TaxTMI 
TaxTMI 
2016 (11) TMI 247
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....re 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 and the assessee as above being a partner itself had received Rs. 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, 1961. Notice u/s 148 be issued." 4. The facts with regard to revaluation of assets by M/S.Salarpuria Softzone, are that one M/s. I Gate Global Solutions Ltd was the owner of industrially converted land mearsuring 3,12,092 sq. ft. in Bellandur Village, Varthur Hobli, Bangalore East taluk (hereinafter referred to as "the said land"). The said land was advertised for sale. The assessee along with two other companies viz. Command Construction Pvt. Ltd. and Blue Haven Griha Nirman Pvt. Ltd. (hereinafte....
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....panies 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 Rs. 8,15,00,000/-. The said firm accounted for the said land as work in progress and reflected it under "Current Assets" in its balance sheet. Diverse amounts were thereafter spent by the said firm on the development of the said land as an industrial park including construction thereon. Funds for the said purpose were provided by the fourth partner. The completed industrial park was mostly leased out by March, 2008. 8. On March 30, 2008, the said firm converted the said land, building and its amenities, which were shown as inventory in its accounts, into fixed assets. On March 31, 2008 the said land and building were revalued. Such revaluation was made in order to reflect the-market value of the land and building in the books of account and to justify the bank loan of Rs. 250 crores. The values of the land and bui....
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....9,74,600/- being taken into consideration and consequently to avoid higher taxes on capital gains in the hands of the said three companies. (d) The revaluation amount of Rs. 370,33,61,874/- was real profit and not notional and had been credited to the current accounts of the four partners in their profit sharing ratio each of whom had withdrawn substantial amounts almost equal to the cost of the land/money brought in. The said firm was taxable in respect of its profits but the revaluation profit was not disclosed by it as its income for the assessment year 2008-09 and no tax was paid thereon. Each of the partners was thus liable for tax on its share of revaluation profit. The said three companies were each liable to be taxed on Rs. 37,03,36,187/- as partners entitled to 10% share in the partnership land the fourth company having 70% share was liable to be taxed on Rs. 259,23,53,313/-. 11. The AO thus computed the total income of the Assessee in the order u/s.147 of the Act as follows: "Total Income as per I.T.Returns for AY 2008-09 (-)Rs.58,885/- Add: i) Short Term Capital Gains accrued Rs.96,37,85,635 (As discussed in above paras) ....
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....asons that any income chargeable to tax under section 45(3) of the Act had escaped assessment. The assumption of jurisdiction under section 147 cannot be justified upon the basis that income chargeable to tax in terms of section 45(3) of the Act had escaped assessment. The only fact referred to in the recorded reasons is the revaluation by the firm of its assets and consequent transfer of the revaluation amount to the partners' accounts alleged to have been received by the partners. One has to bear in mind the scheme of the Act in the matter of taxation of a Firm and its partners. According to section 10(2A) of the Act the share of a partner in the total income of the firm is exempt in his hands. What is taxed in the hands of the partner is only the amount of interest, salary, bonus, commission or remuneration which has been allowed as a deduction in the assessment of the firm in terms of section 40(b) of the Act. If the revaluation by the firm resulted in any taxable income, such income had to be considered in the hands of the firm alone and the partner's share in such income would be exempt in his hands. Even if the case made out in the recorded reasons is taken as correc....
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.... finding of the ITO that the partners' capital accounts were not credited during the financial year ended March 31, 2006 for their capital contribution by way of bringing in the said land is contrary to the factual position. That the said land was brought in by the partners as inventory/current assets does not in any way alter the fact that the partners had in fact brought in the land into the partnership business as their 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 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. 15. It was further contended that the said 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....
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....eceived or accrued as a result of the transfer of the capital asset. " (emphasis added) It was submitted that in the instant case, section 45(3) of the Act had no application in the year of transfer viz. the financial year ended March 31, 2006 since what the partners transferred to the said firm was inventory and not a capital asset. The conversion of inventory into fixed assets was made by the said firm more than two years later during the financial year ended March 31, 2008 as was the revaluation of the converted asset. As submitted hereinbefore, neither such conversion nor revaluation by the said firm during the previous year relevant to the assessment year 2008-09 brought the provisions of section 45(3) of the Act into play for the said year. There was no transfer of any capital asset by the assessee to the said firm during the previous year relevant to the assessment year 2008-09 for section 45(3) to apply. When the partners had no liability for any tax under section 45(3) of the Act, the question of resorting to a device to avoid tax under section 45(3) does not arise. 18. It was further contended that even otherwise, section 45(3) seeks to determine the capital gains w....
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....ment activities, the land price in the area kept on rising. The State Government revised the guideline value for stamp duty purposes thrice after purchase of the land by the said three companies as follows» DATE RATE Residential Commercial 02.08.2004 200 260 14.10.2005 800 1040 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 could only be shown at its cost. The ITO was wholly unjustified in labeling the accounting made by the said firm in accordance with accountancy principles as gross undervaluation. 19. It was submitted that it was only after conversion of inventory into fixed assets that the said 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 Rs. 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....
