I.T.O., Ward-1(4), Kolkata v. M/s. Orchid Griha Nirman Pvt. Ltd
[Citation -2016-LL-1019-7]

Citation 2016-LL-1019-7
Appellant Name I.T.O., Ward-1(4), Kolkata
Respondent Name M/s. Orchid Griha Nirman Pvt. Ltd.
Court ITAT-Kolkata
Relevant Act Income-tax
Date of Order 19/10/2016
Assessment Year 2008-09
Judgment View Judgment
Keyword Tags full value of consideration • initiation of reassessment • transfer of capital asset • reassessment proceedings • short-term capital gain • value of closing stock • profit sharing ratio • business transaction • capital contribution • cost of acquisition • valuation of stock • reason to believe • state government • transfer of land • valuation report • work in progress • purchase of land • registered deed • current account • supply of water • capital account • industrial park • stock-in-trade • purchase price • money borrowed • current asset
Bot Summary: 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. 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. In terms of section 10(2A) of the Act, the partner's share in the total income of the firm is exempt from tax in his hands, If according to the Department any amount has escaped assessment in the hands of the said firm it cannot reopen the partner's assessment for bringing to tax such income alleged to have escaped assessment in the case of the firm. 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. The accounts of the partners and of the firm for the financial year ended March 31, 2006 were drawn up on the basis that the partners had contributed the land held as stock-in- trade to the firm by way of capital contribution with corresponding credit to the partners' capital accounts and that such land was also accounted for by the firm as stock-in-trade. If the partners agree to contribute an asset held by them at cost and such cost is recorded in the books of account of the firm as the value of the assets contributed, it is only such cost recorded in the books of the firm which can be considered for the purposes of section 45(3). The provisions of Sec.45(3) of the Act reads thus: Section: 45(3): The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.


IN INCOME TAX APPELLATE TRIBUNAL BENCH : KOLKATA [Before Hon ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM] I.T.A No. 2269/Kol/2013 Assessment Year : 2008-09 I.T.O., Ward-1(4) -vs.- M/s. Orchid Griha Nirman Pvt. Ltd. Kolkata Kolkata [PAN : AAACO 7148 L] (Appellant) (Respondent) For Appellant : Shri Angam Shaiza, CIT For Respondent : (i) Shri J.P.Khaitan, Sr.Advocate (ii)Shri S.Jhajharia, FCA (iii) Shri Sujoy Sen, Advocate Date of Hearing : 25.08.2016. Date of Pronouncement : 19.10.2016. ORDER Per N.V.Vasudevan, JM This is appeal by Revenue against order dated 23.05.2013 of CIT(A)- I, Kolkata relating to AY 2008-09. 2. Assessee is company. For AY 2008-09, Assessee filed return of income declaring loss at Rs.58,885/-. Assessee along with M/S.Command Constructions Pvt.Ltd., M/S.Blue Heaven Griha Nirman Pvt.Ltd., and M/s.Wellgrowth Grha Nirman Pvt.Ltd., were partners in partnership firm by name M/S.Salarpuria Soft Zone. income declared by Assessee was on account of share of exempt profit from partnership firm M/S.Salarpuria Soft Zone. return so filed was processed u/s.143(1) of Income Tax Act, 1961 (Act) on 13.10.2009. 2 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 3. Subsequently proceedings u/s.147 of Act were initiated by issue of notice u/s.148 of Act dated 3.11.2011 which was served on Assessee on 4.11.2011. reasons recorded by AO before issuing notice u/s.148 of 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 revalued reserve to its partners' account and assessee as above being 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 above has escaped assessment within meaning of section 147 of I. TAct, 1961. Notice u/s 148 be issued. 4. facts with regard to revaluation of assets by M/S.Salarpuria Softzone, are that one M/s. I Gate Global Solutions Ltd was owner of industrially converted land mearsuring 3,12,092 sq. ft. in Bellandur Village, Varthur Hobli, Bangalore East taluk (hereinafter referred to as said land ). said land was advertised for sale. assessee along with two other companies viz. Command Construction Pvt. Ltd. and Blue Haven Griha Nirman Pvt. Ltd. (hereinafter collectively referred to as "the said three companies") responded by offering price of Rs.16,94,34,666. Subsequently, there were negotiations between parties and price was increased to Rs.22,36,79,266/- on basis that said land measured 3,19,086 sq. ft. and accordingly, agreement was entered into on June 14,2004. However, upon actual measurement area of land was found to be 3,12,092 sq. ft. and as such final price stood at Rs.21,87,76,492/- as per supplemental agreement dated December 28, 2004. said three companies paid agreed consideration and received possession. registered deed of sale was executed in their favour on March 30, 2005. 5. State Government guideline value for purpose of registration and stamp duty in respect of said land was Rs.260/- per sq. ft. whereas purchase price paid by said three companies was Rs.70l/- per sq. ft. i.e. more two and half times stamp value. total cost of said land to said three companies, who had purchased it in equal shares, was Rs.24,54,54,125/- after taking into consideration stamp duty 2 3 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 and registration cost. said three companies had purchased said land with object of developing industrial park. Each of said three companies accounted for said land so purchased as work in progress and reflected it under "Current Assets" in balance sheet. 6. On January 9, 2006, said three companies and another company called Wellgrowth Griha Nirman Pvt. Ltd. executed deed of partnership in terms of which said three companies transferred said land to partnership firm M/s. Salarpuria Soft Zone as their capital contribution. fourth company was to arrange entire finance required for development of said land. Each of said three companies had 10% share in profit/loss and fourth company's share was 70%. partnership business was deemed to have commenced on and from April 1, 2005. supplemental deed of partnership was executed on March 13, 2006 between four partners which inter alia, provided that said firm can avail loan/credit facilities from commercial banks/financial institutions by mortgaging/charging its movable and immovable properties. said firm subsequently obtained such loan/credit facilities to extent ofRs.250 crores. 