No capital gain tax liability on receipt of credit in partner’s capital account due to revaluation of firm

Lupin Investments Private Limited Vs DCIT (ITAT Mumbai)

Conclusion: Since assessee did not receive any sum over and above the value of its investments from partnership firm on revaluation of assets, therefore, there could not be any levy of capital gains or any levy in the nature of income upon retirement of assessee from firm within the meaning of Section 2(24) in the hands of assessee.

Held:  Assessee was a partner in the firm Pranik Landmark Associates (‘Firm’). On 1st April 2007, the said firm revalued its asset ‘Development rights in land’ which resulted in an appreciation of Rs 262,12,92,699/- and 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 retired with effect from 1 April 2009 and upon retirement, assessee received Rs 11,34,07,570/- being the amount standing to its credit in the books of Pranik Landmark Associates.  Assessee credited Rs 10,48,51,708/-as share in revaluation profit from Firm and claimed an exemption u/s 10(2A) in the Return of Income. Assessee also reduced the said amount while computing book profits under Section 115JB. AO observed that assessee was not eligible for exemption u/s.10(2A) as amount was received from firm on revaluation of assets. AO also levied capital gains on the ground that assessee had relinquished / assigned its rights in the firm and assets in favour of the continuing partners. It was held that much prior to the retirement i.e. on 01/04/2007, the firm re-valued its asset i.e “Development rights in land” which resulted in appreciation of Rs.262,12,92,699/- and correspondingly credited partner’s current account in their respective profit sharing ratio in the books of that firm. In response to this revaluation, no entry was passed in the books of the assessee firm as on 31/03/2008, by correspondingly increasing the investment made in Pranik Landmark Associates with corresponding credit to current account of the partners of the assessee firm. Assessee passed this entry belatedly only in the year of receipt of actual money from Pranik Landmark Associates i.e. during the F.Y.2009-10 relevant to A.Y.2010-11 in which year, it retired from Pranik Landmark Associates. Pursuant to assessee passing this entry during A.Y.2010-11 in its books for the revaluation, the amounts ultimately received by assessee from the partnership firm exactly matched with the investments made in the partnership firm. Assessee did not receive any sum over and above the 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 the meaning of Section 2(24) in the hands of assessee.

FULL TEXT OF THE ITAT JUDGEMENT

These cross appeals in ITA No.2752/Mum/2014 & 3366/Mum/2014 for A.Y.2010-11 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-21, Mumbai in appeal No.CIT(A)21/IT/189/2013-14 dated 28/02/2014 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/03/2013 by the ld. Dy. Commissioner of Income Tax-10(1), Mumbai (hereinafter referred to as ld. AO).

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