2016 (11) TMI 1708 - AT - Income Tax

Tribunal: Revaluation profit not taxable to partners under Income-tax Act

The Tribunal upheld the CIT(A)'s decision, ruling that the initiation of proceedings under section 147 of the Income-tax Act was unjustified, and the ... Reopening of assessment u/s 147 - addition of credit to the current account of the Assessee in the partnership firm - AO noticed that the partnership firm M/S.Salarpuria Soft Zone, of which the assessee company was a partner, had revalued its assets during the year ended with 31.3.2008 and transferred the Revaluation profit to its partners’ current account in their respective profit or loss sharing ratio - CIT-A deleted the addition by quashing reopening notice - HELD THAT:- On a careful perusal of the order of the learned CIT(Appeals), we do not find any legal infirmity or illegality in his order to interfere. Findings of the learned CIT(Appeals) are impeccable, and are in accordance with the law laid down by the Hon’ble Apex Court in Sanjeev Woolen Mills v. CIT, [2005 (11) TMI 26 - SUPREME COURT]. The ratio of decision in the case of M/s. Orchid Griha Nirman Pvt. Ltd. [2016 (11) TMI 247 - ITAT KOLKATA] is applicable to the facts of this case on all fours, inasmuch as the facts of both the cases emanate from the same transaction. We, therefore, while respectfully following the established judicial reasoning referred to above, hold that the facts of the case do not warrant any interference with the impugned order of the learned CIT(Appeals) on the aspect of proceedings under section 147 of the Act, and accordingly, uphold the same. Ground No 1 of the Revenue stands dismissed. Issues Involved:1. Propriety of initiation of proceedings under section 147 of the Income-tax Act, 1961.2. Taxability of revaluation profit credited to the partners' accounts.3. Applicability of section 45(3) of the Income-tax Act, 1961.4. Allegation of double taxation.5. Allegation of colorable transaction to avoid taxes.Detailed Analysis:1. Propriety of initiation of proceedings under section 147 of the Income-tax Act, 1961:The reassessment proceedings were initiated by the Assessing Officer (AO) under section 147 of the Act based on the belief that the revaluation profit credited to the partners' accounts had escaped assessment. The AO issued a notice under section 148 of the Act. The CIT(A) held that the initiation of proceedings under section 147 was not justified, as the reasons recorded did not refer to section 45(3) of the Act, and the AO could not have formed a belief that any income chargeable to tax had escaped assessment. The Tribunal upheld the CIT(A)'s decision, stating that even if the revaluation of assets by the firm resulted in taxable income, such income should be considered in the firm's assessment, not in the hands of the partners.2. Taxability of revaluation profit credited to the partners' accounts:The AO added the revaluation profit of Rs. 37,03,36,187 to the total income of the assessee, arguing that it was real profit and not notional. The CIT(A) disagreed, stating that the revaluation profit was not taxable in the hands of the partners. The Tribunal supported this view, citing the Supreme Court's decision in Sanjeev Woolen Mills v. CIT, which held that notional profits from revaluation of stock are not taxable.3. Applicability of section 45(3) of the Income-tax Act, 1961:The AO contended that section 45(3) was applicable, and the revalued figure of Rs. 314,29,74,600 should be deemed as the full value of consideration for the transfer of the capital asset by way of capital contribution. The CIT(A) rejected this argument, and the Tribunal concurred, noting that the reasons recorded for reopening the assessment did not mention section 45(3).4. Allegation of double taxation:The assessee argued that the addition of Rs. 37,03,36,187 resulted in double taxation, as it was already included in the short-term capital gains of Rs. 96,37,85,635. The CIT(A) accepted this contention, and the Tribunal did not delve deeper into this issue, as the proceedings under section 147 were held to be invalid.5. Allegation of colorable transaction to avoid taxes:The AO alleged that the assessee and other partners adopted colorable transactions to avoid taxes. The CIT(A) and the Tribunal did not find merit in this argument. The Tribunal referred to a similar case involving one of the partners, M/s. Orchid Griha Nirman Pvt. Ltd., where the reassessment proceedings were also held to be invalid.Conclusion:The Tribunal upheld the CIT(A)'s decision, holding that the initiation of proceedings under section 147 was not justified, and the revaluation profit was not taxable in the hands of the partners. The appeal by the Revenue was dismissed. The Tribunal's decision was based on established judicial reasoning and the Supreme Court's precedent.