ACIT, CHENNAI V. M/s. Pelican Estates & Developers, CHENNAI

ITA 1145/CHNY/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5274 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 06-12-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 12-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P B SEKARAN
• Keywords: Capital asset; Business income; Business expenditure; Source of fund
• Section: 131

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH B, CHENNAI BEFORE SHRI U.B.S. BEDI, J.M. & SHRI ABRAHAM P. GEORGE, A.M. I.TA. NO.1145/MDS/2010 ASSESSMENT YEAR: 2006-07 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE IV, CHENNAI. VS. M/S. PELICAN ESTATES & DEVELOPERS, B-2, SHOBA, NO. 26, 10 TH AVENUE, ASHOK NAGAR, CHENNAI 600 083. [PAN:AAHFP2942H] (APPELLANT) (RESPONDENT) REVENUE BY : SHRI P.B. SEKARAN ASSESSEE BY : SHRI RAMAKRISHNAN O R D E R PER U.B.S. BEDI, J.M. THIS APPEAL OF THE DEPARTMENT IS DI RECTED AGAINST THE ORDER PASSED BY THE LD. CIT(A) VIII, CHENNAI DATED 26.04.2010 RE LEVANT TO THE ASSESSMENT YEAR 2006- 07 WHEREBY THE DEPARTMENT HAS CHALLENGED THE ORDER OF THE LD. CIT(A) WITH RESPECT TO THE FOLLOWING GROUNDS RAISED: 1. THE ORDER OF THE CIT(A) IS OPPOSED TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LD. CIT(A) ERRED IN ARRIVI NG AT THE DECISION THAT THE INCOME OF ` ..2.8 CRORES ADMITTED BY THE ASSESSEE SHALL AMOUNT ONLY TO INCOME FROM BUSINESS. 2.1 THE LD. CIT(A) OUGHT TO HAV E APPRECIATED THAT THE ASSESSEE FIRM HAVING BEEN INCORPORATED ON 04.03.2004 WITH A CAPITAL OF ` .1 LAKH, WAS NOT IN A FINANCIAL POSITION TO ENTER INTO SUCH A HUGE VENTURE IN MAY, 2004. 2.2 THE LD. CIT(A) FAILED TO APPREC IATE THAT THE ASSESSING OFFICER BASED ON THE MATERIALS AV AILABLE ON RECORD HA S CLEARLY BROUGHT OUT THAT THE ASSESSEE ONLY ENGAGED IN PURCHASE AND SALE OF RIGHTS WHICH WERE RELINQUISHED SUBSEQUENTLY IN FA VOUR OF M/S. ARIHANT DEVELOPERS. ITA NO. 1145/MDS/10 2 2.3 IT IS SUBMITTED THAT THE A SSESSEE WHILE STATING BEFORE THE CIT(A) THAT ITS CONDUCT PROVED THAT IT WAS ENGAGED IN DEVELOPMENT ACTIVITY, DID NOT SUBSTANTIATE ITS CLAIM WITH ANY DOCUMENTARY EVIDENCES. IT IS FURTHER SUBMITTED THAT A PERUSAL OF THE FINANCIALS OF THE ASSESSEE FIRM SHOWS THAT THERE WERE NO COSTS RELATING TO THE SALE OF DEVELOPMENT RIGHTS WHICH IS A POINTER THAT THE ASSESSEES ACTIVITY WAS NOT IN THE NATU RE OF TRADE OR VENTURE. 3. THE LD. CIT(A) ERRED IN HOLD ING THAT THE INTEREST INCOME OF ` .75 LAKHS ADMITTED BY THE ASSESSEE SH OULD BE ASSESSED UNDER THE HEAD BUSINESS. 3.1 THE LD. CIT(A) OUGHT TO HAVE SEEN THAT THE ASSESSEE RECEIVED INTEREST OF ` .56 LAKHS FROM M/S. AGS ENTE RTAINMENT LIMITED AND PAID INTEREST OF ` .50 LAKHS TO M/S. SSI LIMI TED. FURTHER, M/S. AGS ENTERTAINMENT LIMITED IS A COMPANY PROMOTED BY THE DIRECTORS OF M/S. SSI LIMITED. AGAIN THE ASSESSEE WAS TO PAY ` .1.75 CRORES TO SSI AS ON 31.03.2006 AND WAS TO RECEIVE THE SAME AMOUNT FROM M/S. AGS. THIS CLEARLY INDICATES THAT THE TRANSACTION IS NOT RELATED TO THE BUSINESS OF THE ASSESSEE BUT TO THE BUSINESS OF M/S. SSI AND AGS. 3.2 IN THE ABOVE CIRCUMSTANCES, IT IS SUBMITTED THAT IN THE HANDS OF THE ASSESSEE THE INTEREST INCOME HAS TO BE ASSESSED UNDER THE HEAD OTHER SOURCES ON LY AS THE TRANSACTION HAS GOT NOTHING TO DO WITH THE ASSESSEES BUSINESS. 3.3 WITH REGARD TO THE SUM OF ` .19 LAKHS RECEIVED AS INTEREST FROM ONE SRI JAWAHAR, IT IS SUBMITT ED THAT THE ASSESSEE COULD NOT SUBSTANTIATE ITS CLAIM EITHER BEFORE THE ASSESSING OFFICER OR BEFORE THE CIT(A) THAT THE AMOUNT WA S ACTUALLY ADVANCED TO HIM FOR PURCHASE OF PROPERTY AT POONAMALLE HIGH ROAD. THUS, THIS INTEREST CAN ALSO BE ASSESSED ONLY UNDER THE HEAD OTHER SOURCES. 4. THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON A SUM OF ` .10,92,500/-(INCORRECTLY WRITTEN AS ` .10,29,500/-) TOWARDS DISALLOWAN CE OF INTEREST ON ACCOUNT OF DRAWINGS BY PARTNERS. 4.1 THE LD. CIT(A) OUGHT TO HAVE SEEN THAT FROM THE BALANCE SHEET FILED BY THE ASSESSEE, MAJOR PORTION OF LOAN FUND WAS NOT UTILIZED FOR THE PURPOSE OF ASSESSEES BUSINESS BUT WAS ONLY USED FOR DRAWINGS BY PARTNERS. IN SUCH CIRCUMSTANCES, THE ASSESSEES CLAIM OF INTEREST ITA NO. 1145/MDS/10 3 CANNOT BE CONSIDERED AS EXPE NDITURE INCURRED FOR BUSINESS PURPOSES. 4.2 THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THAT THE ASSESSEE DID NOT SUBSTANTIATE HIS CLAIM THAT DRAWINGS WERE MADE ONLY OUT OF PROFITS AND NOT OUT OF BORROWED FUNDS, WITH REFERENCE TO ITS BOOKS OF ACCOUNTS. 5. THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON A SUM OF ` .2 LAKHS TOWARDS REWORKING OF PAYMENT OF INTEREST TO M/S SSI LIMITED. 5.1 THE LD. CIT(A) FAILED TO NOTE THAT AS PER RECORDS, ON BEHALF OF SSI THE FINANCE MANAGER GAVE THE DETAILS REGARDING THE INTEREST RECEIVED FROM THE ASSESSEE FIRM AN D AS PER THE SAME THE INTEREST WAS CHARGED AT 12.5%. IT IS SUBM ITTED THAT THE ASSESSING OFFICER REWORKED THE INTEREST ONLY ON TH IS BASIS SINCE THE ASSESSEE HAS REPAID ` .2.25 CRORES ON 18.03.2006. 6. THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF COMMISSION PAYMENT ON A SUM OF ` .24 LAKHS. 6.1 THE LD. CIT(A) OUGHT TO HAVE SEEN THAT THE SERVICES STATED TO BE RENDERED BY SRI JAGA DISH WERE NOT COMMENSURATE WITH THE COMMISSION STATED TO BE PAID TO HI M. FURTHER THIS WAS THE ONLY YEAR IN WHICH SRI JAGADISH EA RNED THE INCOME AND NE ITHER IN THE PAST NOR IN THE FUTURE SIMILAR COMMISSIONS WERE RECEIVED BY HIM. 7. FOR THESE AND OTHE R GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT(A) MAY BE SET ASIDE AND THAT OF ASSESSING OFFICER RESTORED. 2. AS REGARDS FIRST GROUND, THE SAME IS GENERAL IN NATURE AND GROUND NO. 7 IS PRAYER PART, WHICH NEEDS NO SPECIFIC ADJUDICATION. AS REGARDS GROUND NO. 2 TO 2.3, WHICH RELATES TO TREATMENT OF INCO ME OFFERED/ADMITTED AS BUSINESS INCOME, AND ASSESSED AS INCOME FROM SHORT TERM C APITAL GAINS, THE FACTS AS RECORDED BY THE LD CIT(A) AND NOT DISPUTED BY EITHER SIDE, INDICATE THAT THE ASSESSEE IS A PARTNERSHIP FIRM STATED TO BE IN THE BUSINESS OF REAL ESTA TE AND CIVIL CONTRACTOR, AS ITA NO. 1145/MDS/10 4 IS ALSO EVIDENT FROM T HE PARTNERSHIP DEED. THE A SSESSEE HAD ENTERED INTO AN AGREEMENT FOR SALE ON 05.05.2004 TO ACQUIRE THE PROPERTY SITUATED AT 4/293, OLD MAHABALIPURAM ROAD, PER UNGUDI ADMEASURING 37 GROUNDS FROM M/S.AGS ENTERTAINMENT PRIVATE LIMITE D (LAND OWNER) FOR A SUM OF ` .9,00,00,000/-. BY THIS AGREEMENT, THE ASSESSEE WAS STATED TO HAVE ACQUIRED THE RIGHT TO DEVELOP AND SELL THE PROPERTY. THE ASSESSEE IS DES CRIBED AS THE 'DEVELOPER' IN THIS AGREEMENT. THE ASSESSEE PAID A SUM OF ` .10 LAKHS ON SIGNING THE AGREEMENT. THE BALANCE CONSIDERATION WAS TO BE DISCHARGED AS UNDER: 1. ` .1.90 CRORES BEFORE 1-6-2004 2. ` . 2.00 CRORES BEFORE 5-8-2004 3. ` . 5.00 CRORES 15 MONTHS FROM 5-8-2004 IN THIS AGREEMENT, IT WAS CLEARLY ST ATED THAT, THE LANDOWNER SHALL HAND OVER VACANT POSSESSION AND TITLE DEEDS OF THE SAID PROPERTY ONLY AT THE TIME OF REGISTRATION OF THE SALE DEED (CLAUSE 11 ). 2.1 ON THE VERY SAME DAY, A SUPPLEMENT AL AGREEMENT FOR SALE WAS ENTERED BY THE LAND OWNER AND THE ASSESSEE, WHEREI N IT WAS AGREED THAT, UPON A RECEIPT OF ` .6 CRORES, THE LANDOWNER SHA LL HAND OVER THE ORIGINAL TI TLE DEEDS AS A SECURITY TO THE ASSESSEE AND THE LAND OWNER SHALL ALSO EXECUTE AN IRREVOCABLE POWER OF ATTORNEY IN FAVOUR OF THE ASSESSEE OR HIS NOMINEES FOR THE DEVELOPMENT AND SALE OF THE SAID PROPERTY. 2.2 THE ASSESSEE ON THE SAME DAY ENTERED INTO A JOINT DEVELOPMENT AGREEMENT WITH M/S. ARIHANT FOUNDATIONS AND HOUSING LTD (CALLED 'CO DEVELOPER') FOR THE JOINT DEVELOPMENT OF THE SAID PROPERTY. THIS WAS ONLY BECAUSE THE TIE UP BETWEEN THEM WOULD RESU LT IN NEGATION OF RISK AND ALSO TO THE ITA NO. 1145/MDS/10 5 MUTUAL ADVANTAGE OF BOTH. THE SALIENT FEAT URES OF THIS AGREEMENT WERE THAT: A) THE CO-DEVELOPER IS PERMITTED TO CONS TRUCT THE SUPERSTRUCTURE ON THE SAID PROPERTY. (CLAUSE 1). B) THE CO-DEVELOPER SHALL BRING IN ` . 2 CRORES AND THE DEVE LOPER ALSO BRING IN ` . 3 CRORES FOR THE CONSTR UCTION OF THE PROPERTY. C) THE CO-DEVELOPER SHALL PAY 22.5% OF THE NET PROFIT GE NERATED FROM THE DEVELOPMENT AND SALE OF THE SAID PR OPERTY TO THE ASSESSEE, APART FROM REIMBURSING THE ASSESSEE THE ` .2 CRORES PAID AS ADVANCE TO THE LAND OWNER. THE TOTAL AMOUNT WAS ALSO QUANTIFIED AS ` .4.5 CRORES IN THE AGREEMENT. 2.3 AS ON 31-3-2005, THE END OF THE PREVIOUS YEAR RE LEVANT TO THE AY 2005-06, THE ASSESSEE HAD PAID T HE LAND OWNER A SUM OF ` . 8.80 CRORES, OUT OF WHICH ` .2 CRORES WAS FROM THE CO -DEVELOPER. OUT OF THE ` .8.80 CRORES, ` .4.80 CRORES IS ADVANCE FOR PURCHASE OF L AND AND THE BALANCE OF ` .4 CRORES IS INTEREST BEARING ADVANCE GIVEN TO THE LAND OWNER. THIS IS EV IDENT FROM THE BALANCE SHEET FILED FOR THAT ASSESSMENT YEAR ALONG WITH THE RETURN OF INCOME. 2.4 DURING THE ASSESSMENT YEAR 2006-07, THE CO-DEVELOPER AGREED TO PAY A SUM OF ` .5.50 CRORES IN CONSIDERATION OF THE ASSESSEE(DEVELOPER) RELINQUISHING ALL RIGHTS IN THE SAID PROPERTY APART FROM THE ` .2 CRORES GIVEN AS REIMBURSEMENT OF ADVANCE TO THE LAND OWNER. THE SAID ARR ANGEMENT WAS EVIDENC ED BY EXCHANGE OF LETTERS DATED 10.10.2005. THUS, THE ASSESSEE, NET OF REIMBURSEMENT OF ADVANCES, HAD PAID TO THE LAND OWNER A SUM OF ` .4.80 CRORES AND FOR RELINQUISHING ALL HIS RIGHTS IN THE SA ID VENTURE, THE ASSESSEE HAD RECEIVED ` .5.5 CRORES TOGETHER WITH REIMBUR SEMENT OF THE ADVANCE OF ` .2 CRORES, THE TOTAL INCOME OF ` .7.50 CRORES. THE NET INCOME OF ` .2.70 CRORES ( ` .7.5 CRORES RECEIVED FROM THE ITA NO. 1145/MDS/10 6 CO-DEVELOPER LESS ` .4.80 CRORES PAID TO LAND OW NER) WAS OFFERED AS BUSINESS INCOME FOR THE A Y 2006-07 BY THE ASSESS EE APART FROM INCOME FROM OTHER REAL ESTATE ACTIVITIES IN THAT YEAR. IN SUPPOR T OF THE CLAIM BY THE APPELLANT, THE AR SUBMITTED COPIES OF AGREEMENTS AND CORRESPONDENCE BETWEEN THE ASSESSEE AND THE CO-DEVELOPER AND COPIES OF THE BALANC E SHEET AND RETURN OF INCOME FOR AY 2005-06 AND AY 2006-07 AND THE PARTNERSHIP DEED OF THE ASSESSEE FIRM. 2.5 THE ASSESSEE FURTHER SUBMITS THAT THE ASSESSING OFFICER ERRED IN HOLDING THE SAID PROPERTY AS A CAPITAL ASSET IN T HE HANDS OF THE ASSESS EE AND TO CONCLUDE THAT, THERE WAS A TRANSFER IN A Y 2006-07. THE INTENTI ON OF THE ASSESSEE WAS TO DEVELOP THE PROPERTY AND SELL AS A PART OF IT S BUSINESS IN REAL ESTATE AS IS EVIDENT FROM THE CONDUCT OF THE PARTIES. IT WAS FU RTHER SUBMITTED THAT, THE AO FAILED TO APPRECIATE THAT THE INCOME FROM SALE OF LAND AND DEVELOPMENT RIGHT IS BUSINESS INCOME OF THE ASSESSEE, WHO IS IN REAL ESTATE AND CIVIL CONTRACTOR BUSINESS AND NOT SHORT TERM CAPITAL GAINS. THE ASSESSI NG OFFICER HAD FAILED TO APPRECIATE THE BASIC LEGAL TENET AND MAIM 'NEMO DAT QUID NON HABET' MEANING NO ONE CAN GIVE WHAT HE DOES NOT HAVE OR NO ONE CAN GIVE BETTER TITLE THAN WHAT HE DOES NOT HAVE. IN THE INSTANT CASE, THE L AND OWNER DID NOT GIVE POSSESSION OF THE PROPERTY TO THE ASSESSEE (CLAUSE 11 OF T HE AGREEMENT TO SELL) WHICH THE ASSESSEE ALSO DID NOT GRANT TO THE CO-DEVELOPER (CLAUSE 1 OF THE JOINT DEVELOPMENT AGREEMENT). HENCE, THE ASSESSING OFFICER FA ILED TO APPRECIATE THAT, THE PROVISIONS OF SECTION 2(47)(V) IS NOT APPLICABLE IN T HE FACTS AND CIRCUMSTANCES OF THE CASE AS IN THE FIRST PLACE THE ASSESSEE DID NOT GET POSSESSION OF THE PROPERTY FROM THE LAND OWNER (CLAUSE 11 OF THE AGREEMENT TO SELL) AND THAT AS PER CLAUSE 1 OF THE ITA NO. 1145/MDS/10 7 JOINT DEVELOPMENT AGREEMENT THE LEGAL POSSESSION ALWAYS REMAINED WITH THE LAND OWNER TILL THE ENTIRE SALE CONSIDERATI ON WAS PAID TO THEM, WHICH HAPPENED IN ONLY AY 2006-07, AND HENCE SECTION 53A OF THE TRANSFER OF PROPERTY ACT READ WITH SECTION 2(47)(V) IS NOT APPLICABLE TO THE FACTS OF THE CASE. 2.6 THE ASSESSEE FURTHER SUBMITS T HAT, THE ASSESSING OFFICER FAILED TO APPRECIATE THAT THE ASSESSEE HAD OFFERED THE INCOME OF ` .2.70 CRORES IN THE PREVIOUS YEAR RELEVANT TO THE ASSE SSMENT YEAR IN WHICH THE ASSESSEE HAD RELINQUISHED ALL HIS RIGHTS IN THE JOIN T DEVELOPMENT AGREEMENT (A Y 2006-07 AS THE RELINQUISHMENT HAPPENED ON 10-10- 2005) AS BUSINESS INCOME. 2.7 AS PER CLAUSE 2 OF THE PARTNERSH IP DEED DATED 4-3-2004, THE BUSINESS OF THE ASSESSEE FIRM IS THAT OF REAL ESTA TE AND DEAL WITH ALL KINDS OF BUILDING CONSTRUCTIONS INTERALIA OTHER ACTIVITIES . THE ASSESSEE WAS IN THE PROCESS OF DEVELOPING THE PROPERTY AS IS EVID ENT EVEN FROM THE BALANCE SHEET AS ON 31.3.2005 WHEREIN, THE ADVANCE PAID TO TH E LAND OWNER IS SHOWN IN THE ASSET SIDE UNDER THE LOAN & ADVANCES AND THE SUM RECEIVED FROM THE CO-DEVELOPER IS SHOWN AS A LIABILITY. FURTHER , THE CONDUCT OF THE PARTIES I.E. THE ASSESSEE AND THE CO-DEVELOPER TILL THE DATE OF RELINQUISHME NT IS THAT, BOTH WERE ENGAGED IN THE DEVELOPMENT OF THE PROPERTY. THE RELINQUIS HMENT OF THE RIGHTS IN THE AGREEMENT BY THE ASSESSEE TAKES PLACE ONLY ON 10-10-2005 RELEVANT TO AY 2006-07. 