Nareshbhai Ishwardas Patel Vs I.T.O (ITAT Ahmedabad)
ITAT Ahmedabad held that the provision of section 50C of Act cannot be made applicable to transaction of capital assets transferred by assessee to a partnership firm by way capital contribution. Such transaction falls under the provision of section 45(3) of the Income Tax Act.
Facts- The assessee in the present is an individual and engaged in the proprietary business of processing of plastic raw materials into articles under the name and style of “M/s Gokul Plastic”. The assessee is also a partner in the firm namely “M/s Pooja Buicon”. The assessee in the F.Y. 2009-10 along with other person acquired an immovable property for Rs. 70 Lakh in which his share was 50% only. During the year under consideration i.e. F.Y. 2013-14,the assessee along with co-owner so 5% of impugned property for a consideration of Rs. 18,35,000/- and the remaining 95%of property was transferred to partnership firm “M/s Pooja Buicon” as partner’s capital contribution at Rs. 1,47,01,250/- (assessee share). The AO, considering the market value of 5% of impugned property, believed that the remaining property should have been transferred to partnership firm at Rs. 3,48,65,000/- in which assessee share comes at Rs. 1,74,32,500/- only instead of at Rs. 1,47,01,250/-only. Therefore, the AO purposed to invoke the provision of section50Cof the Act and treat the consideration in hand of the assessee at Rs. 1,74,32,500/-instead of Rs. 1,47,01,250/- only.
AO disagreed with the contention of the assessee and held that provision under section 50C of the Act is a special provision with respect to capital assets, being land or building. As per section 50C of the Act, the full value of consideration on transfer of land or building shall be the value at which stamp duty is assessed or assessable and in the case of assessee, such value comes at Rs. 1,74,32,500/- (50%) only. Thus, the AO added an amount of Rs. 27,31,250/-(1,74,32,500 – 1,47,01,250) to the total income of the assessee.
CIT(A) confirmed the findings of the AO. Aggrieved, the assessee appealed before the tribunal.
Conclusion- The coordinate bench of Lucknow Tribunal held that the provision of section 50C of Act cannot be made applicable to transaction of capital assets transferred by assessee to a partnership firm by way capital contribution. The tribunal further held that for such transaction there is specific provision under section 45(3) of the Act and full value consideration shall be determined only as per the provision of section 45(3) of the Act.
Held that we hereby set aside the finding of the learned CIT(A) and direct the AO to take full value of consideration as prescribed under section 45(3) of the Act and work out the amount of capital gain accordingly. Hence the ground of appeal of the assessee is hereby allowed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals), Vadodara, (in short “Ld. CIT(A)”) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2014-15.
2. The assessee has raised following grounds of appeal:
1. The learned Commissioner of Income Tax(Appeal)-6 Ahmedabad, has grievously erred in facts and law while passing the order under consideration.
2. The learned Commissioner of Income Tax (Appeal)-6 Ahmedabad, erred in facts and in law in upholding the addition of Rs.27,31,250/- made by the Assessing Officer u/s.50C of Income Tax Act, 1961.
3. The learned commissioner of Income Tax (Appeal)-6 Ahmedabad, erred in facts and in law in holding the disallowance in cost of improvement of Rs.59,91,687/- made by the Assessing Officer.
4. The appellant reserves his right to add alter amend modify or cancel any one or more of the grounds of appeal before the finalization of the appeal.
3. The first issue raised by the assessee is that the learned CIT(A) erred in confirming the addition of Rs. 27,31,250/- made under section 50C of the Act.
4. The facts in brief are that the assessee in the present is an individual and engaged in the proprietary business of processing of plastic raw materials into articles under the name and style of “M/s Gokul Plastic”. The assessee is also a partner in the firm namely “M/s Pooja Buildcon”. The assessee in the F.Y. 2009-10 along with other person acquired an immovable property for Rs. 70 Lakh in which his share was 50% only. During the year under consideration i.e. F.Y. 2013-14, the assessee along with co-owner sold 5% of impugned property for a consideration of Rs. 18,35,000/- and the remaining 95% of property was transferred to partnership firm “M/s Pooja Buildcon” as partner’s capital contribution at Rs. 1,47,01,250/- (assessee share). The AO, considering the market value of 5% of impugned property, believed that the remaining property should have been transferred to partnership firm at Rs. 3,48,65,000/- in which assessee share comes at Rs. 1,74,32,500/- only instead of at Rs. 1,47,01,250/-only. Therefore, the AO purposed to invoke the provision of section 50C of the Act and treat the consideration in hand of the assessee at Rs. 1,74,32,500/-instead of Rs. 1,47,01,250/- only.
