2017 (1) TMI 1471 - HC - Income Tax

Capital gain computation - consideration paid for free-hold -lawful right or interest in the property - Assessee transfers his land by way of capital contribution and becomes a partner in the firm, does it result in transfer in terms of Section 2 (47) of Act, 1961 or the term transfer has to be construed in the light of Act, 1882 - Whether Tribunal has erred in law in holding that full value of consideration shall be determined as per Section 45 (3) and not under Section 50C of Act, 1961? Held that - Entire consideration for free-hold was paid by M/s SICCL but in what capacity, is not known. A part of land was transferred by sale to M/s SICCL at a consideration which has a vast difference than that was acquired by Assessee after execution of free-hold deed. For the purpose of contributing to partnership firm and applying book value, Tribunal failed to appreciate that the entire land came to be acquired by Assessee only on 31st March, 2002. Prior thereto, it had no lawful right or interest in the property in dispute which belonged to State of U.P. Even as per book value, cost of land determined and share profits determined between the parties and their capital contribution is so negligible, as it did not conform to even any normal business transaction entered into by a person of ordinary prudence, and, therefore, there existed all the facts and circumstances to show prima facie that entire transaction of contribution to partnership is a sham and fictitious transaction and an attempt to device a method to avoid tax. Even the terms and conditions of partnership fortify the above inference. In the present case, in the garb of entering into a partnership and taking recourse to some earlier laws, an attempt was made to avoid execution of a registered document which would have needed stamp duty to the State and, as a result thereof, there could have been an occasion for payment of tax under the Act, 1961. The requirement of registration needs consideration in the light of the fact that contribution of immovable property as partnership asset by a person is transfer and has the effect of extinguishing or limiting rights and interest of the owner partner and, therefore, such a non-testamentary document is within the ambit of Section 17 (1)(b) of Indian Registration Act, 1908 However, we find that the Tribunal has not looked into the matter with regard to colorable device and sham transaction of partnership, which was an issue directly raised by Revenue right from the stage of ACIT and onwards, and for that purpose matter requires to be remanded to Tribunal. At this stage we propose to answer question no.1 in favour of Revenue and against Assessee

Summary

Issues Involved:
1. Application of Section 45(3) vs. Section 50C of the Income Tax Act, 1961.
2. Determination of full value of consideration for transfer of land.
3. Applicability of Section 50C in the absence of registration and stamp duty payment.
4. Determination of the cost of acquisition for capital gains calculation.

Issue-wise Detailed Analysis:

1. Application of Section 45(3) vs. Section 50C of the Income Tax Act, 1961:
The Tribunal held that the full value of consideration should be determined as per Section 45(3) and not under Section 50C. The court found that Section 45(3) applies when there is a transfer of a capital asset by a person to a firm in which they become a partner, and the value recorded in the firm's books is deemed to be the full value of consideration. However, the court noted that the Tribunal did not consider whether the partnership was a sham transaction designed to evade tax.

2. Determination of full value of consideration for transfer of land:
The court examined the facts, including the conversion of Nazul land to freehold and the subsequent sale and contribution to the partnership firm. The court noted discrepancies in the valuation of the land at different stages, including the freehold conversion charge, the sale price to M/s SICCL, and the value recorded in the firm's books. It found that the value recorded in the books was significantly lower than the market value, suggesting a potential undervaluation to avoid tax.

3. Applicability of Section 50C in the absence of registration and stamp duty payment:
The Tribunal held that Section 50C could not be invoked as no registration or stamp duty payment was involved in the transfer of land to the partnership firm. The court disagreed, stating that Section 50C was introduced to address the issue of unaccounted income through undervaluation of property transactions. It emphasized that the requirement of registration and stamp duty is not a precondition for the application of Section 50C.

4. Determination of the cost of acquisition for capital gains calculation:
The Tribunal allowed the assessee to adopt the market value as of 01.04.1981 for determining the cost of acquisition. The court observed that the assessee's lease on the Nazul land had expired, and the land became freehold only in 2002. Therefore, the cost of acquisition should be based on the freehold conversion charges paid in 2002, not the market value in 1981.

Conclusion:
The court set aside the Tribunal's order and remanded the matter for reconsideration, emphasizing the need to examine the genuineness of the partnership and the applicability of Section 50C. It directed the Tribunal to decide the issues afresh, considering the observations made in the judgment.