Section 45(3) - Capital Gains On Transfer of Capital Asset By A Partner/ Member To Firm/ AOP/ BOI - Income Tax - Ready Reckoner - Income Tax

Section 45(3) : Capital Gains On Transfer of Capital Asset By A Partner/ Member To Firm/ AOP/ BOI The capital gains arising from the transfer of a capital asset by a person to a firm in which he is or in which he becomes a partner , by way of capital contribution or otherwise, shall be chargeable to tax in the previous year in which such transfer takes place. The amount recorded in the books of account of the firm as the value of capital asset, shall be deemed to be the sales consideration for the purposes of section 48 . Full value of consideration - for this purpose, the full value of the consideration will be deemed to be the amount recorded in the books of account of the firm, AOP or BOI as the value of the capital asset. Notes: The same provisions will apply where a member of AOP/ BOI, transfers a capital asset to AOP/BOI. Section 50C shall apply and if stamp duty value is more than the amount recorded in books of account, the stamp duty value shall be taken to be sales price. Where a partner brings in shares of private company or unlisted company as capital contribution to the firm then section 56(2)(viia) shall be applied and the difference between the fair market value of shares and recorded price, if exceeds 50,000/-, then whole of difference shall be taxable in the hands of the firm as income from other sources. But capital gain in the hands of the partner shall be on the basis of value recorded in the books of the firm u/s 45(3) . Please note: At present, there exists Intricacies in application of Section 45(3) in the light of Section 50C and Section 56 . There are dissenting views among Judgements, authors and experts. Keeping in view, various provisions, discussions etc, it can be concluded that in cases of transfer of capital asset by a partner in the partnership firm, the genuineness of the transaction has to be evaluated to determine whether such transfer is a real attempt to contribute in the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert personal asset into money while evading tax on capital gain. If the transaction is genuine with an intention for the purpose of business of partnership firm then the provisions of section 45(3) would be applicable in determining the full value of consideration for any capital asset whether it be land or building or unquoted shares or any other capital asset - However, if the said transfer has been determined to be not genuine or is sham or fictitious transaction with a view to evade capital gain, section 45(3) would not be said to be applicable and in respect of capital asset being a land or building or unquoted shares, for the purpose of determining full value of consideration section 50C and section 50CA of the act would be applicable respectively.