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2016 (11) TMI 247 - AT - Income TaxReopening of assessment - whether there was short term capital gain? - Held that:- The reasons recorded by the AO before issuing notice u/s.148 of the Act for making reassessment u/s.147 of the Act, shows that the AO had information that the Partnership Firm had revalued its assets. If at all any income accrues or arises owing to such revaluation, it was an issue which had to be dealt with in the assessment of the firm, which is a separate taxable entity. The Assessee’s source of income is “share income from partnership firm”. Even assuming that income accrued and arose in the hands of the firm consequent to revaluation of the assets by the firm, the income that might accrue in the hands of the partner would be in the nature of “share income from the firm”. In terms of Sec.10(2A) of the Act, partner’s share in the total income of the firm is not to be included in the total income of the partner. Therefore, looked at from any angle, the AO could not on the basis of the reasons recorded formed belief that income chargeable to tax in the hands of the Assessee has escaped assessment. Since the formation of such belief is a requirement for initiating proceedings u/s.147 of the Act and since on the facts and circumstances of the present case such formation of belief does not exist, the initiation of reassessment proceedings, were rightly held to be not valid in law by the CIT(A). 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 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. 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. 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 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. 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 ₹ 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 taxable income. A person cannot make a profit from himself. In the event of sale, in computing the capital gains, only the actual cost of the asset would have been considered as the cost of acquisition and not the revalued cost. Thus, even in case of transfer of the capital asset, the revaluation would not have resulted in any tax benefit or advantage. There was no withdrawal by the Partners from capital account and therefore there cannot be any income liable to taxation in their hands. We therefore concur with the view of the CIT(A) on this issue also. We therefore confirm the order of the CIT(A) by holding that the assessee did not make any short term capital gains of ₹ 96,37,85,635/- taxable under section 45(3) of the Act or otherwise and that on revaluation of its fixed assets by the firm (of its land and building) there was no income that accrued or arose in the hands of the partners and the addition of ₹ 37,03,36,187/- on account of alleged revaluation profit is not sustainable and was rightly deleted by the CIT(A).- Decided against revenue
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