Issue at hand
When a partner contributes a piece of land as his capital in the partnership firm, what shall be the consideration for calculation of capital gain on such transfer of land? Since no actual consideration arises, the consideration shall be deemed as per section 45(3) or Section 50C of the Income Tax Act, 1961. Will the consideration, as per Section 45(3), be the amount credited in the partner’s capital account? Or will the consideration, as per Section 50C, be the value adopted by the revenue for levying stamp duty?
Understanding Section 45(3) and 50C and their history
Section 45(3) was introduced in 1987, with the objective to overrule the Supreme Court decision in Sunil Sidharthbhai vs. CIT, which stated that since it was impossible to evaluate the consideration acquired by the partner when he brings his personal asset in the partnership firm as contribution to capital, they are unable to calculate the capital gain and tax the same. Section 45(3) states that the amount recorded in the books of accounts of the firm as the value of capital asset, i.e. the amount credited in the partner’s capital account shall be deemed to be the value of consideration received. Hence, as per Section 45(3) capital gain should be charged on the difference between such value and the cost (in case of Short Term Capital Gain)/ indexed cost (in case of Long Term Capital Gain) of such land to the partner.
Section 50C states that where the consideration received or accrued as a result of transfer of a land or building or both is less than the value adopted or assessed or assessable for the purpose of Stamp Duty (Stamp Duty Valuation), then the Stamp Duty Valuation will be deemed to be the full value of consideration received/ accrued for the purpose of calculating Capital Gain tax. Section 50C was introduced to deal with the unaccounted money generated by under-reporting of sale price.
Assuming that a piece of land, which had the cost of Rs 10,000/-, is transferred in the partnership firm by a partner at Rs 20,000/- and its value assessed for the purpose of stamp duty id Rs 1,00,000, will the capital gain be Rs 10,000/- as per Section 45(3) or Rs 90,000/- as per Section 50C. Which section (Section 45(3) or Section 50C) overrides the other section?
Understanding the issue
Section 45(3) and Section 50C both are deeming fiction with regards to the consideration.
The case “Carlton Hotel (P) Ltd. v. Asstt. CIT (2009 TaxPub (DT) 1039 (Luck–Trib)” established that Section 45(3) is a general provision and section 50C is a special provision which would override section 45(3) if the sale deed is sought to be registered by paying stamp duty. But, where such registration does not take place by paying stamp duty that case would only be covered under section 45(3) and, therefore, value recorded by the firm in its books would be deemed to be the full value of consideration for the purposes of computing capital gains.
However, the addition of the word “assessable” in Section 50C on 1-10-2009 changed the position, implying that even if the sale deed/ instrument of transfer is not sought to be registered but if such transfer is assessable to stamp duty, then Section 50C would apply. The word “assessable” has been defined to mean the price which the stamp valuation authority would have adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty.
Analysis
- “Assessed” or “Assessable”?
The first question we need to address is whether the transfer is assessable to stamp duty or not? And if the transfer is assessable to stamp duty, does it involve valuation of the immovable property?
Article no. 44 “Partnership” under Schedule I of the Gujarat Stamp Act, 1958 states that stamp duty is payable on registration of partnership deed, alteration in the constitution of partnership as a consequence of increase in capital or for any other reason and for distribution of an asset brought in as capital by one partner amongst the other partners on dissolution. On alteration in constitution of partnership due to increase in capital, the stamp duty chargeable is Re1 for every Rs 100 credited in the partner’s capital account, subject to a maximum of Rs 10,000. Hence, in this case for the purpose of payment of stamp duty, no valuation of the property is required. There is no other clause, charging stamp duty on such transfer of immovable property from partner to partnership firm.
It may also be noted that in Article 44, no stamp duty is chargeable on dissolution, if property brought in as capital by a partner goes back to the same partner. This implies that the property when contributed as capital in the partnership firm is not regarded as transferred to the partnership firm, because in that case the transfer of the same property from partnership firm to partner would also have been considered transfer and made chargeable to stamp duty. Hence, we can presume that such transaction is not assessable under the Gujarat Stamp Act, 1958 except for payment of duty payable on increase in the capital of the firm which does not involve valuation of immovable property.
If the transfer is not chargeable under the Stamp Act, or where it is chargeable, the payment of stamp duty does not involve valuation of the asset, it can be presumed that the value of the asset is neither ‘adopted’, ‘assessed’ or ‘assessable’ for the purpose of payment of stamp duty. Hence, in such cases, Sec 45(3) should apply.
- General provision V/s Specific Provision
It is a well-known rule of interpretation that in a case where a general as well as a specific section is applicable, the specific provision will overrule the general provision. Examining the facts of the case with this rule, Section 45(3) of 50C, whichever is the specific provision should overrule the other section.
Though in the case “Carlton Hotel (P) Ltd. v. Asstt. CIT (2009 TaxPub (DT) 1039 (Luck–Trib)” it has been established that Section 45(3) is a general provision and section 50C is a specific provision, I believe it would be erroneous to jump to such conclusion. While section 50C is specific to a class of asset (land and building), section 45(3), though is general as far as the class of assets is concerned, it is specific to a category of transaction (contribution of capital by partner to a firm). This makes it difficult to arrive at a conclusion regarding which section is general and which section is specific and shall apply in this case.
- Deemed consideration V/s Consideration received or accrued
Section 50C reads as “Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both..”. In case of contribution of land as capital by partner to the partnership firm, no consideration is received or accrued as a result of such transfer.
Section 45(3) was introduced, in 1987, for deeming an amount as ‘full consideration’, so as to calculate the capital gain on contribution of asset by a partner to a partnership firm. The deemed ‘full consideration’ is an expression different from the word ‘consideration’ appearing in Section 50C. Hence the amount determined as consideration in case of contribution of an immovable property by a partner to partnership firm is a deemed one which is received by or accrued to the partner. Hence, Section 50C should not be invoked in such cases and Section 45(3) should apply.
Conclusion
Based on the above premises that since the immovable land is not assessable for the purpose of stamp duty, Section 45(3) is not a general provision and Section 50C is not a specific one and that the consideration as per Section 45(3), which is the charging section, is deemed consideration, it can be contended that Section 50C should not be invoked in a case of contribution by partner of an immovable property to a partnership firm as capital. The consideration as per Section 45(3) should be binding. However, due to lack of any High Court or Supreme Court decisions on this subject post the amendment in Section 50C in 2009, this controversy remains outstanding.
Disclaimer: The views expressed here are solely the author’s and should not be attributed to my firm or its clients. The material and information provided in this article are for informational purposes only. These materials do not constitute legal advice. No person should act or refrain from acting in reliance on any information found in this article, without first retaining counsel and obtaining appropriate professional advice from a lawyer.