Taxpublishers.in - Monday Corner Answer to the Quiz for the week (23 Dec 2024)

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Quiz for the week (23 Dec 2024): Rubber (P) Ltd is engaged in manufacturing activity. It is a partner in Rasi LLP with 40% share. Rubber (P) Ltd contributed its vacant land as capital contribution to Rasi LLP for construction of factory building to expand its business. Rs.45 lakhs was credited to capital account of Rubber (P) Ltd in the books of Rasi LLP for the vacant land contributed by it. The stamp duty value of the land was Rs.80 lakhs on the date of contribution. The vacant land was acquired for Rs.20 lakhs by Rubber (P) Ltd about 10 years ago. Discuss the tax implication in the hands of Rubber (P) Ltd. Will your answer be different in case for Rubber (P) Ltd the vacant land contributed by it, is its stock in trade? Best Answer : This query requires reference to section 45(3) and section 50C of the Act. The capital contribution by a person to a firm in which he is a partner, will be treated as “transfer” for the purposes of capital gains and would be chargeable to tax in the hands of the partner as per section 45(3) of the Income-tax Act 1961. Thus, in the present case, the contribution of vacant land by Rubber (P) Ltd to Rasi LLP as capital contribution will be regarded as transfer and the capital gain would be taxable in the hands of Rubber (P) Ltd. As far as the full value of consideration is concerned for the purpose of computing capital gains so chargeable to tax, section 45(3) provides that the amount recorded in the books of account of the firm shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. Moreover, since in the present case, the capital asset being vacant land, section 50C also comes into play. The full value of consideration in case the transferred asset is land or building or both is the value adopted by the stamp valuation authority. However, when there are two conflicting provisions applicable for the same transaction, the specific provision would prevail. Thus, section 45(3), being the specific provision, will prevail over section 50C which is a general provision. Accordingly, the price recorded in Rasi LLP books of account being Rs. 45 lakhs will be treated as the full value of consideration for the purpose of computation of capital gains taxable in the hands of Rubber (P) Ltd. In case the vacant land transferred by Rubber (P) Ltd. is stock-in-trade, then section 45(3) will not be attracted. Since the vacant land was held by Rubber (P) Ltd as stock-in-trade the resultant profit / gain shall be taxable as business income in the hands of Rubber (P) Ltd. and neither section 45(3) nor section 50C will be applicable in that case. In such scenario, section 43CA will be applicable which says that where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer: Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment of stamp duty does not exceed 110% of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration. In the present case, the value adopted by the LLP was Rs.45 lakhs. 110% of 45 lakhs would be 49.50 lakhs, which is less than the value adopted by the stamp duty value authorities, i.e., Rs. 80 lakhs. Thus, Rs.80 lakhs would be taken as full value of consideration for the purpose of computing business profits in the hands of Rubber (P) Ltd.

Quiz for the week (23 Dec 2024):

Rubber (P) Ltd is engaged in manufacturing activity. It is a partner in Rasi LLP with 40% share. Rubber (P) Ltd contributed its vacant land as capital contribution to Rasi LLP for construction of factory building to expand its business. Rs.45 lakhs was credited to capital account of Rubber (P) Ltd in the books of Rasi LLP for the vacant land contributed by it. The stamp duty value of the land was Rs.80 lakhs on the date of contribution. The vacant land was acquired for Rs.20 lakhs by Rubber (P) Ltd about 10 years ago.

Discuss the tax implication in the hands of Rubber (P) Ltd. Will your answer be different in case for Rubber (P) Ltd the vacant land contributed by it, is its stock in trade?

Best Answer :

This query requires reference to section 45(3) and section 50C of the Act. The capital contribution by a person to a firm in which he is a partner, will be treated as “transfer” for the purposes of capital gains and would be chargeable to tax in the hands of the partner as per section 45(3) of the Income-tax Act 1961.

Thus, in the present case, the contribution of vacant land by Rubber (P) Ltd to Rasi LLP as capital contribution will be regarded as transfer and the capital gain would be taxable in the hands of Rubber (P) Ltd. As far as the full value of consideration is concerned for the purpose of computing capital gains so chargeable to tax, section 45(3) provides that the amount recorded in the books of account of the firm shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

Moreover, since in the present case, the capital asset being vacant land, section 50C also comes into play. The full value of consideration in case the transferred asset is land or building or both is the value adopted by the stamp valuation authority.

However, when there are two conflicting provisions applicable for the same transaction, the specific provision would prevail. Thus, section 45(3), being the specific provision, will prevail over section 50C which is a general provision.

Accordingly, the price recorded in Rasi LLP books of account being Rs. 45 lakhs will be treated as the full value of consideration for the purpose of computation of capital gains taxable in the hands of Rubber (P) Ltd.

In case the vacant land transferred by Rubber (P) Ltd. is stock-in-trade, then section 45(3) will not be attracted. Since the vacant land was held by Rubber (P) Ltd as stock-in-trade the resultant profit / gain shall be taxable as business income in the hands of Rubber (P) Ltd. and neither section 45(3) nor section 50C will be applicable in that case.

In such scenario, section 43CA will be applicable which says that where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer:

Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment of stamp duty does not exceed 110% of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration. In the present case, the value adopted by the LLP was Rs.45 lakhs. 110% of 45 lakhs would be 49.50 lakhs, which is less than the value adopted by the stamp duty value authorities, i.e., Rs. 80 lakhs. Thus, Rs.80 lakhs would be taken as full value of consideration for the purpose of computing business profits in the hands of Rubber (P) Ltd.