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Whether the capital Gain on contribution of land by partner to partnership firm is

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chargeable u/s 45(3) or 50C of the Income Tax Act?
Date posted: Friday 28 August 2015
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Laws:Income Tax Act 1961 (http://nrsadvisors.com/tag/income-tax-act-1961/)

Issue at hand
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When a partner contributes a piece of land as his capital in the partnership firm, what shall be the consideration for
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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
* = required field 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?
Email Address *
Understanding Section 45(3) and 50C and their history

Full Name * 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.
Organization *
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.
Designation *
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
Alternate Email Id 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.

Submit 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

1. “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.

2. 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.

3. 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.

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