ASST CIT (OSD) -I CEN RG 7, MUMBAI vs. SUKHRAJ B NAHAR, MUMBAI

This appeal has been filed by the revenue against order dated 25/06/2014 passed by the Ld. Commissioner of Income Tax (Appeals)- 40, Mumbai, for the assessment year 2006-07, whereby the Ld. CIT (A) has allowed the appeal filed by the appellant/assessee against assessment order passed u/s 143 read with section 153A of the Income Tax Act, 1961 (for short ‘the Act’).

Brief facts of the case are that the assessee a partner in M/s Nahar & Seth Enterprises, M/s Nahar Builders and M/s Shanti Enterprises, having income from salary, business, capital gain and other sources, filed his return of income u/s 139(1) of the Act, for the assessment year under consideration declaring the total income of Rs. 32,53,096/- on 31.03.2007. Subsequently, search and survey action was carried out on 2 Assessment Year: 2006-07 02.02.2012 on ‘Nahar Group’ of cases, its individuals and associate concerns. Based on the seized papers and other incriminating documents found during the course of search, the assessee was confronted and his statement was recorded. Accordingly, notice u/s 153A of the Act was served upon the assessee. In response to the said notice the assessee filed return of income declaring undisclosed income. During the course of assessment it was noticed that the assets of the firm M/s Shanti Enterprises, had revalued the assets of the firm on the basis of appreciation in the value of landed property and the amount of appreciation was credited to the accounts of the partners. Accordingly, a sum of Rs. 43,27,322/- was credited to the capital account of the assessee. The AO relying on the judgment of Hon’ble Bombay High Court delivered in CIT vs. A.N. Naik Association 265 ITR 346 treated the said amount taxable in the hands of the assessee and determined the income of the assessee at Rs.78,80,420/-.

In the first appeal, the Ld. CIT(A) deleted the addition relying on the judgments/orders of the Hon’ble Supreme Court, High Court and the Income Tax Tribunal.

Aggrieved by the order of Ld. CIT (Appeals), the revenue has preferred this appeal before the Tribunal raising the following effective grounds:- i. “Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) failed to appreciate the fact that the revaluation of assets of the firm instead of being kept in Revaluation Reserve had been credited directly to the Partners Capital thereby enriching the personal capital.

Before us, the Ld. Departmental representative relying on the assessment order submitted that the Ld. CIT(A) has deleted the addition without appreciating the fact that the firm has credited the revaluation of assets of the firm to the capital accounts of the firm instead of keeping the same in revaluation reserve; that the amount in question is nothing but an income in the hands of the partners including the assessee under the head ‘income from other sources’ read with section 28 of the Act. Ld. DR further submitted that since the impugned order is erroneous, the same is liable to be set aside.

On the other hand, the Ld counsel for the assessee relying on the order passed by the Ld. CIT(A) submitted that since, the findings of the Ld. CIT(A) are based on the principles of law laid down by the Hon’ble Supreme Court, various High Courts and the decisions of the various Benches of the ITAT, there is no merit in the appeal of the revenue.

We have heard the rival contentions and carefully gone through the entire record including the cases relied upon by the authorities below. The only grievance of the revenue is that the Ld. CIT(A) has wrongly 4 Assessment Year: 2006-07 deleted the addition made by the AO. We notice that the Ld. CIT(A) has deleted the addition relying on the following judgments/orders: i) CIT vs. Hind Construction Ltd.1974 CTR 157(SC), ii) CIT vs. Kunnamkulam Mill Board 257 ITR 544, iii) ITO vs. Paru D Dave 110 ITD 410 Mum. ( Tribunal) , iv) DCIT vs. Manish M Chheda 29 SOT 138 Mum. (Tribunal) and v) Girish Textile Industries vs. ACIT 10 SOT, Mum (Tribunal)

The concluding para of the impugned order passed by the Ld. CIT(A) reads as under: “12. In view of the above discussion, as also in view of the case laws discussed hereinabove, I hold that revaluation of assets by the partnership firm and crediting of his shares in such increased value to the capital account of the partners, is not a taxable event. Further relevant details regarding revaluation of assets (property) has been furnished. This property was initially valued at Rs. 7,15,957/-but as per fresh evaluation its value is worked out at Rs. 2.07,15,957/-. Increased value has been credited to the capital account of the partners, otherwise Balance Sheet of the assessee cannot be balanced. It however does not amount to any benefit or transfer to the partners. In any case this credit cannot be treated as unexplained in the hands of the assessee. Further it does not constitute ‘transfer of assets’ as defined u/s 2(47) of the Act. Such an arrangement also does not attract the provisions of Sec. 45(4) of the Act, which are attracted only on dissolution of partnership firm. Accordingly, I hold that the amount of Rs. 43,27,322/- credited to the capital account of the appellant on revaluation of the assets of partnership firm is not chargeable to tax. Therefore, the addition of Rs. 43,27,322/- made by the AO is directed to be deleted and the grounds of appeal taken by the appellant in this regard are allowed.”

In the case of ITO vs. Paru D Dave 110 ITD 410 Mum.(supra) the coordinate Bench of the Tribunal has decided the identical issue in favour of the assessee holding as under:

The coordinate Bench of the Tribunal has already decided the identical issue in favour of the assessee in ITO vs. Paru D Dave (supra)