s.45(3) — Capital gains on contributing a capital asset to a firm
A partner or member who contributes a capital asset such as land to a firm, association of persons or body of individuals is taxed in the year of contribution on the value recorded in its books.
The text was read in the Year 2025 edition and the first Year 2019 edition of the 1961 Act on the Department's site; neither carries a footnote recording when the sub-section was inserted, and that date has not been verified for this page. The counterpart in the Income-tax Act, 2025 is section 67(9).
Income-tax Act, 1961
s.45(3)
Income-tax Act, 2025
s.67(9)
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 45(3) of the Income-tax Act, 1961 provides that 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, are chargeable as his income of the previous year in which the transfer takes place, and that for section 48 the amount recorded in the books of the firm, association or body as the value of the asset is deemed to be the full value of the consideration. The Supreme Court in Sunil Siddharthbhai (September 1985), two Gujarat partners who brought shares into their firms as capital, held that a contribution is a transfer because the partner "reduces his exclusive rights in the asset to shared rights in it with the other partners of the firm", but that no gain could be computed because the consideration could not be evaluated. Section 45(3) now supplies the consideration; the rest of the judgment stands. For land the sub-section matters where a landowner brings his land into a firm that will develop it. The contribution is not a specified agreement, so section 45(5A) has no role: the gain is taxed in the year of contribution on the recorded value, whenever the project is completed. In Sai Teja Constructions (Hyderabad Tribunal, October 2023) a firm revalued two acres at Madenaguda bought for Rs 1.20 crore to Rs 6 crore and contributed them as capital to a new firm formed to build apartments; section 45(3) was applied on Rs 6 crore as the full value, giving a short-term gain of Rs 4.80 crore. A partner's later exit is taxed on the firm under sections 9B and 45(4). The counterpart in the Income-tax Act, 2025 is section 67(9), in the same terms, with the recorded value deemed to be the full value of consideration.
What the provision does
Taxes the partner or member, in the year of contribution, on a gain measured by the value at which the firm, association or body records the asset, so that the parties' own book entry fixes the consideration. It does not apply to a contribution to a company or a co-operative society, and it does not tax the firm, whose later distributions on reconstitution fall under sections 9B and 45(4).
Threshold questions
- Is the transferee a firm, association of persons or body of individuals, and not a company or a co-operative society
- Is the transferor a partner or member, or does he become one, and is the transfer by way of capital contribution or otherwise
- Is the land actually transferred to the firm or association, or only made available to it for a joint venture
- At what value does the firm record the asset in its books, and was it revalued before contribution
- In which previous year did the transfer take place, which fixes the year of charge whenever the project is completed
In practice
The recurring disputes.
Whether section 50C overrides the value recorded in the firm's books
Land is often brought into a developing firm at its old cost. The Revenue's argument is that section 50C deems the stamp duty value to be the full value of consideration wherever the consideration for land is less, and the recorded value is that consideration. The partner's argument is that section 45(3) is a specific deeming provision that itself fixes the full value as the amount recorded in the books, and that a capital credit is, in the Supreme Court's words in Sunil Siddharthbhai, of "notional value only", not consideration received or accruing to which section 50C can attach. The Ahmedabad Tribunal in Nareshbhai Ishwardas Patel (August 2023) held section 45(3) to be the specific provision that prevails over section 50C; the Mumbai Tribunal in Amartara (December 2017) reached the same result for land contributed to a limited liability partnership, holding that the section 50C fiction cannot be imported into the section 45(3) fiction. The Revenue relies on a High Court decision. Carlton Hotel (Allahabad High Court, ITA 31 of 2009, 31 January 2017) answered for the Revenue its first question, whether section 50C rather than section 45(3) governed a contribution said to be a colourable device, on a prima facie view that the partnership was a sham (paragraphs 86 and 92); held that a contribution of land to a firm is a transfer that requires registration under section 17(1)(b) of the Registration Act (paragraph 90); and refrained from answering the remaining questions, including whether section 50C can be invoked where the contribution is unregistered, remanding them (paragraphs 91 to 93). Nareshbhai Ishwardas Patel distinguished it as a sham-partnership case (paragraph 11.3). Amartara, decided eleven months later, discussed only the Lucknow Tribunal's order that Carlton set aside. The Revenue's reply to Nareshbhai is that the High Court made no final finding of sham and that its registration holding (paragraph 90) is not confined to a sham; the partner's reply is that, on a remand that left unanswered whether section 50C reaches an unregistered contribution, Carlton decided nothing for a genuine contribution, and no High Court has decided the point for one.
Contribution at book value followed by withdrawal
The Supreme Court in Sunil Siddharthbhai said, in its own words, that if the transfer of the personal asset to the partnership "is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income tax on a capital gain, it will be open to the income tax authorities to go behind the transaction", and to examine whether even a genuine partnership's transfer "represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business". The Revenue relies on this where land goes in at a low book value and the partner draws out cash from the developer's funding. The partner's answer is that the firm genuinely develops the land, that the contribution is real capital for that business, and that section 45(3) now taxes the contribution on the recorded value the parties chose. The Allahabad High Court applied that test in Carlton Hotel (January 2017), where a company contributed land at book value to a firm in which it held five per cent, and remanded for the Tribunal to examine whether the partnership was a device. Each case turns on the flow of money after the contribution.
Stock in trade introduced into a firm
Section 45(3) speaks of the transfer of a capital asset, and section 2(14) excludes stock in trade from that term, which is the dealer's argument that land he holds as stock is outside the sub-section when he brings it into a firm. The Hyderabad Tribunal in Sai Teja Constructions (paras 20 and 21) rejected that, following the Special Bench in DLF Universal as the order cites it, on the reasoning that stock introduced as capital does not retain its character as stock at the point of introduction. The dealer's reply is that the character of the asset in his own hands, not the firm's treatment of it, decides whether a capital asset was transferred. No High Court ruling was traced.
Landowners who join a venture with a developer
Where landowners and a developer form an association of persons to build, the Revenue's argument is that the land has been contributed to the association, so section 45(3) charges the owners in the year the venture is formed, outside section 45(5A). The owners' argument, accepted by the Pune Tribunal in Ashok Gordhandas Kirpalani (May 2016), is that a joint venture deed under which they only make development rights available, reciting that no party transfers any right in the properties, is a pooling of resources and not a transfer: "where the asset held by the assessee has not been transferred to the AOP, there is no question of charging" under section 45(3) (para 14). The Revenue can still treat the venture as an association of persons outside section 45(5A), and the terms of the deed decide which way a case falls.