2018 (3) TMI 1349 - AT - Income Tax

Valuation of land acquired from the partners in the partnership firm - Application of Section 40(2)(a) - The assessee has submitted that the provisions of sec. 40A(2)(a) will apply only to goods, services or facilities and the same will not apply to land. - it is further submitted that, the provisions of sec. 45(3) shall apply to the transaction of transfer of capital asset by a partner to the partnership firm and the provisions of sec. 40A(2) will not override the provisions of sec. 45(3) of the Act - Date on which partnership firm came into existence. Held that - Since the assessee is dealing in land, as stated earlier, it constitutes goods in its hands and since the payments have been made to partners (who are covered by sec. 40A(2)(b)), we are of the view that the AO was very much entitled to examine the payments made vis-a-vis the fair market value of the goods (land) in terms of sec. 40A(2)(a) of the Act. Hence, as per the provisions of sec. 45(3), the assessee firm might have made payments to the partners towards the cost of land, but the same does not bar application of sec. 40A(2)(a) of the Act. We have noticed that the provisions of sec. 45(3) are applicable in the hands of partners. The objective behind provisions of sec. 45(3) and sec. 40A(2)(a) is different. Hence, in our view, sec. 45(3) cannot override provisions of sec. 40A(2)(a) of the Act. - Decided in favor of revenue. Date on which partnership firm came into existence - Held that - The ld. CIT(A), upon going through the documents relating to the plan approval, Partnership deed etc., came to the conclusion that the partners have applied for a common layout in 2002-03 in their personal names and no further action has been taken up to 2005-06. Thereafter, for the first time, the Partnership deed was executed on 31/05/2005 with retrospective effect from 19/05/2005. Accordingly, the ld. CIT(A) held that the Partnership firm came into existence only on 19/05/2005, as recorded in the registered partnership deed. - tax authorities have given proper reasoning to come to the conclusion that the partnership firm came into existence only on 19/05/2005 as per the registered partnership deed executed on 31/05/2005 - Decided against the assessee.

Issues Involved:
1. Substitution of "fair market value" of land for the cost to the assessee.
2. Disallowance of development expenses.
3. Determination of the existence date of the partnership firm.
4. Validity of reopening assessments under section 148 of the Act.
5. Limitation of assessment orders under section 153(2) of the Act.

Detailed Analysis:

1. Substitution of "Fair Market Value" of Land:
The Revenue was aggrieved by the decision of the CIT(A) in canceling the addition made by the AO by substituting the "fair market value" of land acquired by the assessee firm from its partners in place of the cost to the assessee. The AO had adopted the SRO value as the fair market value, leading to an addition of ?202.18 lakhs to the assessee's total income for AY 2007-08. The CIT(A) held that as per section 45(3) of the Act, the value recorded in the firm's books should be deemed the full value of consideration, and the AO was not entitled to substitute this with the fair market value. The Tribunal agreed with the Revenue's contention that the AO was justified in determining the fair market value of land under section 40A(2)(a) of the Act, as the land was acquired from partners. The Tribunal restored the issue to the AO for fresh examination of the fair market value.

2. Disallowance of Development Expenses:
The AO disallowed the entire claim of development expenditure on the basis that the assessee had not actually incurred the expenses and had accounted for them on an estimated basis. The CIT(A) allowed the claim, stating that under the "revenue-cost matching" principle and as per the Supreme Court's decision in Calcutta Co. Ltd., the estimated expenditure to be incurred in discharging a liability should be allowed as a deduction. The Tribunal upheld the CIT(A)'s decision, noting that the claim of development expenses fits into the mercantile system of accounting and the revenue-cost matching principle.

3. Determination of the Existence Date of the Partnership Firm:
The AO and CIT(A) concluded that the partnership firm came into existence on 19/05/2005, as per the registered partnership deed executed on 31/05/2005. The assessee's claim that the firm existed since 01/11/2002 was rejected based on the partnership deed and other documents. The Tribunal found no reason to interfere with the CIT(A)'s order on this issue.

4. Validity of Reopening Assessments under Section 148 of the Act:
The assessee contended that the reasons for reopening the assessments for AY 2006-07 and 2008-09 were recorded after the issue of notices under section 148, violating section 148(2) of the Act. The Tribunal agreed with the assessee, noting that the notices were issued on 02/06/2010, while the reasons were recorded on 04/06/2010. Following precedents, the Tribunal held that the reopening was invalid due to non-compliance with the mandatory requirement of recording reasons before issuing the notice. Consequently, the assessment orders for AY 2006-07 and 2008-09 were quashed.

5. Limitation of Assessment Orders under Section 153(2) of the Act:
The assessee raised an additional ground that the assessment orders were barred by limitation as per section 153(2) of the Act. However, this ground was not pressed during the hearing and was dismissed as not pressed.

Conclusion:
- The appeal of the Revenue for AY 2007-08 was allowed, and the issue of fair market value was restored to the AO for fresh examination.
- The appeals of the Revenue for AY 2006-07 and 2008-09 were dismissed.
- The cross-objection of the assessee for AY 2007-08 was dismissed.
- The cross-objections for AY 2006-07 and 2008-09 were allowed, and the assessment orders were quashed due to invalid reopening.

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