2019 (8) TMI 1527 - AT - Income Tax

Long Term Capital Gain arising on account of transfer of capital asset to the firm as capital contribution - appellant is a partner in a partnership firm with equal profit share ratio - provisions of Section 50C prevailing over the provisions of Section 45(3) - whether the transfer of asset by a partner to the firm constitutes a transfer? - HELD THAT - Provisions of Section 45(3) of the Act was introduced in order to overcome the decision in the case of Karthikeya V Sarabhai 1997 (9) TMI 2 - SUPREME COURT which held that there is no liability to capital gains in the case of contribution of capital asset by a partner in a firm since the value of consideration cannot be determined. It was further held that the credit entry made in the partner s capital account in the books of partners firm does not represent the true value of the consideration. Therefore in the present case the partnership firm viz. M/s. K G P Builders had recorded the consideration. Having regard to these facts the transaction of introduction of land into the firm by the appellant fairly attracts the capital gains. Therefore we hold that the provision of Section 45(3) of the Act are squarely applicable to the facts of the present case. Hon ble Jurisdictional High Court in the case of Pr.CIT vs. Dr.D. Ramamurthy 2017 (9) TMI 1732 - MADRAS HIGH COURT held that the value recorded in the books of the firm is conclusive as to the consideration received on transfer of asset by a partner to the firm. Therefore the Hon ble Madras High Court further held that the assessment has to be done on the basis of value of asset when the firm was constituted not on the basis of revalued value of the assets. Applying the ratio to the facts of the present case the value to be adopted by the AO is only Rs. 29, 77, 300/- lakhs which was recorded in the books of accounts of the firm as on date when the firm was constituted. Whether the provision of Section 50C of the Act are applicable to the case covered by the Section 45(3)? - Provisions of Section 45(3) of the Act are special provisions as it deems value of consideration which otherwise is not computable under general law and it is applicable to the specific situations of introduction of capital by partner to the firm and whereas the provisions of Section 50C of the Act are general in nature applicable whether consideration is known and determinate. It is a rule of construction that the special provisions prevail over general provisions as per Latin Maxim. When there is a specific provision in the statute to deal with a particular kind of transaction then it would be squarely applied. Thus having regard to the principles enunciated above it cannot be said that provision of Section 50C of the Act overrides the provision of Section 45(3) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Confirmation of Long Term Capital Gains addition.
2. Applicability of Section 45(2) and Section 45(3) of the Income Tax Act.
3. Applicability of Section 50C of the Income Tax Act.
4. Levy of interest under Sections 234A, 234B, and 234C of the Income Tax Act.

Detailed Analysis:

1. Confirmation of Long Term Capital Gains Addition:
The Commissioner of Income Tax (Appeals) confirmed the addition of Long Term Capital Gains amounting to Rs. 10,09,84,896/-. The Assessee contended that the provisions of Section 45(3) of the Income Tax Act should apply, which would consider the value recorded in the books of the firm as the full value of consideration. The AO had computed the capital gains by adopting the market value of the land as revalued by the firm, leading to the addition.

2. Applicability of Section 45(2) and Section 45(3) of the Income Tax Act:
The Assessee argued that Section 45(3) should apply, which states that the value recorded in the books of the firm is conclusive evidence of consideration received for the transfer of a capital asset by a partner to the firm. The CIT(A) upheld the applicability of Section 45(3) but also considered Section 50C. The Tribunal held that the provisions of Section 45(3) are exhaustive and do not confer any power on the AO to adopt a consideration different from what is recorded in the books of accounts of the firm. The value recorded in the books of the firm at Rs. 29,77,300/- should be considered for computing capital gains.

3. Applicability of Section 50C of the Income Tax Act:
The Assessee contended that Section 50C, which provides that the value adopted for stamp duty purposes shall be deemed to be the consideration received, does not apply to cases covered by Section 45(3). The Tribunal agreed, stating that Section 50C applies where there is an actual receipt of consideration, implying a physical flow of money. Since Section 45(3) deals with deemed consideration in specific situations, it operates in a different sphere from Section 50C. The Tribunal emphasized that if Section 50C were to override Section 45(3), it would render Section 45(3) otiose, which is not the intention of the legislature. Therefore, Section 50C does not override Section 45(3).

4. Levy of Interest under Sections 234A, 234B, and 234C of the Income Tax Act:
The Assessee argued against the indirect confirmation of interest levied under Sections 234A, 234B, and 234C. The CIT(A) had not specifically adjudicated these grounds. However, since the Tribunal set aside the orders of the lower authorities regarding the capital gains addition, the interest levied under these sections would also be affected accordingly.

Conclusion:
The Tribunal concluded that the value recorded in the books of the firm at Rs. 29,77,300/- should be adopted for computing capital gains, and the provisions of Section 50C do not override Section 45(3). The orders of the lower authorities were set aside, and the appeal filed by the Assessee was allowed.