2.8 THE SAME INCOME WAS ASSESSED IN THE ASSESSMENT ORDER FOR A Y 2005- 06 UNDER THE HEAD SHORT TERM CAPITAL GAINS. THE ASSE SSEE FILED APPEAL BEFORE THE CIT(A) AGAINST THE SAID ASSESSMENT. THE LD. CIT (A)-VIII, IN HIS ORDER ITA NO.35/2007-08 VIDE HIS ORDER DT.15-02-2008 DELETED THE ENTIRE ADDITION MADE IN ITA NO. 1145/MDS/10 8 THE ASSESSMENT ORDER FOR THE A Y 2005-06 WITH THE FOLLOWING OBSERVATIONS: PARA 4: I HAVE GONE THROUGH THE RECORDS OF THE AO AND THE DOCUMENTS SUBMITTED BY THE AR AND HEARD THE SUBMISSIONS. AS PER CLAUSE 2 OF THE PARTNERSHIP DEED DATED 4-3- 2004, THE BUSINESS OF THE ASSESSEE FIRM IS THAT OF REAL ESTATE AND DEAL WITH ALL KINDS OF BUILDING CONSTRUCTIONS INTERALIA OTHER ACTIVITIES. THE ASSESSEE HAD FIRS T ENTERED INTO THE AGREEMENT AND THE SUPPLEMENTAL AGREEMENT WITH THE L AND OWNER AND THEN ENTERED INTO THE AGREEMENT WITH THE CO DEVELOPER. THE INTENTION OF THE ASSESSEE IS CLEAR THAT, IT WANTED TO DEVELOP THE PROPERTY FROM ITS CONDUCT AND THE RECITALS IN THE JOINT DEVELOPMENT AGREEMENT. THE APPELLANT WAS IN THE PROCESS OF DEVELOPING THE PROPERTY WHICH IS EVIDENT FROM THE BALANCE SHEET AS ON 31.3.2005 WHEREIN, THE ADVANCE PAID TO THE LAND OWNER IS SHOWN IN THE ASSET SIDE UNDER THE LOAN & ADVANCES AND THE SUM RECEIVED FROM THE CO- DEVELOPER IS SHOWN AS A LIABILITY. AS RIGHTLY CONTENDED BY THE REPRESENTATIVE, THE INT ENTION OF THE ASSESSEE WA S TO DEVELOP THE PROPERTY AND SELL AS A PART OF ITS BUSINESS IN REAL ESTATE WHICH IS EVIDENT FROM THE FACT THAT THE ASSESSEE IMMEDIATEL Y AFTER ENTERING INTO THE PURCHASE AGREEMENT ON THE SAME DAY ENTERED INTO A JOINT DEVELOPMENT AGREEMENT WITH M/S ARIHANT FOUNDATIONS & HOUSING LTD. IN THE. CIRCUMSTANCES, THERE IS NO BASIS FOR TREATING IT AS AN ASSET AS HELD BY THE AO. FURTHER, AS PER CLAUSE 11 OF THE SALE AGREEMENT T HE LAND OWNER RETAINED THE POSSESSION OF PROPERTY WITH HIM AND, THER EFORE, THERE IS NO QUESTION OF HANDING OVER POSSESSION TO CO-DEVELOPER. A PERUSAL OF CLAUSE 1 OF THE JOINT DEVELOPMENT AGREEMENT MAKES IT CLEAR THAT, THE POSSESSION OF THIS PROPERTY SHALL REMAIN WIT H THE OWNER. THUS, THE AO IS NOT CORRECT IN STATING THAT THE POSSESSION WAS TAKEN OVER BY THE ASSESSEE AND HANDED OVER TO THE CO-DEVELOPER DURING THIS YEAR. IN ANY CASE, THE TRANSACTION WAS IN THE NATURE OF ADVENTURE IN THE NATURE OF TRADE AS THE PRIMARY INTENTION OF THE ASSESSEE WAS TO EARN PROFIT AND NOT TO HOLD IT AS CAPITAL ASSET . IN THE CIRCUMSTANCES, THE DEC ISION OF AAR REPORTED IN 294 ITR 196 IS NOT APPLICABLE TO THE FACTS OF THE CASE. FU RTHER, THE CONDUCT OF THE PARTIES I.E. ITA NO. 1145/MDS/10 9 THE ASSESSEE AND THE CO-DEVELOPER TILL THE DATE OF RELINQUISHMENT IS THAT, BOTH WERE ENGAGED IN THE DEVELOP MENT OF THE PROPERTY. THE RELINQUISHMENT OF THE RIGHT S IN THE AGREEMENT BY THE ASSESSEE TAKES PLACE ONLY ON 10-10-2005 AND NOT IN THE A Y 2005-06 AS HELD BY THE AO. THE DELHI BENCH OF ITAT IN THE CASE OF ANSAL PROPERTIES AND INDUSTRIES LTD.(ITA NO.3518/2004 DATED 3.8.2007) HA S HELD THAT WHERE IT IS FOUND THAT A CONTRACT WAS ENTERED INTO IN ORDI NARY COURSE OF BUSINESS, ANY COMPENSATION RECEIVED FOR ITS TERMINATION WOULD BE A REVENUE RECEIPT. IN THE INSTANT CASE, THE ASSE SSEE GOT THE COMPENSATION FOR THE TERMINATION OF THE JOINT DEVELOPMENT AGREEMENT WIT H THE CO-DEVELOPER, WHICH WAS ENTERED INTO IN THE ORDINARY COURSE OF BUSINESS ON 10-10-2005, WHICH IS RELEVANT TO AY 2006-07 AND NOT IN AY 2005-06. FURTHER, AS THE ASSESSEE IS IN BUSINESS OF REAL ESTATE AND THE RE LINQUISHMENT OF ALL RI GHTS IN THE JOINT DEVELOPMENT AGREEMENT HAPPENED ON 10-102005, THE PROVISIONS OF SECTION 2(47)(V) ARE NOT APPLICABLE IN THE APPELLANT'S CASE FOR ASSESSMENT YEAR 2005- 06' PARA 6: AS I HAVE HELD THAT T HE TRANSACTION IS ONLY A BUSINESS TRANSACTION, THERE IS NO NECESSITY TO DEAL WITH T HE ALTERNATIVE ARGUMENT OF THE ASSESSEE THAT, EVEN IF THIS IS ASSESSED TO SHOR T TERM CAPITAL GAINS, THE SAME IS TAXABLE ONLY IN THE NEXT YEAR AND NOT IN THIS YEAR. 2.9 THE AR SUBMITTED THAT, THE ORDER OF THE THEN CIT(A) WAS AFFIRMED BY THE ITAT 'B' BENCH, CHENNAI IN ITA NO. 1048/MDS/2008 DATED 30.4.2009. 2.10 THE EMPHASIS SUPPLIED IN THE ABOVE. ORDER OF CIT(A) CLEARLY SHOWS THAT, THESE TRANSACTION ARE IN THE NATURE OF TRADE, AND THE PROPER TY IN QUESTION WAS NEVER HELD AS ASSETS WHICH ATTRACTS THE PR OVISION OF 2(47)(V) TO OFFER THE SAME AS CAPITAL GAINS. SINCE THE ASSESSEE HAS CORRECTLY OFFERED THE SAME UNDER THE HEAD 'INCOME FROM BUSINESS' AND IT I S MOST HUMBLY AND RESPECTFULLY PRAYED THAT, ITA NO. 1145/MDS/10 10 THE TREATMENT OF THE SAID INCOME AS S HORT TERM CAPITAL GAINS BY THE AO MAY PLEASE BE DIRECTED TO DELETE THE SAME. 3. THE LD. CIT(A) WHILE CONSIDERING THE ISSUE AND ACCEPTING THE PLEA OF THE ASSESSEE HAS CONCLUDED TO ALLOW THIS GR OUND OF THE APPEAL OF THE ASSESSEE AS PER PARA 4.1 OF HIS ORDER WHICH READS AS UNDER: 4 1 I HAVE CONSIDERED THE CONT ENTS OF THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE AR OF TH E APPELLANT. I FIND FORCE IN THE SUBMISSIONS OF THE AR THAT, THE AS SESSEE WAS CARRYING ON THE BUSINESS OF REAL ESTATE, AS HELD BY MY PR EDECESSOR IN ITA NO.35/2007-08 VIDE HIS ORDER DT.15-02-2008 AND AFFIRME D BY THE HON'BLE ITAT, CHENNAI BENCH IN ITA NO.1048/MDS/2008 DATE D 30-4-2009 IN THE APPELLANT'S OWN CASE FOR A Y 2005-06. RESPEC TFULLY FOLLOWING THE DECISION OF HON'BLE ITAT (CITED SUPRA), I DIRECT THE AO TO TREAT THE INCOME OF ` .269.25 LAKHS AS INCOME FROM BUSIN ESS INSTEAD OF SHORT TERM CAPITAL GAINS. THE APPELLANT SUC CEEDS IN THIS GROUND. 4. AGGRIEVED BY THIS OR DER OF THE LD. CIT(A), THE DEPARTMENT IS IN APPEAL AND IT WAS SUBMITTED THAT THE LD. CIT(A) IS NOT JUSTIFIED IN HOLDING THAT THE INCOME OF ` .2.8 CRORES ADMITTED BY THE ASSESSEE SHALL AMOUNT ONLY TO INCOME FROM BUSINESS. HE OUGHT TO HAVE APPRECIA TED THAT THE ASSESSEE FIRM HAVING BEEN INCORPORATED ON 04.03. 2004 WITH A CAPITAL OF ` . 1 LAKH WAS NOT IN A FINANCIAL POSITION TO ENTER INTO SUCH A HUGE VENTURE IN MAY, 2004 AND FURTHER THE LD. CIT(A) FAILED TO APPRECIATE THAT THE ASSESSING OFFICER BASED ON THE MATERIALS AVAILABLE ON RECORD HAS CLEARLY BROUGHT OUT THAT THE ASSESSEE ONLY ENGAGED IN PURCHASE AND SALE OF RIGHTS WHICH WERE RELINQUISHED S UBSEQUENTLY IN FAVOUR OF M/S. ARIHANT ITA NO. 1145/MDS/10 11 DEVELOPERS. IT WAS SUBMITTED THAT THE A SSESSEE WHILE STATING BEFORE THE CIT(A) THAT ITS CONDUCT PROVED THAT IT WAS ENG AGED IN DEVELOPMENT ACTIVITY, DID NOT SUBSTANTIATE ITS CLAIM WITH ANY DOCUMENTARY EVIDENCES. IT IS FURTHER SUBMITTED THAT A PERUSAL OF THE FINANCIALS OF THE ASSESS EE FIRM SHOWS THAT THERE WERE NO COSTS RELATING TO THE SALE OF DEVELOPMENT RIGHTS WHICH IS A POINTER THAT THE ASSESSEES ACTIVITY WAS NOT IN THE NATURE OF TRADE OR VENTURE. THEREFORE, IT WAS PRAYED FOR REVERSAL OF THE IMPUGNED ORDER IN THIS REGARD, WHEREAS, THE LD. COUNSEL FOR THE ASSESSEE WHILE RELYING UPON THE ORDER OF THE LD. CIT(A) PLEADED FOR CONFIRMATION OF THE IMPUGNED ORDER WHILE MAKING REFER ENCE TO VARIOUS POINTS RAISED AND DISCUSSED BY THE LD. CIT( A) IN THE IMPUGNED ORDER. 