Transfer of a capital asset by partner to firm, by way of capital contribution: Whether section 50C overrides section 45(3)?

Short Overview : Provision of section 45(3) are exhaustive and does not confer any power on the AO to adopt consideration different from what is recorded in the books of account of the firm. Thus, AO was not correct in adopting the market value of land as revalued subsequently by the firm in the books of account. Further, provisions of section 45(3) are special provisions as these deem value of consideration which otherwise is not computable under general law and it is applicable to the specific situations of introduction of capital by partner to the firm and whereas the provisions of section 50C are general in nature and applicable whether consideration is known and determinate. Thus, when there is a specific provision in the statute to deal with a particular kind of transaction, then it would prevail over general provisions.

Assessee-partner had transferred his land to the partnership firm as capital contribution. AO worked out the capital gains by adopting the market value of land as revalued subsequently by the firm in the books of account. Assessee contended that transfer of asset by a partner to the firm as a capital contribution, no doubt constitutes a transfer but the value recorded in the books of the firm was conclusive proof of consideration received towards transfer of the capital asset. He further contended that section 50C could not override section 45(3). Revenue contended that the entire transaction of contribution of asset to the partnership firm was a sham transaction and that section 50C prevails over section 45(3) as the provisions of section 50C are special provisions.

it is held that As per section 45(3), transfer of land by assessee to his firm as capital contribution fairly attracts the capital gains. The provisions of section 45(3) are exhaustive and does not confer any power on the AO to adopt consideration different from what is recorded in the books of account of the firm. Thus, AO was not correct in adopting the market value of land as revalued subsequently by the firm in the books of account. Further, provisions of section 45(3) are special provisions as these deem value of consideration which otherwise is not computable under general law and it is applicable to the specific situations of introduction of capital by partner to the firm and whereas the provisions of section 50C are general in nature and applicable whether consideration is known and determinate. When there is a specific provision in the statute to deal with a particular kind of transaction then it would prevail over general provision. Thus, it cannot be said that provision of section 50C overrides the provision of section 45(3).

Decision: In assessee’s favour.

Referred: D.R. Yadhav v. R.K. Singh (2003) 7 SCC 110, Principal CIT v. D. Ramamurthy, (2018) 410 ITR 236 (Mad) : 2018 TaxPub(DT) 6329 (Mad-HC), Karthikeya v. Sarabhai, (1997) 94 Taxman 164 (SC) : 1997 TaxPub(DT) 1341 (SC), CIT v. Carlton Hotel (P) Ltd. (2017) 399 ITR 611 (All) : 2017 TaxPub(DT) 4806 (All-HC), CIT v. Moon Mills Ltd. (1966) 59 ITR 574 (SC) : 1966 TaxPub(DT) 0220 (SC).

IN THE ITAT, ‘B’ BENCH, CHENNAI

N.R.S. GANE SAN, J.M. AND INTURI RAMA RAO, A.M.

Sarrangan Ashok v. ITO

ITA No.  544/Chen/2019

A.Y.  2015-16

19 August, 2019

Appellant by: B. Ramakrishnan, FCA

Respondent by: B. Sagadevan, Jt. Commissioner of Income Tax

ORDER

Inturi Rama Rao, A.M.

This is an appeal filed by the assessee directed against the order of the Commissioner (Appeals)-15, Chennai, (in short ‘Commissioner (Appeals)’) dt. 29-1-2019 for the assessment year 2015-16.

2. The assessee raised the following grounds of appeal:
3. The order of the learned Commissioner (Appeals) is contrary to law, facts and circumstances of the case.
4. The learned Commissioner (Appeals) erred in confirming the addition of long-term capital gains amounting to Rs. 10,09,84,896. (Tax effect is Rs. 2,28,83,177)

2.1 The learned Commissioner (Appeals) erred in confirming that the provisions of section 45(2) is not applicable to the subject property.

2.2 The learned Commissioner (Appeals) erred in considering the revalued amount as full value of consideration of Rs. 10,42,83,478 while computing capital gains under section 45(3) of the Act.

2.3 The learned Commissioner (Appeals) erred in not considering that the provisions of section 45(3) over rides the provisions of section 50C.

3. For that the learned Commissioner (Appeals) erred in indirectly confirming the levy of interest under section 234A of the Act amounting to Rs. 16,00,771 through computation attached as Annexure to the order though not specifically adjudicating the ground raised in this regard.
4. For that the learned Commissioner (Appeals) erred in indirectly confirming the levy of interest under section 2348 of the Act amounting to Rs. 75,46,491 through computation attached as Annexure to the order though not specifically adjudicating the ground raised in this regard.
5. For that the learned Commissioner (Appeals) erred in indirectly confirming the levy of interest under section 234A of the Act amounting to Rs. 16,541 through computation attached as Annexure to the order though not specifically adjudicating the ground raised in this regard.

For these grounds and such other grounds that may be adduced before or during the hearing of the appeal, it is prayed that the Hon’ble Tribunal may be pleased to delete the long-term capital gains confirmed in the order of the Commissioner (Appeals) and/or pass such other orders as the Hon’ble Tribunal may deem fit.

3. The brief facts of the case are as under:

The appellant is an individual deriving income from business. The return of income for the assessment year 2015-16 was filed on 2-2-2016 disclosing total income of Rs. 13,65,210. Against the said return of income, the assessment was completed by the Income Tax Officer, Non-Corporate Ward 15(1), Chennai (hereinafter referred as ‘assessing officer ‘) vide Order, dt. 29-12-2017 passed under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) at total income of Rs. 23,83,26,510. While doing so, the assessing officer made addition of Long Term Capital Gain arising on account of transfer of capital asset to the firm as capital contribution of Rs. 23,69,78,315. The factual background of the case are as under:-

3.1 The appellant is a partner in a partnership firm called M/s. K.G.P. Builders along with one Shri K.G. Pandian, both having an equal profit share ratio. The partnership firm was created by Deed of Partnership dt. 12-9-2002 and it is formed for the purpose of carrying on the business of real estate. The appellant was owning land of 55.62 cents which was acquired as under:-

(i) The assessee through a Sale Deed dt. 2-1-2006 had acquired 31.52 Cents (13.742 Sq.Ft) out of an extent of 2 Acres and 69 Cents for a consideration of Rs. 9,06,972 evidenced by Doc No. 1/2006 dt. 2-1-2006. The market value of the property was Rs. 13,74,200.

(ii) Another 11.27 cents was acquired through a Settlement deed dt. 26-5-2014. The settler is one Mrs.Padma Ravi, who got the property settled on the same day by her husband. The value of the property settled is mentioned as Rs. 9,00,000. This parcel of land also forms part of the 2 Acres and 69 Cents mentioned above.

(iii) Through another Settlement Deed dt. 26-5-2014, the assessee received another 12.83 cents which again formed part of the larger extent of 2.68 acres. The Settlors in this case is one Shri S. Venkatesh and one Shri Suresh Sarangan, both of them are brothers of the assessee.

(iv) From the above, it is clear that the assessee had owned 31.52 cents acquired by him in the year 2006 in his name and during the relevant financial year, he received through settlement two pieces of land admeasuring 11.27 cents and 12.83 cents aggregating to 24.10 cents. Thus, the assessee had a total extent of 55.62 cents (31.52+11.27+12.83 cents)

3.2. The said land was transferred to the partnership firm M/s. K.G.P. Builders as capital contribution at valuation of Rs. 29,77,300 and accordingly the firm was reconstituted on 2-6-2014. Subsequently the said partnership was reconstituted whereby the value of land was revalued and the corresponding credit was given to the respective capital account in the profit and sharing ratio. Finally based on the market value of the land, the land was revalued and the same was credited to the respective partners account and the share of the appellant was determined at Rs. 23,94,41,006. Based on this valuation, the assessing officer adopted this value as consideration for transfer of the asset to the firm and computed the capital gains by deducting the cost of acquisition, as increased by the cost of inflation index. Accordingly, the assessing officer arrived the Long Term Capital Gain at Rs. 23,69,78,315 and brought to tax.