4.1 The assessee in reply submitted that he transferred the impugned property as capital contribution to the firm. Therefore, the transaction falls under the provision of section 45(3) of the Act wherein it is provided that a capital asset transferred to a firm by a partner by way of capital contribution, then the amount at which, the firm records such capital assets in its books shall be deemed as full of value of consideration for the purpose of section 48 of the Act. Hence, the provision of section 50C of the Act cannot be applied to the impugned transfer of property.
4.2 However, the AO disagreed with the contention of the assessee and held that provision under section 50C of the Act is a special provision with respect to capital assets, being land or building. As per section 50C of the Act, the full value of consideration on transfer of land or building shall be the value at which stamp duty is assessed or assessable and in the case of assessee, such value comes at Rs. 1,74,32,500/- (50%) only. Thus, the AO added an amount of Rs. 27,31,250/(1,74,32,500 – 1,47,01,250) to the total income of the assessee.
5. Aggrieved assessee preferred an appeal before the learned CIT(A).
6. The assessee before the learned CIT(A) reiterated that he made capital contribution in firm by way of transfer of capital assets, therefore the consideration should be determined as per the provision of section 45(3) of the Act and not as per section 50C of the Act. The assessee further submitted that to apply the provision of section 50C, there should be consideration received or receivable by the assessee on transfer of capital assets being land or building and such consideration should be less than the value adopted or assessed or assessable by the state government authority to charge stamp duty in connection with such transfer. However, in his case, there is no consideration received or receivable by him for reason that he has made capital contribution in the firm in the form of land. Hence, there is no assessable value of land for charging stamp duty in connection with such transfer. Therefore, the provision of section 50C cannot be made applicable in his case in the absence of consideration received or receivable and in the absence of assessable value of land for the stamp duty purposes.
7. However, the learned CIT(A) after considering the facts in totality confirmed the findings of the AO by observing as under:
During the assessment proceedings, the AO noted that the appellant had purchased a property in P.Y. 2009-10 in which he had 50% share. Further, that during the year under consideration, the appellant sold 5% of his share in the property for Rs.10,35,000/-, Remaining share in property 1.e. 95% of his share in property was introduced in a partnership firm Pooja Bulldcon as his capital contribution at value of Rs.1,47,01,250/-. The AO held that section 50C of the Act was applicable to Introduction of land as capital contribution in firm. The AO held that, based on market value of 5% of property sold by appellant, the stamp duty value of land (95%) Introduced in firm comes to Rs.1,74,32,500/- as against value of Rs.1,47,01,250/- shown by the appellant. Accordingly, the AO added Rs.27,31,250/- u/s 50C of the Act. The appellant is in appeal against this action of the AO. During the appeal proceedings, the appellant primarily submitted that the case of the appellant does not fall in section 50C of the Act but it falls within the ambit of section 45(3) of the Act. Hence the value recorded in books of accounts would be the value of for the purpose of capital gains tax. The appellant submitted that section 45(3) of the Act creates a fiction of an amount to calculate the “full value of consideration” for computing capital gains on the contribution of capital asset by a partner to a partnership firm. The appellant submitted that the deemed “full value of consideration” is an expression different from the phrase “consideration received or accruing” as appearing in section 50C of the Act. Hence, the amount determined as consideration in case of contribution of an immovable property by a partner to partnership firm is deemed one, which is received by or accrued to the partner. Hence, the appellant submitted that section 50C of the Act should not be invoked in such cases and section 45(3) of the Act should apply. In support of his contention, the appellant relled on judgment of Hon’ble ITAT, Lucknow in Hotel (P) Ltd. Vs ACIT (2009) Tax Pub (DT)1039 (Luck-Trib). Submitting thus the appellant submitted that addition of Rs.27,31,250/- may be deleted.
