Profits and gains arising from the transfer of a capital asset by a partner to a firm shall be chargeable as the partner`s income of the previous year in which the transfer took place under sub-section (3) to section 45. Circular 495 dated 22-9-1987 explained the intention of the sub-section inserted by the Finance Act, 1987 and the effect of this amendment. For purposes of computing the capital gains, the value of the asset recorded in the books of the firm on the date of the transfer shall be deemed to be the full value of the consideration received or accrued as a result of the transfer of the capital asset.  

Section 45(3) and Section 50C both are deeming fiction and SC has categorically held that one deeming fiction cannot be extended by importing another deeming fiction. Expl. 2 inserted in Section 50C w.e.f. 1-10-2009 stating that the expression "assessable" by the stamp valuation authority means the price which would have been adopted/assessed had the transaction been referred to such valuation authority for the payment of stamp duty.  

The question that arises is whether sec. 45(3) and sec. 50C operate in different fields or in the same field. 

At Taxsutra Database Insight, we have complied 11 rulings on “Interpretation of Applicability of Sec. 50C to transactions covered by Sec. 45(3)” which explain the invocation of deeming in computing capital gains on land introduced into a partnership firm as a capital contribution.

Interpretation of Applicability of Sec. 50C to transactions covered by Sec. 45(3)

1) [TS-5572-ITAT-2009(Ahmedabad)-O] - Revaluation of assets after conversion of proprietary concern into partnership firm - ITAT Third Member: As per section 45(3), for the purpose of sec. 48 the amount recorded in the books of firm on the date of such transfer shall be deemed to be the full value of the consideration received or accrued. It does not restrict the value of the consideration to the extent it is credited to the capital account of the partners who contributed the assets to the firm. ITAT notes that Assessee having converted his proprietary concern into a partnership firm, revalued the assets and straightaway credited the capital accounts of the partners by the revalued figure at the end of the same previous year, 31st March 1995 i.e during the previous year in which the transfer has taken place and the firm has recorded the capital assets at a revalued figure, accordingly the said value will be taken to be the full value of the consideration. ITAT rejects, Assessee argument that the value of the consideration should be restricted to the extent it is credited to the capital account, holds value will be deemed to be the full value of the consideration received or accrued as a result of the transfer of capital assets.

2) [TS-5004-ITAT-2010(Delhi)-O] -  ITAT Special Bench: Sec. 45(3) applicable in respect of the capital asset cannot be applied to the stock-in-trade – ITAT SB rules in Assessee favour, a Capital asset held as stock-in-trade, continued to be stock-in-trade even at the time of introduction and subsequently by the firm also. ITAT notes that after the decision of SC in the case reported in [TS-4-SC-1985-O] the law as regards charging of capital gain has been amended by the introduction of Sec. 45(3) of the Act. Even the definition of the word "transfer" in Sec. 2(47) of the Act is substituted w.e.f. 1st April 1985 but the definition is only in relation to a 'capital asset and not for 'stock-in-trade. The definition of 'capital asset itself excludes the 'stock-in-trade. In absence of any specific provision in the IT Act to tax such nature of transaction within the ambit of taxation, the tax cannot be imposed merely on the ground of morality.

3) [TS-6327-HC-2017(Allahabad)-O] - HC: The requirement of registration needs consideration in the light of the fact that contribution of immovable property as partnership asset by a person is ‘transfer’ and has the effect of extinguishing or limiting rights and interest of the owner partner. HC sets-aside ITAT order [TS-5792-ITAT-2008(Lucknow)-O], remands the matter back to ITAT for fresh consideration; 

Note: ITAT, in [TS-5792-ITAT-2008(Lucknow)-O], held that Section 45(3) is a specific provision for taxing the capital gains arising out of introduction of an immovable property by a partner into a firm. Being a specific provision, section 50C should have no application to determine the deemed value of consideration for the purposes of transfer. This would be especially so in cases where there is no requirement for registration and payment of stamp duty. In such cases the value recorded in the books of the firm will be the deemed value of consideration for the purpose of transfer.

