ANILKUMAR BHIKHABHAI VIRANI,BHAVNAGAR vs. DCIT, CIRCLE-1, BHAVNAGAR

The present appeal has been preferred by the Assessee against the Order, dated 27/09/2025, passed by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the ‘CIT(A)’] whereby the Learned CIT(A) had dismissed the appeal against the Assessment Order, dated 21/12/2018, passed under Section 147 r.w.s 143(3) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] for the Assessment Year 2011-2012. 2. The Assessee has raised the following grounds of Appeal as per ‘Ground of Appeal’ enclosed to memorandum of appeal in Form 36:

On the facts and circumstances of the case as well as the law on the subject, the Ld. CIT(A) has erred in confirming the action of the assessing officer in re-opening the assessment u/s. 147 by issuing notice u/s. 148 of the Act and thereby framing assessment u/s. 147 r.w.s. 143(3) of the Act.

On the facts and circumstances of the case as well as the law on the subject, the Ld. CIT(A) has erred in confirming the action of the assessing officer in disallowing the exemption of Rs. 1,37,70,000/- claimed u/s. 10(2A) of the Act.

It is therefore prayed that the assessment framed may please be quashed and/or the disallowance made by the assessing officer and confirmed by Ld. CIT(A) may please be deleted.”

We have heard both the sides on the above grounds raised by the Assessee and have perused the material on record.

It is admitted position that the Assessee was a partner in a partnership firm (i.e., M/s Aum Developers) and received on retirement from the said partnership firm a sum of INR.1,37,70,000/- as his share in enhancement in the value of land on account of revaluation. Before the Assessing Officer it was contended by the Assessee that the aforesaid amount was not taxable in the hands of the Assessee. Rejecting the aforesaid submission the Assessing Officer brought the same to tax in the hand of the Assessee holding that the aforesaid amount received by the Assessee was neither in the nature of share of profit nor remuneration received by the partner and therefore, the same did not qualifying for exemption under Section 10(2A) of the Act. The Assessing Officer observed that the said amount was over and above the amount of capital of the Assessee and therefore, the Assessee should have offered the same to tax. Accordingly, the Assessing Officer made addition of INR.1,37,70,000/- in the hands of the Assessee.

In appeal before the Learned CIT(A) the Assessee reiterated the stand taken before the Assessing Officer and in addition, inter alia, contended that INR.1,37,70,000/- could only be taxed as income the firm is in view of the provisions contained in Section 45(4) of the Act as held by the Hon’ble Supreme Court in case of Mansukh Dyeing and Printing Mills vs. CIT : 151 taxmann.com 306 (SC). However, the Learned CIT(A) declined to grant any relief and dismissed the appeal of the Assessee.

Being aggrieved, the Assessee has carried the issue in appeal before the Tribunal by way of Ground No.2 raised in the present appeal.

In the facts and circumstances of the present case the issue that arises for consideration is that whether the amount received by the Assessee as partner, which is admitted to be on account of revaluation of assets of the firm, can be claimed as exempt under section 10(2A) of the Act and if not, whether such amount is taxable in the hands of the partner.

On perusal of Section 10(2A) of the Act we find that for taking benefit of the said Section 10(2A) of the Act the amount should qualify as ‘share in the total income of the firm’. In the case of CIT Vs. Hind Construction Ltd (1972) 83 ITR 211 (SC) it was held by the Hon’ble Supreme Court that where assets are revalued and the effect is given in the books by crediting partners’ accounts, no actual sale or transfer to an independent person takes place, and therefore, no profit arises that can be taxed as business income. Revaluation of assets is not a taxable event by itself; it does not create ‘profit’ in the ordinary commercial or tax sense. Thus, it was held that the distribution of surplus arising from revaluation of capital assets of the firm amongst the partners did not result in taxable income/profits in the hands of the partners.

Subsequently, Section 45(4) of the Act was inserted by way of Finance Act, 1987 [and Section 2(47)(ii) of the was omitted]. Section 45(4) provided for, inter alia, taxation of capital gains on transfer of capital asset by way of distribution of capital assets of firm on account of dissolution of the firm or otherwise, in the hands of the firm (and not the partners). In the case of CIT v. A.N. Naik Associates (2004) 265 ITR 346 (Bom) it was held by the Hon’ble Bombay High Court that the transfer of assets of the partnership to the retiring partners would amount to transfer of capital assets, attracting capital gains under Section 45(4) of the Act.

We note that subsequently in the case of CIT Vs. Mansukh Dyeing & Printing Mills (2022) 449 ITR 439/145 taxmann.com 151 (SC), the Hon’ble Supreme Court held that the revaluation of assets of partnership firm followed by the credit of the revaluation surplus to partners capital account was, in effect, distribution of increased value of the assets of the firm amongst the partners, and therefore, the same constituted transfer attracting the provisions contained in Section 45(4) of the Act. Therefore, it was held that the income arising from such transfer would be computed and taxed as capital gains in the hands of the firm in terms of Section 45(4) of the Act.

We note that Section 45(4) of the Act has since been substituted and Section 9B of the Act has been inserted by the Finance Act, 2021. However, the amended provisions are effective from 01/04/2021 and therefore, have no application to the present appeal which pertains to Assessment Year 2011-2012. Therefore, we find merit in the contention advance on behalf of the Assessee that in the facts and circumstances of the present case and as per the judgment of the Hon’ble Supreme Court in the case of Mansukh Dyeing & Printing Mills (supra) the profits/income, if any, was taxable in the hands of the partnership firm and not the partner/Assessee.

We further note that by way of Circular No.8 of 2014, dated 31/03/2014, issued by the Central Board of Direct Taxes (CBDT) it was clarified that the income of a firm is to be taxed in the hands of the firm only and not in the hands of its partners.

In view of the above we hold that though the benefit of Section 10(2A) of the Act cannot be extended to the Assessee in the facts and circumstances of the present case, the amount in question (admittedly being surplus arising on account of revaluation of assets of the firm) cannot be brought to tax in the hands of the partner/Assessee since the same would have been taxable in the hands of the partnership firm in terms of Section 45(4) of the Act. Accordingly, addition of INR.1,37,70,000/- made by the Assessing Officer in the hands of the Assessee is deleted and Ground No.2 raised by the Assessee is allowed in part. All the other grounds raised by the Assessee are dismissed having been rendered academic in nature in view of the fact that we have deleted the addition on merits.

In result, in terms of paragraph 14 above, the appeal preferred by the Assessee is partly allowed.

""यथ"/ The Respondent. 3. संबंिधतआयकरआयु"/ Concerned CIT 4. आयकरआयु"(अपील) / The CIT(A) 5. िवभागीय"ितिनिध, आयकरअपीलीयअिधकरण/ DR, ITAT, 6. गाड"फाईल /Guard file. आदेशानुसार/BY ORDER, उप/सहायकपंजीकार (Dy./Asstt.