After considering all facts and circumstances of the case, I am not Inclined to agree with the appellant. Section 45(3) of the Act was Inserted with a view to shut down the escape route available to an individual by entering into a sham transaction with a firm. Section 50C of the Act was Inserted to control transactions in unaccounted Income by practice of under- statement of consideration in acquisition of a property. Whether stamp duty is payable or not, is not a factor relevant for attracting section 50C of the Act. It is a settled legal position that section 45(3) and section 50C of the Act are not exclusive. The appellant in support of his contention has relied on judgment of hon’ble ITAT, Lucknow in Carlton Hotels (P) Ltd Vs. ACIT (supra). is noteworthy that this judgment of hon’ble ITAT was reversed by hon’ble Allahabad High Court in CIT Vs Carlton Hotels Pvt. Ltd, Tax Appeal No. 31 of 2009. The question before the Hon’ble Court was as follows:-
“(1) Whether Tribunal has erred in law in holding that full value of consideration shall be determined as per section 45(3) of and not u/s 50C of the Act, 1961 without appreciating that transfer of land by Assessee, having only 5% share in the firm is as good as transfer to M/s Sahara India Commercial Corporation Ltd., having a share of 90% In the firm and that such transfer of land to firm is only a colourable device to avoid payment of tax ?”
After detailed discussion of all aspects of the case the hon’ble Court answered the above question in favour of Revenue and against the assessee. SLP filed by the assessee against above judgment was dismissed by Hon’ble Supreme Court in SLP (C) No (S) 28637/2017, 2017-TIOL-417-SC-IT. It must be mentioned that facts in CIT Vs Carlton Hotels (supra) are identical to the facts of the present case. In CIT vs Carlton Hotels (supra) also the assessee (Carlton Hotels) had transferred land to the firm as its capital contribution. In this case the court held as follows:-
“90. In the present case, in the garb of entering into a partnership and taking recourse to some earlier laws, an attempt was made to avoid execution of a registered document which would have needed stamp duty to the State and, as result thereof, there could have been an occasion for payment of tax under the Act, 1961. The requirement registration consideration in the light of fact that contribution of Immovable property as partnership asset by a person “transfer” and has the effect of extinguishing or limiting rights and interest the owner partner…. ” (Emphasis supplied)
As said above also, facts of the above case are identical to the facts of the present case and hence ratio of above judgment is squarely applicable to the present case.
In view of discussion above and relying on judgment of Hon’ble Allahabad High Court in CIT Vs Cariton Hotels (supra), I hold that the AO was judtified in making addition of Rs.27,31,250/- u/s. 50C of the Act. Accordingly, addition of Rs.27,31,250/- is upheld. Thus ground of appeal is rejected.
8. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
9. The learned AR before us submitted that property in dispute was transferred by the assessee as capital contribution and therefore, the same is subject to tax under the provisions of section 45(3) of the Act and not under the provisions of section 50C of the Act.
10. On the other hand, the learned DR before us filed paper books which are available on record and vehemently supported the order of the authorities below.
11. We have heard the rival contentions of both the parties and perused the materials available on record. The facts relating to the issue at hand have been elaborately discussed in previous paragraphs. Therefore, we are not inclined to repeat the same for the sake of brevity and convenience. The limited issue before us is to adjudicate that a capital asset transferred by the assessee to a firm as capital contribution can be brought under the net of provisions of section 50C of the Act as held by the revenue authorities or the consideration should be determined as per the provision of section 45(3) of the Act as claimed by the learned AR of the assessee. Before going into the specific question, we proceed to analyze the provision of respective section i.e. section 45(3) and 50C(1) of Act which are reproduced as under:
Capital gains.
45. (1) ***********
(2) **************
(2A) *************
(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
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Special provision for full value of consideration in certain cases.
50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.
11.1 From the perusal of the provisions of section 45(3) of the Act, it is transpired that the said provision is specific provision dealing with regard to value of consideration in the case of a capital asset transferred by the assessee to a firm or AOP/BOI in which such assessee is partner or member and such capital asset is transferred as capital contribution whereas the provision of section 50C(1) of the Act deals with the value of consideration in the case of a capital asset being land or building transferred by an assessee for a consideration which is less than the value adopted for charging stamp duty on such transfer. Thus, in our considered view the provision of section 50C(1) of the Act is general provision in the given facts and circumstances whereas the provision of section 45(3) of the Act is specific provision dealing with the specific transfer of capital assets by the partner to partnership firm by way capital contribution. It is the accepted rule of construction that special provisions would prevail over general provisions as per the famous latin maxim “Generalia Specialibus Non Derogant”. When two conflicting provisions of law operate in the same field, the provision that specifically operates in that field would apply over the general rule. In holding so we draw support and guidance from the judgment of Hon’ble Supreme court in case of State of Rajasthan v. GopiKishan Sen AIR1992 SC 1754 wherein it was held as under:
“The rule of harmonious construction of apparently conflicting statutory provisions is well-established for upholding and giving effect to all the provisions as far as it may be possible, and for avoiding the interpretation which may render any of them ineffective or otiose. In the present case, rule 29 dealing with payment of increment is in general terms while the Schedule in the 1969 Rules makes a special provision governing the untrained teachers, attracting the maxim generalibus specialia derogant, i.e., if a special provision is made on a certain subject, that subject is excluded from the general provision. The Schedule in the 1969 Rules, therefore, must be held to prevail over the general provisions of 1951 Rules.”
