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2024 (8) TMI 169 - AT - Income TaxPowers of the CIT (A) u/s 251(1) - jurisdiction of the CIT (A) to tax a new source of income - Applicability of Section 45(4) - increase in capital account of partners on account of revaluation of the assets held by the firm - HELD THAT - In the present case, the issue considered by the Assessing Officer is increase in capital account of partners on account of revaluation of the assets held by the firm and credited such revaluation amount to the capital account of the partners and said issues falls under the provisions of section 45(4) of the I.T. Act, 1961, but, the AO has considered the issue u/s 68 of the Act as unexplained cash credit. CIT (A) having noticed the fact has rightly invoked the provisions of section 45(4). Therefore, in our considered view the powers exercised by the CIT (A) cannot be said to be beyond the scope of provisions of section 251(1) - what was considered by the learned CIT (A) is the very same income which arises out of the revaluation of the asset held by the firm and the same has been assessed under proper provisions of section and as per facts available on record. Therefore, we are of the considered view that there is no merit in the legal grounds taken by the assessee challenging the powers of the CIT (A) u/s 251(1) and thus, the additional grounds of appeal taken by the assessee are rejected. Capital gain computation - appellant firm has revalued its assets held in the books of account - whether the revaluation of assets and crediting the amount of said revaluation amount to the capital account of the partners is amounts to or tantamount to transfer of a capital asset by way of distribution of capital asset on the dissolution of a firm or otherwise ? - HELD THAT - The provisions of section 45(4) of the I.T. Act, 1961 deals with the profits or gains arising from the transfer of a capital asset by way of distribution of capital asset on the dissolution of a firm or otherwise and as per the said provisions, the profits or gains shall be chargeable to tax as income of the firm of the previous year in which the said transfer takes place and for the purpose of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. This issue is no legal res integra. Hon'ble Supreme Court in the case of Mansukh Dyeing and Printing Mills 2022 (11) TMI 1180 - SUPREME COURT has considered an identical issue in light of provisions of section 45(4) of the I.T. Act, 1961 and after considering the relevant facts has held that the assets revalued and the credits into capital account of the respective partners can be said to be transfer and which fall in the category of otherwise and therefore, the provisions of section 45(4) inserted by the Finance Act, 1987 w.e.f. 1.4.1988 shall be applicable - revaluation of the asset held by the firm and crediting the amount of said revaluation to the partners capital account is a transfer which falls under section 45(4) and any profit or gain arising from the transfer needs to be taxed in the hands of the appellant firm. Therefore, to this extent, we fully agree with the findings given by the CIT (A). Deemed full value of the consideration for the purpose of section 48 - When the law specifically provides for considering the fair market value of the asset on the date of such transfer itself, it is incorrect on the part of the learned CIT(A) to direct the Assessing Officer to consider amount of said revaluation credited to the partners capital account as full value of the consideration for the purpose of section 48 of the I.T. Act, 1961, without having regard to computation/valuation procedures. Therefore, to this extent, the learned CIT (A) is erred in considering the amount of revaluation credit to the partners capital account for the purpose of computation of capital gain arising as a result of transfer of capital asset in terms of section 45(4) of the I.T. Act, 1961. The value recorded by the assessee in the books of account for the purpose of revaluation of asset cannot be a fair market value of the property because it is not ascertainable as what is the basis on which said value has been arrived at - guideline value fixed by the stamp duty authorities reflects the correct fair market value of any property and it may be a yardstick to determine the fair market value of the property. Therefore, in our considered view, in absence of contrary evidence to that effect, the fair market value fixed by the stamp duty value authorities should be taken as deemed full value of the consideration for the purpose of section 48. In the present case, the appellant has obtained a certificate from the Sub-Registrar, Shankarpally, RR District. As per the said certificate, the market value/guideline value of the property as on 1.1.2017 is at Rs. 7 lakh per acre. Since the appellant has filed relevant evidences to prove the fair market value of the property at Rs. 7 lakh per acre on the date of transfer of the capital asset, in our considered view for the purpose of section 48 of the I.T. Act, 1961, the fair market value of the asset on the date of such transfer should be adopted as per the guideline value of the property which is further supported by certificate issued by the stamp duty authorities. Capital gain arising out of transfer of capital asset by way of revaluation of asset and crediting said amount of revaluation to partners capital account should be computed in terms of section 45(4) of the I.T. Act, 1961 by considering the fair market value of the property at Rs. 7 lakh per acre to total extent of land revalued by the assessee. Thus, we reverse the findings of the learned CIT (A) on this aspect - Decided partly in favour of assessee.