7. said three companies transferred said land to said firm on January 9, 2006 at cost and such cost was amount recorded in books of account of said firm for year ended March 31, 2006 as value of said land with corresponding credit to capital accounts of each of said three companies. Accordingly, capital account of assessee was credited by Rs.8,15,00,000/-. said firm accounted for said land as work in progress and reflected it under "Current Assets" in its balance sheet. Diverse amounts were thereafter spent by said firm on development of said land as industrial park including construction thereon. Funds for said purpose were provided by fourth partner. completed industrial park was mostly leased out by March, 2008. 3 4 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 8. On March 30, 2008, said firm converted said land, building and its amenities, which were shown as inventory in its accounts, into fixed assets. On March 31, 2008 said land and building were revalued. Such revaluation was made in order to reflect the-market value of land and building in books of account and to justify bank loan of Rs.250 crores. values of land and building before and after revaluation are as under :- Cost as on Revalued figure Extent of increase due to 30.03.08 as on 31.03.08 revaluation Rs. Rs. Rs. Land 25,16,17,696/- 314,29,74,600/- 289,13,56,904/- Building 119,02,85,430/- 200,22,90,400/- 81,20,04,970/- Total 370,33,61,874/- 9. amount of revaluation was credited to current accounts of four partners in their profit sharing ratio. Thus, current account of each of said three companies was credited by Rs.37,03,36,187/- and that of fourth company having 70% share by Rs.259,23,53,313/-. 10. On above facts which are not in dispute, question before AO was as to whether credit to current account of Assessee in partnership firm M/S.Salarpuria Soft Zone of sum of Rs.37,03,36,187/- gives raise to any income chargeable to tax. AO in reassessment proceedings held that: - (a) Bringing of land into said firm by way of inventory as part of project without crediting partners' capital accounts and without bringing it as fixed assets cannot be considered as capital contribution by partners during financial year ended March 31, 2006. land was contributed by said three companies during previous year ended March 31, 2008 relevant to assessment year 2008-09 for sum of 4 5 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 Rs.314,29,74,600/- (value of land on revaluation as on 31.3.2008) by way of capital contribution when it was converted into fixed assets from inventory by said firm. (b) Section 45(3) of Act was applicable in respect of such transfer made during previous year relevant to assessment year 2008-09. revalued figure of Rs.314,29,74,600/- recorded in books of account of said firm as on March 31, 2008 was to be deemed as full value of consideration received or accruing as result of transfer of capital asset by way of capital contribution. revaluation amount of Rs.289,13,56,904/- was profit which accrued to said three companies and each of them was liable to be taxed on one-third of such profit i.e. Rs.96,37,85,635/- as short term capital gains. (c) land was grossly undervalued till it was part of inventory in books of said firm to avoid market value of land of Rs.314,29,74,600/- being taken into consideration and consequently to avoid higher taxes on capital gains in hands of said three companies. (d) revaluation amount of Rs.370,33,61,874/- was real profit and not notional and had been credited to current accounts of four partners in their profit sharing ratio each of whom had withdrawn substantial amounts almost equal to cost of land/money brought in. said firm was taxable in respect of its profits but revaluation profit was not disclosed by it as its income for assessment year 2008-09 and no tax was paid thereon. Each of partners was thus liable for tax on its share of revaluation profit. said three companies were each liable to be taxed on Rs.37,03,36,187/- as partners entitled to 10% share in partnership land fourth company having 70% share was liable to be taxed on Rs.259,23,53,313/-. 5 6 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 11. AO thus computed total income of Assessee in order u/s.147 of 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) ii) Share of Revaluation Profit Rs.37,03,36,187 (As discussed in above paras) Assesseed Total Income Rs.133,40,62,937 12. Before CIT(A) assessee submitted that initiation of re-assessment proceedings u/s 148 of Act are not valid. It was contended that reasons recorded did not spell out belief of AO regarding escapement of income chargeable to tax. 13. On above contention CIT(A) held as follows :- Grounds No. 1 to 5 is regarding validity of re-assessment proceedings. AO has reopened proceedings within four years from end of assessment year and for intimation u/s 143(1) was issued. first aspect is as to whether having regard to reasons recording, AO was competent to initiate proceedings under section 147 by issue of notice under section 148. assessment year involved is 2008-09 for which notice under section 148 was issued within four years on November 3, 2011. There was no assessment in appellant's case for assessment year 2008-09 and its return was processed under section 143(1). It cannot therefore be said that initiation of proceedings under section 147 was by way of change of opinion. In absence of assessment under section 143(3), it cannot be said that AO formed opinion which he sought to change. only question is as to whether AO formed any belief that any income in respect of which assessee was chargeable to tax had escaped assessment enabling him to initiate reassessment proceedings. To decide upon this issue reasons recorded for reopening assessment needs to be examined and such Reasons are reproduced herewith as follows: "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 revalued reserve to its partners' account and assessee as above being partner itself had received Rs. 37,03,36,187/- on account of such revaluation reserved. 