Income Tax Appellate Tribunal - Hyderabad
Sri G Radha Charan Reddy,, Hyderabad vs Assessee on 5 August, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A" : HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA.No. 162 & 163/Hyd/2013
Assessment Year 2008-2009 & 2010-2011
M/s. Charans Life Devices vs. DCIT, Central Circle-2
Pvt. Ltd. Hyderabad Hyderabad
PAN AACCC0638H
(Appellant) (Respondent)
ITA.No.373, 374 & 375/Hyd/2013
Assessment Years 2005-2006 to 2008-08
Sri G. Radha Charan vs. DCIT, Central Circle-2
Reddy, Hyderabad Hyderabad
PAN ACAPG3331Q
(Appellant) (Respondent)
ITA.No.376/Hyd/2013
Assessment Year 2009-2010
Sri G. Radha Charan vs. DCIT, Central Circle-2
Reddy, Hyderabad Hyderabad
PAN ACAPG3331Q
(Appellant) (Respondent)
ITA.No.377, 378 & 379/Hyd/2013
Assessment Years 2006-2007 to 2008-2009
Smt. G. Niveditha Reddy, vs. DCIT, Central Circle-2
Hyderabad Hyderabad
PAN ADJPG5941N
(Appellant) (Respondent)
For Assessee : Shri A.V.Raghuram (A.R.)
For Revenue : Shri A.K.Satpathi (D.R.)
Date of Hearing : 05.08.2013
Date of pronouncement : 31.10.2013
2
ITA.No.162,163/Hyd/2013 etc.,
M/s. Charans Life Devices Pvt. Ltd. Hyd.
ORDER
PER SMT. ASHA VIJAYARAGHAVAN, J.M.
The above (9) appeals are filed by three different assessees viz., M/s. Charans Life Devices Pvt. Ltd., Sri G. Radhacharan Reddy and Smt. G. Niveditha Reddy against the Order of the CIT(A), Hyderabad. Since, common issues are involved in these appeals, they were clubbed and heard together and are being disposed of by this single consolidated order. First, we will take up ITA.No.162/Hyd/2013 for the assessment year 2008-09 in respect of M/s. Charans Life Devices Pvt. Ltd. Hyderabad, which was filed against the Order of the CIT(A)-1, Hyderabad dated 30.11.2012.
ITA.No.162/Hyd/2013 - A.Y. 2008-2009
2. Brief facts of the case are that the assessee is a Private Limited Company and has filed its return of income for the assessment year 2008-2009 on 29.09.2008 declaring an income of Rs.45,33,010/-. The same was processed under section 143(1) of the Act. Later, search and seizure operation was conducted in assessee's case on 12.08.2009. Accordingly, notice under section 153A was issued on 28.04.2010 and the assessee filed return of income on 19.07.2010 declaring income of Rs.45,33,010/-. The assessment was completed under section 143(3) read with section 153A of the Act determining total income at Rs.1,29,26,848/-. The relevant observations of Assessing Officer reads as under :
"04.0. During the course of assessment proceedings, the Assessing Officer noticed that the ledger extract of Sri Radha Charan Reddy, Director, in 3 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
the assessee's books shows a debit balance of Rs.65,00,000/- as on 27-9-2007. The account had been further credited by way of journal entries on various dates from 4-10-2007 to 29-3-2008 by an amount of Rs.25 lakhs and outstanding balance as on 31-3-2008 showed a debit balance of Rs. 40 lakhs. On verification with the individual balance sheet and profit and loss a/c of Sri G. Radhacharan Reddy furnished by the assessee after the search and seizure operation however, it was noticed that no such outstanding amount was shown in his hands as on 31-3-2008. It was explained that a sum of Rs.40,00,000/- was received towards advance for sale of flat No.103 at Zamrud Residency while Rs.25 lakhs was the amount received towards loan from Kotak Mahindra. The Assessing Officer noted that the sum of Rs.40 lakhs found part of Rs.60,50,OOO/- which had already been treated as deemed dividend in the hands of Shri G.Radhacharan Reddy. The balance Rs.25 lakhs was the amount adjusted by the assessee towards commission paid to him whereon no TDS was deducted. Accordingly, considering the same as not allowable u/s.40(a)(ia), the Assessing Officer added the amount of Rs.25 lakhs to the income returned.
0.5.0. By way of written submissions, the Authorised Representative of the assessee submitted that out of the Rs.65 lakhs appearing in the ledger a/c, Rs.25 lakhs pertained to loan taken from Kotak Mahindra Bank Ltd for the purpose of payment of commission to Sri Reddy. He explained that the assessee had repaid four monthly instalments of Rs.3,53,883/- during the year against the said loan and the same was adjusted towards commission paid to the director for the Assessment Year 2008-09, totalling to Rs.14,15,532/-. He submitted that this amount was shown by Shri G. Radhacharan Reddy as income in his income tax return for the Assessment Year 2008- 09, whereas the balance amount of Rs.10,84,468/- was carried to the next year and recorded as commission paid for the Assessment Year 2009-10, wherein again, the same was shown as income in the return of income. The Authorised Representative argued that since Rs.25,00,000/- was paid as commission to the Director and the Director admitted 4 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
the same as income, there is no loss to the Revenue and the commission has already been taxed in the hands of the Director. He argued that it is an accepted principle that similar amount shall not be taxed twice when there is proof of payment of taxes by the receiver (Director) for the expenditure claimed by the assessee. In this regard, he relied on the decision in the case of Hindustan Coca Cola Beverages (P) Ltd Vs. Commissioner of Income-tax 293 ITR 226 (SC).
06.0 The Authorised Representative alternatively argued that disallowance of provisions of sec.40(a)(ia) are not applicable to salary payments and the commission paid to the Director based on the turnover of the company, is part of salary only. He pointed out that in the computation of income, the recipient had offered such commission as salary only and accordingly the provisions of sec.40(a)(ia) could not have been applied".
3. On appeal by the assessee before the CIT(A), the learned CIT(A) observed after going through the facts of the case and the submissions of the assessee that it can be seen that the Assessing Officer disallowed the expenditure of Rs. 25 lakhs paid as "commission to Directors", as no TDS was deducted thereon. The CIT(A) pointed out that in the course of appellate proceedings, the assessee has firstly contended that the recipient Director had offered such amount as income and 'paid taxes thereon in the Assessment Years 2008-09 and 2009-10, and therefore the same amount should not be taxed twice. The learned CIT(A) observed that it was further submitted by the assessee that in the instant case a disallowance of expenditure claimed by the assessee towards "commission to Director" has been made in terms of the provisions of sec. 40(a)(ia) of the I.T. Act and it is not a case of bringing any income to tax twice.
5ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
4. The CIT(A) held that as regards the alternative contention that the commission so paid, being based on the turnover of the company, is part of salary and has been offered as salary only by the recipient, it is seen that firstly there was no employee and employer between the assessee and the Director, so as to claim that the amount had been paid as "salary". Besides, it is seen that the assessee did not make any deduction of tax on such "salary" u/s.192 of the Act also. Therefore, even from this angle, the assessee has failed to comply with the provisions of sec. 40(a)(ia) during the year and consequently, is not eligible for claiming deduction of expenditure of Rs.25 lakhs. The CIT(A), therefore, upheld the disallowance and decided the appeal against the assessee.
