BY CA Surekha S Ahuja
Tax outcomes do not follow business sentiment. They follow ownership, documentation, and timing.
The ITAT Visakhapatnam ruling in Vivek Industries v. ITO (December 2025) decisively settles a long-debated issue in partnership taxation:
Can a firm that has stopped business shift capital gains tax on its property to its partners?
The answer is now unequivocal—No.
This judgment is not merely about capital gains computation. It is a structural ruling that dismantles aggressive post-sale tax repositioning and reaffirms that legal ownership—not commercial intention—determines taxability.
For promoters, boards, and advisors dealing with immovable property exits, this ruling redraws the strategic map.
CORE CONTENT – WHAT THE LAW NOW ESTABLISHES
1. Discontinuance Does Not Change Ownership
The Tribunal clarified a critical distinction:
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Discontinuance of business is only stoppage of operations
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It does not dissolve the firm
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It does not vest firm assets in partners
Until there is:
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Formal dissolution, and
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Legal distribution of assets,
the firm continues to be the legal owner of its property.
Ownership does not fade away with inactivity—it transfers only through law.
2. Section 176(3): Procedural Compliance with Substantive Effect
Failure to intimate business discontinuance to the Assessing Officer under Section 176(3) proved fatal.
The Tribunal reinforced that:
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Discontinuance is a statutory event, not a factual claim
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Intimation to other authorities is irrelevant
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Without Section 176(3) compliance, claims of closure lack legal standing
Practical Reality:
If the tax department is not informed, the business is alive in law.
3. Capital Gains Taxable Only in Hands of the “Right Person”
Relying on ITO v. C.H. Atchaiah (SC), the Tribunal reaffirmed:
Income must be taxed only in the hands of the entity that legally earns it.
Accordingly:
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Capital gains on firm property cannot be assessed in partners’ hands
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Partner-level exemptions (Sections 54F / 54EC) are invalid
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Taxes wrongly paid by partners must be credited to the firm
This doctrine safeguards correct taxation—it does not validate flawed structuring.
4. Land vs Building: Documents Override Assumptions
The Assessing Officer attempted to:
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Split consideration between land and building
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Tax building as STCG under Section 50
The Tribunal rejected this approach because:
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The registered sale deed transferred only land
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No building was conveyed or valued
Law Affirmed:
What is not transferred under the deed cannot be taxed by estimation.
STRATEGIC VIEW – HOW FUTURE DECISIONS MUST BE MADE
Firm vs Partner Sale: The Only Valid Decision Framework
Step 1: Identify current legal ownership
→ Firm
→ Partners / Co-owners
If the Firm Is the Owner
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Firm sells → Firm pays capital gains tax
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Partner-level exemptions are not available
If partners desire individual exemptions:
Ownership must be transferred before sale, through:
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Formal dissolution
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Registered asset distribution
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Mutation of records
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Section 176(3) compliance
Post-2021 Strategic Reality (Critical Overlay)
Even after proper distribution:
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Section 9B taxes the firm on FMV of assets transferred
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Revised Section 45(4) taxes excess over partners’ capital balance
Distribution itself is now a taxable exit.
There is no longer any silent migration of assets from firm to partners.
Board-Level Questions That Must Be Answered Before Sale
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Who should bear the tax—firm or individuals?
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Is individual exemption worth firm-level exit tax?
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Are we prepared for FMV exposure under Section 9B?
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Is sale documentation aligned with tax intent?
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Has every statutory compliance been completed before negotiations?
If these questions arise after signing the sale deed, the tax outcome is already sealed.
The Vivek Industries ruling delivers a clear, uncompromising message:
There is no tax arbitrage between a firm and its partners without first transferring ownership—and ownership transfer itself is taxable.
For promoters, boards, and advisors, the takeaway is strategic, not technical:
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Stoppage of business is not a tax exit
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Intention does not override title
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Planning after sale is not planning
Closing Thought
In tax law, exits are designed at the structuring stage—not at registration. Everything else is damage control.
