9911796707
TMI Blog2016 (11) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment. Since the formation of such belief is a requirement for initiating proceedings u/s.147 of the Act and since on the facts and circumstances of the present case such formation of belief does not exist, the initiation of reassessment proceedings, were rightly held to be not valid in law by the CIT(A). In the instant case, the year of transfer was the financial year ended March 31, 2006. The ITO was wholly unjustified in invoking section 45(3) which had no application in the assessment year 2008-09 or for that matter in the assessment year 2006-07. Even otherwise, section 45(3) seeks to determine the capital gains with reference to the value of the asset recorded in the books of account of the firm. The value so recorded is statutorily deemed to be the full value of consideration received or accruing to the partner as a result of the transfer of the capital asset to the firm. Thus, section 45(3) does not seek to substitute by any other figure the value agreed between the partners at which the asset is transferred by a partner to the firm. The ITO's actions are completely contrary to the scheme of the statute. We therefore uphold the order of the CIT(A) in so far as it rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER Per N.V.Vasudevan, JM This is an appeal by the Revenue against the order dated 23.05.2013 of CIT(A)- I, Kolkata relating to AY 2008-09. 2. The Assessee is a company. For AY 2008-09, the Assessee filed a return of income declaring loss at ₹ 58,885/-. The Assessee along with M/S.Command Constructions Pvt.Ltd., M/S.Blue Heaven Griha Nirman Pvt.Ltd., and M/s.Wellgrowth Grha Nirman Pvt.Ltd., were partners in a partnership firm by name M/S.Salarpuria Soft Zone. The income declared by the Assessee was on account of share of exempt profit from the partenership firm M/S.Salarpuria Soft Zone. The return so filed was processed u/s.143(1) of the Income Tax Act, 1961 (Act) on 13.10.2009. 3. Subsequently proceedings u/s.147 of the Act were initiated by issue of a notice u/s.148 of the Act dated 3.11.2011 which was served on the Assessee on 4.11.2011. The reasons recorded by the AO before issuing notice u/s.148 of the Act reads thus: It transpires from communication from O/o Joint Commissioner of I. T., Range - 56, Kolkata that M/s. Salarpuria Softzone (PAN ABEFS2661L) had revalued its assets and transferred the revalued reserve to its partners' account a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred the said land to the partnership firm M/s. Salarpuria Soft Zone as their capital contribution. The fourth company was to arrange the entire finance required for the development of the said land. Each of the said three companies had a 10% share in the profit/loss and the fourth company's share was 70%. The partnership business was deemed to have commenced on and from April 1, 2005. A supplemental deed of partnership was executed on March 13, 2006 between the four partners which inter alia, provided that the said firm can avail loan/credit facilities from commercial banks/financial institutions by mortgaging/charging its movable and immovable properties. The said firm subsequently obtained such loan/credit facilities to the extent ofRs.250 crores. 7. The said three companies transferred the said land to the said firm on January 9, 2006 at cost and such cost was the amount recorded in the books of account of the said firm for the year ended March 31, 2006 as the value of the said land with corresponding credit to the capital accounts of each of the said three companies. Accordingly, the capital account of the assessee was credited by ₹ 8,15,00,000/-. The said fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three companies during the previous year ended March 31, 2008 relevant to the assessment year 2008-09 for a sum of ₹ 314,29,74,600/- (value of the land on revaluation as on 31.3.2008) by way of capital contribution when it was converted into fixed assets from inventory by the said firm. (b) Section 45(3) of the Act was applicable in respect of such transfer made during the previous year relevant to the assessment year 2008-09. The revalued figure of ₹ 314,29,74,600/- recorded in the books of account of the said firm as on March 31, 2008 was to be deemed as the full value of consideration received or accruing as a result of transfer of the capital asset by way of capital contribution. The revaluation amount of ₹ 289,13,56,904/- was the profit which accrued to the said three companies and each of them was liable to be taxed on one-third of such profit i.e. ₹ 96,37,85,635/- as short term capital gains. (c) The land was grossly undervalued till it was part of inventory in the books of the said firm to avoid the market value of the land of ₹ 314,29,74,600/- being taken into consideration and consequently to avoid higher taxes on capital gains in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant's case for the assessment year 2008-09 and its return was processed under section 143(1). It cannot therefore be said that the initiation of