Vivek Industries vs ITO (ITAT Visakhapatnam)Capital Gains – Assessment in Hands of the “Right Person”
- Mayur Bhadani
- 4 days ago
- 3 min read
🧾 Case Overview
Case: Vivek Industries vs Income Tax Officer
Forum: Income Tax Appellate Tribunal (ITAT), Visakhapatnam
Assessment Year: 2018–19
Property Sold: Industrial plot measuring 7,500 sq. mtr. at Mankhal
Sale Deed No.: 1625/2018
Sale Consideration: ₹6.50 crore
Declared by Partners: Long-Term Capital Gain (LTCG) ₹5.88 crore in their individual returns
The partners of Vivek Industries declared the capital gains individually, assuming that since the firm had discontinued its business, the property was owned by them personally. The Assessing Officer, however, questioned whether the capital gains should be taxed in the hands of the firm or the partners.
🎯 Core Legal Question
Does discontinuance of business convert a partnership firm into an Association of Persons (AOP), allowing partners to declare capital gains individually?
ITAT’s Ruling: No. Discontinuance of business does not dissolve the firm or transfer ownership of its assets to the partners.
🔍 Detailed Findings
1️⃣ Discontinuance vs Dissolution
The Tribunal clarified that discontinuance of business is not the same as dissolution of the firm.
Under the Indian Partnership Act, 1932, a firm continues to exist until it is formally dissolved.
The ownership of assets remains with the firm until dissolution.
Therefore, the property sold continued to belong to the firm, not to the partners individually.
2️⃣ Determining the “Right Person” for Taxation
The sale deed explicitly named the partnership firm as the vendor and owner of the property.
The principle of taxing the “right person” means that income must be assessed in the hands of the entity that actually earns it.
Since the firm owned and sold the property, the capital gains must be taxed in the firm’s hands.
The partners’ declaration of capital gains in their individual returns was legally incorrect.
3️⃣ Treatment of Taxes Paid by Partners
The partners had already paid taxes and TDS on the capital gains declared in their individual returns.
ITAT directed that such taxes must be credited to the firm, as per the Supreme Court’s principle that “tax follows income.”
The firm is entitled to claim credit for taxes paid by the partners on the same income.
4️⃣ Nature of the Capital Asset
The Assessing Officer had split the sale consideration into:
Land (LTCG): ₹5.52 crore
Building (STCG): ₹61.34 lakh
However, the sale deed mentioned only land, with no reference to any building or superstructure.
ITAT held that the entire ₹6.50 crore should be treated as Long-Term Capital Gain arising from the sale of land.
5️⃣ Deductions under Sections 54D, 54EC, and 54F
The partners had claimed exemptions under these sections in their individual returns.
Since the income was not assessable in their hands, these claims were invalid.
The firm, being the correct assessee, could claim exemptions if it satisfied the conditions prescribed under the Act.
⚖️ ITAT’s Final Directions
✔ Capital gains to be assessed only in the hands of the partnership firm.✔ Capital gains wrongly taxed in partners’ returns to be deleted.✔ Credit of taxes/TDS paid by partners to be transferred to the firm.✔ Entire gain to be treated as Long-Term Capital Gain (land only).
📘 Key Takeaways
Ownership as per sale deed determines who is the “right person” for taxation.
A partnership firm remains a separate taxable entity even after discontinuing business.
Discontinuance ≠ Dissolution ≠ AOP.
Taxes paid by the wrong person must be credited to the correct assessee.
Exemptions under capital gains provisions can only be claimed by the entity in whose hands the income is assessable.
Essence of the Judgment:A partnership firm’s ownership and tax liability continue until it is legally dissolved. The sale of a firm’s property must be taxed in the firm’s hands, not in the hands of its partners, even if the business has been discontinued.
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