4.1 WE HAVE CONSIDERED AR GUMENTS OF RIVAL SIDES, MA TERIAL ON RECORD AND PRECEDENTS RELIED UPON BY THE LD. AR OF THE ASSESSEE AND CONSIDERED BY THE LD. CIT(A) AND FIND THAT THE ASSESSEE FI RM WAS CONSTITUTED ON 04.03.2004 WITH A CAPITAL OF ` .1.00 LAKH AND IT MADE A CLAIM BEFOR E THE ASSESSING OFFICER THAT IT HAS RELINQUISHED ITS DEVELOPMENT RIGHTS WITH RESP ECT TO PROPERTY SITUATED AT 4/293, OLD MAHABALIPURAM ROAD, PERUNGUD I ADMEASURING 37 GROUNDS, WHICH WAS ACQUIRED ON 05.05.2004 FROM AGS ENTE RTAINMENT PRIVATE LIMI TED, AND BY EXECUTING RELINQUISHMENT ON 10.10.2005,IT HAS EXTINGUISHED ITS RIGHT IN THE ASSET. HOWEVER, THE CLAIM OF CREATING AND RELINQUISHING THE SO-CALLED DEVELOPMENT RIGHTS WAS MADE ON THE STRENGTH OF VARIOUS DOCUMENTS PRODUCED BEFORE THE LOWER AUTHORITIES WITHOUT STATI NG OR ESTABLISHING ITS CONDUCT TO PROVE THAT IT WAS ENGAGED IN DEVELOPMENT ACTIVITY NOR DID IT FOUND TO HAVE SUBST ANTIATED ITS CLAIM WITH ANY DOCUMENTARY EVIDENCE TO ESTABLISH IT TO BE BUSINESS INCOME, WHEREAS A PERUSAL ITA NO. 1145/MDS/10 12 OF FINANCIAL STATEMENT S OF THE ASSESSEE FIRM SHOW T HAT THERE WAS NO COST INCURRED BY THE ASSESSEE RELATING TO CREATION OF OR SALE OF DEVELOPMENT RIGHTS ON THE ASSET PURCHASED AND IN A WAY ASSET ACQUIRED I. E. LAND PURCHASE HAS BEEN RELINQUISHED IN FAVOUR OF M/S. ARIHANT FOUNDATIONS AND HOUSING LTD. AND T HE ASSESSING OFFICER SPECIFICALLY HELD THAT THE ASSESSEES ACTIVITY IS NOT IN THE NATURE OF TRADE AND ADVENTURE AND TREATED SUCH INCOME AS SHOR T TERM CAPITAL GAINS IN PLACE OF BUSINESS INCOME AS DECLARED BY THE ASSE SSEE. IN FIRST APPEAL, THE FIRST APPELLATE AUTHORITY, WHILE FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSE SSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06 IN IT A NO.1048/MDS/2008 HAS DIRECTED THE ASSESSING OFFICER TO TREAT SU CH INCOME AS THAT FROM BUSINESS INSTEAD OF SHORT TERM CAPITAL GAINS, WHILE DECIDING APPE AL OF THE DEPARTMENT AND CO OF THE ASSESSEE WHICH DEALT WITH TAXABI LITY OF THIS ITEM FOR T HAT YEAR, AFTER MENTIONING ISSUE INVOLVED IN PARA 2 ,RECORDING FACTS IN PARA 3, HAS CONCLUDED IN LAST TWO SENTENCES OF PARA 7 AND PARAS 8 TO 10 HAS PASSED THE ORDER DATED 30.04.2009. PARAS 2, 3, PART OF PARA 7AND PARAS 8, 9 AND 10 ARE REPRODUCED HEREUNDER: 2. THE ISSUE RAISED IS THAT THE LEARNED C1T(A) ERRED IN DELETING THE ADDITION OF ` . 2.7 CRORES MADE UNDER THE HEAD SHORT TERM CAPITAL GAINS. 3. THE BRIEF FACTS OF THE CASE IS THAT THE ASSESSING OFFICER FOUND THAT THE APPELLANT ENTERED INTO A JOINT DEVEL OPMENT AGREEMENT WITH M/S. ARIHANT FOUNDATIONS AND HOUSING LIMITED ON 05.05.2004 FOR JOINT DEVELOPMENT OF THE PROPERTY SITUATED AT 4/293, OLD MAHABALIPURAM ROAD, PERUNGUDI, CHENNAI 600096 COMPRISED IN SURVEY NO.281/1 AND 281/5 IN NO.111, KOTTIVAKKAM VILLAGE, SAIDAPET TALUK, KANCHEEPURAM DISTRICT MEASURING 37 GROUNDS. THE ASSESSEE PURCHASED THIS LAND FROM M/S. AGS ENTERTAINMENT PRIVATE LIMITED, CHENNAI FOR A SUM OF ` .4,80,00,000 THE ASSESSEE RECEIVED ` .7,50,00,000 CRORES FROM ITS CO-DEVELOPER, M/S. ARIHANT FOUNDATIONS AND HOUSING LIMITED FOR RELI NQUISHING ITS RI GHT OVER THE ABOVE PROPERTY AND GIVING M/S. ARIHANT FOUNDATIONS AND HOUSING LIMITED THE ABSOLUTE OWNERSHIP OF 100% OF THE SAID PROPERTY INCLUDING LAND AND BUILDING THEREON. THE ASSESSEE HAS OF FERED THE DIFFERENCE OF ` .2,70,00,000 IN THE ITA NO. 1145/MDS/10 13 RETURN OF INCOME FLIED FOR TH E ASSESSMENT YEAR 2006-2007 ON 31.10.2006 AS INCOME FROM SALE OF LAND AND DEVELOPMENT RIGHT. A CCORDING TO THE ASSESSING OFFICER, THE ASSESSEES STAND OF ADMITTING A SUM OF ` .2.70 CRORES AS BUSINESS INCOME FOR RELINQUISHING THE RIGHT ON THE PROPERTY AT PERUNGUDI WAS NOT CORRECT. HE WAS OF THE OPIN ION THAT FROM THE FACTS OF THE CASE THAT COULD BE TRACED THROUGH SEVERAL AGREEMENTS BE TWEEN M/S. A.G.S. ENTERTAINMENT PRIVATE LIMITED, ARIHANT FOUNDATIONS AND HOUSING LIMITED AND ASSESSEE CLEARLY INDICATE THAT THIS AMOUNT SHOULD HAVE BEEN OFFERED ONLY IN THE ASSESSMENT YEAR 2005-2006 AND NOT IN THE ASSESSMENT YEAR 2006-07 AS ADMITTED BY THE ASSESSEE, THAT TOO, AS SHORT TERM CAPITAL GAINS. HE HELD THAT THE ASSESSEE TRANSFERRED ITS RIGHT ON A CAPITAL ASSET THUS FALLING UNDER THE AMBIT OF SECTION 2(47) OF THE INCO ME TAX ACT, 1961 TO BE PRECISE, SECTION 2(47)(V). THE ASSESSING OFFICER FURTHER RELIED ON THE DECISION OF THE AAR IN 294 ITR 196 IN SUPPORT TO BRING THE SUM TO TAX IN THE ASSESSMENT YEAR 2005- 2006 AS SHORT TERM CAPITAL GAINS. 4. XXXXXX 5. XXXXXX 6. XXXXXX 7. XXXXXXXXXXX . THUS FROM THE ABOVE, IT IS CLEAR THAT THE ASSESSING OFFICERS ACTION IN TREATI NG THE DEVELOPMENT AGREEMENT AS AN INSTRUMENT OF TRANSFER OF LAND CANNOT BE SUSTAINED. UNDER THE CIRCUMSTANCES, WE UPHOLD THE WELL REASONED ORDER OF THE LEARNED CIT(A) THAT THE AMOUNT INVOLVED IS NOT TAXABLE IN THE IMPUGNED ASSESSMENT YEAR. 8. CROSS OBJECTION : IN THE CROSS OBJECTION, THE ISSUE RAISED IS THAT ASSUMING WITHOUT CONCEDING THAT THE INCOME IS CHARGEABLE UNDER THE HEAD CAPITAL GAINS, THE SUM COULD BE CHAR GEABLE TO TAX ONLY IN THE ASSESSMENT YEAR 2006-2007 AND NOT IN THE ASSESSMENT YEAR 2005-2006. 9. IN THE PRECEDING PARAGRAPH WHERE WE HAVE DEALT WITH THE REVENUES APPEAL, WE HAVE CLEARLY HELD THAT THE AMOUNT IN THIS CASE IS NOT COMING UNDER THE AMBIT OF TAXATION FOR THE ASSESSMENT YEAR 2005-2006. HENCE, THE CROSS APPEAL HAS BECOME INFRUCTUOUS. HENCE, THE SAME IS INFRUCTUOUS. 10. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED AND THE CROSS OBJECTION FILED BY THE ASSESSEE IS DISMISSED AS INFRUCTUOUS. 4.2 FROM THE FINDING AND CONCLUSION AS DRAWN BY THE TRIBUNAL FOR THE ASSESSMENT YEAR 2005-06, AS REPRODUCED AB OVE, IN THE IMPUGNED ORDER OF THE LD CIT(A), IT WOULD BE SEEN THAT THE LD. FIRST APPELLATE AU THORITY HAS NOT CONSIDERED THE SAID DECISION OF ITAT IN ITS RIGHT PR OSPECTIVE AND JUST ACCEPTED THE PLEA OF THE ITA NO. 1145/MDS/10 14 ASSESSEE TO TREAT THE IMPUGNED INCOME AS BUS INESS INCOME INSTEAD OF SHORT TERM CAPITAL GAIN, WHEN THE RELINQUISHMENT OF RIGHT IN THE PROPERTY DOCUMENT WAS EXECUTED ON 10.10.2005 AND SUCH ISSUE WAS NOT THERE IN THE SA ID APPEAL NOR ANY SUCH FINDING IS THERE IN THE ITAT ORDER , AND OTHERWISE SUCH ORDER COULD NOT BE CONSIDERED OR APPLIED TO DECIDE THE IMPUGNED ISSUE FOR THE FOLLOWING FURTHER REASONS; (A) FIRSTLY, THE ISSUE RAISED BEFORE T HE ITAT FOR THE EARLIER YEAR WAS ABOUT ACTION OF LD. CIT(A) HAVING DELETING THE OF ADDITION ` . 