2017 (12) TMI 1677 - AT - Income Tax

Long Term Capital Gain - transfer of land as capital contribution to a Limited Liability Partnership by invoking section 50C - capital contribution u/s 45(3) - determination of full value of consideration received or accrued as a result of transfer of capital asset - whether section 50C overrides provisions of section 45(3) when document of transfer is registered as per the provisions of Registration Act, 1908? - as stamp duty paid for registration of such document, the value determined by the stamp duty authority shall be replaced as full value of consideration as per the provisions of section 50C - HELD THAT - A plain reading of provisions of section 45(3) makes it clear that it comes into operation only in special cases of transfer between partnership firm and partners and in such circumstances, a deemed full value of consideration shall be considered for the purpose of computation of capital gain as per which the amount recorded in the books of account of the firm shall be taken as full value of consideration. Though the provisions of section 45(3) is not a specific provision overrides the other provisions of the Act, importing a deeming fiction provided in section 50C of the Act cannot be extended to another deeming fiction created by the statute by way of section 45(3) to deal with special cases of transfer. Since the Act itself is provided for deeming consideration to be adopted for the purpose of section 48 of the Act, another deeming fiction provided by way of section 50C cannot be extended to compute deemed full value of consideration as a result of transfer of capital asset. We are of the considered view that the profits or gains arising from the transfer of a capital asset by a partner to a firm in which he is or becomes a partner by way of capital contribution, then for the purpose of section 48, the amount recorded in the books of account of the firm shall be deemed to be full value of consideration received or accruing as a result of transfer of a capital asset. The AO cannot import another deeming fiction created for the purpose of determination of full value of consideration as a result of transfer of a capital asset by importing the provisions of section 50C of the Act. Therefore, we reverse the finding of the CIT(A) and delete the addition made towards recomputation of long term capital gain on account of transfer of capital asset into partnership firm.- Decided against revenue Disallowance u/s 14A r.w.r 8D - Assessee has not disallowed expenditure incurred in relation to earn exempt income - HELD THAT - We find force in the arguments of the assessee for the reason that the Hon ble Delhi High Court in the case of CIT vs Cheminvest Ltd 2009 (8) TMI 126 - ITAT DELHI-B has held that where there is no exempt income, disallowance contemplated u/s 14A shall not be worked out. In this case, the fact that the assessee has not earned any exempt income, has not been disputed by the revenue. Therefore, we are of the view that the AO was erred in disallowing expenditure incurred in relation to exempt income u/s 14A by invoking Rule 8D(2)(ii) & (iii) of I.T. Rules, 1962. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. - Decided against revenue

Summary

Issues Involved:
1. Addition in respect of Long Term Capital Gain.
2. Disallowance of expenses incurred in relation to exempt income under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Addition in Respect of Long Term Capital Gain:

The primary issue in the appeal by the assessee was the addition of ?3,81,78,500/- made by the AO in computing Long Term Capital Gain on the transfer of land as capital contribution to a Limited Liability Partnership (LLP) by invoking Section 50C of the Income Tax Act, 1961, ignoring the specific provisions of Section 45(3) of the Act.

The assessee transferred an immovable property as its capital contribution to an LLP, valuing it at ?5.60 crores based on a valuation report. However, the Stamp Duty Authority valued the property at ?9,41,78,500. The AO applied Section 50C, using the higher stamp duty value for computing the capital gain, resulting in a recomputed gain of ?8,74,96,093 against ?4,93,17,593 declared by the assessee.

The CIT(A) upheld the AO's decision, relying on the ITAT Lucknow Bench's decision in Carlton Hotel Pvt Ltd vs ACIT, which held that Section 50C overrides Section 45(3) when the transfer document is registered and stamp duty is paid.

The assessee argued that Section 45(3) is a specific provision for taxing transfers of capital assets between partnership firms and partners, and it should not be overridden by the general provisions of Section 50C. The assessee cited the Supreme Court's decision in CIT vs Moon Mills Ltd, asserting that one deeming fiction should not be extended by importing another deeming fiction.

Upon review, the Tribunal found merit in the assessee's argument, stating that Section 45(3) deals with special cases of transfer and provides a specific mechanism for computing capital gains. The Tribunal held that the AO should not import the deeming fiction of Section 50C into the specific provisions of Section 45(3). Consequently, the Tribunal reversed the CIT(A)'s decision and deleted the addition made by the AO.

2. Disallowance of Expenses Incurred in Relation to Exempt Income under Section 14A:

The revenue's appeal concerned the disallowance of ?42,85,198/- under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules, 1962. The AO disallowed the amount, arguing that the assessee had made significant investments in shares and partnerships, which generate exempt income, and had not disallowed any expenditure related to earning this income.

The assessee contended that it had not incurred any expenditure related to exempt income, and all investments were made from its own interest-free funds. Moreover, the assessee had not earned any exempt income during the year under consideration, citing the Delhi High Court's decision in CIT vs Cheminvest Ltd, which held that no disallowance can be made under Section 14A if no exempt income is earned.

The CIT(A) agreed with the assessee, stating that in the absence of exempt income, disallowance under Section 14A is not warranted. The CIT(A) relied on the Delhi High Court's decision in Cheminvest Ltd and the Bombay High Court's decision in CIT vs Deloitte Enterprises.

The Tribunal upheld the CIT(A)'s decision, noting that the AO's disallowance was incorrect as it was based on general observations without any nexus between the expenditure incurred and the exempt income. The Tribunal emphasized that disallowance under Section 14A cannot be made in the absence of exempt income, aligning with the High Courts' rulings.

In conclusion, the Tribunal allowed the appeal filed by the assessee regarding the addition in respect of Long Term Capital Gain and dismissed the revenue's appeal concerning the disallowance of expenses under Section 14A.

Order pronounced in the open court on 29th December, 2017.