TMI Blog2018 (9) TMI 2071X X X X Extracts X X X X X X X X Extracts X X X X ..... nt : Shri J. P. Khaitan, Sr. Counsel, Shri Sujoy Sen, Advocate. ORDER Per M. Balaganesh, AM 1. This appeal by the Revenue arises out of the order of the Learned Commissioner of Income Tax(Appeals)-I, Kolkata [in short the ld CIT(A)] in Appeal No. 270/CIT(A)-1/Ward-1(4)/2014-15 dated 23.01.2015 against the order passed by the ITO, Ward-1(4), Kolkata [ in short the ld AO] under section 147/143(3) of the Income Tax Act, 1961 (in short the Act ) dated 28.03.2014 for the Assessment Year 2006-07. 2. The only issue involved in this appeal is as to whether the ld CITA was justified in deleting the addition of ₹ 96,37,85,635/- towards capital gains u/s 45(3) of the Act in the facts and circumstances of the case. 3. The brief facts of this issue are that the assessee is a company and for the Asst Year 2006-07 had filed its return of income on 11.11.2006 declaring total loss of ₹ 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d land with the object of developing an industrial park. Each of the said three companies accounted for the said land so purchased as work in progress and reflected it under Current Assets in the balance sheet. 3.2. On January 9, 2006, the said three companies and another company called Wellgrowth Griha Nirman Pvt. Ltd. executed a deed of partnership in terms of which the said three companies transferred the said land to the partnership firm M/s. Salarpuria Soft Zone as their capital contribution. The fourth company was to arrange the entire finance required for the development of the said land. Each of the said three companies had a 10% share in the profit/loss and the fourth company's share was 70%. The partnership business was deemed to have commenced on and from April 1, 2005. A supplemental deed of partnership was executed on March 13, 2006 between 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 of₹ 250 crores. 3.3. The said three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmission dated 24.3.2014 and gist of those submissions as reproduced in the assessment order are as under:- i) Section 45(3) is applicable only in case of transfer of a capital asset by a partner to a firm. ii) the assessee had accounted for the aforesaid land as a current asset and not as capital asset on it accounts. iii) Since the aforesaid land was not a capital asset in the hands of the assessee, section 45(3) is ex facie not applicable. iv) the said land upon purchase was shown by the partners including the assessee as part of their current assets. The 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 land at cost. As such, there was no profit in the hands of the partners upon transfer of the land to the firm v) After receiving the land as capital contribution, the firm developed the same and expended as substantial amount far: the said purpose during the financial year 2005-06 and thereafter. It was only an March 30, 2008 that the firm converted the developed land including construction thereon held at inventory into. Fixed assets and therea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y tax under section 45(3) of the Act, the question-of resorting to. Device to avoid tax under section 45(3) does not arise. xii) Even otherwise. section 45(3) seeks to. determine the capital gains with reference to the value of the asset recorded in the books of account of the firm. The value so recorded is statutorily deemed to the full value of consideration received or accruing to. the partner as a result of the transfer of the capital asset to the firm. Thus, section 45(3) does not seek to substitute by any other figure the value agreed between the partners at which the asset is transferred by a partner to the firm. xiii) Without prejudice to the validity of the addition/adjustment so made in A.Y.:2008- 09 on issue of capital gains, it may kindly be appreciated that such adjustment have already been made A. Y.: 2008-09 cannot be done again in A. Y.: 2006-07 which may amount to. double adjustment of same item which is not permissible at all in law. 4.2. The ld AO disposed of the submissions made by the assessee in the following manner:- The above contentions of the assessee are not acceptable and accordingly are not accepted. i) During the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer took place. For the purpose of computing the capital gains, the value of assets recorded in the books of the firm on the' date of transfer shall be deemed to be the full value of consideration received or accrued as a result of transfer of the capital asset . v) As per provisions of section 45(3) of the I.T. Act'1961 for the purpose of computation of Capital gains U/s48 of 'the IT. Act, 1961, the amount of ₹ 314,29,74,600/-, which was ultimately recorded in the books of the Partnership Firm as value of Land asset, will be deemed to be the full value of consideration received or accrued as a result of the transfer of such Capital Asset by way of Capital contribution, during the current year ended on 31.03.2006. vi) The assessee has contended that the aforesaid share of Land;' asset which was transferred 'at cost' by it by way of Capital contribution during the current year ended on 31.03.2906 to the Partnership Firm viz. M/s Salarpuria Soft Zone , has been accounted for in its books of account as 'Stock in trade' i.e. 'Current asset' and not a 'Capital asset'. Hence the provisions of section 45(3) of the I.T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm had already pledged the said land before 30.03.2008. xii) It may not be out of way to bring on record that all the partner companies and the partnership firm have common business addresses and belong to the same Group. The asset i.e. land was kept under inventory and not brought to Fixed assets for last two earlier Financial years ended on 31.03.2006 and 31.03.2007 in the Books of the Partnership Firm and also till such asset was kept as inventory its xiii) correct value was not recorded in the Books of the Firm. It is very much clear that all of the partner companies and their Partnership Firm has adopted the means of colourable transaction, in collusion with each other, to achieve the purpose of avoiding taxes on Capital Gains accrued to the three partner companies who have contributed land in the firm. xiv) It may further be noted that the Revaluation Profit accrued on revaluation of Land Building was credited to Partners Current a/c in their respective Profit/Loss sharing ratio by the Partnership Firm viz. M/s Salarpuria Soft Zone during the year ended on 31.03.2008. xv) The Partnership Firm viz. M/s Salarpuria Soft Zone was converted into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd will be ₹ 313,81,06,404/- (i.e ₹ 24,67,49,500, being the cost incurred by partner companies on purchase of land) + ₹ 289,13,56,904/- , being the revaluation of land on 31.3.2008 by the partnership firm) be taken as accrued and recorded in the books of the firm on the date of the transfer i.e 31.3.2006. Hence the profit accrued to the three partner companies, for the year ended 31.3.2006, as a result of the transfer of the capital asset i.e afore discussed land, to the partnership firm will be deemed at ₹ 289,13,56,904/-. He held that hence assessee s share thereon would be ₹ 96,37,85,635/- requires to be taxed as short term capital gains for the Asst Year 2006-07. 