2.7 CRORES MADE UNDER THE HEAD SHORT TERM CAPITAL GAINS AND CATEGO RICAL FINDING HAS BEEN GIVEN IN THE APPEAL OF THE DEPARTMENT AS WELL AS IN TH E CO OF THE ASSESSEE VIDE ORDER DATED 30.04.2009 THAT IT PERTAINS TO THE ASSESSMENT YEAR 2005-06. (B) SECONDLY, THE APPELLATE TRIBUNAL HA S NO JURISDICTION TO GIVE DIRECTION WITH REGARD TO THE PROCEEDINGS OF THE EARLIER YEAR OR OF SUBSEQUENT YEAR AND SIGNIFICANT FINDING OF THE H ONBLE SUPREME COURT IN THE CASE OF ITO VS. MURLIDHAR BHAGWAN DAS (52 ITR 335 ) IS AS UNDER: .. THE JURISDICTION OF TH E TRIBUNALS IN THE HIERAR CHY CREATED BY THE ACT WAS NO HIGHER THAN THAT OF THE INCOME-TAX OFFICER: IT WAS ALSO CONFINED TO THE YEAR OF ASSESSMENT. VARIOUS HONBLE HIGH COURTS INCLUD ING HONBLE MADRAS HIGH COURT, WHILE CONSIDERING THE ABOVE DECISION OF HONBLE SUPREME COURT, HAS CATEGORICALLY HELD THAT WHERE AN APPEAL RELATES TO A PARTIC ULAR ASSESSMENT YEAR, THE FINDING AND DIRECTION MUST NECESSARILY BE LIM ITED TO THAT PARTICULAR YEAR . INCIDENTAL OBSERVATIONS RELATING TO OTHER YEARS, IF ANY MADE, IS NOT, STRICTLY SPEAKING, A FINDING. IN OTHER WORDS, THE TRIBUNAL CANN OT TRAVEL OUTSIDE THE SCOPE OF THE APPEAL ITA NO. 1145/MDS/10 15 AND PURPORT TO GIVE DIRECTION BEYOND ITS LIMITS [EAST INDIA CORPORATION LTD. V. CIT [1966] 61 ITR 16, 23 (MAD)]. (C) THIRDLY, THE FACTUAL ASPECT ABOUT AC QUISITION OF RIGHT IN THE PROPERTY OF THE ASSESSEE WAS CREATED VIDE AGREEM ENT DATED 05.05.2004 FOR THE YEAR 2004- 05, WHICH IS RELATABLE TO THE ASSESSM ENT YEAR 2005-06, WHER EAS, RELINQUISHMENT OF THE SUCH RIGHT OF THE ASSESSEE WAS TR ANSFERRED BY VIRTUE OF DOCUMENT EXECUTED ON 10.10.2005, WHICH FALLS IN THE YEAR 2005 -06 RELATABLE TO THE ASSESSMENT YEAR 2006-07 AND THERE IS NO SUCH RELINQUISHMENT OF RIGHT IN THE ASSETS DURING THE YEAR 2004-05 RELEVANT TO THE ASSESSMENT YEAR 2005-06, SO MIXING SUCH FACTS FOR THE YEAR UNDER CONSIDERATION WITH THE FACTS OF EARLIER YEAR AND TREATING THE FACTS OF THIS YEAR WITH EARLIER YEAR TO BE SAME IS NOT LEGALLY CORRECT. (D) FOURTHLY, FROM THE BALANCE SHEET OR OTHER RELATED DOCUMENTS PRODUCED BEFORE THE AUTHORITIES BELOW AND REFERRED TO BEFORE THIS BENCH CLEARLY INDICATE THAT THE ASSESSEE HAS NOT BEEN ABLE TO ES TABLISH, EXCEPT ENTERING INTO ANY AGREEMENT WITH DEVELOPER, THAT THERE IS ANY DEVELOPMENT IN THE PROPERTY ACQUIRED BY THE ASSESSEE AND RELINQUISHED IN FAV OUR OF THE DEVELO PER HAS BEEN DONE DURING THE ENTIRE PERIOD FOR WHICH OWNER SHIP REMAINED WITH THE ASSESSEE, AND (E) FIFTHLY, THE LD. CIT(A) HAS NOT CONS IDERED THE VITAL ASPECT OF THE CASE BEFORE CONCLUDING TO REVERSE THE ORDER OF THE ASSESSING OFFICER IN THE GARB OF FOLLOWING ITAT ORDER, WHICH IS TOTALLY ON DIFFERENT POINT AND NOT RELATABLE TO THE ISSUE INVOLVED IN THE EARLIER YEAR AND IN THE YEAR UNDER CONSIDERATION IS ENTIRELY DIFFERENT. ITA NO. 1145/MDS/10 16 4.3 TAKING IN TO CONSIDERATION OF FACT S, MATERIAL ON RECORD AND VARIOUS COURTS DECISIONS IT IS HELD THAT EARLIER YEARS DECISION IN ASSESSEES OWN CASE COULD NOT BE APPLIED WHEN THERE IS NO SIMILARITY OF FACTS AND ISSUE INVOLVED THE ISSUE INVOLVED IN EARLIER YEAR WAS NOT WITH R EGARD TO RELINQUISHMENT FOR WHICH DOCUMENT CAME TO BE EXECUTED DURING THE YEAR UNDER CONSIDERATION ON LY BESIDES OTHER POINTS AS RAISED AND DISCUSSED IN EARLIER PARAGRAPHS. IN VIEW OF RELINQUISHMENT HAVING BEEN EXECUTED DURING THE YEAR UN DER CONSIDERATION AN D THERE BEING NO DEVELOPMENT WORK DONE BY THE ASSESS EE AND RIGHTS PURCHAS ED HAVE BEEN SOLD WITHIN A SHORT SPAN OF TIME, SO IN OUR VIEW IT ATTRACTS SHORT TE RM CAPITAL GAINS AND THUS THE ASSESSING OFFICER IS FOUND TO HA VE CORRECTLY TREATED THE DIFFERENCE IN AMOUNT SPENT FOR ACQUISITION AND PROCEEDS, TO BE TAXABLE AS SHORT TERM CAPITAL GAINS AND THE LD. CIT(A) IS NOT JUSTIFIED IN TREATING THE SAME AS INCOME FROM BUSINESS. AS SUCH, WHILE A CCEPTING THE APPEAL OF THE REVENUE IN THIS REGARD, WE SET ASIDE THE IMPUGNED ORDER ON THIS I SSUE AND RESTORE THAT OF THE ASSESSING OFFICER. 5. AS REGARDS NEXT GROUND, THE ISSUE RELATES TO INTEREST INCOME OF ` .75 LAKHS PLUS AMOUNT ADMITTED BY THE ASSESS EE SHOULD BE ASSESSED UNDER THE HEAD BUSINESS, WHICH HAS BEEN ASSESSED AS INCO ME FROM OTHER SOURCES AND ACTION OF A.O. CAME TO BE REVERSED IN APPEAL. 5.1 FACTS INDICATE THAT ASSESSEE HAD BORROWED ` .1.20 CRORES FROM STATE BANK OF MAURITIUS AND HAD ADVANCED THE SAME TO MR. JAWAHAR FOR THE PURCHASE OF LAND AT POONAMALLE HIGH ROAD, CHENNAI. SINCE THE SAID DEAL DID NOT MATERIALIZE, A SUM OF ` .19,00,376/- WAS CHARGED ON THE AMOUNTS ADVANCED TO MR. JAWAHAR AND ITA NO. 1145/MDS/10 17 ` .17,54,222/- WAS PAID AS INTEREST ON THE MONEYS BORROWED FROM STATE BANK OF MAURITIUS. FURTHER T HE ASSESSEE HAD BORROWED ` .4 CRORES FROM SSI LTD AND USED THE SAID MONEY FOR THE INTEREST BEARING ADVANCE TO AGS ENTERTAINMENT P LTD IN CONNECTION WITH THE LAND AT PERUNGUDI. THE ASSESSEE EARNED INTEREST OF ` .56 LAKHS FROM AGS ENTERTAINMENT P LTD AND PAID INTEREST OF ` .50 LAKHS TO M/S . SSI LTD. ALL THESE EVENTS OCCURRED DURI NG THE A Y 2006-07. THE ASSESSING OFFICER TREATED THE INTEREST INCOME OF ` .75,00,376/- AS INCOME FROM OTHER SOURCES AND THE INTEREST PAID OF ` .67,54,222/- AS BUSINESS EXPENDITURE. 5.1 THE ASSESSEE SUBMITTED BEFORE THE FI RST APPELLATE AUTHORITY THAT BOTH THE INTEREST RECEIPT OF ` . 75,00,376/- WERE IN THE ORDINARY COURSE OF THE REAL ESTATE BUSINESS AND HAVE TO BE TREATED AS 'BUSIN ESS INCOME' AS INTEREST PAYMENTS OF ` .67,54,222/- WERE TREATED AS 'BUSINESS EX PENDITURE' BY THE ASSESSING OFFICER. IN THE ALTERNATIVE, IF THE INTE REST RECEIPT IS TREATED AS INCOME FROM OTHER SOURCES, THEN AS PER SECTION 57(III), THE INTEREST PAID SHOULD ALSO BE TREATED AS EXPENDITURE UNDER 'OTHER SOURCES'. 5.2 THE LD. CIT(A), WHILE CONSIDERING AND ACCEPTING THE PLEA OF THE ASSESSEE HAS CONCLUDED TO ALLOW THIS GROUND OF APPEAL OF THE AS SESSEE AS PER PARA 5.1 OF HIS ORDER WHICH READS AS UNDER: 5.1 I HAVE CONSIDERED THE CONTENTS OF THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE AR OF THE APPE LLANT. THE AR HAS ESTABLISHED THE NEXUS THAT, THE MONEYS WERE BORRO WED AND ADVANCED IN THE ORDINARY COURSE OF REAL ESTATE BUSINESS AND INTEREST WAS PAYABLE AND RECEIVABLE IN THE SAID TRANSACTIONS. THE LEARNE D AO HAS TAKEN INTEREST PAID OF ITA NO. 1145/MDS/10 18 ` .67,54,222/- AS BUSINESS EXPENDITURE WHEREAS, THE INTEREST INCOME OF ` .75,00,376/- AS INCOME FROM 'OTHER SOURCES' IS NOT FO UND TO BE FAIR. SINCE BOTH THE INTEREST PAYMENT AS WELL AS RECEIP T ARE HAPPENED TO BE IN THE NORMAL COURSE OF BUSINESS, IT IS FAIR TO TREAT IT AS A BUSINESS RELATED TRANSACTION AND ACCORDINGLY, I DIRECT THE AO TO TREAT THE INTEREST RECEIVED OF ` .75,00,376/-AS 'INCOME FROM BUSINESS' INSTEAD OF INCOME FROM OTHER SOURCES. THE ASSESSEE SUCCEEDS IN THIS GROUND. 