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.... firm let out the developed project to different parties and did not sell any part thereof. In the event of sale, in computing the capital gains, only the actual cost of the asset would have been considered as the cost of acquisition and not the revalued cost. Thus, even in case of transfer of the capital asset, the revaluation would not have resulted in any tax benefit or advantage. It was pointed out that the ITO has mentioned that the partners had withdrawn amounts almost equivalent to the cost of the asset/money brought in by them. Such withdrawals were made by the partners from their capital accounts and cannot result in any taxation in their hands. It was submitted that as stated hereinbefore, upon revaluation of the land and building, the consequent credit was made to the partners' current accounts. The withdrawals were made not from the current accounts but from the capital accounts as aforesaid. The revaluation amount credited to the partners' current accounts in their respective profit sharing ratio remained untouched. Reference in this behalf was invited to the said firm's accounts for the previous year ended March 31, 2008. Even according to the ITO, the par....
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.... income in the hands of the partners and the addition of Rs. 37,03,36,187/- on account of alleged revaluation profit is equally unsustainable. 23. The CIT(A) accepted the contentions of the assessee. He held as follows :- "2.4. For the sake of completeness, let me consider the question as to whether revaluation of an asset which the owner thereof continues to hold can give rise to any taxable income. This question does not call for much discussion in view of the authoritative pronouncement of the Apex Court in Sanjeev Woolen Mills v CIT, (2005) 279 ITR 434 (SC). In the said decision the Apex Court has taken note of its previous decisions. It has been held by the Apex Court that valuation at market value, where such value is higher than the cost, results in imaginary or notional profits which have not actually been received and that such notional imaginary profit cannot be taxed. Revaluation of an asset is not a business transaction resulting in any pecuniary gain which can form subject matter of taxation. Where the owner accounts for the asset at market value, though he has incurred a lower amount by way of cost to acquire it, there is no real income. At best, it can be said ....
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....irm that the withdrawal by the partners was funded by borrowings from the banks. Withdrawal by the partners of the money brought in by them by way of capital and replacing such capital by borrowed funds cannot have any tax impact in the hands of the partners. I am in agreement with the appellant that substitution of capital by funds borrowed from the banks for which the partners are jointly and severally liable to the banks cannot have any tax incidence in the hands of the partners 2.7. In so far as invocation of section 45(3) of the Act is concerned, I cannot see how the said provision is applicable in the instant case. The accounts of the partners and that of the firm for the financial year ended March 31, 2006 show that the partners held the and acquired by them as stock-in-trade and the firm upon contribution of the land by the partners also accounted for it as stock-In-trade. Section 45(3) is applicable in respect of a capital asset. The definition of capital asset in section 2(14) of the Act expressly excludes stock-in-trade. Conversion of stock-in-trade into fixed assets was made by the firm more than two years after the partners' contribution. Such conversion of stoc....
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.... developments, the price of the and kept on rising, This is adequately borne out from the fact that the guideline value for payment of stamp duty went up by more than 10 times in a span of three years subsequent to the partners' purchasing the land. 2.9. As noted earlier, the land was held by the partners as stock-in-trade and the firm upon transfer continued to hold the land as stock-in-trade. It is the settled position of law that stock-in-trade has to be valued at cost or market price whichever is lower, As long as the firm held the land as stock-in-trade, it was not possible for it to account for its market value unless such market value fell below the cost. The firm revalued the land and the construction made thereon on the basis of valuation report only after it converted the same from stock-in-trade to fixed asset. As long as the firm held the land and building thereon as stock-in-trade, it could not have accounted for the market value thereof, which was several times higher than the cost. Having regard to the aforesaid position, the explanation of the assessee that revaluation was made for financial purposes in order to justify the large amount of bank loans of more ....
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....ting the additions of Rs. 96,37,85,635/- added as Short Term Capital Gains and addition of Revaluation Profit for Rs. 37,03,36,187/- by not giving cognizance to the issue & fact that this assessee company along with other all of the partner companies and their Partnership Firm has adopted the means of colourable transaction, in collusion with each other, to achieve the purpose of avoiding taxes. 6. The appellant craves leave to amend, modify and alter any grounds of appeal during the course of hearing of this case. 25. We have heard the submissions of the ld. Counsel for the assessee and the ld. DR. The ld. DR relied on the order of AO. The ld. Counsel for the assessee relied on the submissions as were made before CIT(A) and relied on the order of CIT(A). He further placed reliance on the decision of the Hon'ble Supreme Court in the case of Sanjeev Wollen Mills Vs. CIT 279 ITR 434 (SC) wherein the Hon'ble Supreme Court held that by showing Market value of closing stock, assessee cannot be said to have made profit which was necessary for taxing income under the Act. 26. We have given a very careful consideration to the rival submissions. As far as the validity of initiation....
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..... Provisions of Section 45(3) of the Act, were inserted by Finance Act, 1987 (w.e.f. 1-4- 1988). The facts with regard to purchase of land by the Assessee and two other companies of land at Bangalore and the facts with regard to transfer of the land by the three companies as capital contribution to a partnership firm during the financial year ended March 31, 2006 relevant to the assessment year 2006-07, cannot be disputed. 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....
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....ssment 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 relates to his conclusion that the AO was not justified in assessing short term capital gain of Rs. 96,37,85,635/- in the hand of the Assessee on the ground that: (a) The partners' capital accounts were credited during the financial year ended March 31, 2006 for their capital contribution by way of bringing in land at Bangalore and that 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 a....
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....rence in this behalf was made to the judgment of the Hon'ble Supreme Court in Chainrup Sampatram, (1953) 24 ITR 481 (SC). The firm correctly reflected the land received from its partners by way of capital contribution and held as inventory at cost. The three companies paid Rs. 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. The 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....