4. Being aggrieved by the action of the assessing officer, an appeal was preferred before the Commissioner (Appeals) contenting that the provisions of section 45(3) of the Act have no application to the facts of the present case, as the asset transferred to the firm as capital contribution is not capital asset. Without prejudice, it was argued that the value recorded in the books of firm is conclusive evidence of consideration received in respect of the capital contribution to the partnership firm under section 45(3) of the Act. It is further contended that the provisions of section 50C of the Act has no application to the cases covered by provisions of section 45(3) of the Act, as the provisions of Section 45(3) of the Act which itself in the nature of deeming provision and a deeming provision cannot be extended by importing another deeming provision by placing reliance on the decision of the Hon’ble Supreme Court in the case ofCIT v. Moon Mills Ltd. (1966) 59 ITR 574 (SC) : 1966 TaxPub(DT) 0220 (SC). The learned Commissioner (Appeals) considered the above submissions and held that the provisions of section 45(3) and 50C of the Act are squarely applicable to the facts, accordingly directed the assessing officer to compute the capital gain by adopting the proportionate value of revalued asset i.e., the land contributed by the assessee as a consideration instead of 50% of the entire value of the land. Thus the appeal came to be partly allowed by Commissioner (Appeals). Being aggrieved, the appellant is in appeal before us in the present appeal.
5. The learned authorised representative contented that transfer of asset by a partner to the firm as a capital contribution, no doubt constitutes a transfer but the value recorded in the books of the firm is conclusive proof of consideration received towards transfer of the capital asset. In this connection, he placed reliance on the decision of the Hon’ble Jurisdictional High Court of Madras in the case ofPrincipal CIT v. D. Ramamurthy (2018) 410 ITR 236 (Mad) : 2018 TaxPub(DT) 6329 (Mad-HC). He further contented that the provision of section 50C of the Act cannot override the provision of section 45(3) of the Act.
6. On the other hand, the learned Senior Departmental Representative submitted that the entire transaction of contribution of asset to the partnership firm is a sham transaction and it is a device adopted to evade the taxes. He placed reliance on the decision of the Allahabad High Court in the case ofCIT v. Carlton Hotel (P) Ltd. (2017) 399 ITR 611 (All) : 2017 TaxPub(DT) 4806 (All-HC) and the provisions of section 50C of the Act shall override the provisions of section 45(3) of the Act. He further submitted that the provisions of section 50C of the Act prevail over the provisions of section 45(3) of the Act as the provisions of section 50C of the Act are special provisions.
7. We heard the rival submissions and perused the material on record. The appellant entered into partnership in the name and style of M/s. K.G.P. Builders with one Shri K.G. Pandian. Towards the capital contribution, the appellant contributed land whose value was recorded in the books of firm at Rs. 29,77,300. The assessing officer had treated the transaction of capital contribution as the case of transfer of asset and accordingly worked out the capital gains by adopting the market value of the land as revalued subsequently by the firm in the books of accounts. While doing so, the assessing officer adopted 50% of the revalued value of the entire land owned by the firm as the consideration and accordingly computed the capital gains. While doing so, the assessing officer assumed that the revalued figure is the market value which is required to be adopted under the provisions of section 50C of the Act. Accordingly, assessing officer had impliedly applied section 50C of the Act and assessed to capital gains. On appeal before the Commissioner (Appeals), the learned Commissioner (Appeals) upheld the applicability of provisions of section 45(3) of the Act as well as section 50C of the Act, however directed the assessing officer to adopt the revalued value proportionate to the share of land contributed by the partner.

7.1 Therefore, the question that arises to be addressed is whether the transfer of asset by a partner to the firm constitutes a transfer? The provisions of section 45(3) of the Act provides that profits or gains arising from the transfer of a capital asset by a person who is a partner to the firm by way of capital contributions shall be chargeable to tax in the year in which such transfer takes places and it further provides that the value recorded in the books of accounts of the firm shall be deemed to be full value of consideration accrued as a result of such transfer for the purpose of section 48 of the Act. The CBDT Circular No. 495 dt. 22-9-1987 had explained the purpose intend of introducing the provisions of section 45(3) of the Act with effect from 1-4-1988. It is mentioned that the provisions of section 45(3) of the Act was introduced in order to overcome the decision of the Hon’ble Supreme Court in the case of Karthikeya V. Sarabhai, (1997) 94 Taxman 164 (SC) : 1997 TaxPub(DT) 1341 (SC) which held that there is no liability to capital gains in the case of contribution of capital asset by a partner in a firm, since the value of consideration cannot be determined. It was further held that the credit entry made in the partner’s capital account in the books of partners firm does not represent the true value of the consideration. Therefore in the present case, the partnership firm viz., M/s. K.G.P. Builders had recorded the consideration at Rs. 29,77,300. Having regard to these facts, the transaction of introduction of land into the firm by the appellant fairly attracts the capital gains. Therefore we hold that the provision of section 45(3) of the Act are squarely applicable to the facts of the present case.

