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The intricacies of tax law often unfold through nuanced interpretations and amendments aimed at addressing loopholes. One such facet is the taxation of capital contributions by partners in partnership firms (including limited liability partnerships), as delineated under section 45(3) of the Income-tax Act, 1961 (“IT Act”). This provision deals with taxing transactions involving contribution of a capital asset by a partner to a partnership firm. It creates a deeming fiction whereby such contribution is considered as a taxable ‘transfer’, with the amount recorded in the books of accounts of the firm being taken as the ‘full value of consideration’ received for the asset. The said provision was introduced as an anti-avoidance measure, since it was found that taxpayers were converting individual assets into assets of a firm and escaping capital gains tax.[1]

Subsequent to the insertion of section 45(3), two additional deeming provisions, i.e., sections 50C and 50CA, were added to the IT Act. They seek to target transactions involving transfer of immovable properties and unquoted shares, respectively. The said provisions require that such assets be transferred at least at fair market value (determined in a prescribed manner), failing which such fair market value would be deemed to be the ‘full value of consideration’ for the purposes of computing capital gains in the hands of the transferor. The intent behind these sections was to tackle the influx of black money in property and share transactions, made possible by undervaluing the property.

Thus, the presence of these provisions in the IT Act raises a fundamental question – whether a partner is required to contribute immoveable properties and unquoted shares to a firm at their fair market value to ensure compliance with sections 50C and 50CA or if section 45(3) would override these provisions.

Arguments and Analysis

The rule of construction, ‘generalia specialibus non derogant’, emphasises that special provisions prevail over general ones. Section 45(3) is a specific provision tailored for situations involving capital contributions, whereas sections 50C and 50CA operate more generally and apply to all kinds of transfer. Further, it is also an accepted principle of statutory interpretation that one deeming provision cannot be extended by importing another deeming fiction.

Both sections 45(3) and 50C/50CA create deeming fictions whereby the full value of consideration is determined in specified scenarios. Basis these rules of construction, both section 45(3) and sections 50C/50CA should not operate simultaneously. Further, section 45(3), being a more special provision, should prevail over sections 50C/50CA.

The aforementioned understanding has been endorsed by, inter alia, the Mumbai Income Tax Appellate Tribunal[2] (“ITAT”) and the Ahmedabad ITAT.[3] The Mumbai ITAT has observed that section 45(3) comes into play only when a capital contribution is made by partners to a partnership firm. Further, the said provision provides a deeming fiction whereby the amount recorded in the books is considered to be the full value of consideration. Hence, another deeming fiction provided under section 50C cannot be extended to compute the full value of consideration when an immoveable property is contributed by a partner to the partnership firm.

The Chennai ITAT[4] has also adopted a similar approach and has clarified that if the provisions of section 50C were to override section 45(3), it would result in a situation where the provisions of section 45(3) would become otiose. Further, the ITAT held that such an interpretation would be against the intention of the legislature, considering the legislature did not carve out any exemption under section 45(3), at the time of introducing sections 50C/50CA.

However, the Allahabad High Court (“HC”)[5] has opined that section 50C should apply to transactions involving contributions of immoveable property by a partner in a partnership firm. It is relevant to note here that this decision was rendered in the context of a unique fact scenario, where the tax authorities were able to establish that the impugned transaction was a colourable device to evade taxes. Thus, the observations made by the HC, in the said case, reflect that the interplay between section 45(3) and sections 50C/50CA may not be a clear-cut determination. It would have to be analysed on a case-to-case basis, keeping in mind the intent of the partners in transferring a said property to the partnership firm.

Since, both section 45(3) and sections 50C/50CA were introduced as anti-avoidance measures, if there is evidence of foul play, the courts may well require partners to transfer such property at fair market value. Similar observations were also made by the ITATs while holding that section 45(3) would override section 50C. Thus, it is imperative to evaluate each transaction based on the overall factual matrix, ensuring that contributions are not deemed or regarded as a sham or colourable.

Yet another anti-avoidance provision!

Section 56(2)(x) introduces another layer of complexity by adding the issue of taxability in the hands of the transferee i.e., a partnership firm. Under section 56(2)(x), notional income arising on receipt of a specified property (including shares and immoveable property) by a taxpayer for no or inadequate consideration, is chargeable to tax in its hands. Thus, it is the difference between the consideration paid and the fair market value of the property that will be taxed. Hence, if section 56(2)(x) is to apply to transactions involving capital contribution, the firm may be liable to pay tax on the deemed income arising to it.

Akin to sections 50C/50CA, section 56(2)(x) is also a deeming provision, but unlike sections 50C/50CA (or 45(3)), it seeks to tax the recipient of the property. Thus, arguments, as discussed above, may not be significantly diluted, vis-à-vis section 56(2)(x).

However, it would be relevant to note that section 56(2)(x) was also introduced as an anti-avoidance measure to plug in loopholes created post the abolishment of the Gift Tax Act, 1958. Further, previously courts have ruled that gift tax should not be charged on capital contribution by a partner to a partnership firm. Accordingly, one may argue that since gift tax was not leviable on such capital contributions, interpreting section 56(2)(x) to cover such capital contributions would be contrary to the legislative intent.  

Having said that, the interplay between section 45(3) and 56(2)(x) remains largely untested before the courts, and the position taken under the gift tax regime may need to be re-analysed in light of the specific facts at hand.


From the above discussions it is clear that a thorough analysis of the facts, on a case by case basis, is required to navigate the intricate terrain of taxing capital contributions in partnership firms. Ensuring alignment with standard business transactions and avoiding indicia of sham arrangements is crucial. Additionally, in the absence of clear judicial authority, it would be critical to analyse risks and adopt an approach that aligns with settled judicial principles as well as the business needs of clients. Thus, clients should approach their tax advisors, right at the structuring stage, to ensure that their operations are able to smoothly sail through the watchful eye of tax assessment.

[1] For rationale behind its introduction, see Circular No. 495, dated 22-09-1987 (

[2] Deputy Commissioner of Income-tax v. Amartara Pvt. Ltd. IT Appeal No. 6050 (Mum.) of 2016, dated December 29, 2017.

[3] Nareshbhai Ishwardas Patel v. The Income Tax Office [2023] 155 141 (Ahmedabad – Trib.).

[4] Shri Sarrangan Ashok v. The Income Tax Officer IT Appeal No. 544 (Chennai) of 2019, dated August 19, 2019.

[5] Commissioner of Income Tax v. Carlton Hotel, [2017] 88 257 (Allahabad).