16 June 2016

Contribution of land to AOP for joint development is not

transfer of capital asset and therefore not taxable as
capital gain

Background
The Pune Bench of the Income-tax Appellate Tribunal  The said Joint Venture was entered into with
(the Tribunal) in the case of Ashok Gordhandas M/s. Estate Enterprises, Kriplani Brothers
1 (taxpayer) and M/s. Shriram Constructions. The
Kirpalani (the taxpayer) held that contribution of land
to Association of Person (AOP) formed for joint first two parties were to make available the land
development of property is not transfer of capital for joint development and the third party was to
asset under Section 45(3) of the Income-tax Act, 1961 bring in the capital required for the construction
(the Act) but is the case of joint pooling of resources of project.
by different parties. Therefore, security deposits  The said joint venture was for efficient pooling of
received against the contribution made by the resources and it was undertaken that neither
taxpayer is not taxable as capital gain. party was transferring to other, any kind of right
Facts of the case or interest, etc. in the said properties and as
such, the documents were exempted from
 The taxpayer had furnished a return of income registration.
declaring total income of INR0.3 million. The
Assessing Officer (AO) noted that the taxpayer had  The taxpayer stated that it had taken sum of
shown a liability of INR2.5 million in the balance INR2.5 million as a security deposit to avoid any
sheet. The taxpayer furnished the explanation losses and the same does not become part of
along with a copy of joint venture agreement with sale consideration.
M/s. Shriram Constructions.  The AO held that the interest-free deposit
 The AO noted that five persons had entered into a received from M/s Shriram Construction was
development agreement with different land owners nothing but assignment of development rights to
and all the five parties had further transferred and the AOP through M/s Shriram Construction. The
assigned development rights in taxpayer’s and his taxpayer is getting profit from the AOP formed
family’s favour and they had started development under the name and M/s Gajanan Associates as
of the said properties with M/s. Estate Enterprises per agreement. The taxpayer has acquired the
and M/s. Shriram Constructions and had formed development rights for INR1.8 million and
the AOP in the name and style M/s. Gajanan assigned the rights to M/s Shriram Construction
Associates by deed of joint venture on 26 May for INR2.5 million. The difference between the
2008. deposits and the development rights acquired in
the above properties is to be taxed as a capital
gains and added to the total income.

________________________
2
Ashok Gordhandas Kirpalani v. ITO (ITA No.1647/PN/2014) (Pune) -
Taxsutra.com

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Tribunal’s ruling Though the Tribunal does not refer to the
Supreme Court decision in the case of Sunil
 The perusal of joint venture agreement entered Siddharthbhai, in the present case it observed
into between the taxpayer and others reflected that the taxpayer’s case was not of transfer of
that M/s Estate Enterprises had contributed land to the AOP, but was the case of joint pooling
certain lands and also TDR rights and the of resources by different parties and therefore
taxpayer had contributed the land to the AOP for contribution of land to AOP is not taxable as
development only. capital gains because it is not a case of transfer
 It was not the case of transfer of land to the AOP, of capital asset under Section 45(3) of the Act.
but was the case of joint pooling of resources by This decision has been rendered on the basis of
three different parties. peculiar facts of the case. In this case the
members themselves have registered their AOP
 In such scenario where the asset held by the
whereas, normally, in a joint development
taxpayer has not been transferred to the AOP,
scenario, the members ensure that they do not
there is no question of charging any income from
form an AOP. Further in this case the members
capital gains in the hands of the taxpayer in this
have agreed to share the gross sales proceeds
regard under section 45(3) of the Act.
as against a normal industry practice of sharing
 The security deposit received by the taxpayer is profits on net basis. However, it seems that the
not chargeable to tax. Even otherwise, the said Tribunal has not emphasised on such
security deposit has been refunded by the peculiarities while dealing with the present case.
taxpayer to M/s. Shriram Constructions. The
taxpayer has also placed the copy of bank
account on record, wherein there is debit INR2.5
million.
 The assessment of Parmanand A. Kirpalani
(Kriplani Brother), who had received 16.67 per
cent as against 8.33 per cent received by the
taxpayer, was completed by the AO vide order
passed under section 143(3) of the Act and
though during the course of assessment
proceedings, submissions were made with
regard to the purchase of property and the joint
venture agreement, no addition was made in this
regard.
 Where the transaction as such has been
accepted in the hands of one of the co-owners,
no adverse view could be taken in the hands of
other person.
Our comments
The Supreme Court in the case of Sunil
2
Siddharthbhai held that when the taxpayer
transferred his shares to the partnership firm by way
of capital contribution, he has not received any
consideration within the meaning of Section 48 of
the Act nor did any profit or gain accrue to him for
the purpose of Section 45 of the Act. Subsequently,
the Finance Act, 1987 introduced Section 45(3) in
the Act to tax the profits and gains arising from the
transfer of a capital asset by a partner or by a
member to partnership or AOP or body of
individuals, as the case may be. The provisions
have been introduced with a view to prevent misuse
of entities such as partnership firms, AOP, etc.

____________
2
Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC)

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