Capital gain on giving land as capital contibution

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Rahul (Querist)
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21 March 2013 Dear Experts,

If a person transfers a capital asset (Land)to a Company as Capital Contribution in which he proposes to become member, then whether such transaction is to be chageable to Capital Gain in the hands of Person (Transferor)?

The Provisions of Section 45(3) of the Income Tax Act,1961 inter alia states as under:-

"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".

Here, the law maker has emphasized on "not being a company or a cooperative society"

Please reply to this issue urgently...

Soumitra Basu

Soumitra Basu (Expert)
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23 March 2013 SECTION 45(3) IS NOT APPLICABLE IN THIS CASE.

Rahul

Rahul (Querist)
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24 March 2013 Sir,

Please Clarify whether Capital Gain will be attracted or not in this case in the hands of transferor?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 Based on the provisions of Section 45(3) of the Income Tax Act, 1961, let's clarify the taxation implications when a person transfers a capital asset (such as land) to a company as capital contribution:

### Understanding Section 45(3):

1. **Applicability**: Section 45(3) applies when a person transfers a capital asset to a firm, association of persons, or body of individuals (other than a company or cooperative society) as a capital contribution.

2. **Taxation Treatment**:
- The transfer of the capital asset is treated as a taxable event for the transferor.
- The profits or gains arising from such transfer are chargeable to tax in the hands of the transferor in the previous year in which the transfer takes place.
- The amount recorded in the books of account of the firm, association, or body as the value of the capital asset is deemed to be the full value of consideration received or accruing as a result of the transfer.

3. **Exclusion of Companies and Cooperative Societies**:
- The provision explicitly excludes transfers to companies or cooperative societies from its purview. This means that if a capital asset (like land) is transferred to a company as capital contribution, it does not attract taxation under Section 45(3).

### Implication for Transfer to a Company:

Since the transfer is to a company (which is explicitly excluded from Section 45(3)), the transfer of land as capital contribution does not trigger capital gains tax in the hands of the person making the transfer. Therefore:

- **No Capital Gains Tax**: The transfer of land to the company will not result in capital gains tax liability for the transferor.

- **Tax Implications for the Company**: The company receiving the land will record the land at its fair market value as per the provisions of the Companies Act and related regulations. This value will determine the company's capital base but does not affect the transferor's tax liability.

### Conclusion:

When a person transfers land to a company as capital contribution, the transaction does not attract capital gains tax under Section 45(3) of the Income Tax Act, 1961, as companies are explicitly excluded from this provision. This ensures that the transferor does not incur tax liability on the transfer of the capital asset to the company. However, it's advisable to consult with a tax advisor or chartered accountant for specific advice tailored to your situation and to ensure compliance with all tax regulations.