Income Tax Appellate Tribunal - Hyderabad
J.A. Chowdary, Hyderabad vs Assessee on 15 April, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "B" : MUMBAI
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA.No.1072/Hyd/2011
Assessment Year 2006-2007
J.A.Chowdary vs. ACIT, Circle 16 (3)
Hyderabad Hyderabad
PAN ABZPJ3167D
(Appellant) (Respondent)
For appellant : Shri V.Raghavendra Rao (A.R.)
For respondent : Shri D.Sudhakar Rao (CIT)
Date of Hearing : 15-04-2013
Date of pronouncement : 17-06-2013
ORDER
Per SAKTIJIT DEY, J.M.
This appeal filed by the assessee against the Order of the CIT, Hyderabad for the A.Y. 2006-2007 on the Order passed under section 263 of the Income Tax Act, 1961. The assessee has raised the following effective grounds :
1. "The order of the Commissioner of Income Tax - IV, Hyderabad dated 25.3.2011 is erroneous, contrary to law, facts of the case and devoid of merit.
2. The Commissioner of Income Tax erred in law in holding that the assessment made on 17.12.2008 u/s. 143(3) of the Act by the Assessing Officer as erroneous and prejudicial to the interests of revenue in so far as the issue of computation of long term capital gains on ESOP shares and exemption claimed U/s 54F of the Act.
3. The Commissioner of Income Tax ought not have held that further enquiry and evidence is necessary in respect of computation of long term capital gains on ESOP shares inspite of the letter of confirmation dated 26.2.2006 issued by Portal Player India (P) Ltd., confirming the price at which the shares were issued.
24. The Commissioner of Income Tax grossly erred in directing the Assessing Officer to withdraw the exemption allowed u/s.54F of the Act holding that the assessee owns more than one residential house and therefore not entitled to exemption u/s. 54F of the Act.
5. The Commissioner of Income Tax failed to see that property bearing Plot No.7, in Bangalore is in the name of the Appellant's daughter and it belongs to his daughter and hence it is not proper justified in directing the Assessing Officer to withdraw exemption allowed u/s.54F on the ground that the Assessee owns more than one residential house.
6. For all of the above grounds and such other grounds that may be urged at the time of hearing it is most respectfully prayed that this Hon'ble Tribunal may be pleased to allow the appeal and the respondent be directed to accept the computation of long term capital gains on ESOP shares and not to withdraw exemption allowed U/s 54F of the Act by the Assessing Officer while completing the assessment u/s. 143(3) for the assessment year 2006-07 in the interest of justice."
2. Briefly stated facts of the case are that the assessee is an individual. For the A.Y. under dispute the assessee filed his return of income on 31.7.2006 declaring total income of Rs.5,15,06,540/-. The Assessing Officer completed the assessment under section 143(3) vide order dated 17.12.2008 by accepting the income returned. The Commissioner of Income Tax in exercise of his powers under section 263 of the Act called for the assessment orders of the assessee for the impugned assessment year for examination. After examining the assessment records the Commissioner of Income Tax prima facie was of the opinion that the assessment order dated 17.12.2008 is erroneous and prejudicial to the interests of revenue as the Assessing Officer has neither made enquiry nor applied his mind to the following issues :
"(i) M/s. Portal Player Inc. Had allowed 2,94,077 shares at 0.15 cents per share to the assessee on 2.6.2004 on employee's stock option scheme. During the year the assessee had sold 70000 shares out of this for a sale consideration of Rs.7,44,62,203/-. However, while computing long term capital gain on sale of shares assessee had adopted purchase cost of 70000 shares at Rs.14,17,500/- instead 3 of Rs.4,76,910/- which has resulted in under assessment of capital gains to the tune of Rs.9,75,892/-.
(ii) Assessee has claimed exemption u/s. 54F of an amount of Rs.1,21,03,459/-. However, as the assessee was the owner of more than one residential house other than the new asset on the date of transfer of the original asset, the assessee is not entitled for exemption u/s. 54F as per proviso (i) to sub-section 1 of section 54F.