5.3 AGGRIEVED BY THIS ORDER OF THE LD. CIT(A), THE D EPARTMENT HAS CAME UP IN APPEAL AND IT WAS STATED T HAT INCOME ADMITTED BY THE ASSESSEE SHOULD BE ASSESSED UNDER THE HEAD BUSINESS ONLY AND WHILE RELYING UPON THE GROUNDS NO. 3 TO 3.3, IT WAS PLEADED FOR REVERSAL OF THE ORDER OF THE LD. CIT(A) AND RESTORING THAT OF THE ASSESSING OFFI CER. WHEREAS, THE LD. COUN SEL FOR THE ASSESSEE WHILE RELYING UPON THE ORDER OF THE LD. CIT(A) HAS PLEADED FO R CONFIRMATION OF THE ORDER OF THE LD. CIT(A) ON THIS POINT AS HE HAS PASSED WELL REASONED AND ELABORATE ORDER AS PER PROVISIONS OF LAW. 5.4 BOTH THE SIDES HAVE BEEN HEARD ON THIS POINT IN THE LIGHT OF MATERIAL ON RECORD AND FIND THAT THE ASSESSEE HAS BORROWED ` .1.20 CRORES FROM STATE BANK OF MAURITIUS AND HAD ADVANCED THE SAME TO MR. JAWAHAR FOR THE PURCHASE OF LAND AT POONAMALLEE HIGH ROAD, CHENNAI. SINC E THE DEED DID NOT MATERIALIZE, ` .19 LAKHS PLUS AMOUNT WAS CHAR GED ON THE AMOUNT ADVANCED TO MR. JAWAHAR AND ` .17,54,222/- WAS PAID AS INTEREST ON T HE MONEYS BORROWED FROM THE STATE BANK OF MAURITIUS. FURTHER THE ASSESSEE HAD BORROWED ` .4.00 CRORES FROM THE COMPANY SSI LTD AND UTILIZED THE SAID MONEY FOR INTEREST BEARING ADVANCE TO AGS ENTERTAINMENT P. LTD. FR OM WHOM INTEREST OF ` .56.00 LAKHS WAS EARNED AND THE ASSESSEE PAID INTEREST OF ` .50.00 LAKHS TO SSI LTD. A ND THESE TRANSACTIONS HAD ITA NO. 1145/MDS/10 19 TAKEN PLACE IN THE ACCOUNTING YEAR 2005- 06 RELEVANT TO THE ASSESSMENT YEAR 2006-07, THE ASSESSING OFFICER TREATED THE INCOME OF ` .75,00,376/- AS INCOME FROM OTHER SOURCES AND INTEREST PAID WAS TREATED AS BUSINESS EXPENDITURE AND THE LD. CIT(A),WHILE ACC EPTING THE APPEAL OF THE A SSESSEE ON THIS POINT HAS DIRECTED THE ASSESSING OFFICER TO TREAT TH E INTEREST RECEIVED AS INCOME FROM BUSINESS INSTEAD OF INCOME FROM OTHER S OURCES. WE, AFTER HAVING CONSIDERED THE RIVAL SUBMISSIONS IN THE LIGHT OF MATERIAL ON RECORD, ARE OF THE OPINION THAT INTEREST INCOME IN THIS CASE, IN THE ABSENCE OF HAVING ESTABLISHED/CONDUCTED ANY BUSINESS WHEN THE AMOUNT HAS BEEN UTILIZ ED FOR EARNING INTEREST INCOME, COULD ONLY BE TREATED AS INCOME FROM OTHER S OURCES AS NO BUSINESS ACTIVITY HAS BEEN CONDUCTED DURING THE YEAR UNDER CONSIDERATION WITH RESPEC T TO THESE AMOUNTS SO THE ACTION OF THE A.O IN THIS REGARD IS JUSTIFIED. BUT SO FAR AS INTEREST PAID OF ` .67,54,222/- ON BORROWED AMOUNT IS CONCERNED, SAME THOUGH COULD NOT BE TREATED AS BUSINESS EXPENDITURE, YET SAME COULD BE ALLOWED UNDER SECTION 57(III) AS EXPENDITURE UNDER THE HEAD OTHER SOUR CES. THEREFORE, ORDERS OF BOTH THE AUTHORITIES ARE SET ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO TREAT ` .75,00,376/- AS INCOME FROM OTHER SOURCES AND ALLOW EXPENDITURE OF ` . 67,54,222/- UNDER THE HE AD OTHER SOURCES. AS SU CH, CONCLUSION DRAWN GETS MODIFIED TO THE EXTENT INDICATED ABOVE AND THIS GROUND OF APPEA L OF THE REVENUE GETS PARTLY ACCEPTED. 6. AS REGARDS NEXT ISSUE, THE SAME RELATES TO DELETION OF ADDITION OF ` .10,92,500/- TOWARDS DISALLO WANCE OF INTEREST ON A CCOUNT OF DRAWINGS BY PARTNERS. ITA NO. 1145/MDS/10 20 6.1 IN FIRST APPEAL, AGAINST SUCH ADDITION/DI SALLOWANCE, IT WAS STATED BEFORE THE FIRST APPELLATE AUTHORITY THAT THE ASSE SSEE USED THE MONEYS BORROWED FROM SSI LTD AND STATE BANK OF MAURITIUS FOR THE REAL ESTATE BUSINESS AND EARNED INTEREST INCOME OUT OF SUCH ADVANCES. NO MONEY WAS DRAWN BY THE PAR TNERS FROM THESE BORROWINGS. WHATEVER WAS DRAWN BY THE PAR TNERS WAS OUT OF THE PROFITS EARNED BY THEM. THE ASSESSING OFFICER ASSUMED THAT THE BORROWED MONEYS WERE USED BY THE PARTNERS' FOR THEIR OVER DR AWALS AND CONSEQUENT IALLY DISALLOWED ` .10,92,500/-. THE BORROWED MONEYS WERE NOT USED FOR T HE OVERDRAWING, HENCE IT WAS PRAYED THAT DISALLOWANCE ON THE IN TEREST PAID ON ACCOUNT OF THE SAME BE DELETED. 6.2 THE LD. CIT(A), WHILE ACCEPTING THE PLEA OF THE ASSESSEE HAS CONCLUDED TO ALLOW THIS GROUND OF APPEAL OF THE ASSESSEE AS PER PARA 6.1 OF HIS ORDER WHICH READS AS UNDER: 6 1. I HAVE CONSIDERED THE CONTEN TS OF THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE AR OF THE APPELLANT. I FIND THAT, THE SUBMISSIONS OF THE AR THAT, MONEYS BORROWED FROM SSI LTD., WAS BEARING INTEREST AT 12.5% AND WAS ADVANCED FOR INTEREST AT 14 % AND THAT THE AO HAS NOT MADE OUT ANY CASE THAT THE SAID SSI LTD., AND THE ASSESSEE FIRM ARE RELATED PARTIES COVERED BY THE PR OVISIONS OF SECTION 40A(2)(B). FURTHER, I ALSO AGREE W ITH THE SUBMISSIONS OF TH E AR THAT, PROFITS ARE EARNED THROUGHOUT THE YEAR AND THE ASSESSEE FIR M HAD ENOUGH PROFITS FOR THE PARTNERS TO WITHDRAW AND TH E BORROWINGS WERE NOT UTILIZED FOR THE PARTNERS' WITHDRAWALS. HENCE, I DI RECT THE AO TO DELETE THE AD HOC ADDITION OF ` .2 LAKHS AND ` .10,92,500/- FOR THE PARTNERS' OVERDRAWAL SAID TO BE FROM THE BORROWED MONEY. THE ASSESSEE SUCCEEDS IN THESE GROUNDS. ITA NO. 1145/MDS/10 21 6.3 AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE D EPARTMENT HAS CAME UP IN APPEAL AND IT WAS PLEADED THAT THE LD. CIT(A) HAS WR ONGLY DELETED THE IMPUGNED ADDITION AND HE OUGHT TO HAVE SEEN THAT FROM THE BALANCE SHEET FILED BY THE ASSESSEE, MAJOR PORTION OF LOAN FUND WAS NOT UTILIZ ED FOR THE PURPOSE OF ASSESSEES BUSINESS BUT WAS ONLY USED FOR DRAWINGS BY PARTNERS. IN SUCH CIRCUMSTANCES, THE ASSESSEES CLAIM OF INTEREST CANNOT BE CONSIDERED AS EXPENDITURE INCURRED FOR BUSINESS PU RPOSES. THE LD. CIT(A) WOULD HAVE ALSO APPRECIATED THAT THE ASSESSEE FA ILED TO SUBSTANTIATE HIS CLAIM THAT DRAWINGS WERE MADE ONLY OUT OF PROFITS AND NOT OUT OF BORROWED FUNDS, WITH RESPECT TO ITS BOOKS OF ACCOUNTS. TH EREFORE, HIS ORDER ON THIS ACCOUNT SHOULD BE REVERSED AND THAT OF THE ASSE SSING OFFICER SHOULD BE RESTORED. 6.4 THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE ORDERS OF THE LD. CIT(A) AND PLEADED FOR CONFIRMATION OF THE ORDER AND HE HAS FURTHER SUBMITTED THAT AT THE MOST THE INTERE ST COULD BE DISALLOWED IF ESTABLISHED THAT BORROWED FUNDS HAVE BEEN UTILIZED FOR WITHDRAWALS OF PARTNERS AND BOTH ARE RELATED TO EACH OTHER BUT THAT TOO HAS NOT BEEN PROVED SO ADDITION WAS UNCALLED FOR WHICH HAS CORRECTLY BE EN DELETED SO IMPUGNED ORDER IN THIS REGARD SHOULD BE UPHELD 6.5 AFTER HAVING CONSIDERED THE RIVAL SU BMISSIONS IN THE LIGHT OF MATERIAL ON RECORD WE FIND THAT PARTNERS HAVE WITHDRAWN A NET AMOUNT OF ` 1,82,09,793/- AND INTEREST AT 12% WAS LEVIABLE FOR SU CH AMOUNT FOR THE FULL YEAR COMES TO ` . 