2019 (12) TMI 312 - AT - Income Tax

Transfer of property u/s 2(47) or not - capital gain u/s 45 - transfer of land by the partners to the partnership firm - absence of consideration - Transfer as per Act states u/s 2(47)(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock in trade of a business carried on by him, such conversion or treatment - HELD THAT - Land was transferred by the assessee to the partnership firm in the year ending as on 31st March 2005 corresponding to the assessment year 2005-06. This fact can be verified from the partner s capital account in the partnership firm which is placed on page 6 of the paper book. Admittedly, the impugned land was transferred by the partners to the firm as capital contribution which was recorded as stock-in-trade in the books of the firm. As such there was no transfer of capital assessee as stock-in-trade in the books of the assessee. Therefore in our considered view, there cannot be any application of the provisions of section 45(2) of the Act in the hands of the assessee. Provisions of section 45(3) of the Act requires to take the sale consideration in the case of transfer of any capital asset by the partner to the firm as capital contribution which was recorded in the books of accounts of the firm. In the case on hand, there is no dispute that the value of such assets transferred by the partner to the firm was recorded at the book value which can be verified from the financial statements of the assessee placed on pages 2 to 7 of the paper book. Accordingly, there cannot be any income in the hands of the assessee on account of transfer of such assets as capital contribution. In view of the above, we do not find any infirmity in the order of the learned CIT-A. Hence the ground of appeal of the Revenue is dismissed. Deduction u/s 80IB - AO observed that, partner did not claim remuneration and interest on capital from the firm in order to claim the higher deduction under section 80(IB)(10) - whether the assessee is bound to draw the amount of remuneration and interest from the partnership firm in pursuance to the date of partnership firm? - HELD THAT - The clauses mentioned in the partnership deed are not mandatory but made to avoid any ambiguity and misunderstanding between the partners. As such, there is no dispute among the partners for not claiming the remuneration/interest on capital in the profit and loss account of the firm. Therefore, in our considered view the conduct of the partners of the firm suggests that it was agreed not to claim any remuneration/interest on the capital account. See SMT. MALA TANDON 2011 (6) TMI 855 - ITAT AMRITSAR We note that it is not compulsory to claim the remuneration/interest on partner s capital account despite the fact there was a specific clause in the deed of partnership. Accordingly, we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition of ?27,36,800/- regarding transfer of land by partners to the partnership firm.
2. Deletion of remuneration from the firm amounting to ?1,58,79,299/-.
3. Deletion of interest on capital amounting to ?1,02,557/-.

Issue-Wise Detailed Analysis:

1. Deletion of Addition of ?27,36,800/-:
The Revenue contended that the CIT(A) erred in deleting the addition made by the AO for ?27,36,800/- on account of transfer of land by the partners to the partnership firm. The AO viewed the transfer as a conversion of the land into stock-in-trade under section 45(2) of the Income Tax Act, 1961, and calculated the capital gain based on the fair market value (Jantri value) of ?3,36,68,000/-. The AO attributed ?27,36,800/- as the assessee's 10% share of the capital gain.

The assessee argued that the land was never converted into stock-in-trade, thus section 45(2) was not applicable. The CIT(A) agreed, noting that the land was contributed as a capital asset to the partnership firm and recorded at book value, invoking section 45(3) instead. As per section 45(3), the amount recorded in the firm's books is deemed the sale consideration, resulting in no capital gain for the assessee. The Tribunal upheld CIT(A)'s decision, confirming no capital gain arose under section 45(2) and dismissing the Revenue's appeal.

2. Deletion of Remuneration from the Firm Amounting to ?1,58,79,299/-:
The AO added ?1,58,79,299/- to the assessee's income, arguing the assessee did not claim remuneration to avail higher deduction under section 80IB(10). The CIT(A) found that the firm did not deduct remuneration in its accounts, thus it could not be treated as the assessee's income under section 28(v). The Tribunal supported this view, referencing a similar case (ITO vs. Mala Tondon), where it was held that clauses in a partnership deed are enabling, not mandatory. The Tribunal concluded that the partners' conduct indicated mutual agreement not to claim remuneration, thus dismissing the Revenue's appeal.

3. Deletion of Interest on Capital Amounting to ?1,02,557/-:
The AO added ?1,02,557/- as interest on capital, assuming it was receivable from the partnership firm. The CIT(A) deleted this addition, reasoning that since the firm did not claim such interest as a deductible expense, it could not be treated as the assessee's income. The Tribunal upheld this decision, reiterating that the partnership deed's clauses are not obligatory. The Tribunal found no evidence of interest received by the assessee, confirming the CIT(A)'s order and dismissing the Revenue's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal on all grounds, confirming the CIT(A)'s deletion of additions regarding the transfer of land, remuneration, and interest on capital. The Tribunal emphasized the non-mandatory nature of partnership deed clauses and upheld the application of section 45(3) over section 45(2) in the context of capital asset contribution to a partnership firm.