Sec. 54G Relief Available Even if New Undertaking Was Set Up in Name of Firm in Which Assessee Was Partner | ITAT

Case Details: Hasmukhbhai Makanbhai Padariya vs. Income Tax Officer - [2024] 165 taxmann.com 572 (Rajkot - Trib.)

Judiciary and Counsel Details

• Dr. Arjun Lal Saini, Accountant Member & Dinesh Mohan Sinha, Judicial Member
• Kalpesh Doshi, AR for the Appellant.
• Ashish Kumar Pandey, Sr. DR for the Respondent.

Facts of the Case

The assessee was engaged in the business of manufacturing and job work of CI Casting, as a proprietor. While furnishing the return of income the assessee claimed deduction under section 54G on the ground that he had invested in a firm (new industrial undertaking in rural area) in which he was a partner and the said firm had invested the said amount in Factory Building and Plant & Machinery.

However, the Assessing Officer (AO) rejected the assessee’s contention and held that the assessee was an individual who shifted the undertaking from urban to rural areas to a partnership firm, which was a different entity under the Income Tax Act. Therefore, the AO made additions to the income of assessee and disallowed the assessee’s claim under section 54G.

On appeal, CIT(A) upheld the action of AO. Aggrieved by the order, the assessee filed an appeal to the Rajkot Tribunal.

ITAT Held

The Tribunal held that the object of section 54G is to promote decongestion of urban areas and balanced regional growth. This section exempts capital gains on the transfer of plant, machinery, land, building, etc., used for the purpose of the business of industrial undertaking as a consequence of shifting the industrial undertaking from an urban area to a non-urban area. The capital gain would be exempt to the extent, it is utilized within a period of one year before or three years after the date of transfer.

The assessee has complied with and satisfied the following conditions, namely: (i) shifting the existing undertaking from urban to rural area, (ii) transferring and installing the existing plant machinery, and other equipment in the rural area, (iii) making investment in the new undertaking for expansion and investment in business, (iv) MoU was made for expansion and investment in shifting the business, and (v) new investment in the firm was made in which the assessee was a partner. Therefore, the assessee had total right in the investment of the firm.

The firm name is only a compendious name given to the partnership for the sake of convenience. The firm’s assets belong to and are owned by the firm’s partners. Any property owned by it is really the property of the partners, and the use of the expression ‘firm’ is only a compendious mode to designate the persons who have agreed to a joint venture. What is called the property of the firm is really the property of the partners. The partnership property will vest in all the partners, and in that sense, every partner has an interest in the property of the partnership. The interest of a partner in a partnership firm belonged to him and would be includible in his ‘assets’ and will have to be taken into account while computing his net wealth.

The primary condition is that the assessee should have made an investment in the undertaking shifted to a rural area. Section 54G does not state that the asset should be acquired in the assessee’s name. Therefore, the assessee was eligible for exemption under section 54G.

List of Cases Referred to

• Hotel Centre Point v. ITO [2024] 160 taxmann.com 604/206 ITD 565 (Guwahati – Trib.) (para 14),
• Chandra N. Jethwani v. ITO [2019] 111 taxmann.com 58/179 ITD 663 (Ahmedabad – Trib.) (para 17),
• Commissioner of Wealth-tax, Patiala v. Mohan Lal Kapur [2007] 163 Taxman 575 (Punjab & Haryana) (para 18)
• Pr. CIT v. Vaidya Panalalmanilal(HUF) [2018] 98 taxmann.com 189/259 Taxman 19 (Gujarat) (para 19).