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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri P. M. Jagtap, AM & Shri K. Narasimha Chary, JM]
1 ITA No. 2270/Kol/2013 Blue Heaven Griha Nirman Pvt. Ltd., AY 2008-09 IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH: KOLKATA [Before Shri P. M. Jagtap, AM & Shri K. Narasimha Chary, JM] I.T.A No. 2270/Kol/2013 Assessment Year: 2008-09 Income-tax Officer, Wd-1(4), Kolkata. Vs. Blue Heaven Griha Nirman Pvt. Ltd. (PAN: AACCB3287F) (Appellant) (Respondent)
Date of hearing: 08.11.2016 Date of pronouncement: 16.11.2016
For the Appellant: Shri Niraj Kumar, CIT, DR For the Respondent: Shri S. Jhajharia, CA & Shri Sujoy Sen, Advocate ORDER Per Shri K. Narasimha Chary, JM: This appeal by revenue is arising out of order of CIT(A)-I, Kolkata vide appeal No. 393/CIT(A)-1/1(4)/12-13 dated 23.05.2013. Assessment was framed by ITO, Ward-1(4), Kolkata u/s. 143(3)/147 of the Income-tax Act, 1961(hereinafter referred to as the “Act”) for AY 2008-09 vide his order dated 25.03.2013.
Brief facts of the case are that the assessee along with two other companies viz. Command Construction Pvt. Ltd. and Orchid Griha Griha Nirman Pvt. Ltd. (hereinafter collectively referred to as "the said three companies”) purchased a piece of land at Rs.21,87,76,492/- on March 30, 2005 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. The Assessee along with M/S. Command Constructions Pvt. Ltd., M/s Orchid Griha Nirman Pvt. Ltd., and M/s. Wellgrowth Grha Nirman Pvt. Ltd., were partners in a partnership firm by name M/S. Salarpuria Soft Zone having 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
2 ITA No. 2270/Kol/2013 Blue Heaven Griha Nirman Pvt. Ltd., AY 2008-09 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 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. Various 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. 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 said to have been 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 :- Particulars Additions during the period Revaluation during the year Cost as on 31.3.2008 Land Rs. 25,16,17,696/- Rs. 289,13,56,904/- Rs. 314,29,74,600/- Building Rs. 119,02,85,430/- Rs. 81,20,04,970/- Rs. 200,22,90,400/- Revaluation during the year Rs.370,33,61,874/-
The amount of revaluation was credited to the current accounts of the 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/-. For AY 2008-09, the Assessee filed a return of income on 28.9.2008 showing current year loss at Rs.93,755/-. The income declared by the Assessee was on account of share profit transferred from the partnership firm M/S. Salarpuria Soft Zone. The return so filed was processed u/s.143(1) of the Act on 24.9.2009.
Subsequently, the Assessing Officer noticed that the partnership firm M/S.Salarpuria Soft Zone, of which the assessee company was a partner, had revalued its assets during the year ended with 31.3.2008 and transferred the Revaluation profit to its partners’ current account in their respective profit or loss sharing ratio and the assessee received a sum of Rs.37,03,36,187 on account of such revaluation profit. Stating that on that score there was reason to believe that the said receipt escaped Assessment, Assessing Officer initiated
3 ITA No. 2270/Kol/2013 Blue Heaven Griha Nirman Pvt. Ltd., AY 2008-09 proceedings u/s.147 of the Act 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 read 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." 4. After hearing the assessee, the Assessing Officer, on considering the question as to whether the credit to the current account of the Assessee in the partnership firm M/S.Salarpuria Soft Zone of a sum of Rs.37,03,36,187/- gave raise to any income chargeable to tax, added back such sum to the total income of the assessee, on the premise, 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. (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
4 ITA No. 2270/Kol/2013 Blue Heaven Griha Nirman Pvt. Ltd., AY 2008-09 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/- and the fourth company having 70% share was liable to be taxed on Rs.259,23,53,313/- .
Assessing Officer thus computed the total income of the Assessee in the order u/s.147 of the Act as follows:
Total Income as per I.T.Returns for AY 2008-09 (-)Rs.93,755/- Add: i) Short Term Capital Gains accrued Rs.96,37,85,635 ii) Share of "Revaluation Profit" Rs.37,03,36,187 Assesseed Total Income Rs.133,40,28,067/- R/o: Rs.
Challenging the said order of the Assessing Officer, the assessee preferred an appeal before the learned CIT(Appeals) contending, inter alia, that the initiation of proceedings under section 147 of the Act was bad in law, order of the Assessing Officer rejecting the contentions raised by the assessee is very cryptic, addition of Rs. 37,03,36,187/- suffers double taxation inasmuch as it was already included in Rs.96,37,85,635/-, Assessing Officer was wrong in treating the increase in value of assets of firm due to revaluation as income in the hands of the assessee. Learned CIT(Appeals), by way of impugned order, accepted the above contentions of the assessee and allowed the appeal of assessee. Challenging the said findings of the learned CIT(Appeals), the Revenue carried the matter in this appeal on the following grounds: “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/s. 147 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 where as both the issues of addition are different from each other and have been added back for different reasons.
5 ITA No. 2270/Kol/2013 Blue Heaven Griha Nirman Pvt. Ltd., AY 2008-09 5. The Ld. CIT(A) has erred in law and on the facts & circumstances of the case in deleting the additions of Rs.96,37,85,635/- added as Short Term Capital Gains and addition of Revaluation Profit for Rs.37,03,36,187/-, by not giving cognizance to the issue & fact that this assessee company along with 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.”
We have heard the learned counsel on either side and perused the material papers on record. Learned DR and AR addressed arguments in consonance with their case and reiterated the contentions raised before the learned CIT(Appeals). At the outset, we find it convenient to deal with the issue relating to the propriety of initiation of proceedings under section 147 of the Act. On this aspect, the observations of the learned CIT(Appeals) are as follows :- "Grounds No. 1 to 5 is regarding validity of re-assessment proceedings. The AO has reopened the proceedings within four years from the end of the assessment year and for intimation u/s 143(1) was issued. The first aspect is as to whether having regard to the reasons recording, the AO was competent to initiate proceedings under section 147 by issue of notice under section 148. The assessment year involved is 2008-09 for which the notice under section 148 was issued within four years on November 3, 2011. There was no assessment in the appellant's case for the assessment year 2008-09 and its return was processed under section 143(1). It cannot therefore be said that the initiation of proceedings under section 147 was by way of change of opinion. In the absence of an assessment under section 143(3), it cannot be said that the AO formed an opinion which he sought to change. The only question is as to whether the AO formed any belief that any income in respect of which the assessee was chargeable to tax had escaped assessment enabling him to initiate reassessment proceedings. To decide upon this issue reasons recorded for reopening the assessment needs to be examined and such Reasons are reproduced herewith as follows: "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. TAct, 1961. Notice u/s 148 be issued."
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 been allowed as a deduction in the assessment of the firm in
6 ITA No. 2270/Kol/2013 Blue Heaven Griha Nirman Pvt. Ltd., AY 2008-09 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 paragraph 7.2 of 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 onty 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."
In Sanjeev Woolen Mills v. CIT, (2005) 279 ITR 434 (at pages 447-8) the Hon'ble 8. Supreme Court held that,-
" 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 CITv. Birla Gwalior (P.) Ltd [1973J 89 ITR 266 (SC), which was pronounced in CIT v. Shoorji Vallabhdas and CO. [1962J 46 ITR 144 (Se)." 9. Further more, along with the assessee, one M/s. Orchid Griha Nirman Pvt. Ltd., one of the partners of M/S.Salarpuria Soft Zone also faced the same situation of reassessment under section 147 of the Act. They have challenged the order under section 147 of the Act in I.T.O. Vs. M/s. Orchid Griha Nirman Pvt. Ltd. ITA No.2269/Kol/2013. A coordinate Bench of this Tribunal, by way of order dated 25.08.2016 (A.Yr.2008-09), allowed the appeal. Observations of the Bench on the aspect of propriety of proceedings under section 147 of the Act are as follows:
7 ITA No. 2270/Kol/2013 Blue Heaven Griha Nirman Pvt. Ltd., AY 2008-09 “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 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).”
On a careful perusal of the order of the learned CIT(Appeals), we do not find any legal infirmity or illegality in his order to interfere. Findings of the learned CIT(Appeals) are impeccable, and are in accordance with the law laid down by the Hon’ble Apex Court in Sanjeev Woolen Mills v. CIT, (2005) 279 ITR 434. The ratio of decision in the case of M/s. Orchid Griha Nirman Pvt. Ltd. supra is applicable to the facts of this case on all fours, inasmuch as the facts of both the cases emanate from the same transaction. We, therefore, while respectfully following the established judicial reasoning referred to above, hold that the facts of the case do not warrant any interference with the impugned order of the learned CIT(Appeals) on the aspect of proceedings under section 147 of the Act, and accordingly, uphold the same. Ground No 1 of the Revenue stands dismissed.
Since we held in the preceding paragraphs that the proceedings under section 147 of the Act are bad under law, we do not propose to delve deeper into the merits of other grounds since it would only be academic. On this score, other grounds are also dismissed.
In the result, the appeal by the Revenue is dismissed.
Order is pronounced in the open court on 16.11.2016 Sd/- Sd/- (P. M. Jagtap) (K. Narasimha Chary) Accountant Member Judicial Member
Dated :16th November, 2016
Jd.(Sr.P.S.)
8 ITA No. 2270/Kol/2013 Blue Heaven Griha Nirman Pvt. Ltd., AY 2008-09 Copy of the order forwarded to:
APPELLANT – ITO, Ward-1(4), Kolkata. 1. Respondent –M/s. Blue Heaven Griha Nirman Pvt. Ltd., Laha Paint 2 House, 3rd Floor, 7, Chittaranjan Avenue, Kolkata-700 072. . The CIT(A), Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,
Asstt. Registrar.