Capital gain on revaluation of asset by firm

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NARESH KUMAR SHARMA (Querist)

19 August 2011 A firm was converted into company under Chapter IXth of Companies Act 1956. On conversion the asset of the firm (land and building) was revalued from 15 lac to 25 lac, and revaluation reserve being Rs. 10 lac (25-10) was transferred to partners capital account and finally the partners was allotted shares in the company against their capital balance as on date of conversion.

The Assessing officer argued that profit on revaluation will attract capital gain and therefore liable to tax.

pl. suggest whether profit on such revaluation will be liable to capital gain or not.

if yes in whose hand (either firm or partners)

pl. suggest

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

19 August 2011 In case the conversion has been completed in accordance with Section 47(xiii) of the Income Tax Act, 1961 the transfer of assets by the firm to the company is not treated as transfer, hence question of capital gain does not arise here.
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The revaluation reserve has arisen due to
revaluation of assets and not due to transfer of any assets.
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When an asset is revalued, its valuation goes up but increase in valuation does not mean accrual of capital gains income, as the revalued asset may remain with the assessee only.
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It can said that the point of arising income and its taxability lies at the moment when the "transfer" or conversion takes place.
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At that moment, section 47(xiii) comes into action and escapes the same from being treated as transfer.
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There can not be a capital gain without transfer.
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The AO's action, in such situation, is against the principles laid down in the law.

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