TaxTMI 
TaxTMI 
2020 (12) TMI 214
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.... as the facts narrated in ITA No.1235/Ahd/2017, Shri Krishnakumar Ramsinh Parmar, for assessment Year 2013-14, have been taken into consideration for deciding the above appeals en masse. 3. The grievances raised by the assessee in ITA No.1235/Ahd/2017, (lead case) are as follows: "(1) Charge of Capital Gains: The learned Commissioner of Income tax (Appeals) erred in confirming charge of capital gains in respect of Alwara Lands which had no cost. (2) Determination of capital gain at Rs. 33,85,312/- (i) On the facts and circumstances of the case and as per law, the learned Commissioner of Income-tax (Appeals) erred in holding that the half share of land received by the assessee from his sister Ranjanben Parmar which she admittedly held as stock-in-trade, on introduction of such land in the partnership firm by the assessee attracted provisions of section 45(3) of the Act in spite of the fact that the land so introduced continued to be stock-in- trade. (ii) The assessee submits that the learned Commissioner of Income-tax (Appeals) was not justified in holding that the concept of stock-in-trade is specific to the individuals when in fact, unless converted into capital asset, ....
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....nh Ramsinh Parmar are partners). As per registered gift deed dated 20.12.2012, Smt. Ranjnaben R. Parmar transferred the whole land parcel of 38,000 Sq. mtr to her two brothers, Shri. Krishnakumar R. Parmar (the assessee) and Shri Chandrasinh R. Parmar. After receipt of gift of land parcel, the assessee as well as his brother Shri Chandrasinh Ramsinh Parmar introduced 1677 Sq. mtr of land as capital contribution to the firm M/s Sai Enterprises in the current assessment year. 7. The assessee sought directions from the Addl. Commissioner of Income-tax, Vapi Range, Vapi on the additions proposed by the assessing officer, relying on the provisions of section 144A of the Income Tax Act. The Addl., CIT, Vapi Range, Vapi after giving opportunity of being heard to the assessee and considering various submissions made by the assessee before him, vide para-8 to para 9.1 of his order under section 144A of the Act dated 23.03.2016 has directed the assessing officer. The said directions issued by the Addl., CIT, Vapi Range, under section 144A of the Act is reproduced below: "08. As per the findings given in para 05 and 06 above, it is very clear that Shri Ranjanben R. Parmar has on 27.08.2010....
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....mpletion method for offering the profit/income to tax. The AO will also ensure that the action as above is taken in respect of the remaining land of 34,000 Sq. Mtr. for which the building construction has been duly approved, as discussed in the paras above. 09. Now coming to the introduction of land as capital by Shri Krishnakumar R. Parmar and Shri Chandrasinh R. Parmar, the details of which have been discussed in paras 05, 06 & 10 above, the provisions of section 45(3) of the I. T, Act, 1961 would apply. The capital gain on transfer of the capital assets by a partner to a firm is chargeable to tax in the previous year, in which such transfer has taken place. The amount recorded in the books of accounts of the firm as the value of the capital assets is to be taken by the AO as full value of consideration received as a result of the transfer. The details in respect of such transfer by Shri Krishnakumar K. Parmar and Shri Chandrasinh R. Parmar to M/s. Sai Enterprises and M/s. Sai Samarth Enterprises are as per para 07 above. The AO may note that the transfer of capital assets by the partners is only at 1677 Sq. Mtr each in the aforementioned firms, out of 34,000 Sq. Mtr of land ap....
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.... capital assets by the partners is only at 1677 Sq. Mtr each in the aforementioned firms, out of 34,000 Sq. Mtr of land approved for construction of flats/apartments. Therefore, for the purpose of calculating the capital gain on transfer of land to the firm, the value recorded in the books has to be considered. The value recorded in the books was to the tune of Rs. 33,85,312/-. In view of the direction given by the Addl. Commissioner of income Tax, Vapi Range Vapi, vide his order u/s. 144A dated 23.03,2016, the assessing officer made addition under section 45(3) of the Income Tax Act, to the tune of Rs. 33,85,312/- on protective basis. 10. On appeal, the ld CIT(A) deleted addition made by assessing officer on substantive basis to the tune of Rs. 19,79,699/-. The findings of the ld CIT(A) in respect of addition on substantive basis are as follows: "After considering the findings of the assessing officer and submissions of the assessee, I find that the following facts emerge:- (i) The factual matrix of the case indicates that Smt. Ranjnaben R. Parmar converted her agricultural land admeasuring 38,000 Sq. mtr into non-agricultural land in F.Y. 2002-03 and permission for developme....
