Section 45(3): Capital Gain on Transfer of Capital assets by a partner to a firm or by a member to Association of Persons, etc.

By | June 1, 2016

Though under the general law, firm does not have a distinct legal identity apart from its partners, under the Income-tax Act, transfer of a capital asset by the partner to a firm or by a Member of Association of Persons to the Association of Persons (AOP) by way of capital contribution or otherwise is chargeable to tax as capital gains of the previous year in which such transfer takes place. The amount recorded as the value of the capital asset in the books of account of the firm, AOP or Body of Individuals (BOI) will be deemed to be the full value of the consideration.

Similar is the position when a capital asset is transferred to the partner or member by way of distribution of capital asset on the dissolution of a firm or an AOP or BOl or otherwise. The fair market value of the asset on the date of such transfer is treated as the full value of consideration.

Related Cases:

S. 45(3) & 92 of IT Act, 1961—Capital gain—When a transaction referred to in S. 45(3) is in the nature of international transaction, the value of consideration shall not be the value as recorded in the firm’s account books, but the same shall be determined on the basis of arms length price in accordance with transfer pricing provisions contained in Chapter X of the Act—Canoro Resources Ltd., In re. (2009) 223 CTR 339 (AAR)

S. 2(47), 28(i), 45(2) & 45(3) of IT Act, 1961—Capital gain—Where land held by assessee company as stock-in-trade has been contributed as capital in a firm after revaluing the same at higher figure and same has been taxed by treating the transaction as a trading or commercial transaction, the same can be taxed as capital gains u/s 45(3) of the Act—DLF Universal Ltd. vs. DCIT (2010) 128 TTJ 121 (ITAT-Delhi)

S. 2(47), 45(3), 45(4) & 47(ii) of IT Act, 1961—Capital gain—S. 47 was introduced to take out certain transactions which otherwise are transfers of capital assets and otherwise taxable u/s 45 from being taxed. On the reintroduction of sub-s. (3) and (4) of S. 45 by the Finance Act, 1987, cl. (ii) of S. 47 has been expressly omitted removing the protective umbrella. Where in respect there is transfer of capital asset, by any mode and to ensure the gain being taxed u/s 47 has been amended. Therefore, continuing the business with the new partners who are introduced after retiring the old partners is a transfer of capital assets within the meaning of S. 2(47) attracting the capital transactions in terms of S. 45(4) of the Act—CIT vs. Gurunath Talkies (2009) 226 CTR 474 (Ker)

S. 45(3), 48, 50C & 55A of the IT Act, 1961—Capital gain—Where a sale transaction is registered by paying stamp duty then it is only S. 50C which can operate. In that situation S. 50C would override S. 45(3). S. 45(3) is a general provision and S. 50C is a special provision which override S. 45(3) if the sale deed is sought to be registered by paying stamp duty but where such registration does not take place by paying stamp duty that case would only be covered u/s 45(3) and therefore value recorded by the firm in its books would only be the fully value of consideration for the purpose of computing capital gains. Since there is no registration of transfer under registration Act and no stamp duty is paid, the provisions of S. 50C of the IT Act cannot be invoked—Carlton Hotel Pvt. Ltd. vs. ACIT (2009) 122 TTJ 515 (ITAT-Lucknow)


As Per Section 45(3), of the Income Tax Act, 1961-

Capital gains.

45(3). The profits or gains arising from the transfer 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.

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