6 7 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 I have reason to believe on examination of record that above has escaped assessment within meaning of section 147 of I. TAct, 1961. Notice u/s 148 be issued. reasons recorded do not refer to provisions of section 45(3) of Act and it is not suggested in recorded reasons that any income chargeable to tax under section 45(3) of Act had escaped assessment. assumption of jurisdiction under section 147 cannot be justified upon basis that income chargeable to tax in terms of section 45(3) of Act had escaped assessment. only fact referred to in recorded reasons is revaluation by firm of its assets and consequent transfer of revaluation amount to partners' accounts alleged to have been received by partners. One has to bear in mind scheme of Act in matter of taxation of Firm and its partners. According to section 10(2A) of Act share of partner in total income of firm is exempt in his hands. What is taxed in hands of partner is only amount of interest, salary, bonus, commission or remuneration which has been allowed as deduction in assessment of firm in terms of section 40(b) of Act. If revaluation by firm resulted in any taxable income, such income had to be considered in hands of firm alone and partner's share in such income would be exempt in his hands. Even if case made out in recorded reasons is taken as correct, AO could not have formed belief that any income in respect of which partner was chargeable to tax had escaped assessment in his hands. AO himself was quite aware of this position as is apparent from observation made by him in paragraph 7.2 of his order. Even if one proceeds on basis that revaluation of assets by firm gave rise to taxable income, such income can onty be considered in firm's assessment. That firm did not disclose any income on account of revaluation and did not pay any tax on such income does not confer jurisdiction upon partner's Assessing Officer to reopen partner's assessment on allegation of escapement of income. In my view, even if case made out in reasons recorded is accepted on its face value, no belief could have been entertained by AO that any", income in respect of which partner was chargeable to tax had escaped assessment and AO acted without jurisdiction by issuing notice under section 148 for making assessment under section 147 in partner's case. Hence, these grounds of appellant are allowed. 14. As far as merits of addition made by AO is concerned assessee submitted that there can be no manner of doubt that land was transferred by said three companies by way of capital contribution during financial year ended March 31, 2006 relevant to assessment year 2006-07. partnership deed, which provided that said three companies would transfer said land to said firm as capital contribution, was executed on January 9, 2006. said deed vide second recital expressly stated that at or before execution of deed said firm had taken over said land as part of assets of partnership business. said transfer was 7 8 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 given effect in accounts of partners for financial year ended March 31, 2006. assessee's balance sheet and profit and loss account for said financial year showed said land, which had been reflected as work in progress under "current assets", was transferred to said firm as capital contribution. said land received from said three companies was shown in said profit and loss account and balance sheet as work in progress under "current assets" with corresponding credit to partners' capital accounts. purported finding of ITO that partners' capital accounts were not credited during financial year ended March 31, 2006 for their capital contribution by way of bringing in said land is contrary to factual position. That said land was brought in by partners as inventory/current assets does not in any way alter fact that partners had in fact brought in land into partnership business as their capital contribution. It is not requirement that asset brought in by partner by way of capital contribution must be fixed asset or that current asset cannot be brought in by partner as his capital contribution. books of account of said firm for financial year ended March 31, 2006 clearly reflected receipt of said land by it by way of capital contribution from three of its partners as also value thereof with corresponding credit to partners' capital accounts. 15. It was further contended that said land upon purchase was shown by said three companies as part of their current assets. said firm upon receipt of said land during financial year ended March 31, 2006 also accounted for it as current asset. partners transferred said land at cost. As such, there was no profit in hands of partners upon transfer of said land to said firm. Section 45(3) of Act is applicable only in respect of capital asset. said provision has no application in instant case since what was transferred by partners was current asset and not capital asset. 8 9 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 16. It was pointed out that after receiving said land as capital contribution, said firm developed same and expended substantial amount for said purpose during financial year 2005-06 and thereafter. It was only on March 30, 2008 that said firm converted developed land including construction thereon held as inventory into fixed assets and thereafter on March 31, 2008 revalued it with consequent credit to partners' current accounts. It was submitted that section 45(3) of Act did not come into operation for assessment year 2008-09 by reason of conversion of developed land and building into fixed assets by said firm or due to revaluation by said firm of asset so converted during previous year ended March 31, 2008. Section 45(3) of Act is applicable in year of transfer by partner of his capital asset to partnership firm by way of capital contribution. In instant case, year of transfer was financial year ended March 31, 2006. ITO was wholly unjustified in invoking section 45(3) which had no application in assessment year 2008-09 or for that matter in assessment year 2006-07. 17. Assessee brought to notice of CIT(A) CBDT Circular subsequent to insertion of sub-section (3) in section 45 of Act, viz., circular bearing No. 495 dated September 22, 1987, (1987) 168 ITR (St.) 87, wherein it was stated thus: 24.2 With view to blocking this escape route for avoiding capital gains tax, Finance Act, 1987 has inserted new sub-section (3) in section 45. effect of this amendment is that profits and gains arising from transfer of capital asset by partner to firm shall be chargeable as partner's income of previous year in which transfer took place. For purposes of computing capital gains. value of asset recorded in books of firm on dale of transfer shall be deemed to be full value of consideration received or accrued as result of transfer of capital asset. (emphasis added) It was submitted that in instant case, section 45(3) of Act had no application in year of transfer viz. financial year ended March 31, 2006 since what partners transferred to said firm was inventory and not capital asset. conversion of inventory into fixed assets was made by said firm more than two years later during 9 10 