Section 45(3) fixes consideration at the value recorded in firm books on transfer, not later revaluation.

The appellant carried on a proprietary business until 31 March 1994.

With effect from 1 April 1994, the business was carried on by a partnership firm comprising the appellant and six other partners, to which the business assets were transferred.

On 31 March 1995, the firm revalued land, factory building, and plant and machinery, recording a total revaluation of ₹80,54,997 and crediting the revaluation reserve to the partners’ capital accounts.

The Assessing Officer treated the revalued amount as consideration under Section 45(3) of the Income Tax Act, 1961, and made an addition of ₹64,05,788; the CIT(A) and ITAT upheld the addition.

The assessee appealed under Section 260A.

Whether the revaluation of the assets recorded by the partnership firm on 31 March 1995 could be treated as the full value of consideration under Section 45(3), where the assets had been transferred to the firm on 1 April 1994.

Whether the ITAT was correct in confirming the addition made under Section 45(3).

Section 45(3) of the Income Tax Act provides that, where a person transfers a capital asset to a firm as capital contribution or otherwise, the amount recorded in the firm’s books as the value of the asset is deemed to be the full value of consideration for purposes of Section 48.

The Court read this provision in light of its legislative purpose, explained in the Finance Act, 1987 memorandum and CBDT Circular No. 495 dated 22 September 1987: the value recorded in the firm’s books on the date of transfer is the deemed consideration.

It also referred to Sunil Siddharthbhai v. CIT, (1985) 156 ITR 509 (SC), which held that a partner’s contribution of a personal asset to a firm constitutes a transfer but, absent the later statutory deeming provision, does not itself produce consideration or a taxable gain in the ordinary sense.

The transfer occurred when the partnership commenced on 1 April 1994. The firm’s accounts showed the assets at their then-recorded values; the ₹80,54,997 revaluation was made by the firm on 31 March 1995, nearly a year later.

Because Section 45(3) fixes deemed consideration by reference to the amount recorded in the firm’s books on the date of transfer, the later revaluation could not be treated as the consideration for the earlier transfer.

The fact that the revaluation reserve was subsequently credited to the partners’ capital accounts did not alter the relevant transfer date or make the year-end revalued amount the statutory measure.

It quashed and set aside the Tribunal’s order and allowed the appeal.