Income Tax Appellate Tribunal - Hyderabad
Ganjikunta Kishore Babu(Huf), ... vs Assessee on 24 August, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 839/Hyd/2015
Assessment Year: 2011-12
Ganjikunta Kishore Babu (HUF), vs. Income-tax Officer, Ward - I,
Dharmavaram. Anantapur.
PAN - AAFHG 7199 R
(Appellant) (Respondent)
Assessee by : Shri J. Prabhakar
Revenue by : Shri K.E. Sunil Babu
Date of hearing 09-08-2016
Date of pronouncement 24-08-2016
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
This appeal is preferred by the Assessee against the order of the learned Commissioner of Income-tax(A), Kurnool, dated 04/03/2013 for AY 2011-12.
2. Briefly the facts of the case are that the assessee is the proprietor of STS Handloom Silks, Dharmavaram in his HUF capacity. Assessee is engaged in the business of manufacture and sale of handloom silk sarees. It e-filed its return of income on 03/09/2011 admitting income of Rs. 4,27,640/-. In scrutiny assessment, the AO assessed the income of the assessee at Rs. 48,62,230/- by making the following additions:
i) Receipts of immovable/movable properties without consideration/inadequate consideration u/s 56(2)(vii)
a) Building A/c Rs. 22,13,152/-
b) Handloom Machinery A/c Rs. 15,79,809/- Rs. 37,92,961/-2 ITA No. 839/H/15
Ganjikunta Kishore Babu (HUF)
ii) Addition on account of inflated sales Rs. 6,41,625/-
3. The AO observed that on verification of capital account of HUF it was found that the following movable and immovable properties were received by HUF from individual status of Sri G. Kishore Babu:
Description Immovable property Movable property (building) (machinery) Total cost Rs. 5,71,152/- Rs. 21,79,809/-
Consideration Rs. 35,00,000/- Rs. 6,00,000/-
paid by HUF to
individual
Difference Rs. 22,13,152/- Rs. 15,79,809/-
Total Rs. 37,92,961/-
3.1 AO brought the above of Rs. 37,92,961/- to tax u/s 56(2)(vii) as
the HUF paid inadequate consideration.
4. Aggrieved, the assessee preferred an appeal before the CIT(A).
5. The CIT(A) referring to the provisions of section 56(2)(vii), observed that as per clause (e) of section 56(2)(vii) 'relative' in case of HUF is any member of the family. Therefore, the CIT(A) held that since the assessee HUF received immovable property from a relative (individual) the provisions of section 56 are not applicable. Hence, he deleted the amount of Rs. 22,13,152/- being the inadequate consideration paid by HUF on transfer of building.
5.1 However, he observed that such exemption cannot be given to transfer of machinery from individual to HUF as machinery is not included in the definition of property under clause (d) of section 56(2)(vii). He, therefore, confirmed the addition of Rs. 15,79,809/-
being the inadequate consideration paid for receiving machinery.
6. The AO made another addition of Rs. 6,41,625/- towards inflated sales for the following reasons:
3 ITA No. 839/H/15Ganjikunta Kishore Babu (HUF)
(a) The assessee started his business on 01.04.2010. On the very first day he started his purchases and sales.
(b) In this line of business, weaving a saree from the raw materials take at least 15 days - which includes Winding of Resham/Warp, Achu (Warp Joint) Dying, Doubling, Embroidery works etc.
(c) When the explanation was called for as to how the sales were made from 01.04.2010 onwards without any sarees on hand, it was explained by the assessee vide his letter dated 16.08.2013 that the raw-materials were given to the weaver about 10 to 15 days ago so as to make the sarees available on the auspicious day of opening of business on 01.04.2010.
6.1 However, the Assessing Officer was not satisfied with the explanation given by the assessee for the following reasons :
(a) That the HUF did not have any sarees on hand on 01.04.2010.
(b) The assessee did not purchase any sarees from any other person nor submitted any purchase bills.
(c) The assessee did not purchase raw-material or sarees from the individual status. Neither any sarees were transferred from individual status to HUF. There is no record/evidence in favour of the assessee that the raw-materials were purchased/sarees were purchased/ sarees were transferred from individual status to HUF status.
(d) The assessee do not have sufficient funds to make purchases of raw-materials prior to starting of business.
Therefore, the sales made from 01.04.2010 to 10.04.2010 were treated as inflation of sales. The sales made during 01.04.2010 to 10.04.2010 totalling to Rs.6,14,625/- was treated as unexplained sales / inflation of sales.
(e) On subsequent date, on 18.12.2013 the assessee had come up with new explanation stating that there were no sales on 01.04.2010, in real sense, all cash invoices were raised on the auspicious day of starting of business and the delivery was given two weeks later.
4 ITA No. 839/H/15Ganjikunta Kishore Babu (HUF)
(f) This explanation of the assessee is totally in contradiction to the explanation given on 16.08.2013 wherein the assessee had stated that raw-material was given to the weavers 10 to 15 days prior to 01.04.2010.
In view of the above reasons, the Assessing Officer made addition of Rs.6,41,625/- as unexplained sales / inflation of sales.
7. The CIT(A) after considering the submissions of the assessee, confirmed the said addition by observing that the corresponding purchases for the sales made during the first 10 days of the business could not be explained by the assessee with any reliable evidence.
8. Aggrieved by the order of the CIT(A) the assessee is in appeal before us.
9. Ground Nos. 1 to 4 are pertaining to addition of Rs. 15,79,809/- made u/s 56(2)(vii) of the Act. Ground Nos. 5 to 12 are pertaining to the addition of Rs. 6,41,625/-. Ground No. 13 is pertaining to levy of interest u/s 234C of the Act. Ground Nos. 14 to 16 are general in nature.
10. As regards the addition of Rs. 15,79,809/-, the ld AR submitted that the first appellate authority has misunderstood the purport of section 56 (2) (vii) which seeks to tax assets, hitherto treated as exempt capital assets within the meaning of section 2 (14) of the Act. Section 2 (14) of the Act, inter-alia, includes property of any kind, held by an assessee unconnected with his business but excluded personal effects for the purpose of imposing capital gains tax. . Thus, immovable properties, being capital assets, were subjected to capital gains tax; certain transfers of immovable properties such as gifts and settlements were not treated as liable for capital gains taxation and hence the loophole was being misused by gifting or settling immovable properties between non relatives instead of outright sale 5 ITA No. 839/H/15 Ganjikunta Kishore Babu (HUF) to avoid payment of taxes. This misuse was sought to be plugged by amending section 56 to bring to tax, transfer of capital assets, including immovable properties, between non-relatives and unconnected persons. Pro-tanto, the definition of "personal effects"
were also amended to exclude assets such as shares, jewellery, archeological collections paintings etc to bring these into the tax net for capital gain purposes. Corresponding effect was given in explanation (d) to section 56 (2) (vii) to rope in the above classification of capital assets so as to tax thereon in the recipient non-relative's hands.
10.1 In view of above, the ld. AR submitted that "the attempt of the CIT (A) to disregard the real meaning of the above sections and perfunctorily attributing absence of the term "Machinery" in the explanation (d) to section 56 (2) (vii) is incorrect appreciation of the legal purport of said section. Moreover, if the view of the CIT (A) is to be treated as correct, then the entire transaction of machinery purchased by the HUF from the individual, cannot be taxed under section 56 in the absence of proper definition of the term "Property" to include machinery within its ambit, since "any property" under clause ( c) does not include machinery with its definition under explanation
(d) there under. Thus there is no ground for sustaining the addition of Rs.15,79,809/- which is the balance amount due to the Individual as at the year end and not the agreed value for the transfer of asset. In any event, the transaction is exempt as transfer to a 'relative' as the HUF received the same from a member thereof (Individual)."
11. Ld. DR, on the other hand, relied on the orders of revenue authorities.
12. Considered the submissions of both the parties and perused the material facts on record. Ld. AR submitted that the property definition given in section 56(2)(vii) is only illustrative and does include the assets given as gift between the relatives, irrespective of kind of assets. We have carefully analysed the section 56(2)(vii) of the Act, 6 ITA No. 839/H/15 Ganjikunta Kishore Babu (HUF) which was introduced in Finance Act, 2009. The sub-section in that Finance Act stood as below:
"(vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009,--
(a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;
(b) any immovable property,--
(i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
(ii) for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration;
Provided that where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purposes of this sub- clause.