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 financial year ended March 31, 2008 as was revaluation of converted asset. As submitted hereinbefore, neither such conversion nor revaluation by said firm during previous year relevant to assessment year 2008-09 brought provisions of section 45(3) of Act into play for said year. There was no transfer of any capital asset by assessee to said firm during previous year relevant to assessment year 2008-09 for section 45(3) to apply. When partners had no liability for any tax under section 45(3) of Act, question of resorting to 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 capital gains with reference to value of asset recorded in books of account of firm. value so recorded is statutorily deemed to be full value of consideration received or accruing to partner as result of transfer of capital asset to firm. Thus, section 45(3) does not seek to substitute by any other figure value agreed between partners at which asset is transferred by partner to firm. ITO's actions are completely contrary to scheme of statute. It was reiterated that purported finding of ITO that land was grossly under-valued till it was part of inventory in books of said firm is without any basis whatsoever. There was no undervaluation of land when it was held by said firm as inventory. For accounting purposes, stock is valued at cost or market price, whichever is lower. market value is taken only when it falls below cost. Reference in this behalf was made to judgment of Hon'ble Supreme Court in Chainrup Sampatram, (1953) 24 ITR 481 (SC). said firm correctly reflected land received from its partners by way of capital contribution and held as inventory at cost. It was pointed out that said three companies in fact paid Rs.21,87,76,492/- for purchasing said land which was more than two and half times State Government guideline value for stamp duty purposes at time of purchase. As stated hereinbefore, said three companies entered into agreement for purchase of said land in 10 11 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 June 2004 and conveyance was executed in their favour on March 30, 2005. Subsequent to said purchase, area in which said land was situated underwent major development and became premium destination for IT and ITES companies. Several IT parks and SEZ as also high end residential projects were developed in said area. area which was under gram panchayat came under limits of Municipal Corporation of Bangalore. Municipal Corporation carried out various improvements in area by constructing several flyovers and under passes. Supply of water was provided and sewerage lines were laid. In June 2007, comprehensive development plan of Bangalore was revised and FAR ratio for construction of buildings in said area was increased from 2.00 to 3.25 because of road width of 150 feet. As consequence of all such development activities, land price in area kept on rising. State Government revised guideline value for stamp duty purposes thrice after purchase of land by 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, land held as inventory could only be shown at its cost. ITO was wholly unjustified in labeling accounting made by 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 said firm revalued developed land including construction thereon in order to bring it in line with current market value and for justifying bank finance of nearly Rs.250 crores. Such revaluation was neither colourable nor device. It is settled 11 12 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 law that revaluation in books of account of asset which 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 asset which assessee continues to hold is not taxable event and does not give rise to any taxable income. person cannot make profit from himself. Reliance was placed on following passage from judgment of Hon'ble Supreme Court in Sanjeev Wool en Mills v. CIT, (2005) 279 ITR 434 (at pages 447-8) which takes note of relevant previous decisions:- " In present case, method adopted by assessee is to value closing stock at market value irrespective of fact whether market value of stock at relevant time is more than cost value of stock, which necessarily results in imaginary or notional profits to assessee which he has not actually received. In fact such notional imaginary profit cannot be taxed. It is well settled principle as held in Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC) Constitution Bench judgment that firm cannot make profit out of itself transaction which is not business transaction and does not derive immediate pecuniary gain is not subjected to tax. In present case by showing market value of closing stock assessee has earned potential profit out of itself in as much as stock-in-trade remained with assessee at closing of accounting year. Secondly, putting stock at market value does not and cannot bring in any real profit which is necessary for taxing income under 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 settled principle of income-tax law that it is real income, which is taxable under Act. This proposition was enunciated in CITv. Birla Gwalior (P.) Ltd [1973J 89 ITR 266 (SC), which was pronounced in CIT v. Shoorji Vallabhdas and CO. [1962J 46 ITR 144 (Se)." It was argued that above observations with reference to valuation of stock at market value higher than cost are equally applicable in respect of any other asset. 20. It was submitted that revaluation by said firm was made for financial purposes and no tax advantage of any kind was sought to be derived thereby. ITO has himself recorded that said firm did not claim any depreciation in respect of any asset 12 13 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 of developed project. said firm let out developed project to different parties and did not sell any part thereof. In event of sale, in computing capital gains, only actual cost of asset would have been considered as cost of acquisition and not revalued cost. Thus, even in case of transfer of capital asset, revaluation would not have resulted in any tax benefit or advantage. It was pointed out that ITO has mentioned that partners had withdrawn amounts almost equivalent to cost of asset/money brought in by them. Such withdrawals were made by partners from their capital accounts and cannot result in any taxation in their hands. It was submitted that as stated hereinbefore, upon revaluation of land and building, consequent credit was made to partners' current accounts. withdrawals were made not from current accounts but from capital accounts as aforesaid. revaluation amount credited to partners' current