11.2 In the case on hand, the present assessee is a partner in a firm namely M/s Pooja Buildcon and transfers land property to such partnership firm by way of capital contribution. This is a specific transaction between partnership and partner for which there is special provision enacted by the legislator vide section 45(3) of the Act. Therefore, in our considered view the consideration in the hand of the partner (present assessee) shall be determined as per the provision of section 45(3) of the Act and not as per the provisions of section 50C of the Act. In this regard we also find support and guidance from the order of the special bench of Delhi Tribunal in case of “DLF Universal Ltd vs. DCIT reported in 36 SOT 1” wherein in identical facts and circumstances the special bench of tribunal held that personal assets contributed by the partner into firm as capital contribution is capital transaction and the same shall be taxed as capital gain and the consideration for the same shall be taken as per the provision of section 45(3) of the Act. The relevant observation of special bench is extracted as under:
Undoubted proposition of law is that that there is no transfer on mere conversion of stock-in-trade into capital assets and/or on revaluation thereof in the assessee’s books and no income arises on such conversion. In other words, there cannot be any actual profit or loss on withdrawal of stock-in-trade from a trading business and its conversion into capital asset. There is no deeming fiction to deem the conversion of stock-in-trade into capital assets as a transfer or to deem the fair market value as on the date of conversion as the cost of acquisition of the capital assets. However, a transfer does take place when any personal asset of a partner is introduced into a firm as his capital contribution, and the value of the asset recorded in the books of the firm shall be deemed to be full value of the consideration received or accruing as a result of the transfer of such an asset contributed by the partner. Consequently, in the instant case, there was no transfer of land held by the assessee as stock-in-trade when the same was merely revalued at a market value in its books and it was converted into capital asset and, thus, no profit or gain had accrued to the assessee merely on its revaluation at a higher value, more than the cost to the assessee in its books or on its mere conversation from stock-in-trade to a capital asset. In such a case, the conversion of stock-in-trade into investment has to be at cost/book value. Thus, the legal proposition that no man can make a profit out of himself or there can not be any real profit/loss on withdrawal of stock from a trading business, shall govern such type of cases.
However, the position would be different in cases where on or after conversion of stock-in-trade into a capital asset either by implication of law or by an act or conduct of the assessee, or otherwise, the asset is contributed to a firm as capital contribution by a partner at the value more than the cost to the assessee. In such a case, there is a transfer of asset taking place and the value of the asset recorded in the books of the firm shall be deemed to be the full value of consideration received or accruing as a result of the transfer of the asset. [Section 45(3)].
Therefore, in the instant case, when the land in question was contri-buted by the assessee to the firm as its capital contribution, in which the assessee became a partner, a transfer of capital asset had taken place, and the amount recorded in the books of account of the firm as the value of the land would be deemed to be the full value of the consideration received or accrued as a result of the transfer of the land, and the profits or gains arising from such transfer would be chargeable to tax as its income of the previous year in which such transfer had taken place.
(x)In the light of the view taken as above, it was to be held that the surplus arose to the assessee from the transaction of contribution of land held by it to the firm as capital contribution and would be assessable to tax as profits or gains under the head ‘Capital gain’ under section 45, and for that purpose, the amount of Rs. 11.50 crores recorded in the books of account of the partnership firm as the value of the land would be deemed to be the full value of the consideration received or accruing as a result of the transfer of the land as so provided under sub-section (3) of the section 45.