5. The learned Counsel for the assessee Shri A.V. Raghuram, pointed out at page 263 of the paper book the resolution with respect to Mr. Radha Charan Reddy, Managing Director of the Company that the Directors are eligible to take commission on achievement of target set by the Principal- Company from the Financial Year 2007-08 onwards. The learned Counsel for the assessee relied on the decisions in the case of CIT vs. Indian Engineering & Commercial Corporation Pvt. Ltd. (1993) 201 ITR 723 (SC), Rohit Pulp & Paper Mills Ltd. vs. CIT (1995) 215 ITR 919 (Bom.) The Learned Counsel for the assessee Shri A.V.Raghuram relied on the decision of the Calcutta High Court decision in the case of Sajid Mowjee vs. ITO (2005) 279 ITR 467 (Cal.) wherein the Hon'ble High Court held as follows :
"Board of Directors of a company having appointed assessee as a wholetime director and sanctioned his remuneration in terms of articles of association, it was a contract of employment and not for employment and, therefore, remuneration received by the 6 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
assessee, by whatever name called, falls within the definition of salary under s. 17(1)(iv) and was assessable as such, and not as income from other sources."
6. Aggrieved, assessee filed appeal before us and has raised the following grounds of appeal before the Tribunal.
1. "On the facts and in the circumstances of the case the order of the learned CIT(A) is erroneous and unsustainable in law and on facts.
2. The CIT(A) erred in sustaining the disallowance of Rs.25,00,000/- made by the Assessing Officer under the provisons of section 40(a)(ia) of the I.T. Act.
3. The CIT(A) failed to appreciate that the amount of Rs. 25,00,000/- paid to Director of the Company is part of salary and therefore, provisions of section 40a(ia) of the Act are not applicable to such payment.
4. Without prejudice, the CIT(A) ought to have appreciated that the provisions of section 40a(ia) of the Act are applicable in respect of amounts payable, and not where the amounts are already paid".
7. The learned D.R., on the other hand, submitted that required Form-16 is to be furnished so as to find-out from the return of income whether the amount which has been stated as salary is received by the Director and is reflected in the return of income. The learned D.R. relied on the decision of the Supreme Court in the case of CIT (Central) vs. Standard Vacuum Oil Co. (1969) 59 ITR 685 (SC). The learned D.R. also further relied on the decision in the case of CIT vs. Manmohan Das (1966) 59 ITR 699 (SC) and requested to explain the characteristic of the receipt to be treated under the head salary for the purpose of income-tax. According to D.R., in the case of CIT vs. Manmohan Das (supra), the AO, the CIT(A) and the learned Tribunal were right in holding that the receipt could not be assessed under the head 'Salary'. For the purpose of ascertaining the character of the receipt, the D.R. pointed out that it is only a contract of employment when the receipt could be brought 7 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
under the head salary for the purpose of income-tax but not in case of a contract for employment.
8. We have heard both the parties. We find that the decision in the case of Sajid Mowjee vs. ITO (2005) 279 ITR 467 (Cal.) the Hon'ble Calcutta High Court has discussed the issue at length and the relevant findings of the Hon'ble Calcutta High Court are extracted hereunder :
"The company is a juristic person and it is governed by the board of directors and is altogether independent entity other than the directors. Board of directors may control the company but such directors might have dual capacity, one as member of the board of directors and the other as an employee of the company or being in charge of the administration of the company as an independent administrator in the capacity of a director. The appointment of one of the members of the board of directors as wholetime director involved certain kind of responsibility to be carried out in terms of his appointment whether specified or not. The board has a right to appoint. It has a right to give directions, it may not have right to take disciplinary action. But it has right to prescribe conditions of service. It has right to determine the nature of the duties to be performed by the wholetime directors. It has right to determine the salary to be paid. Therefore, the company could be an employer while appointing one of its directors as wholetime director on a particular remuneration and prescribing the terms and conditions of his appointment. In common parlance the wholetime director may not be an employee but even then the character of the receipt or remuneration having come within the definition of salary under s. 17(1)(iv) being a fee or remuneration in whatever name it is called and not being excluded by the Expln. 2 to s. 15, the remuneration received by the assessee cannot be treated to be anything other than income under the head salary. The income cannot be treated as income from other sources. The facts disclose that the appointment is a contract of employment not a contract for employment. Therefore, the receipt comes under the head salary.--Ram Prashad vs. CIT 1972 CTR (SC) 97 : (1972) 86 ITR 122 (SC) relied on; State of Gujarat & Anr. vs. Raman Lal Keshav Lal Soni & Ors. AIR 1984 SC 161 distinguished.8
ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
9. In these circumstances, we direct the Income Tax Officer to examine the issue in the light of Sajid Mowjee vs. ITO (supra) and to verify the return of the assessee as to whether the amount of Rs.25,00,000/- has been declared as salary income in the return of income and decide accordingly.
10. In the result, ITA.No.162/Hyd/2013 of the assessee is allowed for statistical purposes.
ITA.No.163/Hyd/2013 - Assessment year 2010-2011 :
11. This appeal also filed by M/s. Charans Life Devices Pvt. Ltd. against the Order passed by the Deputy Commissioner of Income Tax, Central Circle-2, Hyderabad, u/s. 143(3) on 27.12.2011 for the assessment year 2010-11 before CIT(A). By way of the said order, the total income of the assessee was determined at Rs.2,00,51,003/-, as against the total income of Rs.1,15,00,230/-. The only issue raised by the assessee in the appeal before the CIT(A) is relating to addition of interest of Rs.13,21,936/- paid on the bank loan, claimed as utilized for expansion of activities.
12. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had debited Rs.13,21,936/- towards interest on borrowed capital, which was utilized for the purpose of investment in a company named PHEPL. He disallowed the interest so claimed as he found that it was not related to the business of the assessee-company.
13. By way of written submissions, the Authorised Representative of the assessee submitted that the assessee is 9 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
engaged in the business of trading in Pace-makers and Stents, besides other life saving appliances since 1986. He submitted that the return of income for the Assessment Year 2010-11 was filed on 15-10-2010 i.e. after the search and seizure action in the assessee's case in Aug. 2009. He submitted that since the assessee is in the business of health care, it had desired to develop a HealthCare Unit, which prevents health problems, and had accordingly promoted a company by the name Proquest Health Enterprises (PHEPL) and invested in its share capital, as an ongoing business in the line of health care. He averred that the business conducted in the said company is similar to the assessee's business of protecting the health. The Authorised Representative argued that the investment so made in the subsidiary was diversification of the activity in the same life saving and medical category and since the assessee did not want to divert his own funds in large volumes at a time, which would have affected the liquidity of his company, the loan was obtained from Citi Bank, so that repayment can be made in a phased manner. He added that since the said company did not have assets like land and building to offer as collateral security, the directors offered their personal assets in this regard. He added that for obtaining the loan and for providing the collateral mortgage, commission charges had to be paid to the property holder as per the normal business scheme. The Authorised Representative averred that as held in the case of Commissioner of Income-tax Vs. Tulip Star Hotels Ltd (338 ITR 442) (Del), if borrowed funds are invested in equity capital of subsidiary company, expenditure incurred would be for business purpose only.
10ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
14. On appeal before the CIT(A), the learned CIT(A) held that it is an undisputed fact that the borrowed capital, on which interest of Rs.13,21,936/- was paid, had been utilized for the purpose of investment in PHEPL and the same had not been utilized directly for the own business of the assessee company. As regards the contention that the business of the company being so promoted by the assessee was similar to the assessee's own business, the CIT(A) observed that it is clear that the assessee is only dealing in life saving devices and appliances, such as pacemakers, stents, etc., whereas PHEPL was promoted to develop a health care unit. The CIT(A) held that firstly it is clear that the business of PHEPL was never likely to augment the business of the assessee company, as admittedly the said health care unit aimed to prevent health problems and business of the assessee company can thrive only when there are serious health/heart problems.
15. Secondly, the CIT(A) held that it is clear that the investment in PHEPL cannot be said as diversification of the assessee's activity in the field of life saving and medical category, as the assessee itself is only dealing in life saving devices and does not do any activity of life saving directly.
16. Lastly, as regards the reliance of the Authorised Representative of the assessee on the decision in the case of Tulip Star Hotels Ltd (supra), the CIT(A) pointed out that the Hon'ble Supreme Court have opined that the decision in the case of S.A.Builders Vs. Commissioner of Income Tax (288 ITR 1), on which the above decision of the Hon'ble High Court of Delhi is based, needs reconsideration and they have accordingly issued notice on the SLP recently. The CIT(A) 11 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
observed that even otherwise, in the case of S.A. Builders Vs. Commissioner of Income Tax (supra), the Hon'ble Supreme Court had indeed observed that it needs to be seen as to what the sister concern did with the money so advanced and whether it is for business purpose, the CIT(A) pointed out that in the instance case, though it is claimed that PHEPL, was to develop a health care unit, it has not been demonstrated that the borrowed money diverted to them was actually utilized for such business purpose. Accordingly, CIT(A) rejected the contentions of the assessee and sustained the addition of Rs.13,21,936/- on account of claim of interest on bank loan and the grounds raised in this appeal were decided against the assessee.
17. On appeal before us, it was submitted by learned Counsel for the assessee Shri A.V. Raghuram that the subsidiary company M/s. Proquest Health Enterprises Pvt. Ltd. was formed for the diversification of the activity in the same life saving and medical category. The company did not have assets like land and building which can be offered as collateral security as demanded by the panel for financing and the Directors of the company offered their personal assets as collateral security. The interest paid to the banker for the land utilised for investment in share capital of the subsidiary company which is in similar line of business is an allowable expenditure. It was also submitted that the clients of the sister concern may also become the clients of the assessee company at one point of time and with this motive the assessee felt that there was business expediency in the investment. The learned Counsel for the assessee, relied on the decision of SA 12 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
Builders vs. CIT and another 288 ITR 1 (S.C.) and the decision of the CIT vs. Tulip Star Hotels Ltd. 338 ITR 482 (Del.). The assessee also relied on the decision of the coordinate Bench of the Tribunal in the case of Vishnu Cements in ITA.No.1211/Hyd/2004 dated 09.01.2009.
18. The learned D.R. submitted that the CIT(A) was right in upholding the disallowance as the object of the sister concern is to prevent health problem which was not the interest or objectives of the assessee company.
19. The learned Counsel for the assessee in the rejoinder stated that both the assessee company and the sister company were helping each other as pointed out at pages 62 to 67 of the paper book where the sister company stood as guarantor for the loan raised by the assessee company. (Page-185 of paper book).
20. We have heard both the parties. We find that the Supreme Court in its decision in the case of SA Builders Ltd. vs. CIT(A) and another (2007) 288 ITR 1 (S.C.) has held as follows :
"32. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister-concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister-concern utilise the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency.13
ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
However, money can be said to be advanced to a sister-concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans."
21. Hence, we delete the addition towards interest paid on bank loan of Rs.13,21,936/-. Accordingly, we allow ground No.2 of the assessee.
22. In the result, ITA.No.163/Hyd/2013 of the assessee is allowed.
ITA.No.373/Hyd/2013 - A.Y. 2005-2006 (Shri G. Radhacharan Reddy)
23. ITA.No.373/Hyd/2013 - A.Y. 2005-06 : Brief facts of the case are that the assessee is an individual and Director of M/s. Charan Life Devices Private Limited since inception of the company and a search operation was conducted in the residential premises of the assessee in the month of August, 2009. The DCIT, Central Circle-2 assessed the income of the assessee under section 153A of the Income Tax Act. The assessee filed return of income for the assessment year 2005-2006 on 7.12.2005 declaring income of Rs.28,13,266/-. In the month of August, 2009 the Assessing Officer issued a notice under section 153A of the Income Tax Act, 1961. The assessee filed return under section 153A of the I.T. Act on 16.6.2010 declaring income of Rs.25,61,650/-. During the assessment under section 143(3) read with section 153A of the I.T. Act, the Assessing Officer 14 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
passed assessment order adding the amount of Rs.11,64,800/- as undisclosed investment in GMS Medimall Pvt. Ltd. The facts are that the assessee along with his NRI friends had floated the company in the name of GMS Medimall Pvt. Ltd. Since the company did not perform as planned due to the changed circumstances, the Directors decided to wind-up the company and distributed the funds invested back to the Directors and shareholders while refunding the funds to one of the NRI investor Shri P. Venugopal Reddy. As per his instructions GMS Medimall Pvt. Ltd. refunded the investment to his cousin Shri G. Radhacharan Reddy the assessee herein. The assessee has collected the same and recorded in his books. The Assessing Officer was of the opinion that the amount has been exhibited in the name of GMS Medimall Pvt. Ltd. but not in the name of Shri P. Venugopal Reddy. It was submitted before the CIT(A) that as GMS Medimall Pvt. Ltd. paid the money to assessee, the assessee recorded the money received from GMS Medimall Pvt. Ltd. which is not in existence by error. This was only an error but not concealment or unexplained investment. The investment was made by Shri P. Venugopal Reddy but received from GMS Medimall Pvt. Ltd. and hence, it was exhibited in the name of GMS Medimall Pvt. Ltd. inadvertently. The learned Counsel for the assessee has also submitted the certificate dated 22.12.2011 from Mr. P.Venugopal Reddy to this effect. The CIT(A) has held as follows :
"6.0. I have gone through the facts of the case and submissions of the appellant. Admittedly, the amount of Rs.11,64,800/- had been shown as due to GMS Medi Mall (P) Ltd. in the balance sheet of the appellant as at 31.3.2005. It is now claimed that the amount actually pertained to Sri P. 15 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
Venugopal Reddy and it was shown in the name of GMS as Shri Reddy had directed GMS to refund his investment to the appellant. The appellant has also sought to furnish a certificate from P. Venugopal Reddy in this regard.
