TaxTMI 
TaxTMI 
2018 (9) TMI 2071
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....Year 2006-07 had filed its return of income on 11.11.2006 declaring total loss of Rs. 41,824/- . The assessee along with M/s Command Constructions Pvt Ltd, M/s Blue Heaven 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 16.5.2007. The assessee had shown interest receipt of Rs. 2,244/-. 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 in....
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....etween the four partners which inter alia, provided that the said 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 a....
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....on held at inventory into. Fixed assets and thereafter an March 31, 2008 revalued it with consequent credit to the. partner's current accounts. vi) The partners 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 ....
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....ceptable and accordingly are not accepted. i) During the course of assessment proceeding, for the assessment year 20'08-09, in case of this assessee company it had been contended that the aforesaid asset viz. 'Land' 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....
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....ot a 'Capital asset'. Hence the provisions of section 45(3) of the I.T. Act'1961 will not be applicable and it is not liable to 'Capital Gain tax'. vii) From the details filed by the assessee it is clear that during the current year ended on 31.03.2006 or in 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" b....
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.... on 31.03.2008. xv) The Partnership Firm viz. "M/s Salarpuria Soft Zone" was converted into a company name M/s Softzone Tech Park Limited (PAN: AAMCS5238D) latter on during the year ended on 31.03.2008. The revalued price of land was treated as 'Unsecured Loans' in the hands of M/s Softzone Tech Park Limited, as payable by 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....
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....ce the same are not reiterated for the sake of brevity. We find that this issue is squarely covered in favour of the assessee by the co-ordinate bench decision of this tribunal in the case of another partner of the assessee i/e M/s Blue Heaven Griha Nirman Pvt Ltd in ITA No. 570/Kol/2015 dated 1.8.2018 for Asst Year 2006-07 wherein it was held as under:- 6. We have heard the rival submissions and perused the materials available on record including the paper book of the assessee comprising of pages 1 to 124 of the paper book. The primary facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. It is not in dispute that the assessee along with other two partner companies had given land held as stock in trade as their capital contribution in the partnership firm M/s Salarpuria Soft Zone in Asst Year 2006-07. 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 t....
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....ar 2008-09. Only pursuant to such conversion and pursuant to revaluation of the converted land, the gains to the extent of revaluation arose which is merely a book entry. Infact that the assessee together with other two partner companies had actually 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 in March 2005. The ld AR stated that 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 Municipal Corporation of Bangalore. He stated that 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 ; 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 ....
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....se by showing the market value of the closing stock the assessee has earned potential profit out of itself in as much as the stock-in-trade remained with the assessee at the closing of the accounting year. Secondly, putting the stock at the market value does not and cannot bring in any real profit which is necessary for taxing the income under the Act as is held in Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) and CIT v. Hind Construction Ltd [1972 ] 83 ITR 211 (SC). Thirdly, it is a settled principle of income-tax law that it is the real income, which is taxable under the Act. This proposition was enunciated in CIT v. Birla Gwalior (P.) Ltd [1973] 89 ITR 266 (SC), which was pronounced in CIT v. Shoorji Vallabhdas and CO. [1962] 46 ITR 144 (SC)." 6.3. We hold that the assessee had not derived any tax advantage pursuant to the revaluation of land in the said firm in Asst Year 2008-09. In any case, the revaluation, 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 pre-empt in Asst Year 2006-07, that the partnership firm would reconvert the stock in trade int....
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....ch 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 shown in the said profit and loss account and balance sheet as work in progress under "current assets" with corresponding credit to the partners' capital accounts. The purported 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 par....
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....tners 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 also the value thereof with corresponding credit to the partners' capital accounts. 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. 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 ....
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....e 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 of Bangalore was revised and the FAR ratio for construction of buildings in the said area was increased from 2.00 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 three companies as follows: DATE RATE Reside....