Exemption u/s 54G nowhere states asset in undertaking shifted in rural area should be acquired in name of assesse only – ITAT
In a recent judgment, ITAT Rajkot has held that the primary condition of exemption u/s 54G is that assessee should have made investment in undertaking shifted in rural area, nowhere it states that asset should be acquired in the name of the assesse only.
ABCAUS Case Law Citation:
4207 (2024) (08) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming disallowance of the deduction u/s 54G of the Income Tax Act, 1961 (the Act) on account of shifting of undertaking in Rural area.
The appellant assessee was an Individual. During the year consideration, the assessee had claimed exemption u/s 54G of the Act, on account of Capital Gain arising, on account of shifting of an undertaking from urban area to rural area. His return of income was processed u/s 143(1) of the Act. Later, the case was selected for Limited scrutiny under Computer Aided Scrutiny Selection (CASS).
The assessee was engaged in the business of manufacturing and job work, as a proprietor. The assessee had furnished audit report u/s 44AB of the Act, alongwith Balance-sheet, Profit& Loss account, copy of bank statement and computation of total income which were examined by the assessing officer
The Assessing Officer (AO) noted that the assessee had executed registered deed of assignment for the industrial land and building registered in the name of the assessee. It was claimed by the assessee that the consideration received was invested by him as a partner in a firm. It was submitted by the assessee that the said partnership firm had invested in Factory Building and Plant & Machinery. It was further submitted that the location of the said firm was in a village, and it was rural area as per definition of Income-tax Act, 1961. Hence, it was submitted that the condition for exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area was duly fulfilled.
However, the AO observed that the investment had been made by the firm and not by the assessee for claiming deduction u/s 54G of the Act. Rejecting the contention of the assessee the AO held that assessee was individual and he shifted the undertaking from urban area to rural area, to a partnership firm, which was different entity under the Income Tax Act, therefore, the assessing officer made the addition and disallowed the claim of the assessee u/s 54G of the Act.
Before the Tribunal, the assessee contended that he had duly complied with all the conditions of shifting of undertaking and there is no other conditions required, as to direct investment or indirect investment. The primary condition is that the assessee should have made investment in the undertaking shifted in rural area, nowhere in the provision it is stated that asset should be acquired in the name of the assessee and for which assessee relied on various case laws of the High Courts.
The Tribunal noted that the object of the section 54G of the Act, is to promote decongestion of urban areas, as also balanced regional growth. The Section 54G of the Act, exempts capital gains on transfer of plant, machinery, land, building etc., used for the purpose of the business of industrial undertaking. The transfer must be affected in the course of or in consequences of shifting of 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 Tribunal further noted that the assessee had complied with and satisfied the following conditions, namely: (i) Assessee has shifted the existing undertaking from urban to rural area, (ii) The assessee transferred and installed the existing plant machinery, and other equipment in the rural area, (iii) The assessee made further investment in the newly undertaking for the expansion and investment in the foundry business, (iv) The assessee has made MoU to make expansion and investment in shifting of the business, and (v) The assessee made new investment in the firm and the assessee was a partner and therefore the assessee has total right in the investment of the firm. Hence, the important conditions to comply with the object and intention of section 54G of the Act had been fulfilled by the assessee.
Further, the Tribunal stated that asessee had invested in the firm, as a partner and same was utilized in construction of building and purchasing of new plant and machineries. The assessee shifted the existing plant and machinery, along with all important business plans, goodwill to rural area and therefore the whole manufacturing undertaking had been shifted to rural- area. Therefore, the assessee was eligible for exemption u/s 54G of the Act. The firm name is only a compendious name given to the partnership for the sake of convenience. The assets of the firm belong to and are owned by the partners of the firm as held by Hon’ble Supreme Court.
The Tribunal also noted that on similar and identical facts, the Co-ordinate Bench had held that that the partners are not separate from the partnership firms.
Therefore, the Tribunal opined that any property owned by firm was really the property of the partners and the use of expression ‘firm’ is only a compendious mode to designate the persons who have agreed to a joint venture and 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 Apex Court held that 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. In this view of the matter, the assessee could be said to be having specific interest in the factory land and the building belonging to the firm and, as such, was entitled to the exemption under section 54G of the Act.
The Tribunal held that each partner is owner of the assets to the extent of his share in the partnership, hence, exemption u/s 54G of the Act, should not be denied to the assessee under consideration. The primary condition is that the assessee should have made investment in the undertaking shifted in rural area, nowhere section 54G of the Act, states that asset should be acquired in the name of the assessee.
Accordingly, the Tribunal delete the addition made by the assessing officer.
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