(iii) The Assessing Officer has not levied interest u/s. 234C of the Act.
(iv) The Assessing Officer had not called for and examined the evidence in support of long term capital gains and short term capital gains on sale of shares.
(v) The Assessing Officer has not called for and examined the bank accounts held by the assessee for the period 1.4.2005 to 31.3.2006.
(vi) The Assessing Officer had not examined the sale of agricultural land for an amount of Rs.26,00,000/-.
(vii) The Assessing Officer had not examined the investment made by the assessee in various residential houses."
3. The Commissioner of Income Tax, therefore, issued a notice dated 27.1.2011 under section 263 of the Act, directing the assessee to show cause. In reply to the show cause notice, the assessee submitted that the purchase price of each stock was enhanced by the company from 0.15 cents to 0.45 cents vide grant No.482. As per the grant, 98025 stocks were allotted at 0.45 cents per stock under reverse split, working out to US $ 44,111.5 (INR Rs.19,85,006/-) for 98025 shares. Therefore, proportionate value of 70000 stocks was rightly claimed at Rs.14,17,500/- as the purchase value of stocks while computing long term capital gain. So far as the issue of exemption claimed u/s. 54F is concerned, it was submitted that on the date of acquisition of the new asset, the assessee did not possess more than one residential house. Further explaining, the assessee submitted that the property at Plot No.249, Prashasan Nagar, Road No. 72, 4 Jubilee Hills was actually the Office premises with M/s. Portal Player Pvt. Ltd. and did not belong to the assessee. Residential flat No. 2C Doyen Hospital Apartments, Srinagar Colony, Hyderabad though was owned by the assessee but it was sold on 22.4.2003 and sale was disclosed in the return of income also. The assessee submitted that residential house at Plot No. 113/114, Bangalore, which is the new asset, was acquired on 26.10.2005 and the investment made in the said house was Rs.1,21,03,459/- upto 13.6.2006, the date of filing of return. It was submitted that the only other residential house of the assessee is at Gachibowli, IVRCL, Hyderabad which is the self-occupied property of the assessee construction of which was going on and assessee occupied it in financial year 2007-08. So far as the Plot No.7 at Bangalore is concerned, it was submitted that the property was owned by his major daughter J.Naga Shravani and the property was registered and held by her. However, she has to return an amount of Rs.2,24,096/- on account of certain payments to be made to the assessee.
4. The Commissioner of Income Tax after considering the submissions of the assessee passed an order under section 263 of the Act vide order dated 25.3.2011 setting aside the assessment order passed under section 143(3) of the Act by holding it to be erroneous and prejudicial to the interest of revenue due to the following reasons.
5. So far as the purchase value of ESOPs shown by the assessee at Rs.14,17,500/- is concerned, the Commissioner of Income Tax held as under :
"3.1. The first issue is regarding ESOPs allotted to the assessee by his employer company i.e. Portal Player Inc ( Parent company of Portal Player India Pvt.Ltd] in February, 2002 @ $0.15 for 2,94,077 shares.
Subsequently, in the year 2004, the parent company, at the time of IPO, has restructured its share holding pattern wherein, the number of shares have been reduced to one third of holding consequent upon reverse split. According to the assessee, this resulted 5 in increase in cost of its shares i.e. for instance US $ 0.15 Cents is automatically raised to 0.45 cents on account of reverse split. In the course of the present proceeding a letter was addressed to the company i.e. Portal Player India Pvt. India, Hyderabad requesting for clarification and information regarding the transaction in question. The reply was received on 23.03.2011 saying that the company had discontinued its activities after its business was sold to Nvidia. The reply has been signed by an accountant who was an employee when the company was in business. The reply repeats the version given by the assessee. Even the assessment records of the company have been transferred from Hyderabad Income Tax jurisdiction to Bangalore Income Tax jurisdiction. In view of this surrounding fact, it is very necessary to make enquiries in order to find out clinching evidence as to the actual cost of acquisition of ESOPs in question. The Assessing Officer is directed to make enquiries with the parent company, as well as the Assessing Officer in possession of the assessment records of the company i.e. Portal Player India Pvt. Ltd. , Bangalore i.e. Nvidia. The assessee has produced copy of letter dated 26.02.2006. But it would not be conclusive.
