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TMI Blog2008 (11) TMI 295X X X X Extracts X X X X X X X X Extracts X X X X ..... t proper or sufficient opportunity to have its say or make compliance of the reasons relied upon by her in not appreciating and considering the contentions of the appellant favourably in the present case and in confirming the action of the AO." 2. Original grounds raised in the appeal were not pressed. 3. The first issue relates to applicability of s. 50C while levying capital gains tax under s. 45(3) and the second issue relates to adopting cost of acquisition as on 1st April, 1981 at the option of the assessee. 4. The facts of the case are that assessee filed return of income on 1st Nov., 2004 on a total income of Rs. 35,22,840. It consisted of loss of Rs. 25,51,985 from hotel business and also long-term capital gain amounting to Rs. 60,74,821. 5. The assessee was in possession of leasehold nazul land under a deed of lease executed on 31st March, 1943. The lease of the land expired on 31st March, 1990. However, the assessee continued to be in possession of the land. In pursuant to State Government's notification, land measuring 3,64,937 sq. ft. in possession of the assessee was converted into freehold land with payment of freehold charges of Rs. 8,94,94,944, in addition to st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of s. 50C, the AO mentioned that in the partnership firm assessee has contributed 88 per cent capital while it is getting only 5 per cent share in profits which is beyond the normal business prudence and transfer to the firm is as good as sale. While referring to the clauses of the partnership, the AO mentioned that assessee has little role to play in the partnership business. The assessee is not a managing partner in the firm, construction on the plot is to be carried out by M/s Sahara India Commercial Corporation Ltd., assessee would not have any civil, criminal or financial liability, business of the partnership would be exclusively carried out by M/s Sahara India Commercial Corporation Ltd., bank account can be independently operated only by the other two partners whereas the assessee can operate with joint Signatures of other two, it is only M/s Sahara India Commercial Corporation Ltd. which has been empowered to introduce new partners, assessee does not have any right over the goodwill of the firm, assessee cannot make any change in the composition of board which has controlling interest in its 3hare capital, disputes shall be resolved only by Shri Subrat Roy Saha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the same firm. Thus, 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. 10. Regarding adopting cost of acquisition of land measuring 10,000 sq. ft., the AO adopted the value of the land shown by the assessee at nil in the books of account and ignored the value of the land as on 1st April, 1981 adopted by it while offering capital gains tax thereon. The reasoning given by the AO is that once assessee is adopting value of the land at nil in its books, it should calculate capital gains by taking cost of acquisition at nil. 11. In respect of first issue about applicability of s. 50C, the learned CIT(A) confirmed the order of the AO. According to her, the legislature has provided specific provisions under s. 50C which squarely covers the present transaction for valuation purposes. She endorsed the view of the AO that s. 50C nowhere mentions that registration of the transfer deed is necessary when value of assets by stamp valuation authority is to be adopted. Further, the value adopted by the assessee for transferring the land to the firm is not at ALP but collus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to the firm. Therefore, in cases where a partner transfers an asset to the firm as his capital contribution then the provisions of s. 45(3) would be applicable. Sec. 50C cannot be invoked in such a situation because there is no transfer of the asset within the meaning in Registration Act as there is no registration of immovable property in the name of the firm. The transfer is not complete, stamp valuation is not done, no stamp duty is paid and therefore, provisions of s. 50C cannot be invoked. He submitted that conditions laid down for invoking s. 50C are not present. These conditions are that there should be a valuation, either assessed or adopted, by stamp valuation authority for the purposes of transfer of the asset. If a particular transaction is not passed through stamp valuation authority then provisions of s. 50C cannot be invoked. He referred to the decision of Jodhpur Bench SMC in the case of Navneet Kumar Thakkar vs. ITO (2007) 112 TTJ (Jd) 76 : (2008) 110 ITD 525 (Jd), for the proposition that unless property is transferred through a registered sale deed and stamp duty has been paid by the parties, s. 50C cannot be put to operation. 14. The learned Authorised Repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transaction, therefore, the form has to be ignored and substance has to be considered. The substance is that fair market value of the land is much higher which is apparent from the OM circle rate at which assessee itself has sold 10,000 sq. ft. of land to other partner of the firm. There was no reason to adopt lower rate in the books of the firm in respect of transfer of the land to the firm by the assessee as share capital contribution. The learned Departmental Representative referred to the provisions of s. 50C and submitted that the word 'adopted' used in that section clearly shows that DM circle rates which are adopted by the stamp valuation authority could be substituted for calculating sale consideration. It is not necessary that the transfer of asset should be actually registered for the purposes of invoking s. 50C. Stamp valuation authorities have already declared circle rates which are only required to be adopted for the purposes of working out sale consideration and hence, capital gains. There is no provision in the law not to invoke s, 50C where s. 45(3) is invoked. He strongly supported the order of the learned CIT(A) and AO by emphasizing that assessee has clearly un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is required only when transfer of capital asset is registered under Registration Act. If payment of stamp duty for the purposes of the transfer is not required, then there is no occasion to look into other conditions as mentioned in s. 50C. Similar view was taken by the Jodhpur Bench 'SMC' in the case of Navneet Kumar Thakkar vs. ITO wherein it is held that unless property transferred has been registered by sale deed and for that purpose value has been assessed and stamp duty has been paid by the parties, s. 50C inserted by Finance Act, 2002 w.e.f. 1st April, 2003 cannot come into operation. Therefore, in those cases of transfer where agreement or sale deed is not registered and stamp duty is not paid, or capital gain is simply charged by deeming certain transaction as transfer as per other provisions of the Act or some transactions of transfer are not registered or are not legally required to be registered under Registration Act, s. 50C cannot be put into operation. 19. Sec. 45(3) is a deeming fiction and it treats a particular type of transaction as transfer and the capital gains is directed to be charged by treating book entry in the books of the firm as sale consideration, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 981) 129 ITR 229 (Bom), while interpreting the provisions of s. 7(1) of WT Act, held that though legal fiction should be given full effect but it cannot be carried beyond the purpose for which it is intended. The legal fiction is limited to the direction contained in the deeming section and not beyond. Therefore, for the purposes of s. 45(3), if AO finds that a person has contributed a capital asset as his capital contribution to the firm/AOP at a price higher than its cost price then the value, at which firm has credited the individual partner for the transfer of capital asset to the firm, would be, the full value of sale consideration. In other words, full value of consideration cannot be a different figure than what is recorded by the firm in its books by crediting the partner who has contributed the capital asset as his capital contribution. The AO is not empowered to take a different figure as full value of consideration other than what the firm has recorded in the books. It is immaterial as to whether the value so recorded by the firm in its books by crediting the capital bringing partner is less than the fair market value of the capital asset which was contributed to the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re a sale transaction is registered by paying stamp duty then it is only s. 50C which can operate. In that situation, s. 50C would override s. 45(3). Sec. 45(3) is a general provision and s. 50C is a special provision which would override s. 45(3) if the sale deed is sought to be registered by paying stamp duty. But where such registration does not takes place by paying stamp duty that case would only be covered under s. 45(3) and therefore, value recorded by the firm in its books would only be the full value of consideration for the purposes of computing capital gains. 25. In the present case, there is 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 under s. 45(3). 26. The learned Departmental Representative has argued that under s. 50C the word used is 'adopted' the AO has only adopted the DM circle rates for working out capital gains to the transfer in place of consideration recorded by the firm in its books. 27. In our considered view, the argument of the learned Departmental Representative is not legally sound. The words used 'adopted or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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