Income Tax Appellate Tribunal - Mumbai
Ajay Sharad Khankoje, Mumbai vs Department Of Income Tax on 28 August, 2012
ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" Bench, Mumbai
Before Shri B.R. Mittal, Judicial Member and
Shri B. Ramakotaiah, Accountant Member
ITA No.4400/Mum/2010
(Assessment year: 2007-08)
ACIT, 25(3), C-11, Room Vs. Shri Ajay Sharad Khankhoje,
No.308, Pratyaksh Kar Bhavan, 803, Challenger Tower-III,
Bandra-Kurla Complex, Bandra Thakur Village, Kandivali
(East) Mumbai 400 051 (East), Mumbai 400 101
PAN: AABPL 0243 R
(Appellant) (Respondent)
Department by: Ms. Neeraja Pradhan, DR
Assessee by: Shri Firoze B. Andhyarujina &
Shri D.B.Shah
Date of Hearing: 28/08/2012
Date of Pronouncement: 28/09/2012
ORDER
Per B. Ramakotaiah, A.M.
This is a Revenue appeal against the orders of the CIT (A)-35 Mumbai, dated 12-03-2010. The Revenue has raised the following grounds:
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in accepting the shares of the company are long term capital asset and the profit arising thereof is long term capital gains without appreciating the fact that that issue of share certificate is an integral part of the process of allotment of shares and further the reliance was based on the judgment of Hon'ble High Court OF Madras in the case of CIT v. M. Ramaswamy [1985] 151 ITR 122 in which It was held that between the transferor and the transferee, the transaction was complete when the share certificates were handed over.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs 21,34,8391- on the ground that the dissolution of SYNCON being a condition precedent Page 1 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai to the sale of shares in SITSIPL and hence allowable without appreciating the fact that mere liability or obligation cannot be regarded as an item of expenditure, let alone an expenditure incurred wholly and exclusively in connection with the sale of the capital asset.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of exemption claimed by assessee under section 54F without appreciating the fact that assessee had more than one house at the time of transfer of capital asset and for qualifying the exemption it is necessary and applicable to have the investments made in residential house in the name of the assessee only.
4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to delete the addition of the cost of acquisition of shares considered as 'NIL' during the assessment proceedings without appreciating the fact that assessee could not produce the evidence for payment of purchase; of shares neither in assessment proceedings nor in appellate proceedings".
2. Briefly stated, assessee is an individual and is one of the promoter and director of a closely held company namely M/s Synergetics Information Technology Services (India) Private Limited (SITSIPL) engaged in the business of software training.
3. SITSIPL promoted by the appellant and Mr. Sanjay Vyas was incorporated on 22 April 1997 in India, under the provisions of Companies Act, 1956. Total issued, paid-up and subscribed share capital of SITSIPL was 81,200 shares. Assessee was also a partner in a registered partnership firm M/s Synergetics Consultancy (SYNCON) with other four partners namely Mr. Sanjay Vyas, Mr. Mahesh Shinde (MS), Mr. Raj Dorvani (RD), Mr. Shantanu Soman (SS), each having equal share in profit and loss of the firm. SYNCON was also engaged in the business of software training, similar to the business of SITSIPL. During the year under consideration, assessee along with his co-promoter Mr. Sanjay Vyas, entered into, an Page 2 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai agreement dated 12th October 2006 to sell part of their stake in SlTSIPL to Aptech Limited (Aptech). Assessee and the co-promoter entered into a non-binding offer with Aptech, which contained the terms of the offer for acquisition of the shareholding in SITSIPL. As per the said offer letter, Aptech would acquire the shares in SITSIPL from assessee and the co-promoter after closure of SYNCON, in which both persons were partners along with 3 others.
4. By virtue of the said offer, assessee agreed to transfer 28,420 shares being 70% of his total shareholding to Aptech. After extensive negotiations, the sale consideration per share was mutually decided at `615.75/-. Accordingly assessee received a sum of `1,74,99,615.00 being consideration for the sale of 28,420 shares.
5. As part of deal, an agreement dated 1.4.2006 (before the deal has crystallized) was entered into between SITSIPL and SYNCON wherein the said firm would be taken over by company and three outgoing partners would be paid. Followed by an addendum dated 12.10.2006 it was decided that the partners MS, RD and SS as consideration for closure of SYNCON would be paid a sum of `14,23,226.00 each and that the liability for payment of this sum would be to the account of assessee and his co-promoter.
6. On receipt of the consideration for the sale of shares, assessee purchased a residential unit No.804 & 805 both having common entrance and a single indivisible residential unit on 8th Floor in D Wing of building Ekta Meadows aggregating to `37,66,259/- in the joint names of himself and his spouse and deposited `1,00,00,000/- in capital gain saving account with bank of Baroda before due date of filing return of income.
7. Assessee while offering long term capital gain claimed certain expenditures including `21,34,839/- towards payment for dissolution of SYNCON a partnership firm and claimed deduction of investment in house property under section 54F. AO on the reason that share certificate was issued just before the sale, held that the Page 3 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai sale of shares of the company was short term capital gain thereby he did not allow the exemption under section 54F. He also did not give the benefit of cost of acquisition of shares on the reason that assessee did not furnish any evidence towards purchase of shares by paying 'cost'. In the computation, he also denied the claim of expenditure of `21,34,839/-(along with other amounts) on the reason that the payment was not linked to sale of shares in SITSIPL. On these reasons, AO computed the short term capital gain.
8. Assessee contested the same before the CIT (A) who after examining the facts of the case held that assessee purchased the shares way back in 1998, supported by the copy of the balance sheet, annual reports filed with the Registrar of Companies and also distinguished the judgment of the Hon'ble Madras High Court in the case of CIT vs. M. Ramaswamy (1985) 151 ITR 122 and held that assessee has purchased the shares long back. Therefore, he held that claim of long term capital gain is correct. In addition he also examined the issue of 'cost' and directed AO to allow the cost at `.10/-per share as the purchase price of shares. With reference to the expenditure claimed under section 48 he allowed an amount of `.21,34,839/- holding that the amount was necessary for sale of the shares while however, not accepting the claim of `.91,026/- on unsecured loans. With reference to the deduction under section 54F he also examined the title deeds and held that assessee is beneficial owner of the property and has purchased in the joint name only for personal purposes and further, the investment was made by assessee. He elaborately discussed all the issues and allowed assessee's claims on which Revenue is aggrieved.
9. We have heard the learned DR and the learned Counsel.
10. The Ground No.1 raised by the Revenue is on the issue whether the shares are long term assets or short term assets. The finding of the CIT (A) after examining the facts is as under:
Page 4 of 17ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai "2.7 I have carefully considered the submission of the appellant. On perusal of the audited balance sheet and Profit & Loss A/c for the year ended 31.3.2004, it is evident that the total issued, subscribed and paid-up share capital of the company was `.8,12,000/- divided into 81,200 shares of `.10/- each as on 31.3.2004 and 31.3.2003. Further, the Annual Return of SITSIPL for year ended 31.3.2003 submitted with the Registrar of Companies clearly shows that the appellant holds 40,600 equity shares in SITSPL. As such, it is evident that the appellant was holding 40,600 equity shares for at least 4 years i.e. since 31.3.2003. There is merit in the appellant's contention that the date of issue of the share certificate does not reflect the date of purchase of the shares especially in view of the fact that other records maintained by SITSPL under the Companies Act, 1956 clearly establish beyond doubt that the equity shares are not held only from 12.10.2006 i.e. the date of the issuance of the share certificates but in fact the share were held by assessee at least from 31.3.2003. 2.8 In view of the above, I am of the opinion that 40,600 equity shares held by the appellant in SITSPL are long term capital assets and therefore the gains arising to the appellant on the sale of 28,420 shares are in the nature of long term capital gains".
11. Since it is a fact that assessee has acquired shares long back, just because a fresh share certificate was issued on 12.10.2006, it cannot be considered that he acquired shares only on that date. We do not find any reason to differ from the findings of the CIT (A) which is the factual matter. Nothing was brought on record to counter the above finding except relying on judicial decision which was distinguished correctly by CIT(A). Therefore, this ground of the Revenue is rejected.
12. In Ground No.2 the facts are that assessee claimed deduction of payment stating that the payments made to the other partners of the SYNCON aggregating to `21,34,839 were directly linked to the part sale of his shareholding to Aptech. Aptech, in the Non-Binding Term Sheet had, inter alia, stipulated that SYNCON would require to be folded up i.e. dissolved. It was claimed that assessee agreed to pay each of the other 3 partners a sum of `7,11,613, in all aggregating to `21,34,839 as consideration for consenting to Page 5 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai dissolve the partnership firm, SYNCON. The co-promoter, Sanjay Vyas, similarly agreed to pay each of the 3 partners a sum of `7,11,613 each. As such, it was claimed that the payment by assessee was directly linked to the sale of his shareholding to Aptech and, therefore, deductible u/s 48 of the I.T. Act, 1961.
12.1 The AO has held that the payment by assessee to the other partners of SYNCON does not bear a direct and proximate nexus to the transfer of shares by assessee. The AO states that the non- binding term sheet does not stipulate that the other partners of SYNCON are to be compensated to the extent of `42,69,678/- by assessee. Further AO states that Aptech is not a party to the agreement between SITSIPL, assessee, co-promoter Sanjay Vyas and SYNCON. Under the circumstances, AO disallowed the expenditure on the transfer of the asset as claimed by assessee.
12.2 The assessee submitted before the CIT (A) that:
i) SYNCON, being a business similar to that of SITSIPL, needed to be dissolved before the shares could be sold by assessee to Aptech as per the non-binding term sheet.
ii. The Non-Binding Offer from Aptech Ltd setting out the terms and conditions for the purchase of shares held by assessee and the co-promoter, explicitly mentions as follows:
"This summary of Terms outlines the indicative principal commercial terms and conditions pursuant to which Aptech Lta. [APTECH] would acquire 85%stake in Synergetics Information Technology Services (India) Pvt. Ltd. (Synergetics) after folding in of the partnership firm- Synergetics Consultancy (the "Transaction').(emphasis added). iii. Further, the aforesaid Offer defines Company as ''Synergetics Information Technology Services (India) Pvt. Ltd. [Synergetics] after folding in of the partnership firm- Synergetics Consultancy"
iv. Vide Agreement dated 01.04.06 between SITSIPL and SYNCON, it was agreed that in consideration for transfer of Page 6 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai business of SYNCON, 3 partners of SYNCON namely MS, RD and SS would be paid a sum of `14,23,226 each aggregating to ` 42,69,678.
v. Further vide an Addendum dated 12-10-2006, the liability to pay the aforesaid said sum of `42,69,678 was assigned to assessee and the co-promoter Sanjay Vyas (`21,34,839/- each) in view of the fact that on closure of the business of SYNCON, the appellant and Sanjay Vyas would be directly benefited in as much as being able to sell their shares in SITSIPL to Aptech.
vi. In view of the above, it is clearly established that the closure of the SYNCON was inextricably linked being a pre- condition, to the, transfer of shares by assessee. vii. SYNCON was in fact dissolved and the payment of `21,34,839/- by assessee to the 3 partners of SYNCON is in the nature of consideration for agreement to dissolve SYNCON.
viii. Payment of `21,34,839/- was in fact made by assessee and the said amount is not a mere liability or an obligation. ix. The partners of SYNCON in receipt of the consideration for agreeing for the closure of SYNCON, have offered the said receipt from assessee and his co-promoter Sanjay Vyas for tax under the head Capital Gains.
x. As part of the settlement between the partners of SYNCON, assessee, in the course of dissolution of SYNCON, had to forego the balance to the credit of his capital account aggregating to `3,79,135/-.
xi. While computing the value of share for the purposes of sale to Aptech, the unsecured loan from the assessee amounting to `91,026.00/- was included as capital by the promoters and hence not separately receivable from the SITSIPL. In view of the above, it was submitted that assessee needed to incur the following expenditure to sell his shares to Aptech. As Page 7 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai such, the said expenditure is wholly and exclusively incurred for the transfer of shares to Aptech. The details of the expenses are as follows:
a) Payment to other partners of SYNCON `.21,34,839/-
b) Closing balance of capital in SYNCON `. 3,79,135/-
c) Unsecured loan to SITSIPL `. 91,026/-
Total `.26,05,000/-
------------------
12.3 The CIT (A) considered the findings of AO and the submissions of assessee. He decided the issue as under.
"3.6 I have considered the findings of AO and the submission of the appellant. Section 48 of the IT Act, 1961 which stipulates the mode of computation reads as follows:
"48 MODE OF COMPUTATION The income chargeable under the head "Capital gains"
shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts namely:-
(i) Expenditure incurred wholly and exclusively in connection with such transfer;
(ii) The cost of acquisition of the asset and the cost of any improvement thereto;
................."
3.7 On a plain reading of the section it is clear that only expenditure which is incurred wholly and exclusively in connection with the transfer i.e. expenditure which is inextricably linked to the transfer are deductible from full value of the consideration of such transfer. 3.8 The appellant was one of the partners in SYNCON, a registered partnership firm, carrying on the business similar to the business of SITSIPL. Aptech, in its non- binding Term Sheet had clearly mentioned that SYNCON would require to be dissolved prior to sale of shares of SITSIPL. Accordingly, the appellant and co-promoter Mr. Sanjay Vyas entered into an agreement for dissolution of SYNCON. This proves that the dissolution of partnership firm SYNCON was one of the conditions for sale of shares. As per the said agreement followed by an addendum dated 12.10.2006, the business of the SYNCON will be acquired as a going concern and purchase consideration will be borne equally by the shareholders of SITSIPL i.e. the ass and Mr. Sanjay Vyas Page 8 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai and the said consideration has been offered to tax by the receiving partners.
3.9 In view of the above, I am of the opinion that dissolution of SYNCON being a condition precedent to the sale of shares by the appellant, was directly related to the transfer of shares in SITSIPL and therefore, expenses amounting to `21,34,839/- incurred in relation thereto are expenses deductible under section 48 of the I.T. Act, 1961.
3.9.1 Regarding the amount foregone by the appellant which was outstanding in his capital account at `3,79,135/- the CIT (A) opined that the same cannot be allowed as deduction as the appellant has not offered the same separately for taxation under the head capital gains unlike other partners. The appellant would be able to realize his capital account balance from the assets of the firm and as such the same cannot be allowed as deduction.
3.10 In respect of the unsecured loan of `91,026/- the appellant has not been able to provide support to his claim that the said amount was factored in while working out the sale price of equity shares of SITSIPL. Under the circumstances the CIT (A) upheld the disallowance of the sum of `91,026/- made by AO".
13. The contentions were reiterated before us. Paper book filed was referred to support respective arguments. After considering the rival submissions, we are of the opinion that the decision of the CIT (A) is not correct. There is no dispute with reference to legal position u/ 48. On a plain reading of the section it is clear that only expenditure which is incurred wholly and exclusively in connection with the transfer i.e. expenditure which is inextricably linked to the transfer are deductible from full value of the consideration of such transfer. The claim has to be examined in the context of provisions and facts on record. First of all as seen from the non binding offer for purchase of shares the Aptech agreed to purchase 85% of the stake in SITSIPL after folding in of the partnership firm Synergy Consultancy. This offer as per record finalized on 12th October 2006. An MoU between SITSIPL (first party) and Synergy Consultancy (second party) was entered on 1.4.2006 by which the company was to acquire the firm and payment terms were mentioned as under:
Page 9 of 17ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai "4 PAYMENT TERMS 4.1 The First Party shall pay the Second Party the agreed consideration of`70.42,891/-as follows:
4.1.1 `14,23,226/- (Rupees Fourteen Lacs Twenty Three Thousand Two Hundred and Twenty Six only) on signing this agreement within 7 days, `2,51,158/-
(Rupees Two lacs Fifty One Thousand One Hundred and Fifty Eight Only) will be paid at the end of 6 months along with interest @ 7 % P .A., `1.41,085/- as continuity incentive to be paid for the calendar years ended "2007, 2008, and 2009" and 406 shares of Synergetics Information Technology Services India Pvt. Ltd. @ `615.75 per share aggregating to `2.49,995/- (Rupees Two Lacs Forty Nine Thousand Nine Hundred and Ninty Five only) to Mr. Mahesh Shinde, partner of the Second Party.
4.1.2 `14,23,226/- (Rupees Fourteen Lacs twenty Three Thousand Two Hundred and Twenty Six only) on signing this agreement within 7 days, `2,51,158/-
(Rupees Two lacs Fifty One Thousand One Hundred and Fifty Eight Only) will be paid at the end of 6 months along with interest @ 7 % P .A., `1.41,085/- as continuity incentive to be paid for the calendar years ended "2007, 2008, and 2009" and 406 shares of Synergetics Information Technology Services India Pvt. Ltd. @ `615.75 per share aggregating to `2.49,995/- (Rupees Two Lacs Forty Nine Thousand Nine Hundred and Ninty Five only) to Mr. Raj Dorwani, partner of the Second Party.
4.1.3 `14,23,226/- (Rupees Fourteen Lacs Twenty Three Thousand Two Hundred and Twenty Six only) on signing this agreement within 7 days, `2,51,158/-
(Rupees Two lacs fifty One Thousand One Hundred and Fifty Eight Only) will be paid at the end of 6 months along with interest @ 7 % P .A., `1.41,085/- as continuity incentive to be paid for the calendar years ended "2007, 2008, and 2009" and 406 shares of Synergetics Information Technology Services India Pvt. Ltd. @ `615.75 per share aggregating to `2.49,995/- (Rupees Two Lacs Forty Nine Thousand Nine Hundred and Ninty Five only) to Mr. Shantanu Soman, Page 10 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai partner of the Second Party.
4.1.4 Rs. Nil to Mr. Ajay Khankhoje, partner of the Second Party.
4.1.5 Rs. Nil to Mr. Sanjay Vyas, partner of the Second Party".
However, vide the addendum dated 12.10.2006 on the reason that clause 2(D) of the MoU provide for amendments, the payment terms were modified as under:
"C. The payment terms to be amended according to the following schedule:
Liability of Mr. Sanjay Vyas:
i) `711,613/- to MS, RD and SS each within 10 days of signing the MoU.
ii) Transfer of 1.5% of self shareholding in SYNERGETICS i.e. 609 shares equally to MS, RD and SS each of an agreed price of `615.75/-.
Liability of Mr.Ajay Khankhoje i. `.711,613/- to MS, RD and SS each within 10 days on signing the MoU.
ii. Transfer of 1.5% of self shareholding in SYNERGETICS i.e. 609 shares equally to MS, RD and SS each at an agreed price of `.615.75/-
Liability of SYNERGETICS:
i) `.251,158/- to MS, RD and SS each of the end of 6 months along with interest of 7% on signing the MoU.
ii) `.141,085/- as continuity incentive to be paid for the calendar years ended "2007, 2008 and 2009" to MS, RD and SS each".
14. We have perused the clause 2 (D) of MoU which is as under:
"2 Interpretation Save where the context otherwise requires in this Agreement:
(a)........
(b).......
(c).......
(d) Reference to this MoU or any other MoU are indicative and shall not be deemed part thereof or be taken into consideration in the interpretation or construction of the Agreement".Page 11 of 17
ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai
15. Even though we admit that the agreements are between the parties and bind themselves, what we notice is complete change in the terms. As per MoU in April 2006 the parties for the agreement are the company and firm only whereas the addendum to MoU was signed by the original shareholders of company and firm, thereby entire payments schedule has been modified so as to, in our view, claim the expenditure in the individual hands. According to the original plan, the firm is to be acquired by the company and accordingly the payments are to be made by Company to other partners. This was changed completely so that individual share holders were made liable, to certain extent only. The company continues to have liability as shown above even after taken control by Aptech. The payments by the original shareholders, one of which is assessee, to the partners who are leaving the firm is not a condition precedent to the sale of shares of assessee in SITSIPL and hence in our view the expenditure claim cannot be allowed while working out the capital gain. The entire change of payment schedule from that of the company to the individual is only to allow the share holders making a claim for deduction. However the payments to retired partners for a period of three years as 'continuing incentive' are still reflected as liability of company. In addition, the allotment of shares of 609 each was also agreed upon but these were not considered as liability of individuals. This indicates that 'addendum' was only for creating the so called liability which in practice is not linked to share transfer at all. Another reason for not accepting the contention is that assessee did not transfer all shares of company. Only few shares were transferred, but the claim of entire amount paid in cash was made. This also indicates that folding up of company and payment to three retiring partners was not a condition precedent for transfer of shares on which capital gain was offered. The part of amount being paid to retiring partners can not be allowed as deduction u/s 48. Therefore, we are not in agreement with the order of the CIT (A). For Page 12 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai these reasons, we set aside the order of CIT(A) allowing the amount and restore that of AO. Accordingly, Ground No.2 is allowed.
