Transfer of land as share of capital in AOP is taxable u/s 45(3) of Income Tax Act

DCIT Vs Ghanshyamdas J Sukhwani(HUF) (ITAT Pune)

ITAT Pune held that contribution of undivided title and rights in the land as share of capital in AOP is taxable under section 45(3) of the Income Tax Act.

Facts- The assessee is a proprietor of Vikram Constructions, engaged in the business of land development and Builder.

During the assessment proceedings, the AO observed that assessee was owner of the land at Survey No.72/2d, Hissa No.2 to 7, Hadapsar, Pune. During the year, the assessee sold half of the said land to JKG Associates.

The assessee formed an AOP along with JKG Associates and Mantra Majestique Associates vide “Articles of Agreement”. As per Article-6(i), of the said “Articles of Agreement”, the assessee contributed his undivided title and rights in the impugned land which is at Survey No.72/2d, Hissa No.2 to 7, Hadapsar, Pune, as its capital contribution to the AOP. It is also mentioned in Article-6(i) that the AOP shall be entitled to exploit the rights obtained therein for the purpose of its business. Thus, Rs.5 crores was credited to the capital account of the assessee.

The AO taxed Rs.5 crore as business income of the assessee. Aggrieved by the assessment order, assessee filed appeal before ld.CIT(A). The ld.CIT(A) vide his order dated 08.01.2018 allowed the appeal of the assessee.

Conclusion- Held that the transaction of impugned land introduced by the assessee as his share of capital in the AOP is taxable u/s.45(3) of the Act. The AO shall consider the value of Rs.5,00,00,000/- which is credited in the books of accounts , as value of land shall be deemed to be the full value of consideration as a result of transfer of land as provided in Section 45(3) of the Act.

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal filed by the Revenue is directed against the order of ld.Commissioner of Income Tax(Appeals)-6, Pune dated 08.01 .2018 emanating from order under section 143(3) of the Income Tax Act, 1961 for the A.Y.2013-14 dated 29.03.2016. The Revenue has raised the following grounds of appeal:

“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the transfer of stock in trade as capital contribution by the assessee is not taxable in the year under consideration.

2. On the facts and circumstances of the case and provision of law, the Ld. CIT(A) erred in holding that the stock in trade brought into common stock of partnership firm(AOP) by the assessee HUF by credit at an agreed value to the HUF capital does not amount to transfer of asset to the partnership firm(AOP), giving rise to taxable profit.

3. On the facts and circumstances of the case and in law, the CIT(A) failed to consider the decision of the Special Bench of the ITAT, Delhi in the case of DLF Universal Vs DCIT order dated 31/12/2009, where it has been held that provision of section 45(3) of the Act will also apply when stock in trade is introduced into a firm as capital contribution.

4. The appellant craves leave to add, modify or delete any or all of the aforesaid grounds of appeal”

Brief facts of the case :

2. The assessee filed return of income for A.Y.2013-14 on 28.09.2013 by declaring total income of Rs.3,13,66,950/-. The assessee is a proprietor of Vikram Constructions, engaged in the business of land development and Builder. The case was taken up for scrutiny. The Assessing Officer passed order under section 143(3) of the Act on 29.03.2016. During the assessment proceedings, the AO observed that assessee was owner of the land at Survey No.72/2d, Hissa No.2 to 7, Hadapsar, Pune. During the year, the assessee sold half of the said land to JKG Associates. The assessee formed an AOP along with JKG Associates and Mantra Majestique Associates vide “Articles of Agreement” dated 02.11.20 12 which was duly registered with Joint Sub Registrar, Haveli, Pune. In the said “Articles of Agreement”, the assessee i.e. Vikram Constructions prop Ghanshyamdas J Sukhwani (HUF) is referred as party of the first part, JKG Associates is referred as the party of the second part and Mantra Majestique Associates is referred as party of the third part. The said AOP was called as Mantra Majestique Associates(AOP). As per Article-6(i), of the said “Articles of Agreement”, the assessee contributed his undivided title and rights in the impugned land which is at Survey No.72/2d, Hissa No.2 to 7, Hadapsar, Pune, as its capital contribution to the AOP. It is also mentioned in Article-6(i) that the AOP shall be entitled to exploit the rights obtained therein for the purpose of its business. Article-6(ii) is reproduced here as under :

“ii. For making available the rights as per clause (i) above the Joint Venture the value of such contribution of the land shall be Rs. 5,00,00,000/- (Rupees five crore only) and the said amount shall be credited to the capital account of the First party.”

