The Income Tax Appellate Tribunal (ITAT), Chennai Bench held that Section 56(2)(vii)(b)(ii) Income Tax Act , 1961 would not be applied when property purchased for business use of partnership firm.
The assessee,Chandrasekaran Valarmathi is a partner in a firm M/s Chandran Steels, along with 3 other partners of the firm, purchased a certain building for Rs.95.72 Lacs. This amount was stated to be debited in the firm. The building loan of Rs.70 Lacs was obtained against the same.
During the assessment proceedings AO noted that as against guideline value of the property for Rs.155.77 Lacs, the property was purchased for Rs.85 Lakhs. Therefore, the provisions of Sec.56(2)(vii)(b)(ii) would apply and accordingly, the differential amount was to be added as ‘income from other sources’ to the extent of assessee’s share therein i.e., one-fourth.
Aggrieved, the assessee filed further appeal before the CIT(A) who dismissed the appeal. Thereafter the assessee filed a second appeal before the tribunal.
K.G. Raghunath , counsel for assessee argued that as per Section 14 of Indian Partnership Act, any property and rights and interest in property acquired with money belonging to the firm is deemed to have been acquired by the firm. The entire amount to purchase the property was spent by the firm and the property actually belonged to the firm.
Further the counsel argued that the firm claimed the depreciation on the property which would show that the property was being used for the business of the firm. Therefore, the provisions of Sec.56(2)(vii)(b)(ii) would not apply.
P.Sajit Kumar , counsel for the revenue argued that the deed does not mention that the property was purchased in the capacity of the partners of the firm and the property was being acquired by the firm. The loan was sanctioned in the name of the partners only. Therefore, the property was purchased in individual names only.
The tribunal observed that the property has been purchased in joint ownership of 4 persons all of whom happen to be partners in a firm M/s Chandran Steels. depreciation has also been allowed to the firm. The firm is repaying the loan installment and for all practical purposes, it is the firm only which is exclusively using the property for its business use.
Accordingly the tribunal determined that the property is deemed to have been acquired by the firm only and not by individual partners. This being so, the provisions of Sec.56(2)(vii)(b)(ii) could not be pressed into service since these provisions do not apply to partnership firm at the relevant point of time
After reviewing the facts and records, the two-member bench Of Manoj Kumar Aggarwal,(Accountant member ) and Mahavir Singh, (Vice President) held that the Section 56(2)(vii)(b)(ii) Income Tax Act , 1961 would not be applied when property purchased for business use of partnership firm.
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