Income Tax Appellate Tribunal - Hyderabad
K.Siva Reddy(Huf), Secunderabad vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH ' B ', HYDERABAD
BEFORE SHRI N.R.S. GANSAN, JUDICIAL MEMBER AND
SHRI CHANDRA POOJARI ACCOUNTANT MEMBER
ITA-696/Hyd/2006 Asst. Year : 2001-2002
ITA-697/Hyd/2006 2002-2003
ITA-698/Hyd/2006 2003-2004
Late K. Siva Reddy (HUF), Vs ITO, Range 11(4),
Secunderabad Secunderabad
(PAN AALH S5118 Q)
(Appellant) (Respondent)
Appellant by : Shri S. Rama Rao
Respondent by : Shri E.S. Nagendra Prasad
ORDER
Per N.R.S. Ganesan, Judicial Member
All these three appeals have been filed by the assessee are directed against the common order passed by the CIT(A)-VI, Hyderabad dated 22.3.2006 and pertains to assessment years 2001-2002, 2002-03 and 2003-04. Since common issues arise for consideration in all these appeals, we have heard the same together and disposing off the same by this common order for the sake of convenience.
2. The only issue arises for consideration in these three appeals is computation of capital gain.
3. Shri Rama Rao, learned counsel for the assessee has submitted that the assessee inherited a piece of land in Survey No.105 situated at Kompally, Qutbullaur Mandal, Ranga Reddy District along with other properties from his father Shri K. Rami Reddy. According to 2 the learned counsel, a portion of the land was used for construction of commercial complex. The balance land measuring about 2480 sq. yards was given for development to M/s Shri Sai Saran Builders. According to the learned counsel, the first development agreement was executed on 27.8.1998 for construction of an apartment called Emerald Residency Block 'A' on a portion of the said vacant land to the extent of 1240 sq. yards. According to the learned counsel, this development agreement was executed between the assessee and 8 others including minor co- owners on one part and the builder Shri Sai Saran Builders on another part. According to the learned counsel, the assessee has also entered into a co-ownership agreement on 30.8.1999 in respect of 1240 sq. yards of land which was given for development for construction of Emerald Residency Block B The assessee has taken a loan to develop the very same property.
4. The learned counsel explained that the land was a big pit and total loose soil and unfit for any construction. Therefore, the assessee by raising funds filled up the pit and made the land into normal condition for the purpose of developing the same and to construct building thereon. However, the assessee could not re-pay the amount borrowed for the purpose of development of the land. Therefore the assessee entered into a co-ownership agreement on 30.8.1999 and thereby taken the eight persons who are all close relatives of the assessee as co-owners of the land. Thereafter, the assessee entered into a development agreement for constructing a multi storied residential complex.
5. The learned counsel further submitted that there are certain minors who are taken as co-owners in respect of 1240 sq. yards land. The respective guardians of the minors approached the Principal District Judge, RR District for permission to sell their portion of 1/9th share of 3 their property. The Principal District Judge by an order dated 27.12.1999 permitted guardians of the minors to sell their share of land and deposit the sale proceeds in a fixed deposit in any one of the scheduled bank till the minors attain their respective ages of majority. The learned counsel further submitted that the co-ownership agreement and development agreement though executed on 30.8.1999 and 28.7.1998 respectively, both the agreements came into effect on 1.7.1998. According to the learned counsel, the assessing officer has not doubted the development agreement therefore he cannot doubt the effective date of the co-ownership agreement from 1.7.1998. Therefore, according to the learned counsel, in view of the co-ownership agreement, only 1/9th share of the profit on sale of 1240 sq. yards land is to be added in the hands of the assessee and remaining 8/9th share shall be added in the co-owners. Therefore, the assessment of the entire profit on sale of land in the hands of the assessee is not justified. In respect of the second development agreement also the terms and conditions on the co-ownership remained the same. All the co-owners has shown the expenditure in their respective hands in respect of second development agreement which was known as Emerald Residency Block B. Further, he pointed out that the assessing officer rejected the claim of the assessee mainly on the ground that the co-ownership agreement was not registered as required under the Registration Act. According to the learned counsel, registration of land under the Registration Act may not be a relevant factor under the income tax Act for assessment of income. Since the co-owners jointly sold their shares of constructed property by executing various registered sale deed in favour of prospective buyers. According to the counsel, the entire capital gain has to be assessed in the hands of 9 persons including the assessee. Further he submitted that the assessing officer has disbelieved the development made by the assessee after borrowing 4 funds from co-owners and assessed the entire profit without allowing the expenditure on development as capital gain.
