2008 (11) TMI 295 - AT - Income Tax

Computation of capital gains on transfer of land to partnership firm - invoking the provisions of section 50C and applying DM circle rates - by taking the substance of the transaction into consideration, the market value of the land transferred to the firm as capital contribution was adopted by invoking s. 50C. HELD THAT - We are of the considered view that s. 45(3), s. 50C and s. 55A operate in different spheres and they can be invoked when conditions laid down in those sections are satisfied. Invoking of power contained in one of these sections does not come into conflict with each other. Admittedly no registration of the transfer under Registration Act and no stamp duty has been paid. Therefore, provisions of s. 50C cannot be invoked. The case is therefore, covered only u/s. 45(3). The words used 'adopted or assessed' in s. 50C refer to two different situations. One is where for certain area, DM circle rates are announced for the purposes of determining payment of stamp duty in respect of registration of sale deed. Then the stamp valuation authority adopts such declared rates. Second situation is where DM circle rates are not declared then stamp valuation authorities carry out an assessment as to what should be the market value of the land/building for the purposes of levying stamp duty. Thus, he word 'adopted' used in the s. 50C covers the situation where DM circle rates are already announced and which are picked up for ascertaining stamp duty and the word 'assessed' is used to cover a situation where such circle rates are not announced and actual assessment of market value for levying stamp duty is carried out. As the crux of invoking s. 50C is actual registration of transfer under Registration Act, the adoption or assessment of value for the purpose of levying stamp duty would arise only thereafter. As a result, we hold that AO was not justified in invoking the provisions of s. 50C, therefore, the value at which capital asset is transferred to the firm as recorded by it in its books would only be the full value of the consideration for the purpose of computing capital gains. Cost of acquisition - transfer of 10,000 sq. ft. of land - HELD THAT - In our considered view, the stand of Revenue is not justified because as per s. 55(2)(b)(i) an option is given to the assessee to adopt either the actual cost of acquisition of the asset to the assessee or fair market value of the asset as on 1st April, 1981 as the cost of acquisition of the asset under transfer. The assessee has rightly exercised its option and there is no reason to take a different view. As a result, this ground of assessee is also allowed.

Summary

Issues Involved:
1. Applicability of Section 50C while levying capital gains tax under Section 45(3).
2. Adopting the cost of acquisition as on 1st April, 1981 at the option of the assessee.

Issue-wise Detailed Analysis:

1. Applicability of Section 50C while levying capital gains tax under Section 45(3):

The first issue pertains to whether Section 50C can be applied in conjunction with Section 45(3) for the purpose of levying capital gains tax. The assessee argued that the transfer of land to a partnership firm should be governed solely by Section 45(3), which states that the amount recorded in the books of the firm shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. The assessee contended that Section 50C, which deals with the valuation of property for stamp duty purposes, should not apply in this context as there was no registration of the transfer deed.

The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) held that Section 50C should apply, arguing that the transfer was essentially a sale and that the market value of the land, as determined by the DM circle rates, should be used for calculating capital gains. The AO added 15% to the DM circle rates, considering the land as a corner plot, and calculated the long-term capital gains accordingly.

The Tribunal, however, disagreed with the AO and CIT(A). It noted that Section 50C requires the payment of stamp duty and the registration of the transfer deed, which did not occur in this case. The Tribunal emphasized that Section 45(3) creates a legal fiction that the value recorded in the firm's books is the full value of the consideration for the transfer. It stated that legal fictions should be limited to the purpose for which they are created and should not be extended beyond their intended scope. The Tribunal concluded that Section 50C could not be invoked in this case, as the transfer was not registered and no stamp duty was paid. Therefore, the value recorded in the firm's books should be considered the full value of the consideration for computing capital gains.

2. Adopting the cost of acquisition as on 1st April, 1981 at the option of the assessee:

The second issue involves the cost of acquisition for the purpose of calculating capital gains on the sale of 10,000 sq. ft. of land. The assessee had adopted the fair market value as on 1st April, 1981, while the AO and CIT(A) argued that the cost of acquisition should be nil, as the assessee had shown nil value in its books.

The Tribunal upheld the assessee's position, citing Section 55(2)(b)(i), which allows the assessee to adopt either the actual cost of acquisition or the fair market value as on 1st April, 1981, as the cost of acquisition. The Tribunal found no reason to deviate from this provision and allowed the assessee to adopt the fair market value as the cost of acquisition.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, ruling that Section 50C could not be applied in conjunction with Section 45(3) due to the lack of registration and payment of stamp duty. Additionally, the Tribunal permitted the assessee to adopt the fair market value as on 1st April, 1981, as the cost of acquisition for calculating capital gains.