No capital gain tax if capital contribution by partner is current asset and not capital asset: ITAT

Facts:

The issue before the ITAT was as under:

Whether the CIT(A) has erred in deleting the addition of Short Term Capital Gains earned by the assessee on transfer of land to the Partnership firm as their Capital Contribution, by holding that the provisions of section 45(3) was not applicable?

The ITAT held as under:

1) Section 45(3) is applicable only in respect of a capital asset. The said provision has no application in the instant case since what was transferred by the partners was a current asset and not a capital asset.

2) Section 45(3) did not come into operation for the assessment year 2008-09 by reason of conversion of the developed land and building into fixed assets by the said firm or due to revaluation by the said firm of the asset so converted during the previous year ended March 31, 2008.

3) Section 45(3) of the Act is applicable in the year of transfer by the partner of his capital asset to the partnership firm by way of capital contribution. In the instant case, the year of transfer was the financial year ended March 31, 2006. The ITO was wholly unjustified in invoking section 45(3) which had no application in the assessment year 2008-09 or for that matter in the assessment year 2006-07. - [2016] 74 taxmann.com 187 (Kolkata - Trib.)