6. On the contrary, the learned Departmental Representative Shri E. Nagendra Prasad submitted that the landed property situated at Kompally originally belongs to Shri Rami Reddy father of the assessee. On the death of Shri Rami Reddy, the assessee inherited the above said property along with other properties. Late Shri Siva Reddy constructed a commercial complex on a portion of the land and shown the income for the assessment year 1997-98 and balance land 2480 sq. yards was given for development through two development agreements. The first development agreement was executed between the assessee and 8 others on one part and Shri Sai Saran Builders on the other part for construction of residential complex known as Emerald Residency Block A. The first agreement was executed on 27.8.1998. The second agreement was also executed in respect of remaining 1240 sq.yards for construction of residential complex known as Emerald Residency Block B. The second agreement was executed only by the assessee. The assessee also executed a co-ownership agreement on 30.8.1999 in respect of Emerald Residency Block A. According to the representative, in respect of Emerald Residency Block B there was no co-ownership agreement. Referring to the assessment order where the assessing officer explained the family tree of the assessee, the learned departmental representative pointed out that the assessee is the only son of Shri Rami Reddy. The assessee has two daughters. The first daughter Swapna Rani and the second daughter Niraja. The so called co-owners are minor children of the assessee's Daughter and son in laws. Referring to the assessment order the DR pointed out that the assessing officer examined the co-ownership agreement and found that the co-ownership agreement suffers from legal infirmities and it was only tax avoidance device to divert income by over riding and evading 5 tax. The learned Departmental Representative further pointed out that the property can be alienated only for legal necessities with the knowledge of the other co-owners.
7. In this case, the learned departmental representative submitted that there was no legal necessity for transfer of HUF property. The learned Representative further pointed out that there was no evidence to show that the income from property was actually passed on to co-owners. Therefore, according to the learned representative, the entire profit arising out of the transfer of the land has to be assessed only in the hands of the assessee. Since the assessee has not produced any evidence for development of the land; the assessing officer has rightly disallowed the expenditure claimed by the assessee on the so called development. Since the co owners agreement is not acted upon and the assessee has not produced any evidence for development of the property, the assessing officer has rightly computed the capital gain which was confirmed by the CIT(A). The learned DR placed reliance on the judgment of the Madras High Court in the case of ITO Vs. K. Jayaram (1986) (Mad. HC) (168 ITR 757) and submitted the assessing officer can go into the question of validity and genuineness of the documents produced before him. The learned DR also placed reliance on the judgement in the case of A K Babu Khan Vs. CIT (AP HC) (1974) 102 ITR 757 and submitted that the additional evidence filed by the assessee for the expenditure said to be incurred for development of land cannot be admitted at this stage.
8. We have considered rival submissions on either side and also perused the matter available on record. Admittedly, the landed property located at 105, Kompally was originally belonged to Shri Rami Reddy, father of the assessee. On death of Shri Ram Reddy the assessee inherited the same along with other properties. The assessee 6 late Shri K. Siva Reddy died on 15.9.2004. During his life time he constructed a commercial complex in a portion of the land and filed return of income for the assessment year 1997-98. The balance land of 2480 sq. yards was given for development to one Mr. Sai Saran Builders a partnership firm for development by way of two development agreements. The first agreement was executed on 27.8.1998 for construction of a portion of the land to the extent 1240 sq. yards between Late Shri K. Siva Reddy and 8 others on the one part and Shri Sai Saran Builders on the other part. A second agreement was executed on 3.4.2002 for construction of Block B Emerald Residency in respect of the remaining 1240 sq. yards. This agreement was executed between late Shri K. Siva Reddy and the same builder Shri Sai Saran Builders. The assessee claimed that the second agreement was also executed by the assessee on behalf of himself and 8 other co-owners. Further, the DR claims that the second agreement dated 3.4.2002 was executed only between Shri Siva Reddy and the builder.