2.1 Thus, Rs.5 crores was credited to the capital account of the assessee.

2.2 Similarly, JKG Associates contributed its undivided title and rights in the impugned land at Survey No.72/2d, Hissa No.2 to 7, Hadapsar, Pune as their capital contribution. For making available the rights, the value of such contribution of the land was taken at Rs.5 crores and credited to the capital account of the JKG Associates.

2.3 It is also mentioned at Article-32 that AOP shall file a separate Income Tax Return and other Tax Returns. It is further mentioned in Article-32 that the AOP shall be responsible for making payment of Income Tax. Accordingly the AOP has filed separate Income Tax Return.

3. The AO taxed Rs.5 crore as business income of the assessee. Aggrieved by the assessment order, assessee filed appeal before ld.CIT(A). The ld.CIT(A) vide his order dated 08.01.2018 allowed the appeal of the assessee. The relevant para 6.2 of the order of ld.CIT(A) is reproduced as under :

“In the present case, the appellant had not entered into any agreement to sell the property to the AOP. This is clear from the various recitals in the articles of agreement. There is no power of attorney provided to the AOP or to any member of the AOP to deal in the property. The stamp authorities have also not treated it as a transfer, as the stamp duty collected on the same is not on the market value of the property but on the refundable advances received by two of the members. The clause 8(v) of the articles of agreement, mentions that all the papers required. pertaining to sanction of the building plans and other clearances shall be obtained by the land owners namely the appellant and JKG Associates. As per the penalty clause 9(B) of the agreement, if the construction of the building of the said property is not commenced by the third party namely M/s Mantra Majestique Associates within six calendar months with the date of execution of .the agreement without any just and sufficient reason, the land owners would be entitled to cancel this agreement and return the deposit without any interest. This clause clearly indicates that there is no absolute transfer of the property by the appellant and the other party JKG Associates, as they have retained the right to cancel the agreement, for any non starting of the project and not for non-payment of the consideration of the land. Further, the clause 10 of the agreement also does not allow the third party to the agreement, M/s Mantra Majestique Associates to mortage the said property or pledge their rights with any financial institution. As per the agreement, the entire project development was to be carried out by the third party and there is no responsibility or liability on the part of the other two partners to the agreement. The clause-12 of the agreement provides that the method of sharing the profits and as per this, the first party and second party are each entitled to 35% of snare in profit and with no liability to share the losses. The clause also provides for minimum assured profit of 22.5% of the sale proceeds to each of the first party and the second party i.e. the land owners. As seen from the various clauses in the agreement, the land owners namely the first party and second party to the agreement have not assumed any liability towards the execution of the project but are entitled to certain fixed ………………… me gross sale proceeds for each is nothing but the consideration for the surrendering the rights in the land by them and not for assuming any business risks. This only leads to conclusion that the land price, has not been determined on the date of the agreement, though it is stated the cost of the land to be adopted is Rs. 10 crores while drawing up the P & L account at the end of the project. It is also seen that there is no capital contribution brought in by the third party. All the expenditures for the completion of the project were to be borne by the third party. This agreement is not truly in the nature of an association of persons though stated so, as the responsibilities and the risks are not borne in the proportionate ratio of the capital brought in by the members. It is more in the nature of joint venture agreement wherein the appellant and the second party introduced their land for development and the construction to be undertaken by the third party along with the risks associated with such construction business. In the light of the various clauses cited above, it is clear that there is no transfer of the property to any party on signing of this agreement. The consideration of the property itself is unascertainable at the time of the agreement, as the appellant is entitled to 22.5% of the sale consideration of the flats to be-constructed.. The consideration as and when received on transfer to the final purchasers has to be assessed in the year of such transfer on proportionate basis of transfer of land. In view of the reason cited above, the addition made by the AO on the ground of the entry, in the books of the AOP cannot be taxed in the current year, as there is no transfer of any stock in trade in the current year. Therefore, the addition made is deleted.”