proceedings under section 147 was by way of change of opinion. In the absence of an assessment under section 143(3), it cannot be said that the AO formed an opinion which he sought to change. The only question is as to whether the AO formed any belief that any income in respect of which the assessee was chargeable to tax had escaped assessment enabling him to initiate reassessment proceedings. To decide upon this issue reasons recorded for reopening the assessment needs to be examined and such Reasons are reproduced herewith as follows: It transpires from communication from O/o Joint Commissioner of I. T., Range - 56, Kolkata that M/s. Salarpuria Softzone (PAN ABEFS2661L) had revalued its assets and transferred the revalued reserve to its partners' account and the assessee as above being a partner itself had received ₹ 37,03,36,187/- on account of such revaluation reserved. I have reason to believe on examination of record that the above has escaped assessment within the meaning of section 147 of the I. TAct, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 147 in the partner's case. Hence, these grounds of the appellant are allowed. 14. As far as the merits of the addition made by the AO is concerned the assessee submitted that there can be no manner of doubt that the land was transferred by the said three companies by way of capital contribution during the financial year ended March 31, 2006 relevant to the assessment year 2006-07. The partnership deed, which provided that the said three companies would transfer the said land to the said firm as capital contribution, was executed on January 9, 2006. The said deed vide the second recital expressly stated that at or before the execution of the deed the said firm had taken over the said land as part of the assets of the partnership business. The said transfer was given effect in the accounts of the partners for the financial year ended March 31, 2006. The assessee's balance sheet and profit and loss account for the said financial year showed the said land, which had been reflected as work in progress under current assets , was transferred to the said firm as capital contribution. The said land received from the said three companies was shown in the said profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by the said firm or due to revaluation by the said firm of the asset so converted during the previous year ended March 31, 2008. Section 45(3) of the Act is applicable in the year of transfer by the partner of his capital asset to the partnership firm by way of capital contribution. In the instant case, the year of transfer was the financial year ended March 31, 2006. The ITO was wholly unjustified in invoking section 45(3) which had no application in the assessment year 2008-09 or for that matter in the assessment year 2006-07. 17. The Assessee brought to the notice of the CIT(A) a CBDT Circular subsequent to the insertion of sub-section (3) in section 45 of the Act, viz., circular bearing No. 495 dated September 22, 1987, (1987) 168 ITR (St.) 87, wherein it was stated thus: 24.2 With a view to blocking this escape route for avoiding capital gains tax, the Finance Act, 1987 has inserted new sub-section (3) in section 45. The effect of this amendment is that profits and gains arising from the transfer of capital asset by a partner to a firm shall be chargeable as the partner's income of the previous year in which the transfer took place. For purposes of computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53) 24 ITR 481 (SC). The said firm correctly reflected the land received from its partners by way of capital contribution and held as inventory at cost. It was pointed out that the said three companies in fact paid ₹ 21,87,76,492/- for purchasing the said land which was more than two and half times the State Government guideline value for stamp duty purposes at the time of purchase. As stated hereinbefore, the said three companies entered into the agreement for purchase of the said land in June 2004 and conveyance was executed in their favour on March 30, 2005. Subsequent to the said purchase, the area in which the said land was situated underwent major development and became a premium destination for IT and ITES companies. Several IT parks and SEZ as also high end residential projects were developed in the said area. The area which was under gram panchayat came under the limits of the Municipal Corporation of Bangalore. The Municipal Corporation carried out various improvements in the area by constructing several flyovers and under passes. Supply of water was provided and sewerage lines were laid. In June 2007, the comprehensive development plan of Bangalore was revised and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot actually received. In fact such a notional imaginary profit cannot be taxed. It is a well settled principle as held in Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC) the Constitution Bench judgment that the firm cannot make a profit out of itself The transaction which is not business transaction and does not derive immediate pecuniary