INCOME TAX ACT, 1961

Section 45(2) Section 45(3)

Capital gains - Chargeability - Land introduced in firm as stock-in-trade -

During the course of scrutiny proceedings, the assessing officer noticed that the assessee alongwith his brother received gift of plot of land alongwith certain construction of building on the said land from his sister Smt. R. In financial year 2010-11, Smt. R was granted permission on 27-8-2010 for construction of 22 buildings/Apartments on 34,000 sq.mtr. of the said land. The Construction of building A was started on 1677 sq.mtr. of land out of 34,000 sq.mtr. of land in collaboration with the partnership firm M/s. S (the assessee alongwith his brother Shri C were partners). As per registered gift deed, Smt. R transferred the whole land parcel of 38,000 sq.mtr. to her two brothers, K. (the assessee) and C. After receipt of gift of land parcel, the assessee as well as his brother C introduced 1677 sq.mtr. of land as capital contribution to the firm M/s. S in the current assessment year. The assessing officer held that assessee was liable to pay capital gain tax as per the clear cut provisions of section 45(2) of the Act on conversion of the land into stock-in-trade and the value of consideration would be the fair market value as on the date of conversion of the land into stock-in-trade. Thus, assessing officer computed long-term capital gain on land admeasuring 1677 sq.mtrs. Held: 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 to the above and deals with the situation where capital asset is converted into stock-in-trade. At that point of time, as per sub-section (2) of section 45 of the Act there is no charge of capital gain. The charge of capital gain arises when such stock-in-trade is sold. In assessee's case under consideration, we note that 1677 sq.mtr. of land was transferred by assessee as capital contribution, as a stock-in-trade, to the firm M/s. S in the assessment year 2013-14. Since the capital asset is converted into stock-in-trade during the assessment year 2013-14, it will be treated as 'transfer' under section 2(47) for the assessment year 2013-14 but charge of capital gain does not arise. The charge of capital gain arises when such stock-in-trade is sold. In other words, the Capital gain shall be computed on the assumption that the capital asset is transferred in assessment year 2013-14, however, by virtue of sub-section (2) of section 45 such capital gain will be taxable in the subsequent assessment year in which such stock-in-trade is sold. In the assessee's case, the stock-in-trade is not sold in the assessment year 2013-14 therefore, there is no any liability on the assessee to pay tax in the assessment year 2013-14, the liability to pay tax will arise in subsequent year in which such stock-in-trade is sold by the assessee. Therefore taxable event or tax liability on the assessee arises on sale of such stock-in-trade.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2013-14

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