TaxTMI 
TaxTMI 
2018 (3) TMI 1349
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.... the addition made by the AO by substituting "fair market value" of land acquired by the assessee firm from its partners in the place of Cost to the assessee. 3. The Assessing Officer first completed the assessment of Assessment Year 2007-08 on 30/12/2009. Based on the finding given in the assessment order of AY 2007-08, the Assessing Officer reopened the assessments of the Assessment Years 2006-07 & 2008-09. We shall first discuss in brief facts relating to the case as discussed by the Assessing Officer in Assessment Year 2007-08. The assessee is a partnership firm and is engaged in real estate business of developing and selling housing plots. It filed its return of income for the Assessment Year 2007-08 on 22/05/2008 declaring a loss of Rs. 60.57 lakhs. The Assessing Officer noticed that the partners of the firm have transferred the lands held by them in Antakaplli village, Binagadi Village, Gorapalli Village as their respective capital contribution and the same was taken as "trading stock" of the assessee firm. It was noticed that the partners have transferred in aggregate 100.53 acres of land to the partnership firm as their capital contribution and sum of Rs. 1490.29 lakhs wa....
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....of section 45(3) of the Act, the value recorded in the books of account of the firm shall be taken as fair market value for the purpose of computing capital gains in the hands of partners. Accordingly, it was contended that the value credited to the capital account of the partners should be considered as fair market value of the land acquired by the firm for computing profits and gains of business in the hands of the firm also. The assessee also submitted that the value determined by SRO cannot be considered as fair market value. The assessee also furnished a sale deed executed on 12/04/2007 in respect of land located in Gorapalli Village, wherein the sale consideration was shown at Rs. 20 lakhs per acre while guideline value was around of Rs. 5.56 lakhs. 8. The Assessing Officer was not convinced with the contentions of the assessee. The Assessing Officer took the view that the Assessing Officer cannot close his eyes and accept assessee's claim, when there is a leakage of income. The Assessing Officer took the support of the decision rendered by the Hon'ble Supreme Court in the case of Sheriffa Bibi Mohmed Ibrahim & Others vs. CIT (204 ITR 631) wherein the Hon'ble Supreme....
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....ived as a result of the transfer. By considering both the provisions, the Ld CIT(A) decided the question relating to valuation of land as under in AY 2007-08:- "8.4 From the above, the intention of law makers becomes clear that when asset is transferred by partner to firm the concept of fair market value does not come into operation and the value of capital assets recorded in the books of firm shall be deemed to be full value of consideration. The word "shall" used in the sub-section is definitive and does not give any scope to the AO to substitute his opinion of fair market value in the place of the amount recorded in the books of account of the firm. Had the law-makers wanted to use the word fair market value they would have used the same in section 45(3) also as was used in section 45(4). Thus from the language of statute it is clear that AO does not have any authority to tinker with the value recorded in the books of account and replace it with the fair market value of the asset. In view of the clear language of the section I hold that AO is duty bound to accept the value recorded in the books of account as the full value of consideration in the hands of partners as well as f....
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.... when it was noticed that the land has been transferred by partners to the partnership firm at substantially enhanced prices. The Ld D.R, accordingly, contended that the AO was justified in holding that the purchase cost paid by the assessee herein to its partners towards purchase land was excessive and accordingly he was justified in determining fair market value of land. 12. The Ld A.R, on the contrary, submitted that the assessing officer has raised queries during the course of assessment proceedings with regard to applicability of provisions of sec. 40A(2)(a) to the impugned transactions and the assessee has given a detailed reply to the AO. The assessee has submitted that the provisions of sec. 40A(2)(a) will apply only to goods, services or facilities and the same will not apply to land. It was further submitted that the partners have determined the rates of Rs. 12.00 lakhs per acre after making thorough enquiries with regard to prevailing market rates. The partners have also taken into consideration the fact that the firm need not pay money to the partners towards the cost of land immediately, otherwise the firm would have incurred heavy interest burden. The assessee firm w....