Issues Involved:
1. Jurisdiction of the CIT (A) to tax a new source of income. 2. Applicability of Section 45(4) of the I.T. Act, 1961. 3. Determination of fair market value for capital gains computation under Section 45(4). Issue-wise Detailed Analysis: 1. Jurisdiction of the CIT (A) to Tax a New Source of Income: The assessee challenged the jurisdiction of the CIT (A) to tax a new source of income, arguing that the powers of the CIT (A) under Section 251(1)(a) of the I.T. Act, 1961, are confined to the assessment reached through a particular process and cannot be extended to the amount which ought to have been computed. The Tribunal, after considering various judicial precedents, including the decision of the Hon'ble Supreme Court in the case of CIT vs. Shapoorji Pallonji Mistry, held that the CIT (A) has wide powers to decide an appeal and consider issues arising out of the proceedings from which the order appealed germinates. The CIT (A) can consider any issues which are raised out of the appeal filed by the assessee and also any other issues which come to its knowledge from the assessment proceedings and the return of income filed by the assessee. The Tribunal concluded that the CIT (A) is empowered to change the head of income if facts suggest that the said income should be assessed under different provisions of the Act. Therefore, the Tribunal found no merit in the legal grounds taken by the assessee challenging the powers of the CIT (A) under Section 251(1) and rejected the additional grounds of appeal. 2. Applicability of Section 45(4) of the I.T. Act, 1961: The assessee firm had revalued its assets and credited the revaluation amount to the capital accounts of the partners. The Tribunal examined whether this revaluation and crediting amounted to a transfer of a capital asset by way of distribution of capital asset on the dissolution of a firm or otherwise under Section 45(4) of the I.T. Act, 1961. Referring to the Hon'ble Supreme Court's decision in CIT vs. Mansukh Dyeing and Printing Mills, the Tribunal held that the revaluation of the asset and crediting the amount to the partners' capital accounts is a transfer falling under Section 45(4) and any profit or gain arising from this transfer needs to be taxed in the hands of the appellant firm. Thus, the Tribunal agreed with the CIT (A)'s invocation of Section 45(4). 3. Determination of Fair Market Value for Capital Gains Computation under Section 45(4): The Tribunal addressed the issue of determining the full value of consideration for the purpose of Section 48 of the I.T. Act, 1961. It noted that the fair market value of the asset on the date of transfer should be deemed to be the full value of the consideration received or accruing as a result of the transfer. The Tribunal rejected the value recorded in the assessee's books of account for revaluation purposes, stating that it is not ascertainable and not binding on the Revenue. It emphasized that the fair market value should be determined by referring to the guidelines provided by the stamp duty authorities or other methods as per the Act/Rules. The Tribunal concluded that the fair market value fixed by the stamp duty authorities reflects the correct fair market value of any property. In this case, the appellant had obtained a certificate from the Sub-Registrar, Shankarpally, RR District, indicating the market value/guideline value of the property at Rs. 7 lakh per acre as on 1.1.2017. Therefore, the Tribunal directed the Assessing Officer to compute the capital gain by adopting the fair market value of the property at Rs. 7 lakh per acre, thereby reversing the CIT (A)'s findings on this aspect. Conclusion: The Tribunal partly allowed the appeal filed by the assessee, upholding the CIT (A)'s invocation of Section 45(4) but directing the Assessing Officer to compute the capital gain by adopting the fair market value of the property as per the guideline value provided by the stamp duty authorities. The order was pronounced in the Open Court on 31st July, 2024.
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