06.1. On going through the said certificate/ confirmation, it is seen that Shri Venugopal Reddy therein has stated that he had invested Rs.12,50,000/- in GMS in the year 2002, out of his savings in USA, towards his share as a Director. It is added that since the company did not perform as expected, he had requested GMS to refund his proportionate share to the appellant, which was "approximately Rs.11,64,800/-". He has also stated that the funds will be collected by him upon his arrival in India.
06.2. First of all, it is seen that the above certificate was not furnished before the Assessing Officer. The appellant has not been able to explain as to why the same could not be furnished in the course of assessment proceedings. Even otherwise, the contents of the said certificate are not sufficient to examine and establish the genuineness of transactions stated therein. Mr. P. Venugopal Reddy has not mentioned any details regarding mode of investment and his capacity to do so. Moreover, he is not even seen to be sure about the exact amount receivable by him. Under the circumstances, firstly, the additional evidence in the shape of "certification/confirmation" does not deserve to be admitted. On the other hand, it is also clear that the company GMS Medi Mall Pvt. Ltd. already stands wound-up, and therefore, the 16 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
liability has been indeed shown by the appellant in respect of a non-existent entity in the present year, genuineness whereof cannot be established. The treatment of such credit of Rs.11,64,800/- as unexplained is therefore upheld and the ground raised in this regard is decided against the appellant."
24. Aggrieved, the assessee preferred appeal before us and submitted the ledger account of GMS Medimall Pvt. Ltd. at page 286 of the paper book. The learned Counsel for the assessee has also produced the statement of P & L account as on 31.03.2003 of GMS Medimall Pvt. Ltd. at page 342 of the paper book, balance sheet of Shri G.Radhacharan Reddy assessee herein from April, 2007 to March, 2008 at page 609 of the paper book. The assessee also submitted the certificate/confirmation from Mr. P. Venugopal Reddy at page 285 of the paper book. We are of the opinion that as the actual owner of the funds has been identified and certificate has been obtained from the owner, the explanation given by the assessee can be verified by the Assessing Officer and the matter shall be set aside to the file of the Assessing Officer for reconciliation to be done after perusing the account of Shri G. Radhacharan Reddy the assessee herein. Needless to mention herein that a reasonable opportunity of being heard to be given to the assessee.
25. In the result, ITA.No.373/Hyd/2013 of the assessee is allowed for statistical purposes.
17ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
ITA.No.374/Hyd/2013 - A.Y. 2006-07 ( Shri G. Radhacharan Reddy) AND ITA.No.377/Hyd/2013 - A.Y. 2006-2007 (Smt. G. Niveditha Reddy) :
26. Since common grounds are raised in both these appeals for the assessment year 2006-2007 with respect to undisclosed long term capital gains and short term capital gains of Rs.12,67,790/- and Rs.7,41,160/- in the case of Shri G. Radhacharan Reddy and Rs.13,46,210/- and Rs.7,87,000/- in the case of Smt. G. Niveditha Reddy, we are passing a common order in these two appeals.
27. The brief facts of the case are that during the course of search, an unregistered agreement of sale, executed by the assessee, along with her husband, Sri. G. Radhacharan Reddy, with M/s. VNR Constructions on 21/12/2005, was found. The total sale consideration received for the property at Hasmathpet had been shown at Rs.19,78,000/- and the entire amount had been given through cheques drawn on Bank of Baroda, dated April, 2006. The Assessing Officer noted that for the assessment year 2006-07, both the assessee and her husband had admitted the consideration received under the head capital gains in their returns of income on the basis of the above unregistered agreement of sale. However, it was noted that a development agreement had been entered into by them with VNR Constructions subsequently, for the construction of 25,000 square feet building (Annexure A/GRCR/RES/03, Pages 74 to 84). As per the said agreement, registered on 31/1/2006, the assessee and her husband were entitled for owner-ship of 8 flats, besides being absolute owners of terrace rights. It was also mentioned therein that a sum of 18 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
Rs.6 lakhs had been received as advance by cheque. On successful completion of the construction or during the period of construction, the said 8 flats were sold to the customers for a total sale consideration of Rs.68 lakhs and registered.
28. The Assessing Officer observed that as against the Long Term Capital Gains shown by the assessee and her husband on the basis of above mentioned unregistered agreement of sale, they had got 40% of the constructed area in the apartment "Srinivasa Residency", Hasmathpet, as per the agreement and the long Term Capital Gain had been estimated in their hands by taking 40% of the cost estimated (Rs.1,10,00,000 x 40% = Rs.44,00,000/-), computed in the Development Agreement cum General Power of Attorney, as consideration for transfer of the Long Term Capital Asset. The cost of acquisition for the assessee and her husband was Rs.2,62,782/- before indexation and accordingly, the Long Term Capital Gain was Rs.41,37,218/-. However, both of them had admitted Long Term Capital Gain of Rs.15,23,221/- only in their return of income.
28.1. Before the Assessing Officer, the assessee submitted that the long term capital gain had already been disclosed in the A.Y. 2006-07. The assessee claimed that M/s. VNR Constructions, represented by its proprietor, G. Venkateswara Rao, his friend, had shown his interest in construction of apartment on the land. Though the property was not legally approved for such construction, G. Venkateswara Rao had requested the assessee not to register the plot. The assessee submitted that Shri Rao wanted to use the assessee's name in the development agreement, which 19 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
was to be registered, as it would be more legal and convincing to customers. The assessee submitted that in view of the legal problems, this was agreed upon. The assessee contended that they had not received any sale proceeds as per the registered development agreement and that all the sale proceeds were received by VNR Constructions.
29. The Assessing Officer noted that the assessee was denying the development agreement without any basis, whereas from the documents of sale of flats, it was clear that he and his wife were parties as sellers. The A.O. opined that if the property had already been transferred before entering into the development agreement, as claimed by the assessee, there was no necessity of becoming a party to the sale of flats. It was noted by the A.O. that the agreement was of sale was dated 21.12.2005 and on that basis, capital gains were admitted by the assessee. However, the said agreement of sale was not a registered document, whereas, the development agreement dated 21.1.2006 was registered. From the sale documents executed in favour of buyers of flats also the A.O. found that the assessee and his wife had obtained permission from the Municipality for the construction of multi-storeyed building and had offered to sell out their 40% share. Therefore, the A.O. felt that there was nothing further to be proved and the onus was upon the assessee to show that the development agreement was a sham transaction. Accordingly, the A.O. did not accept the contention of the assessee and her husband that they are not liable to capital gains on transfer of the property as per the development agreement and 48.5% of the assessee's 20 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
share in the Long Term Capital Gain worked out at Rs.26,13,997/- was brought to tax leading to addition of Rs.12,67,790/- in the hands of Shri Radhacharan Reddy, while the balance of Rs.13,46,210/- was taxed in the hands of Smt. G.Niveditha Reddy.
