2023 (5) TMI 407 - AT - Income Tax

Land transaction introduced as capital contribution in AOP deemed taxable under Income Tax Act

The DCIT, Central Circle-2 (3), Pune Versus Ghanshyamdas J Sukhwani (HUF)

The DCIT, Central Circle-2 (3), Pune Versus Ghanshyamdas J Sukhwani (HUF) - TMI Issues Involved:1. Taxability of transfer of stock in trade as capital contribution.2. Whether the stock in trade brought into common stock of partnership firm (AOP) amounts to transfer of asset.3. Applicability of Section 45(3) of the Income Tax Act when stock in trade is introduced into a firm as capital contribution.Summary:Issue 1: Taxability of Transfer of Stock in Trade as Capital ContributionThe Revenue contended that the transfer of stock in trade as capital contribution by the assessee is taxable in the year under consideration. The Assessing Officer (AO) taxed Rs. 5 crore as business income of the assessee. However, the Commissioner of Income Tax (Appeals) [CIT(A)] held that the transfer was not taxable as there was no absolute transfer of the property by the assessee and other parties. The CIT(A) emphasized that the property was not sold but contributed for development purposes, and the consideration was unascertainable at the time of the agreement. Therefore, the addition made by the AO was deleted.Issue 2: Whether the Stock in Trade Brought into Common Stock of Partnership Firm (AOP) Amounts to Transfer of AssetThe AO argued that the stock in trade brought into the partnership firm by the assessee HUF amounted to the transfer of an asset, giving rise to taxable profit. The CIT(A) disagreed, stating that the land was not treated as stock in trade in the assessee's balance sheet and profit & loss account. The CIT(A) concluded that the land was not transferred but merely given for development, and thus, no transfer as envisaged in Section 2(47) of the Act occurred. Issue 3: Applicability of Section 45(3) of the Income Tax ActThe Revenue cited the Special Bench decision in DLF Universal Ltd. Vs DCIT, asserting that Section 45(3) applies when stock in trade is introduced into a firm as capital contribution. The Tribunal observed that the assessee had not shown the impugned land as stock in trade in the balance sheet and profit & loss account. The Tribunal held that the land introduced as capital in the AOP partakes the character of a capital asset, making Section 45(3) applicable. The Tribunal relied on the Special Bench decision, concluding that the transaction is taxable under Section 45(3), and the AO should calculate the capital gain accordingly.Conclusion:The Tribunal allowed the Revenue's appeal, holding that the transaction of the impugned land introduced by the assessee as capital in the AOP is taxable under Section 45(3) of the Income Tax Act. The AO shall consider the value of Rs. 5 crore credited in the books of accounts as the full value of consideration for the transfer of land and calculate the capital gain accordingly. The Tribunal distinguished the case laws cited by the assessee, noting that they pertained to Joint Development Agreements and not to the introduction of land as capital contribution in a firm or AOP.