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2023 (5) TMI 407 - AT - Income TaxCapital gain on sale of land - transfer of stock in trade as capital contribution by the assessee - assessee (HUF) had introduced his share of land as capital contribution in the AOP - capital asset u/s 2(14) - AO stated that the land was not transferred and it was merely given for development, hence, there was no transfer as envisaged in section 2(47) - HELD THAT - In the case under consideration, the assessee contributed his land as Capital in the AOP. The assessee is liable to receive share of profit of AOP as mentioned in the Article 11 of the Articles of Agreement vide which the AOP was formed. Therefore, the facts of the present case are identical to the facts of the case of DLF Universal Ltd 2010 (1) TMI 54 - ITAT DELHI-B . Therefore, as held that the land which was introduced as Capital by the assessee in the AOP and has been duly credited to his capital account of AOP, partakes the character of Capital Assets. Thus provisions of Section 45(3) are applicable in the case of the assessee. Section 45(3) is a deeming provision. As relying on case of DLF Universal Ltd. supra we hold that the transaction of impugned land introduced by the assessee as his share of capital in the AOP is taxable u/s.45(3) of the Act. The AO shall consider the value of Rs.5,00,00,000/- which is credited in the books of accounts, as value of land shall be deemed to be the full value of consideration as a result of transfer of land as provided in Section 45(3) of the Act. The AO shall accordingly calculate the Capital gain.
Issues Involved:
1. Taxability of transfer of stock in trade as capital contribution. 2. Whether the stock in trade brought into common stock of partnership firm (AOP) amounts to transfer of asset. 3. Applicability of Section 45(3) of the Income Tax Act when stock in trade is introduced into a firm as capital contribution. Summary: Issue 1: Taxability of Transfer of Stock in Trade as Capital Contribution The Revenue contended that the transfer of stock in trade as capital contribution by the assessee is taxable in the year under consideration. The Assessing Officer (AO) taxed Rs. 5 crore as business income of the assessee. However, the Commissioner of Income Tax (Appeals) [CIT(A)] held that the transfer was not taxable as there was no absolute transfer of the property by the assessee and other parties. The CIT(A) emphasized that the property was not sold but contributed for development purposes, and the consideration was unascertainable at the time of the agreement. Therefore, the addition made by the AO was deleted. Issue 2: Whether the Stock in Trade Brought into Common Stock of Partnership Firm (AOP) Amounts to Transfer of Asset The AO argued that the stock in trade brought into the partnership firm by the assessee HUF amounted to the transfer of an asset, giving rise to taxable profit. The CIT(A) disagreed, stating that the land was not treated as stock in trade in the assessee's balance sheet and profit & loss account. The CIT(A) concluded that the land was not transferred but merely given for development, and thus, no transfer as envisaged in Section 2(47) of the Act occurred. Issue 3: Applicability of Section 45(3) of the Income Tax Act The Revenue cited the Special Bench decision in DLF Universal Ltd. Vs DCIT, asserting that Section 45(3) applies when stock in trade is introduced into a firm as capital contribution. The Tribunal observed that the assessee had not shown the impugned land as stock in trade in the balance sheet and profit & loss account. The Tribunal held that the land introduced as capital in the AOP partakes the character of a capital asset, making Section 45(3) applicable. The Tribunal relied on the Special Bench decision, concluding that the transaction is taxable under Section 45(3), and the AO should calculate the capital gain accordingly. Conclusion: The Tribunal allowed the Revenue's appeal, holding that the transaction of the impugned land introduced by the assessee as capital in the AOP is taxable under Section 45(3) of the Income Tax Act. The AO shall consider the value of Rs. 5 crore credited in the books of accounts as the full value of consideration for the transfer of land and calculate the capital gain accordingly. The Tribunal distinguished the case laws cited by the assessee, noting that they pertained to Joint Development Agreements and not to the introduction of land as capital contribution in a firm or AOP.
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