EY Tax Alert. Executive summary

Transcription

1 5 January 2018 EY Tax Alert Mumbai Tribunal rules stamp duty value cannot be deemed as consideration while computing capital gains arising on contribution of land by a partner to the partnership firm which is governed by a specific provision Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your Ernst & Young advisor. Executive summary This Tax Alert summarizes a recent ruling of Mumbai Tribunal (Tribunal) dated 29 December 2017, in case of Amartara Pvt. Ltd. [1] (Taxpayer) on the issue whether value adopted for stamp duty purposes can be deemed as full value of consideration while computing capital gains arising on contribution of land by a partner to the partnership firm. Under the Indian Tax Laws (ITL), gains arising from transfer of a capital asset by a partner to a partnership firm by way of capital contribution is governed by a specific provision as per which the amount recorded in the books of the partnership firm as the value of capital asset is deemed as the consideration arising on such transfer. Further, the ITL contains a deeming provision that in a case where land or building is transferred at a value lower than the value adopted for stamp duty purpose, such stamp duty value shall be deemed as the full value consideration arising on such transfer. In the present case, the Taxpayer transferred land to a limited liability partnership (LLP) by way of capital contribution and computed gains arising on such transfer by taking the value of such land recorded by the LLP in its books as the full value of consideration. However, the Tax Authority sought to compute the gains by considering the stamp duty value of such land as the full value of consideration, which was higher than the value recorded by the LLP. [1] [TS-612-ITAT-2017(MUM)]

2 Page 2 The Tribunal ruled in favor of the Taxpayer and held that capital gains arising from the contribution of land into a firm is to be computed by considering the value recorded in the books of the LLP. The Tribunal observed that a specific provision is created in the ITL for taxing cases of transfer between partner and partnership firm. Accordingly, the Tribunal held that the specific provision itself deems how the full value of consideration should be determined in special cases, another deeming fiction relating to stamp duty value cannot be imported while computing the deemed full value of consideration. In this regard, the Tribunal relied on the Supreme Court (SC) ruling in the case of Moon Mills Ltd. (59 ITR 574) which held that that scope of one deeming fiction cannot be extended by importing another deeming fiction. Further, the Tribunal observed that reliance by the Tax Authority on the Lucknow Tribunal ruling in the case of Carlton Hotel Pvt. Ltd. (122 TTJ 515) is inappropriate since the Lucknow Tribunal dealt with a different set of facts. Background and facts The ITL contain a specific provision for taxation of profits or gains arising from transfer of a capital asset by a partner to a partnership firm by way of capital contribution according to which the amount recorded in the books of the partnership firm as the value of the capital asset is deemed as the full value of consideration received or accruing as a result of the transfer of such capital asset (specific provision). Prior to introduction of specific provision, transaction of contribution of capital asset by partner into firm was not chargeable to capital gains tax in view of SC ruling in the case of Sunil Siddharthbhai [2]. In that case, SC held that amount recorded in books of the firm to the credit of partner account against contribution of asset did not represent true value of the consideration. It is only a notional value, which is intended to be taken into account at the time of determining the value of the partner's share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend upon deduction of the liabilities and prior charges existing on the date of dissolution or retirement. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal assets into the partnership firm when neither the date of dissolution or retirement can be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. The ITL also separately provide that where the sale consideration in relation to transfer of land or building held as capital asset is less than the value adopted or assessed or assessable by stamp valuation authority for the purposes of payment of stamp duty (stamp duty value) on such transfer, the amount determined by the stamp valuation authority shall be deemed to be full value of consideration for the purposes of computation of capital gains (deemed consideration provision). The ITL, thus, provide for an artificial computation mechanism in relation to transfer of land or building which is invoked when consideration received by a taxpayer is lower than the value adopted for stamp duty purposes. The Taxpayer, vide an agreement dated 28 December 2011, entered into a LLP with the objective of developing, constructing and operating resorts, hotels and other hospitality business. Immediately thereafter, the Taxpayer vide a supplementary agreement dated 29 December 2011 transferred a plot of land as its capital contribution to the LLP. The LLP recorded the said land in its books as per valuation report obtained by the Taxpayer at the time of contribution of the said land to the LLP. Subsequently, on registration of aforesaid supplementary agreement, the stamp duty authority determined the stamp duty value at a significantly higher amount as compared to the value at which the same was recorded in the books of LLP. In the case of Carlton Hotel Pvt. Ltd. [3], the Lucknow Tribunal held that in a case of contribution of land by partner into firm where there was neither payment of stamp duty nor was it registered under the Registration Act, capital gains was to be computed under specific provision by considering amount credited in books of the firm as full value of consideration and that deemed consideration provision [4] will have no applicability in such case. The Lucknow Tribunal, however, further observed that if the transaction of capital contribution is registered by the firm and stamp duty is paid by the parties, deemed consideration provisions will operate and would override the specific provision. The Taxpayer, while computing the capital gains arising from transfer of land to LLP, considered the value recorded in the books of LLP as full value of consideration deemed to have received or accrued as a result of such transfer. However, the Tax Authority, by applying the deemed consideration provision, computed the capital gains arising on transfer of land by adopting the stamp duty value as full value of consideration arising on transfer and made addition of difference to the total income of Taxpayer. On appeal by the Taxpayer, the First Appellate Authority confirmed the order of the Tax Authority by relying on the Lucknow Tribunal ruling in the case of Carlton Hotel Pvt. Ltd. [3] Aggrieved, the Taxpayer further filed an appeal before the Tribunal. [3] 122 TTJ 515 [4] During relevant year before the Tribunal, deemed consideration provision triggered on actual registration of the property. Since then, ITL is amended to cover cases where stamp duty is assessable though not assessed. [2] 156 ITR 509 (SC)