Provided further that the said proviso shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by any mode other than cash on or before the date of the agreement for the transfer of such immovable property.
(c) any property, other than immovable property,--
(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:
Provided that where the stamp duty value of immovable property as referred to in sub- clause (b) is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub-clause (b) as they apply for valuation of capital asset under those sections:
Provided further that this clause shall not apply to any sum of money or any property received--
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or (
d) in contemplation of death of the payer or donor, as the case may be; or
(e) from any local authority as defined in the Explanation to clause (20) of section 10; or
(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA. Explanation.--For the purposes of this clause,--
(a) "assessable" shall have the meaning assigned to it in Explanation 2 to sub-section (2) of section 50C; ( 7 ITA No. 839/H/15 Ganjikunta Kishore Babu (HUF)
b) "fair market value" of a property, other than an immovable property, means the value determined in accordance with the method as may be prescribed;
(c) "jewellery" shall have the meaning assigned to it in the Explanation to sub-clause (ii) of clause (14) of section 2;
(d) "property" means--
(i) immovable property being land or building or both;
(ii) shares and securities;
(iii) jewellery;
(iv) archaeological collections;
(v) drawings;
(vi) paintings;
(vii) sculptures; or
(viii) any work of art; "
12.1 Subsequently in Finance Act, 2010, included the assets Bullion. On careful reading of the section, it is clear that the legislature intended to exclude the properties which are personal belongings like land and buildings, shares, securities and personal effects. It was never intended to exclude the business assets like stock-in-trade, machinery etc. On safe and infallible principle is to read the words through and see if the rule is clearly stated. If the language employed gives the rule in words of sufficient clarity and precision, nothing more requires to be done, in such a case, the task of interpretation can hardly be said to arise. Absoluta sententia expositore non indiget. The language used by the legislature best declares its intention and must be accepted as decisive of it. Hence, it is clear that the intention of the legislature not to include business assets in the exclusion list, it has to be accepted as such. Considering the above discussion, we are of the view that the definition of the capital assets for exclusion does not include the assets, 'machinery'. Hence, the definition cannot be expanded beyond what is not intended to include. Accordingly, the addition made by the AO in this regard is sustained.
13. As regards the addition of 6,41,625/- on account of inflated sales, the ld. AR submitted that the CIT (A) has taken a jaundiced view of the explanations made to countenance the fundamental flaw in the additions made on a subject matter which forms part of the accounted transactions. It is submitted that the treatment of sales 8 ITA No. 839/H/15 Ganjikunta Kishore Babu (HUF) made during the first 10 days of account opening as alleged inflation of sales is unwarranted and illegal, in as much as the entire transactions are already found recorded in the regular books of account as sales and there cannot be a double addition thereon by treating the same as if it is an unaccounted transaction and bringing the entire sale to tax. Moreover out of the total sales made in the 10 day period, there are cash sales made only for 3 days aggregating to Rs. 2,22,125/- and the balance sales are made to group concern (T.R.Silks) which are arms length sales and cannot be doubted since it is found recorded in both the entities. The reasons touted by the Assessing Officer to disbelieve the transaction on the ground that there are no fresh saree purchases (finished stock) on the opening stock is contradicted by the Assessing Officer himself at para 3 page 5 of the assessment order that manufacturing of hand loom sarees in sheds ab-initio is accepted and hence corresponding purchases are also accepted. If this is accepted as correct than having accepted the purchase cost of sarees are available on the threshold date, there is no reason to disbelieve the corresponding sales within the 15 day window and assess a sum of Rs. 6,41, 625/-.