accounts in their respective profit sharing ratio remained untouched. Reference in this behalf was invited to said firm's accounts for previous year ended March 31, 2008. Even according to ITO, partners had only withdrawn their investment in firm. 21. It was further argued that matter can be looked at from another angle. As on March 31, 2007, secured loan taken by said firm from bank amounted to Rs.57,67,58,719/-. As on March 31, 2008 amount of secured loans from banks went up to Rs.243,56,03,002.55, that is by Rs.185.88 crores. withdrawal of capital by partners amounted to Rs.182.20 crores. It was thus clear that partners decided to substitute their own funds by borrowed funds. It was submitted that substitution by partners of their own funds brought in as their capital by borrowed funds and withdrawal of such capital cannot have any tax incidence in hands of partners. It is important to bear in mind that partners were jointly and severally liable to banks for money borrowed by said firm. Under Act, firm is taxed as separate entity. In computing firm's income deduction is allowed in respect of interest, salary, bonus, commission or remuneration paid to partner to extent 13 14 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 indicated under clause (b) of section 40 of Act. share of partner in total income of firm is exempt in his hands in terms of section 10(2A) of Act. partner is liable for tax only on amount of interest, salary, bonus, commission or remuneration which has been allowed as deduction in assessment of firm. It is not in dispute that said firm revalued its assets. If such revaluation resulted in any taxable income (although that cannot be case), such income was required to be assessed in hands of said firm. In terms of section 10(2A) of Act, partner's share in total income of firm is exempt from tax in his hands, If according to Department any amount has escaped assessment in hands of said firm it cannot reopen partner's assessment for bringing to tax such income alleged to have escaped assessment in case of firm. 22. It was reiterated that assessee did not make any short term capital gains of Rs.96,37,85,635/- taxable under section 45(3) of Act or otherwise and addition made on that account by ITO is wholly unsustainable. Such addition is also beyond recorded reasons. It was further submitted that revaluation by said firm of its land and building did not result in any income in hands of partners and addition of Rs.37,03,36,187/- on account of alleged revaluation profit is equally unsustainable. 23. CIT(A) accepted contentions of assessee. He held as follows :- 2.4. For sake of completeness, let me consider question as to whether revaluation of asset which owner thereof continues to hold can give rise to any taxable income. This question does not call for much discussion in view of authoritative pronouncement of Apex Court in Sanjeev Woolen Mills v CIT, (2005) 279 ITR 434 (SC). In said decision Apex Court has taken note of its previous decisions. It has been held by Apex Court that valuation at market value, where such value is higher than cost, results in imaginary or notional profits which have not actually been received and that such notional imaginary profit cannot be taxed. Revaluation of asset is not business transaction resulting in any pecuniary gain which can form subject matter of taxation. Where owner accounts for asset at market value, though he has incurred lower amount by way of cost to acquire it, there is no real income. At best, it 14 15 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 can be said that by showing market value in books, owner has earned potential profit out of himself since asset is continued to be held by owner. There can be no taxation of such notional profit. In view of said decision of Apex Court, I have no hesitation in concluding that revaluation by firm of its assets, which it continued to hold, is not taxable event at all. 2.5. I cannot see any tax advantage to firm or to any of its partners by reason of revaluation. No depreciation can be claimed under Act with reference to revalued figure. It is also not in dispute that firm did not in fact claim any depreciation in respect of revalued assets. Let me consider question as to what would happen if firm were to sell revalued assets. In event of such sale, firm having converted its stock- in-trade into fixed assets i.e. capital asset, it will be liable for capital gains tax in year of sale. In computing such capital gains, what would be considered is cost of acquisition and not revalued cost. I would tend to agree with assessee that revaluation was made for other reasons and not for gaining any tax advantage. 2.6 AO has mentioned that partners had withdrawn amounts almost equivalent to cost of asset/money brought in by them and that they could also make further withdrawals in future. It has been shown by assessee from accounts of firm as also its own accounts that revaluation amount was credited to partners' current accounts and that no withdrawal was made from current accounts. What AO failed to notice was that in effect, partners had replaced substantial part of capital brought in by them by borrowed funds and in respect of such borrowed funds they were jointly and severally liable to banks from which borrowings were made. It is not case that by virtue of revaluation firm earned any income which 'was credited to partners' accounts who thereupon withdrew such income. accounts of firm for year ended March 31, 2008 show that amount of secured loan from banks went up by nearly Rs.186 crores during said financial year. At same time, partners had withdrawn about RS.182 crores from their capital accounts during same period. It is clear from accounts of firm that withdrawal by partners was funded by borrowings from banks. Withdrawal by partners of money brought in by them by way of capital and replacing such capital by borrowed funds cannot have any tax impact in hands of partners. I am in agreement with appellant that substitution of capital by funds borrowed from banks for which partners are jointly and severally liable to banks cannot have any tax incidence in hands of partners 2.7. In so far as invocation of section 45(3) of Act is concerned, I cannot see how said provision is applicable in instant case. accounts of partners and that of firm for financial year ended March 31, 2006 show that partners held and acquired by them as stock-in-trade and firm upon contribution of land by partners also accounted for it as stock-In-trade. Section 45(3) is applicable in respect of capital asset. definition of capital asset