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.... hence the order passed by Ld CIT(A) on this issue should be upheld. 17. In the rejoinder, the Ld D.R submitted that the AO has also obtained sale instances from the SRO office, which showed lower rates. He submitted that the Ld CIT(A) should not have ignored the provisions of sec. 40A(2)(a) of the Act, when the AO has recorded a finding that the cost of land was excessive. He submitted that the AO has, in fact, applied the provisions of sec. 40A(2)(a) only and reference to sec. 45(3) in the assessment order may be a mistake, since the provisions of sec. 45(3) will not apply to assessee firm, but would apply only to its partners. 18. We have heard rival contentions and perused the record. The undisputed facts are that the partners of the assessee firm have contributed the impugned lands to the assessee firm as part of their capital contribution and hence the value of the land as determined by the partners has been credited as capital of the partners. According to AO, the value assigned to the lands was very much higher than the market rates. Hence the AO has determined the market rates by adopting SRO rates and took the same as cost of lands and accordingly computed the profits o....
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....ue. In our view, the deeming provision enshrined in sec. 45(3) of the Act will have binding effect while computing Capital gains in the hands of partners. This view gets support from the decision rendered by Mumbai bench of ITAT in the case of Kapil Ratan Associates (supra). In the above said case also, the assessee was a partnership firm and it had purchased lands from erstwhile partners of the firm. The firm was reconstituted and at that point of time, the purchase consideration of land was substantially enhanced and as a result payments made to erstwhile partners were found to be in excess of prevalent market rates. Since the AO did not examine these aspects while passing assessment order, the Ld CIT revised the assessment order u/s 263 of the Act. The assessee challenged the revision order passed by Ld CIT. The Mumbai bench examined the provisions of sec. 40A(2)(a) of the Act and observed as under:- "8. A perusal of the above said provisions reveals that the expenditure in respect of which payment "has been made" or "is to be made" to any person referred to in clause (b), if, the same is in the opinion of the AO, is excessive or unreasonable having regard to the market value ....
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....services or facilities for which the payment is made or the legitimate needs of the business or profession etc., is liable to be disallowed. Since the assessee is dealing in land, as stated earlier, it constitutes "goods" in its hands and since the payments have been made to partners (who are covered by sec. 40A(2)(b)), we are of the view that the AO was very much entitled to examine the payments made vis-a-vis the fair market value of the goods (land) in terms of sec. 40A(2)(a) of the Act. Hence, as per the provisions of sec. 45(3), the assessee firm might have made payments to the partners towards the cost of land, but the same does not bar application of sec. 40A(2)(a) of the Act. 23. The Ld A.R relied upon the decisions rendered by Hon'ble Supreme Court in the case of Sunil Siddarth Bai (supra). But the provisions of sec. 45(3) have been brought into the statute to overcome the said decision. In view of our discussion above, we are of the view that the same would not come to the support of the assessee. The Ld A.R also referred to the decision rendered by Hon'ble Rajasthan High Court in the case of Marudhar Hotel (P) Ltd (supra) to contend that the amount credited to the accou....
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.... value of land. We notice that the assessee, in its written submissions, has mentioned about certain locational advantages. It is noticed that the assessee has also started selling plots also. Accordingly we are of the view that the issue of determination of "fair market value" requires fresh examination. Accordingly we restore the same to the file of the AO. 27. Accordingly we set aside the order passed by Ld CIT(A) on this issue and hold that the assessing officer is entitled to examine the quantum and reasonableness of the payments made to partners for acquiring goods from them in terms of sec. 40A(2)(a) of the Act. 28. We shall now take up the Cross Objections filed by the assessee for the Assessment Year 2007-08, wherein the assessee is aggrieved by the decision of the ld. CIT(A) in upholding the view taken by the Assessing Officer that the partnership firm came into existence only during the Financial Year 2005-06 and not during the Financial Year 2002-03, as claimed by the assessee. 29. The facts relating to this issue are discussed in brief. Before the Assessing Officer, the assessee claimed that the partnership firm came into existence on 01/11/2002 and the same is evid....
