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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Shri Aby. T. Varkey, JM & Shri M.Balaganesh, AM ]
Per M.Balaganesh, AM
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. 271/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.
The only issue involved in this appeal is as to whether the ld CITA was justified in deleting the addition of Rs 96,37,85,635/- towards capital gains u/s 45(3) of the Act in the facts and circumstances of the case.
2 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 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 24.10.2006 declaring total loss of Rs 63,011/- . The assessee along with M/s Command Constructions Pvt Ltd, M/s Orchid 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 exempt profit from the said partnership firm. The return was processed u/s 143(1) of the Act on 31.8.2007. The assessee had shown interest receipt of Rs 3,890/-. The ld AO reopened the assessment for the Asst Year 2006-07 on the ground that the capital gains of Rs 96,37,85,635/- had not been included by the assessee company in its return of income for the Asst Year 2006-07 and accordingly it had escaped assessment for which notice u/s 148 of the Act was issued . In the reassessment completed u/s 147/143(3) of the Act dated 28.3.2014, the income of the assessee firm representing short term capital gain of Rs 96,37,85,635/- was brought to tax. The brief facts of this addition is that 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 measuring 3,12,092 sq. ft. in Bellandur Village, Varthur Hobli, Bangalore East taluk (hereinafter referred to as “the said land”). The said land was advertised for sale. The assessee along with two other companies viz. Command Construction Pvt. Ltd. and Blue Haven Griha Nirman Pvt. Ltd. (hereinafter collectively referred to as "the said three companies") responded by offering a price of Rs.16,94,34,666. Subsequently, there were negotiations between the parties and the price was increased to Rs.22,36,79,266/- 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 Rs.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. 2
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3.1. The State Government guideline value for the purpose of registration and stamp duty in respect of the said land was Rs.260/- per sq. ft. whereas the purchase price paid by the said three companies was Rs.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 Rs.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" 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 ofRs.250 crores.
3.3. 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 3
4 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 capital account of the assessee was credited by Rs.8,15,00,000/-. The said firm accounted for the said land as work in progress and reflected it under "Current Assets" in its balance sheet. Diverse amounts were thereafter spent by the said firm on the development of the said land as an industrial park including construction thereon. Funds for the said purpose were provided by the fourth partner. The completed industrial park was mostly leased out by March, 2008.
3.4. On March 30, 2008, the said firm converted the said land, building and its amenities, which were 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 Rs.250 crores. The values of the land and building before and after revaluation are as under :-
Cost as on Revalued figure Extent of increase due to 30.03.08 as on 31.03.08 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.
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.
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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 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 thereafter an March 31, 2008 revalued it with consequent credit to the. partner's current accounts. vi) The partners entered into. the agreement far purchase of the land in June 2004 and conveyance was executed in their favour an March 30, 2005. Subsequent to. the said purchase, the area an which the land was situated underwent major development and became a premium destination for IT and ITES Companies ,
vii) Notwithstanding such price rise, in accordance with accounting principles, the land held as inventory was shown by the firm at cast
viii) It was only after conversion of inventory into. fixed assets that 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 Rs.250 crores. Such revaluation was neither colorable nor a device
ix) The revaluation by the. firm was made for financial purposes and no. tax advantage of any kind was sought to be derived thereby. Even in case of transfer of the capital asset, no. tax benefit or advantage will arise an account of the revaluation
x) 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. For purposes of 5
6 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 computing the capital gains, the value of the asset recorded in the books of the firm on the date 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.
