Taxability in case of Revaluation of Firms Property

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Rahim (Querist)
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10 February 2020 Hi
Kindly guide me regarding taxability in following situation

Partnership Firm is having Immovable Property of Book Value of Rs Say 10 Lacs 31.03.2020
Property Revalued to Rs 1 Crore and transfer the Revalaution surplus to Partner Capital Account in PSR 31.03.2021
Old Partners Retired and New Partners Admitted after paying Capital Account Balance (Which Includes Revaluation Profit Also) 01.04.2021.

Kindly Guide me to find out taxabilty in the hands of :
Firm
Retiring Partners

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)
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27 May 2020 Mere revaluation of L&B in books does not give rise to capital gain. For capital gain to be applicable there has to be a transfer.until and unless there is no transfer of asset to the partner there will be no implications in Income tax Enhancing the value of assets and settlement of retiring partners: In CIT v. Kunnamkulam Mill Board (2002) 257 ITR 544 / 125 Taxman 802 (Ker) there was a change in constitution of firm with the retirement of partners who received credit balances in their accounts which was enhanced due to revaluation of assets of the firm. The AO was of the view that the partners took settlement amount based on enhanced value of assets and thus section 45(4) would apply. He treated the difference between the value of assets (before revaluation as per records of the firm) and amount credited to retiring partners account by applying section 45(4). The court held that when a partnership is reconstituted by adding a new partner and on the retirement of existing partners there was no transfer of asset within the meaning of section 45(4) of the Act. The court applied the rationale of the apex court decision in the case of B.T.Patil and Sons v. CGT (2001) 247 ITR 588 (SC) and Sunil Sidharthbhai v. CIT (1985) 156 ITR 509 (SC) and the decision was in favour of the assessee. Thus when a partnership firm revalues the asset and settles the amount to the retiring partners, section 45(4) will not apply.

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