TaxTMI 
TaxTMI 
2018 (8) TMI 2075
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....006 declaring total loss of Rs. 63,011/- . The assessee along with M/s Command Constructions Pvt Ltd, M/s Orchid Griha Nirman Pvt Ltd and M/s Wellgrowth Griha Nirman Pvt Ltd were partners in a partnership firm by name M/s Salarpuria Soft Zone. The income declared by the assessee was on account of share of exempt profit from the said partnership firm. The return was processed u/s 143(1) of the Act on 31.8.2007. The assessee had shown interest receipt of Rs. 3,890/-. The ld AO reopened the assessment for the Asst Year 2006-07 on the ground that the capital gains of Rs. 96,37,85,635/- had not been included by the assessee company in its return of income for the Asst Year 2006-07 and accordingly it had escaped assessment for which notice u/s 148 of the Act was issued . In the reassessment completed u/s 147/143(3) of the Act dated 28.3.2014, the income of the assessee firm representing short term capital gain of Rs. 96,37,85,635/- was brought to tax. The brief facts of this addition is that 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 measuring 3,12,092 sq. ft. in Bel....
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....id firm can avail loan/credit facilities from commercial banks/financial institutions by mortgaging/charging its movable and immovable properties. The said firm subsequently obtained such loan/credit facilities to the extent ofRs. 250 crores. 3.3. The said three companies 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. 3.4. On March 30, 2008, the said firm converted the said land, building and its amenities, which were shown as inventory in its accounts, in....
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....rtners entered into. the agreement far purchase of the land in June 2004 and conveyance was executed in their favour an March 30, 2005. Subsequent to. the said purchase, the area an which the land was situated underwent major development and became a premium destination for IT and ITES Companies , vii) Notwithstanding such price rise, in accordance with accounting principles, the land held as inventory was shown by the firm at cast viii) It was only after conversion of inventory into. fixed assets that the 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 colorable nor a device ix) The revaluation by the. firm was made for financial purposes and no. tax advantage of any kind was sought to be derived thereby. Even in case of transfer of the capital asset, no. tax benefit or advantage will arise an account of the revaluation x) Section 45(3) of the Act is applicable in the year of transfer by the partner of his capital asset to. The partnership firm by way of capital contribution. For purposes of computing the ca....
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....as contributed by the partners during the current year ended on 31.03.2006, and Capital gains if any can arise only in the. year when such asset 'was actually contributed by the partners, to the 'Partnership Firm', as their Capital Contribution, i.e. during the current year ended on 31.03.2006. ii) The Partnership Firm viz. "M/s Salarpuria Soft Zone" has transferred & converted the 'inventory' of "Land" into 'Fixed Assets' in its Books of account as on 30.03.2008. Subsequently on 31.03.2008 the, Land has been revalued at Rs. 314,29,74,600/-, as per Valuers Report by the Partnership Firm. As such value of "Land" asset, which was contributed way of Capital contribution by the assessee along with two other partners during the year ended on 31.03.2006, was ultimately recorded at its correct value at Rs. 314,29,74,600/- by the 'Partnership Firm' during the year ended on 31.03.2008 i.e. after a gap of two years. iii) Hence in one day i.e. f fm 30.03.2008 to 31.03.2008, after converting the "Land" from inventory to Fixed Assets, the revaluation done is only a device to avoid the market value of cost of land of Rs. 314,29,74,600/- taken and consequen....
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....n subsequent years, assessee was never engaged in any sort of trading or business activity. The assessee also was neither engaged in the Business of real estate by developing the aforesaid land during the current year ended on 31.03.2006 nor in subsequent years. Hence the aforesaid "Land" asset transferred by this assessee by way of Capital contribution to the Partnership Firm' viz "M/s Salarpuria Soft Zone", during the current year ended on 31.03.2006, is actually its 'Capital asset and by any stretch of imagination it cannot be a 'Current asset' or 'closing stock' or 'stock-in-trade' in the case of this assessee company. viii) Further the cost of aforesaid "Land" asset, after transfer by way of Capital contribution Partnership Fir viz., "M/s Salarpuria Soft Zone", has been shown by the assessee "Investment: 'Capital investment', in Partnership firm" by the assessee in its accounts. ix) The reflection of such/aforesaid "Land" asset as a 'Current asset' in the books. of account of the assessee company in the year ended on 31.03.2006 and recording of the actual market value of cost of aforesaid "Land' asset at Rs. 314,29,74,600....
