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TMI Blog2018 (3) TMI 1349X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. - I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f land . Accordingly, the assessee computed the profit arising on sale of plots. 4. The assessee had also debited development expenses as part of cost of land. The assessee had claimed development charges @ ₹ 75/- per sq.yards. The Assessing Officer noticed that the assessee has estimated the aggregate development charges and included the same as part of land. Since the assessee has not shown to have actually incurred the development expenses and since the assessee has accounted for the same on estimated basis, the Assessing Officer disallowed the entire claim of development expenditure. 5. With regard to cost of land, the Assessing Officer noticed that the value adopted for the trading stock of land was very much on higher side, which worked out to ₹ 12 lakhs per acre in respect of land located at Antakaplli village. For the lands located in other places also, the value adopted by the assessee was found to be at higher rates. Hence the Assessing Officer made enquiries with the Sub-Registrar Office (SRO) in order to find out the fair market value of the land. (a) The SRO, Sabbavaram submitted that the market value per acre of land was around ₹ 1 lakh to 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and for agricultural purposes at the price at which the land was sold. He also took the support of the decision rendered by the Hon'ble Supreme Court in the case of Mc.Dowell vs. CIT (154 ITR 144) wherein it was held that the colourable devices adopted for avoidance of tax must be looked into by the taxing authorities. Accordingly, the Assessing Officer held that the fair market value of property acquired from the partners is excessive and accordingly rejected the book value. In the absence of other documentary evidence, the Assessing Officer proceeded to adopt SRO s value as fair market value. Accordingly, the Assessing Officer recast the profit loss account by substituting opening stock value and closing stock value as per the SRO s rate and computed profit for assessment year 2007-08. The adjustments made by the AO resulted in addition of ₹ 202.18 lakhs to the total income of the assessee in AY 2007-08. 9. Based on the finding given by him in Assessment Year 2007-08, he reopened the assessments of Assessment Years 2006-07 2008-09 by issuing notices under section 148 of the Act and made identical additions. 10. The assessee challenged the order passed by AO in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the firm with SRO value. Thus it is held that the action of AO in redrawing the trading account of the firm by reducing the opening stock as well as closing stock of the firm s stock in trade is incorrect and not as per law. Irrespective of the fact as to whether the firm came into existence in assessment year 2002-03 or 2005-06 the value adapted by the firm and the partners is to be accepted by AO in arriving at the trading results of the firm. Therefore AO is directed to adopt the value of opening and closing stocks of land as recorded in the books of accounts of the firm .. It can be noticed that the provisions of sec. 45(3) do not use the word fair market value and hence the Ld CIT(A) held that the AO was not entitled to adopt fair market value in the hands of the assessee firm for determining its profits. The revenue is aggrieved by the above said decision of Ld CIT(A). 11. The Ld D.R submitted that the provisions of sec. 45(3) were related to the computation of capital gains in the hands of partners and hence the same cannot be applied in the hands of the assessee. He submitted that the assessee has carried on trading activities in land acquired from its partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards stamp duty and registration charges. The Ld A.R 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. 13. The Ld A.R submitted that the AO did not appreciate the above said legal position and has observed that he cannot close his eyes and accept the assessee s claim. Further the AO has observed in paragaraph 4.6 of the order that the SRO rates are substituted in place of value adopted by the assessee as transfer consideration as per provisions of sec. 45(3) of the Act, while he does not have power to substitute the value determined in terms of se.c 45(3) of the Act. 14. The Ld A.R submitted that the provisions of sec. 45(3) and 45(4) were brought into the Statute to overcome the decision rendered by Hon ble Supreme Court in the case of Sunil Siddarth Bhai (156 ITR 509), wherein it was held that the partner does not receive any consideration on transfer of his capital asset to the partnership firm and hence no profit accrues to him. He submitted that the amount credited to the capital ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO was justified in determining the fair market value of land in terms of sec. 40A(2)(a) of the Act, since the land was acquired from its partners. The contention of the assessee, which was upheld by Ld CIT(A), was that the deeming provisions of sec. 45(3) provides that the value credited to the capital account of the partners towards the capital asset brought by him shall be deemed to be the full value of consideration. Since sec. 45(3) is a deeming provision and since it does not refer to fair market value of capital asset, the provisions of sec. 45(3) shall be strictly applied and it would override the provisions of sec. 40A(2)(a) of the Act also. 19. The Ld A.R also pointed out that the assessing officer has observed in the assessment order that he is substituting the fair market value in the place of value adopted by the assessee and the same is treated as transfer consideration in terms of sec. 45(3) of the Act. Accordingly he contended that the AO has invoked the provisions of sec. 45(3) only and the same has to be interpreted strictly. Accordingly it was contended that the AO was not empowered to breach the mandatory conditions prescribed in sec. 45(3) of the Act. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is made, then such an expenditure is hit by the provisions of section 40A. Now in this case as we have discussed above, the expenditure had been agreed to be incurred for the purchase of land by the assessee firm before the reconstitution of the firm. Even cheques/bankers cheques were drawn prior to the date of reconstitution of the firm. The sale consideration had been increased five times from that agreed at vide agreement dated 02-06-06. All these facts are enough for forming an opinion by the Ld CIT that certain expenditure has been made which is hit by the provisions of section 40A and hence, the opinion of the Ld CIT cannot be said to be wrong to the effect that the assessment order was erroneous and prejudicial to the interests of the Revenue since the AO has not considered this aspect of the matter. 