Section 56(2)(vii)(b)(ii) of the IT Act does not apply in case of property bought by partnership firm for business use: ITAT

 

 

Facts:

1. The taxpayer Chandrasekaran Valarmathi is a partner in a firm M/s Chandran Steels, including three other partners of the firm, purchased a specific building for Rs.95.72 Lacs. This amount was remarked to be debited in the firm. The building loan of Rs.70 Lacs was received against that.

2. The Assessing Officer (AO) observed that the property, acquired at a value of Rs. 85 Lakhs, deviated from the guideline value of Rs. 155.77 Lacs.

3. Consequently, the AO invoked the provisions of Sec.56(2)(vii)(b)(ii), suggesting that the differential amount should be treated as ‘income from other sources’ for the assessee, with the specific share being one-fourth.

4. The assessee contended that according to Section 14 of the Indian Partnership Act, any property, rights, or interest acquired with the firm’s funds is deemed to be owned by the firm. Since the entire purchase amount was funded by the firm, the assessee argued that the property rightfully belonged to the firm.

ITAT Chennai held as under:

1. The property had been acquired through joint ownership involving four individuals, all of whom were partners in the firm M/s Chandran Steels.

2. Furthermore, the firm was granted depreciation, and it was exclusively utilizing the property for its business needs, with the repayment of the loan instalment handled by the firm.

3. So, the property was effectively acquired by the firm itself and not by the individual partners. Consequently, the provisions of Sec.56(2)(vii)(b)(ii) could not be invoked, as these provisions did not apply to partnership firms during the relevant period.

The copy of the order is as under:

 

1701337650-ITA 652 & 653-2022 VALARMATHI