Land introduced as capital in partnership firm rightly taxed as capital gain u/s 45(3), no benefit can be given for stock-in-trade
ABCAUS Case Law Citation:
ABCAUS 3815 (2023) (11) ITAT
Important Case Laws relied upon by parties:
P. Nageswara Rao vs. Dy. CIT
Income Tax Officer vs. Orchid Griha Nirman (P) Ltd reported in (2022) 134 Taxmann.com 281 (Cal.)
CIT vs. Sundaram Iyengar & Sons (P) Limited (1975) 101 ITR 764 (SC)
Keshavji Ravji & Co. vs. CIT (1990) 183 ITR 1 (SC)
UOI vs. Kamlakshi Finance Corporation Ltd. 1992 taxmann.com 16 (SC)
DLF Universal vs. DCIT (2010) 123 ITD 0001
Sunil Siddharthbhai vs. CIT (1985) 156 ITR 509 (S.C)
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming addition of capital gain u/s 45(3) of the Income Tax Act, 1961 (the Act) on account of transfer of land as capital contribution in partnership firm.
The Assessing Officer during the course of assessement proceedings noted that the assessee had acquired some land which he had transferred as capital contribution to his partnership firm under a Memorandum of Understanding (MOU) for construction of multi-storied residential apartment complex.
It was observed that assessee before the transfer first revalued the land and transferred the land at revalued price to the firm. The Assessing Officer referred to provisions of section 45(3) of the Act according to which any contribution by the partner of a firm by way of capital asset shall be chargeable to tax as his income of the previous year in which such transfer takes place and for the purpose of section 48 the amount recorded in the books of the firm shall be deemed to be the full value of the consideration received as accruing as a result of such transfer.
The AO therefore, after recording reasons reopened the assessment u/s 147 with the prior approval of the appropriate authority as per section 151(2) of the Act, and issued notice u/s 148 of the Act to the assessee.
The AO noted that in the Balance Sheet of the assessee, it was shown as the investment in the partnership firm on the assets side and in the Balance sheet of the firm, the same was reflected as the capital contribution on the liabilities side at the same amount.
The stand of the assessee was that it entered into the joint development agreement with firm and the land held by the assessee and others together was jointly developed and introduced as the stock-in-trade.
However, the AO held that the assessee was liable to pay capital gain tax. He made addition of of difference of cost of acquisition of the land and revalued price as short – term capital gain in the hands of the assessee.
The CIT(A) was not satisfied with the arguments advanced by the assessee and upheld the addition of capital gain in the hands of the assessee.
Before the Tribunal, the assessee contended that that there was no consideration derived in the hands of the assessee for keeping the stock-in-trade of land into the joint venture and therefore, the AO wrongly applied the decision of the jurisdictional High Court. It was submitted that in said case it was held that when the transfer of capital asset is complete, sale consideration has to be taken into consideration for the purpose of assessment even though the payment of consideration deferred till other A.Y and therefore, the said decision was on different set of facts. However, in the instant case there was neither any transfer of capital asset nor any sale consideration. Therefore, the said decision was not applicable.
The assessee also relied upon the decision of the Hon’ble Supreme Court in contending that when partner brings in his asset into partnership as capital contribution, neither any consideration is received by the partner within the meaning of section 48 nor does any profit or gain accrues to him in commercial sense and, therefore, no capital gain is chargeable u/s 45 of the Act.
Referring to the decision of the Hon’ble High Court it was submitted that the Hon’ble High Court in the said decision has held that the section 45(3) would be applicable only in respect of a capital asset and not to stock-in-trade.
With respect to the reliance placed on Special Bench of ITAT by the CIT(A), it was submitted that in that case, after introduction of land on revaluation, the amount credited was withdrawn immediately by the partners whereas, in the case of the assessee there was no such withdrawal of any capital introduced by way of stock-in trade by the assessee in the firm.
The Tribunal observed that the contention of the assessee was that there was no consideration derived in the case of the assessee for keeping the stock-in-trade of land into the joint venture and therefore, the decision of the jurisdictional High Court was not applicable to the facts of the case. It was also a submission that no consideration is received by the partner within the meaning of section 48 nor does any profit or gain accrue to him in commercial sense and therefore, no capital gain chargeable u/s 45 arises. Further, it was the submission that in the absence of decision of the jurisdictional High Court on this issue and when there are conflicting decisions, the decision which is favourable to the assessee should be adopted.
The Tribunal observed that there no merit in the above arguments. A plain reading of the provisions of section 45(3) clearly shows that the amount recorded in the books of the firm should be deemed to be the full value of contribution received or accrued as a result of such transfer.
Further, the Special Bench of the Tribunal had held that though section 45(3) applies when a capital asset is introduced into a firm as capital contribution, it will also apply when stock-in-trade is introduced into a firm because the transaction is on the capital account and stock-in-trade does not retain its character as stock-in-trade at the point of time of introduction.
With respect to the reliance placed by the assessee on the decision of the Hon’ble High Court was concerned, the Tribunal opined that the same was not applicable to the facts of the present case. In that case a land was transferred by the assessee and other partners to the firm at its cost as current asset. Later, the firm converted the said land into fixed assets and revalued it. The amount of revaluations were credited to the current account of partners in their profit sharing ratio. The Assessing Officer in the re-assessement order brought to tax the amount credited as income chargeable to tax u/s 45(3). Under these circumstances, the Tribunal after considering the facts of the case held that the provisions of section 45(3) are not applicable to the facts of the case which has been upheld by the Hon’ble High Court.
The Tribunal pointed out that in the instant case, the valuation of land was done by the assessee himself as against the cost price and the same has not been revalued by the joint venture or the firm. The assessee in that case has transferred the land at cost to the firm and the firm has revalued the land in question and the amounts were transferred to the current account of the partners.
Also, the Tribunal observed that the Special Bench of the Tribunal had held that the provisions of section 45(3) also applies when stock-in-trade is introduced into a firm because the transaction on the capital account and stock-in-trade does not retain its character as stock-in-trade at the point of time of introduction.
Accordingly, the ITAT opined that there was no infirmity in the order of the CIT(A) confirming that there was a transfer resulting in capital gain for the year under consideration and thereby confirming the addition made by the AO.
Finally, the appeal was dismissed.
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