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2016 (11) TMI 247 - ITAT KOLKATA

2016 (11) TMI 247 - ITAT KOLKATA - TMI - Reopening 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. .....

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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 financ .....

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e 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 .....

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valuation 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 capit .....

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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 - I.T.A No. 2269/Kol/20 .....

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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 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 partenership firm M/S.Salarpuria Soft Zone. The return so filed was processed u/s.143(1) of the Income Tax Act, 1961 (Act) on 13.10.2009. 3. Subsequently proceedings u/s.147 of the Act were initiated by issue of a notice u .....

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ch revaluation reserved. I have reason to believe on examination of record that the above has escaped assessment within the meaning of section 147 of the I. TAct, 1961. Notice u/s 148 be issued. 4. 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 mearsuring 3,12,092 sq. ft. in Bellandur Village, Varthur Hobli, Bangalore East taluk (hereinafter referred to as the said land ). The s .....

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to on June 14,2004. However, upon actual measurement the area of the land was found to be 3,12,092 sq. ft. and as such the final price stood at ₹ 21,87,76,492/- as per supplemental agreement dated December 28, 2004. The said three companies paid the agreed consideration and received possession. A registered deed of sale was executed in their favour on March 30, 2005. 5. The State Government guideline value for the purpose of registration and stamp duty in respect of the said land was ͅ .....

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or the said land so purchased as work in progress and reflected it under "Current Assets" in the balance sheet. 6. 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 .....

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equently obtained such loan/credit facilities to the extent ofRs.250 crores. 7. 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 ₹ 8,15,00,000/-. The sai .....

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ere shown as inventory in its accounts, into fixed assets. On March 31, 2008 the said land and building were revalued. Such revaluation was made in order to reflect the-market value of the land and building in the books of account and to justify the bank loan of ₹ 250 crores. The values of the land and building before and after revaluation are as under :- Cost as on 30.03.08 Revalued figure as on 31.03.08 Extent of increase due to revaluation Rs. Rs. Rs. Land 25,16,17,696/- 314,29,74,600/- .....

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e current account of the Assessee in the partnership firm M/S.Salarpuria Soft Zone of a sum of ₹ 37,03,36,187/- gives raise to any income chargeable to tax. The AO in the reassessment proceedings held that: - (a) Bringing of land into the said firm by way of inventory as part of the project without crediting the partners' capital accounts and without bringing it as fixed assets cannot be considered as capital contribution by the partners during the financial year ended March 31, 2006. .....

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377; 314,29,74,600/- recorded in the books of account of the said firm as on March 31, 2008 was to be deemed as the full value of consideration received or accruing as a result of transfer of the capital asset by way of capital contribution. The revaluation amount of ₹ 289,13,56,904/- was the profit which accrued to the said three companies and each of them was liable to be taxed on one-third of such profit i.e. ₹ 96,37,85,635/- as short term capital gains. (c) The land was grossly u .....

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st equal to the cost of the land/money brought in. The said firm was taxable in respect of its profits but the revaluation profit was not disclosed by it as its income for the assessment year 2008-09 and no tax was paid thereon. Each of the partners was thus liable for tax on its share of revaluation profit. The said three companies were each liable to be taxed on ₹ 37,03,36,187/- as partners entitled to 10% share in the partnership land the fourth company having 70% share was liable to be .....

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the Act are not valid. It was contended that the reasons recorded did not spell out the belief of the AO regarding escapement of income chargeable to tax. 13. On the above contention the CIT(A) held as follows :- Grounds No. 1 to 5 is regarding validity of re-assessment proceedings. The AO has reopened the proceedings within four years from the end of the assessment year and for intimation u/s 143(1) was issued. The first aspect is as to whether having regard to the reasons recording, the AO wa .....

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t under section 143(3), it cannot be said that the AO formed an opinion which he sought to change. The only question is as to whether the AO formed any belief that any income in respect of which the assessee was chargeable to tax had escaped assessment enabling him to initiate reassessment proceedings. To decide upon this issue reasons recorded for reopening the assessment needs to be examined and such Reasons are reproduced herewith as follows: "It transpires from communication from O/o Jo .....

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do not refer to the provisions of section 45(3) of the Act and it is not suggested in the recorded reasons that any income chargeable to tax under section 45(3) of the Act had escaped assessment. The assumption of jurisdiction under section 147 cannot be justified upon the basis that income chargeable to tax in terms of section 45(3) of the Act had escaped assessment. The only fact referred to in the recorded reasons is the revaluation by the firm of its assets and consequent transfer of the re .....

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erms of section 40(b) of the Act. 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. Even if the case made out in the recorded reasons is taken as correct, the AO could not have formed the belief that any income in respect of which the partner was chargeable to tax had escaped assessment in his hands. The AO himself was quite aware of this position .....

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income. In my view, even if the case made out in the reasons recorded is accepted on its face value, no belief could have been entertained by the AO that any", income in respect of which the partner was chargeable to tax had escaped assessment and the AO acted without jurisdiction by issuing notice under section 148 for making an assessment under section 147 in the partner's case. Hence, these grounds of the appellant are allowed. 14. As far as the merits of the addition made by the AO .....

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xecution 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 fr .....

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s 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 sai .....

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ofit in the hands of the 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. 16. It was pointed out that after receiving the said land as capital contribution, the said firm developed the same and expended a substantial amount for the said purpose during the financial year .....

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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. 17. .....

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partner to a firm shall be chargeable as the partner's income of the previous year in which the transfer took place. For purposes of computing the capital gains. the value of the asset recorded in the books of the firm on the dale of the transfer shall be deemed to be the full value of the consideration received or accrued as a result of the transfer of the capital asset. (emphasis added) It was submitted that in the instant case, section 45(3) of the Act had no application in the year of tr .....

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visions of section 45(3) of the Act into play for the said year. There was no transfer of any capital asset by the assessee to the said firm during the previous year relevant to the assessment year 2008-09 for section 45(3) to apply. When the partners had no liability for any tax under section 45(3) of the Act, the question of resorting to a 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 the capital gains .....

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statute. It was reiterated that the purported finding of the ITO that the land was grossly under-valued till it was part of inventory in the books of the said firm is without any basis whatsoever. There was no undervaluation of the land when it was held by the said firm as inventory. 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'bl .....

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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 Cor .....

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uideline value for stamp duty purposes thrice after purchase of the land by the 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, the land held as inventory could only be shown at its cost. The ITO was wholly unjustified in labeling the accounting made by the said firm in accordance with accountancy principles a .....

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fit 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 was placed on the following passage from the judgment of the Hon'ble Supreme Court in Sanjeev Wool en Mills v. CIT, (2005) 279 ITR 434 (at pages 447-8) which takes note of the relevant previous decisions:- " .....

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e Constitution Bench judgment that the firm cannot make a profit out of itself The transaction which is not business transaction and does not derive immediate pecuniary gain is not subjected to tax. In the present case 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 a .....

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he 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 the said firm was made for financial purposes and no tax advantage of any kind was sought to be derived thereby. The ITO has himself recorded that the said firm did not claim any depreciation in respect of any asset of the developed project. The said firm let out the developed project to different parties and di .....

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made by the partners from their capital accounts and cannot result in any taxation in their hands. It was submitted that as stated hereinbefore, upon revaluation of the land and building, the consequent credit was made to the partners' current accounts. The withdrawals were made not from the current accounts but from the capital accounts as aforesaid. The revaluation amount credited to the partners' current accounts in their respective profit sharing ratio remained untouched. Reference .....

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85.88 crores. The withdrawal of capital by the partners amounted to ₹ 182.20 crores. It was thus clear that the partners decided to substitute their own funds by borrowed funds. It was submitted that substitution by the partners of their own funds brought in as their capital by borrowed funds and withdrawal of such capital cannot have any tax incidence in the hands of the partners. It is important to bear in mind that the partners were jointly and severally liable to the banks for the mone .....

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emuneration which has been allowed as a deduction in the assessment of the firm. It is not in dispute that the said firm revalued its assets. If such revaluation resulted in any taxable income (although that cannot be the case), such income was required to be assessed in the hands of the said firm. 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 .....

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firm of its land and building did not result in any income in the hands of the partners and the addition of ₹ 37,03,36,187/- on account of alleged revaluation profit is equally unsustainable. 23. The CIT(A) accepted the contentions of the assessee. He held as follows :- 2.4. For the sake of completeness, let me consider the question as to whether revaluation of an asset which the owner thereof continues to hold can give rise to any taxable income. This question does not call for much discu .....

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resulting in any pecuniary gain which can form subject matter of taxation. Where the owner accounts for the asset at market value, though he has incurred a lower amount by way of cost to acquire it, there is no real income. At best, it can be said that by showing the market value in the books, the owner has earned potential profit out of himself since the asset is continued to be held by the owner. There can be no taxation of such notional profit. In view of the said decision of the Apex Court, .....

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were to sell the revalued assets. In the event of such sale, the firm having converted its stock- in-trade into fixed assets i.e. capital asset, it will be liable for capital gains tax in the year of sale. In computing such capital gains, what would be considered is the cost of acquisition and not the revalued cost. I would tend to agree with the assessee that revaluation was made for other reasons and not for gaining any tax advantage. 2.6 The AO has mentioned that the partners had withdrawn a .....

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rrowed funds and in respect of such borrowed funds they were jointly and severally liable to the banks from which the borrowings were made. It is not the case that by virtue of the revaluation the firm earned any income which 'was credited to the partners' accounts who thereupon withdrew such income. The accounts of the firm for the year ended March 31, 2008 show that the amount of secured loan from the banks went up by nearly ₹ 186 crores during the said financial year. At the sam .....

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he banks for which the partners are jointly and severally liable to the banks cannot have any tax incidence in the hands of the partners 2.7. In so far as invocation of section 45(3) of the Act is concerned, I cannot see how the said provision is applicable in the instant case. 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 partne .....

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ction 45(3). Section 45(3) is applicable for the year in which the partner transfers his asset to the firm. It is clear from the partnership deed that the land was contributed by the partners to the firm during the financial year ended March 31, 2006. The partnership deed which records the factum of such contribution is dated January 9, 2006 and is a registered document. 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 p .....

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s difficult to uphold the assessment made on the basis as if transfer was effected during the financial year ended March 31, 2008 relevant to the assessment year 2008-09. That apart, the provisions of section 45(3) of the Act do not envisage substitution of the value agreed between the partners in respect of any asset brought by them into the firm by way of capital contribution by any other value. If the partners agree to contribute an asset held by them at cost and such cost is recorded in the .....

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he partners for purchase of the land has not been disputed by the ITO. There is no suggestion that any under valuation was involved at the time of purchase of the land. On the other hand, the assessee has demonstrated that because of subsequent developments, the price of the and kept on rising, This is adequately borne out from the fact that the guideline value for payment of stamp duty went up by more than 10 times in a span of three years subsequent to the partners' purchasing the land. 2. .....

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ation report only after it converted the same from stock-in-trade to fixed asset. As long as the firm held the land and building thereon as stock-in-trade, it could not have accounted for the market value thereof, which was several times higher than the cost. Having regard to the aforesaid position, the explanation of the assessee that revaluation was made for financial purposes in order to justify the large amount of bank loans of more than ₹ 240 crores is plausible and acceptable. I do n .....

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sed and deliberated upon the AO's action in adding ₹ 96,37,85,635/- as short-term capital gain and ₹ 37,03,36,187/- as share of revaluation profit as unjustified at para 2.3 to 2.10, as the addition so made in respect of both the items is deleted. Hence, these grounds of the appellant are allowed. 24. Aggrieved by the order of CIT(A) the revenue has preferred the present appeal before the Tribunal. Grounds of appeal raised by the revenue read as follows :- 1. The Ld. CIT(A) has e .....

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tion, by holding that the provisions of section 45(3) of the I.T. Act, 1961 is not applicable. 3. The Ld. CIT(A) has erred in law and on the facts & circumstances of the case in deleting the addition of share of Revaluation Profit of ₹ 37,03,36,187/- received by the assessee by holding that such profit is notional and is not taxable 4. The Ld. CIT(A) has erred in law and on the facts & circumstances of the case, by holding and adjudicating that addition of Short Term Capital Gains .....

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by not giving cognizance to the issue & fact that this assessee company along with other 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. 6. The appellant craves leave to amend, modify and alter any grounds of appeal during the course of hearing of this case. 25. We have heard the submissions of the ld. Counsel for the assessee and the ld. DR. The ld. DR relied on .....

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to the rival submissions. As far as the validity of initiation of reassessment proceedings u/s.147 of the Act is concerned, we are of the view that the conclusions of the CIT(A) are just and proper and calls for no interference. 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 .....

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ot 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 h .....

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ich 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, .....

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s 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 .....

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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 c .....

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it as a current asset. The partners transferred the said land at cost. As such, there was no profit in the hands of the 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 co .....

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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 t .....

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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 cap .....

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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 .....

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stitute 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 .....

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d which was more than two and half times the State Government guideline value for stamp duty purposes at the 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 .....

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ecause 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 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 invento .....

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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 .....

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