Hari Om Maratha, Member (J)

1. This appeal of the Revenue, for assessment year 2007-08, is directed against the order of the Id. CIT(A)-VIII, Chennai, dated 4-1-2011. Briefly stated, the facts of the case are that a return of income was filed, for the assessment year 2007-08, on 18-9-2007 declaring an income of Rs. 43,36,780. The return was filed in ITR-3 (applicable to individuals/HUFs being partners in the firm and not carrying out business or profession under any partnership). In this return, the name of Jayant Kumar Sharma and also the name of M/s. South India Pulverizing Mills (the firm) were mentioned. The PAN was quoted as ABGFS5244R, which is assigned to the firm. This return accompanied statements of accounts in which the name of the firm has been mentioned. The date of formation of the firm being 1-4-1976 was also mentioned, but at the same time, the assessee, as individual, had computed Long-Term Capital Gains (LTCG) chargeable to tax at Rs. 43,36,779 and also enclosed a tax paid challan for Rs. 10 lakhs which was paid on 15-3-2007 in the Bank of Baroda in the name of the firm. At the same time, the exemption available under section 54EC was claimed and deducted. A certificate obtained in the name of Shri Jayant kumar Sharma was also enclosed with the statement. While computing capital gains, some expenditure supported by receipts obtained from advocates, brokers etc. which are in the name of Shri Jayant Kumar Sharma and some of them also in the name of the firm were enclosed. Property tax had also been paid in Madhavaram Municipality in the name of the firm. The case was scrutinized and during which certain defects in the filing of return of income were pointed out and certain particulars required for the completion of the assessment were also called for from the assessee. Meanwhile, a revised return was filed on 2-6-2009 in which NIL income was declared. A covering letter was filed alongwith this revised return stating the reasons for filing NIL return. In this letter, it has been claimed that the capital gain claimed in this case, is assessable in his individual hands and not in the hands of the firm. It was also mentioned that the assessee had already declared capital gains in the returns filed with the Business Range III. As per the statement of facts, the assessee was assessed to tax by ACIT and now by Dy. CIT, Business Range V, Chennai. The assessee had filed another revised return of income in the status of individual before the ACIT, Range III, Chennai. The assessee has claimed that the capital gain is assessable in the hands of the assessee as individual in the given facts and the circumstances of the case, which was duly explained and detailed vide reply dated 5-10-2009 and 26-10-2009. It is claimed that the assessee had also paid advance tax to the assessing officer having jurisdiction over the assessee in the individual capacity. It is claimed that there was a dissolution of the firm in the year 1992. A civil suit was filed by one of the partners before the Honble High Court of Judicature at Madras and the dispute was settled in the year 2006 and consequent thereto, a Release Deed was executed by one of the partners in favour of the remaining partners of the erstwhile firm (Refer pages 2 & 3 of the statement of facts filed before the Id. CIT(A), copies of which is enclosed on record.

2. After examining the claim of the assessee, the assessing officer has concluded that the capital gain arising in this case is to be assessed in the hands of the firm and not in the hands of Shri Jayant Kumar Sharma, as individual. The main reason for coming to the above conclusion is that perusal of the returns of income filed by the firm for assessment year 2000-01 the value of the building has been shown at Rs. 57,748 (after depreciation) and value of the land has been shown at Rs. 34,077. For assessment year 2004-05, the value of the building has been shown at Rs. 47,636 (after depreciation) and value of the land at Rs. 34,077 in the return filed by the firm. Apart from the above, acknowledgement for assessment year 2001-02 in the case of the firm, no statements are available, but a letter stating that the firm is running under loss for last several years and has no income for assessment years 2005-06 and 2006-07,which are available before the assessing officer, are also the reason for arriving at the conclusion by the assessing officer that the capital gain has to be assessed in the hands of the firm. On the contrary, as per Shri Jayant Kumar Sharma, the capital gains has to be treated in his hands as individual as per his letter dated 5-10-2009 because the property which was sold and which is the subject matter of capital gains was admittedly inherited and the sale deed has been executed by the legal heirs. After considering these issues, the assessing officer has made elaborate study and has finally confirmed that capital gains is assessable in the hands of the firm only because section 45(4) comes into play in the case of distribution of capital assets on the dissolution of the firm. It has been mentioned by the assessing officer that the firm came into existence somewhere in the year 1972 and the firm took over the assets of the individual business of Shri Jethalal Manekjee Sharma (J.M. Sharma) on his death on 29-8-1970. As per the copy of statement of accounts filed for assessment year 1972-73, the value of the building has been shown at Rs. 1,08,326 and the value of the land at Rs. 34,077. The firm has been claiming and getting depreciation on this asset. The assessing officer has mentioned that for claiming depreciation, the assessee needs to be owner of the asset. He has mentioned that when the firm has claimed depreciation, it infers that the firm was claiming itself to be owner of this asset. The assessing officer has further mentioned that in that case the legal heirs of Shri J.M. Sharma should have owned the assets in question, but why the firm was allowed to use the assets and claim depreciation and why this fact was not mentioned in the return of income of the firm. He has construed that after a lapse of long years it cannot now be claimed that bringing of such asset into the Balance Sheet of the firm has no meaning. He has further mentioned that the firm came into existence on 1-9-1970 and there have been changes in the constitution of the firm from time to time. The last Partnership Deed was drawn on 5.7.1976 between Shri Jayant Kumar Jethalal Sharma and Rajani Kumar Jethalal Sharma. Until the dispute arose, the firm was filing the return of income showing this asset in the hands of the firm itself and it was only on 11-8-2006 (relevant to assessment year 2007-08) a Deed of Dissolution was drawn which was supported by duly sworn affidavit of Shri Rajani Kumar Sharma declaring his willingness to retire from the firm and he received a sum of Rs. 70 lakhs in consideration of relinquishment of his right, title and share in the property of the firm. The assessing officer has correctly mentioned that when there are two partners in a firm and one of them retires, the firm is automatically dissolved.

3. It has also been mentioned by the assessing officer that the firm had obtained a certificate under section 230A from the Income-tax Department in the year 1990, to mortgage this very property in favour of one M/s. Senthil Financiers, Madras for Rs. 20 lakhs. This very fact suggests that the property belong to the firm. As per the property tax paid receipts, patta of the property stands in the name of the firm. He has further mentioned that the original return being belated and filed under section 139(4), the revised return under section 139(5) cannot be accepted and taken cognizance thereof. Therefore, he has ignored the revised return.

4. The assessing officer has mentioned that Shri Jayant Kumar Sharma and other legal heirs have executed a Deed of Sale in favour of the vendees and therefore, according to the assessee, this asset did not belong to the firm but to individuals. The vendees (buyers) have also confirmed this fact that the property was purchased from individuals and not from the firm. The assessee as individual had also approached the Dy. CIT, Range V, for direction u/s 144A, who, after hearing the assessee has confirmed the proposed action to assess the capital gains in the hands of the firm itself. The assessing officer has rejected the fact of transfer of the asset by Shri Jayant Kumar Sharma and other legal heirs by explaining it away that the observation that much importance cannot be attached to this fact because the buyer may have desired to ensure that the legal heirs and others claiming through him should also execute the Deed of Sale. Therefore, he has treated the other legal heirs as only the confirming parties. As such, the capital gain has been assessed in the hands of the firm and not in the hands of the individual.

5. The Id. CIT(A) has, on the contrary, accepted the version of the assessee as individual and has allowed the claim on the premise that the capital gain can be assessed in the hands of the real owner of the asset and not in the hands of the firm, who never owned the impugned assets as well as the partners of the firm never brought the same in the accounts of the firm as their share capital. He has chosen to ignore the other attaining circumstances and reasons treated by the assessing officer of much importance to decide the issue. He has ignored the claim of depreciation on the building which is structured on a piece of this land on the reasoning that after accepting the explanation of the assessee that the mill was being used by the firm and therefore, depreciation was correctly claimed thereon. He has accepted the contention of the assessee as individual that depreciation has been claimed only on the building and the value of the land has been shown to the extent of the land on which the building of mill is standing. Therefore, he has ignored the returns of income and the statements accompanying therewith showing the building and portion of the land in the list of assets of the firm. As far as the Release Deed dated 4-9-2006 which was executed by Shri Rajani Kumar Jethalal Sharma in favour of Shri Jayant Kumar Jethalal Sharma, a copy of which is enclosed at pages 121 to 142 of the paper book, whereby Shri Jayant Kumar Jethalal Sharma and Shri Rajani Kumar Jethalal Sharma became the sole owners of the Schedule A property. Regarding the Dissolution Deed dated 24-6-1977 (enclosed at pages 63 to 74 of the paper book) executed between Shri Jayant Kumar Jethalal and Shri Rajani Kumar Jethalal, Chandrakant Jethalal and Shri Suryakant Jethalal, who were partners of the firm, it has been observed that Shri Chandrakant Jethalal and Shri Suryakant Jethalal relinquished their shares in the firm in favour of continuing partners viz. Shri Jayant Kumar Jethalal and Shri Rajani Kumar Jethalal. Shri Jayant Kumar Jethalal and Rajani Kumar Jethalal are the same persons whose names have been mentioned hereinabove as Jayant Kumar Sharma and Shri Rajani Kumar Shama. In this Dissolution Deed, the party of the second part has expressed their desire to retire from the partnership with effect from 30-6-1976, releasing and relinquishing all their rights, interests and claims in respect of the partnership business and its assets, agency benefits and all other trade rights, land in favour of the Continuing Partners. In consideration of the same, Rs. 1,67,682-82 and Rs. 1,76,657-38 were payable to Shri J. Chandrakant (HUF) and J. Suryakant, respectively. By this deed, the retiring partners had released relinquishment of their rights, interests, claim in respect of the partnership business and its assets, quota rights, licences, sanctions, permits, book debts, stock-in-trade, furnitures, fixtures, pending contracts, tenancy rights, land and building of the business premises and all other trade rights in favour of the Continuing Partners. The Id. CIT(A) has considered these facts and has ignored them finding them to be irrelevant for deciding the impugned issue.

6. Regarding obtaining certificate under section 230A from the Income-tax Department to mortgage this very property in favour of one M/s. Senthil Financiers, Madras, for Rs. 20 lakhs, is concerned, it has been mentioned that this was never acted upon.

7. Regarding property tax, it was explained that the firm had paid four godown rent for the superstructure and not for the land.

8. Regarding disclosing this property in the Balance Sheet of the firm and claiming depreciation on the superstructure and also payment of property tax to the godown used by the firm were not found to be detriment factors to decide the ownership of the land. With these reasonings, the Id. CIT(A) has held that the capital gains has to be assessed in the hands of individual and not in the hands of the firm.

9. Before us, both the parties took the same stand in respect of the following grounds raised before us:

1. The order of the Commissioner of Income Tax (Appeals) is opposed to the facts and circumstances of the case.

2. The Id. CIT(A) erred in directing the assessing officer to assess the capital gain in the hands of the individual assessee Sri Jayant Kumar Sharma and not in the hands of the assessee firm.

2.1 The Id. CIT(A) failed to appreciate that the assessee firm voluntarily admitted the capital gain on sale of property in the original return of income filed.

2.2 The Id. CIT(A) ought to have seen that as per the balance sheets filed alongwith the returns for a number of years the property belonged to the assessee firm and the assessee firm claimed depreciation on the building and machinery situated in the property.

2.3 The Id. CIT(A) ought to have appreciated that the since the assessee did not file the original return of income within the due date specified in section 139(1) the revised return need not be taken cognizance of. It is submitted that this view has been held by the Honble Supreme Court in the case of Jagdish Chandra Sinha (: 86 Taxman 122) .

2.4 The Id. CIT(A) ought to have appreciated that the purview of section 139(5) is limited to rectifying any errors or omissions in the original return of income.

2.5 The Id. CIT(A) erred in deciding that the capital gain transaction is taxable in the hands of the individual not appreciating the fact that the provisions of section 45(4) are applicable to the transaction.

2. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Commissioner of Income Tax (Appeals) may be set aside and that of assessing officer restored.

10. We have considered the rival submissions and have perused the entire material available on record. In effect, main issue regarding the hands in which capital gains has to be assessed -whether in the hands of the individual or in the hands of the firm is involved in this appeal. The Id. DR, while arguing the case, has mostly relied on the reasons given by the assessing officer to conclude that capital gains has to be assessed in the hands of the firm. He has sternly argued that in the Balance Sheets filed alongwith the returns of the firm, for a number of years, this property has been shown as belonging to the assessee-firm and depreciation on the building and machinery has also been claimed. He has supported the rejection of the revised return as the original return was not filed under section 139(1), but under section 139(4) of the Act.

