2018 (8) TMI 2075 - AT - Income Tax

Addition towards capital gains u/s 45(3) - profit accrued to assessee company on transfer/contribution of capital by way of contribution in the form of its share of land asset to the partnership firm - HELD THAT - Notwithstanding such price rise, in accordance with accounting principles, the land held as inventory could only be shown at its cost. Hence there cannot be any undervaluation of land in the books of the assessee and other two partner companies of recording the value of land as alleged by the ld AO. We find that only after conversion of inventory into fixed assets that the said firm revalued the developed land including construction thereon in order to bring it in line with the current marked value and for justifying the bank finance of nearly ₹ 250 crores. Such revaluation was neither colourable nor a device. It is well settled that revaluation in the books of accounts of an asset which the assessee continues to own does not result in any profit or income. Revaluation at market value results in notional imaginary profit which cannot be taxed. Revaluation of an asset which an assessee continues to hold is not a taxable event and does not give rise to any taxable income. A person cannot make a profit from himself. We hold that the assessee had not derived any tax advantage pursuant to the revaluation of land in the said firm in Asst Year 2008-09. In any case, the revaluation, even if held to be taxable, could be examined only in Asst Year 2008-09 and it has got absolutely no bearing in Asst Year 2006-07. The assessee cannot be expected to preempt in Asst Year 2006-07, that the partnership firm would reconvert the stock in trade into capital asset and then revalue the same . Hence in any event, there is absolutely no scope for bringing any capital gains to tax in the Asst Year 2006-07 in the hands of the assessee partner. - Decided in favour of assessee

Summary

Issues Involved:
1. Justification of the deletion of the addition of ?96,37,85,635/- towards capital gains under Section 45(3) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Justification of the Deletion of the Addition of ?96,37,85,635/- towards Capital Gains under Section 45(3) of the Income Tax Act, 1961:

The primary issue in this appeal is whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the addition of ?96,37,85,635/- towards capital gains under Section 45(3) of the Income Tax Act, 1961.

Facts of the Case:
The assessee, a company, along with other companies, was a partner in a partnership firm named M/s Salarpuria Soft Zone. The land in question was purchased by these companies and later transferred to the partnership firm as their capital contribution. The land was initially shown as work in progress and reflected under "Current Assets" in the balance sheet. Subsequently, the partnership firm revalued the land and credited the revaluation amount to the partners' current accounts.

Assessment Proceedings:
The Assessing Officer (AO) reopened the assessment for the Assessment Year (AY) 2006-07 on the grounds that the capital gains of ?96,37,85,635/- had not been included by the assessee in its return of income. The AO contended that the land, upon transfer to the partnership firm, should be considered a capital asset, and its revaluation should be taxed as capital gains under Section 45(3) of the Act.

Assessee's Arguments:
The assessee argued that Section 45(3) applies only to the transfer of a capital asset by a partner to a firm. Since the land was accounted for as a "current asset" and not a "capital asset," Section 45(3) was not applicable. The land was transferred at cost, and no profit arose at the time of transfer. The revaluation of the land by the partnership firm in a subsequent year (AY 2008-09) was for financial purposes and did not result in any tax advantage.

AO's Counterarguments:
The AO rejected the assessee's contentions, stating that the land was a capital asset and should be taxed under Section 45(3). The AO argued that the revaluation was a device to avoid taxes on capital gains and that the revaluation amount should be considered the full value of consideration for the transfer.

CIT(A)'s Findings:
The CIT(A) agreed with the assessee's contentions and deleted the addition of ?96,37,85,635/-. The CIT(A) held that the land was a current asset and not a capital asset, and therefore, Section 45(3) was not applicable. The revaluation gains could not be brought to tax in AY 2006-07.

Tribunal's Analysis:
The Tribunal upheld the CIT(A)'s decision, emphasizing that the land was held as stock in trade and not as a capital asset. Therefore, the provisions of Section 45(3) did not apply. The Tribunal noted that the revaluation gains arose in AY 2008-09 and were merely book entries for financial purposes, not resulting in any real profit or income.

The Tribunal also referenced previous judgments, including those in the cases of M/s Orchid Griha Nirman Pvt Ltd and M/s Command Constructions Pvt Ltd, which supported the view that revaluation of assets does not result in taxable income.

Conclusion:
The Tribunal concluded that the assessee did not derive any tax advantage from the revaluation of the land. The revaluation was for financial purposes and did not result in any real profit or income. Therefore, the deletion of the addition of ?96,37,85,635/- towards capital gains under Section 45(3) was justified. The appeal by the Revenue was dismissed.

Order Pronounced:
The Tribunal dismissed the appeal of the Revenue and upheld the CIT(A)'s order, confirming that there was no taxable capital gain in AY 2006-07. The petition filed by the assessee under Rule 27 of the Income Tax Appellate Tribunal, Rules, 1963, was also dismissed as not pressed.