2017 (3) TMI 1313 - AT - Income Tax

Addition u/s 50C - valid transfer through a registered deed by the assessee (through its power of attorney holder) in favour of Shri Ratan Singh - Held that - In the present case, the facts are on a stronger footing as the capital contribution is evidenced by a deed of partnership and the same would be considered as a transfer in relation to capital asset in terms of Section 2(47) read with section 45(3) of the Act. Therefore, we agree with the finding of the ld CIT(A) that the liability to pay tax on capital gains, if any, arises in the hands of the appellant, when the property (purchased by the appellant) was transferred to the books of the partnership firm. Thus, the capital gains, if any, in the hands of the appellant would arise in FY 2006-07 under the provisions of section 45(3) of the IT Act i.e. in the year when such property is transferred to the books of the firm as capital contribution. Hon ble Bombay High Court in case of CIT vs. A.N. Naik Associates (2003 (7) TMI 46 - BOMBAY High Court ) wherein the Hon ble Court have examined the provisions of Section 45(4) of the Act. It held that the expression otherwise used in section 45(4) has to be read with the words transfer of capital assets by a distribution of capital assets, if so read, it becomes clear even when a firm is in existence and there is a transfer of capital assets, it comes within the expression otherwise as the object of the amending Act was to remove the loophole which existed whereby capital gain tax was not chargeable. In the instant case, the firm continue to exist and the subject land has been transferred by the firm (as we have held above) in favour of one of the partners of the firm, Shri Ratan Singh. Therefore, it is for the Revenue to decide whether such transfer in favour of Ratan Singh is taxable in hands of the firm under section 45(4) of the Act or not. To that extent, the above findings of ld CIT(A) stand modified. In light of above discussion taking into consideration the entirety of facts and circumstances of the case, it is the firm in whose name the asset stood prior to the date of the transfer which has transferred the asset (and not the assessee) vide the sale deed dated 12.05.2009. Therefore, it is clear that the assessee cannot be brought to tax in respect of such transfer.

Summary

Issues Involved:
1. Whether the land at Khasra No. 230, Village Naurangabad, was the individual property of the assessee or the property of the firm.
2. Whether the execution of the sale deed by the power of attorney holder constituted a transfer by the assessee in his individual capacity or as a partner of the firm.
3. Applicability of Section 50C of the Income Tax Act for the purposes of levy of capital gains tax in the hands of the appellant.
4. Determination of the tax liability under Section 45(3) and Section 45(4) of the Income Tax Act.

Detailed Analysis:
1. Property Ownership:
The assessee purchased agricultural land at Khasra No. 230 and subsequently contributed it to a partnership firm as capital contribution. The partnership deed dated 19.07.2006 explicitly stated that the land would be considered the firm's asset. This was reiterated in subsequent reconstituted deeds, confirming that the land was the firm's property and not the individual property of the assessee. The firm recorded the land in its books, and the assessee had no individual rights except as a partner.

2. Execution of Sale Deed:
The sale deed executed by the power of attorney holder, Shri Ratan Singh, was contested. The CIT(A) and the Tribunal found that the sale deed did not imply that the assessee sold the land to Ratan Singh. Instead, it was executed to safeguard the firm's interests, as the land was already the firm's property. The assessee had relinquished all rights upon retirement from the firm, and the property continued to be the firm's asset.

3. Applicability of Section 50C:
The AO invoked Section 50C, which deals with the valuation of capital gains on the transfer of property. However, the CIT(A) found that the land was consistently shown as the firm's asset in its returns and books. The Tribunal agreed, stating that the substance of the transaction indicated that the property was the firm's asset, and no consideration passed to the assessee. Therefore, Section 50C was not applicable to the assessee.

4. Tax Liability under Section 45(3) and 45(4):
The CIT(A) held that any capital gains liability arose when the property was transferred to the firm's books in FY 2006-07 under Section 45(3). The Tribunal agreed, stating that the capital gains, if any, would arise in the year of the transfer to the firm. The CIT(A) also mentioned Section 45(4), which deals with the distribution of capital assets on the dissolution of a firm. The Tribunal clarified that the firm continued to exist, and the transfer of the land to Ratan Singh should be examined under Section 45(4) by the AO having jurisdiction over the firm.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the land at Khasra No. 230 was the firm's property, and the execution of the sale deed by the power of attorney holder did not constitute a transfer by the assessee. The applicability of Section 50C was rejected, and any capital gains liability was to be assessed under Section 45(3) in FY 2006-07. The issue under Section 45(4) was to be examined by the AO having jurisdiction over the firm. The appeal filed by the Revenue was disposed of with these directions.