30. Before the CIT(A), the learned A.R. reiterated that the assessee and her husband has entered into an agreement of sale on 21.12.2005 but, the agreement of sale was not registered under the A.P. Stamp Act. The learned A.R. submitted that the assessee and her husband had disclosed capital gains as per the said sale deed and the purchaser had paid the sale proceeds to them as envisaged in the agreement. Accordingly, he claimed that in view of the said agreement of sale, possession of the property had already been transferred to the purchaser. The Authorised Representative submitted that as per the clauses of the said agreement of sale, the assessee entered into a Development Agreement later, which had to be registered. He claimed that the said Development Agreement was entered into with a view to avoid payment of property registration charges twice over. He contended that the value of Rs.1,10,00,000/- was affixed to the proposed flats for paying the registration charges, which was arbitrarily adopted by the Assessing Officer for working out the capital gains. It was also contended that the cheque of Rs.6 lakhs was mentioned in the development agreement only for the registration purpose and the said cheques, which were dated one year backwards, are not reflected in the books of the assessee, as those were never received. It was submitted that registering the development agreement could not mean that the assessee 21 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
was delivering possession of land to the purchasers first time, as possession was already given on 21-12-2005. It was also stated by the learned A.R. that all the sale proceeds for the developed area, along with land cost, were collected by the developer and exhibited in his books and returns. In this process, the developer collected Rs.2,18,25,564/- in 2 years. The learned A.R. therefore, claimed before the CIT(A) that the Development Agreement was entered and executed only in the process of sale of the residential flats, while the assessee never had the idea of entering into any development agreement, as concluded by the Assessing Officer. The learned A.R. also submitted that the A.O. did not allow indexation while arriving at long term capital gain.
31. After hearing the submissions of the assessee as well as the Assessing Officer, the learned CIT(A) held as follows :
"06.0. I have gone through the facts of the case and submissions of the assessee. Despite contending that the assessee and her husband had entered into an Agreement of Sale on 21-12- 2005, it has not been disputed that the same was not a registered document. Even if the Agreements of Sale may not need compulsory registration, it is an undisputed fact that the Development Agreement was indeed a registered document, duly enforceable by Law. Besides, it was also found that the assessee and her husband were made a party to sale of flats constructed subsequently and they only had obtained permission from the Municipality for construction. Therefore, it was clear that the assessee and her husband had not passed on their right and title over the property to the purchasers as per the Agreement of Sale and the said rights were finally transferred only upon execution of the Development Agreement. Since the permission for 22 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
construction was taken by the assessee and her husband only, it also cannot be accepted that possession of the property was contendedly given on the date of Agreement of Sale itself. Accordingly the action of the Assessing Officer in bringing to tax the Long Term Capital Gains arising on account of transfer effected by way of the Development Agreement is upheld.
06.1. As regards the computation of such Long Term Capital Gain, it is seen that the cost of construction as on the date of agreement was taken up at Rs.1,10,00,000/- as per the Sub- Registrar's valuation, as mentioned in the Encumbrance Certificate. Accordingly, no infirmity can be said to exist in adoption of such cost also for working out the consideration received by the assessee and her husband. However, the Assessing Officer is directed to allow the benefit of indexation while working out the Capital Gains. The ground raised in this regard is, therefore, partly allowed.
07.0. As far as the addition of Rs.7,87,000/- on account of Short Term Capital Gain is concerned, as discussed above, the assessee and her husband had sold the 8 flats for a total sale consideration of Rs.68 lakhs, Rs.43 lakhs pertaining to the Financial Year 2005-06 and Rs.25 lakhs to Financial Year 2006-07. Considering the cost of acquisition for the total construction area of 11,972 square feet being Rs.44 lakhs, value per square foot was worked out at Rs.367.52. Accordingly, the Assessing Officer worked out the Short Term Capital Gain for the Financial Year 2005-06 and 2006-07 at Rs.15,25,164/- and Rs.8,71,886/-, respectively.
07.1. On being confronted with the above working, the assessee contended that the cost of construction should be adopted at Rs.782/- per sq. fool on the basis of total cost to VNR Construction. It was claimed that the calculations made by the Assessing Officer are based on assumptions. However, the assessee's contention was not accepted by the Assessing Officer for the 23 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
reason that the cost of construction for 40% of share worked out to Rs.367.52 per square feet on the basis of cost shown in the Encumbrance Certificate of Rs.1,10,00,000/- for the total constructed area of 29,930 square feet. Accordingly, the Assessing Officer made addition of Rs. 7,41,160/- in the assessment year 2006-07 in the hands of Shri Reddy and of Rs.7,87,000/- in the hands of the assessee. Likewise, additions of Rs.4,22,860/- and Rs.4,49,020/- were made in the Assessment Year 2007-08 in their hands".
32. Aggrieved, assessee filed appeals before us and has raised the following grounds :
"1. On the facts and in the circumstances of the case, the order of the CIT(A)-I, Hyderabad is erroneous, illegal and unsustainable in law.
2. The CIT(A) erred in sustaining the addition of Rs.12,67,790/- towards the alleged undisclosed long term capital gains in the hands of the appellant. The CIT(A) failed to appreciate that the appellant based on the agreement of sale dated 21.12.2005 had already admitted long term capital gains based on alleged development agreement dt.31.01.2006 is totally unwarranted.
3. The CIT(A) failed to appreciate that so far as the appellant and his wife is concerned, they had acted upon only the agreement of sale dt. 21.12.2005 and they have got nothing to do with the development agreement dt.31.01.2006 which was executed at the instance of appellant's friend Sri G. Venkateswara Rao proprietor of VNR Constructions who wanted to develop the said property.24
ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
4. The CIT(A) failed to appreciate that the so called development agreement could not have been relied upon in as much as the appellant and his wife already executed agreement of sale pursuant to which they had received consideration. Contrary to this, the CIT(A) ought to have appreciated that appellant and his wife have not received the alleged advance mentioned in the development agreement and consequently there is no 'Transfer' under the said development agreement.
5. On the facts and in the circumstances of the case the CIT(A) erred in sustaining the levy of short term capital gains of Rs.7,41,160/- in the hands of the appellant.
6. Without prejudice to above ground, the CIT(A) erred in upholding the value per square foot worked out by the A.O. at Rs.367.52. The CIT(A) failed to appreciate that the cost of construction should be worked out based on the cost of construction to VNR Construction/Developer and doing so the same would be Rs.782 per square foot".