4) [TS-6829-HC-2017(MADRAS)-O] - HC : For the purpose of computing the capital gains u/s 45(3), value of assets recorded in the books of the firm on the date of transfer would be deemed to be the full value of consideration received or accrued as a result of the transfer. HC separately, holds that court cannot entertain any appeal u/s 206A against factual determination by ITAT of value of assets

5. [TS-10321-ITAT-2018(KOLKATA)-O] : ITAT upholds, CIT(A) order that, Sec. 50C of the Act which is a deeming provision, cannot be applied as, Sec. 45(3) of the Act is also a deeming provision, follows co-ordinate bench ruling reported in [TS-8707-ITAT-2017(Mumbai)-O],. ITAT further holds that, when the order of  the ld. CIT(A) has not been accepted by the AO, who had challenged the same by way of appeal before the ITAT, he could not, on the other hand, make contrary recordings in the reasons recorded for re-opening the assessment, applies Bombay HC decision in [TS-5497-HC-2006(Bombay)-O]

6) [TS-7303-ITAT-2019(Hyderabad)-O] - Deeming fiction cannot be superimposed –  ITAT rules in assessee`s favour, holds the provisions of section 50C of the Act which has a legal fiction “to adopt the value determined by the State Stamp Valuation Authority as the sale value where the sale value is less than the value determined by the Stamp Valuation Authority” and cannot be superimposed while giving effect to the provisions of section 45(3) of the Act which is also a provision with legal fiction. Follows [TS-5038-SC-1965-O]

7) [TS-8114-ITAT-2019(Chennai)-O] -  ITAT: Rejects FMV substitution u/s. 50C for partner's land contribution as 'capital' to firm - ITAT rejects Revenue's invocation of Sec. 50C [which empowers substitution of FMV determined by stamp duty authority with the consideration value] with respect to transfer of capital asset (land) by assessee-partner to the partnership firm as capital contribution during AY 2015-16. Revenue had sought to tax the land transferred by assessee-individual u/s 45(3) by adopting market value of land [as revalued subsequently by the firm in its books] as consideration value and thus had impliedly applied Sec. 50C to assess capital gains. ITAT observes that the subject transaction is squarely covered u/s 45(3), rules that “The provision of Section 45(3) of the Act are exhaustive and does not confer any power on the AO to adopt consideration different from what is recorded in the books of accounts of the firm.”. Clarifies that “the provisions of Sec. 50C cannot be applied to the case of deeming the value of consideration like cases covered by provisions of 45(3)”, remarks that “provisions of Sec.45(3) and 50C operate in different spheres” and are not overlapping;

8) [TS-8707-ITAT-2017(Mumbai)-O] - ITAT: Sec 45(3) supreme on partnership-partner dealings; Rejects invoking Sec 50C on land contributed as capital - Mumbai ITAT rejects AO’s invocation of deeming fiction u/s. 50C in computing capital gains on land introduced into an LLP as a capital contribution during AY 2012-13. Assessee (a private limited company and a partner in LLP) computed capital gains on land transferred by taking the amount recorded in the books of the LLP as full value of consideration u/s 45(3), however, Revenue invoked Sec. 50C and recomputed capital gains by adopting higher fair market value as determined by the stamp duty authority at the time of registration. Rejects Revenue’s stand that Sec. 50C overrides Sec. 45(3) in cases where land /building is transferred below the stamp duty value determined. ITAT observes that Sec. 45(3) deals with special cases of transfer between partnership firm and partners and in such cases, the Act provides for computation mechanism and also provides for consideration to be adopted as full value of consideration. ITAT remarks that though Sec.45(3) is not a specific provision overriding the other provisions of the Act, “importing a deeming fiction provided in Sec. 50C cannot be extended to another deeming fiction created by the statute by way of Sec. 45(3) to deal with special cases of transfer.”

On Principles

9) [TS-5038-SC-1965-O] – SC: The fiction is an indivisible one. It cannot be enlarged by importing another fiction. The compensation received only in the accounting year was by fiction treated as profit, no scope for holding that the expression "received" means "receivable".

10) [TS-4-SC-1985-O] -  Transfer of the personal asset by the partner to a partnership firm – SC : Consideration received by the partner on the transfer of his shares to the partnership firm does not fall within the contemplation of section 48 of the IT Act nor did any profit or gain accrue to him for the purpose of s. 45 of the IT Act. SC notes that, when a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which originally was subject to the entire ownership of the partner becomes now subject to the rights of other partners in it. Interest cannot be evaluated immediately, it is an interest which is subject to the operation of future transactions of the partnership, and it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm.

11) [TS-5050-HC-1939(MADRAS)-O] – HC: Right of the assessee to claim that he should be taxed under that one which leaves him with a lighter burden - HC on question “whether Sec. 9, as claimed by the department to be applied to the case or Sec. 10 of the IT Act, 1922, as claimed by the Assessee, HC holds being a taxing statute, the IT Act should receive a strict construction, that is, a construction in favour of the subject, and not in favour of the Crown. If a case appears to be governed by either of two provisions, it is the right of the assessee to claim that he should be taxed under that one which leaves him with a lighter burden.”