11.3 Before parting it is also important to highlight that the learned CIT(A) while confirming the order of the AO, refer the judgment of Hon’ble Allahabad High Court in case of CIT vs. Carlton Hotel Pvt. Ltd. reported in 88 taxmann.com 257. We have perused the judgment of Hon’ble Allahabad High Court in the above-mentioned case and find that one M/s Carlton Hotel Pvt Ltd (CHPL) was holding a land property admeasuring to 364937 sq. ft. out of which a minor portion of land admeasuring to 10000 sq ft was sold to Sahara India Commercial Corporation Ltd (SICCL) vide sale deed and offered capital gain on the same as per the provision of section 50C of the Act. Subsequently, CHPL, SICCL and an individual Mr. I Ahmad entered into agreement to form partnership firm in the name and style of “M/s India Housing” in which CHPL made capital contribution by way of transfer of remaining land at value of Rs. 7,81,96,735/- and SICCL made contribution of Rs. 1,36,37,700/- and NIL contribution made by Mr. I Ahmad. However, profit sharing ratio decided in the ratio of 5% to CHPL, 5% to Mr. I Ahmad and 90% to SICCL. The assessee (CHPL), offer capital gain on transfer of land property to Partnership firm by the adopting the full value of consideration at Rs. 7,81,96,735/- as prescribed under section 45(3) of the Act. However, the AO disputed the same and invoked the provision of section 50C of the Act and worked the full value of consideration accordingly. The action of the AO came to be confirmed by the learned CIT(A). On second appeal by the assessee the coordinate bench of Lucknow Tribunal held that the provision of section 50C of Act cannot be made applicable to transaction of capital assets transferred by assessee to a partnership firm by way capital contribution. The tribunal further held that for such transaction there is specific provision under section 45(3) of the Act and full value consideration shall be determined only as per the provision of section 45(3) of the Act. Thus, the tribunal allowed the appeal of the assessee (CHPL). On appeal by the Department, the Hon’ble Allahabad High Court reversed the order of Lucknow tribunal as discussion and restore the order of the AO. To this extent, the facts involve in the case of the present assessee and in the case of CHPL prima facie seems identical. However, on careful perusal of finding of the Hon’ble Allahabad High Court, we find the Hon’ble High Court reversed the order of Tribunal on completely different footing. As such the Hon’ble High Court held the entire transaction of establishing partnership firm and thereby transferring land to firm for a minor share in profit was sham transaction designed for evading due taxes. As such, the actual transaction was sale of land by the assessee CHPL to SICCL. Therefore, the Hon’ble High in the light of above facts reversed the order of the tribunal and restored the order of the AO. Thus, the principles laid down by the Hon’ble Allahabad High Court in above mentioned case cannot be applied in the case of present assessee and in our considered view, the learned CIT(A) erred in applying such principles in the case of present assessee.
11.4 In view of detail discussion made in above paragraph, we hereby set aside the finding of the learned CIT(A) and direct the AO to take full value of consideration as prescribed under section 45(3) of the Act and work out the amount of capital gain accordingly. Hence the ground of appeal of the assessee is hereby allowed.
12. The next issue raised by the assessee is that the learned CIT(A) erred in confirming the disallowance of claim representing cost of improvement for Rs. 59,91,687.00 only.
13. The necessary facts continue from the previous ground of appeal are that the assessee against the sale of land and transfer of land to partnership firm claimed certain amount incurred in different years as cost of improvement which includes interest paid to one Shri Suresh Patel in different years and compensation paid to one Shri Sanat Non-Trading Association of Rs. 25 Lakh in lieu of cancellation deed executed by the impugned party and parties from whom the assessee purchased the impugned land property.
13.1 However, the AO during the assessment proceedings found that the assessee along with his brother purchased impugned property vide purchases deed dated 10-08-2009 for a consideration of Rs. 70 Lakh out of which an amount of Rs. 45 lakh was paid in cash and remaining amount of Rs. 25 Lakh was paid by cheque. Thus, assessee’s share in the amount paid through cheque was of Rs. 12.5 lakh only whereas the assessee is claiming that he took loan through banking channel for Rs. 40 Lakh from Shri Suresh Patel for purchase of impugned property. The loan from the party Shri Suresh Patel claimed to be received on 18-8-2009 i.e. after purchase of property. The assessee in support of genuineness of loan furnished ledger confirmation from the party for the AYs 2011-12 and 12-13 along with copy of return whereas loan claimed to be taken in A.Y. 2010-11. Thus, the copy of confirmation and ITR of the party has no relevance. The assessee only submitted the bank of the party namely Shri Suresh Patel showing an amount of 40 Lakh as on 18-08-2009 vide cheque no. 3897 transferred from the bank but assessee failed to submit his own bank statement to demonstrate the credit of corresponding amount and utilization of the same. Thus, the AO in view of the above disallowed the claim of cost of improvement on account of interest expenditure which is detailed as under:
