Section 50C cannot override section 45(3) for capital contribution to a firm; related depreciation and 14A issues follow.

Where land is contributed to a partnership firm as capital, section 45(3) governs computation and deems the firm's book value as full consideration, so section 50C cannot be superimposed to substitute a higher value for capital gains under section 48. On that basis, consequential reduction of depreciation on the block of assets also fails because it depends on the rejected section 50C adjustment. The text further notes that disallowance under section 14A read with Rule 8D is confined to the exempt income actually earned. The Revenue's appeals therefore failed and the appellate relief was sustained.

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Issues: (i) Whether section 50C of the Income-tax Act, 1961 could be applied to substitute the consideration in respect of transfer of land by way of capital contribution to a partnership firm and thereby recompute capital gains under section 45(3) read with section 48; (ii) whether the reduction in depreciation on the block of assets, based on the same section 50C adjustment, was justified; and (iii) whether the disallowance under section 14A read with Rule 8D could be restricted to the exempt income earned.

Issue (i): Whether section 50C of the Income-tax Act, 1961 could be applied to substitute the consideration in respect of transfer of land by way of capital contribution to a partnership firm and thereby recompute capital gains under section 45(3) read with section 48.

Analysis: The transfer was by way of capital contribution to a firm, a situation specifically governed by section 45(3), under which the amount recorded in the books of account of the firm is deemed to be the full value of consideration for the purpose of section 48. The adjustment under section 50C, which is another deeming provision, could not be imported to override the specific computation mechanism already provided for such transfers. The earlier decision in the assessee's own case governed the issue.

Conclusion: The application of section 50C was not justified and the capital gains addition was correctly deleted, in favour of the assessee.

Issue (ii): Whether the reduction in depreciation on the block of assets, based on the same section 50C adjustment, was justified.

Analysis: The depreciation adjustment was consequential to the rejected section 50C substitution. Once the valuation adopted for the transfer was not to be enhanced under section 50C, the corresponding restriction in depreciation on the block of assets could not survive. The issue depended on the first issue and stood on the same legal footing.

Conclusion: The restriction of depreciation was not sustainable and the assessee's claim was upheld.

Issue (iii): Whether the disallowance under section 14A read with Rule 8D could be restricted to the exempt income earned.

Analysis: The disallowance under section 14A was confined to the exempt income actually earned, in line with the binding judicial view followed by the Tribunal and the earlier order in the assessee's own case. The Revenue did not bring any distinguishing material for the relevant year.

Conclusion: The restriction of the disallowance to exempt income was upheld, in favour of the assessee.

Final Conclusion: The Revenue's appeals failed on all contested issues, and the relief granted by the first appellate authority was sustained in full.

Ratio Decidendi: Where a specific deeming computation provision governs the transfer of capital assets to a partnership firm, a separate deeming fiction cannot be superimposed to alter the full value of consideration; consequential adjustments based on that rejected substitution also fail, and disallowance under section 14A is confined to exempt income earned.

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