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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri Aby.T.Varkey, JM & Dr.Arjun Lal Saini, AM]
Per Dr. A.L. Saini, AM
This is an appeal by the Revenue against the order dated 23.05.2013 of CIT(A)-I, Kolkata relating to AY 2008-09.
The Assessee is a company. For AY 2008-09, the Assessee filed a return of income declaring total loss at Rs.51,360/-. The Assessee along with M/S.Wellgrowth Griha Nirman Pvt.Ltd., M/S. Blue Heaven Griha Nirman Pvt.Ltd., and M/s.Orchid Griha Nirman Pvt.Ltd., were partners in a partnership firm by name M/S.Salarpuria Soft Zone. The loss declared by the Assessee was on account of share of exempt profit from the partnership 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. The assesse has shown, mainly, income from share of profit transferred from partnership firm Viz,M/s Salarpuria Soft Zone.
M/s. Command Constructions Pvt. Ltd. A.Y.2008-09
Subsequently proceedings u/s.147 of the Act were initiated by issue of a notice u/s.148 of the Act dated 3.11.2011 which was served on the Assessee on 4.11.2011. The reasons recorded by the AO before issuing notice u/s.148 of the Act reads thus: "It transpires from communication from O/o Joint Commissioner of I. T., Range - 56, Kolkata that M/s. Salarpuria Softzone (PAN ABEFS2661L) had revalued its assets and transferred the revalued reserve to its partners' account and the assessee as above being a partner itself had received Rs.37,03,36,187/- on account of such 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. T Act, 1961. Notice u/s 148 be issued.”
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 (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.
M/s. Command Constructions Pvt. Ltd. A.Y.2008-09 5. 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.
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 assessee 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 assessee 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 of Rs.250 crores.
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 3
M/s. Command Constructions Pvt. Ltd. A.Y.2008-09 said land with corresponding credit to the capital accounts of each of the said three companies. 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 assessee. The completed industrial park was mostly leased out by March, 2008.
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/-
The amount of revaluation was credited to the current accounts of the four partners in their profit sharing ratio. Thus, the current account of each of the said three companies was credited by Rs.37,03,36,187/- and that of the fourth company having 70% share by Rs.259,23,53,313/-.
On the above facts which are not in dispute, the question before the AO was as to whether the credit to the current account of the Assessee in the M/s. Command Constructions Pvt. Ltd. A.Y.2008-09 partnership firm M/S.Salarpuria Soft Zone of a sum of Rs.37,03,36,1874/- 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. The land was contributed by the said three companies during the previous year ended March 31, 2008 relevant to the assessment year 2008-09 for a sum of Rs.314,29,74,600/- (value of the land on revaluation as on 31.3.2008) by way of capital contribution when it was converted into fixed assets from inventory by the said firm.
(b) Section 45(3) of the Act was applicable in respect of such transfer made during the previous year relevant to the assessment year 2008-09. The revalued figure of Rs.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 Rs.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. Rs.96,37,85,635/- as short term capital gains.
(c) The land was grossly undervalued till it was part of inventory in the books of the said firm to avoid the market value of the land of Rs.314,29,74,600/- being taken into consideration and consequently to avoid higher taxes on capital gains in the hands of the said three companies.
M/s. Command Constructions Pvt. Ltd. A.Y.2008-09 (d) The revaluation amount of Rs.370,33,61,874/- was real profit and not notional and had been credited to the current accounts of the four partners in their profit sharing ratio each of whom had withdrawn substantial amounts almost 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 Rs.37,03,36,187/- as partners entitled to 10% share in the partnership land the fourth company (Wellgrowth Griha Nirman P.Ltd) having 70% share was liable to be taxed on Rs.259,23,53,313/-.
The AO thus computed the total income of the Assessee in the order u/s.147 of the Act .
Before CIT(A) the assessee submitted that initiation of re-assessment proceedings u/s 148 of 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.
On the above contention the CIT(A) held as follows :- “The reasons recorded 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 revaluation amount to the partners' accounts alleged to have been received by the partners. One has to bear in mind the scheme of the Act in the matter of taxation of a Firm and its partners. According to section 10(2A) of the Act the share of a partner in the total income of the firm is exempt in his hands. What is taxed in the hands of the partner is only the amount of interest, salary, bonus, commission or remuneration which has 6
M/s. Command Constructions Pvt. Ltd. A.Y.2008-09 been allowed as a deduction in the assessment of the firm in terms 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 as is apparent from the observation made by him in his order. Even if one proceeds on the basis that the revaluation of assets by the firm gave rise to taxable income, such income can only be considered in the firm's assessment. That the firm did not disclose any income on account of revaluation and did not pay any tax on such income does not confer jurisdiction upon the partner's Assessing Officer to reopen the partner's assessment on the allegation of escapement of 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.”
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 erred in law and on the facts & circumstances of the case by adjudicating that the Assessing officer acted without jurisdiction by issuing notice U/s148 of the I.T. Act, 1961 for making assessment U/s147 of the I.T. Act, 1961.
2. The Ld. CIT(A) has erred in law and on the facts & circumstances of the case in deleting the addition of Rs 96,37,85,635/-,added as short term capital gains earned by the assessee on transfer of land property to the partnership firm as their capital contribution, 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 Rs. 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 for Rs.96,37,85,635/- and addition of Revaluation Profit received for Rs. 37,03,36,187/- has resulted towards additions of the same amount twice whereas 7 M/s. Command Constructions Pvt. Ltd. A.Y.2008-09 both the issues of addition are different from each other and have been added back for different reasons.
The Ld. CIT(A) has erred in law and on the facts & circumstances of the case in deleting the additions of Rs37,03,36,187/- by not giving cognizance to the issue & fact that this assesse company alongwith 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.
15. The Ld AR for the assesse has submitted before us that the issue under consideration are fully covered by the order dated October 19, 2016 passed by the “A” Bench of Hon`ble Tribunal Kolkata in /Kol/ 2013 ( Orchid Griha Nirman Pvt. Ltd) involving the same assessment year viz. 2008-09. The relevant paras of the judgment is reproduced below: “25. We have heard the submissions of the ld. Counsel for the assessee and the ld. DR. The ld. DR relied on the order of AO. The ld. Counsel for the assessee relied on the submissions as were made before CIT(A) and relied on the order of CIT(A). He further placed reliance on the decision of the Hon’ble Supreme Court in the case of Sanjeev Wollen Mills Vs. CIT 279 ITR 434 (SC) wherein the Hon’ble Supreme Court held that by showing Market value of closing stock, assessee cannot be said to have made profit which was necessary for taxing income under the Act.
26. We have given a very careful consideration 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 was an issue which had to be dealt with in the assessment of the firm, which is a separate taxable entity. The Assessee’s source of income is “share income from partnership firm”. Even assuming that income accrued and arose in the hands of the firm consequent to revaluation of the assets by the firm, the income that might accrue in the hands of the partner would be in the nature of “share income from the firm”. In terms of Sec.10(2A) of the Act, partner’s share in the total income of the firm is not to be included in the total income of the 8
M/s. Command Constructions Pvt. Ltd. A.Y.2008-09 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 held to be not valid in law by the CIT(A).
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).
In the result, the appeal by the Revenue is dismissed.”
This way, the ld AR for the assessee has submitted before us that reopening the assessment U/s 147/148 was without any tangible material therefore, the said reopening of the assessment U/s 147/148 was bad in law, as rightly held by the Hon`able Tribunal in the /Kol/ 2013 ( Orchid Griha Nirman Pvt. Ltd) (supra). As rightly pointed out that even assuming that income accrued and arose in the hands of the firm consequent to revaluation of the assets by the firm, the income that might accrue in the hands of the partner would be in the nature of “share income from the firm”. In terms of Sec.10(2A) of the Act, partner’s share in the total income of the firm is not 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. Considering the M/s. Command Constructions Pvt. Ltd. A.Y.2008-09 factual position, we are of the view that ld CIT (A) has rightly deleted the addition therefore we confirm the order of ld CIT (A).
In the result, the appeal filed by the Revenue (on all the grounds), is dismissed. Order pronounced in the Court on 15/03/2017
Sd/- Sd/- (A.T.VARKEY) (DR.ARJUN LAL SAINI) Judicial Member Accountant Member Kolkata, dated 15/03/2017 Prakash Ku.Mishra, Sr.Private Secretary आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant- ITO Ward-1(4), Kolkata 2. ��यथ� / The Respondent.-M/s Command Constructions Pvt.ltd. 3. आयकर आयु�त(अपील) / The CIT(A), Kolkata. 4. आयकर आयु�त / CIT �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 5. 6. गाड� फाईल / Guard file. स�या�पत ��त //True Copy// आदेशानुसार/ BY ORDER,