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.... it is argued by the assessee that expenditure is claimed on the basis of matching principal in accordance with the ratio laid down by the Hon'ble Supreme Court in the case of Calcutta Co. Ltd 37 ITR 1. It is argued that the Hon'ble Apex court had dealt with a similar situation of real estate project development and held that the provision for pro-rata expenses to be incurred has to be allowed as a deduction 'in the year in which income from sale of plots is recognized as revenue. Assessee further relied on the Hon'ble jurisdictional High Court decision in the case of B.V.Hanumantha Rao Vs. CIT 45 ITR 464 wherein the Hon'ble High Court held a similar view by following the Hon'ble High Court decision in the case of Calcutta Co. Ltd. Reliance in this regard is also placed on the Supreme Court's decision in the case of Rotork Controls India Pvt. Ltd Vs. CII 314 ITR 62. Assessee put forward an alternate argument that even if the disallowance is made it should be restricted only to the amount pertaining to the plots sold during the year which is Rs. 40,22,987/- (Rs.75.57 x 53235 sq.yrds which is the extent of land sold during the year under consideration). Fu....
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....t under "revenue-cost matching" principle, the assessee is required to account for all the relevant expenditure, whether incurred or not as per the principle laid down by by Hon'ble Supreme Court in the case of Calcutta Co. Ltd (37 ITR 1). Since the assessee has included the estimated development expenses in the cost of land, the cost pertaining to unsold plots is revenue neutral, since the cost of land pertaining to unsold plots shall be included both in the opening stock and closing stock. With regard to the plots already sold by the assessee, the Ld CIT(A) accepted the contentions of the assessee that the liability to develop the plots always lies upon the shoulders of the assessee and hence, under mercantile system of accounting, the assessee is required to recognise the relevant costs. Accordingly, the Ld CIT(A) held that there is no requirement of disallowing the development expenses claimed by the assessee. 35. On a careful consideration of the order passed by Ld CIT(A) on this issue, we do not find any infirmity in his order. We notice that the claim of the assessee fits into two accounting principles, i.e., mercantile system of accounting and Revenue-cost matching princip....
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....nd that reasons for reopening of the assessments were recorded only subsequent to the issue of notice under section 148 of the Act, in contravention of the mandatory requirements of sec. 148(2) of the Act. 39. The facts relating to the above said legal issue are discussed in brief. The Assessing Officer issued notices under section 148 for the Assessment Years 2006-07 & 2008-09 and both notices are dated 02/06/2010. Copies of notices are placed in page No. 4 & 6 of the paper book filed by the assessee. The assessee has also obtained a copy of reasons recorded by the Assessing Officer for both the years and they are placed in page No. 5 & 7 of the paper book. A perusal of the reasons recorded by the AO would show that the reasons for reopening have been recorded by the AO on 04/06/2010. We have already noticed that the notices under section 148 of the Act are dated 02/06/2010. Hence, there is merit in the contention of the assessee that the reasons for reopening of the assessments have been recorded subsequent to the issue of notice under section 148 of the Act. 40. We noticed that the ld. CIT(A) has taken a view that it may be a case of typographical mistake and the Ld D.R also s....
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....f the Act as per the above said decisions relied upon by Ld A.R. Accordingly, by following the above said decisions, we hold that the jurisdiction assumed by the Assessing Officer for Assessment Years 2006-07 & 2008-09 was not valid and hence, the assessment orders passed by him in both the years are liable to be quashed. Accordingly, we quash the orders passed by the tax authorities for Assessment Years 2006-07 & 2008-09. 43. The assessee has also raised one more legal ground in both the years, i.e., the assessment orders are barred by limitation as per the provisions of sec. 153(2) of the Act. At the time of hearing, the Ld A.R did not press the same and accordingly this legal ground urged in AY 2006-07 and 2008-09 are dismissed as not pressed. 44. The assessee has also raised following additional grounds in AY 2008-09, which is also legal in nature:- "1.The entire assessment is bad in law for the reason that even though time was available for issue of notice under section 143(2), notice under section 148 was issued thereby artificially extending the period of limitation. 2. The AO has not exercised his discretion/satisfaction independently but has obtained the approval of....