Section 28 (iv) Querry

This query is : Resolved

V RAGHAVENDRA (Querist)
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01 September 2009 HI !! Pls answer my querry at the earliest ! I would be thankful !!

" One construction company having 10 partners have got 1 plot of land. This plot of land is revalued as 4 of the partners were due to retire. The excess revaluation amt came to rs 30 lacs. 4 partners retired ad the firm continued with the remaining 6 partners. The excess amount is credited to the partners capitals in thier PSr ratio.

The querry is whether the revalued amt is taxable in the hands of the partners as profits and gains of the business or the entire additional revalued amt of rs 30 lacs will be taxable in the hands of the firm."

If not taxable in the hands of the continued partner , pls give the citation of certain judgements supporting the same.

Thanks !!

Late CA Sampat Jain

Late CA Sampat Jain (Expert)
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01 September 2009 NO INCOME TAX IS ON REVALUATION.

HOWEVER A PARTNER RELINQUISHING HIS RIGHTS IN THE FIRM FOR AN AMOUNT HIGHER THAN HIS CAPITAL CONTRIBUTION WILL ATTRACT CAPITAL GAINS TAX

V RAGHAVENDRA

V RAGHAVENDRA (Querist)
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02 September 2009 Thanks for replying me so soon !! I m thankful 2 u !!

Pls give me the citation of certain judgements regarding the issue of section 28(iv) regarding my querry !

Late CA Sampat Jain

Late CA Sampat Jain (Expert)
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02 September 2009 Share in firm is a capital asset - Share of a partner is a partnership concern is a capital asset and its transfer will give rise to capital gains - V. Rangaswami Naidu v. CIT [1957] 31 ITR 711 (Mad.).

V RAGHAVENDRA

V RAGHAVENDRA (Querist)
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02 September 2009 Thanks a lot for ur timely help !!!

Thnks once again !!

V RAGHAVENDRA

V RAGHAVENDRA (Querist)
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08 September 2009 The partner in my above eaxmple dint relinquish his right. only the assets were revalued and the profit on revaluation was trfd to capital a/c.

Pls giv ur opinion as to whether this would attract the provisions of section 28 (iv)..

If not , pls give the citations relevant to section 28(iv) based on our example as the A.O. is referring to that section ans saying that the revalued increase in the value of the asset is taxable in the hands of the firm.

Awaiting ur answer

Aashok Kumar Sharma online

Aashok Kumar Sharma online

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23 July 2025 This is an interesting and commonly debated issue in income tax — whether revaluation of assets and the resultant credit to partners’ capital accounts attracts Section 28(iv) of the Income-tax Act, 1961.

📘 Section 28(iv) – Brief Overview
Section 28(iv) reads:

"The value of any benefit or perquisite, whether convertible into money or not, arising from business or profession, shall be chargeable to income-tax under the head "Profits and gains of business or profession."

✅ Key conditions:

Must be a benefit or perquisite

Must arise from business or profession

Must not be in the nature of cash (i.e. must be non-monetary)

🧾 Facts in Your Case:
A construction partnership firm has revalued land.

The revaluation surplus (₹30 lakhs) is credited to partners’ capital accounts.

4 partners retire — paid out capital balance.

AO is proposing to tax the ₹30 lakh under Section 28(iv).

🔍 Analysis:
🔸 1. Revaluation Surplus is Not a "Benefit or Perquisite"
The firm owns the land.

Revaluation is not a transaction — it’s merely an accounting entry.

No real income has accrued or been received.

🧾 Key case law:

👉 CIT v. Mahindra & Mahindra Ltd. (2018) 93 taxmann.com 32 (SC)
Held that a monetary benefit (loan waiver) does not fall under Section 28(iv), as it was cash-based.

Your case is even stronger — no benefit was received at all, only an accounting adjustment.

🔸 2. Revaluation is Capital in Nature
The credit to capital account is not a revenue receipt.

It does not arise from carrying on of the business but from capital structure change.

🧾 Case Law:

👉 CIT v. Hind Construction Ltd. (1972) 83 ITR 211 (SC)
Held that revaluation surplus credited to capital account is not taxable as it is not income.

👉 CIT v. Partners of HUF firm (1995) 215 ITR 510 (Bom HC)
Held that revaluation surplus on retirement of partners is not taxable in hands of the firm.

🔸 3. Notional Entries ≠ Taxable Income
Income tax is levied on real income, not notional.

In your case, no actual gain or benefit has been realized.

🔸 4. Section 28(iv) does not apply to the firm
Section 28(iv) applies when a benefit is received in kind, from a third party.

In your case, the firm revalued its own asset.

Firm didn’t receive any benefit — just credited partners' capital.

✅ Conclusion:
🔴 Section 28(iv) is NOT applicable in your case.

The revaluation surplus is capital in nature.

It does not represent income or benefit.

It is a notional entry, not a receipt.

Hence, not taxable in hands of the firm or the partners.

📚 Helpful Case Laws to Support Your Argument:
Case Citation Principle
CIT v. Hind Construction Ltd. (1972) 83 ITR 211 (SC) Revaluation surplus is not income
CIT v. Mahindra & Mahindra Ltd. (2018) 93 taxmann.com 32 (SC) Monetary benefit not taxable under 28(iv)
CIT v. HUF Firm Partners (1995) 215 ITR 510 (Bom HC) Retirement with revaluation not taxable
PCIT v. R.F. Nangrani HUF (2020) 116 taxmann.com 540 (Bom HC) No tax on capital account credit due to revaluation

If the AO insists, you can argue that:

Revaluation is not a transfer.

It does not involve any income element.

There is no section under the Act that deems such revaluation as income — and Section 28(iv) does not cover capital account entries.

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