By C. N. Vaze
Shailesh Kamdar
Jagdish T. Punjabi
Chartered Accountants
fiogf49gjkf0d
New Page 1
44 2010-TIOL-16-ITAT-D-L-SB
DLF Universal Ltd vs DCIT
ITA No. 3622/Del/1995
Assessment Year: 1992-93.
Date of Order – 4.1.2010
Section 45(3)- Provisions of S.
45(3) are attracted even when an asset held as stock-in-trade is introduced by
an assessee into a partnership firm as its capital contribution.
Facts:
The assessee was engaged in the business of real estate
development. The assessee held land costing Rs 4.40 crores as its
stock-in-trade. Vide a Memorandum of Partnership executed on 23rd March, 1992,
the assessee entered into a partnership with four of its subsidiaries and one
individual. The assessee contributed all its rights in the five plots of land to
the newly constituted partnership firm in which the assessee became a partner
with 76% share. The rights of the assessee in the land so contributed became the
property of the firm from 16th March, 1992. A sum of Rs 11.50 crores,
representing the market value of the land, was credited by the partnership firm
to the capital account of the assessee. The assessee credited its ‘profit and
loss’ account with Rs 6.01 crores, the sum being the difference between market
value of the land introduced into the firm and its book value. However, in the
return of income filed by the assessee, this sum of Rs 6.01 crores was claimed
to be not taxable on the ground that the introduction of an asset into a
partnership firm does not constitute sale. In support of its contention, the
assessee placed reliance on the decision of the Apex Court in the case of Hind
Construction Ltd. (83 ITR 211)(SC). The AO and the CIT (A), relying on the ratio
of the decision of the Apex Court in the case of Sunil Siddharthbhai, taxed this
amount.
Aggrieved, the assessee preferred an appeal to the Tribunal.
The Special Bench of the Tribunal, by the majority, held as
follows:
Held:
(i) The Apex Court has in the case of Sunil Siddharthbhai
held that when a partner introduces his asset into a firm as capital
contribution, there is a `transfer’, though the gains are not chargeable to
tax, as the consideration is not determinable. The Apex Court has clarified
that this principle does not apply if the partnership was non-genuine or a
sham or where the transaction of transferring personal assets to the
partnership firm was a device or ruse to convert personal assets into money
while evading tax on capital gains.
(ii) The bench, upon having noted that the assessee had
encashed its stock-in-trade and had derived gains, held that going by facts —
though there was no material to hold that the partnership was non-genuine or
sham — the assessee had adopted a calculated device of converting land into
money by withdrawing substantial sums from the firm and debiting the same to
its current account. Accordingly, the contribution by the assessee of its
personal land to the capital of the firm was a device or ruse for converting
land into money for its benefit. Thus, the entry of Rs 11.50 crores being the
value of land credited in the assessee’s capital account was not imaginary or
notional. The surplus was chargeable to tax.
(iii) S. 45(3) applies when a capital asset is introduced
into a firm as capital contribution. S. 45(3) applies also when stock-in-trade
is introduced into a firm. The transaction of introducing stock-in-trade into
a firm is on capital account. At the point of time of introduction, the
stock-in-trade does not retain its character as stock-in-trade. This is also
shown by the fact that the assessee revalued the stock-in-trade to its market
value prior to introduction into the firm. Consequently, the gains on such
transfer are taxable u/s 45(3);
(iv) As regards the contention whether the AO, after having
assessed the gain as business profits, is entitled to urge before the Tribunal
that the gains should be assessed as capital gains u/s 45(3), it held in the
affirmative for the reason that this is merely an alternative argument on the
same set of facts and not making out of a new case against the assessee. The
bench noted that in Sumit Bhattacharya 112 ITD 1 (Mum)(SB), it was held that
the Tribunal was competent to change the head of income even at the instance
of the respondent.
(v) The surplus to the assessee from the contribution of
land to the firm as capital was held to be assessable u/s 45(3). Even
otherwise, the surplus was taxable as the transaction was a colorable device.
Without prejudice, if it was held that the land should be treated as
stock-in-trade, the surplus is assessable as business income.
