnut Co. (P) Ltd.' was taken as partner by three brothers. item of property known as 'Asoka Building', which comprised of land on which was situated residential house as well as factory premises, was purchased out of funds of firm on 25th Jan., 1973. factory building and land appurtenant thereto were utilised for purposes of business of firm and residential building and land appurtenant thereto were utilised for residential purposes of Kuppuraj, Chandrakant and Ananthakumar, who resided there jointly. firm in its assessment claimed depreciation based on 60 per cent of cost of property, i.e., relating to factory building and on remaining 40 per cent, which was used for residential purposes, no depreciation was claimed. income from portion used for residential purposes by three brothers was also not shown in hands of firm. On 11th April, 1977, dissolution deed was drawn up dissolving firm w.e.f. 31st March, 1977. assets were distributed amongst various partners. Subsequently, document stated to be one of partition was drawn up on 22nd Nov., 1978. In this document value of Rs. 32 lakhs was placed on entire properties of firm, i.e., factory building, residential building and land. company partner took over factory building and appurtenant land thereto, which was valued at Rs. 20 lakhs and other three partners, viz., brothers took over remaining property, viz., residential house and appurtenant land. In entire value of property of Rs. 32 lakhs, company's share being one-fourth was Rs. 8 lakhs. Since company took over property worth Rs. 20 lakhs, amount of Rs. 12 lakhs was paid to three brothers. share of each brother, thus, came to Rs. 4 lakhs and this amount of Rs. 4 lakhs was shown by each of brothers as sale to Asoka Betelnut Co. (P) Ltd. Each of brothers invested in approved securities amount slightly exceeding Rs. 4 lakhs. Thus, in respect of sale consideration of Rs. 4 lakhs, full exemption became available under s. 54E of IT Act, 1961 ('the Act'), in case of each of brothers. Chandrakant sold his one-third share in residential property by document No. 3962 of 1978, dt. 1st Dec., 1978 to Smt. Gualani. Consequent to this, Smt. Gualani became joint owner with remaining two brothers in property. remaining two brothers Kuppuraj and Ananthakumar in their turn released their interest in property to Smt. Gualani by document dt. 24th Feb., 1979. Chandrakant showed sale value of property to Smt. Gualani at Rs. 3,00,000 in his case. Kuppuraj showed value of released property at Rs. 3,30,000 and Ananthakumar showed value of released property at Rs. 3,30,000. brothers had purchased jointly property known as 'Hawarden Bungalow' in Coimbatore shortly thereafter and value of purchase price of each brother came to about Rs. 4 lakhs. Thus, under provisions of s. 54 of Act, they claimed that no capital gain was exigible in respect of residential household. We have elaborately set out facts which is reflected in cryptic manner in computation of long-term capital gain as made by each of brothers and exemption claimed by them while filing their returns. In case of each brothers, ITO while making assessment observed that capital gain was exempt under s. 54E. CIT on scrutiny of records, was of view that exemption from capital gains was wrongly allowed. However, CIT has elaborated only on exemption allowed in respect of fresh purchase of residential house. In order passed by CIT in revision there is no mention of any objection against grant of exemption of capital gains consequent to investment in approved securities. Eventually, CIT no doubt has set aside assessment in each case stating that ITO had not quantified how much is exemption under s. 54 and under s. 54E and, therefore, assessment should be redone giving exemption only under s. 54E and withdrawing exemption under s. 54. objection of CIT to grant of exemption under s. 54 was that house property in which brothers were residing was not owned by them for more than two years, since property was obtained only on 1st April, 1977 by them, when firm, in which they were partners and which firm owned property, was dissolved. Though partners were staying in said property earlier, as observed in order of CIT, he also did not consider that requirement of their stay in property for two years prior to its transfer was satisfied since they became owners only w.e.f. 1st April, 1977 and stay prior to that period was not as owners since at material time prior to 1st April, 1977, it was firm which was owner. Yet another objection which CIT found was that income from this property had not been offered for tax as income from house property. learned counsel appearing for appellants relied on language of provisions of s. 54. We set out below provisions as they stood at material time: " 54. Profit and sale of property used for residence. Where capital gain arises from transfer of capital asset to which provisions of s. 53 are not applicable, being buildings or lands appurtenant thereto income of which is chargeable under head 'Income from house property', which in two years immediately preceding date on which transfer took place, was being used by assessee or parent of his mainly for purposes of his own or parent's own residence, and assessee has within period of one year before or after that date purchased, or has within period of two years after that date constructed, house property for purposes of his own residence, then, instead of capital gain being charged to income-tax as income of previous year in which transfer took place, it shall be dealt with in accordance with following provisions of this section, that is to say, (i) if amount of capital gain is greater than cost of new asset, difference between amount of capital gain and cost of new assets shall be charged under s. 45 as income of previous year; and for purpose of computing in respect of new asset any capital gain arising from its transfer within period of three years of its purchase or construction, as case may be, cost shall be nil; or (ii) if amount of capital gain is equal to or less than cost of new asset, capital gain shall not be charged under s. 45; and for purpose of computing in respect of new asset any capital gain arising from its transfer within period of three years of its purchase or construction, as case may be, cost shall be reduced by amount of capital gain. " He submitted that exemption could be had where capital gains arose f r o m transfer of capital asset, which represented building or land appurtenant thereto, income of which was chargeable under head 'Income from house property'. There was further condition that preceding date of transfer for at least two years, property should have been used by assessee for his residence. According to learned counsel, condition that assessee should have been owner of asset also for period of two years for which he resided was not stipulated in section. In present case, on date of transfer, admittedly, each assessee was owner and income would have been assessable under head 'Income from house property'. Merely because no assessment was made, there was no bar to grant of exemption because all that section required was that income would have been chargeable from assets transferred under head 'Income from house property'. Certainly, income in present case would have been chargeable under head 'Income from house property'. He, therefore, submitted that exemption was rightly allowed. learned Departmental Representative, on other hand, submitted that section has to be read as whole and it was clear that requirement was that assessee should have been owner for period of two years at least prior to date of transfer apart from factum of residence for that period. learned Departmental Representative also relied on reasoning in order of CIT, which is common to all cases. We have considered rival submissions. Each of brothers was partner in erstwhile firm, which owned property. They got property consequent to dissolution of firm and distribution of assets. Therefore, property became property of each of brothers in manner prescribed under s. 49(1)(iii)(b) of Act. They obtained property on 1st April, 1977. From this date, no doubt, sale took place within period of less than two years. If this period subsequent to 1st April, 1977 is taken in isolation, asset would be short-term capital asset in their hands. But provisions of Expln. to s. 2(42A) of Act, which define 'short-term capital asset', states that in case of capital asset, which became property of assessee in circumstances mentioned in s. 49(1), then period for which asset was held by previous owner had also to be taken into consideration. asset having been purchased by firm in 1973, if such period of ownership by firm is also taken into consideration, as it has to be, asset was not short- term capital asset in hands of each of brothers. exemption under s. 54 is not available to short-term capital asset; but since asset is not short- term capital asset in hands of assessee as long as other conditions are satisfied, exemption under s. 54 would be available. At time of transfer each of assessees was owner of asset to extent stated. Since asset consisted of building with appurtenant land used for residence, notional income therefrom would be chargeable under head 'Income from house property' at time of transfer. first set of requirements of s. 54 are, therefore, fully satisfied. We now come to expression 'which in two years immediately preceding date on which transfer took place, was being used by assessee'. We are unable to agree with learned Departmental Representative that word 'which' would imply that asset should also have been owned for two years prior to date of transfer. plain reading of section does not warrant any such interpretation. We would also add that qualifying nature attributed to word 'which' in CIT vs. C. Jayalakshmi (1980) 18 CTR (Mad) 37: (1981) 132 ITR 82 (Mad.) relied on by learned Departmental Representative, does not help proposition sought to be canvassed. As far as user is concerned, even according to order of CIT and facts as found by us, admittedly, each of brothers was using building for purpose of residence even when it belonged to firm. Thus, prior to transfer by them, they were using building for purposes of their residence for period of more than two years. Because they were partners they stayed in their own right and ratio of case of Smt. Vijayalakshmi vs. CIT 1975 CTR (Kar) 84: (1975) 100 ITR 648 (Kar.), relied on by learned Departmental Representative, has no application. Hence, requirement of residence is fully satisfied. new acquisition has been made within stipulated period and that requirement is also satisfied. Therefore, capital gains from sale of residential house would be exempt under provisions of s. 54. We have already indicated how capital gains from property taken over by Asoka Betelnut Co. (P) Ltd. was exempt because of investment in approved securities under provisions of s. 54E. Therefore, ITO was not in error in exempting total capital gains in hands of each of assessees. Accordingly, order passed by CIT in each of assessees' case is set aside and assessment as made by ITO in each case is restored. learned counsel submitted before us that CIT was precluded from exercising his jurisdiction in cases of Chandrakant and Ananthakumar because in those two cases appeals had been filed to CIT (A) and though point of capital gains was not agitated, there was merger of order of ITO in appellate order because CIT (A) could have rectified assessments if he had considered allowance of exemption of capital gains to be erroneous since it was matter specifically considered by ITO. We do not pronounce on this in view that we have taken, viz., that on merits, order of ITO was not erroneous. result is, that appeals are allowed. *** M.K. CHANDRAKANT v. INCOME TAX OFFICER
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