32.1. Ground No. 1 is general in nature and therefore, it needs no adjudication.
33. With respect to grounds 2 to 6, the Learned Counsel for the assessee, reiterated the submissions made before the lower authorities. Before us, it was submitted by the learned Counsel for the assessee that the learned CIT(A) 25 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
has erred in sustaining the addition of Rs.12,67,790/- towards the alleged undisclosed long term capital gains in the hands of the assessee. The learned Counsel for the assessee further contended that the CIT(A) has failed to appreciate that the assessee based on the agreement of sale dated 21.2.2005 had admitted long term capital gains and as such, the alleged undisclosed long term capital gains based on alleged development agreement dated 31.1.2006 is totally unwarranted. Further, the learned Counsel submitted that the CIT(A) also failed to appreciate that so far as the assessee and his wife is concerned, they had acted only upon the agreement of sale dated 21.12.2005 and they have got nothing to do with the development agreement dated 31.01.2006 which was executed at the instance of assessee's friend Sri G. Venkateswara Rao, Proprietor of VNR Constructions who wanted to develop the said property. The learned Counsel for the assessee contended that the CIT(A) failed to appreciate that the so-called development agreement could not have been relied upon in as much as the assessee and his wife already executed agreement of sale pursuant to which they had received consideration. Contrary to this, the CIT(A) ought to have appreciated that assessee and his wife have not received the alleged advance mentioned in the development agreement and consequently, there is no 'transfer' under the said development agreement. Therefore, the CIT(A) erred in sustaining the levy of short term capital gains of Rs.7,41,160/- in the hands of the assessee. Further, the learned Counsel for the assessee submitted that the CIT(A) erred in upholding the value per sq. feet worked out by the Assessing Officer at Rs.367.52ps. It was submitted by the learned Counsel for the assessee, that the cost of construction should be worked-out based on the cost of construction to M/s. VNR Constructions/developer and that would be at Rs.782/- per sq. feet.
26ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
34. On the other hand, the learned D.R. relied upon the Order of the Assessing Officer.
35. We have heard both the parties. From the perusal of the Order of the revenue authorities, we find that it is clear that the assessee is denying the development agreement without any basis and it is also clear from the documents of the sale of flats that the assessee and his wife Smt. G. Niveditha Reddy are parties as sellers. In the event that the property has already been transferred even before ente3ring to development agreement as claimed by the assessee, there is no necessity of becoming a party to the sale of flats. The agreement of sale dated 21.12.2005, on the basis of which the capital gains has been admitted by the assessee is not a registered document whereas the development agreement dated 21.1.2006 is registered. It is clear from the sale documents executed in favour of buyers of flats that the vendors viz., Smt. G. Niveditha Reddy and Sri G. Radhacharan Reddy have obtained permission from the Kukatpally Municipality for construction of multi-storeyed building and also started constructing the building complex known as Srinivasa Residency. It is also clear from the sale documents that the above mentioned vendors have offered to sell out of their 40% share the semi finished flats for consideration which total to Rs.68,00,000/-. The onus is on the assessee to show that the development agreement is a sham transaction. Hence, the contentions of the assessee that he/she is not liable to capital gains on transfer of property as per development agreement cannot be accepted. Since the cost of construction as on the date of agreement is Rs.1,10,00,000/- as per the Sub Registrar's valuation as mentioned in the Encumbrance Certificate, the same is considered as consideration for determining capital gains in the A.Y. 2006-07. Accordingly, capital gains works out to 27 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
Rs.44,00,000/- (40% of constructed area) minus Rs.2,62,782/-, which comes to Rs.41,37,218/-. Since the assessee and his wife have already disclosed Rs.15,23,221/- the balance of Rs.26,13,997/- is brought to tax in the current assessment year. The share of the assessee is 48.5%. The proportionate income brought to tax in his hands is Rs.12,67,790/-. The balance of Rs.13,46,210/- is brought to tax in the hands of Smt. G. Niveditha Reddy. Accordingly, grounds No. 2 to 4 are dismissed.
36. With respect to short term capital gains, the assessee and her husband had sold the 8 flats for a total sale consideration of Rs.68 lakhs, Rs.43 lakhs pertaining to the Financial Year 2005-06 and Rs.25 lakhs to Financial Year 2006-07. Considering the cost of acquisition for the total construction area of 11,972 square feet being Rs.44 lakhs, value per square foot was worked out at Rs.367.52. Accordingly, the Assessing Officer worked out the Short Term Capital Gain for the Financial Year 2005-06 and 2006- 07 at Rs.15,25,164/- and Rs.8,71,886/-, respectively.
36.1. The CIT(A) held that the short term capital gain of Rs.7,41,160/- and Rs.4,22,860/- have been worked out after adopting the value per sq. foot of Rs.367.52 in view of the total cost of acquisition of Rs.44,00,000/- for 11,972 sq. feet. Since the cost of acquisition is well supported by the Sub Registrar value shown in the Encumbrance Certificate and the assessee could not furnish any evidence to establish that the same was lower than that, the learned CIT(A) held that it cannot be said that the short term capital gain have been so calculated only on assumptions. Finding no infirmity in the additions made in the assessment years 28 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
2006-07 and 2007-08 on this ground, the grounds raised in this regard are decided by the CIT(A) against the assessee.
37. We are of the view that the cost of construction should be worked out based on cost of construction of M/s. VNR Constructions. Hence, we direct the Assessing Officer to adopt the value per sq. feet at Rs.782/-. Hence, grounds No. 5 and 6 are allowed for statistical purposes.
38. In the result, ITA.No.374/Hyd/2013 and ITA.No. 377/Hyd/2013 for the assessment year 2006- 2007 in the case of Shri G. Radhacharan Reddy and Smt. Niveditha Reddy are partly allowed for statistical purposes.
ITA.No.375/Hyd/2013 - A.Y. 2007-08 ( Shri G. Radhacharan Reddy) AND ITA.No.378/Hyd/2013 - A.Y. 2007-2008 (Smt. Niveditha Reddy) :
39. In both the appeals i.e., ITA.No.375 & 378/Hyd/2013 for the assessment year 2007-2008, the assessees' have raised common grounds. For the sake of brevity, we are reproducing grounds raised in ITA.No.375/Hyd/2013 :
"1. On the facts and in the circumstances of the case, the order of the CIT(A)-I, Hyderabad is erroneous, illegal and unsustainable in law.
2. The CIT(A) erred in sustaining the assessability of capital gains based on the development agreement dated 31.01.2006 when the appellant had already sold the property by virtue of agreement of sale dated 21.12.2005.29
ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
3. On the facts and in the circumstances of the case the CIT(A) erred in sustaining the levy of short term capital gains of Rs.4,49,020/- in the hands of the appellant.
4. Without prejudice to the above ground, the CIT(A) erred in upholding the value per square foot worked out by the A.O. at Rs.367.52. the CIT(A) failed to appreciate that the cost of construction should be worked out based on the cost of construction to VNR Construction/Developer and doing so the same would be Rs.782 per sq. foot.
5. The CIT(A) erred in sustaining the addition of Rs.15,45,000/- made on account of alleged undisclosed sale of terrace rights. The CIT(A) failed to appreciate that the said sale, if any, pertained to VNR Constructions and had nothing to do with the appellant or his wife.
6. Without prejudice to above, even if it considered that the appellant and his wife owned terrace rights and they have sold it to Charan's Life Devices Pvt. Ltd., still the value of tertrace rights cannot be to the extent of Rs.30 lakhs especially when VNR Constructions has made the construction."
