Addition made on capital gain on revaluation of land to partners are not sustainable under law for Conversion of partnership firms can be considered only in the hands of the firms under Section 47(xiii)(b): ITAT [Read Order]

The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) he that capital gain on revaluation of land to partners are not sustainable under law for Conversion of partnership firms can be considered only in the hands of the firms under Section 47(xiii)(b) of the Income Tax Act.

Yougstar Infrastructure Partnership Firm constituted on 7.11.2006 with five partners, including the two respondents herein. The business of the Partnership Firm was of dealing in land, development thereof, carrying out commercial and residential construction work and to carry out other related activities.

One of the Partners brought into the partnership two pieces of land as his capital. Thus capital account in the books of the firm was credited by an amount of Rs.2,11,41,990/-. The profit sharing ratio was 50% to the Partner who brought in the land as Capital contribution and the remaining four Partners profit sharing ratio was 12.5% each.

This Partnership was re-constituted by a deed dated 01-05-2008 by admitting three more Partners with effect from 01-05-2008. The profit sharing ratio was 20% each to the Partner who brought in the land originally and three newly admitted Partners. Remaining four original Partners profit sharing ratio was 5% each. The land of the Partnership Firm was got revalued on 10.08.2008 by an Approved Registered Valuer and the value of the land was arrived at Rs.7,80,02,176/-.

Subsequently, the Partnership firm was converted into Private Limited Company on 23.09.2008. All the Partners of the erstwhile Partnership firm were allotted shares of the company in proportion to the Fixed Capital held by them in the erstwhile firm. The current capital, attributable to the share received on account of revaluation of land, was converted into unsecured loans.

Chanakya Infrastructur, another Partnership firm executed on 12.02.2007 with 10 Partners including the two respondents herein. The business of the Partnership firm was that of dealing in land, development thereof, carrying out commercial and residential construction work and to carry out other relating activities. Five of the Partners brought in five pieces of land into the Partnership firm.

In consideration of the said land brought in, the Capital Accounts of three partners were credited by Rs.1,03,036/- each and two partners capital accounts were credited by Rs.1,28,133/- each. The profit sharing ratio was 10% each to the above mentioned partners. Out of the remaining five partners, three partners share was 12% each and two persons share was 7% each. Thus Respondent’s share of profit was 12%.

The land brought in the Partnership Firm was got revalued by an Approved Registered Valuer on 10.8.2008. According to the revaluation report, the value of land was Rs.42,71,87,326/- The difference between the original value and the value on revaluation was credited to the Partner's Capital Accounts in proportion to their profit sharing ratio. In the process, the Respondent's Capital Account was credited by an amount of Rs.5,12,62,479/-,

Subsequently, the Partnership Firm was converted into Private Limited Company on 23.09.2008. The current capital, attributable to the share received on account of revaluation of land, was converted into unsecured loans in respective names of the share hoers of the Private Limited Company. With this factual back ground, while passing the assessment order, the  Assessing Officer he that M/s. Yougstar Infracon Pvt. Ltd. and M/s. Chanakya Infracon Pvt. Ltd. allotted shares worth Rs. 12 lakhs and Rs.35 lakhs respectively to the Assessee herein.

The assessee’s contention was that it is only a book entry and not actual profit was not accepted by the AO and thereby he he that the Respondent/assessee earned income on revaluation of land; but he did not follow the provisions prescribed under Section 47(xiii)(b) of the Income Tax Act at the time of conversion of the Firm into Company; thus the assessee earned Rs.39,00,109/- and Rs.5,12,62,479/- from the above mentioned companies respectively and therefore the total of the said sums amounting to Rs.5,51,62,588/- was being assessed as casual and non-recurring income in view of Section 2(24) read with Section 28 of the Income Tax Act and added as the income of the assessee.

Aggrieved against the assessment order the assessee filed an appeal before Commissioner of Income Tax. Aggrieved against the appellate order the Revenue appealed before the tribunal.

After hearing both the parties, the two member bench consisting of Waseem Ahmed (Accountant member) and T.R. Senthil Kumar (Judicial member) held that the addition made on account of capital gain on revaluation of land made in the hands of the Partners are not sustainable in law and the Grounds raised by the Revenue are devoid of merits. Thus the appeal was dismissed.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates