2025 (3) TMI 297 - AT - Income Tax

Asset revaluation by joint venture AOP credited to partner's capital account is legitimate accounting practice under Section 68

Deputy Commissioner of Income Tax, Circle-1, Thane Versus Darshan Enterprises

ITAT Mumbai ruled in favor of the assessee firm regarding Section 68 addition. The AO incorrectly applied Section 68 to revaluation of assets by AOP, ... Addition u/s 68 - as alleged that the assessee firm has introduced its undisclosed income in the process and has failed to prove the genuineness of the transaction for which he invoked provisions of section 68 - CIT (A) held that Section 68 is not applicable because here in this case AOP had re-valued its assets and accordingly, credited into creditor’s profit and loss account - HELD THAT:- The amount credited to the assessee’s account in the books of AOP was recorded by the assessee by debiting the investment in AOP and crediting the capital account of individual partners in their respective shares which has been as highlighted above. AO without understanding the true nature of transaction has held that during this process, the development rights in line is getting transferred from one partner to other without getting registered through instrument and that it is some kind of accounting gimmick to reduce the tax liability by transferring entries by denying the real income. First of all, we are unable to understand how any income has arisen on account of such revaluation by the joint venture M/s. DD Associates in assessee’s hand. The revaluation has been done by M/s. DD Associates who is independently assessed to tax as an AOP. The assessee was only entitled to receive share debt surplus from AOP because any such tax incidence would be only in the hands of the AOP only. The AOP i.e. M/s.DD Associates have members having determined share therefore, liable to pay tax in its own hands. Even otherwise also there is no sale or transfer of any assets warranting liability to tax as it is only a revaluation of stock in trade to recognize in the books of accounts and the present value does not trigger in tax liability either in the hands of joint venture AOP from any of its members. It has also been brought on record and also noted in the CIT(A) order that credit of small share of re-valuation of stock-in-trade in the books of the other member i.e. Friends Development Corporation, no adverse view has been taken by the department in their case. Here in this case, the total re-valuation of project land was Rs. 125.72 Crores as per the audited financial statement of M/s. DD Associates-AOP and the share of the assessee till 31/03/2017 was Rs. 46.50 which was brought down to 5% at the year ending 31/03/2018. The gain equivalent to 41.50% to which assessee was entitled to is recognized by AOP by crediting to the capital account by such amount and pressing equivalent debit to the capital account of the other member of the AOP. It was for this reason that the profit and loss share alleged was increased by 41.1%. There is no sale consideration as inferred by the ld. AO or any kind of transfer of property to trigger capital gain and stamp duty or to reduce any tax liability. There is no provision or law which has been referred by the ld. AO that form of partner cannot revalue assets or is there any procedure to moderate such exercise. Accordingly, we do not find any reason to uphold the addition as stated by the ld. AO and order of the ld. CIT(A) is confirmed. Decided in favour of assessee. Disallowance of property paid for loan - disallowance of brokerage expenses claimed against unsecured loans - CIT(A) deleted addition - HELD THAT:- On perusal of the facts and material brought on record, once there is a finding of the fact that the brokerage has been paid for the specific purpose and the amounts have been paid through cheques and TDS has been deducted and without any adverse material, we do not find any infirmity in the order of the ld. CIT (A) deleting the addition. Accordingly, this ground raised by the Revenue is dismissed. ISSUES PRESENTED and CONSIDEREDThe judgment revolves around two primary issues:1. Whether the addition of Rs. 52,17,38,000/- to the assessee's income under Section 68 of the Income Tax Act, 1961, on account of revaluation of assets by the AOP, is justified.2. Whether the disallowance of brokerage expenses amounting to Rs. 7,69,655/- claimed by the assessee against unsecured loans is warranted.ISSUE-WISE DETAILED ANALYSISIssue 1: Addition under Section 68Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained cash credits, allowing the tax authorities to add such credits to the income of the assessee if the nature and source are not satisfactorily explained. The case references the principles laid out by the Supreme Court in CIT Vs Hind Construction.Court's Interpretation and Reasoning: The Tribunal noted that the revaluation of assets by the AOP, M/s. D.D. Associates, was done independently and reflected in the capital accounts of its members, including the assessee. The revaluation did not involve any actual transfer of assets or realization of income, and thus, did not trigger tax liability under Section 68.Key Evidence and Findings: The assessee provided documentary evidence, including bank statements, ledger accounts, and replies from M/s. D.D. Associates, supporting the revaluation and subsequent accounting entries. The Tribunal found no defects in these documents.Application of Law to Facts: The Tribunal held that the revaluation entries did not constitute income in the hands of the assessee firm. The AOP, being taxed separately, was responsible for any tax liabilities arising from its operations. The Tribunal emphasized that the revaluation was a legitimate accounting exercise and not a 'colourable device' to evade taxes.Treatment of Competing Arguments: The Revenue argued that the revaluation was a means to introduce undisclosed income and avoid capital gains tax. The Tribunal rejected this, noting that the ownership of the land remained unchanged and that the revaluation did not lead to any real income or transfer of assets.Conclusions: The Tribunal concluded that the addition under Section 68 was unwarranted, as the revaluation did not constitute income in the hands of the assessee firm.Issue 2: Disallowance of Brokerage ExpensesRelevant Legal Framework and Precedents: The deduction of expenses is governed by the provisions of the Income Tax Act, which require that expenses be genuine and incurred wholly and exclusively for business purposes.Court's Interpretation and Reasoning: The Tribunal found that the brokerage expenses were paid through banking channels, with TDS deducted, and were supported by invoices. The expenses were incurred for business purposes, specifically for facilitating loans.Key Evidence and Findings: The assessee provided details of brokerage payments, including the nature of services rendered and the parties involved. The Tribunal noted the absence of any adverse findings by the Assessing Officer regarding the genuineness of these expenses.Application of Law to Facts: The Tribunal applied the principle that expenses genuinely incurred for business purposes should be allowed as deductions. The brokerage payments were found to meet this criterion.Treatment of Competing Arguments: The Revenue contended that the brokerage expenses were not justified due to a lack of increase in loans. The Tribunal dismissed this argument, emphasizing the business rationale behind the expenses.Conclusions: The Tribunal upheld the CIT(A)'s decision to allow the brokerage expenses, finding them to be legitimate and incurred for business purposes.SIGNIFICANT HOLDINGSThe Tribunal's significant holdings include:- The revaluation of assets by an AOP does not constitute income for its members unless there is an actual realization of income or transfer of assets.- Section 68 cannot be invoked merely based on accounting entries reflecting revaluation, absent any evidence of undisclosed income.- Legitimate business expenses, supported by documentation and incurred for business purposes, should be allowed as deductions.- The Tribunal reiterated the principle that accounting entries, in themselves, do not create tax liabilities without corresponding real-world transactions.The Tribunal ultimately dismissed the Revenue's appeal, confirming the CIT(A)'s decision on both issues. The judgment underscores the importance of distinguishing between accounting practices and actual income realization for tax purposes.