Submission of ld. Departmental Representative (ld.DR) :

4. The ld.DR submitted a paper book. The ld.DR submitted that as per the Balance Sheet of the assessee, the land is shown as current asset and not as closing stock. In the Balance Sheet for A.Y. 2012- 13 and 2013-14 the closing stock is shown separately and land is show separately. The ld.DR submitted that therefore the ld.CIT(A) erred in stating that assessee has treated land as stock-in-trade. Had the assessee treated the land as stock-in-trade, then it would have also appeared in the profit and loss account of the assessee as closing stock and opening stock, but on perusal of the profit and loss account, it is observed that land is not appearing as closing stock, opening stock in the profit and loss account. This explains that assessee had not treated land as stock-in-trade. The ld.DR relied on the decision of Special Bench of ITAT in the case of “DLF Universal Ltd. Vs. DCIT [2010] 36 SOT 1 (Delhi)”. The ld.DR explained that the Special Bench of ITAT has categorically held that “We therefore hold that the surplus arising from making over assessee ’s personal asset, i.e. said plot of land in question, to the firm as his contribution to its capital account is a profit or gain accrued to the assessee and is chargeable to tax.”

4.1 The ld.DR distinguished the case laws on facts relied by the assessee.

Submission of ld.Authorised Representative of the Assessee :

5. The ld.AR strongly relied on the order of ld.CIT(A). The ld.AR specifically stated that it was a joint development agreement for development of the land. Assessee had not sold the land to the AO. Assessee was entitled to receive profit at 15% of gross sales. The ld.AR further stated that the land was not transferred and it was merely given for development, hence, there was no transfer as envisaged in section 2(47) of the Act.

Findings & Discussions :

6. We have heard both the parties and perused the records. On perusal of the profit and loss account for A.Y. 2012-13 and 2013-14, it is observed that following was closing stock :

The Balance Sheet entries were as under :

6.1 The break-up of land at various sites, for AY 2012-13, is given in the Annexure which contains land at Hadapsar at Survey No.72/2d, Hissa No.2 to 7, Pune, which is the impugned land.

6.2 The ld.AR has claimed that the impugned land was stock in trade of the assessee. However, it is observed that assessee had not shown the impugned land as stock in trade in the balance sheet and Profit & Loss account. Therefore, the claim of the Ld.AR that the land was stock in trade is rejected. The Ld.CIT(A) has accepted the averments of the assessee and held that the land was stock in trade. However, we do not agree with the Ld.CIT(A)’s these findings. The Ld.CIT(A) had failed to appreciate the fact that “stock in trade” has to be shown in the Profit & Loss Account as Stock in trade which the assessee has not shown. Similarly, the assessee has not shown the impugned land as “Stock in Trade” in the Balance Sheet also. The Ld.CIT(A) in para 6, 6.1 of his order held that since the land was “stock in trade” the section 45(3) will not be applicable for stock in trade. However, we have already mentioned that the Ld.CIT(A) has failed to appreciate that the impugned land was not shown by the assessee as Stock in Trade in Profit and Loss Account, Balance Sheet, hence, the findings of the Ld.CIT(A) are factually incorrect.

6.3 The assessee entered into an “Articles of Agreement” dated 02.11.20 12 which is duly registered with Joint Sub-Registrar, Haveli, Pune. The assessee is described as party of the first part, JKG Associates is described as the party of the second part and Mantra Majestique Associates is described as the party of the third part. The Article-1 of the said “Articles of Agreement” is reproduced here as under :

“1. The Parties herein hereby confirm having formed into as an Association of Persons (AOP) to be known in the name and style of “MANTRA MAJESTIQ UE ASSOCIATES (AOP)”

7.1 Thus, vide the Articles of Agreement dated 02.11.2012, Assessee, JKG Associates and Mantra Majestique Associates formed an AOP called Mantra Majestique Associates (AOP).

7.2 The Article-6 of the said Articles of Agreement specifies capital contribution for the AOP. The same is reproduced here as under :

“6. THE CAPITAL OF THE A OP SHALL BE CONTRIBUTED BY THE PARTIES HEREIN AS UNDER :”

A. FIRST PARTY :

i. As a capital contribution the party of the First Part have contributed their respective fifty percent undivided title and rights in the said property as their capital contribution and have made available their respective one half i.e. fifty percent undivided share of the “the said property” to this AOP and the AOP shall be entitled to exploit the rights obtained therein for the purpose of its business.

ii. For making available the rights as per clause(i) above the Joint Venture the value of such contribution of the land shall be 5,00,00,000/- (Rupees five crore only) and the said amount shall be credited to the capital account of the First party.

iii. If at any stage it is required to make any payments to the previous Owners of “the said property” or any person connected therewith on any account, it would be the liability of the party of the First Part only and the AOP and the party of the Third Part will not be responsible for the payment of any such liability.