2 1,85,175/- AND THE ASSESSING O FFICER NOTED THAT AS THIS ITA NO. 1145/MDS/10 22 WORKING IS NOT BASED ON DATE-WIS E AND QUANTUM-WISE WITHDRAWALS AND WITHOUT ANALYZING THE IMMEDIATE SOURCE OF FUND FOR SUCH PAYMENT IN THE ABSENCE OF PROPER DATA AVAILABLE ON RECORD, DISALLOWANCE OF INTEREST WAS MADE ON A CONSERVATIVE BASE AND ONLY 50% OF INTEREST ON THE SAID AMOUNT TO THE EXTENT OF ` .10,92,500/- WAS CONSIDERED AS RELATABLE INTEREST IN RESPECT TO THE FUND UTILIZED BY THE PARTNERS AND AS INTEREST PAYMENT TO THAT EXTENT IS DEBITED IN THE PROFIT AND LOSS ACCOUNT, IT CAME TO BE CONSIDERED AS NON-BUSINESS EXPENSES AND DISALLOWE D. AFTER CONSIDERING THE ARGUMENTS OF RIVAL SIDES, WE ARE OF THE VIEW THAT NEITHER ACTION OF THE ASSESSING OFFICER NOR OF LD. CIT(A) CAN BE HELD TO BE JUSTIFIED BECA USE THE ASSESSING OFFICER IS MAKING THE ADDITION WITHOUT RECORDING APPROPRIATE DETAILS OR BASIS AND THE LD. CIT(A) IS JUST DELETING TH E SAME, THEREFORE, IN THE INTEREST OF JUSTICE AND TO HAVE FAIR PLAY IN THE MA TTER, WE, SET ASIDE TH E ORDERS OF BOTH THE AUTHORITIES ON THIS ISSUE AND REST ORE THE MATTER BACK ON THE FILE OF THE ASSESSING OFFICER FOR RECONSIDERING THE SAME AFRESH AFTER GATHERING NECESSARY DETAILS AND MATERIAL DATE WI SE AND AMOUNT WI SE BEFORE MAKING ADDITION IF ANY REQUIRED TH AT TOO BY GIVING DUE OPPO RTUNITY TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. SO TH IS ISSUE GETS RESTORED ON THE FILE OF THE ASSESSING OFFICER. 7. THE NEXT ISSUE AS CONTAINED IN GROUND NOS. 5 AND 5.1 RELATES TO DELETION OF ADDITION OF ` .2.00 LAKHS TOWARDS REWO RKING OF PAYMENT OF INTEREST TO M/S. SSI LTD. ITA NO. 1145/MDS/10 23 7.1 FACTS INDICATE THAT TH E ASSESSING OFFICER TREATED ` .2 LAKHS OUT OF THE INTEREST PAID OF ` . 50 LAKHS TO SSI LTD. AS EXCESSIVE. THE ASSESSEE SUBMITTED BEFORE THE FIRST APPELLATE AUTHORITY THAT T HE INTEREST CHARGED BY SSI LTD WAS 12.5% AND THE SAID AMOUNT BORROWED WAS ADV ANCED AS INTEREST BEARING ADVANCE @14% TO AGS ENTERTAINMENT P LTD., AND RECEIVED ` .56 LAKHS AS INTEREST. THE LENDER SSI LTD., IS NOT A RELATED PARTY AND HENCE THE PROVISIONS OF SECTION 40A (2) (B) DO NOT APPLY TO THE ASSESSEES CASE. HENCE, THE ASSESS EE PRAYED BEFORE THE FIRST APPELLATE AUTHORITY THAT THE SAID DISALLOWANCE OF ` .2 LAKHS BE DELETED. 7.3 THE LD. CIT(A), WH ILE DEALING WITH THE ISSUE OF ADDITION OF ` .10,92,500/- HAS DELETED THIS ADDITION OF ` .2.00 LAKHS ALSO AND AS PER OUR FINDING GIVEN IN THE EARLIER PART OF THE ORDER IN PAR A 6, THE ISSUE HAS BEEN SET ASIDE ON THE FILE OF THE ASSESSING OFFICER. SO, IN VIEW OF THE FACT S, CIRCUMSTANCES AND MATERIAL ON RECORD, WE SET ASIDE THIS ISSUE ALSO ON THE FILE OF THE ASSESS ING OFFICER FOR DECIDING THE SAME IN TERMS OF DIRECTION ISSUED FOR THE EARLIER ISSUE. 8. THE LAST ISSUE RELATES TO DELET ION OF DISALLOWANCE OF COMMISSION PAYMENT ON A SUM OF ` .24 LAKHS. 8.1 FACTS INDICATE THAT THE ASSESSEE HAD ENGAGED THE SERVICES OF MR. M. JAGADISH IN CONNECTION WITH THE ACQUISITION OF THE PROPERTY BY OZONE PROJECTS P LTD FROM SRI KRISHNA TILES & POTTERIES MA DRAS P LTD. THE PR OPERTY TRANSACTION WAS FOR ABOUT ` .250 CRORES WHEREIN, THE ASSESSEE FIRM WAS THE MEDIATOR AND EARNED A GROSS INCOME OF ` .14.11 CRORES. THE ASSESSEE FIRM WAS ALSO STATED TO BE THE FINANCE MEDIATOR FOR THE PURCHASER TO ARRANGE F UNDS FROM INVESTORS FROM MUMBAI. THE ASSESSEE FIRM IS STATED TO HA VE ENGAGED THE SERVICES OF THE SAID ITA NO. 1145/MDS/10 24 MR. M. JAGADISH, A QUALIFIED CHARTERED A CCOUNT FOR PREPARATION OF THE PROJECT REPORT IN CONNECTION WITH THE SAME AND HAD PAID ` .29 LAKHS TO HIM. THE ASSESSING OFFICER IN HIS LETTER DATED 18.12. 2008 PROPOSED TO DISALLOW 50% OF THE AMOUNT PAID TO MR. JAGADISH ( ` .14.5 LAKHS) TREATING IT AS EXCESSIVE. HOWEVER, IN THE ASSESSMENT ORDER, HE HAD DISALLOWED ` .24 LAKHS. THE ASSESSEE TOOK UP THE MATTER BEFORE THE FIRST APPELLATE AUTHORITY AND SUBMITTED THAT MR. JAGADISH IS NOT A RELATIVE OF THE PARTNERS OF THE ASSESSEE AND THAT EVEN ASSUMING BUT NOT ADMITTING THAT THE PAYMENTS WERE EXCESSIVE, TH E ASSESSING OFFICER OUGHT TO HAVE DISALLOWED 50% AS PROPOSED BY HIM AND NOT ` .24 LAKHS WHICH IS 80%. HENCE IN APPEAL IT WAS PLEADED THAT THE ENTIRE DISALLOWANCE MADE ON THIS COUNT MAY BE DELETED. 8.2 THE LD. CIT(A), WHILE CONSIDERING AND ACCEPTING THE PLEA OF THE ASSESSEE HAS DIRECTED TO DELETE THE IMPUGNED ADDITION AS PER PARA 7.1 OF HIS ORDER, WHICH READS AS UNDER: 7.1 I HAVE CONSIDERED THE CONTEN TS OF THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE AR. THE FACTS THAT ARE RELEVANT ARE THAT, THE ASSESSEE FIRM WAS THE MEDI ATOR IN THE PROPERTY TRANSACTION OF ABOUT ` .250 CRORES WHEREIN, THE ASSESSEE FIRM HAD EARNED A GROSS INCOME OF ` .14.11 CRORES. THE ASSESSEE FIRM WAS ALSO THE FINANCE MEDIATOR FOR THE PURCHASER TO ARRANGE FUNDS FROM IN VESTORS FROM MUM BAI. THE ASSESSEE FIRM HAD ENGAGED THE SERVICES OF THE SAID MR. M. JAGADEESH, A QUALIFIED CHARTERED ACCOUNT FOR PREP ARATION OF THE PROJECT REPORT IN CONNECTION WITH THE SAME AND HAD PAID ` .29 LAKHS TO HI M. THE AO HAS NOT MADE OUT ANY CASE THAT THE SA ID MR. M. JAGADEESH WAS RELATED TO THE PARTNERS OF THE ASSESSEE FIRM AN D THUS THE PAYMENT IS EXCESSIVE U/S ITA NO. 1145/MDS/10 25 40A(2)(B). THEREFORE, I DIRECT TH E AD TO DELETE THE ADDITION OF ` .24 LAKHS. THE ASSESSEE SUCCE EDS IN THIS GROUND. 8.3 THE DEPARTMENT IS IN APPEAL BEFO RE THIS BENCH AND DURING HEARING IT WAS CONTENDED THAT THE LD . CIT(A) IS NOT JUSTIFI ED IN DELETING THE IMPUGNED ADDITION AND HE OUGHT TO HAVE SEEN THAT THE SERV ICES STATED TO BE RENDERED BY SRI JAGADISH WERE NOT CO MMENSURATE WITH THE COMMISSION STATED TO BE PAID TO HIM AND THIS WAS THE ONLY YEAR IN WHIC H SRI JAGADISH EARNED THE INCOME AND NEITHER IN THE PAST NOR IN THE FUTURE SI MILAR COMMISSIONS WERE RECEIVED BY HIM. THEREFORE, THERE WAS NO JU STIFICATION TO DELETE THE IMPUGNED ADDITION AND HENCE IT WAS PLEADED FOR REVERSAL OF THE ORDER OF THE LD. CIT(A) AND THAT OF THE ASSESSING OFFICER SHOULD BE RESTORED. 8.4 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS WAS ONE OF THE BIGGEST DEAL IN CHENNAI ON THAT RELEVANT POINT OF TIME WHEN TRANSACTION OF ` .250 CRORES WAS MADE. SHRI JAGAD ISH IS NOT RELATED TO ANY OF THE CONSTITUENT OF THE ASSESSEE FIRM AND IN FACT THE ASSESSING OFFICE R WANTED TO DISALLOW AND FOR THAT HE HAS MADE THE DISALLOWANCE, WHICH IS OTHER WISE NOT JUSTIFIED AND THE LD. CIT(A) HAS CORRECTLY DELETED T HE IMPUGNED ADDITION AND HIS ORDER IS LEGALLY CORRECT, WHICH SHOULD BE UPHELD. 