Further enquiry and evidence is necessary to
determine this issue".
6. With regard to claim of exemption under section 54F of the Act, the Commissioner of Income Tax accepted assessee's contention in respect of house property at Plot No. 249, Prashasan Nagar, Hyderabad and residential Flat No. 2C, Doyen Habital Apartment, Srinagar Colony, Hyderabad. The Commissioner of Income Tax, however, did not accept assessee's contention with regard to the property at Plot No.7, Bangalore standing in the name of assessee's daughter and treated it to be assessee's residential house. He, therefore, directed the Assessing Officer to withdraw the exemption of 6 Rs.1,21,03,459/- claimed under section 54F of the Act on the following observations :
"3.2. The second issue is regarding grant of exemption of Rs.1.21 crores u/s. 54F against Long Term Capital Gains. The assessee had claimed the exemption and was allowed the same by the Assessing Officer in the scrutiny assessment. In the show cause notice on this matter, five residential properties were listed which were supposed to be in the name of the assessee. The assessee submitted that the property at Plot No. 249, Prashasan Nagar, Road No. 72, Jubilee Hills, Hyderabad is the address of the office premises of M/s. Portal Player Pvt. Ltd. The property is owned by Sri N. Sambasiva Rao which had been leased out to the company. He had used the address in his return for the purpose of easy communication. This version of the assessee is found to be factually correct and the same is accepted. The property at Flat No. 2C, Doyen Habitat Apartment, Srinagar Colony, Hyderabad owned by the assessee had been sold in April, 2003 and hence the property was not in the possession of the assessee during the assessment year under consideration. This submission is also accepted. However, the residential house at Plot No. 113/114, Bangalore was apparently in the name of the assessee, and it was in possession of the assessee during the assessment year under consideration. According to the assessee, the residential house at Gachi Bowli, IVRCL, Hyderabad, was under construction during the assessment year under consideration. It was occupied in the financial year 2007-08. As regards the property at Plot No. 7, Bangalore, the assessee submitted, that this property is owned by his daughter J. Naga Shravani and the property was registered and held in her name, that a 7 sum of Rs.2,24,096/- was advanced to her by the assessee. The Authorised Representative submitted a copy of the Sale Deed. The Sale Deed date is 16.09.2005. On the date of execution of the sale deed, the assessee's daughter J. Naga Shravanti was 20 year old pursuing her studies (Vide order sheet noting dated 04.03.2011) the assessee Sri J.A.Chowdary is a holder of power of Attorney in respect of J.Naga Shravanti. In the course of hearing, asked as to the sources of investment in the said property, the Authorised Representative fairly admitted that the daughter's investment in the said property has come from gifts made to her by the assessee in the earlier years. In other words, the entire investment has come from the assessee, and the assessee holds the Power of Attorney in respect of the property. The assessee's return for the assessment year under consideration evidences - self occupied property (no address given). But the assessee has claimed deduction u/s.24(b) i.e. an amount of Rs.1,50,000/- out of interest paid on housing loan i.e. Rs.3,19,836/-. The self occupied property, ofcourse, is in Hyderabad. The assessee is found to be the owner of the two properties in Bangalore ( One in his own name and one standing in the name of his daughter). In other words, on the material date, the assessee was certainly owning more than one residential property. In view of these facts, the assessee is certainly not entitled to the exemption u/s.54F. Hence, the Assessing Officer is directed to withdraw this exemption of Rs.1,21,03,459/ - and bring the same to tax".
