CA Aayush Jain
Many times it happens that a person contributes capital in a partnership firm in the form of land or building in order to become a partner. It has been noted that the tax consequence in such cases is not clear since two sections comes into play in such kind of transactions-Section 45(3) and Section 50C of the Income Tax Act, 1961. The aforesaid issue has been discussed below in detail.
As per section 45(3) of the Income Tax Act, whenever a partner contributes any capital asset in the partnership firm then the value of capital asset recorded in the books of accounts of the firm is to be considered as the full value consideration for the purpose of computing capital gain. On the other hand, as per section 50C, if the value adopted for stamp duty purpose is higher than the declared transaction value then the value adopted for stamp duty purpose will be considered as the full value consideration for the purpose of computing capital gains.
Therefore, the issue that arises here is that in case of contribution of land or building in partnership firm whether the value recorded in books of accounts of the firm [section 45(3)] or the value adopted for stamp duty purpose [section 50C] will be considered as the full value consideration for the purpose of computing capital gain.
The same issue has been resolved in the case of Carlton Hotels (P) Ltd. vs. ACIT (2009) 122 TTJ 515 (Lucknow) where it was held that where immovable property is transferred by a partner to the firm as a capital contribution and registration does not take place by paying stamp duty, the case would be covered under section 45(3) and the provisions of section 50C cannot be invoked. Section 50C overrides section 45(3) only if the sale deed is sought to be registered by paying stamp duty.
Also in the case of Navneet Kumar Thakkar vs. ITO (2007) 110 ITD 525 (Jodhpur SMC) it was held that despite contribution of land to the firm it continues to be legally owned by the partner since registration of property is not done therefore section 50C shall not apply and hence the capital gains shall be computed by taking into consideration the full value consideration as per section 45(3).
However, as per amendments made by Finance Act, 2009 the word ‘assessable’ has been included in section 50C implying that the value adopted for stamp duty purpose shall be considered as full value consideration even if no registration takes place. Hence, the above decisions stand overruled.
But, in my opinion, section 45(3) shall overrule section 50C because section 50C says as follows
“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 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 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.” Therefore by carefully reading section 50C of the Income Tax Act, 1961 it can ruled out that the partner who is contributing land or building to a partnership firm shall receive some consideration in return then only the provisions of section 50C can be invoked. Also the Supreme Court in case of Sunil Sidharthbhai vs. CIT (1981) 156 ITR 509 held that it is impossible to evaluate the consideration received by a partner who has contributed his /her personal asset to a partnership firm and hence such consideration shall not fall within the terms of section 48. Hence by reading section 50C along with the above Supreme Court judgment it can be said that the provisions of section 50C shall not apply in case of contribution of land or building to a partnership firm.
Hence, in my opinion it can be safely concluded that the provisions of section 50C shall not be invoked in case contribution of land or building to a partnership firm and the capital gains shall be computed by taking full value of consideration as per section 45(3). However, as on today, there are no clear judgments in this regard.
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(Republished with Amendments by Team Taxguru)