2018 (1) TMI 507 - AT - Income Tax

Capital gains assessed in the hands of the assessee on account of assessee s assignment and relinquishment of rights in the firm s assets on the reconstitution of the firm - Held that - The coordinate Bench of the Tribunal has already decided the identical issue in favour of the assessee in ITO vs. Paru D Dave (2006 (12) TMI 168 - ITAT BOMBAY-F) holding that revaluation of assets of partnership and the credit of revalued amount to the capital account of partners in their respective share ratio do not entail any transfer as defined under s. 2(47) of the IT Act - Decided against revenue.

Summary

Issues:
1. Revaluation of assets in a partnership firm and its tax implications under the Income Tax Act, 1961.

Analysis:
The appeal was filed by the revenue against the order passed by the Ld. Commissioner of Income Tax (Appeals) for the assessment year 2006-07. The assessee, a partner in multiple firms, declared income but was later confronted due to search and survey actions on the 'Nahar Group.' The revaluation of assets in M/s Shanti Enterprises led to a credit of ?43,27,322 to the assessee's capital account, treated as taxable income by the Assessing Officer (AO) based on a Bombay High Court judgment. However, the Ld. CIT(A) deleted this addition citing various judicial precedents.

The revenue raised grounds challenging the deletion of the addition by the Ld. CIT(A), arguing that the revaluation amount should have been kept in a revaluation reserve and not directly credited to partners' capital accounts. The revenue contended that this amount constituted income in the hands of partners to be taxed under the head 'Income from Other Sources' as per Section 28 of the IT Act. However, the Ld. CIT(A)'s decision was supported by the assessee's counsel, highlighting that the deletion was based on established legal principles from higher courts and ITAT decisions.

The Tribunal carefully reviewed the case, noting the revenue's contention that the addition deletion was erroneous. The Ld. CIT(A) had relied on judgments like CIT vs. Hind Construction Ltd. and others to support the deletion. The Tribunal upheld the Ld. CIT(A)'s decision, emphasizing that the revaluation of assets by a partnership firm and crediting the increased value to partners' capital accounts did not constitute a taxable event. The Tribunal referenced the decision in ITO vs. Paru D Dave, where it was established that such revaluation and crediting did not attract capital gains and did not involve a transfer as defined under the IT Act.

Ultimately, the Tribunal dismissed the revenue's appeal for the assessment year 2006-2007, affirming the Ld. CIT(A)'s decision based on established legal principles and precedents. The Tribunal found no reason to interfere with the deletion of the addition made by the AO, as the revaluation of assets in the partnership firm did not result in a taxable event for the assessee.