13.1 On the contrary the explanation offered by the assessee that prior to commencement of business, the weaving of stock of sarees, 15 days prior thereto should have been understood in the correct perspective. The assessee by asking the weavers to commence weaving operations prior to auspicious day of opening, procured raw materials on credit and on the day of opening, made purchases of raw materials such as Zari, resham and warp and book the bills therefor on the date of opening to square up the credit purchases for the 15 days credit. Reference is invited to the recent decision of the Hon'ble Bombay High court rendered on 4th February 2015 in the case of CI T
- 8 Vs. Hariram Bhambhani in 1. T.A. No 313 of 2013 wherein it was held that the entire unaccounted sales cannot be assessed as undisclosed income particularly if the purchases have been accounted for. Only the net profit on such unaccounted sales can be taken as 9 ITA No. 839/H/15 Ganjikunta Kishore Babu (HUF) income; However in the present case no unaccounted sale or purchase has been unearthed but the Assessing Officer simply disbelieves the opening day sales which is duly accounted while accepting the pro tanto purchases therefor. Hence there is no ground for adding a sum of Rs.6,41,625/-as alleged inflation in sales, when the said sales are already part of the recorded transactions and the Assessing Officer has accepted the pro tanto purchases and manufacturing operations as correct.
13.2. Ld. AR submitted that it is also pertinent to note that the Assessing Officer having accepted the purchases are available, vide his observation in para 3, page 5 of the assessment order, there is no case for suspecting that the sales are bogus. However, in view of the inherent inconsistencies in the accounts rendered per-se, the additions that, can be contemplated on this alleged bogus sale is only a sum of Rs.37,000/- on basis of decided case laws aforesaid.
14. Ld. DR on the other hand relied on the orders of revenue authorities.
15. Considered the submissions of both the parties and perused the material facts on record. We observe from the submissions and records produced before us that there is sales taken place at the commencement of the business which is fact. For sales to complete there has to be stock for such purpose. In the given case, assessee had made sales in the commencement of the year. There has to be some expenditure without which the stock would not have appeared for making sales. Moreover, the assessee had made sales to its own sister concerns. There has to be stock to make sales. In our considered view, no businessman will make bogus sales in the commencement of the venture. It is wrong to treat such sales as unexplained or inflated sales. The assessee has made sales with stock but failed to explain the source of such arrangement. This is also fact that the sister concerns of the assessee are also in the same line of business. It may be internal arrangement to make sure to 10 ITA No. 839/H/15 Ganjikunta Kishore Babu (HUF) have initial sales on the first day of commencement of the business. In our considered view, the AO must have brought the element of profit to tax instead of whole value of sales. We direct the AO to tax only the profit. We remit the matter back to the file of the AO to determine the profit considering the industry and calculation offered by the assessee. Needless to say that assessee must be given proper opportunity of being heard.
16. As regards ground No. 13 pertaining to charging of interest u/s 234C, it is observed that charging of interest u/s 234C is consequential in nature. It is directed that the interest u/s 234C shall be revised on the basis of liability computed as per this order.
17. In the result, appeal of the assessee is partly allowed for statistical purposes.
Pronounced in the open court on 24 th August, 2016.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 24 th August, 2016
kv
Copy to:-
1) Ganjikunta Kishore Babu (HUF), C/o J Prabhakar, CA., Residency Apartments, 245, TTK Road, Alwarpet, Chennai.
2) ITO, Ward - 1, Anantapur.
3) CIT(A), Kurnool
4) CIT, Kurnool
5) The Departmental Representative, I.T.A.T., Hyderabad.
11 ITA No. 839/H/15 Ganjikunta Kishore Babu (HUF) De scri pti on Date Intls S.No. 1. Draft dictated on Sr.P.S./P.S 2. Draft placed before author Sr.P.S/PS Draf t propo sed & pl ac ed b ef ore the se con d Mem ber JM/AM 3 4 Draf t di scu ssed/a ppr ov ed by sec on d Mem ber JM/AM 5 Approv ed Draft comes to the Sr.P.S./PS Sr.P.S./P.S 6. Kept for pronouncement on Sr. P.S./P.S. 7. Fi l e sent to the B enc h Cl erk Sr.P.S./P.S 8 Dat e o n whi ch f i l e goe s t o t he H ea d Cl erk 9 Date of Di sp atch of order