in section 2(14) of Act expressly excludes stock-in-trade. Conversion of stock-in-trade into fixed assets was made by firm more than two years after partners' contribution. Such conversion of stock-in- trade into capital asset by firm and its revaluation long after partners' contribution cannot bring into operation provisions of section 45(3). Section 45(3) is applicable for 15 16 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 year in which partner transfers his asset to firm. It is clear from partnership deed that land was contributed by partners to firm during financial year ended March 31, 2006. partnership deed which records factum of such contribution is dated January 9, 2006 and is registered document. accounts of partners and of firm for financial year ended March 31, 2006 were drawn up on basis that partners had contributed land held as stock-in- trade to firm by way of capital contribution with corresponding credit to partners' capital accounts and that such land was also accounted for by firm as stock-in-trade. Thus, transfer of land from partners to firm took place during financial year ended March 31, 2006 relevant to, assessment year 2006-07. Capital contribution having been made by partners during financial year ended March 31, 2006, it is difficult to uphold assessment made on basis as if transfer was effected during financial year ended March 31, 2008 relevant to assessment year 2008-09. That apart, provisions of section 45(3) of Act do not envisage substitution of value agreed between partners in respect of any asset brought by them into firm by way of capital contribution by any other value. If partners agree to contribute asset held by them at cost and such cost is recorded in books of account of firm as value of assets contributed, it is only such cost recorded in books of firm which can be considered for purposes of section 45(3). Any subsequent conversion or revaluation of asset by firm is of no relevance for purposes of section 45(3) which is applicable only in year transfer. 2.8 AO has mentioned that asset contributed to firm was grossly under - valued. There is no basis for such observation. price paid by partners for purchase of land has not been disputed by ITO. There is no suggestion that any under valuation was involved at time of purchase of land. On other hand, assessee has demonstrated that because of subsequent developments, price of and kept on rising, This is adequately borne out from fact that guideline value for payment of stamp duty went up by more than 10 times in span of three years subsequent to partners' purchasing land. 2.9. As noted earlier, land was held by partners as stock-in-trade and firm upon transfer continued to hold land as stock-in-trade. It is settled position of law that stock-in-trade has to be valued at cost or market price whichever is lower, As long as firm held land as stock-in-trade, it was not possible for it to account for its market value unless such market value fell below cost. firm revalued land and construction made thereon on basis of valuation report only after it converted same from stock-in-trade to fixed asset. As long as firm held land and building thereon as stock-in-trade, it could not have accounted for market value thereof, which was several times higher than cost. Having regard to aforesaid position, explanation of assessee that revaluation was made for financial purposes in order to justify large amount of bank loans of more than Rs.240 crores is plausible and acceptable. I do not see actions of firm or its partners as being colourable or any sort of device. 2.10 firm revalued its land as well as construction thereon. AO taxed 1/3rd of revaluation amount relating to land in hands of each of 3 partners who had contributed it. same amount was again taxed in hands of 4 partners in their 16 17 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 profit sharing ratio. contention of assessee as regards addition of same amount twice over has to be accepted. I have already discussed and deliberated upon AO's action in adding Rs. 96,37,85,635/- as short-term capital gain and Rs. 37,03,36,187/- as share of revaluation profit as unjustified at para 2.3 to 2.10, as addition so made in respect of both items is deleted. Hence, these grounds of appellant are allowed. 24. Aggrieved by order of CIT(A) revenue has preferred present appeal before Tribunal. Grounds of appeal raised by revenue read as follows :- 1. Ld. CIT(A) has erred in law and on facts & circumstances of case by adjudicating that Assessing officer acted without jurisdiction by issuing notice U/s148 of I.T. Act, 1961 for making assessment U/s147 of I.T. Act, 1961. 2. Ld. CIT(A) has erred in law and on facts & circumstances of case in deleting addition of Rs.96,37,85,635/- added as Short Term Capital Gains earned by assessee on transfer of land property to Partnership firm as their Capital Contribution, by holding that provisions of section 45(3) of I.T. Act, 1961 is not applicable. 3. Ld. CIT(A) has erred in law and on facts & circumstances of case in deleting addition of share of Revaluation Profit of Rs.37,03,36,187/- received by assessee by holding that such profit is notional and is not taxable 4. Ld. CIT(A) has erred in law and on facts & circumstances of case, by holding and adjudicating that addition of Short Term Capital Gains for Rs.96,37,85,635/- and addition of Revaluation Profit received for Rs.37,03,36,187/- has resulted towards additions of same amount twice where as both issues of addition are different from each other and have been added back for different reasons. 5. Ld. CIT(A) has erred in law and on facts & circumstances of case in deleting 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 issue & fact that this assessee company along with other all of partner companies and their Partnership Firm has adopted means of colourable transaction, in collusion with each other, to achieve purpose of avoiding taxes. 