11. Per contra, the Id. AR has clamoured that the reasoning given by the learned Commissioner (Appeals) is correct and has to be upheld. He has also relied on his paper book. The Id. AR has placed specific reliance on the decision of Honble Madras High Court rendered in the case of CIT v. Dadha & Co., : (1983) 142 ITR 792 (Mad)/219, a copy of which has been placed on record for our perusal. After going through all these records in the light of oral submissions of the parties, we have found that at no point of time, the land which was sold in this case was owned by the firm but it was always owned by the individual. On the death of Shri Jethal Manekjee Sharma, the property devolved on his wife, sons and daughters totalling to 18 in number. The following uncontroverted submission (incorporated from the Id. CIT(A)s order) is very relevant in this connection:

The property comprising 3.62 acres situate in Kalpalayam, Madhavaram Village, Thiruvallore District, Chennai- 600 099 forms part a total extent of 4.95 acres of land. The entire extant of 4.95 acres, of which the land in question forms part of, was purchased by Late Mr. Jethal Manekjee Sharma (hereinafter referred to as "J.M. Sharma") under six documents of sale executed by six difference persons. The patta, Chitta, and Adangal for the aforesaid property stood transferred in the name of J.M. Sharma. J.M. Sharma died on the 29-8-1970 leaving him surviving wife, Yashodha Bai, daughters Mrs. Sarada, Mrs. Vidya and Pushpa and sons, J. Chandrakant, J. Suryakant, J. Jayantkumar and J. Rajanikumar (Rajanikant). On the 1-9-1970, a partnership was constituted between Chandrakant, Suryakant Jayakumar and Rajanikumar to carry on the business carried on by J.M. Sharma during his lifetime, in partnership under the name find style of "South India Pulverising Mills". The partnership Deed of 1970 recites that the partners who are the sons of Late J.M. Sharma have taken over this business carried on by their father and they have by a separate arrangement divided the capital standing to his credit on the date of demise, that they are desirous of carrying on the said business in partnership, that they have invested capital in the said business and proposed to carry on this business in partnership. The partnership Deed further states that the parties have invested their separate capital with a view carryon the said business. The partnership deed does not recite that the immovable property in question or any portion thereof which have devolved on the four partners as the sons of J.M. Sharma has been brought in as their contribution of capital. The partnership Deed does not, thus, evidence that the above immovable property was brought into the firm by the partners.

In any event, since the property in question belongs not merely to the four partners but also to the other legal heirs of Late J.M. Sharma as on the date of constitution of the partnership, it would not have been possible for the partners to bring in the aforesaid land, either in whole or in part, into the partnership or constitute the same, either in whole or in part, a property of the firm. While this is so, it. appears that in the balance sheet of the firm the above property has been disclosed as an asset of the firm. The mere disclosure of the above property in the balance sheet of the firm, as an asset of the firm, would not vest the property in the firm.

The above position is strengthened by the subsequent developments which are dealt with hereinafter.

While J.M. Sharma died on the 29-8-1970 and the firm was constituted on the 1-9-1970, there was reconstitution of the firm in 1976. In the meanwhile, on the 25-6-1972 Mrs. Yashodabai, wife of Late J.M. Sharma and the Three daughters of J.M. Sharma executed a Deed of release in respect of their interests in the aforesaid property in favour of the four sons of J.M. Sharma.

Two of the partners retired from the partnership with effect from 30-6-1976 and consequently under a Deed of partnership dated 5-7-1976, Jayantkumar and Rajanikumar took over the partnership with all its assets and liabilities. While this Partnership Deed recites that the business has been taken over as going concern, there is nothing to indicate in the Partnership Deed that the property in question formed part of assets of the firm. While the partnership Deed between Jayantkumar and Rajanikumar was executed on the 5-7-1976, a Deed of Dissolution was executed on the 24-6-1977 which records the retirement of the two partners, Chandrakant and Suryakant with effect from 13-6-1976. Though the Deed of Dissolution was executed subsequent to the execution of the Partnership Deed by the two partners retired and the remaining two partner, Jayantkumar and Rajanikumar took over the business of the firm as a going concern. Even in the deed of Dissolution dated 24-6-1977 there is no reference to the aforesaid immovable property, except a casual reference to the retiring partners releasing and relinquishing all their rights, and interests in the partnership business premises. This appears to be a general statement without any specific reference to the specified property.

On 21-4-1993 Mr. Rajanikumar Sharma sent Legal notice through his advocates N.S. Vardachari and N.V. Vasudevan to the appellant Mr. Jayantkumar Sharma for dissolution of firm M/s. South India Pulvarising Mills and asked to submit accounts of the firm. Further the said Mr. Rajanikumar Sharma field suit against the appellant Mr. Jayantkumar Sharma in the Madras High Court vide Ref: O.Q.No.317/ 93, Application No. 2232/93 in C.S.No.476/93. The said suit pending till 2006. The firm lost the status from the date 21-4-1993 and thereafter run under individual status.

On the 4-9-2006 Rajanikumar Sharma executed a Deed of Release in favour of Jayantkumar where by he has released, in consideration of a sum of Rs. 70 Lakhs, his share in the property comprising 4.95 acres. The property is detailed in schedule "D" as 5096 share therein.

Subsequently, a Deed of absolute sales executed in respect of the property in question on the 4-9-2006. The Deed is executed by Chandrakant, Jayantkumar ant the legal representatives of Suryakant. The Deed recites that Chandrakant and the legal representatives of Suryakant have been impleased by way abundant caution. This Deed also refers to the Deed of Release executed by Rajanikumar in favour of Jayantkumar. There is a recitation in the above deed that the property devolved on the legal heirs of late J.M. Sharma and that the wife and daughters have released their rights in the property in favour of three sons. There is no recitation in the aforesaid deed that the property had been converted into a firms property at any point of time.

To sum up, the various documents, some of which are registered documents, point to the following facts:

I. The property was originally acquired by J.M. Sharma in his individual capacity.

II. The Business of South India Pulverising Mills was, carried on by J.M. Sharma as his proprietary business.

III. On the death of J.M. Sharma, his estate including the above property devolved on the legal hairs consisting of his wife, sons and daughters.

IV. A partnership was constituted subsequent to the death of J.M. Sharma whereby four sons only became partners.

V. At that point of time, it would not have been possible for the four sons to bring the above property into the firm, in so far as there were other owners to the property.

VI. The Partnership Deed does not state anywhere that the property either in full or any interest therein was brought into the firm by partner.

VII. The mere disclosure of the property in the balance sheet of the firm would not be sufficient to convert the separate property into firms property, particularly since there were other co-owners who are not in the partnership.

VIII. It was only in 1972 subsequent to the constitution of the firm that the Release Deed was executed by the wife and daughters in favour of the four sons.

IX. Even the Deed Release does not refer to the immovable property or any portion thereof or interest therein, having been brought in as the firms property by the partners.

X. In 1976 two of the partners retired from the partnership and neither the Deed of Dissolution nor the subsequent Partnership Deed mentions the aforesaid property or the interests of the partners therein, having been brought into the partnership as firms property.

XI. A Deed of Release was executed by Rajanikumar in favour of Jayantkumar which also does not refer to the property being held as the firms property.

XII. A Deed of sale was executed on the 4th September, where Chandrakant and the Legal representatives of Suryakant have been specifically brought into confirm that they have no interest in the property. This necessarily assumes that the parties were aware of the position that in the absence of a Deed of Release executed, by them earlier they continue to have interest in the property and consequently it was necessary to bring them as vendors in the Sale Deed.

The conduct of the parties in the above circumstances clearly shows that they intended to retain the property as a family Property, subject to the various Release deeds executed by the legal heirs of J.M. Sharma. Notwithstanding that the firm disclosed the property in its balance sheet, the title continued to vest in the legal heirs of J.M. Sharma who alone had the ownership over the property. Consequently, the property continued to remain the property of the legal heirs of J.M. Sharma, subject to the release by some of them and was never the property of the firm.

12. Accordingly, we hold that the piece of land measuring 4.95 acres is owned by assessee (individual). Since the firm used the superstructure on this land for its business purposes, it might have claimed depreciation and that does not mean that the asset is owned by the firm. Making and allowance of a wrong claim cannot alter the ownership of a property or asset. It is true that the certificate under section 230A was obtained in the name of the firm. But, it is also an undeniable fact that the mortgage deed was not registered and was not executed. The firm did not pay the property tax, it paid only the godown rent for the superstructure and did not pay land tax. We epilogue that mere disclosure of the property in the Balance Sheet of the firm and claiming depreciation on the superstructure and the payment of property tax (rent) for the godowns used by the assessee-firm are not determinant factors for the ownership of the property. Even if depreciation was wrongly claimed by the firm, this fact cannot override and take away the ownership rights of the assessee as individual, which are well evident from the record. The perusal of the records especially the partnership deed, dated 1-9-1970, reveals that the four partners of the firm, namely, S/Shri Chandrakant Jethalal, Suryakant Jethalal, Jayantkumar Jethalal and Rajanikumar Jethalal had contributed amounts of Rs. 60,000 and Rs. 15,000 each towards capital but land was not contributed by them. The Partnership-Deed dated 5-7-1976, reveals that Shri Jayantkumar Jethalal Sharma and Shri Rajanikumar Jethalal Sharma, both sons of late Shri Jethalal Manekjee Sharma, continued to be the partners of the firm; and Shri Chandrakant and Suryakant both retired. There is one more Release Deed by Shri Rajanikumar in favour of Jayantkumar Jethalal dated 4-9-2006 for a consideration of Rs. 70 lakhs being his 50% undivided share and the title over the property which can be depicted as under:

Schedule A

All that piece and parcel of land property situated at Kalpalayam Hamlet of Madhavaram admeasuring 4.95 acres or thereabouts comprised in S. Nos. 1448/ 1,2,3,& 4 and 1449/4B, as per patta S. Nos. 1448/1, 1148/2A, 3B, 4B1 and 4B2 and 1449/4B2 of Madhavaram Village.

9. With the above process, the appellant is trying to say that the partnership firm become defunct and the appellant is the absolute owner of the property in his individual capacity as legal heirs and not the land were owned by the firm as held by the learned AO and another release deed dated 25-6-1972 executed by

(1) Yashodabai, W/o. Jethalal Manekjee Sharma

(2) Smt. Sarada, W/o. Shri Ratilal Dave

(3) Smt. Vidya, W/o. Sri Jagadishchandra N. Bhatt

(4) Smt. Pushpa, W/o. Sri Harihar Dave.

For a consideration of Rs. 33,160 to relinquish the right over the Schedule property A.

The Sale Deed Document No. 7434/06 for 1.33 acres executed on 4-9-2006 by the same persons as above and 4 other confirming parties in favour of Shri P. Tarachand Bhandari, S/o. Mr. Pratapmal Bhandari by the following legal heirs of late Shri Jethalal Manekjee Sharma.

1. Mr. Chandrakant Jethalal

2. Mr. Jayantkumar Jethalal

3. Mrs. Hansa

4. Mrs. Shilpa

5. Mr. Rajiv Dave

The Sale Deed Document No. 7433/06 for 3.62 acres executed on 4-9-2006 in favour of M/s. Vardhaman Construction & Investments represented by its partner Mr.Mahesh Kumar Bhandari, S/o Shri P. Tarachand Bhandari.

13. Therefore, it becomes amply clear, from the above, that the land was sold by the individual and not by the firm and Shri Jayant Kumar Sharma was the owner of the property and all other persons were legal heirs of late Shri Jethalal Manekjee Sharma. We also confirm the following regarding the averments made in Dissolution Deed (copy placed at pages 63 to 74 of the paper book) and Release Deed dated 4-9-2006. The assessee, as individual, has already paid advance tax of Rs. 10 lakhs which is evinced from the copy of bank challan placed on record. The cumulative effect of these evidence(s) tends to tilt in favour of the assessee. The assessee has invested Rs. 50 lakhs in REC Bond and for the balance of Rs. 43,44,779 advance tax has been paid. Accordingly, the capital gain has to be assessed in the hands of the individual Shri Jayantkumar Sharma. We, therefore, confirm the finding of the Id. CIT(A). We also draw support from the decision of Honble Madras High Court rendered in the case of Dadha & Co. (supra), the head note of which reads as under:

Capital gains - Transfer by book entries - Assessee-firm had purchased two properties income from which being assessed in the hands of the firm till assessment year 1964-65 -Firm removing the properties from the partnership assets and showing them as individual properties of the partners by means of book entries for the accounting year ended, 4-11- 1964 - income from properties assessed in the partners hands subsequently - Property sold to third party on 15-10-1970 -Registered document is necessary for converting immovable property of the firm in favour of partners - Common properties cannot be possessed and enjoyed in severalty unless there is a document in writing -Book entries do not make any conversion known to law.

Firm - assessment - House property of firm shown as individual property of partners by passing book entries -Capital gains on transfer of such property - Assessable in the hands of firm and not partners as there could be no valid transfer to partners in the absence of registered deed.

14. In so far as the ratio of above Honble Jurisdictional High Courts decision is concerned, it unequivocally declares that any property/asset cannot be transferred from a firm to its partners by making took entries and the Sale Deed has to be given prominence. In that case, the property was purchased by the firm and allegedly transferred by making book entries in the name of the individual (partner). In the given case, the property was inherited by Jethalals/ Sharmas which was never brought as their share capital in the firm but it was simply recorded in the books as firms property. When we apply the ratio of the above decision, it becomes clear that the partners also cannot make owner of this property/asset by simply passing book entries. The ratio of the above decision is loud and dear that when a property stands in the name of either firm or partners, it cannot be transferred by book entries vice versa.

15. To further elaborate the point, let us examine as to what constitute the property of a firm. Section 14 of the Indian Partnership Act, 1932, recognizes that, subject to contract between the partners, the property of the firm would include all the property and rights and interests in property originally brought into the stock of the firm or acquired by purchase or otherwise, by the firm or for the purpose of, or in the course of business of, the firm and includes the goodwill of the business of the firm. It further provides that unless the contrary intention appears, property and rights in property acquired with money belonging to the firm are deemed to have been acquired by the firm. Sections 5,6 and 14 give a definite idea about the factum of the existence of the firm and the determination of what is the property of the firm. The two methods by which property can be brought into the firm are :

(i) The rights and interests in property could be brought into the stock of the firm by partners at the time of formation of the firm.

(ii) Subsequent acquisition, by purchase or otherwise, in the course of the business of the firm for the purpose of bringing the separate property of a partner into the stock of the firm.

16. The expression property of the firm refers to partnership property, partnership assets, joint stock, common stock or joint estate denoting all property rights and interests to which the firm i.e. all the partners as such, may be said to be entitled and in this context the assets of a firm may illustratively include benefit of a contract, benefit of lease or renewal of a lease, benefit of licence or quota, lands and buildings, etc.

17. It may be noted that the words used in section 14 are subject to contract between the partners which clearly establishes that the definition of the property given in the section hold good only in the absence of contract to the contrary between the partners.

18. When one talks of the firms property or firms assets, all that is meant is property or assets in which all partners have a joint or common interest (Malabar Fisheries Co. v. CIT: (1979) 120 ITR 49 /(SC)). It is not necessary that every partnership for the purpose of its business should own and utilize its own partnership property only. It can utilize property owned by others for the purposes of its business. It would become the property of the partnership only if there is an agreement that the property under the agreement of partnership to be treated as the partnership property. Property belonging to the partners, or to one of them, does not become property of the firm merely by being used for the purpose of the business. The partnership property belongs to all the partners constituting the firm. The Honble Supreme Court in the case of Arjun Kanoji Tankar v. Sataram Kanoji Tankar : (1969) 3 SCC 555 (page 561), has held that the property belonging to a person, in the absence of an agreement to the contrary, does not, on the person entering into a partnership with others, become the property of the partnership merely because it is used for the business of the partnership. It will become property of the partnership only if there is an agreement express or implied that the property was, under the agreement of partnership, to be treated as the property of the partnership. The court rejected the contention that whenever there is a partnership and the assets which originally belonged to one of the partners are used for the purposes of the partnership, they must be presumed to have become partnership assets. It held that there is no rule that whatever is brought by a partner in the partnership and is continued to be used by the members is presumed to have become the property of the partnership. Any right which a partner has over any property, other than the partnership property, would remain as his individual asset. The mere fact that the particular person has chosen to include himself as a partner of a firm will not result in incorporation of all his individual properties as the assets of the partnership. There is no rule that whatever is brought by a partner in the partnership, and is continued to be used by the members is presumed to have become the property of the partnership. It will become so only if the partners show an intention to make it so, as where the owner of a mill agreed to carry on the manufacture in partnership with others and was credited in the accounts of the firm with the value of the mill and plant as his capital. In that case, both the mill and any subsequent additions to the site and plant were the firms property, and any increased value obtained for them on a sale of the business was divisible as partnership profits.

19. The partner who brings in his personal asset into the capital of the partnership firm as his contribution to its capital, he reduces his exclusive right in the asset to the shared rights in it with other partners of the firm. While he does not lose his rights in the asset altogether, what he enjoys now is an abridged right which cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital. When a property is made over to a partnership firm, there is no sale (CIT v. Janab N. Hyath Batcha Sahib : (1969) 72ITR 528 (Mad.), and CIT v. Abdul Khader Motor & Lorry Service : (1978) 112 ITR 360 (Mad.)- The capital contribution by the partner to the assets of partnership firm at an appreciated value. There is no capital gains in his hands liable to income under section 45 of the Act because the consideration received by the partner on transfer of his shares to the partnership firm does not fall within section 48. It is true that it is the intention of the partners that results into throwing their individual assets into the pool of partnership business and converting them into partnership assets. Where A who carried on business as a photographer on premises which he held on lease, invited B to join him as partner, the only agreement expressly made being that profits should be shared equally, it was held that the lease, the furniture, and the equipment of the studio did not form part of the partnership property. Likewise, it is trite that there is no transfer of property in case where there is a dissolution of partnership or a partner retires and obtains in lieu of his interest in the firm, assets of the firm. However, where the property is transferred to one of die partners during the subsistence of the partnership, it amounts to a transfer.

20. When we apply the above explanation to the given case, it becomes amply clear that this property was not contributed by any of the partner(s) as his/their capital at the time of the creation of the partnership and simply the building and the land belonging to one of the partners was utilized for firms business, it would not become the property/asset of the firm. The mere fact that when the property was originally acquired by Shri Jethalal Manekjee Sharma (J.M. Sharma) in his individual capacity and when he carried on the business as his proprietary business, on his death, his estate including the property in question devolved on his legal heirs consisting of his wife, sons and daughters. The partnership was constituted subsequent to the death of Shri J.M. Sharma whereby four sons only became its partners. It implies from that at that point of time, it was not possible for the four sons to bring the above property into the firm as there were other co-owners of the property. The Partnership Deed does not state anywhere that the property either in full or any interest therein was brought into the firm by the partner(s). It was only in the year 1972, subsequent to the constitution of the firm, that the Release Deed was executed by the wife and daughters in favour of four sons. Even this deed does not refer to the immovable property or any portion thereof or interest therein having been brought in as the firms property by the partners. Again, in the year 1976, two of the partners retired from the partnership and the Deed of Dissolution or the subsequent Partnership Deed do not mention that this property or any interest therein has been brought into the partnership as firms property. A Release Deed was executed by Shri Rajanikumar J. Sharma in favour of Shri Jayant Kumar J. Sharma and that too does not speak of this property having been held as the firms property. A Sale Deed was executed on 4-9-2006, where Shri Chandrakant Jethalal and the legal representatives of Suryakant Jethalal have been specifically brought into the firm that that have no interest in the property. This implies that the parties were aware of the position in the absence of a Deed of Release executed, by them earlier and they continued to have interests in the property and consequently, it was necessary to bring them as vendors in the Sale Deed. Thus, the conduct of the parties throughout in this case in the given facts and the circumstances, clearly shows that they intend to retain the property as a family property subject to the various Release Deeds executed by the legal heirs of Shri J.M. Sharma.

21. As we have already mentioned disclosing the property by the firm in its Balance Sheet would not change the title which vested in the legal heirs of late Shri J.M. Sharma, who alone had the ownership over the property. Thus, the property continued to remain the property of the legal heirs of late Shri J.M. Sharma, subject, however, to the Release Deed by some of them and was never the property of the firm.

22. As we have already discussed the use of the property to carry on the business of the firm by raising loan or using the structure standing thereon by the firm, claiming depreciation thereon and the other small evidences which the assessing officer has mentioned and we have discussed in the former part of the order, would not either expressly or impliedly tantamount to throwing of this property by the partner in the pool of the partnership asset. Accordingly, the decision of the Honble Madras High Court rendered in the case of Dadha & Co. (supra) squarely applies to the facts of this case apart from what we have discussed above. In any case no capital gains would arise in the hands of the firm.

23. Moreover, before parting, we may mention that the interest of the Revenue are taken care of by the provisions of sections 188A and 189 of the Act whereunder joint and several liability of partners for tax payable by the firm has been dealt with.

24. Accordingly, we dismiss the appeal of the Revenue.

N.S. Saini, Member (A)

25. Despite best persuasion of myself, I am not able to agree with the finding and conclusion as drawn by the Id. Judicial Member and I write my order as under:

26. The undisputed facts of the instant case are that the property in question was purchased by Late Mr. Jethalal M. Sharma and was used for his proprietary business styled South India Pulverising Mills. On the death of said Mr. Jethalal M. Sharma on 29-8-1970 his estate were inherited by all his legal successors, i.e., his wife, his four sons and three daughters. The proprietary business of Mr. Jethalal M. Sharma was continued by his four sons, viz. Mr. Chandrakant J. Sharma, Mr. Suryakant J. Sharma, Mr. Jayantkumar J. Sharma and Mr. Rajanikumar J. Sharma by forming a partnership firm. The further fact which is not in dispute is that in the year 1972, wife of Late Jethalal M. Sharma and daughters of Late Jethalal M. Sharma released their rights over the property in question in favour of aforesaid four sons. Thus, the aforesaid four sons also became the absolute owner of the aforesaid property in question in the year 1972, who were running the business of South India Pulverising Mills in partnership. The property in question was all along utilized in the course of and for the purposes of the business of the said partnership firm. It is also an admitted fact that the property in question was declared as asset of the firm in the accounts of the said partnership firm by the aforesaid partners and even depreciation in respect of the building comprised in the said property was claimed in accounts of the said partnership firm by the said partners year after year.

27. On the above undisputed facts, the short question which requires our adjudication is that the property in question was the property of the partnership firm M/s. South India Pulverising Mills before 4-9-2006 or not.

28. I fully agree with the proposition of law stated by the learned Judicial Member in para no. 19 of his order that (i) Property belonging to the partner of a firm in his individual capacity does not become the property of the partnership firm merely because of the utilization of such property in the business of the partnership firm; (ii) It will become property of the partnership firm only if there is an agreement, expressed or implied, that the property was, under the agreement of the partnership, to be treated as property of the partnership.

29. In the instant case, Revenue has not brought on record any agreement whereby the partners had expressly agreed to treat the property in question as the property of the partnership. Thus, in the instant case, by taking into consideration the totality of all circumstances including the conduct of the partners of the partnership firm, it has be seen as to whether there was an implied agreement by the partners to treat the property in question as property of the partnership firm.

30. To decipher the same, I have carefully gone through the Paper Book filed in the instant appeal. I find that at page Nos. 121 to 142 of the Paper Book is the Release Deed dated 4-9-2006 executed by Shri Rajanikumar J. Sharma in favour of Shri Jayantkumar J. Sharma which states at page 5 as under:

Whereas, two of the sons of the deceased Mr. Jethalal Manakjee Sharma i.e. Mr. Suryakant Jethalal and Shri Chandrakanth. Mr. Jethalal relinquished their rights in respect of the above said property in favour of their brothers. Mr. Jayanthkumar J. Sharma and Mr. Rajanikumar J. Sharma, namely, the RELEASOR and the RELEASEEE herein by way of Dissolution Deed dated 24-6-1977 and thereby Mr. Jayanthkumar J. Sharma and Mr. Rajanikumar Sharma became the sole owners of the Schedule A property.

31. At page Nos. 63 to 74 of the Paper Book is the copy of Deed of Dissolution dated 24-6-1977 executed by Shri Jayanth Kumar Jethalal, Shri Rajani kumar Jethalal, Shri Chandrakant Jethalal and Shri Suryakant Jethalal who were partners of the assessee firm. The said deed records the terms of dissolution of partnership business carried on by them shows that Shri Chandrakant Jethalal and Shri Suryakant Jethalal relinquished their shares in the assessee firm in favour of the continuing partners, namely, Shri Jayanth Kumar Jethalal and Shri Rajani Kumar Jethalal. The said dissolution deed at page 1 para 2 reads as under:

WHEREAS the parties hereto have been carrying on business in partnership under the name and style of SOUTH INDIA PULVERISING MILLS at Kalpalayam, Sembiam, Red Hills Road, Madras-49, under a deed of partnership executed by them on 1-9-1970, AND WHEREAS the party of the Second part here to have expressed their desire to retire from the partnership with effect from 30-6-1976, releasing and relinquishing oil their rights, interests and claims in respect of the partnership business and its assets, agency benefits and all other trade rights, land, in favour of the Continuing Partners.

32. Again, in this same deed of dissolution of partners at page 3 para 3, it has been stated as under:

3. That in consideration of the following sums found payable to the Retiring partners on the date of dissolution viz.,

Rs. 1,67,682-82 payable to J. Chandrakant (HUF)

Rs. 1,76,657-38 payable to J. Suryakant

and the Continuing Partners undertakes to repay the same to the first retiring partner Shri. Chandrakant (HUF) within three years and for the second retiring partner, as and when demanded by him, the Retiring Partners acknowledges, releases and relinquishes all their rights, interests, claims in respect of the partnership business of "SOUTH INDIA PULVERISING MILLS" and its assets, goodwill, quota rights, licences, sanctions, permits, book-debts, stock-in-trade, furnitures, fixtures, pending contracts, tenancy rights; land and building of the business premises and all other trade rights in favour of the CONTINUING PARTNERS.

33. It is not in dispute that apart from the property in question, there was no other land and building owned by the partnership firm. Therefore, the above facts stated in release deed dated 4-9-2006 and dissolution deed dated 24-6-1977 clearly evidences that the right in the property in question devolved upon Shri Jayanthkumar Jethalal and Shri Rajanikumar Jethalal on retirement of Shri Chandrakant Jethalal and Shri Suryakant Jethalal from the partnership firm which consequently proves that land and building thereon was treated as property of the partnership firm by parties all along. There is no other material in record to show that how the right of Shri Chandrakant Jethalal and Shri Suryakant Jethalal over the property in question devolved upon the then continuing partners, viz., Shri Jayantkumar Jethalal and Shri Rajanikumar Jethalal. The above fact of treating the property in question as property of the partnership by the partners is also corroborated by the fact that the land and building in question were shown as assets of the partnership firm all along and depreciation on the building was claimed by the partnership firm and from the further fact pointed out by the assessing officer that:

The firm had, in the year 1990, obtained a certificate under section 230A from the Income Tax Department to mortgage this very property in favour of one M/s. Senthil Financiers, Madras for Rs. 20 lakhs, which also goes to show that the property belonged to the firm.

The property tax paid receipts show that the patta of the property stands in the name of M/s. South India Pulverizing Mills

34. The further facts pointed out by the AO as stated above was not controverted before us by the assessee by bringing on record any contrary material. In the above facts and circumstances of the case, I am of the considered opinion that the property in question (land and building in question) were owned by the assessee partnership firm and therefore, the assessing officer was fully justified in assessing the capital gains tax thereof in the hands of the partnership firm.

35. Further, in my considered opinion, the decision of the Honble Jurisdictional High Court in the case of Dadha & Co. (supra) is clearly distinguishable on facts and is not applicable on the facts of the instant case. It may be observed that in the case before the Honble High Court the issue was transfer of immovable property from partnership firm to the hands of the partners whereas in the instant case the issue involved is just opposite. The Honble High Court has never held that for an immovable property belonging to partner for becoming asset of the partnership firm, conveyance deed is a must.

36. Further, I do not find any force in the contention of the assessee that in absence of a conveyance deed transferring the rights of the partners over the property in question in favour of the partnership, partners continue to be the owner of the said property. A reading of section 14 of the Indian Partnership Act, 1932 clearly shows that a conveyance deed is not necessary for transfer of immovable property from partners to partnership firm. The Calcutta High Court in the case of Prem Brahmin v. Bhani Ram Brahmin ILR 1946 Cal 191 (FB), on an examination of the relevant provisions of the Indian Contract Act, 1872 and the Indian Partnership Act, 1932 including section 14 of that Act, came to the conclusion that under the provisions of those two Acts, a written document and, consequently, registration is not necessary to bring in separate properties of the partners into the partnership stock. It was further held that by virtue of sections 239, 253 and 265 of the Indian Contract Act and sections 14 and 66 of the Indian Partnership Act, they become the properties of the firm as soon as the partners intend to so bring them in and treat them as such and this is not prohibited by the Transfer of Property Act, 1882 or the Indian Registration Act, 1908. Further, in Janab N. Hyath Batch Sahib (supra) a Division Bench of the Madras High Court held that when a partner brings in certain items into the partnership firm at the time of its formation, such items become the property of the partnership and that such change of ownership is brought about not by any transfer, but by the very intention of the parties to treat such property belonging to one or more of the members of the partnership as that of the firm. The Full Bench of the Madras High Court in the case of Chief Controlling Revenue Authority v. Chidambaram, Partner, Thachanallur Sugar Mills and Distilleries : AIR 1970 Mad 5 , quoted with approval the above stated view of the Calcutta High Court and it was held that when a partner brings some of his assets with intention to treat the same as partnership assets, by virtue of section 14 of the Partnership Act, such property could be thrown into the partnership stock without any formal document so as to make it the property of the firm. The same view was taken by another Division Bench of the Madras High Court in R.M. Ramanathan Chettiar v. Controller of Estate Duty : (1975) 99 ITR 410 (Mad) .

37. Accordingly, I decide the issue in favour of the revenue and therefore, set aside the order of the CIT(A) and restore that of the AO. Thus, the appeal filed by the Revenue is allowed.

REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961

There being a difference of opinion between the Members who heard this matter, the same is being referred to the Honble President with a request to nominate a Third Member to resolve the difference. The point of difference is as follows:

Whether the capital gains arising in this case is to be assessed in the hands of the firm or in the hands of Shri Jayant kumar Sharma, as individual, in the given facts and the circumstances of the case

THIRD MEMBER ORDER

O.K. Narayanan, V.P. (As a Third Member)

38. This is a Third Member Case. The point of difference referred to me is:

Whether the capital gains, arising in this case is to be assessed in the hands of the firm or in the hands of Shri Jayanthkumar Sharma, as individual, in the given facts and circumstances of the case

39. The assessee firm had filed its return of income for the assessment year 2007-08 on a total income of Rs. 43,36,780. The income represented long-term capital gains generated out of sale of land. Later on, the assessee filed a revised return showing NIL income. A covering letter was enclosed alongwith the revised return, stating the reasons for filing the NIL return. The assessee explained that the land, which was sold, belonged to the individual Shri Jayanthkumar Jethalal, a partner of the assessee firm and, therefore, the long-term capital gain is accountable in his hands. Correspondingly, Shri Jayanthkumar Jethalal has filed his income-tax return, declaring the said amount of capital gains in his hands. The assessing officer, after considering the facts and circumstances of the case, held that the capital gain is taxable in the hands of the assessee firm and not in the hands of Shri Jayanth Kumar Jethalal as individual. The assessing officer has come to the above view on the ground that the land and buildings were shown in the balance-sheet of the firm as its assets and the assessee firm had claimed depreciation on the buildings. The owner of an asset alone can claim depreciation. By that conduct itself, the assessee has established itself as the owner of the land.

40. In first appeal the Commissioner of Income Tax (Appeals) accepted the argument of the assessee firm and held that the capital gain is chargeable to tax in the hands of the individual partner. The Commissioner of Income Tax (Appeals) accepted the contention of the assessee that depreciation was claimed only on the buildings, whereas the capital asset sold was the land on which no depreciation was claimed. The Commissioner of Income Tax (Appeals), after examining the history of the property, found that the property and the business were earlier owned by the father of the partners of the assessee firm, in which three daughters as well as his wife also had shares and as such it was a legacy devolved upon the four partners of the assessee firm alongwith four other legal heirs. The Commissioner of Income-tax (Appeals) held that the land was never assigned to the partnership firm. But the four partners were using it as licensees to carry on the business of the firm on the strength of the consent given by the legal heirs and, therefore, at any point of time the landed property was not the property of the firm, in which the four brothers were partners. The Commissioner of Income Tax (Appeals) examined the release of rights by daughters and wife of the deceased owner of the property and thereafter between the four partners. He ultimately found that the property has come to the individual ownership of Shri Jayanthkumar Jethalal and, therefore, the capital gain arising on the sale of the land property is assessable in his hands.

41. The Revenue came in appeal before the Tribunal against the order of the Commissioner of Income Tax (Appeals). The learned Judicial Member, who authored the order for the Tribunal, held that the piece of land measuring 4.95 acres was owned by Shri Jayanth kumar Jethalal as individual and the capital gain arising on the sale of the same is taxable in his hands. The learned Judicial Member held that the superstructure on the land alone was used for business purposes and depreciation might have been claimed thereon, but that does not mean that the asset was owned by the firm. He observed that making a wrong claim and allowing the same in the assessment, do not alter or decide the ownership of the property or asset. Even the issuance of certificate under section 230A in the name of the firm does not decide the issue. The ownership should be decided after examining the solid and decisive facts of the case. He observed that the firm did not pay any property tax, but paid only godown rent for the superstructure. The land tax was not paid by the firm. The mere disclosure of the property in the balance sheet of the firm and claiming depreciation on the superstructure, are not the determining factors to decide the ownership of the property. After going through the records of the case, he found that as stated in the partnership deed dated 1-9-1970, the four partners of the firm, namely, S /Shri Chandrakanth Jethalal, Suryakanth Jethalal, Jayanth Kumar Jethalal and Rajanikumar Jethalal, had contributed amounts of Rs. 60,000 and Rs. 15,000 each towards capital. At the same time, the land was not contributed by them as capital of the firm. The learned Judicial Member has relied on the judgment of the Honble Supreme Court in the case of Malabar Fisheries Co. {supra), to state that when one talks of the firms property or firms assets, all that is meant is property or assets in which all partners have a joint or common interest. It is not necessary that every partnership for the purpose of its business should own and utilize its own partnership property only. It can utilize property owned by others for the purpose of its business. On the basis of the above reasonings, the learned Judicial Member finally held that the capital gain arises in the individual hands and not in the hands of the firm.

42. The learned Accountant Member dissented from the view of the learned Judicial Member and held that the property belonged to the firm and, therefore, capital gain arises in the hands of the firm and the firm is liable for long-term capital gains taxation.

43. It is in the above context that the point of difference has been referred to the Honble President of the Tribunal, who directed me to hear the matter.

44. I heard Dr. Shibendu Moharana, the learned Commissioner of Income-Tax appearing for the Revenue and Shri N. Devanathan, the learned counsel appearing for the assessee, alongwith advocate Shri Narendra Kumar.

45. The property originally belonged to late Jethalal Manekjee Sharma (J.M. Sharma), who died on 29-8-1970. He left behind the following legal heirs:-



46. The business carried on by late J.M. Sharma was thereafter carried on by his four sons as four partners of M/s. South India Pulverising Mills since 1 -9-1970, immediately after the demise of Shri J.M. Sharma. They contributed capital of Rs. 15,000 each. Thereafter the wife and three daughters of late J.M. Sharma relinquished their rights in the immovable properties in favour of the four sons who are partners through a release deed dated 25-6-1972. Thereafter, the partnership was again reconstituted with the four sons as partners. There was a deed of dissolution executed on 24-6-1977 on the retirement of Shri Chandrakanth Jethalal (HUF) and Shri Suryakanth Jethalal. It is after that the agreement for sale of the building was entered into. By that time the land came into the hands of two persons, namely, Shri Jayanthkumar Jethalal and Shri Rajanikumar Jethalal, sons of late J.M. Sharma. Thereafter Shri Rajanikumar Jethalal executed a release deed in favour of Shri Jayanthkumar Jethalal on 4-9-2006 for cash settlement of Rs. 70 lakhs.

47. If the above stated events are chronologically followed, it could be seen that on execution of the release deed by Shri Rajanikumar Jethalal, the landed property has come into the possession of Shri Jayanthkumar Jethalal. Earlier, by virtue of a successive appropriation of the rights in the property, the land has come into the possession of Shri Rajanikumar Jethaklal and Shri Jayanthkumar Jethalal. Thereafter, Shri Jayanthkumar Jethalal paid Rs. 70 lakhs to his brother Shri Rajanikumar Jethalal and converted the property as his individual property. A perusal of the events and the final culmination of the events transferring the ownership of the entire property into the individual hands of Shri Jayanthkumar Jethalal, will definitely show that the partnership firm as such has no role in these events by virtue of any ownership status.

48. Late J.M. Sharma expired on 29-8-1970. At that point of time there were eight legal heirs who had rights in the assets of J.M. Sharma. The business carried on by late J.M. Sharma was continued to be carried on by four sons alone. The wife and three daughters of late J.M. Sharma did not join his sons to carry on the business. The business was carried on by four sons on the basis of a partnership deed with effect from 1-9-1970, immediately after the demise of late J.M. Sharma. Therefore, it is very apparent that at the point of constituting the firm with the four partners, who are the sons of late J.M. Sharma, it was not possible for them to bring the landed property into the capital asset of the firm, as those four persons did not have exclusive ownership right over the property. The property belonged at that point of time not only to the four sons, but also to the remaining four persons, being the wife and three daughters of late J.M. Sharma. The consequential finding is that the four partners were only co-owners of the landed property. They were carrying on the business using the land and the other facilities with the consent of the family members and as in the nature of a family concern. The erstwhile business carried on by J.M. Sharma has been carried on by his four sons in the format of a partnership firm using the family assets. No partition was made at that point of time. The four sons, who became the partners of the firm, did not have any exclusive right over the ownership of the property. They were only co owners. Therefore, it is not possible to hold that the land was converted into a partnership property.

49. It was in the year 1972, subsequent to the constitution of the firm, that the release deed was executed by the wife and daughters in favour of the sons. At the time of the constitution of the firm at the first instance there was no mention in the partnership deed that the landed property was brought into the common hotchpotch of the firm.

50. Unless there is a clear declaration either by act, deed, intention or conduct, it is not possible to presume that the undivided family property becomes the property of the firm for the reason that some of the legal heirs have used the property to carry on the business of the firm constituted by them. The Honble Supreme Court in the case of Arjun Kanoji Cankar (supra), has held, among other things, that the mere fact that a particular person has chosen to include himself as a partner of the firm will not result in incorporation of all his individual properties as the assets of the partnership.

51. The events occurred in the present case are in the following manner, if generally stated: Late J.M. Sharma had carried on a business. On his death, eight persons consisting of four sons and three daughters and his wife became the legal heirs of his estate. The business was carried on by his four sons by constituting a firm. To carry on the business of that firm the estate of late J.M. Sharma was used. The land property belonging to his estate was not specifically assigned to the partnership firm either by act, deed or conduct. There was no such intention at all. This is clear from the fact that later on the ladies relinquished their rights in favour of the four male members of the family by executing release deeds. At least till that time the land never could be the property of the firm, as the four partners alone were not the sole owners of the property. Even thereafter, the shares of two partners were transferred to the remaining partners by stating specific consideration and finally one of the partners sold his share to the remaining partner and thereby ultimately the property came into the individual hands of Shri Jayant Kumar Jethalal.

52. The names of the partnership firm and the partners individually and collectively have been intermittently used in various documents executed over a period of time so as to bring in the entire facts of the case relating to the ownership, possession and enjoyment of the property. Reference made to the name of the firm as such does not decide the character and nature of ownership. At the time of sale of the land also, the names of the firm as well as the partners and all other persons were recited, only to avoid future confusion and to depict the true history of the transmission of the property from hands to hands.

53. In the facts and circumstances of the case, I find that the learned Judicial Member is justified in his finding that the property belonged to Shri Jayanthkumar Jethalal as his individual property and, therefore, the capital gain is assessable to tax in his individual capacity. The long-term capital gain cannot be assessed in the hands of the firm.

54. I agree with the order of the learned Judicial Member.

55. Now, this file will be placed before the Regular Bench for passing orders to finally dispose of the case on a majority view.

N.S. Saini, Member (A)

56. There was a difference of opinion between the Honble Judicial Member and the Accountant Member on the issue whether the long-term capital gains on sale of land was to be assessed in the hands of the partnership firm or in the hands of Shri Jayanthkumar Jethalal, partner of the assessee firm. The Honble Vice President, sitting as the Third Member has agreed with the Honble Judicial Member and has held that the long term capital gain is assessable to tax in the hands of the partner, Shri Jayanthkumar Jethalal. Therefore by the majority view, the appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed.