TMI Blog2018 (8) TMI 2075X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We hold that the assessee had not derived any tax advantage pursuant to the revaluation of land in the said firm in Asst Year 2008-09. In any case, the revaluation, even if held to be taxable, could be examined only in Asst Year 2008-09 and it has got absolutely no bearing in Asst Year 2006-07. The assessee cannot be expected to preempt in Asst Year 2006-07, that the partnership firm would reconvert the stock in trade into capital asset and then revalue the same . Hence in any event, there is absolutely no scope for bringing any capital gains to tax in the Asst Year 2006-07 in the hands of the assessee partner. - Decided in favour of assessee - I.T.A No. 570/Kol/2015 - - - Dated:- 1-8-2018 - HON BLE SHRI ABY. T. VARKEY, JM AND SHRI M. BALAGANESH, AM For the Appellant : Shri Goulean Hangshing, CIT DR For the Respondent : 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 Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- on the basis that the said land measured 3,19,086 sq. ft. and accordingly, an agreement was entered into 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. 3.1. The State Government guideline value for the purpose of registration and stamp duty in respect of the said land was ₹ 260/- per sq. ft. whereas the purchase price paid by the said three companies was ₹ 70l/- per sq. ft. i.e. more two and half times the stamp value. The total cost of the said land to the said three companies, who had purchased it in equal shares, was ₹ 24,54,54,125/- after taking into consideration the stamp duty and registration cost. The said three companies had purchased the said 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of increase due to 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/- 3.5. The amount of revaluation was credited to the current accounts of the four partners in their profit sharing ratio. 4. The ld AO showcaused the assessee to explain as to why the profit accrued to assessee company on transfer/contribution of capital by way of contribution in the form of its aforesaid share of land asset to the partnership firm during the year ended 31.3.2006, should not be treated and added back as its capital gains for the Asst Year 2006-07. 4.1. In response thereto, the assessee replied vide submission 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the full value of the consideration received or accrued as a result of the transfer of the capital asset. xi) In the instant case, section 45(3) of the Act had no application in the year of transfer viz. The financial year ended March 31,2006 since what the partners transferred to. the firm was inventory and not capital asset. The conversion of inventory into. fixed assets was made by the firm mare than two. Year later during the financial year ended March 31, 2008 as was the revaluation of the converted asset. Neither such conversion nor revaluation by the firm during the previous year relevant to assessment year 2008-09 can bring the provisions of section 45(3) of the Act into play for the assessment year 2006-07. There was no. transfer of any capital asset by the assessee to the said firm during the previous year relevant to. the assessment year 2006-07 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s Salarpuria Soft Zone . iv) Section 45(3) of the I.T., Act, 1961 provides that for the purpose of Capital gains u/s 48 of the I.T. Act, 1961, the amount recorded in the Books of the Partnership Firm as the value of assets would be deemed to be full value of consideration received or accrued as a result of the transfer of a capital asset by way of capital contribution. Explanatory Notes to the Finance Act'1987 has clarified the position for newly inserted deeming provisions of Capital gains vide Circular No.495/1987 dated 22.09.1987 as under: With a view to blocking the escape root for avoiding capital gains tax, the Finance act'1987 has inserted a new sub-section (3) in section 45. The effect of this amendment is that the Profits and gains arising, from the transfer of Capital asset by a partner to a firm, shall be chargeable as the partners income of the previous year in which the transfer 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after a gap of two years i.e. during the year ended on31.03.2008, is nothing but adopting of the means of colourable transaction device. in collusion with each other to achieve the purpose of avoiding taxes on 'Capital Gains' accrued to this assessee as well as to the other two partner companies who have contributed land in the aforesaid Partnership Firm. x) Such germ of planning was adopted for avoiding taxes on 'Capital Gains' accrued to the assessee, as well as to the other two partner companies who have contributed land in the aforesaid Partnership Firm, either for the year ended on 31.03.2006 or for the year ended on 31.03.2008. xi) The assessee's contention that revaluation of asset was done by the 'partnership firm' to get financial assistance from financial institutions and/or banks is not tenable since it is observed that the partnership 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm. The land contributed by the assessee company and other two partner companies towards contribution of capital in partnership firm is a capital asset and the provisions of section 45(3) of the Act will be applicable for the Asst Year 2006-07. He observed that the value of land for which the three partner companies had incurred a cost of ₹ 24,67,49,500/- and which was jointly transferred as their capital contribution to the partnership firm during the current year ended on 31.3.2006, was ultimately recorded at ₹ 314,29,74,600/- in the books of the partnership firm when such asset was converted into fixed assets in the books of the partnership firm. 4.3.1. The ld AO further observed that for the purpose of computing capital gains of the three partner companies, who jointly contributed their aforesaid land, the value i.e sale consideration of the land 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 31.3.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as capital contribution to the partnership firm. It is not in dispute that the said lands were held by the assessee along with other two partner companies as stock in trade and not as capital assets. Hence there could be no application of section 45(3) of the Act in as much as what was transferred was only stock in trade and not capital asset. Hence the transfer would 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 find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the books of the assessee and other two partner companies of recording the value of land as alleged by the ld AO. We find that only after conversion of inventory into fixed assets that the said firm revalued the developed land including construction thereon in order to bring it in line with the current marked value and for justifying 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 st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Constructions Pvt Ltd for the Asst Year 2008-09, in ITA No. 2271/Kol/2013 dated 15.3.2017, similar view has been taken by this tribunal. The relevant operative portion of one of the partner s case i.e M/s Orchid Griha Nirman Pvt Ltd in ITA No. 2269/Kol/2013 dated 19.10.2016, wherein detailed findings are given are 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 cooperative 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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. 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 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 appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... current asset. 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. (c) 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed 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. 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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