Mumbai bench of Income Tax Appellate Tribunal (ITAT), recently upheld the book-value based taxation of partner on capital contribution of immovable property in the case of a Limited Liability Partnership (LLP) and proclaimed in its recently published order.
The ruling, favoring the taxpayer could have a positive impact on the corporate restructurings and would result in increasing the popularity of LLP among the businesses.
The assessee in the instant case under consideration entered into limited liability partnership vide an agreement with an object of developing, constructing and operating resorts, hotels and apartment hotels and for carrying out such other hospitality business during the year. During the assessment year the assessee transferred an immovable property and the assessee while computing capital gain on transfer of land into partnership firm in accordance with the provisions of section 45(3) of the Act, has taken the value as recorded in the books of the firm.
During the course of assessment proceedings, the Assessing Officer (AO) called upon the assessee to furnish necessary evidence to justify computation of long-term capital gain in respect of the transfer of capital asset into partnership firm as per the provisions of section 45(3) of the Act. However the AO observed that provisions of section 45(3) of the Act does not begin with a non obtante clause and therefore, there is no specific mention of non-applicability of section 50C of the Act in the cases covered by section 45(3) of the Act and further observed that provisions of section 50C of the Act could be invoked where the market value of the property is more than the value shown in the registered document. Consequently, he computed long-term capital gain by adopting fair market value determined by the stamp duty authority and recomputed long-term capital gain of Rs.8,74,96,093 as against Rs.4,93,17,593 declared by the assessee.
On appeal, the CIT (A) also confirmed the addition made by the AO towards re-computation of long-term capital gain.
Aggrieved by the assessee was on appeal before the tribunal. Before the bench the assessee contended that provisions of section 45(3) and 45(4) are special provisions for computation of capital gain on transfer of capital assets between partnership firm and partners and As per the said section, when a capital asset is transferred to a partnership firm as a capital contribution, the profits or gains arising from the transfer of capital asset shall be chargeable to tax as its income of the previous year in which such transfer takes place and for the purpose of section 48, the amount recorded in the books of account of the firm shall be deemed to be the full value of the consideration received or accruing as a result of transfer.
After considering the rival submissions of both the parties the tribunal bench comprising of Judicial Member Mahavir Singh and Accountant Member G Manjunatha upheld the contention of the assessee that provisions of section 45(3) deal with special cases of transfer of capital asset where the profits or gains arising from the transfer of capital asset by way of capital contribution or otherwise shall be chargeable to tax on the amount recorded in the books of accounts. and the bench further observed that AO cannot import another deeming fiction created for the purpose of determination of full value of consideration as a result of transfer of a capital asset by importing the provisions of section 50C of the Act and the CIT(A) also uphold the decision of AO without appreciating the facts clearly.
“The purpose of insertion of section 45(3) is to deal with cases of transfer between the partnership firm and partners and in such cases, the Act provides for computation mechanism of capital gain and also provides for the consideration to be adopted for the purpose of determination of the full value of consideration. Since the Act itself is provided for deeming consideration to be adopted for the purpose of section 48 of the Act, another deeming fiction provided by way of section 50C cannot be extended to compute deemed full value of consideration as a result of the transfer of capital asset,” the bench said.
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