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....tal gains of Rs. 19,79,699/- u/s. 45(2) of the Act in the case of assessee by taking F.M.V. of 1677 Sq. mtr of land reduced by indexed cost of acquisition for 1677 Sq. mtr land. This is totally incorrect as there is no sale or otherwise transfer of any stock-in-trade by the assessee. The assessee received capital assets in the form of land parcel out of which 1677 Sq. mtr (half share each of the assessee and his brother) introduced as capital contribution in the firm and balance portion is lying in his capital account itself. Thus, the addition of Rs. 19,79,699/- u/s, 45(2) of the Act in the case of assessee is not sustainable and the same is hereby deleted. 11. However, ld CIT(A) confirmed the addition of Rs. 33,85,312/-, which was made by the assessing officer on protective basis. The ld CIT(A) also converted protective addition into substantive addition observing as follows: "(ii) With regard to capital gains of Rs. 33,85,312/- taxed in the case of the assessee on protective basis as per direction u/s. 144A of the Act, I find that the AO as well as the Addl. CIT has misinterpreted the issues involved. The facts indicated that the assessee alongwith his brother received capi....
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....of section 45 of the Act deals with the situation where the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in- trade of a business carried on by him shall be chargeable to income- tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him. There is no tax liability in the hands of the assessee till the capital asset remains as stock-in-trade. The tax liability in the hands of the assessee would arise only when the assessee sales the stock-in-trade. Since, the assessee has not sold the stock-in-trade therefore no any capital gain arises in his hands. The ld Counsel also submits that stock-in-trade is not a capital asset, since it is one of the exclusions from the definition u/s.2(14) of the Act. This way, ld Counsel prayed the Bench that substantive addition of Rs. 33,85,312/- may be deleted. 14. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier paras nos.6 to 9 and is not being repeated for the sake of brevity. 15. We have heard both the par....
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.... 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 " From the provisions of sub- section (3) of Section 45 of the Income Tax Act, it is clear that when a person transfers a capital asset to partnership firm in which he is a partner, by way of capital contribution, then it shall be chargeable to tax as his income of the previous year in which such transfer takes place. However, as per sub-section (2) of section 45, if such capital contribution is made by partner as stock-in-trade then taxable event of capital gain would arise in the year in which such stock-in-trade is sold. Thus, sub-section (2) of section 45 carves out an exception....
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....urrent assessment year which was treated by the firm as stock-intrade. The said stock-in-trade is not a capital asset. 19. Now coming back to the facts of the assessee`s case in the light of the legal position on the issue "stock-in-trade", as explained above. At the cost of repetition we state that the partnership firm M/s. Sai Enterprises was formed on the 14th day of February, 2011.An agreement was executed between Smt. Ranjenben R. Parmar and M/s. Sai Enterprises on 16-2-2011 whereby the owner Smt. Ranjanben R. Parmar had appointed M/s. Sai Enterprise as Manager/ Supervisor to develop the land admeasuring only about 1677 sq. mtrs as per terms and conditions mentioned in the said agreement. Smt. Ranjanben R. Parmar gifted the entire land admeasuring about 38000 sq. mtrs (including 1677 sq. mts) to her brothers Shri Chandrasinh R. Parmar and Krishnakumar R. Parmar. As Shri Chandrasinh R. Parmar and Krishnakumar R. Parmar were partners in the firm, M/s. Sai Enterprises, their capital account each was credited by Rs. 33,85,312/- being the value of land introduce as stock-in-trade. That is, land was held as stock-in-trade so gifted to Chandrasinh Parmar and Krishnakumar Parmar (a....