16. Ground No.3 is on the issue of exemption claimed by assessee under section 54F. This issue was discussed by the CIT (A) elaborately from Para 4.1 to Para 4.8 as under:
4.1 Before the AO, the appellant submitted that an investment was made aggregating to Rs. 37,66,259 in a residential house property divided into two adjacent units i.e. D 804 & 0-805 at Ekta Meadows, on 12-12-
2006. The two units are contiguous, inseparable and having a common entrance & kitchen. For the sake of convenience for unit no. D 804, the appellant's wife, Mrs. Preeti Khankhoje is the first holder and the appellant is the second holder and for Unit No. 0 805, the appellant is the first holder and the wife is the second named' holder. However, the payment for the purchase of both the units was made from the funds of the appellant. Further, the appellant also deposited a sum of `1,00,00,000 in Capital Gains Account Scheme within the time limit prescribed under section 54F of the Act. 4.2 AO vide order sheet entry dated 30.11.2009 and 16.12.2009 required the appellant to show cause why the exemption under section 54F of the IT Act 1961 should not be disallowed when the appellant already has two houses namely D-804 and D-805 at the time of transfer of asset and that the house property purchased is not in the name of the appellant only but also in the name of his wife.
4.3 The appellant, in response, submitted that the exemption u/s 54F of the Act cannot be denied since the 2 adjacent units in Ekta Meadows are in fact one single unit with a common entrance and kitchen. As such the 2 units are a single contiguous unit. It was further submitted that only for the purpose of documentation and for commercial expediency of the builders, the said unit was sold to the appellant under two separate agreements. In support, the appellant relied upon the decision of the Karnataka High Court in the case of Commissioner Of Income-Tax And Another Vs. O. Ananda Basappa [309 ITR 329J, wherein it was held that the purchase of the two adjacent flats made by the assessee has to be treated as one single residential unit and that the assessee is entitled for exemption. In respect, of the issue of the units being purchased in the name of the appellant's spouse, the appellant submitted that the source of purchase of the both the units were his Page 13 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai own funds and that the spouse had not contributed any amount to the said purchase. The name of the spouse (as second holder) was added for the sake of convenience to ensure succession in the property.
4.4 However, the AO having concluded that the gains arising on the sale of shares of SITSIPL are short term capital gains, disallowed the appellant's claim for deduction under section 54F. Notwithstanding the above, the AO also held that the purchase of 2 units by the appellant represents purchase of more than 1 house property and, therefore, exemption under section 54F of the LT. Act, 1961 cannot be allowed to the appellant. The AO also denied the appellant's claim for exemption under section 54F of the LT. Act, 1961 on the ground that the appellant had not purchased the house property only in his own name but also in the name of his spouse. In support, the AO relied on the decision of the Hon'ble Bombay High Court in the case of Prakash vs. Income-tax Officer, ward no. 1(5) [173 TAXMAN 311J wherein the Hon'ble Court held that for qualifying for the exemption it is necessary to have the investment made in residential house in the name of the assessee only.
4.5 Before me the AR of the appellant reiterated the stand that the Flat 0-804 & 0-805 of Ekta Meadows in which the investment is made, being adjacent and with a common entrance and kitchen are being used by the appellant as a single residential unit. As such, the purchase of the 2 units represent investment in one single house property. The AR placed reliance on various judicial pronouncements including the decision of Special Bench of Hon'ble Mumbai Tribunal in the case of Income Tax Officer Ward 19(3)-4 vs. Ms. Sushila M. Jhaveri (ITA No.2856/M/2000) wherein it has been held that where the investments had been made in two adjacent flats intended to be used as one residential house having same kitchen and common passage, that will be considered as investment in a single residential unit.
4.6 The AR further submitted that the AO's reliance on the judicial pronouncement of Hon'ble Bombay High Court in the case of Prakash vs. Income Tax Officer Officer, ward No.1(5) (173 Taxman 311) is incorrect as the material facts of the case before the Hon'ble Bombay High Court and the instant case are completely different.
4.7 In the case before the Hon'ble Bombay High Court assessee therein had sold the property owned by him and acquired and constructed the new property out of Page 14 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai the sale proceeds, only in the name of his adopted son, with a clear intention to transfer the property to the adopted SO. The assessee, therefore, utilized the sale proceeds to construct a house by transferring the property and submitting the house plan in the name of the son only. As such, it was the assessee's intention from the very first day, even prior to the construction of the house property, to transfer all ownership rights and benefits of the assessee to the adopted son. As such, the assessee transferred the property before the prescribed period, as per the scheme of Section and the son became the owner of the property for all the purposes. The assessee, admittedly, had no domain and/or right whatsoever on the said property. The Hon'ble Court also observed that an assessee must have valid title legally conveyed to him after complying with the requirement of law or at least entitled to receive income from the property in his own right and have control and domain over the said property for all the legal purposes, which basically excludes a third person of any right over the said property.
4.8 In the instant case, the appellant has purchased the house property, in the joint names of himself and his spouse, jointly, as follows:
Ekta D 805 Ajay Sharad Khankhoje & Preeti Ajay Khankhoje Ekata D 804 Preeti Ajay Khankhoje & Ajay Sharad Khankhoje Under the circumstances, the appellant has retained right, title and interest in the house property. By including the name of his spouse, the appellant does not transfer any right in the immovable property to his spouse. This is the material fact which is different from the case before the Bombay High Court. Under the circumstances, the AR submits that the said case law does not apply to the facts of the case under consideration.
In view of the clear observations and findings of the CIT (A) with which we agree, Ground No.3 of the Revenue is rejected.
17. Ground No.4 is with reference to the cost of acquisition of shares considered by AO at Nil.
18. Briefly stated, AO based on a review of the resolution of the Board of Directors passed on 23.1.1998 has held that since the resolution does not specifically mention that the shares are being Page 15 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai issued for a consideration, the cost of acquisition is taken to be Nil.
AO further states that assessee did not produce any proof for the purchase of shares.
19. Before the CIT (A) it was submitted that the shares were allotted, at par, to assessee vide the resolution of the Board of Directors dated 23.1.1998. In other words, the shares were allotted for a consideration of `.10/- per share. This was supported by the relevant disclosure in Schedule 1 of the Balance Sheet for the year ended on 31.3.2004 forming part of the submissions. The said schedule 1 reads as follows:
"ISSUED, SUBSCRIBED AND FULLY PAID UP CAPITAL 81,200 EQUITY SHARES OF `.10/- EACH FULLY PAID FOR CASH AT PAR"
It was submitted that section 211 of the Companies Act, 1956 Schedule VI, specifically provides for a separate disclosure in the Balance Sheet where equity shares "are allotted as fully paid up pursuant to a contract without payment being received in cash". In the absence of such disclosure in the Balance Sheet of SITSIPL, it was submitted that AO's conclusion that equity shares were issued for Nil consideration is unfounded.
20. The CIT (A) held as under:
"5.3. I have carefully considered the contention of AO and submission made by the AR. There is no doubt that the appellant has acquired the shares in SITSIPL. I have perused the said Board Resolution and find that it does not specifically mention that the shares are issued for a consideration. However, in view of the supporting evidence in the form of the Schedule VI which is statutorily required to be followed by every company, I find merit in the AR's submissions and hold that the cost of acquisition in respect of the equity shares in SITSIPL is to be considered at `.10/- as claimed by the appellant".
21. After considering the rival submissions, we agree with the order of the CIT (A). There is evidence that the shares were issued at cost and therefore, assessee is entitled for claiming the cost of acquisition with necessary indexation benefits. Nothing was brought Page 16 of 17 ITA No.4400 of 2010 Ajay Sharad Khankoje Mumbai on record to differ from the findings of CIT(A). Ground No.4 of the Revenue is accordingly dismissed.
22. In the result appeal filed by the Revenue is partly allowed.
Order pronounced in the open court on 28th September, 2012.
Sd/- Sd/-
(B.R. Mittal) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 28th September, 2012.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "A " Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
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