2022 (9) TMI 1231 - AT - Income Tax

Addition u/s 45(3) - assessee has contributed land as contribution towards capital in the partnership firm - determination of cost of acquisition - HELD THAT - The purchase cost of the said part of the land was determined at Rs.3,43,12,394 as against the purchase cost computed by the assessee at Rs.4,60,75,840. The assessee contended that the Assessing Officer had not taken into consideration, the improvement cost accepted by the revenue determined from year to year in the past while computing the proportionate cost of the land. AO had not considered the relevant evidences and documents furnished at the time of assessment proceedings. In this regard, we direct the AO to follow the direction of the CIT(A) to verify the sum capitalised by the assessee and considered the correct cost of acquisition as accepted by the Revenue in the preceding years and recompute the capital gains accordingly. Therefore Ground of the assessee is allowed for statistical purposes. Applicability of provisions of section 45(3) or provision of section 50C of the Act in the case of the assessee - Section 45(3) is the specific provision which states that profit or gain arising from the transport of the capital asset by a person to a firm or other association of persons or body of individual (not being a company or a co-operative society) in which he becomes a partner or member by way of capital contribution shall be chargeable to tax as his income for the previous year for which such transfer takes place. For the purpose of section 48, the amount recorded in the books of accounts of the firm as capital asset shall be deemed to be full value of consideration received or accrued as a result of the transfer of capital assets. Hon ble Supreme Court in the case of Pr. CIT Vs. Dr. Ramamurthy ( 2018 (9) TMI 1102 - SC ORDER ) held that for the purpose of computing capital gain u/s.45(3) of the Act, value of assets recorded in the books of account of a firm on date of transfer would be deemed to be full value of consideration received or accrued as a result of transfer. In the case of DCIT Vs. Amartara Pvt. Ltd. 2020 (4) TMI 222 - ITAT MUMBAI it is held that profit or gains arising from the transfer of capital asset by a partner to a firm in which he become a partner by way of capital contribution, then for the purpose of section 48, the amount recorded in the books of accounts of the firm shall be deemed to be full value of consideration received or accrued as a result of transfer of capital asset. - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 45(3) vs. Section 50C of the Income Tax Act, 1961.
2. Computation of cost of acquisition for capital gains calculation.

Issue-wise Detailed Analysis:

1. Applicability of Section 45(3) vs. Section 50C of the Income Tax Act, 1961:
The primary issue in this case is whether the provisions of Section 50C, which deals with the valuation of consideration for the transfer of capital assets based on stamp duty valuation, can override the specific provisions of Section 45(3). Section 45(3) states that when a person transfers a capital asset to a partnership firm as a capital contribution, the value recorded in the books of the firm shall be deemed to be the full value of consideration received or accrued as a result of the transfer.

The assessee transferred land to a partnership firm and recorded the value at Rs. 4,95,00,000 in the firm's books. However, the Assessing Officer (AO) applied Section 50C and considered the stamp duty value of Rs. 9,11,10,000 as the deemed consideration, leading to a higher capital gain calculation.

The Tribunal analyzed various judicial pronouncements, including decisions from the Supreme Court and other ITAT benches, which consistently held that Section 45(3) is a specific provision dealing with transfers to partnership firms and should prevail over the general provisions of Section 50C. The Tribunal cited the Supreme Court ruling in Pr. CIT Vs. Dr. D. Ramamurthy, which affirmed that for computing capital gains under Section 45(3), the value recorded in the firm's books is deemed to be the full consideration.

The Tribunal also referenced decisions such as DCIT Vs. Amartara Pvt. Ltd. and ITO Vs. Chiraayu Estate & Dev. Pvt. Ltd., which supported the view that the deeming fiction in Section 50C cannot be extended to override the specific provisions of Section 45(3). Consequently, the Tribunal concluded that the AO's application of Section 50C was incorrect, and the value recorded in the firm's books should be considered for computing capital gains.

2. Computation of Cost of Acquisition for Capital Gains Calculation:
The second issue pertains to the correct computation of the cost of acquisition of the transferred land. The assessee claimed a cost of acquisition of Rs. 4,60,75,840, while the AO determined it at Rs. 3,43,12,394. The assessee argued that the AO did not consider the improvement costs accepted by the Revenue in previous years.

The Tribunal directed the AO to follow the directions of the Commissioner of Income Tax (Appeals) (CIT(A)) to verify the sum capitalized by the assessee and consider the correct cost of acquisition as accepted by the Revenue in preceding years. This verification would ensure an accurate computation of capital gains.

Conclusion:
The Tribunal allowed the appeal in favor of the assessee regarding the applicability of Section 45(3) over Section 50C, affirming that the value recorded in the firm's books should be deemed the full consideration for capital gains computation. The Tribunal also directed the AO to verify and correctly compute the cost of acquisition, allowing the appeal for statistical purposes.