Revaluation of Fixed Assets by a firm

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Abhijit Gupta (Querist)
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24 May 2011 Whether a partnership firm can revalue its assets when there is no change in constitution of firm??
When the value of fixed assets is increased due to above,and the increase is credited to partner's capital account,whether partners will be entitled to receive interest on such revaluation profit also???

CA MANOJ GUPTA

CA MANOJ GUPTA (Expert)
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25 May 2011 In Asstt. CIT v. Sant Shoe Store (2004) 88 ITD 524 (Chd-Trib), a similar issue was discussed. The Tribunal held the firm has no independent subsistence apart from partners and assets of the firm or assets of the partners. When firm pays interest on capital to the partners there are two legal entities otherwise one cannot make payment to himself. Although what is capital of partnership is neither defined in section 40(b) nor in any other statutory provision, section 14 of the Indian partnership Act, 1932 defines the property of the firm which in fact means property of the partners, as for the sake of convenience, a compendious name given to the partnership. The true value of all assets and liabilities can be determined only at the time of dissolution of partnership. Everything till that date is notional only. Yet for the sake of convenience and for practical purposes entries are made having regard to the market value of items and transactions involved. Till the actual value is determined, the partnership acts on above notional entries. These are binding on partners and partnership. Entries made representing transaction are real unless they are replaced by entries made at the time of dissolution by taking actual value of assets and liabilities of the partnership. Till the above date, (i.e. the date of dissolution) every entry made has to be treated as legally made and effective. Therefore, the assessee is entitled to interest on capital as reflected in the books of account.

In view of the above decision, the partners are eligible to claim interest on the increase in capital effected by means of revaluation of assets of the firm. However, as a matter of caution revaluation exercise must be bona fide and must be based on a technical valuation report from approved sources, with revalued asset value does not exceed original cost of the asset.
CA MANOJ GUPTA
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Abhijit Gupta

Abhijit Gupta (Querist)
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25 May 2011 Sir,
I want to know whether Additional Depriciation on increased revalued amount will be allowed or not?? And if the revalued amount exceeds the original cost of the assets,then what will be the treatment of such revaluation??

CA MANOJ GUPTA

CA MANOJ GUPTA (Expert)
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25 May 2011 no way depreciation under the law will be allowed only on the WDV
and not on revalued amount
u can charge dep on revalued value in accounts as per AS-6

Abhijit Gupta

Abhijit Gupta (Querist)
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25 May 2011 As per my understanding,Depriciation on revalued amount will not be allowed under income tax,although it can be charged in books.
What will be the treatment if revaluation exceeds the original amount of assets????

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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21 July 2025 You're absolutely right in your understanding, and let's break this down clearly:

✅ 1. Can a firm revalue fixed assets without change in constitution?
Yes, a partnership firm can revalue its fixed assets even if there's no change in the constitution (i.e., no new admission or retirement of partners). Revaluation is an accounting decision and is permitted under accounting principles and ICAI guidelines.

✅ 2. Interest on revaluation surplus credited to partners' capital accounts?
As cited in ACIT v. Sant Shoe Store (2004) 88 ITD 524 (Chd-Trib):

If the revaluation surplus is credited to partners’ capital accounts, then it becomes part of their capital.

Interest on capital is allowed (within the limit prescribed under section 40(b), i.e., max 12% p.a.) even on the revaluation portion, provided:

It is allowed in the partnership deed,

It is actually credited/paid,

The revaluation is bona fide (ideally backed by a valuation report).

❌ 3. Depreciation on revalued amount under Income Tax Act?
No, depreciation under the Income Tax Act is always calculated on the WDV (Written Down Value) as per tax books.

Revaluation reserve or enhanced value is ignored for tax depreciation purposes.

As per Explanation 5 to section 32(1) and case laws, revaluation increase is not considered for tax depreciation.

⚠️ 4. If revaluation increases the value above original cost?
For accounting purposes, the firm can revalue the asset even above original cost, and the surplus is credited to a Revaluation Reserve or directly to partners' capital accounts.

However, under Income Tax:

Revaluation surplus cannot be used to claim higher depreciation.

At the time of sale of the asset, capital gain will be calculated based on the original cost, not the revalued amount (as per section 50 for depreciable assets).

Any accounting depreciation on the revalued portion will be added back while computing income under Income from Business/Profession.

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