Transfer of Land as Capital Contribution & Stamp Duty issues thereon

There are following two issues arise when a partner transfers a land as a capital contribution to the partnership firm

Question 1. Whether transfer of Land from Partners to Partnership firm will amount to ‘Transfer’ for the purpose of capital gain and if it is a transfer then what will be the full value of consideration for the purpose of section 48 of income tax act?

Question 2. Whether there should be a formal transfer of property between the partners and the partnership firm and is there any stamp duty will be payable on this transfer?

Answer to question no. 1

According to the sub-section (3) of Section 45 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. 

Accordingly, the same transfer will be treated as “Transfer for the purpose of Section 45 (3) and the Full Value of consideration will be the amount recorded in the books of account of the firm.

 There are judgments to the effect 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 [Carlton Hotels vs. ACIT (2009) 122 TTJ 515 etc.]. However, after amendment to section 50C by F.A. 2009, even unregistered transfers shall also be subject to section 50C however in my opinion still after the said amendment, section 50C shall not override section 45(3), as there is no judgement available to this effect, for the post amendment years.

Answer to question no. 2

Section 5 of the Transfer of Property Act, 1882, defines transfer of property as an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself and one or more other living persons. Thus, a person can transfer a property from himself to himself and one or more other living persons.

In Prem Raj Brahmin v. Bhani Ram Brahmin [1946] ILR 1946 1 Cal 191, a Division Bench of the Calcutta High Court referred to Section 239 of the Indian Contract Act and Section 14 of the Indian Partnership Act and hold that under the provisions of those two Acts for the purpose of bringing the separate properties of a partner into the stock of the firm it is not necessary to have recourse to any written document at all, that as soon as a partner intends that his separate properties should become partnership properties and they are treated as such, then by virtue of the provisions of the Contract Act and the Partnership Act, the properties become the properties of the firm and that this result is not prohibited by any provision in the Transfer of Property Act or the Indian Registration Act.

So If the immovable property is being transferred formally from a partner’s name to the partnership firm’s name or in names of the partners, and there is regular transfer/ conveyance deed, etc., then of course payment of registration fees, stamp duty would be required.

However, if the immovable property continues to be in the personal name of the partner and it is not formally transferred to the firm’s name through a conveyance deed then no payment of registration fees, stamp duty would be required and it will considered as partnership property under section 14 of the partnership act.