5. The ld CITA appreciated the facts of the instant case and agreed to the contentions of the assessee and deleted the levy of short term capital gains in the hands of the assessee partner in the sum of ₹ 96,37,85,635/-. Aggrieved, the revenue is in appeal before us. 6. We have heard the rival submissions and perused the materials available on record. The primary facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. We find th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be outside the scope of section 2(14) (which defines capital asset ) of the Act. Hence there cannot be any levy of capital gains thereon and accordingly the revaluation gains cannot be brought to tax in the Asst Year 2006-07 in the hands of the assessee and other two partner companies. 6.2. We find that section 45(3) of the Act seeks to determine the capital gains with reference to the value of the asset recorded in the books of account of the firm. The value so recorded is statutorily deemed to be the full value of consideration received or accruing to the partner as a result of the transfer of the capital asset to the firm. Thus, section 45(3) of the Act does not seek to substitute by any other figure the value agreed between the partners at which the asset is transferred by a partner to the firm. Hence the finding of the ld AO that the land was grossly undervalued till it was part of inventory in the books of the said firm is without any basis. We have already discussed the purpose of conversion of land held as stock in trade into a capital asset in the books of the partnership firm in Asst Year 2008-09. Only pursuant to such conversion and pursuant to revaluation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustifying the bank finance of nearly ₹ 250 crores. Such revaluation was neither colourable nor a device. It is well settled that revaluation in the books of accounts 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 taxable income. A person cannot make a profit from himself. Reliance in this regard is placed on the decision of Hon ble Supreme Court in the case of Sanjeev Woolen Mills vs CIT reported in 279 ITR 434 (SC) at page 447 and 448 ,as under:- In the present case, the method adopted by the assessee is to value the closing stock at the market value irrespective of the fact whether the market value of the stock at the relevant time is more than the cost value of the stock, which necessarily results in imaginary or notional profits to the assessee which he has not actually received. In fact such a notional imaginary profit cannot be taxed. It is a well settled principle as held in Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reproduced hereinbelow:- 27. As far as the question whether there was short term capital gain of ₹ 96,37,85,635/- is concerned, the provisions of Sec.45(3) of the Act have been pressed into service by the Revenue. 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 (not being a company or a co-operative society) 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. Provisions of Section 45(3) of the Act, were inserted by Finance Act, 1987 (w.e.f. 1-4-1988). The facts with regard to purchase of land by the Assessee and two other companies of land at Bangalore and the facts with regard to transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e partners upon transfer of the said land to the said firm. 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. Section 45(3) of the Act did not come into operation for the assessment year 2008-09 by reason of conversion of the developed land and building into fixed assets by the said firm or due to revaluation by the said firm of the asset so converted during the previous year ended March 31, 2008. 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 that matter in the assessment year 2006-07. Even otherwise, section 45(3) seeks to determine the capital gains with reference to the value of the asset recorded in the books of account of the firm. The value so recorded is statutorily deemed to be the full value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to the value of the asset recorded in the books of account of the firm. The value so recorded is statutorily deemed to be the full value of consideration received or accruing to the partner as a result of the transfer of the capital asset to the firm. Thus, section 45(3) does not seek to substitute by any other figure the value agreed between the partners at which the asset is transferred by a partner to the firm. 28. As far as the question whether the AO was justified in bringing to tax a sum of ₹ 37,03,36,187/- as share of revaluation profit, is concerned, the AO has proceeded to assess the aforesaid sum as income of the Assessee for the previous year relevant to AY 08-09 on the basis of revaluation of the land at Bangalore by the Assessee during the previous year. The law is well settled that for accounting purposes, stock is valued at cost or market price, whichever is lower. The market value is taken only when it falls below the cost. Reference in this behalf was made to the judgment of the Hon'ble Supreme Court in Chainrup Sampatram, (1953) 24 ITR 481 (SC). The firm correctly reflected the land received from its partners by way of capital contribution a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 taxable income. A person cannot make a profit from himself. The decision of the Hon ble Supreme Court in the case of Sanjeev Woolen Mills (supra) wherein it was held that notional imaginary profit cannot be taxed, clearly supports the stand of the Assessee. In fact the observations of the 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 the firm was made for financial purposes and no tax advantage of any kind was sought to be derived thereby. The firm did not claim any depreciation in respect of any asset of the developed project. The firm let out the developed project to different parties and did not sell any part thereof. In the event of sale, in computing the capital gains, only the actual cost of the asset would have been c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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