2020 (8) TMI 561 - AT - Income Tax

Capital gain computation - transaction under consideration is between the members of AOP - addition by invoking the provisions of Section 50C - Introduction of development rights by way of capital contribution under section 45(3) - HELD THAT - Provisions of section 45(3) provides that when a person transfer his capital asset to a firm or a body of individual or to AOP by way of capital contribution for becoming a partner/ member therein, then for the purposes of section 48 of the Act, the amount recorded in the books of account of the assessee firm or AOP, the value of the capital asset shall be deemed to be full value of consideration received or accruing as a result of the transfer of capital asset. As per the deeming fiction an amount recorded in the books of account thereby the full value of consideration for the purpose of section 48 Provisions of section 45(3) of the Act is a charging provision having two limbs joined by conjunction AND . The first limb is a charging provision which levies capital gain tax on gains arising from contribution of capital asset in the AOP by a member and second limb is an essential deeming fiction for determining the value of consideration without which the charging provision would fail. We also noted that the provisions of section 50C of the Act also deeming fiction deems only the value of consideration for the purpose of calculating capital gains in the transfer of capital asset from one person to another. In view of the above, we are of the view that the provisions of section 50C of the Act are not applicable in the instant case and provision of section 45(3) of the Act will be applied. Hence, we reverse the orders of the lower authorities and allow the appeal of the assessee on this issue.

Summary

Issues Involved:
1. Applicability of Section 50C vs. Section 45(3) of the Income-tax Act, 1961.
2. Transfer of development rights and its classification under the Act.

Detailed Analysis:

1. Applicability of Section 50C vs. Section 45(3) of the Income-tax Act, 1961:

The primary issue in the appeal was whether the transaction should be governed by the special provisions of Section 45(3) or by Section 50C of the Income-tax Act, 1961. The assessee contended that the transaction, being between members of an Association of Persons (AOP), should be governed by Section 45(3), which deals with the transfer of a capital asset to a firm or AOP by way of capital contribution. The Assessing Officer (AO), however, invoked Section 50C, which is a special provision for determining the value of the consideration for the transfer of land or building based on the stamp duty valuation.

The Tribunal noted that the assessee had acquired development rights for seven buildings, out of which four were developed and sold, and the remaining three were shown as investments. These development rights were contributed as capital to an AOP, M/s. Benchmark Properties, at an agreed consideration of ?5 crores. The AO assessed the transaction under Section 50C, valuing it at ?10,10,47,000 based on stamp duty valuation, resulting in a long-term capital gain of ?5,10,47,000.

The Tribunal referred to the provisions of Section 45(3), which states that the amount recorded in the books of the AOP as the value of the capital asset shall be deemed to be the full value of the consideration for computing capital gains. It was observed that Section 50C applies to transfers involving land or buildings, while Section 45(3) specifically addresses contributions to a firm or AOP. The Tribunal concluded that Section 45(3) is applicable in this case, as it is a specific provision for such transactions, and Section 50C, being a general provision, cannot override it.

2. Transfer of Development Rights and its Classification under the Act:

The assessee argued that the transfer involved development rights, not land or buildings, and hence Section 50C should not apply. The development rights were acquired through agreements and were never owned as land or buildings by the assessee. The Tribunal noted that the development rights were shown as investments and contributed as capital to the AOP. The Tribunal also referred to the Supreme Court's decision in Sunil Siddharthbhai vs. CIT, which held that the introduction of personal assets into a partnership firm as capital contribution does not result in any real income or gain.

The Tribunal further relied on the Mumbai Tribunal's decision in Voltas Ltd. vs. ITO, which held that Section 50C does not apply to the sale of development rights. The Tribunal emphasized that Section 45(3) provides a specific mechanism for determining the value of consideration in such cases, and this provision should prevail over Section 50C.

In conclusion, the Tribunal held that the provisions of Section 45(3) are applicable to the transaction, and the value recorded in the books of the AOP should be considered for computing capital gains. The appeal was partly allowed, and the addition made by the AO under Section 50C was reversed. The additional ground raised by the assessee regarding the applicability of Section 50C was not adjudicated separately, as it was covered by the main issue.

Judgment Outcome:
The appeal of the assessee was partly allowed, with the Tribunal ruling in favor of applying Section 45(3) over Section 50C for the transaction in question. The additional ground was deemed unnecessary to adjudicate separately.