22. In the instant case also, the payment for purchase of land was made to the partners by way of crediting the value of land to the capital account of partners. The partners are persons covered by the provisions of sec. 40A(2)(b) of the Act. The assessee firm has claimed the purchase cost of land as expenditure. Provisions of sec. 40A(2)(a) shall apply, if in the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect and true value of consideration. We notice that the decision in the case of Marudhar Hotel (P) Ltd (supra) has been rendered in the context of Gift tax Act. Further the observations made by Hon ble High Court refer to correct and true value . However, under the provisions of sec. 40A(2)(a) of the Act, the fair market value of the goods or services is required to be determined. There is difference between fair market value and correct and true value . Hence the decision rendered in the case of Marudhar Hotel (P) Ltd would not also support the case of the assessee. 24. We have noticed that the Ld CIT(A) has upheld the view of the assessee by observing that the provisions of sec. 45(3) does not use the expression fair market value . Accordingly he has taken the view that the AO was not entitled to disturb the value recorded in the books of accounts. In our view, if any payment is made to any of the persons covered by sec. 40A(2)(b) of the Act, the AO is entitled to examine as to whether the said payment is excessive or unreasonable u/s 40A(2)(a) of the Act. Under the provisions of sec. 45(3), the value credited to the capital account of partners as cost of capital asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. However, the Assessing Officer noticed that the Partnership deed was executed only on 31/05/2005, wherein it was stated that the partnership firm is deemed to have commenced from 19/05/2005 and further the first year accounts shall be closed on 31/03/2006. The Assessing Officer further noticed that the lands stood in the name of individual partners and the layout approval was also obtained in the name of individual partners, earlier to the preparation of Partnership Deed. Accordingly, the AO took the view that the Partnership firm came into existence only from 19/05/2005. 30. 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. The assessee is aggrieved by the decision so rendered by Ld CIT(A). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that even out of this amount, an amount of ₹ 28,22,577/-, which is actually spent during the year, should be allowed. With regard to the remaining expenditure it is stated that the same becomes only a contra-entry because the value of the same with reference to the unsold plots is any way reflected in the closing stock. If the AO disallows the entire amount it is contended that the actual expenditure made during the year should be allowed; arid relevant reduction should be mad dosing stock pertaining to the unsold plots. 9.3 I have considered the arguments of the assessee. The method being by the assessee is that it debited the entire expenditure on an estimated basis. Such debit gets added to the cost of the land and is duly reflected as closing stock unsold plots are concerned. Thus with regard to the unsold plots this ii accounting is revenue neutral. With regard to the plots sold, assessee is debiting the expenditure to be incurred in future on the basis of estimation made by the architect. Assessee however is recognizing the entire revenue with regard to the plots sold though it will have to develop the plots subsequently. Thus assessee is under obligation to devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, at the time of hearing, we requested the Ld A.R to furnish a statement comparing actual expenditure incurred on development with the Estimated made by the assessee. The Ld A.R submitted that the actual expenditure would exceed the estimate made by the assessee during initial years. In that view of the matter also, no disallowance of development expenses claimed by the assessee is called for. The Ld A.R furnished a statement regarding development expenses. A perusal of the same would show that the assessee has provided a sum of ₹ 279 lakhs in aggregate in FY 2005-06 and 2008-09. The actual expenditure incurred towards development expenses till FY 2012-17 is shown at ₹ 235.37 lakhs. A sum of ₹ 43.63 lakhs are yet to be incurred. In any case, the unspent amount out of provision created by the assessee is required to be offered as income in the year of completion of project. The AO may monitor the same and bring into tax the unspent amount, if any, after completion of project. The assessee is also directed to furnish a copy of the statement to the AO for his examination. In any case, no disallowance is called for out of Development expenses in view of the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld D.R also supported the orders so passed by Ld CIT(A). However, as rightly pointed out by the ld. Authorized Representative of the assessee, we noticed that the Assessing Officer himself has observed in the assessment orders that notice under section 148 was issued on 02/06/2010 and the reasons were recorded as per order sheet noting on 04/06/2010. It is also pertinent to note that the reasons for reopening have been recorded by the Assessing Officer named, Shri Biswanath Chakravarthi in both the years and the assessment order has been passed by another assessing officer named, Shri Suman Malik. Had it been typographical mistake, the same would have been rectified by the Assessing Officer at the some point of time. So, under these set of facts, we find merit in the contentions of the assessee that the reasons for reopening of assessment has been recorded only after receiving notices under section 148 of the Act. 41. The assessee has placed reliance on the following case laws in order to contend that the impugned assessment orders passed for Assessment Years 2006-07 2008-09 are liable to be quashed as the reasons for reopening have been recorded subsequent to the issue of n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dently but has obtained the approval of the Addl. CIT which makes assumption of jurisdiction by AO bad in law and consequently the order passed under section 147 is null and void. 45. At the time of hearing, the Ld A.R placed his reliance on various case laws in support of Additional ground No.1. However, we find it not necessary to deal with these additional grounds, since, in the previous paragraphs; we have quashed the assessment orders on the basis of legal ground relating to recording of reasons. For the same reason, we decline to adjudicate the second additional ground also. 46. While adjudicating the appeal of the revenue for assessment year 2007-08, we have restored the issue of determination of fair market value of the lands to the file of the AO. We notice that the lands were brought into the books of the assessee in the financial year relevant to the assessment year 2006-07. Consequently, those lands would constitute opening stock in AY 2007-08. The closing stock of AY 2006-07 is being brought forward as opening stock in AY 2007-08. Consequently the question that arises is whether opening stock can be modified without modifying the closing stock of the earlier y ..... X X X X Extracts X X X X X X X X Extracts X X X X
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