6. appellant craves leave to amend, modify and alter any grounds of appeal during course of hearing of this case. 17 18 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 25. We have heard submissions of ld. Counsel for assessee and ld. DR. ld. DR relied on order of AO. ld. Counsel for assessee relied on submissions as were made before CIT(A) and relied on order of CIT(A). He further placed reliance on decision of Hon ble Supreme Court in case of Sanjeev Wollen Mills Vs. CIT 279 ITR 434 (SC) wherein 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 Act. 26. We have given very careful consideration to rival submissions. As far as validity of initiation of reassessment proceedings u/s.147 of Act is concerned, we are of view that conclusions of CIT(A) are just and proper and calls for no interference. reasons recorded by AO before issuing notice u/s.148 of Act for making reassessment u/s.147 of Act, shows that AO had information that Partnership Firm had revalued its assets. If at all any income accrues or arises owing to such revaluation, it was issue which had to be dealt with in assessment of firm, which is separate taxable entity. Assessee s source of income is share income from partnership firm . Even assuming that income accrued and arose in hands of firm consequent to revaluation of assets by firm, income that might accrue in hands of partner would be in nature of share income from firm . In terms of Sec.10(2A) of Act, partner s share in total income of firm is not to be included in total income of partner. Therefore, looked at from any angle, AO could not on basis of reasons recorded formed belief that income chargeable to tax in hands of Assessee has escaped assessment. Since formation of such belief is requirement for initiating proceedings u/s.147 of Act and since on facts and circumstances of present case such formation of belief does not exist, initiation of reassessment proceedings, were rightly held to be not valid in law by CIT(A). 18 19 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 27. As far as question whether there was short term capital gain of Rs.96,37,85,635/- is concerned, provisions of Sec.45(3) of Act have been pressed into service by Revenue. provisions of Sec.45(3) of Act reads thus: Section: 45(3): profits or gains arising from transfer of capital asset by person to firm or other association of persons or body of individuals (not being company or co-operative society) in which he is or becomes partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of previous year in which such transfer takes place and, for purposes of section 48, amount recorded in books of account of firm, association or body as value of capital asset shall be deemed to be full value of consideration received or accruing as result of transfer of capital asset. Provisions of Section 45(3) of Act, were inserted by Finance Act, 1987 (w.e.f. 1-4- 1988). facts with regard to purchase of land by Assessee and two other companies of land at Bangalore and facts with regard to transfer of land by three companies as capital contribution to partnership firm during financial year ended March 31, 2006 relevant to assessment year 2006-07, cannot be disputed. partnership deed, which provided that said three companies would transfer said land to said firm as capital contribution, was executed on January 9, 2006. said deed vide second recital expressly stated that at or before execution of deed said firm had taken over said land as part of assets of partnership business. said transfer was given effect in accounts of partners for financial year ended March 31, 2006. assessee's balance sheet and profit and loss account for said financial year showed said land, which had been reflected as work in progress under "current assets", was transferred to said firm as capital contribution. said land received from said three companies was shown in said profit and loss account and balance sheet as work in progress under "current assets" with corresponding credit to partners' capital accounts. purported finding of ITO that partners' capital accounts were not credited during financial year ended March 31, 2006 for their capital contribution by way of bringing in said land is contrary to factual position. That said land was brought in by partners as 19 20 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 inventory/current assets does not in any way alter fact that partners had in fact brought in land into partnership business as their capital contribution. It is not requirement that asset brought in by partner by way of capital contribution must be fixed asset or that current asset cannot be brought in by partner as his capital contribution. books of account of said firm for financial year ended March 31, 2006 clearly reflected receipt of said land by it by way of capital contribution from three of its partners as also value thereof with corresponding credit to partners' capital accounts. land upon purchase was shown by said three companies as part of their current assets. said firm upon receipt of said land during financial year ended March 31, 2006 also accounted for it as current asset. partners transferred said land at cost. As such, there was no profit in hands of partners upon transfer of said land to said firm. Section 45(3) of Act is applicable only in respect of capital asset. said provision has no application in instant case since what was transferred by partners was current asset and not capital asset. Section 45(3) of Act did not come into operation for assessment year 2008-09 by reason of conversion of developed land and building into fixed assets by said firm or due to revaluation by said firm of asset so converted during previous year ended March 31, 2008. Section 45(3) of Act is applicable in year of transfer by partner of his capital asset to partnership firm by way of capital contribution. In instant case, year of transfer was financial year ended March 31, 2006. ITO was wholly unjustified in invoking section 45(3) which had no application in assessment year 2008-09 or for that matter in assessment year 2006-07. Even otherwise, section 45(3) seeks to determine capital gains with reference to value of asset recorded in books of account of firm. value so recorded is statutorily deemed to be full value of consideration received or accruing to partner as result of transfer of capital asset to firm. Thus, section 45(3) does not seek to substitute by any other figure value agreed between partners at which asset is transferred by partner to firm. ITO's actions 20 21 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 are completely contrary to scheme of statute. We therefore uphold order of CIT(A) in so far as it relates to his conclusion that AO was not justified in assessing short term capital gain of Rs.96,37,85,635/- in hand of Assessee on ground that: (a) partners' capital accounts were credited during financial year ended March 31, 2006 for their capital contribution by way of bringing in land at Bangalore and that books of account of said firm for financial year ended March 31, 2006 clearly reflected receipt of said land by it by way of capital contribution from three of its partners as also value thereof with corresponding credit to partners' capital accounts. Section 45(3) of Act is