INCOME TAX ACT, 1961

Section 45

Capital gains - Chargeability - Credit in partner's capital account on revaluation of assets - Assessee did not receive any sum over and above value of its investments

Assessee was a partner in Pranik Landmark Associates ('Firm'). On 1-4-2007, said firm revalued its asset 'Development rights in land' which resulted in an appreciation of Rs. 262,12,92,699 and firm credited Partners' Current Account in their profit-sharing ratio and accordingly a sum of Rs. 10,48,51,708 was credited to assessee's account (4% share). Assessee having followed conservative treatment for accounting of revaluation reserve credit and hence, had not passed entry in its books of accounts in financial year 2007-08, for revaluation done by firm. Vide retirement Deed, the assessee retired with effect from 1-4-2009. Upon retirement, assessee received Rs. 11,34,07,570 being amount standing to its credit in books of Pranik Landmark Associates. Assessee credited Rs. 10,48,51,708 as share in revaluation profit from Firm and claimed exemption under section 10(2A). AO held that assessee was not eligible for exemption under section 10(2A) as amount was received from firm on revaluation of assets. AO also levied capital gain tax on the ground that assessee had relinquished/assigned its rights in firm and assets in favour of continuing partners. Held: Much prior to retirement i.e. on 1-4-2007, partnership firm re-valued its asset, i.e “Development rights in land” which resulted in appreciation of Rs. 262,12,92,699 and correspondingly credit in partner's current account in their respective profit sharing ratio. In response to this revaluation, no correspondingly entry was passed in books of assessee company as on 31-3-2008, by increasing investment made in Pranik Landmark Associates with. The assessee passed this entry belatedly only in the year of receipt of actual money from Pranik Landmark Associates i.e. during financial year 2009-10 relevant to assessment year 2010-11 in which year, it retired from Pranik Landmark Associates. Pursuant to assessee passing this entry during assessment year 2010-11 in its books for revaluation, amounts ultimately received by assessee from partnership firm exactly matched with investments made in partnership-firm. In other words, assessee did not receive any sum over and above value of its investments from Pranik Landmark Associates. Hence, there could not be any levy of capital gains or any levy in the nature of income within meaning of section 2(24) in assessee's hands.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2010-11

INCOME TAX ACT, 1961

Section 115JB

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