Applicability of section 50C in case of capital contribution in firm

[JB]

Will section 50C applies in case of land contributed by a partner to the firm as capital contribution at cost? Can it be argued that section 50C does not apply as (1) what will be full value of consideration has been defined in section 45(3) and (2) ultimately, the transfer is not to any outsider but by partner to firm who are treated as same under the general laws? OR section 50C will override section 45(3) being a special provision?

[ashutosh majumdar]

S. 45[(3) reads as follows:

The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

S. 50C reads as follows:

50C. (1) 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, is less than the value adopted or assessed 11[or assessable] by any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed 11[or assessable] shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

The notable aspect is that s. 50C does not contain any "non obstante" clause. Both provisions provide for what is to be the "deemed consideration".

S. 50C was inserted with a specific object i.e. to prevent the sale of property at an undervaluation and receiving the difference in cash. In an introduction into partnership, there is no question of the partner getting anything in cash (unless the partnership itself is bogus).

So, having to the object of s. 50C, it should not apply to another deeming provision in s. 45(3).

[camanojgupta]

Fully agree with the views of Ashutosh ji

[JB]

Thanks for your valuable views. but i still have some issues. Though section 50C does not contain any non obstante clause, it is a special provision while section 45(3) is a general provision. It is a well accepted view that special provision will prevail over the general provision. Section 45(3) applies to every capital asset contributed by the partner to the firm whereas section 50C, being specific, applies only to land and building. In fact, lucknow ITAT has considered this point in case of Carlton Hotel (122 TTJ 515) holding that 50C overrides section 45(3). In that case, the decision was in favour of the assessee on the ground that no sale deed was regisstered and hence section 50C was not applicable which ground no longer remains in view of amendment in section 50C.

As far as receipt of black money is concerned, it may be a case that the partner contribute land (or any other capital asset) to firm at cost and receive black money from other partners who may be outsideres so that on further sale or development thereof all partners may get share of profit in agreed manner on paper. In such a case, there may be involvement of black money though partnership is genuine. so this contention may not be a correct situation in all the cases. Kindly share your valuable views. If any direct decision is there on this issue, kindly share with me. Thanks to all. 

[ashutosh majumdar]

Carlton Hotel (P) Ltd. v. Asstt. CIT (2009) 122 TTJ 515 does take the view that s. 50C will prevail over s. 43(5):

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 takes 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 only be the full value of consideration for the purposes of computing capital gains

However, the finding that s. 45(3) is a "general" provision is inconsistent with their own finding in the preceding paragraphs that s. 45(3) is a "fiction":

Section 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, being the value of the asset transferred from individual partner to the firm without getting it registered under Registration Act.....

20. It clearly creates a fiction by deeming the value of a capital asset recorded in the books of the firm being a transfer by the individual partner/member to the firm/AOP by way of capital contribution or otherwise as full value of consideration received or accruing as a result of the transfer."

So, Carlton may not be the last word on the subject.

Your point on black money is well taken. We cannot underestimate the ability of our brothers to generate black money from every transaction. This consideration may well push the Court to come to the conclusion that s. 50C applies to *every* transaction of transfer of land & building, even if it is only by way of introduction into a firm.

[mitalidas]

The main aspect here is how you calculate the value of the asset. If you look at Sec 45(3) it says that the amount that is taken into consideration should be the value of the property should be that which match the government rates or higher. The basic rule to remember here is to not undervalue the property. As far as I can understand this is what is the bottom line. For a clearer picture you should surely contact a professional as this affects both the firm's books as well as the partner's returns.

Regards
Mitali Das