B. SECOND PARTY :

i. As a capital contribution the party of the Second Part has contributed their one half i.e. fifty percent undivided title and rights in the said property as their capital contribution and have made available their respective fifty percent undivided share of the “the said property” to this AOP and the AOP shall be entitled to exploit the rights obtained therein for the purpose of its business.

ii. For making available the rights as per clause (i) above the Joint Venture the value of such contribution of the land shall be 5,00,00,000/- (Rupees five crore only) and the said amount shall be credited to the capital account of the party of the Second part.”

7.3 Thus, as per the “Articles of Agreement”, the assessee and JKG Associates has contributed land as capital in the AOP.

7.3.1 It is mentioned in the Article 24 of the “Article of the Agreement” that the agreement of sale to be entered with the purchaser of proposed housing residential flat and other premises shall be in the name of AOP and the proposed purchaser. This explains that the Assessee had relinquished its rights in the land in favour of the AOP. Therefore as per Section 2(47)(ii) of the Act it is Transfer . Section 2(47) of the Act is reproduced here as under :

(47) [“transfer”, in relation to a capital asset, includes,—

(i) **************** or

(ii) the extinguishment of any rights therein³⁷; or

7.3.2 Thus, extinguishment of Right in Land is Transfer .

7.4 The Special Bench of ITAT Delhi in the case of DLF Universal Ltd. Vs Dy.Commissioner of Income Tax [2010] 3 ITR (T) 635 (Delhi)(SB) vide order dated 4/01/2010 has held as under:

Quote, “It is altogether a different matter that before contributing any personal asset by the partner to a firm, it might have a character of stock-in-trade or capital asset or any other asset in the hands of a partner, but at the time when the same is contributed as capital contribution in a firm in which the ass essee becomes a partner, it would certainly have a character of capital asset only having regard to the capital natural of the transaction and nature of rights acquired by a partner in the firm on his becoming a partner. In other words, whatever may be the character of the property in the partner’s hand before the same is brought in by the partner as capital contribution when a partnership is formed and he becomes a partner, the property brought in partakes the character of a capital asset” Unquote.

7.4.1 Thus, the special bench of ITAT has held that once an asset is contributed as capital in a partnership firm, irrespective of its nature it partakes the character of capital asset.

7.5 In the case under consideration, the assessee contributed his land as Capital in the AOP. The assessee is liable to receive share of profit of AOP as mentioned in the Article 11 of the “Articles of Agreement” vide which the AOP was formed. Therefore, the facts of the present case are identical to the facts of the case of DLF Universal Ltd (supra). Therefore, respectfully following the ITAT Special Bench (supra) it is held that the land which was introduced as Capital by the assessee in the AOP and has been duly credited to his capital account of AOP, partakes the character of Capital Assets.

7.6 The Section 45(3) of the Act applicable for the year under consideration is reproduced here as under for ready reference :

Quote, “Capital gains.

45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H,be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place.

(1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction oj any capital asset, as a result of—

(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

(ii) riot or civil disturbance; or

(iii) accidental fire or explosion; or

(iv) action by an enemy or action taken in combating an enemy

(whether with or without a declaration of war),

then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.

Explanation.—For the purposes of this sub-section, the expression “insurer” shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).

[(1B) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any amount under a unit linked insurance policy, to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereoj including the amount allocated by way of bonus on such policy, then, any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such amount was received and the income taxable shall be calculated in such manner as may be prescribed

(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

(2A) Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as income of the depository who is deemed to be the registered owner of securities by virtue of sub-section (1) of section 10 of the Depositories Act, 1996, and for the purposes of—

(i) section 48; and

(ii) proviso to clause (42A) of section 2,

the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method. Explanation.—For the purposes of this sub-section, the expressions “beneficial owner”, “depository” and “security” shall have the meanings respectively assigned to them in clauses (a), (e) and (l) of sub-section (1) of section 2 of the Depositories Act, 1996.

(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. ” Unquote.

8. In the case under consideration the assessee has introduced his land as his share of Capital in the AOP. The land partakes character of Capital Asset as discussed in earlier paragraph. Therefore, provisions of Section 45(3) are applicable in the case of the assessee. Section 45(3) is a deeming provision.

9. On identical facts the Special Bench of ITAT Delhi in the case of DLF Universal Ltd. Vs Dy.Commissioner of Income tax [2010] 3 ITR (T) 635 (Delhi)(SB) vide order dated 4/01/2010 has held in para 16.49 (x) as under :

Quote, “In the light of the view we have taken above, we, therefore, hold that the surplus arising to the assessee from the transaction of contribution of land held by it to a firm as capital contribution shall be assessable to tax as profit or gains under the head “capital gain” under section 45 of the Income-tax Act, and for that purpose, the amount of 11.50 crore recorded in the books of account of the partnership firm as the value of the land shall 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 of the Act, effective from the assessment year 1988-89.”