3 Page 3 Taxpayer s contentions The specific provision which is a special code for taxation of transfer of capital asset between partnership firm and partners states that the value recorded in books of partnership firm shall be deemed to be the full value of consideration received or accruing as a result of transfer. The legislature has consciously provided for taxation of gains under special provision by considering the value of asset recorded in books of partnership firm. This is supported by the fact that in case of distribution of asset on dissolution of partnership firm, the legislature has provided fair market value as on the date of transfer as full value of consideration received or accruing as a result of transfer. Having regard to conscious departure, the question of applying deemed consideration provision which is a general provision applicable for all transfers does not arise. The specific provision itself is a deeming fiction which deems value recorded in the books of the partnership firm as the full value of consideration received or accruing as a result of the transfer. The SC in the case of Moon Mills Ltd. [5] held that one deeming fiction cannot be extended to or imported in another deeming fiction. Accordingly, deemed consideration provision should not be applied while determining the full value of consideration as per the specific provision. If the specific provision were to be absent, taxation of gains arising on transfer made by a partner to the partnership firm by way of capital contribution would not at all have been possible. Thus, since the specific provision enables taxation of gains arising on capital contribution by partner, such gains needs to be computed in accordance with value of consideration specified under the specific provision. Deemed consideration provision cannot be applied in such a case. Tax Authority s contentions The specific provision does not begin with a nonobstante or overriding clause and hence, the ITL does not specifically exclude applicability of deemed consideration provision to cases covered by the specific provision. Reliance was placed on the Lucknow Tribunal ruling in case Carlton Hotel Pvt. Ltd. (supra) which held that deemed consideration provision will override specific provision in a case where the transfer deed is registered [6] and stamp duty is paid for such registration. Tribunal s ruling In view of the following reasons, the Tribunal ruled in favor of the Taxpayer and held that the gains arising from transfer of land is to be computed by considering the value recorded in books of the LLP: The specific provision deals only with special cases of transfer between partner and partnership firm. It provides the computation mechanism of gains arising on such transfer and also provides for consideration to be adopted for determining full value of consideration. Since the specific provision itself deems consideration to be adopted as full value of consideration, another deeming fiction cannot be imported while computing such deemed full value of consideration under the specific provision. This is supported by the SC ruling in the case of Moon Mills Ltd. (supra) wherein the SC held that one deeming fiction cannot be extended by importing another deeming fiction. Reliance by the Tax authority on decision of the Lucknow Tribunal in the case of Carlton Hotel Pvt. Ltd. is inappropriate since the Lucknow Tribunal dealt with a different set of facts and has not given any categorical finding on why deemed consideration provision will override the specific provision. Observations of the Lucknow Tribunal are in the context of transfer deed registered under the provision of Registration Act. [5] (1966) 59 ITR 574 [6] Registration Act, 1908

4 Page 4 Comments This ruling is welcome decision by the Mumbai Tribunal in favour of the Taxpayer. The issue as to whether specific provision dealing with contribution of capital asset into partnership firm would prevail over general provision of deeming value substitution has been a contentious issue. The present Tribunal ruling would provide relief to taxpayers in litigation. It may be noted that the Lucknow Tribunal ruling has been set aside by the Allahabad High Court vide order dated 31 January 2017 for reconsideration by the Tribunal for adjudicating the Tax Authority s contentions that transaction of partnership was sham and colorable device which the Tribunal had not addressed in its ruling. The High Court expressed a prima facie view that the transaction was fictitious. The effect of setting aside of Tribunal s ruling by the High Court is that, in law, the Lucknow Tribunal ruling is annulled. However, this aspect was not noted by the Mumbai Tribunal in the present case.

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