7. The Commissioner of Income Tax also directed the Assessing Officer to levy interest under section 234C of the Act and examine whether the share transactions are in the nature of trade. Further, the Commissioner of Income Tax directed the Assessing Officer to examine and enquire into the 8 transactions made in various bank accounts including foreign bank accounts. The Commissioner of Income Tax directed the Assessing Officer to bring to tax an amount of Rs. 26 lakhs being the sale consideration received on sale of agricultural land. He also observed that source of investment made by the assessee in residential houses are also required to be examined.
8. The learned A.R. reiterating the stand taken before the Commissioner of Income Tax in course of the proceeding under section 263 submitted that as the number of shares were reduced to one third of holding consequent upon reverse split there was an increase in cost of each share from 0.15 cent to 0.45 cent. The learned A.R. submitted that due to restructuring of share holding pattern by M/s. Portal Player Inc. the number of shares were reduced to 98025 shares from 294077 shares which resulted in increase in price of each share. In this context, he referred to the letter dated 23.3.2011 submitted in the paper book. The learned AR submitted that due to increase in value of share the assessee has correctly shown the purchase value while computing long term capital gain. On the issue of claim of exemption u/s. 54F of the Act, the learned A.R. submitted that Commissioner of Income Tax's conclusion to the effect that assessee was the owner of more than one house is on considering the property at Plot No.7, Bangalore as assessee's property. The learned AR submitted that the said property does not belong to the assessee's major daughter in whose name the property is registered. The entire investment in acquiring the property was also made by her out of the gifts received in earlier years. The learned A.R. further submitted that the proviso to sub-section 1 of section 54F will also not apply as the said property at Bangalore is only a plot of land and not a residential house. In this context, the learned A.R. referred to the sale deed dated 26.10.2005 at page 27 of the paper book. The learned A.R. submitted that the Assessing Officer having examined all these aspects, the assessment order cannot be said to be erroneous and prejudicial to the interest of the revenue.
9. The learned D.R. on the other hand, strongly supported the order of the Commissioner of Income Tax.
910. We have heard rival submissions and perused the material on record. After perusal of the facts and materials on record, we are of the view that the initiation of proceeding u/s. 263 is valid as the assessment order is not only erroneous but also prejudicial to the interest of revenue as the Assessing Officer has failed to enquire on various issues u/s. 263 of the Act. Certainly there is non-application of mind by the Assessing Officer. Apart from the questionnaire there is no material before us which could have suggested that the Assessing Officer had conducted enquiry or taken follow-up action after applying his mind on various issues. In fact, from assessee's reply to the show cause notice under section 263 of the Act as well as ground of appeal raised before us, it is clear that the assessee has accepted the order passed under section 263 on all other issues excepting CIT's direction with regard to ESOPs and claim of exemption u/s. 54F. Even with regard to these two issues also, there is no convincing argument so far as invoking of jurisdiction u/s. 263 is concerned. Therefore, we are of the view that proceeding under section 263 of the Act has been validly initiated as the assessment order passed u/s. 143(3) of the Act is erroneous and prejudicial to the interest of the Revenue due to inapplication of mind by the Assessing Officer.
11. Now coming to the merits of directions of the Commissioner of Income Tax, it is seen that as per the stock option exercise notice dated 2.6.2004 of Portal Player Inc (page 14 of paper book) the assessee was granted 2,94,077 number of shares at the price of 0.15 cent per share for a total consideration of US $ 44,111.55. The assessee also exercised his option and paid the amount of US $ 44,111.55 per cheque (a copy of which is at page 16 of paper book). There is no other document excepting the letter dated 23.3.2011 (page 24 of paper book) which clearly spells out that the value of shares sold by the assessee did increase from 0.15 cent to 0.45 cent. Even the letter dated 23.3.2011 was submitted for the first time before the Commissioner of Income Tax. Therefore, the purchase value of shares shown by the assessee at enhanced value of Rs.14,17,500/- required proper verification which was not done by the Assessing Officer at the time of 10 assessment. The Commissioner of Income Tax has only directed the Assessing Officer to make proper enquiry and thereafter, determine the issue. Hence, we do not find any infirmity with regard to Commissioner of Income Tax's direction in respect of this issue. So far as CIT's direction to the Assessing Officer to withdraw the exemption claimed u/s. 54F of the Act is concerned, as it can be seen the CIT has come to such conclusion by considering the following three properties.