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....it to this assessee company, which enabled the assessee partners of the erstwhile 'Partnership Firm' to withdraw value of 'land asset/property' at any point of time from the accounts of the company. xvi) The Hon'ble ITAT Cochin Bench has, in the case of K.T.C. Automobiles Pvt. Ltd. -vs- DCIT [2014] 41 taxmann.com 160 (Cochin -Trib.), in aforesaid similar case, held that such transactions would be subjected to capital gains tax. xvii) The ,ratio laid down by the Hon'ble Apex Court in the case of Mc Dowell & Co. Ltd. -Vs- CTO [1985] 154 ITR 148/22 Taxman 11(SC) is applicable in this present case wherein the transactions effected by the assessee are not bonafide or genuine but are sham, make believe, arranged one and are collusive. Hence such transactions should be regarded as hollow and colourable device and are not to be accepted by the tax authorities. 4.3. The ld AO held that the cost of land at Rs. 314,29,74,600/- when partnership firm M/s Salarpuria Soft Zone has transferred and converted the inventory of 'land' into 'fixed assets', which has been contributed by this assessee along with two other aforesaid partners during the current year ended on 31....
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....6-07. It is not in dispute that the said land was treated as stock in trade in the books of the partnership firm. Hence the closing inventory could be valued only at the lower of cost or market value. It is not in dispute that the stamp valuation authority had increased the land value substantially after the date of purchase by the assessee. Hence the incremental valuation of land due to market performance could not be captured in the books of the partnership firm so as to project the real strength of the partnership firm. Hence for the purpose of showing the real market strength of the partnership firm, the land held as stock in trade was converted by the partnership firm into capital assets on 30.3.2008. On 31.3.2008, the said capital asset was revalued and the difference between the cost recorded and the revaluation figure was credited to the concerned partners account so as to enable the partnership firm to procure loans from bank for its business purposes. Based on this strength, the bank had also sanctioned heavy loans to the said partnership firm. 6.1. We find at the outset that in Asst Year 2006-07, the assessee along with other two partner companies had transferred their ....
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....rious improvements in the area by constructing several flyovers and under passes ; supply of water was provided and sewerage lines were laid ; and in June 2007, the comprehensive development plan of Bangalore was revised and the FAR ratio for construction of buildings in the said area was increased from 2 to 3.25 because of road width of 150 feet. As a consequence of all such development 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 2.8.2004 200 260 14.10.2005 800 1040 19.4.2007 1500 1950 26.9.2007 2200 3080 However, notwithstanding such price rise, in accordance with accounting principles, the land held as inventory could only be shown at its cost. Hence there cannot be any undervaluation of land in the books of the assessee and other two partner companies of recording the value of land as alleged by the ld AO. We find that only after conversion of inventory into fixed assets that the said firm revalued the developed land including construction thereon in order to bring....
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...., even if held to be taxable, could be examined only in Asst Year 2008-09 and it has got absolutely no bearing in Asst Year 2006-07. The assessee cannot be expected to preempt in Asst Year 2006-07, that the partnership firm would reconvert the stock in trade into capital asset and then revalue the same . Hence in any event, there is absolutely no scope for bringing any capital gains to tax in the Asst Year 2006-07 in the hands of the assessee partner. 6.4. We find that the similar issue had come up for adjudication before this tribunal in the case of one of the partner's case i.e M/s Orchid Griha Nirman Pvt Ltd in ITA No. 2269/Kol/2013 for Asst Year 2008-09 dated 19.10.2016. Yet another judgement rendered by this tribunal in assessee's own case for the Asst Year 2008-09 in ITA No. 2270/Kol/2013 dated 16.11.2016 also supports our aforesaid view We find that in the case of yet another partner i.e M/s Command Constructions Pvt Ltd for the Asst Year 2008-09, in ITA No. 2271/Kol/2013 dated 15.3.2017, similar view has been taken by this tribunal. The relevant operative portion of one of the partner's case i.e M/s Orchid Griha Nirman Pvt Ltd in ITA No. 2269/Kol/2013 dated 19.10.2016, whe....
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....9; 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. The 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 asset. The partners transferred the said land at cost. As such, there was no prof....
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....ital contribution. In the instant case, the year of transfer was the financial year ended March 31, 2006. The ITO was wholly unjustified in invoking section 45(3) which had no application in the assessment year 2008-09 or for that matter in the assessment year 2006-07. (b) The 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 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 asset. Section 45(3) of the Act is applicable only in respect of a capital asset. The said provision has no application in the instant case since what was transferred by the partners was a current asset and not a capital asset. (c) section 45(3) seeks to determine the capital gains wit....
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....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 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 was shown at its cost. Therefore it cannot be said that there was any undervaluation done by the Assessee as alleged by the AO. 29. After conversion of inventory into fixed assets the 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 value results in notional imaginary profit which cannot be taxed. Revaluation of an asset which an assessee continues to hold is not a taxable event and does not give rise to any taxab....