Unquote.

9.1 Respectfully following the decision of ITAT Special Bench(supra), we hold that the transaction of impugned land introduced by the assessee as his share of capital in the AOP is taxable u/s.45(3) of the Act. The AO shall consider the value of Rs.5,00,00,000/- which is credited in the books of accounts , as value of land shall be deemed to be the full value of consideration as a result of transfer of land as provided in Section 45(3) of the Act. The AO shall accordingly calculate the Capital gain.

10. We will like to mention here that the Ld.CIT(A) failed to appreciate the Article 6 of the “Article of Agreement” vide which the AOP was formed. The Ld.CIT(A) treated the said transaction as Joint Venture Agreement for development of land. In the Joint Venture Agreement for development of land the persons do not for an AOP and they do not introduce land as Capital contribution. In the case under consideration the three persons formed an AOP by a registered Agreement. In the said agreement specific share of profit of each person is mentioned and specific capital is mentioned. Once the assessee introduced the land as capital contribution to the AOP, the assessee no longer has any right over the impugned land. The assessee has transferred his rights in the impugned land, the moment the impugned land was introduced as Capital contribution of the assessee in the AOP. The impugned land became property of the AOP. It is also mentioned in the Agreement that AOP shall file its return of income and pay taxes. These facts were not considered by the Ld.CIT(A). The AOP had filed return of Income for A.Y. 2013- 14 vide E-filling Acknowledgement No.820200121161013 dated 16/10/20 13. The AOP had shown the profit sharing ratio as under in the return of Income:

11. Therefore, for elaborate reasons discussed in earlier paragraphs, we hold that the transaction of impugned land introduced by the assessee as his share of capital in the AOP is taxable u/s 45(3) of the act, as discussed in earlier paragraphs, accordingly, grounds of appeal of the revenue are allowed.

12. We will also like to mention here that M/s.J.K.G Associates in its return of Income for A.Y.2013-14 has shown the introduction of capital of Rs.5,00,00,000/- in the AOP Mantra Majestique Associates(AOP) and offered it for taxation. The said amount of 5,00,00,000/- is shown in the Profit & Loss Account under the head Sale. This fact is mentioned here because the Ld.AR has argued that no addition has been made in the case of JKG Associates by department. The Department has not made any addition on this issue because the JKG Associates have Suo-moto offered it for taxation.

Rebuttal of case laws relied by the ld.AR:

13. The Ld.AR has relied on the following case laws. Ø Dheeraj Amin Vs ACIT (ITAT Bangaloe)

> Chaitanya properties Vs JCIT (ITAT bangalore)

> Shri Challa Ramakrishna Anantapur vs ACIT (ITAT Hyderabad)

> Ito Vs Shri Vilas Babanroa Rukari (ITAT Pune)

> Ashok Gordhandas Kirpalani Vs ITO (ITAT Pune)

> DCIT Vs Clean City Estates Pvt. Ltd. (ITAT Pune)

> Sun Enterprise Vs ITO (ITAT Mumbai)

> CIT Vs Mrs. Hemal Raju Shete (Bombay HC)

> CIT Vs Knb Investments Pvt. Ltd. (Andhra Pradesh HC) 367 ITR 616

> Keshavji Karsondas Vs CIT (Bombay HC) 207 ITR 737

> CIT Vs Jannhavi Investments Pvt. Ltd. (BOMBAY HC) 304 ITR 276

> ACIT Vs Reliance Transport & Travels Pvt. Ltd. (ITAT Mumbai)

> Smita conductors Let. Vs DCIT (ITAT Mumbai) 152 ITD 417 1

13.1 These case laws pertain to the issue of Transfer as defined in section 2(47) of the Act in the context of Joint Development Agreement. In these cases the assessee had not introduced the land as his share of capital contribution in the firm or AOP. However, in the case under consideration, the assessee Ghanshyam Sukhwani (HUF) had introduced his share of land as capital contribution in the AOP. Therefore, the case laws relied by the assessee are distinguishable on facts and not applicable to the case under consideration.

14. All other case laws relied by the assessee are distinguishable on facts and hence not applicable in the case of the assessee.

15. Accordingly, the Revenue appeal is Allowed.

Order pronounced in the open Court on 5^th April, 2023.