Sl.No. Details of Properties Remarks 1. -- -- 2. -- --
3. Residential House, Plot No.7, As seen from the Schedule-3-fixed assets to Bangalore balance sheet as at 31.03.2006.
4. Residential House at Gachi Under construction. As seen from the Bowli, IVRCL, Hyderabad. Schedule-3-Fixed assets to balance sheet as at 31.03.2006.
5. Residential House, Plot As seen from the Schedule-3-fixed assets to No.114, Bangalore. balance sheet as at 31.03.2006. You had claimed exemption u/s. 54F in respect of this property for A.Y. 2006-07.
12. It is the claim of the assessee that the residential house at Gachibowli, IVRCL, Hyderabad and residential house at Plot No.114, Bangalore are the only residential houses owned by the assessee. It is further contention of the assessee that the exemption of Rs.1,21,03,459/- claimed u/s. 54F of the Act is in respect of Plot No. 114, Bangalore. So far as property at Plot No.7, Bangalore is concerned, the learned A.R. has contested the finding of the CIT firstly on the ground that the property is registered in the name of her major daughter which she had acquired by making her own investments and secondly on the ground that the said property is only a plot of land and not a residential house. It is a fact that the assessee had shown the property at plot No.7, Bangalore as residential house as fixed assets in the balance sheet filed along with his return. However, copy of the sale deed (at page 27 of paper book) does reveal the fact that the property is registered in the name of J.Naga Shravani who happens to be the major daughter of the assessee. Therefore, before coming to the conclusion that the investment made for acquiring the aforesaid property was out of assessee's income, 11 proper enquiry has to be made to prove such conclusion. The assessee must also be given a fair chance to prove the claim that investment was made by her daughter only. Even assuming for the arguments sake that the said property belongs to the assessee, the claim made by the assessee that it is only a plot of land and not a house merits consideration and cannot be brushed aside lightly. The registered sale deed copy (page 27 of paper book) mentions the property as a residential site. Therefore, if actually the property at plot No.7 is a residential site and not a residential house, then proviso to sub-section 1 of section 54F of the Act clearly would not be applicable and the assessee would be entitled to exemption u/s. 54F of the Act as the assessee will be owning only one residential house other than the new asset. Without properly verifying whether the property at plot No.7, Bangalore is a residential house or simply a plot of land assessee's claim of exemption u/s. 54F of the Act cannot be withdrawn. We, therefore, direct the Assessing Officer to verify assessee's claim in this regard and take a decision with regard to assessee's claim of exemption u/s. 54F of the Act. The order passed by the Commissioner of Income Tax under section 263 of the Act, is modified to the extent indicated above. The grounds raised by the assessee is partly allowed for statistical purposes.
13. In the result, assessee's appeal is partly allowed for statistical purposes.
Order pronounced in the open Court on 17-06-2013.
Sd/- Sd/- (CHANDRA POOJARI) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Date 17 t h June, 2013. VBP/- Copy to
1. Sri J.A.Chowdary, Villa 41, Hillridge Villas, Gatchibowli, Hyderabad - 32 PAN ABZPJ3167D.
2. ACIT, Circle 16(3), Hyderabad
3. Commissioner of Income Tax, Hyderabad.
4. JCIT, Range 16, Hyderabad
5. DR "B" Bench, ITAT, Hyderabad