40. The facts are similar to that of assessment year 2006-2007. Ground No.1 is general in nature and it needs no adjudication. As already discussed in assessment year 2006- 2007, the assessee has sold 8 flats for total sale consideration of Rs.68 lakhs. The year-wise bifurcation is Rs.43,25,000/- for financial years 2005-2006 and 2006-2007 respectively. The Assessing Officer computed short term 30 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
capital gains for financial years 2005-2006 and 2006-2007 relevant to assessment year 2006-2007 and 2007-2008 is Rs.24,00,050/-. The assessee stated that the cost of construction has to be adopted at Rs.782/- per sq. feet on the basis of the total cost of construction by M/s. VNR Constructions. The Assessing Officer did not accept the contention of the assessee and adopted cost of construction of Rs.367.52ps per sq. feet.
41. On further appeal before the CIT(A), the CIT(A) upheld the Order of the Assessing Officer.
42. The grounds No.2 to 4 have been dealt with by us in ITA.No.374/Hyd/2013 in the case of Shri G. Radhacharan Reddy at paras 33 to 37 hereinabove. Respectfully following the same, the appeals are partly allowed for statistical purposes. ITA.No.375 & 378/H/2013 for the assessment year 2007-2008.
43. With respect to grounds No. 5 and 6 relating to sale of terrace rights, the learned counsel submitted that in the assessment year 2007-08, an addition of Rs.14,55,000/- has been made on account of undisclosed sale of terrace rights. As discussed in the assessment order, as per the development agreement, the terrace rights were with the land owners. The learned Counsel submitted that the assessee and his wife had constructed a flat on the 6th floor and sold the same to M/s. Charans Life Devices Pvt. Ltd. on 22.1.2007. As the property was constructed on the terrace, the owners were having the title and the rights over the same. In the registered document, mode of payment of Rs. 9 lakhs as consideration had been mentioned. However, in the books of accounts M/s. Charans Life Devices Ltd., the consideration was shown at Rs.30 lakhs. The learned Counsel for the assessee submitted that the consideration 31 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
paid to VNR Constructions towards the flat has been shown in the books of Charans Life Devices Pvt. Ltd. The Assessing Officer noted that the flat had been purchased by them for Rs. 30 lakhs but the document showed a sum of Rs. 9 lakhs only. Accordingly, the Assessing Officer treated the difference as short term capital gains in proportion to the share holding in ladn of the assessee and his wife, whereby, the assessee's 48.5% share worked out to Rs.14,55,000/-. During the appellate proceedings before the CIT(A), the CIT(A) held as under :
"15. I have gone through the facts of the case and the submissions of the appellant. It is clear that as per the Development Agreement seized as pages 74 to 84 of Annexure A/GRCR/RES/03, the terrace rights were to vest with the land owners only. Even if it is not permissible under the A.P. Apartments Act to retain the terrace rights by any person other than the prospective purchasers, it is clear that the stipulation in this regard in the Development Agreement had been consciously made, conferring rights upon the appellant and his wife as per the mutual understanding between the parties. It is also a fact that the Developer never questioned such rights of the appellant and his wife. Therefore, it is only logical to hold that when the flat constructed by the appellant and his wife on such terrace, as evidenced by pages 85 to 101 of the above annexure were transferred to M/s. Charan's Life Devices Pvt. Ltd. the short term capital gain arising therefrom were to be brought to tax in the hands of the appellant and his wife only. Since the document shows the consideration t Rs. 9 lakhs only, whereas the consideration shown in 32 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
the books of CLD was Rs.30 lakhs, the appellant share of Rs.14,55,000/- in such short term capital gains of Rs.30 lakhs has been rightly brought to tax. The grounds raised in this regard are therefore decided against the appellant."
44. The learned Counsel for the assessee submitted before us that the terrace rights have been sold and accounted by VNR Constructions and submitted the account at pages 406 to 440 of the paper book. It was submitted that nothing was received through the development agreement as presumed by the CIT(A). It was also submitted that the terrace rights cannot be retained by any one except the prospective purchasers. It was submitted that M/s. Charans Life Devices Pvt. Ltd. has purchased the pent house area for office purposes and the amounts were paid by the company showing the building in their books of accounts.
45. The learned D.R. on the other hand, submitted that the issue has to be verified as to whether the consideration is towards terrace rights has been received by VNR Constructions.
46. We have heard both the parties. In view of the above circumstances, we deem it fit to set aside the issue to the file of the Assessing Officer to verify whether VNR Constructions is accounted the proceeds from the sale of terrace rights and thereafter, decide the issue in accordance with law, after giving a reasonable opportunity of being heard to the assessee. Accordingly, ground No.5 of the assessees' in ITA.No.375 & 378/Hyd/2013 for the assessment year 2007- 2008 is allowed for statistical purposes.
33ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
47. Since, we have allowed ground No.5 for statistical purposes, ground No.6 raised in ITA.No.375 & 378/Hyd/2013 has become infructuous.
48. In the result, ITA.No.375/Hyd/2013 of Sri G. Radhacharan Reddy and ITA.No.378/Hyd/2013 of Smt. Niveditha Reddy are partly allowed for statistical purposes.
ITA.No.376/Hyd/2013 - A.Y. 2009-2010 Sri G. Radhacharan Reddy and ITA.No.379/Hyd/2013 - A.Y. 2008-2009 of Smt. G. Niveditha Reddy
49. In both the appeals i.e., ITA.No.376 & 379/Hyd/2013 for the assessment year 2009-2010, the assessees' have raised common grounds. For the sake of brevity, we are reproducing grounds raised in ITA.No.376/Hyd/2013 :
"1. On the facts and in the circumstances of the case, the order of the CIT(A)-1, Hyderabad is perverse, illegal and unsustainable in law.
2. The CIT(A) erred in sustaining the addition of Rs.94,75,000/- made by invoking the provisions of section 2(22)(e) of the Act. The CIT(A) failed to appreciate that the amounts advanced by M/s. Charans Life Devices Pvt. Ltd., was towards sale of properties and consequently the same could not have been considered as deemed dividend.