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 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 assessment proceeding, for the assessment year 20'08-09, in case of this assessee company it had been contended that the aforesaid asset viz. 'Land' as contributed by the partners during the current year ended on 31.03.2006, and Capital gains if any can arise only in the. year when such asset 'was actually contributed by the partners, to the 'Partnership Firm', as their Capital Contribution, i.e. during the current year ended on 31.03.2006. ii) The Partnership Firm viz. "M/s Salarpuria Soft Zone" has transferred & converted the 'inventory' of "Land" into 'Fixed Assets' in its Books of account as on 30.03.2008. Subsequently on 31.03.2008 the, Land has been revalued at Rs.314,29,74,600/-, as per Valuers Report by the Partnership Firm. As such 6
7 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 value of "Land" asset, which was contributed way of Capital contribution by the assessee along with two other partners during the year ended on 31.03.2006, was ultimately recorded at its correct value at Rs.314,29,74,600/- by the 'Partnership Firm' during the year ended on 31.03.2008 i.e. after a gap of two years. iii) Hence in one day i.e. f fm 30.03.2008 to 31.03.2008, after converting the "Land" from inventory to Fixed Assets, the revaluation done is only a device to avoid the market value of cost of land of Rs.314,29,74,600/- taken and consequently to avoid higher taxes on Capital Gains by the company partners of the Partnership Firm viz. "M/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 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 Rs.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. Act'1961 will not be applicable and it is not liable to 'Capital Gain tax'. vii) From the details filed by the assessee it is clear that during the current year ended on 31.03.2006 or in subsequent years, assessee was never engaged in any 7
8 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 sort of trading or business activity. The assessee also was neither engaged in the Business of real estate by developing the aforesaid land during the current year ended on 31.03.2006 nor in subsequent years. Hence the aforesaid "Land" asset transferred by this assessee by way of Capital contribution to the Partnership Firm' viz "M/s Salarpuria Soft Zone", during the current year ended on 31.03.2006, is actually its 'Capital asset and by any stretch of imagination it cannot be a 'Current asset' or 'closing stock' or 'stock-in-trade' in the case of this assessee company. viii) Further the cost of aforesaid "Land" asset, after transfer by way of Capital contribution Partnership Fir viz., "M/s Salarpuria Soft Zone", has been shown by the assessee "Investment: 'Capital investment', in Partnership firm" by the assessee in its accounts. ix) The reflection of such/aforesaid "Land" asset as a 'Current asset' in the books. of account of the assessee company in the year ended on 31.03.2006 and recording of the actual market value of cost of aforesaid "Land' asset at Rs.314,29,74,600/- by the Partnership Firm viz. "M/s Salarpuria Soft Zone" in its Books of/account 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 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. 8
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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 a company name M/s Softzone Tech Park Limited (PAN: AAMCS5238D) latter on during the year ended on 31.03.2008. The revalued price of land was treated as 'Unsecured Loans' in the hands of M/s Softzone Tech Park Limited, as payable by it to this assessee company, which enabled the assessee partners of the erstwhile 'Partnership Firm' to withdraw value of 'land asset/property' at any point of time from the accounts of the company. xvi) The Hon'ble ITAT Cochin Bench has, in the case of K.T.C. Automobiles Pvt. Ltd. -vs- DCIT [2014] 41 taxmann.com 160 (Cochin -Trib.), in aforesaid similar case, held that such transactions would be subjected to capital gains tax. xvii) The ,ratio laid down by the Hon'ble Apex Court in the case of Mc Dowell & Co. Ltd. -Vs- CTO [1985] 154 ITR 148/22 Taxman 11(SC) is applicable in this present case wherein the transactions effected by the assessee are not bonafide or genuine but are sham, make believe, arranged one and are collusive. Hence such transactions should be regarded as hollow and colourable device and are not to be accepted by the tax authorities.
4.3. The ld AO held that the cost of land at Rs 314,29,74,600/- when partnership firm M/s Salarpuria Soft Zone has transferred and converted the inventory of ‘land’ into ‘fixed assets’, which has been contributed by this assessee along with two other aforesaid partners during the current year ended on 31.3.2006, wil be value of ‘capital asset’ recorded in the books of the 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 Rs 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 Rs 314,29,74,600/- in the books of the
10 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 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 Rs 313,81,06,404/- (i.e Rs 24,67,49,500, being the cost incurred by partner companies on purchase of land) + Rs 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 Rs 289,13,56,904/-. He held that hence assessee’s share thereon would be Rs 96,37,85,635/- requires to be taxed as short term capital gains for the Asst Year 2006-07.
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 Rs 96,37,85,635/-. Aggrieved, the revenue is in appeal before us.
We have heard the rival submissions and perused the materials available on record including the paper book of the assessee comprising of pages 1 to 124 of the paper book. The primary facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. It is not in dispute that the assessee along with other two partner companies had given land held as stock in trade as their capital contribution in the partnership firm M/s Salarpuria Soft Zone in Asst Year 2006-07. It is not in dispute that the said land was treated as stock in trade in the books of the partnership firm. Hence the closing inventory could be valued only at the lower of cost or market value. It is not in dispute that the stamp valuation authority had increased the 10
11 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 land value substantially after the date of purchase by the assessee. Hence the incremental valuation of land due to market performance could not be captured in the books of the partnership firm so as to project the real strength of the partnership firm. Hence for the purpose of showing the real market strength of the partnership firm, the land held as stock in trade was converted by the partnership firm into capital assets on 30.3.2008. On 31.3.2008, the said capital asset was revalued and the difference between the cost recorded and the revaluation figure was credited to the concerned partners account so as to enable the partnership firm to procure loans from bank for its business purposes. Based on this strength, the bank had also sanctioned heavy loans to the said partnership firm.
6.1. We find at the outset that in Asst Year 2006-07, the assessee along with other two partner companies had transferred their lands held as stock in trade 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 11
12 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 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 the converted land, the gains to the extent of revaluation arose which is merely a book entry. Infact that the assessee together with other two partner companies had actually paid Rs 21,87,76,492/- for purchasing the said land which was more than two and half times the State Government Guideline Value for Stamp Duty Purposes at the time of purchase in March 2005. The ld AR stated that 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 Municipal Corporation of Bangalore. He stated that the Municipal Corporation carried out various improvements in the area by constructing several flyovers and under passes ; supply of water was provided and sewerage lines were laid ; and in June 2007, the comprehensive development plan of Bangalore was revised and the FAR ratio for construction of buildings in the said area was increased from 2 to 3.25 because 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 said three companies as follows:-
DATE RATE RESIDENTIAL COMMERCIAL 2.8.2004 200 260 14.10.2005 800 1040 19.4.2007 1500 1950 26.9.2007 2200 3080 12
13 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 However, notwithstanding such price rise, in accordance with accounting principles, the land held as inventory could only be shown at its cost. Hence there cannot be any undervaluation of land 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 Rs 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 (SC) the 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 any real profit which is necessary for taxing the income under the Act as is held in Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) and CIT v. Hind Construction Ltd [1972 ] 83 ITR 211 (SC). Thirdly, it is a settled principle of income-tax law that it is the real income, which is taxable under the Act. This proposition was enunciated in CIT v. Birla Gwalior (P.) Ltd [1973] 89 ITR 266 (SC), which was pronounced in CIT v. Shoorji Vallabhdas and CO. [1962] 46 ITR 144 (SC)."
14 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 6.3. 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 pre- empt 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.
6.4. We find that the similar issue had come up for adjudication before this tribunal in the case of one of the partner’s case i.e M/s Orchid Griha Nirman Pvt Ltd in ITA No. 2269/Kol/2013 for Asst Year 2008-09 dated 19.10.2016. Yet another judgement rendered by this tribunal in assessee’s own case for the Asst Year 2008-09 in ITA No. 2270/Kol/2013 dated 16.11.2016 also supports our aforesaid view We find that in the case of yet another partner i.e M/s Command 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 Rs.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 14
15 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 companies of land at Bangalore and the facts with regard to transfer of the land by the three companies as capital contribution to a partnership firm during the financial year ended March 31, 2006 relevant to the assessment year 2006-07, cannot be disputed. The partnership deed, which provided that the said three companies would transfer the said land to the said firm as 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 work in progress under "current assets", was transferred to the said firm as capital contribution. The said land received from the said three companies was shown in the said profit and loss account and balance sheet as work in progress under "current assets" with corresponding credit to the partners' capital accounts. The purported finding of the ITO that the partners' capital accounts were not credited during the financial year ended March 31, 2006 for their capital 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 contribution. 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. 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. 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 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 15
16 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 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 of Rs.96,37,85,635/- in the hand of the Assessee on the ground that: (a) The partners' capital accounts were credited during the financial year ended March 31, 2006 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 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. (b) The 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 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 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.
As far as the question whether the AO was justified in bringing to tax a sum of Rs.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 and held as inventory at cost. The three companies paid Rs.21,87,76,492/- for purchasing the said land 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 16
17 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 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 Corporation carried out various improvements in the area by constructing several flyovers and under passes. Supply of water was provided and sewerage lines were laid. In June 2007, the comprehensive development plan of Bangalore was revised and the FAR ratio for construction of buildings in the said area was increased from 2.00 to 3.25 because 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 inventory was shown at its cost. Therefore it cannot be said that there was any undervaluation done by the Assessee as alleged by the AO.
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 Rs.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 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 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
18 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 taxation in their hands. We therefore concur with the view of the CIT(A) on this issue also. 30. We therefore confirm the order of the CIT(A) by holding that the assessee did not make any short term capital gains of Rs.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 Rs.37,03,36,187/- on account of alleged revaluation profit is not sustainable and was rightly deleted by the CIT(A). 31. In the result, the appeal by the Revenue is dismissed”.
6.5. Hence in view of the aforesaid findings in the aforesaid facts and circumstances and respectfully following the orders of this tribunal on similar set of facts, we hold that the order of the ld CITA granting relief does not call for any interference. Accordingly, the grounds raised by the revenue are dismissed.
The ld AR stated that the petition filed by the assessee under Rule 27 of the Income Tax Appellate Tribunal, Rules, 1963, is not pressed. Accordingly, the same is dismissed as not pressed.
In the result, the appeal of the revenue is dismissed and petition of the assessee under Rule 27 of the ITAT Rules is dismissed.
Order pronounced in the Court on 01.08.2018
Sd/- Sd/- [A.T. Varkey] [ M.Balaganesh ] Judicial Member Accountant Member
Dated : 01.08.2018 SB, Sr. PS 18
19 ITA No.570/Kol/2015 M/s Blue Heaven Griha Nirman Pvt. Ltd. A.Yr.2006-07 Copy of the order forwarded to: 1. ITO, Ward-1(4), Kolkata, 7th Floor, Aayakar Bhawan, P-7, Chowringhee Square, Kolkata-700069. 2. M/s Blue Heaven Griha Nirman Pvt. Ltd., Laha Paint House, 3rd Floor, 7, C.R. Avenue, Kolkata-700072. 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.