Hotel Mahalaxmi Vs ITO (ITAT Mumbai)
The appeal was filed by the assessee against the order dated 25 November 2025 passed by the CIT(A), National Faceless Appeal Centre, Delhi, for AY 2018-19. The assessee was a partnership firm engaged in running a hotel/restaurant under the name Hotel Maha Laxami at Andheri East, Mumbai, and had continuously possessed and occupied the premises since 1984.
During the relevant year, the assessee revalued its existing tenancy/leasehold rights on the basis of a valuation report issued by a Government-approved valuer. The revaluation was recorded as a book entry by debiting the fixed asset account and crediting the partners’ capital accounts. According to the material placed before the Tribunal, no new asset was acquired, no funds were introduced, no consideration was paid to any third party, and no depreciation was claimed on the revalued amount.
The Assessing Officer treated the revaluation amount of ₹18,19,51,875 as unexplained investment under Section 69 of the Income-tax Act, 1961. The CIT(A) upheld the addition.
Issue Before Mumbai ITAT
The principal issue before the Tribunal was whether revaluation of an existing tenancy right, without any inflow of funds or acquisition of a new asset, could be treated as unexplained investment under Section 69.
The assessee also challenged the extension of the limited scrutiny beyond the issue of substantial increase in capital without the necessary approval, and contended that capital contributions credited to partners’ accounts could not be treated as income of the partnership firm.
Tribunal’s Findings on Section 69
The Tribunal examined Section 69 and observed that the provision applies when an assessee makes an investment that is not recorded in the books and offers no explanation regarding its nature and source.
In the present case, the Tribunal found that there was no investment. The tenancy right had already existed with the assessee since 1984, the revaluation was recorded in the books, and there was no source of funds involved. The Tribunal therefore held that invocation of Section 69 was misconceived.
Revaluation and Real Income
The Tribunal observed that revaluation is a recognised accounting practice undertaken to reflect fair market value and does not result in real income, accrual or receipt. It relied upon CIT vs. Shoorji Vallabhdas & Company, 46 ITR 144, concerning taxation of real rather than hypothetical income.
The Tribunal further found that the tenancy right had not been acquired during the relevant year. Municipal records, business licences and rent receipts evidenced the assessee’s possession since 1984. Consequently, no new asset had been acquired and revaluation could not be equated with acquisition.
No Transfer Under Section 2(47)
The Tribunal also held that there had been no transfer within the meaning of Section 2(47) of the Act. There was no sale, relinquishment or extinguishment of rights, and the asset continued to be held by the assessee.
The Tribunal referred to judicial decisions concerning revaluation of assets and held that revaluation through book entries did not involve sale or transfer. It also considered the decisions cited regarding revaluation credits to partners’ accounts and the absence of transfer for purposes of Section 2(47).
The Tribunal noted that there had been no distribution of assets and that the partners at the beginning of the year continued to be the partners at the end of the year.
Final Decision
Considering the facts and the judicial decisions referred to in the order, the Tribunal held that the addition made by the Assessing Officer and sustained by the CIT(A) under Section 69 was not sustainable in law.
The Tribunal directed deletion of the ₹18,19,51,875 addition. The grounds raised by the assessee were allowed, and the appeal filed by the assessee was allowed.
The order was pronounced in the open court on 16 July 2026.
Cases Discussed
- Ravinshankar R. Singh v. ITO, [2014] 45 taxmann.com 359/63 SOT 136 (URO) (Mum. Trib.).
- ITO v. Smt. Paru D. Dave, [2008] 110 ITD 410 (Mum.).
- Asstt. CIT v. Vijay Talkies, [2007] 16 SOT 370 (Mum.).
- Sanjeev Woollen Mills v. CIT, [2005] 279 ITR 434/149 Taxman 431.
- ITO v. Ramesh M. Shah, [2004] 2 SOT 558 (Mum.).
- Well Pack Packaging vs. Dy. CIT, [2003] 130 Taxman 215 (Mag.) (Ahd.).
- CIT v. L. Lingmallu Raghukumar, [2001] 247 ITR 801/[2002] 124 Taxman 127.
- ITO v. Suresh Sood, [1990] 33 ITD 62 (Chd.).
- CIT v. Birla Gwalior (P.) Ltd., 89 ITR 266 (SC).
- CIT v. Hind Construction Ltd., 83 ITR 211 (SC).
- CIT v. Shoorji Vallabhdas & Co., 46 ITR 144 (SC).
- Commissioner of Income-tax v. Chamanlal Mangaldas & Co., [1956] 29 ITR.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal is filed by the Assessee against the order of Ld. CIT APPEAL, NFAC, DELHI vide DIN: ITBA/NFAC/S/250/2025-26/1082992479(1) dated 25-Nov-2025 for the Assessment Year 2018-2019. The Assessee has raised the following grounds of appeal:
1. The order dated 25/11/2025 bearing No. ITBA/NFAC/S/250/2025-26/1082992479[1] passed under section 250 of Income Tax Act, 1961 by the Honourable CIT[A], National Faceless Appeal Centre, Delhi is excessive, unreasonable, arbitrary, against the provisions of Income Tax Act, 1961 and therefore liable to be quashed.
2. On facts and circumstances of the case and in law, the Honourable C.I.T.(A) has erred in confirming the addition of Rs.18,19,51,875/- made by the Assessing Officer on account of unexplained investments under section 69 of Income Tax Act, 1961, in respect of revaluation of assets which is just notional entry book entry.
3. On facts and circumstances of the case and in law, the Honourable C.I.T.(A) erred in not adjudicating the fact that, the assessment in the case of the Appellant was extended the scope of the “Limited Scrutiny” by going beyond the issue of ‘substantial increase in capital in a year’ without taking necessary approval of Higher Authorities as required by CBDT Instruction No.20/2015 dated 29/12/2015.
4. On facts and circumstances of the case and in law, the Honourable C.I.T.(A) erred in ignoring the fact that, the capital contribution by partners cannot be added in the hands of the Partnership Firm. The amount credited to the partners’ capital account cannot be treated as income of the appellant firm.
5. The appellant craves to alter, add, delete, substitute, or modify and other grounds of appeal.
2. All the Ground Nos. 1 to 4 raised by the assessee are inter-related and interconnected and relates to the challenging the order of the Ld. CIT(A) in upholding and confirming the additions made by the AO on account of unexplained investment under Section 69 of the Act. Therefore, we have decided to adjudicate these grounds through the present consolidated order.
3. We have heard the counsels for both the parties, perused the material placed on record, the judgments cited before us, and the orders passed by the Revenue Authorities. From the records, we noticed that the assessee, being a partnership firm, is engaged in the business of running a hotel/restaurant under the name Hotel Maha Laxami at Andheri East, Mumbai. The assessee firm has been in continuous possession and occupation of the said premises since the year 1984 and has been carrying on its business from the same location.
4. During the year under consideration, the assessee revalued its existing tenancy/leasehold rights based on a valuation report issued by a Government-approved valuer. The said valuation was carried out purely by way of a book entry by debiting the fixed asset account and crediting the partners’ capital accounts. It is important to mention here that no new asset was acquired, no funds were introduced, no consideration was paid to any third party, and no depreciation was ever claimed by the assessee on the revalued amount. However, the AO treated the revaluation amount of Rs. 18,19,51,875 as unexplained investment under Section 69 of the Act and added the same to the total income. The said addition was also upheld by the Ld. CIT(A).
5. Now, aggrieved by the order of the Ld. CIT(A), the present appeal has been filed before us. The only issue for consideration is whether the revaluation of an existing tenancy right, without any inflow of funds or acquisition of a new asset, can be treated as unexplained investment under Section 69 of the Income-tax Act or not. Before we proceed further, it is important to examine the provisions of Section 69. After going through the same, we find that the provisions of Section 69 apply only when the assessee makes an investment which is not recorded in the books of account and offers no explanation about the nature and source thereof. However, from the facts, we notice that, in the present case, there is no investment. The asset had already existed with the assessee since 1984. The revaluation carried out by the assessee is duly recorded in the books, and there is no source of funds involved. Therefore, the invocation of Section 69 is wholly misconceived.
6. In our view, revaluation is a recognized accounting practice undertaken to reflect the fair market value. It does not result in real income, accrual, or receipt, as has been held by the Hon’ble Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Company, 46 ITR 144, wherein the Hon’ble Supreme Court categorically held that income-tax is levied on real income and not on hypothetical income by holding as under:
The reason is plain. Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a “hypothetical income”, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. This is exactly what has happened in this case, as it happened in the Bombay case Commissioner of Income-tax v. Chamanlal Mangaldas & Co. [1956] 29 ITR, which was approved by this court. Here too, the agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account.’ A mere book-keeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger.
7. After considering the facts of the present case, we find that the tenancy right in the present case was not acquired during the year under appeal, as the assessee had been in possession thereof since 1984, which fact is evidenced by municipal records, business licences, and rent receipts. No new asset was acquired during the year under consideration and, therefore, the revaluation cannot be equated with acquisition.
8. We also find that there has been no transfer within the meaning of Section 2(47) of the Act, and therefore, the provisions relating to capital gains are not attracted. From the facts, there is no sale, relinquishment, or extinguishment of rights, and the asset continues to be held by the assessee. Thus, there is no transfer within the meaning of Section 2(47) of the Act. On the contrary, the AO travelled beyond the scope of the show-cause notice, rendering the addition legally unsustainable.
9. We are also of the view that simple revaluation of assets does not give rise to the incidence of capital gains inasmuch as the revaluation is made by the assessee by writing up the value of the assets in the books. Accordingly, it cannot be said that mere revaluation of the assets of the firm would result in any liability under the Act. [Well Pack Packaging vs. Dy. CIT [2003] 130 Taxman 215 (Mag.) (Ahd.)]. Revaluation of assets by book entries does not involve any sale or transfer. [ITO v. Suresh Sood [1990] 33 ITD 62 (Chd.)]. It has been held that mere valuation of stock does not give rise to any profit. [Chainrup Sampatram (supra)]. In Sanjeev Woollen Mills v. CIT [2005] 279 ITR 434/149 Taxman 431, the Hon’ble Supreme Court held that notional or imaginary profit (arising from revaluation of a fixed asset by passing a book entry) cannot be taxed. We are also of the view that where assets are revalued and the difference arising due to revaluation is credited in the accounts of the partners, no transfer as envisaged under Section 2(47) takes place. [Ravinshankar R. Singh v. ITO [2014] 45 taxmann.com 359/63 SOT 136 (URO) (Mum. Trib.); ITO v. Smt. Paru D. Dave [2008] 110 ITD 410 (Mum.); CIT v. L. Lingmallu Raghukumar [2001] 247 ITR 801/[2002] 124 Taxman 127].
10. Even the Hon’ble Supreme Court held that when a partner retires from a firm and the amount of his share in the partnership assets, after deduction of liabilities and prior charges, is determined as per partnership law, there is no element of transfer under Section 2(47) of the interest in the partnership assets by the retiring partner to the continuing partners. [ITO v. Ramesh M. Shah [2004] 2 SOT 558 (Mum.)]. However, distribution of assets on dissolution of the firm amounts to transfer under Section 2(47). [Asstt. CIT v. Vijay Talkies [2007] 16 SOT 370 (Mum.)].
11. Reliance is also being placed upon the decision in the case of CIT v. Birla Gwalior (P.) Ltd. (89 ITR 266) (SC), wherein it has been held that mere revaluation of assets for accounting purposes does not give rise to taxable income.
Now turning to the question regarding giving up of the commission, the assessee was maintaining its accounts on the basis of the mercantile system. Its accounting year was the financial year. It gave up the commission after the end of the financial year. No due date was fixed for the payment of the commission under the managing agency agreement. The commission receivable could have been ascertained only after the managed company made up its accounts. The assessee had given up the commission even before the managed company made up its accounts. Hence, the mere fact that the assessee-company was maintaining its accounts on the basis of the mercantile system could not lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year. The real question for decision was whether the income had really accrued or not. It was not a hypothetical accrual of income that had got to be taken into consideration but the real accrual of the income. The High Court had come to the conclusion that the commission given up by the assessee could not be considered as its real income. It was undoubtedly true that there were certain incongruities in the procedure adopted by the High Court, but the final conclusion reached by the High Court was correct in law. In the result, the appeals failed.
(ii) Sanjeev Woollen Mills v. CIT (279 ITR 434) (SC) – Notional profits or imaginary income cannot be brought to tax.
In the instant case, the method adopted by the assessee was to value the closing stock at the market value irrespective of the fact whether the market value of the stock at the relevant time was more than the cost value of the stock, which necessarily resulted in an imaginary or notional profit to the assessee which it had not actually received. In fact, such a notional imaginary profit could not be taxed. It is a well-settled principle [1953] 24 ITR 506 (SC) as held in Kikabhai Premchand’s case (supra). Constitution Bench judgment that a firm cannot make profit out of itself. The transaction which is not a business transaction and does not derive immediate pecuniary gain is not subjected to tax. In the instant case, by showing the market value of the closing stock the assessee had earned potential profit out of itself inasmuch as the stock-in-trade remained with the assessee at the close of the accounting year. Secondly, putting the stock at the market value did not and could not bring in any real profit which was necessary for taxing the income under the Act as is held in Chainrup Sampatram’s case (supra) and CIT v. Hind Construction Ltd. [1972] 83 ITR 211. Thirdly, it is a settled principle of the Income-tax Law that it is the real income which is taxable under the Act. This proposition was enunciated in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC), which was pronounced in CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC). [Para 18].
(iii) CIT v. Hind Construction Ltd. (83 ITR 211) (SC) –
Section 28(i) of the Income-tax Act, 1961 (Corresponding to section 10(1) of the Indian Income-tax Act, 1922) – Business income – Chargeable as – Assessment year 1951-52 – Whether if a person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold those goods and made profits therefrom nor can a person by handing over his goods to a partnership of which he is a partner as his share of capital be considered as having sold the goods to the partnership – Held, yes – Whether in such circumstances there being no sale, no question of making any profit from such transactions arises – Held, yes.
(iv) ITO v. Ramesh M. Shah [2004] 2 SOT 558 (Mumbai) – holding revaluation credit is not taxable as capital gain since there was no transfer.
12. Therefore, considering the totality of the facts and circumstances discussed above, and also considering the judicial decisions referred to herein above, we find that there has been no distribution of assets and that the partners at the beginning of the year continued to be the partners at the end of the year.
13. Accordingly, in view of the above discussion, we hold that the addition made by the AO and sustained by the Ld. CIT(A) under Section 69 of the Act is not sustainable in law and is, therefore, directed to be deleted. Accordingly, the grounds raised by the assessee stand allowed.
15. In the result, appeal filed by the Assessee stands allowed.
Order pronounced in the open court on 16.07.2026.
