Year of capital gain tax implication in partnership firm

We have land. We are total 5( Five)  joint holder on land. Share of each is defined in registered deed. Four partners are from very long time holding this land. I purchased 12.5% of undivided share of  Fifth joint holder in year 2013. So now I am the fifth joint holder.
 Now we all want to develop the land jointly.
 Is it necessary to form partnership firm/ Association of person/Body of individual?
 If Yes, The commencement year of partnership firm is current year(i.e 2016 or year 2013 when I entered into to land ?. 
The main question is What is the capital gain tax implication of joint holders of land as all joint holder will contribute their undivided share in the partnership firm as per respective share in land. (i.e Members of partnership firm are the same as land owners and the respective share in partnership firm is also the same as per the share in land of joint owners. In detail A,B,C,D E are the joint holder in land and same will partners in partnership firm and respective share in land and partnership firm will also the same)
I have read many article in which it has mentioned that when a partner contribute the land as capital contribution the capital gain is in year when he contribute the land in partnership firm. But in our case we all contribute our land in partnership firm. So what is the capital gain tax year in hand of  partners?. Is it the current year when we contribute the land in partnership firm OR is it the commencement year if  commencement year is 2013 OR the capital gain tax year for partner is the year when the developed property actually sell in future?.
Asked 3 months ago in Capital Gains Tax from Visnagar, Gujarat
Sir
 
There are many views with regard to capital gains on contribution of capital in case of firm.

As per our view the capital gains will arise when the land is transferred in partnership firm as there is transfer as per the definition of transfer of property act.
Shyam Sunder Modani
CA, Hyderabad
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Hi,  whether it is necessary to form a partnership firm or AOP.It depends on factor that for what purpose the land is being developedif  development of a land is to continue a business in a long run for, then it is advisable to go for partnershipIf developing the property for sale . in that case the Land would become stock in trade. it is better to form AOP.  an ‘association of persons’, must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section, which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. AOP can be registered and unregistered.depending on the purpose of the development of the land, the question of capital gain on partners contribution  arises.
Vishakha Agarwal
CA, Bangalore
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Capital gain gets attracted at the time of transferring the property in the name of firm.
Abhishek Dugar
CA, Mumbai
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Yes as per our view when you transfer the property into partnership then you need to pay capital gains.
Shyam Sunder Modani
CA, Hyderabad
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When you sell developed plots then the Firm will pay tax under income from business.
Shyam Sunder Modani
CA, Hyderabad
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It will be same. But in that we need to draft accordingly and if you can identify your share then it can be treated as capital gains
Shyam Sunder Modani
CA, Hyderabad
955 Answers
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Hi,
Capital Gain tax is same in both partnership and AOP.


As per The Pune Bench of the Income -tax Appellate Tribunal (the Tribunal) in the case of Ashok Gordhandas 
Kirpalani (the taxpayer) held that contribution of land to Association of Person (AOP) formed for joint 
development of property is not transfer of capital asset under Section 45(3) of the Income - tax Act, 1961 (the Act) but is the case of joint pooling of resources by different parties. Therefore, security deposits received against the contribution made by the taxpayer is not taxable as capital gain.
where the asset held by the taxpayer has not been transferred to the AOP, there is no question of charging any income from capital gains in the hands of the taxpayer in this regard under section 45(3) of the Act.

Link of Full case law is given below:
https://home.kpmg.com/content/dam/kpmg/pdf/2016/06/tnf-india7-june-16-2016.pdf

In partnership firm as capital is getting converted into stock in trade, capital gain will be calculated for partners at the time of such conversion.
Section 45(2) of Income Tax Act deals with the cases where a capital asset is converted into stock in trade. Whenever a capital asset is converted into stock in trade by an assessee it is deemed as transfer of capital asset and attracts capital gain provisions, in spite of the fact that the ownership of such capital asset doesn’t change by such conversion.  
Section 2(47)(iv) while defining the term “Transfer” in relation to a capital asset provides for that it includes “in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment” 
From the plain reading of section 45(2) and 2(47)(iv) above it is clear that if a capital asset is converted into stock in trade of a business carried on by the assessee then it is considered as a transfer of such capital asset and capital gain or loss as the case may be shall be  computed in the year of sale of such converted capital asset. The consideration in such case for the purpose of computing capital gain/loss shall be equivalent to the fair market value of such asset as existing on the date of such conversation. 

CIT  Vs Trivedi  (1988)172 ITR 95(Bombay)
A person acquired land with a view to selling it later after developing it and divided the land into plots and sold the same in parcels, the activity could only be described as a business venture.

so you need to calculate capital gain depending on the date of ownership of each owner.
Vishakha Agarwal
CA, Bangalore
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Hello Sir,

In such a case Capital gain shall apply in the FY in which Asset is transferred to Firm / AOP.

Trust this clarifies your query. 

Feel free to call / get back in case of further clarifications. 

Thanking You. 

Regards,
Rohit R Sharma
BCOM, ACA, LLB-GEN, CERT. FAFP. 
Rohit R Sharma
CA, Mumbai
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