applicable in year of transfer by partner of his capital asset to partnership firm by way of capital contribution. In instant case, year of transfer was financial year ended March 31, 2006. ITO was wholly unjustified in invoking section 45(3) which had no application in assessment year 2008-09 or for that matter in assessment year 2006-07. (b) land was brought in by partners as inventory/current assets does not in any way alter fact that partners had in fact brought in land into partnership business as their capital contribution. It is not requirement that asset brought in by partner by way of capital contribution must be fixed asset or that current asset cannot be brought in by partner as his capital contribution. land upon purchase was shown by said three companies as part of their current assets. said firm upon receipt of said land during financial year ended March 31, 2006 also accounted for it as current asset. Section 45(3) of Act is applicable only in respect of capital asset. said provision has no application in instant case since what was transferred by partners was current asset and not capital asset. (c) section 45(3) seeks to determine capital gains with reference to value of asset recorded in books of account of firm. value so recorded is statutorily deemed to be full value of consideration received or accruing to partner as result of transfer of capital asset to firm. Thus, section 45(3) does not seek to 21 22 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 substitute by any other figure value agreed between partners at which asset is transferred by partner to firm. 28. As far as question whether AO was justified in bringing to tax sum of Rs.37,03,36,187/- as share of revaluation profit, is concerned, AO has proceeded to assess aforesaid sum as income of Assessee for previous year relevant to AY 08-09 on basis of revaluation of land at Bangalore by Assessee during previous year. law is well settled that for accounting purposes, stock is valued at cost or market price, whichever is lower. market value is taken only when it falls below cost. Reference in this behalf was made to judgment of Hon'ble Supreme Court in Chainrup Sampatram, (1953) 24 ITR 481 (SC). firm correctly reflected land received from its partners by way of capital contribution and held as inventory at cost. three companies paid Rs.21,87,76,492/- for purchasing said land which was more than two and half times State Government guideline value for stamp duty purposes at time of purchase. three companies entered into agreement for purchase of said land in June 2004 and conveyance was executed in their favour on March 30, 2005. Subsequent to said purchase, area in which said land was situated underwent major development and became premium destination for IT and ITES companies. Several IT parks and SEZ as also high end residential projects were developed in said area. area which was under gram panchayat came under limits of Municipal Corporation of Bangalore. Municipal Corporation carried out various improvements in area by constructing several flyovers and under passes. Supply of water was provided and sewerage lines were laid. In June 2007, comprehensive development plan of Bangalore was revised and FAR ratio for construction of buildings in said area was increased from 2.00 to 3.25 because of road width of 150 feet. As consequence of all such development activities, land price in area kept on rising. State Government revised guideline 22 23 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 value for stamp duty purposes thrice after purchase of land by 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, land held as inventory was shown at its cost. Therefore it cannot be said that there was any undervaluation done by Assessee as alleged by AO. 29. After conversion of inventory into fixed assets firm revalued developed land including construction thereon in order to bring it in line with current market value and for justifying bank finance of nearly Rs.250 crores. Such revaluation was neither colourable nor device. It is settled law that revaluation in books of account of asset which 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 asset which assessee continues to hold is not taxable event and does not give rise to any taxable income. person cannot make profit from himself. decision of Hon ble Supreme Court in case of Sanjeev Woolen Mills (supra) wherein it was held that notional imaginary profit cannot be taxed, clearly supports stand of Assessee. In fact observations of Hon ble Supreme Court made with reference to valuation of stock at market value higher than cost are equally applicable in respect of any other asset. Revaluation by firm was made for financial purposes and no tax advantage of any kind was sought to be derived thereby. firm did not claim any depreciation in respect of any asset of developed project. firm let out developed project to different parties and did not sell any part 23 24 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 thereof. In event of sale, in computing capital gains, only actual cost of asset would have been considered as cost of acquisition and not revalued cost. Thus, even in case of transfer of capital asset, revaluation would not have resulted in any tax benefit or advantage. There was no withdrawal by Partners from capital account and therefore there cannot be any income liable to taxation in their hands. We therefore concur with view of CIT(A) on this issue also. 30. We therefore confirm order of CIT(A) by holding that assessee did not make any short term capital gains of Rs.96,37,85,635/- taxable under section 45(3) of Act or otherwise and that on revaluation of its fixed assets by firm (of its land and building) there was no income that accrued or arose in hands of partners and addition of Rs.37,03,36,187/- on account of alleged revaluation profit is not sustainable and was rightly deleted by CIT(A). 31. In result, appeal by Revenue is dismissed. Order pronounced in Court on 19.10.2016. Sd/- Sd/- [Dr.Arjun Lal Saini] [N.V.Vasudevan ] Accountant Member Judicial Member Dated : 19.10.2016. [RG PS] Copy of order forwarded to: 1. M/s. Orchid Griha Nirman Pvt. Ltd., C/o Salarpuria Jajodia & Co., 7, C.R.Avenue, Kolkata-700072. 2. I.T.O., Ward-1(4), Kolkata. 3. CIT(A)-I, Kolkata. 4. CIT-I, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata. True copy By Order Asstt.Registrar, ITAT, Kolkata Benches 24 25 ITA No.2269/Kol/2013 M/s. Orchid Griha Nirman Pvt. Ltd. A.Yr.2008-09 25 I.T.O., Ward-1(4), Kolkata v. M/s. Orchid Griha Nirman Pvt. Ltd
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