8. Then the question that may arise is, can the assessing officer disturb the value of consideration recorded in the books of accounts of the firm. The provision of section 45(3) of the Act are exhaustive and does not confer any power on the assessing officer to adopt consideration different from what is recorded in the books of accounts of the firm. The Hon’ble Jurisdictional High Court in the case ofPrincipal CIT v. D. Ramamurthy, (2018) 410 ITR 236 (Mad) : 2018 TaxPub(DT) 6329 (Mad-HC) held that the value recorded in the books of the firm is conclusive as to the consideration received on transfer of asset by a partner to the firm. Therefore, the Hon’ble Madras High Court further held that the assessment has to be done on the basis of value of asset when the firm was constituted, not on the basis of revalued value of the assets. Applying the ratio to the facts of the present case, the value to be adopted by the assessing officer is only Rs. 29,77,300 lakhs which was recorded in the books of accounts of the firm as on date when the firm was constituted.
9. Then the issue that may crop up is whether the provision of section 50C of the Act are applicable to the case covered by the section 45(3) of the Act. We had already discussed the rationale behind the introduction of section 45(3) of the Act. The provisions of section 50C of the Act, provides that for the purpose of computing the capital gains under section 48 of the Act, the higher of two values i.e., the actual consideration received and the value adopted for stamp duty purpose for the valuation of the property shall be deemed to be consideration received. From the mere reading of the provisions of Section 50C of the Act, it would suggest that the provisions are applicable in the cases where there is actual receipt of consideration. The term “actual receipt” implies that there should be physical flow of money. Therefore the provisions of Section 50C cannot be applied to the case of deeming the value of consideration like cases covered by provisions of 45(3). Therefore it is clear that provisions of section 45(3) and 50C of the Act operates in different spheres. There is no overlapping. Further if we were to hold that the provisions of section 50C of the Act overrides the provisions of Section 45(3) of the Act, it would result in a situation where the provisions of section 45(3) of the Act would become otiose. It is a settled principle of interpretation of statute that one should avoid an interpretation which renders a provision otiose. Further had it been the intention of the legislature to make section 50C of the Act, applicable even to the transaction of the contribution of immovable property by a partner into the firm, the Parliament could have either repelled the section 45(3) of the Act, while introducing the provisions of section 50C of the Act, but however the Parliament in its wisdom had retained the section 45(3) of the Act which shows that the Parliament intended to keep the provisions of section 45(3) of the Act. Further the provisions of section 45(3) of the Act, are special provisions as it deems value of consideration which otherwise is not computable under general law and it is applicable to the specific situations of introduction of capital by partner to the firm and whereas the provisions of section 50C of the Act are general in nature applicable whether consideration is known and determinate. It is a rule of construction that the special provisions prevail over general provisions as per Latin Maxim. The Hon’ble Supreme Court in the case ofD.R. Yadhav v. R.K. Singh (2003) 7 SCC 110 held, that when there are two conflicting provisions of law in operation in the same field, the rule that specifically operates in that field would apply over the general rule. Therefore, when there is a specific provision in the statute to deal with a particular kind of transaction then it would be squarely applied. Thus having regard to the principles enunciated above, it cannot be said that provision of Section 50C of the Act overrides the provision of section 45(3) of the Act.
10. In the light of the legal principles enunciated above, we cannot uphold the action of the lower authorities, therefore the orders of the lower authorities are hereby set aside.
11. In the result, the appeal filed by the assessee is allowed.