Juneja & Sumeet Khurana
When a partnership firm is formed for
carrying on real estate business and a partner contributes land or building
therein then the tax consequence of contribution of such land or building
becomes a tricky issue. The computation
of the capital gain on this transaction is a challenge because of two Sections
that are apparently applicable but conflicting in their approach. This article seeks to analyse the issue and
attempts to provide some thoughts towards the solution thereto.
As per Section 45(3) of the Income tax
Act, 1961 ('the Act') when any capital
asset is contributed to the firm by a partner then the 'value' of that asset as 'recorded
in the books of account' of recipient firm is taken as full value of consideration of the transfer of that
asset for levy of capital gains tax. On
the other hand, if a land or building
is transferred by any person to any other
person, then as per Section 50C, value adopted for levying stamp duty is to
be considered as full value of consideration, for computing capital gains,
provided such value is higher than declared transaction value.
When a partner contributes land or
building to the firm then whether the amount recorded in books of account of
the firm is to be adopted [as required under Section 45(3)] or value adopted
for stamp value [as per Section 50C] is a question that requires careful
Section 45(3) creates a deeming fiction
and was introduced by the Finance Act, 1987 with the objective [see end note 1]
to overrule the Supreme Court decision in Sunil Sidharthbhai
[see end note 2].
Supreme Court in that case had held that when the assets are transferred
from partner to a firm, no determinable
consideration is received by that
partner within the meaning of Section 48, nor does any profit or gain accrue to
him in commercial sense, and therefore, chargeability under Section 45 doesn’t
arises. To get over the
conundrum of determinability, the law provided that value recorded in books of
account be adopted. On the other hand, the provisions of Section 50C of
the Act is a special provision intended to deal with unaccounted money
generated by under-reporting of the sale price.
The issue before hand came up for
consideration in the case of Carlton Hotel (P) Ltd.
[see end note 3]. However,
the controversy was resolved by stating that Section 50C is
not applicable on a standalone basis. Following Navneet Kumar Thakkar
[see end note 4] it was held that despite
contribution of land to the firm it continues to be legally owned by the
partner since registration of the property has not been carried out. The ITAT
was of the view that for want of registration, stamp duty has not actually been
assessed as a result Section 50C does not apply. Resultantly only Section 45(3)
was held as applicable. Now the
provisions of Section 50C stand amended [see end note 5] and if the stamp value is not actually assessed
then the value at which it would have been assessable [see end note 6] is required to be adopted under Section
50C. This amendment, in effect, impliedly overruled the aforesaid decision
pronounced by Lucknow and Jodhpur benches of Tribunal. Hence
the problem of resolving conflict between Section 45(3) and 50C has become acute.
conflict was resolved denying the applicability of Section 45(3) when contrasted with applicability of transfer pricing
provisions. AAR held that the value of consideration shall not be the value as
recorded in the books of the firm, but the same shall be determined on the
basis of arm’s length price in accordance with transfer pricing provisions [see end note 7].
We have hereunder independently
interpreted the provisions in dispute and provided our preliminary conclusion.
It is a settled principle that a statute must be read as a whole and one
provision of the Act should be construed with reference to other provisions in
the same Act so as to make a consistent enactment of the whole statute [see end note 8].
The rule of construction is well settled that when there are, in an enactment,
two provisions which cannot be reconciled with each other, they should be so
interpreted that, if possible, effect should be given to both [see end note 9].
Looking from this perspective one would feel that objective of Section 45(3)
was to bring the transaction within tax net by providing computation mechanism
and objective of Section 50C is to ensure that the tax is levied on the proper
sum of money. Therefore the value adopted for Section 50C should be adopted so
that the objectives of both the sections are met.
General v. special provision: Another
well known rule is to classify two apparently conflicting provisions as general
and special. The rule requires that
specific provision should be read as overruling the general one, and the
general enactment must be taken to affect only the other parts of the statute
to which it may properly apply [see end note 10].
Examined from this perspective, we find
that the provisions of Section 50C are specific with respect to class of assets
(being land or building), whereas the provisions of Section 45(3) are general
as far as the class of assets is concerned, but specific to a category of
transaction (between partner and firm).
It appears difficult to arrive at a conclusion based on this rule.
Scope of a legal fiction: Legal
fictions are created only for a definite purpose and they are limited to the
purpose for which they are created and should not be extended beyond their legitimate field [see end note 11].
Even from this perspective one would say that objective of Section 45(3)
was to bring the transaction within tax net while objective of Section 50C is
to ensure that the tax is levied on the proper sum of money and therefore value
adopted for Section 50C should be adopted so that both the objectives are met.
Literal rule is the 'Golden Rule': The opening part of Section 50C
reads as "where the consideration received or accruing
as a result of the transfer.......is less than the [stamp] value". Therefore, for invoking the provisions
of Section 50C, there must be a 'consideration' received or accruing. It needs to be carefully examined whether any
consideration is received or accruing as a result of transfer, in real sense,
when an incoming partner contributes land and building as his capital in the
firm. The Supreme Court in Sunil Sidharthbhai
[see end note 12] made an important
observation in this regard, “It is impossible to conceive of evaluating the
consideration acquired by the partner when he brings his personal asset into
the partnership firm.....In the circumstances, we are unable to hold that the
consideration which a partner acquires on making over his personal asset to the
partnership firm as his contribution to its capital can fall within the terms
of Section 48.”
The proposition that the consideration
received or accruing cannot be determined when a land and building is
transferred by a partner to a firm was thus affirmed in Supreme Court judgment
(supra) and in real sense, no determinable consideration is received or accrued
as a result of transfer in such a case where an incoming partner introduces capital asset as his contribution to the
firm. It is for this reason Section 45(3) was introduced to provide for
deeming an amount as 'full value of consideration' an expression different from
'consideration' appearing in Section 50C.
The former is a deemed one which can neither be received nor accrued.
Based on a detailed analysis of the
relevant provisions of the Act as well as the relevant decisions of various
Courts and Tribunals in this context, followed by the amendment that was
introduced by Finance (No.2) Act, 2009; it
can be contended that Section 50C could not be invoked in such a case, which as
a matter of fact can be invoked in cases where an actual sum of consideration is received or accrued as a result of
transfer in real sense and not a fictitious amount. The adverse ruling of Canoro Resources (supra) can be independently supported by a
different legal reasoning and in view of the authors should not affect the
conclusion herein above.
[The authors are, respectively, Senior Associate and
Director, Direct Tax Practice, Lakshmikumaran & Sridharan, New Delhi
No. 495 dated 22/09/1987
- (1981) 156 ITR 509
- (2009) 122 TTJ 515 (Luck)
- (2007) 110 ITD 525 (Jodhpur SMC)
- Finance (No. 2) Act,
- Clause 25 of the Memorandum
explaining the Finance Bill, 2009
Re: Canoro Resources Ltd. 313 ITR 2 (AAR)
Pentiah v. Veeramallappa Muddala, (1961) 2 SCR 295
Begum v. Prem Chand Jain, 1997 AIR 1006, p. 1009,1010
Das Paramanand Das v. ITO, (1979) 117 ITR 174 (Cal)
v. T.S. Rajam, (1980) 125 ITR 207 (Mad), Cambay Electric Supply Ind. Co. Ltd.
v. CIT (1978) 113 ITR 84(SC)
- (1981) 156 ITR 509