3. The CIT(A) failed to appreciate that the transactions of agreement of sale could not fructify into sale as the property in respect of which agreement was entered into were mortgaged with the Citi Bank".34
ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
50. The brief facts are that the assessee is one of the Directors of M/s. Charans Life Devices Pvt. Ltd. which is not having any landed property or building of its own. The company is facing hurdles for obtaining the loan and financial assistance from banks from and other financial institutions for the purpose of conducting businesses. For obtaining the financial assistance the Directors were mortgaging their personal properties for obtaining the cash credit facilities/term loans from the Banks and financial institutions for the purpose of conducting business. This process is continuing since the inception of the company. The Director desired to change this process and decided to transfer the personnel assets to the company to obviate these situations for future. The assessee has faced serious problem when they applied for the loan for the investment in its subsidiary PHEPL. The Directors decided to sell their personnel properties to the company. The Directors entered into the agreement to sell the properties. The total value arrived for sale consideration is Rs.1,70,00,000/-. The copies of the agreement of sale are on record. As on the date the full consideration was not received. To facilitate the transfer of the properties the company has paid the advances in parts for the transfer of properties. The Directors have decided to transfer of the office property jointly owned by them and the Company has advanced Rs.60,50,000/- for this purpose. Shri G. Radha Charan Reddy decided to sell the property Aparna County (Villa) to the company, for which the company has paid the advance of Rs.94,75,000/- as part payment. However, the property was not totally handed over by the builder by the time of search. The registration process could not be completed as the original documents were pledged with the Bank for the purpose of obtaining loan for the business of M/s. CLD. The sanction letter of the Citi Bank was also produced in the paper book. Hence, the 35 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
intention of the Directors to transfer the property to the Company was always there since advances were also received from the Company. Hence, it was submitted that it is not beneficial to the shareholders but it is for the purpose of the business of the company and for the in the interest of the company and benefit of the company. Hence, it cannot be treated as deemed dividend as it has to be proved that there has been beneficial transfer to the shareholders.
51. Hence, it was submitted that it was the intention of the Directors to transfer the property to the company for which the advances were received. The registration process could not be completed as the original documents were pledged with the Bank for the purpose of obtaining loan for the business purposes of M/s. Charans Life Devices Pvt. Ltd. It was also submitted that the Directions have decided to transfer the office property jointly owned by them and the company has advanced a sum of Rs.60,50,000/- for this purpose. The learned Counsel for the assessee submitted that since M/s. Charan's Life Devices Pvt. Ltd. were not having any landed property or building of their own, they were facing hurdles in obtaining loans and financial assistance from banks/financial institutions for their business. Therefore, the Directors themselves were mortgaging their personal properties for obtaining cash credit facilities/term loans etc., for the purpose of company's business since the beginning. In order to change the process, the Directors decided to transfer their personal assets to company and entered into an agreement to sell. It was further submitted that in order to consider the loans and advances to Directors/share holders as deemed dividend, it needs to be proved as a beneficial transfer to them. However, in the assessee's case it was not beneficial to the shareholders but was for the purpose of the company and 36 ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
therefore, a non-gratuitous advance, which should not have been treated as deemed dividend. The learned Counsel for the assessee also relied on the decision in the case of CIT vs. Satyanarayana Nuwal (2011) 37 (I) ITCL 0060. The decision in the case of Pradip Kumar Malhotra vs. CIT 338 ITR 538 (Cal.) was also cited. The learned Counsel further submitted the balance sheet and profit and loss account of CLD and the assessee for the accounting year ending on 31.3.2008. It was further submitted by the learned Counsel for the assessee that in the books of the company, the advance paid for the building had been shown and the Directors have also shown the advance received for sale of the property in their books.
52. On appeal before the CIT(A), the learned CIT(A) dismissed the appeal of the assessee.
53. On appeal before us, the learned Counsel for the assessee reiterated the contentions raised before the CIT(A).
54. The learned D.R. on the other hand, relied on the order of the Assessing Officer.
55. We have heard both the parties and perused the material available on record. From the perusal of the record, it is noticed by us that the Directors of the company have intended to transfer the property to the Company in order to obtain loan facility from the Banks, Financial Institutions for conducting the business. It is also noted that to facilitate the transfer of the properties to the company, advances were paid by the company to the Directors. However, the fact remains that as of today i.e., even-after six years, the transfer of the properties to the company has not been effected. However, in this context the assessee's contention is that the property has been mortgaged and hence the documents were not available for registration.
37ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
56. The assessee's reliance in the case of Pradeep Kumar Malhotra (2011) 338 ITR 538 (Cal.) is appropriate. The facts of that case are that the assessee has substantial share holding in a private company. The assessee permitted his immovable property to be mortgaged to the Bank for enabling the company to take the benefit for loan and in spite of request of the assessee, the company was unable to release the property from mortgage. Consequently, the Board of Directors of the Company passed a resolution authorising the assessee to obtain from the company interest free deposit up to Rs. 50 lakhs as and when required. During the previous year relevant to the assessment year 1999-2000, the assessee obtained from the company a sum of Rs.20,75,000/- by way of security deposit and out of this amount, a sum of Rs. 20 lakhs was subsequently returned by the assessee to the company. In the assessment made for the assessment year 1999-2000, the Assessing Officer added a sum of Rs.20,75,000/- as deemed dividend. On appeal before the High Court, The Calcutta High Court in the case of Pradip Kumar Malhotra vs. CIT (2011) 338 ITR 538 (Cal.) held as under :
"Held, allowing the appeal, that for retaining the benefit of loan availed of from the bank if decision was taken to give advance to the assessee such decision was not to give gratuitous advance to its shareholder but to protect the business interest of the company. The sum of Rs.20,75,000/- could not be treated as deemed dividend."
57. In the case of the assessee before us the situation is similar. Hence, we are of the opinion that the transaction was for the purpose of business which is a non-gratuitous advance which should not be treated as deemed dividend.
38ITA.No.162,163/Hyd/2013 etc., M/s. Charans Life Devices Pvt. Ltd. Hyd.
58. Accordingly, we allow grounds No. 2 and 3 of the assessees in ITA.No.376 & 379/Hyd/2013 for the assessment year 2009-2010. Since ground No.1 is general in nature in both the appeals, it need not be adjudicated.
59. In the result, ITA.No.376/Hyd/2013 in the case of Shri G. Radhacharan Reddy and ITA.No. 379/Hyd/2013 in the case of Smt. G. Niveditha Reddy are allowed.
60. To sum-up, ITA.No.162/Hyd/2013 of the assessee is allowed for statistical purposes, ITA.No.163/Hyd/2013 of the assessee is allowed, ITA.No.373/Hyd/2013 is allowed for statistical purposes, ITA.No.374 & 377/Hyd/2013 of the assessee are partly allowed for statistical purposes, ITA.No.375 & 378/Hyd/2013 of the assessee are partly allowed for statistical purposes, ITA.No.376 & 379/Hyd/2013 of the assessee are allowed.
Order pronounced in the Open Court on 31.10.2013 Sd/- Sd/-
(CHANDRA POOJARI) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad Date 31st October, 2013. VBP/- Copy to
1. M/s. Charans Life Devices Pvt. Ltd. Flat No.102, Zamrudh Residency, Raj Bhavan Road, Somajiguda, Hyderabad PAN AACCC0638H
2. Sri G. Radha Charan Reddy, Flat No. 102, Zamrudh Residency, Rajbhavan Road, Somajiguda, Hyderabad PAN ACAPG3331Q
3. Smt. G. Niveditha Reddy, Flat No.102, Zamrudh Residency, Rajbhavan Road, Somajiguda, Hyderabad. PAN ADJPG5941N
4. CIT(A)-I, Hyderabad
5. CIT (Central), Hyderabad
6. D.R."B" Bench, I.T.A.T. Hyderabad