2023 (8) TMI 1114 - AT - Income Tax

Short Term Capital Gain - conversion of the Partnership Firms into Companies - Additions in the hands of partners - provisions of section 47(xiii) have not been fulfilled by the assessee and thereby made an addition being the difference in the revaluation of land and assessed as Short Term Capital Gain (STCG) - CIT A deleting the addition on the ground that the provisions of sections 45 and 47(xii) are not applicable to the stock in trade - HELD THAT - It is seen from records that when the Partnership Firms were converted into four companies, at that time entire Capital and Reserves were not converted into equity of the company, but rather the Revaluation Reserve was converted into unsecured loans in the hands of share holders namely erstwhile Partners. The transfer and vesting at para 3 clearly pointed out that the undertaking of the transferor companies shall be transferred to and vested in the transferee company as a going concern and undertaking was to include all assets and interest of the transferee companies further all debts, liabilities, contingent liabilities and obligations of every kind of the transferor companies were now to be discharged by the transferee company. Based on the above facts the Ld CIT (Appeals) correctly deleted the additions on account of capital gain made in the hands of the Partners as he was of the opinion that the applicability of section 47(xiii)(b) at the time of conversion of the Partnership Firms into Companies can be considered only in the hands of the Partnership Firms to which the land belongs. CIT A order that has referred to case of ITO -Vs- Orchid Gruh Nirman Pvt. Ltd. 2016 (11) TMI 247 - ITAT KOLKATA - Revenue s Appeal is also dismissed in the case of PCIT -Vs- Orchid Gruh Nirman Pvt. Ltd. 2022 (2) TMI 186 - CALCUTTA HIGH COURT observing that Section 45(3) would be applicable only in respect of a capital asset; thus, where a land was brought in a firm at its cost as current asset and said firm upon receipt of said land also accounted same as a current asset, in instant case section 45(3) would not be applicable merely because said land was converted into fixed asset and revalued in relevant assessment year. Thus no hesitation in confirming the order of the order of the Ld CIT A who deleted the additions made by the assessing officer. Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition made under the head Short Term Capital Gain (STCG).
2. Validity of revaluation of land held as stock-in-trade.
3. Applicability of Sections 45 and 47(xiii) of the Income Tax Act, 1961.

Summary:

1. Deletion of Addition under STCG:
The Revenue challenged the deletion of additions made under STCG by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) had deleted the additions made by the Assessing Officer (AO) on the grounds that the revaluation of land held as stock-in-trade did not result in any capital gains as per Section 45 of the Income Tax Act. The Tribunal upheld the CIT(A)'s decision, stating that the revaluation of stock-in-trade does not bring any income to the appellant, as no part of the land was transferred to any partner.

2. Validity of Revaluation of Land Held as Stock-in-Trade:
The respondent-assessee, a Private Limited Company and successor of a Partnership Firm, had revalued a piece of land held as stock-in-trade. The CIT(A) held that the revaluation of stock-in-trade does not constitute a transfer and does not attract capital gains tax. The Tribunal agreed with this view, citing various judicial precedents, including the Supreme Court's decision in Hind Construction Ltd. and the ITAT Kolkata's decision in ITO v. Orchid Gruh Nirman P. Ltd.

3. Applicability of Sections 45 and 47(xiii):
The Tribunal examined whether the provisions of Sections 45 and 47(xiii) were applicable to the revaluation of land held as stock-in-trade. It was concluded that these sections do not apply to stock-in-trade, as there was no transfer of capital assets. The CIT(A) and the Tribunal both noted that the revaluation reserve was converted into unsecured loans in the hands of shareholders, and no part of the land was transferred to any partner. The Tribunal referenced multiple High Court judgments, including those from the Gujarat High Court in Well Pack Packaging and R.L. Kalathia & Co., which supported the view that such revaluation does not result in capital gains.

Conclusion:
The Tribunal dismissed the Revenue's appeals, confirming the CIT(A)'s order to delete the additions made under STCG. The revaluation of land held as stock-in-trade was not considered a transfer attracting capital gains tax, and the provisions of Sections 45 and 47(xiii) were deemed inapplicable. The Tribunal's decision was based on consistent judicial precedents and the specific facts of the case.