gain is not subjected to tax. In the present case by showing the market value of the closing stock the assessee has earned potential profit out of itself in as much as the stock-in-trade remained with the assessee at the closing of the accounting year. Secondly, putting the stock at the market value does not and cannot bring in any real profit which is necessary for taxing the income under the Act as is held in Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) and CIT v. Hind Construction Ltd [1972 ] 83 ITR 211 (SC). Thirdly, it is a settled principle of income-tax law that it is the real income, which is taxable under the Act. This proposition was enunciated in CITv. Birla Gwalior (P.) Ltd [1973J 89 ITR 266 (SC), which was pronounced in CIT v. Shoorji Vallabhdas and CO. [1962J 46 ITR 144 (Se). It was argued that the above observations wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind that the partners were jointly and severally liable to the banks for the money borrowed by the said firm. Under the Act, the firm is taxed as a separate entity. In computing the firm's income deduction is allowed in respect of interest, salary, bonus, commission or remuneration paid to a partner to the extent indicated under clause (b) of section 40 of the Act. The share of a partner in the total income of the firm is exempt in his hands in terms of section 10(2A) of the Act. The partner is liable for tax only on the amount of interest, salary, bonus, commission or remuneration which has been allowed as a deduction in the assessment of the firm. It is not in dispute that the said firm revalued its assets. If such revaluation resulted in any taxable income (although that cannot be the case), such income was required to be assessed in the hands of the said firm. In terms of section 10(2A) of the Act, the partner's share in the total income of the firm is exempt from tax in his hands, If according to the Department any amount has escaped assessment in the hands of the said firm it cannot reopen the partner's assessment for bringing to tax such income alleged to have es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sell the revalued assets. In the event of such sale, the firm having converted its stock- in-trade into fixed assets i.e. capital asset, it will be liable for capital gains tax in the year of sale. In computing such capital gains, what would be considered is the cost of acquisition and not the revalued cost. I would tend to agree with the assessee that revaluation was made for other reasons and not for gaining any tax advantage. 2.6 The AO has mentioned that the partners had withdrawn amounts almost equivalent to the cost of the asset/money brought in by them and that they could also make further withdrawals in the future. It has been shown by the assessee from the accounts of the firm as also its own accounts that the revaluation amount was credited to the partners' current accounts and that no withdrawal was made from the current accounts. What the AO failed to notice was that in effect, the partners had replaced a substantial part of the capital brought in by them by borrowed funds and in respect of such borrowed funds they were jointly and severally liable to the banks from which the borrowings were made. It is not the case that by virtue of the revaluation the firm e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with corresponding credit to the partners' capital accounts and that such land was also accounted for by the firm as stock-in-trade. Thus, transfer of the land from the partners to the firm took place during the financial year ended March 31, 2006 relevant to, the assessment year 2006-07. Capital contribution having been made by the partners during the financial year ended March 31, 2006, it is difficult to uphold the assessment made on the basis as if transfer was effected during the financial year ended March 31, 2008 relevant to the assessment year 2008-09. That apart, the provisions of section 45(3) of the Act do not envisage substitution of the value agreed between the partners in respect of any asset brought by them into the firm by way of capital contribution by any other value. If the partners agree to contribute an asset held by them at cost and such cost is recorded in the books of account of the firm as the value of the assets contributed, it is only such cost recorded in the books of the firm which can be considered for the purposes of section 45(3). Any subsequent conversion or revaluation of the asset by the firm is of no relevance for the purposes of section 45(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 to 2.10, as the addition so made in respect of both the items is deleted. Hence, these grounds of the appellant are allowed. 24. Aggrieved by the order of CIT(A) the revenue has preferred the present appeal before the Tribunal. Grounds of appeal raised by the revenue read as follows :- 1. The Ld. CIT(A) has erred in law and on the facts circumstances of the case by adjudicating that the Assessing officer acted without jurisdiction by issuing notice U/s148 of the I.T. Act, 1961 for making assessment U/s147 of the I.T. Act, 1961. 2. The Ld. CIT(A) has erred in law and on the facts circumstances of the case in deleting the addition of ₹ 96,37,85,635/- added as Short Term Capital Gains earned by the assessee on transfer of land property to the Partnership firm as their Capital Contribution, by holding that the provisions of section 45(3) of the I.T. Act, 1961 is not applicable. 3. The Ld. CIT(A) has erred in law and on the facts circumstances of the case in deleting the addition of share of Revaluation Profit of ₹ 37,03,36,187/- received by the assessee by holding that such profit is notional and is not taxable 4. The Ld. CIT(A) has err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revaluation of the assets by the firm, the income that might accrue in the hands of the partner would be in the nature of share income from the firm . In terms of Sec.10(2A) of the Act, partner s share in the total income of the firm is not to be included in the total income of the partner. Therefore, looked at from any angle, the AO could not on the basis of the reasons recorded formed belief that income chargeable to tax in the hands of the Assessee has escaped assessment. Since the formation of such belief is a requirement for initiating proceedings u/s.147 of the Act and since on the facts and circumstances of the present case such formation of belief does not exist, the initiation of reassessment proceedings, were rightly held to be not valid in law by the CIT(A). 27. As far as the question whether there was short term capital gain of ₹ 96,37,85,635/- is concerned, the provisions of Sec.45(3) of the Act have been pressed into service by the Revenue. The provisions of Sec.45(3) of the Act reads thus: Section: 45(3): The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r by way of capital contribution must be a fixed asset or that a current asset cannot be brought in by a partner as his capital contribution. The books of account of the said firm for the financial year ended March 31, 2006 clearly reflected the receipt of the said land by it by way of capital contribution from three of its partners as also the value thereof with corresponding credit to the partners' capital accounts. The land upon purchase was shown by the said three companies as part of their current assets. The said firm upon receipt of the said land during the financial year ended March 31, 2006 also accounted for it as a current asset. The partners transferred the said land at cost. As such, there was no profit in the hands of the partners upon transfer of the said land to the said firm. Section 45(3) of the Act is applicable only in respect of a capital asset. The said provision has no application in the instant case since what was transferred by the partners was a current asset and not a capital asset. Section 45(3) of the Act did not come into operation for the assessment year 2008-09 by reason of conversion of the developed land and building into fixed assets by the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital contribution. It is not a requirement that an asset brought in by a partner by way of capital contribution must be a fixed asset or that a current asset cannot be brought in by a partner as his capital contribution. The land upon purchase was shown by the said three companies as part of their current assets. The said firm upon receipt of the said land during the financial year ended March 31, 2006 also accounted for it as a current asset. Section 45(3) of the Act is applicable only in respect of a capital asset. The said provision has no application in the instant case since what was transferred by the partners was a current asset and not a capital asset. (c) section 45(3) seeks to determine the capital gains with reference to the value of the asset recorded in the books of account of the firm. The value so recorded is statutorily deemed to be the full value of consideration received or accruing to the partner as a result of the transfer of the capital asset to the firm. Thus, section 45(3) does not seek to substitute by any other figure the value agreed between the partners at which the asset is transferred by a partner to the firm. 28. As far as the question whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19.04.2007 1500 1950 26.09.2007 2200 3080 However, notwithstanding such price rise, in accordance with accounting principles, the land held as inventory was shown at its cost. Therefore it cannot be said that there was any undervaluation done by the Assessee as alleged by the AO. 29. After conversion of inventory into fixed assets the firm revalued the developed land including construction thereon in order to bring it in line with the current market value and for justifying the bank finance of nearly ₹ 250 crores. Such revaluation was neither colourable nor a device. It is settled law that revaluation in the books of account 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. The decision of the Hon ble Supreme Court in the case of Sanjeev Woolen Mills (supra) wherein it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
