Case Law Details
The assessee was engaged in the business of real estate development. It held land as stock in trade with a book value of Rs. 4.4 crs. The said land was introduced at its market value of Rs. 11.50 crs as capital contribution into a new firm. The surplus of Rs. 6.01 crore was credited to the profit and loss account. Relying on Hind Construction 83 ITR 211 (SC), it was claimed that the surplus of Rs. 6.01 crs was not liable to tax as the introduction of an asset into a partnership was not a sale.
It was also claimed that s. 45 (3) was applicable only to capital assets and not to stock-in-trade. The AO and the CIT (A) took a contrary view relying on Sunil Siddharthbhai 156 ITR 509 (SC) & McDowell 154 ITR 148 (SC). On appeal by the assessee, HELD by the majority, dismissing the appeal:
(i) In Sunil Siddharthbhai it was held that when a partner introduces his asset into a firm as capital contribution, there is a “transfer” though the gains are not chargeable to tax as the consideration is not determinable. It was clarified that this principle did not apply if the partnership was non-genuine or sham or where the transaction of transferring the personal asset to the partnership firm was a device or ruse to convert personal assets into money while evading tax on capital gains;
(ii) On facts, though there was no material to hold that the partnership was non-genuine or a sham, the assessee had adopted a calculated device of converting land into money by withdrawing substantial sums from the firm and debiting the same to its current account. Accordingly, though the partnership firm was genuine, the contribution by the assessee of its personal land to the share capital of the firm was a device or ruse for converting land into money for its benefit. Thus, the entry of Rs. 11.50 crs being the value of land credited in assessee’s capital account was not imaginary or notional. The surplus was chargeable to tax;
(iii) S. 45 (3) applies when a capital asset is introduced into a firm as capital contribution. This provision applies also 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. This is also shown by the fact that the assessee revalued the stock-in-trade to its market value prior to the introduction into the firm. Consequently, the gains on such transfer is taxable u/s 45(3);
Please become a Premium member. If you are already a Premium member, login here to access the full content.
