Law: Income Tax Act, 1961

Section: 45,48

Income-tax-----Capital gains---Firm---Partner---Transfer---Sale of immovable property by partner to firm---Sale consideration credited to capital account of partner---Difference between sale consideration and fair market value of property assessable as capital gains---Indian Income Tax Act, 1961, Ss.45 & 48. The abstract proposition that a partnership is not a legal entity is not correct. It is true that, under the law of partnership, a firm has no legal existence apart from its partners, and it is merely a compendious name to describe its partners. But under the income-tax law the position is different. The firm and the partners are distinct assessable entities. The law has for some specific purposes relaxed its general rigid notions, and extended a limited personality to a firm. There is nothing in the partnership law to suggest that the firm cannot be treated as an entity for the purpose of dealing with property. During the subsistence of the partnership, the partnership acting through any particular partner authorized for the purpose or through all the partners will be in a position to deal with the asset. On May 1, 1969, the assessee converted his proprietary business into a partnership consisting of himself and his three sons. On April 30, 1975, the assessee sold his property in favour of the firm for a sum of Rs.1,20,000. The net capital gains was computed at Rs.26,098. The property was sold under a registered sale-deed. Thereafter, the entire sale ¬consideration was credited in the partnership capital account. The assessee claimed that inasmuch as the entire sale consideration was credited in the capital account of the firm there was no transfer and consequently no capital gains arose. The Income-tax Officer did not accept this claim but the Tribunal accepted it. On a reference: Held, that normally, when a partner brings his asset into partnership, out of 100 per cent. ownership of the property, he would get only a fraction of the ownership according to his profit-sharing ratio in the firm. Therefore, in such a case, there cannot be any capital gain under the transfer. Hence, even though there is a transfer, section 48 of the Income Tax Act, 1961,…

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