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Treatment of revaluation of assets in income tax

Biraj (Proprietor) (103 Points)

23 September 2013

We have L&B of Rs.5.00Lacs(WDV) in firm's name. old partner to retire.

Revaluation of building can be done at 50 Lacs at the time of retirement.

What is the treatment of revaluation in income tax to the firm, new partner and old partner ?

Regards,

CA. Biraj Kotecha

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2 Replies

CA Pooja Agarwal (Chartered Accountant) (3228 Points)
Replied 23 September 2013

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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Mukesh Goel (CA,CFA) (103 Points)
Replied 25 September 2013

Hi Biraj

In income tax we check the WDV of the asset for depreciation. Since revaluation is done for restructuring the partnership firm there is no impact on WDV and it will be 5 laks for IT purposes.

Thanks

Mukesh