2017 (3) TMI 1879 - AT - Income Tax

Reopening of assessment u/s 147 - whether the credit to the current account of the Assessee in the partnership firm M/S. Salarpuria Soft Zone of a sum gives raise to any income chargeable to tax? - HELD THAT - Reopening the assessment u/s 147/148 was without any tangible material therefore the said reopening of the assessment u/s 147/148 was bad in law, as rightly held in M/S. ORCHID GRIHA NIRMAN PVT. LTD. 2016 (11) TMI 247 - ITAT KOLKATA . As rightly pointed out that even assuming that income accrued and arose in the hands of the firm consequent to revaluation of the assets by the firm, the income that might accrue in the hands of the partner would be in the nature of share income from the firm . In terms of Sec.10(2A) of the Act, partner s share in the total income of the firm is not to be included in the total income of the partner. Therefore, looked at from any angle, the AO could not on the basis of the reasons recorded formed belief that income chargeable to tax in the hands of the Assessee has escaped assessment. Considering the factual position, we are of the view that ld CIT (A) has rightly deleted the addition therefore we confirm the order of ld CIT (A).- Decided against revenue.

Summary

Issues Involved:
1. Validity of initiation of reassessment proceedings under Section 147/148 of the Income Tax Act.
2. Taxability of revaluation profit credited to the partners' accounts.
3. Applicability of Section 45(3) of the Income Tax Act.
4. Allegation of colorable transactions to avoid taxes.

Issue-wise Detailed Analysis:

1. Validity of Initiation of Reassessment Proceedings:
The Assessee filed a return of income for AY 2008-09, which was processed under Section 143(1) of the Income Tax Act. Subsequently, proceedings under Section 147 were initiated by issuing a notice under Section 148. The Assessing Officer (AO) had information that M/s. Salarpuria Soft Zone had revalued its assets and transferred the revalued reserve to its partners' accounts. The AO believed that income had escaped assessment. However, the CIT(A) held that the reasons recorded by the AO did not spell out the belief regarding escapement of income chargeable to tax. The Tribunal agreed with the CIT(A), stating that the AO could not have formed the belief that income chargeable to tax in the hands of the Assessee had escaped assessment based on the reasons recorded. The initiation of reassessment proceedings was thus held to be invalid.

2. Taxability of Revaluation Profit Credited to Partners' Accounts:
The AO held that the revaluation profit credited to the partners' accounts was real profit and not notional, and thus taxable. The CIT(A) disagreed, stating that the revaluation by the firm, if it resulted in taxable income, had to be considered in the hands of the firm alone. The partner's share in such income would be exempt under Section 10(2A) of the Act. The Tribunal confirmed this view, stating that any income that might accrue in the hands of the partner would be in the nature of "share income from the firm," which is exempt under Section 10(2A). Therefore, the revaluation profit was not taxable in the hands of the partners.

3. Applicability of Section 45(3) of the Income Tax Act:
The AO applied Section 45(3) of the Act, arguing that the revalued figure of the land should be deemed as the full value of consideration for the transfer of the capital asset by way of capital contribution. The CIT(A) and the Tribunal held that Section 45(3) was not applicable in this case. The revaluation of assets by the firm did not give rise to any taxable income in the hands of the partners. The Tribunal confirmed that no short-term capital gains accrued to the Assessee under Section 45(3) or otherwise.

4. Allegation of Colorable Transactions to Avoid Taxes:
The AO alleged that the firm and its partners adopted colorable transactions to avoid taxes by undervaluing the land until it was part of inventory. The CIT(A) and the Tribunal did not find merit in this argument. The Tribunal reiterated that even if the revaluation of assets by the firm gave rise to taxable income, such income had to be considered in the firm's assessment, not in the hands of the partners. The Tribunal confirmed that the revaluation profit was not taxable in the hands of the Assessee.

Conclusion:
The Tribunal dismissed the appeal filed by the Revenue, confirming the CIT(A)'s order that the initiation of reassessment proceedings was invalid, and the revaluation profit was not taxable in the hands of the partners. The Tribunal upheld that Section 45(3) was not applicable and rejected the allegation of colorable transactions to avoid taxes. The appeal by the Revenue was dismissed on all grounds.