9. Let us first examine the first development agreement executed between the assessee Shri K. Siva Reddy and 8 other co- owners and the builder Shri Sai Saran Builders. The learned DR by referring to the judgements Madras High Court cited supra, claims that they can go into the validity of the co-ownership agreement. The assessing officer after examining the co-ownership agreement found that the co-ownership agreement was not legally executed for family necessities as required under Hindu law. Therefore it was not acted upon. We have carefully gone through the co-ownership agreement said to be executed and the development agreement dated 28.7.1998, the copies of the said documents are available in the paper book at page 10 and 15 respectively. As per the co-ownership agreement it appears that the assessee Shri K. Siva Reddy borrowed one lakh from each co- owner for the purpose of development of the land and he was not in a 7 position to repay the interest and principal amount. Therefore he agreed to take the 8 creditors as co-owners.
10. The issue arises for consideration is whether the profit arising out of the sale of the property was diverted by overriding title or it is only an application/distribution of income. The claim of the assessee is that the landed property was developed to make it fit for construction. The Revenue authorities examined the partners of M/s Sai Saran Builders who happens to be brother's son of Late Shiva Reddy. The partner of Shri Sai Saran Builders clarified before the Revenue authorities that he knows the said land from his childhood and the land was used for agriculture, later on, in the year 1999, it was given to him for development. M/s Sai Saran Builders spent money to make the land suitable for construction. He also clarified that Late Shiva Reddy has not made any investment or incurred any expenditure on this land for development before giving the same to M/s Sai Saran Builders. In fact, the partner has stated as follows. During the course of examination, 'regarding expenditure on development of land, it is to submit that this land belongs to Late Shiva Reddy my father's elder brother. I know this land from my childhood. The land was used for agriculture later on, in the year 1999 it was given to me for development as it is, without work done on it when it was given to us. We have spent to make the land suitable for construction. Late Shiva Reddy has not made any investment or incurred any expenditure on this land as the land was given to us as on as it is".
11. In view of the statement of this partner, who is none other than the brother's son of Shiva Reddy, it is very clear that Shiva Reddy was not incurred any expenditure for development of the land in question. Therefore, the Xerox copy of the debit vouchers claiming it to be the expenditure incurred for development of land is only self serving document, it may not be of any assistance to the assessee. Now coming to the borrowal of loan, the assessee claims that the loans were borrowed from 8 persons for investing the same in the land for development. In view of the evidence available on record, it is clear 8 that no expenditure was incurred for development of the land. In those circumstances, it may not be in correct in saying that the assessee has borrowed loan for development of the land. There is no other material available on record to suggest that the assessee has borrowed the loan and utilized the same for development of the land. In those circumstances, the reasons given by the assessee for executing a co- ownership agreement is only a story to suit his own convenience. Therefore, in our opinion, the claim of the assessee that the co- ownership was executed since he could not repay the borrowed loan for the purpose of development is not substantiated with necessary materials. The principal District Judge who permitted to sell the minor's share of the land had no occasion to adjudicate on the borrowal of loan and the development said land by the assessee. In fact, this issue was not raised before the Principal District Judge, Ranga Reddy District. Therefore, the order of the Principal District Judge, R R District granting permission to sell the share of the land belongs to the minors may not be of any assistance to the assessee for computing capital gain. Therefore, in our opinion, the lower authorities have rightly assessed the capital gain in the hands of the assessee. Distribution of the profits, if any, to the minors is only an application of income and it cannot be said the income was diverted by overriding title. In view of the above, we do not find any infirmity in the order of the lower authorities and accordingly, the same is confirmed.
12. In the result the appeal of the assessee stands dismissed.
Order pronounced in the open Court : 30. 4. 2010
Sd/- sd/-
(CHANDRA POOJARI) (N.R.S. GANESAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 30th April, 2010
9
Copy forwarded to:
1. Shri S. Rama Rao, Advocate
c/o Late Shri K. Siva Reddy (HUF), 1-12-9/3, Temple Alwal, Secunderabad
2. ITO, Range 11 (4), Secunderabad
3. CIT(A)- VI, Hyderabad.
4. CIT, Hyderabad
5. The D.R., ITAT, Hyderabad.
Np