8.5 WE HAVE HEARD BOTH THE SIDES, CONSI DERED THE MATERIAL ON RECORD AND FIND THAT THE ASSESSING OFFICER IN OR DER TO EXAMINE THE GENUINENESS AND REASONABLENESS OF SUCH EXPENDITURE HAS EXAMINED SHRI JAGADISH UNDER SECTION 131 ON 16.12.2008 AND RECORDED FOLLOWING R EASONS TO DISALLOW PART OF THE EXPENSES IN THE ASSESSMENT ORDER AS UNDER: ITA NO. 1145/MDS/10 26 PROFESSIONAL CHARGES /COMMISSION TO MR. JAGADISH DURING THE YEAR ASSESSEE MADE LOTS OF PAYMENTS TO DIFFERENT CONCERNS BY WAY OF COMMISSION OR CO NSULTANCY AND PROFESSIONAL CHARGES. SHRI M. JAGADISH IS ONE OF THEM WHO WAS PAID TO TAL COMMISSION/ PROFESSIONAL OF ` .29 LAKHS. IN ORDER TO EXAMINE THE GENUIN ENESS AND REASONABLENESS OF SUCH EXPENDITURES HE WAS EXAMINED U/S 13 1 ON 16.12.2008, AND HIS STATEMENT WAS RECORDED IN PRESENCE OF SHRI R. THIRUMALMURUGAN, A/R OF THE ASSESSEE IN HIS WRITTEN SUBMISSION, HE STATED THAT PROVIDED SERVICES TO THE ASSESSEE FIRM BY WAY OF COORDINATION WITH THE ASSESSEES BUYERS/SELLERS AND ALSO ASSISTED THEIR LEGAL COUNSELS TO FINALIZE THE DRAFT / DOCUMENTS ETC. HIS NATURE WORK WAS DESCRIBED IN HIS OWN LANGUAGE COLLECTION OF DOCUME NTS, RECORDS FROM THE OFFICE OF SUB-REGISTRAR, TAHSILDAR, CORPORATION AND OTHER GOVERNMENT OFFICES AND ESTABLISHMENTS PROVIDING SUPPORT AND DOCUME NTATION TO THE ADVOCATES AND TO COORDINATE ALL TH E PARTIES INVOLVED, WORKING OUT PROFITABILITY BALANCE SHEET, CASH FLOW STATEMENT, ETC. EXPLAINING THE INVESTOR ABOUT THE PROJECT. COMMUNICATING WITH THE INVESTORS. ETC. AND AGAINST THIS SERVICES HE RAISED AN INVOICE OF ` .29 LAKHS AND HE RECEIVED FULL PAYMENT. AND AGAINST THIS SERVICES HE RAISED AN INVOICE OF ` .29 LAKHS AND HE RECEIVED FULL PAYMENT. MR. JAGADISHS I T RETURN AND AC COMPANYING DOCUME NTS RELATED TO AY 2006-07 SHOWS THAT HE IS A FULL TIME EMPLOYEE OF M/S. TRANS CORPORATION ADVISORY SERVICES PRIVATE LIMITED FROM WHERE HE RECEIVED HIS SALARY OF ` .6,25,200/- FOR THE YEAR. HIS OTHE R PROFESSIONAL INCOME IS ABOUT ` .1 LAKHS. HIS EARNIN G FROM COMMISSION WAS ` .30,92,000/-, OUT OF WHICH ` .29 LAKHS RECEIVED FROM M/S. PELICAN ES TATES. HE WAS INVO LVED ONLY WITHIN A SINGLE LAND DEALING IN RESPECT OF DE VELOPMENT A SITE BY OZONE GROUP. IN HIS STATEMENT, IT IS STATED THAT HE IS EMPLOYED WITH TRANS CORPORATION SINCE 2000 A ND HIS MAIN INCOME BEING FROM SALARY ONLY - BUT IN AY 2006-07 HE GOT COMMISSION INCOME OF ` .29 LAKHS- HE ADMITS THAT HE ITA NO. 1145/MDS/10 27 NEVER EARNED SUCH A BI G AMOUNT NEITHER IN THE PRECEDING NOR IN THE SUBSEQUENT YEARS. HE COMPLETED HIS CA IN THE YE AR 1998 AND SINCE THEN HIS MAIN EARNING IS FROM SALARY ONLY. HIS NATURE OF WORK WITH THE EM PLOYER IS TO DO PROJECT WORK FOR THE CLIENT COMPAN IES IN CONNECTION WITH MERGER, FUND RAISING, ACQUISITION, ETC. IN RESPECT TO THE QUARRY ABOUT HOW HE RAISED THE BILLS FOR SUCH BIG AMOUNT AS COMMISSION, HE STATED TH AT IT IS BASED ON TIME SPENT AND SUCCESS OF THE PROJECT IF THE PROJEC TS IS SUCCESSFUL MORE COMMISSION WILL BE RECEIVED. HE WAS REQUESTED TO PRODUCE ALL THE DOCUMENTS IN SUPPORT OF HIS ACTIVITIES AND SERVICES HE RENDERED AND COPIES OF BILLS HE RAISED AND CORRESPONDENCES HE MADE. HE COULD NOT FURNISH ANYTHING AT THE TIME OF EXAMINATION BUT HE ASSURED THAT HE WILL PRODUCE THE SAME LATER ON. HE WAS REQUESTED TO FURNISH THOSE DOCUMENTS ON OR BEFORE 24.12.2008. BUT NEITHER HE APPEARED LATER ON NOR HE SENT THE REQUIRED DOCUMENTS FOR VERIFICATION. REGARDING MAINTENANCE OF BOOKS OF ACCOUNT, HE STATED THAT HE DOESNT MAINTAIN ANY BOOKS OTHER THAN BILLS AND CREDIT CARD STATEMENT. HE STATED THAT IT REQUIRED ABOUT 8 TO 10 MONTHS TIME FOR COMPLETION OF THE WORK. THE STATEMENT OF THAT PERSON WAS RE CORDED IN PRESENCE OF THE AUDITOR OF THE ASSESSEE. EXPENSES IS EXCESSIVE AND UNREASONABLE: ON EXAMINATION OF MR. M JAGADISH IT IS SEEN- THAT HE NEVER RECEIVED SUCH A BIG AMOUNT AS COMMISSION / PROFESSIONAL CHARGES FR OM ANY PERSON TILL DATE. THAT, HE IS NOT IN A POSITION TO FURNISH ANY DOCUMENTS OR ANY PROOF ABOUT THE NATURE OF WORK OR SERVICES HE RENDERED. NEITHER HE COULD PRODUCE ANY DETAILED BILLS/ENCLOSURE S TO SUBSTANTIATE HIS OW N EXPENSES FOR CLAIM OF SUCH HUGE COMMISSION. NO PERSON IS GOING TO PAY SUCH A BIG AMOUNT FOR A SMALL WORK IN THE NATURE OF PERSUASION OR COORDINATION. ITA NO. 1145/MDS/10 28 THAT HE DOES NOT MAINTAIN ANY, BOOKS/ DOCUMENT AND COULD NOT PRODUCE ANYTHING EVEN THOUGH HE WAS GI VEN SUFFICIENT TIME AND OPPORTUNITY TO PRODUCE THE SAME. AS SUCH INCOME WILL BE CONSIDERED AS HIS PROF ESSIONAL INCOME, HE IS SUPPOSED TO MAINTAIN ALL BOOKS OF ACCOUNTS AND GET HIS ACCOUNTS AUDITED WHICH WAS NOT SO. THAT A/R OF THE ASSESSEE WAS ALSO PRESENT AT THE TIME OF HEARING AND HE ALSO COULD NOT ENSURED SUCH COMPLIANCE. THAT, HE IS AN EMPLOYEE OF M/S TR ANS CORPORATION ADVISORY SERVICES AND HIS WORK IS OFFICE BASED. IT IS VERY DIFFICULT TO BELIEVE FROM ANY STRETCH OF IMAGINATION THAT AFTER PERFORMING ALL HIS DUTY AT OFFICE, IT IS POSSIBLE FOR HIM TO ATTEND ALL THE WORK OU TSIDE FOR SUCH PROJECT CON TINUOUSLY FOR ABOUT 8 TO 10 MONTHS THAT IS ALSO FOR HIS OWN BENEFIT; ARID STILL HE IS KEPT IN THE SERVICE AND EMPLOYER IS MAGNANIM OUS ENOUGH TO CONTINUE PAYING HIM A SALARY OF MORE THAN ` . 50,000/- PER MONTH. THAT HE COULD PRODUC ED ONLY A SINGLE BILL CL AIMING SUCH BIG AMOUNT OF COMMISSION WHICH READS AS UNDER - PROFESSIONAL CHARGES TOWARDS SERVICES RENDERED IN CONNECTION WITH THE RESOLUTION OF DISPUTE WITH RESPECT TO THE PROPERTY OF SHRI KRISHNA TILES AT ANNA NAGAR, CHENNAI. BILL AMOUNT ` .2630000/- + REIMBURSEMENT AND OTHER OUT OF POCKET EXPENSES ` .270000/- THUS TOTAL BILL AMOUNT ` .29 LAKHS THIS SINGLE PAGE INVOICE IS NOT SUPPORTED BY ANY ENCLOSURES OR ANNEXES, OR ANY OTHER DOCUMENTS . AND ASSESSEE PAID THE ENTIRE ` .29 LAKHS, ON SUCH CLAIM. LETTER TO ASSESSEE AFTER TAKING STATEMENT OF SHRI JAGA DISH AS ON 18.12.2008 STATING THE SAME FACT , AS ABOVE AND ASKING THE A SSESSEE TO JUSTIFY THAT PAYMENT WAS MADE WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE ONLY. ASSESSEE WAS REQUESTED TO FURNISH DETAILS OF SERV ICES RENDERED AND TO PRODUCE ALL THE INFORMATION/ DOCUMENTS TO JUSTIFY THIS EXPENSES. BUT ASSESSEE PREFERRED NOT TO FURN ISHED ANYTHING IN ITS SUPPORT. ITA NO. 1145/MDS/10 29 IT IS RELEVANT TO MENTION HERE T HAT DURING THE YEAR ASSESSEE ALSO PAID PROFESSIONAL CHARGES TO M/S. TRANS CORPORATION CONSULTING ` .52 LAKHS AND THE ENTIRE AMOUNT WAS SHOW N AS OUTSTANDING AT THE END OF THE FY. IT IS PERTINENT TO MENTION HERE THAT SHRI S. VENKATESHS (PARTNER OF THE FIRM) BROTHER HAS SUBSTANTIAL INTEREST IN THIS COMPANY. AND THUS ASSESSE FIRM PAID ` . 52 LAKHS TO M/S TRANS CORPORATE AND ` . 29 LAKHS TO ITS EMPLOYEES MR JAGADISH FOR THEIR SERVES IN RESPECT OF SAME PROJECT. THE CONCLUSION IT IS APPARENT THAT IN ORDER TO SH OW THIS EXPENSES AS GENUINE, SAME WAS PAID BY CHEQUE AND TDS WAS ALSO DEDUCTION AGAINST IT. BUT IT IS NOT THE ULTIMATE PROOF OF GE NUINENESS. AND EVEN IF IT WA S AN ACTUAL PAYMENT IT WAS HIGHLY UNREASONABLE AND EXCESSIVE AS ASSESSEE WAS NOT IN A POSITION TO RENDER SUCH SERVICES UNDER THE CIRC UMSTANCES AS DISCUSSED ABOVE. AND SAME SERVICES ALSO COULD NOT BE S UBSTANTIATED NEITHER BY THE CONCERNED PERSON NOR BY THE ASSESSEE. THE PERSON GETTING SALARY OF ABOUT ` . 50,000/- PER MONTH FROM HIS EMPLOYER FOR HIS FULL DAY SE RVICE. EVEN IF HE RECEIVES SOME EXTRA INCOME FOR PROVIDING SERVICES TO OUTSIDERS SAME IS VERY UNLIKELY TO BE MUCH MORE THAN HIS EARNING CAPACITY. THE REMUNERATION RECEIVED FROM HIS EMPLOYEE CAN BE TAKEN AS THE BENCH MARK OF HIS EARN ING CAPACITY. AND, ABOVE ALL, THE JOB OFFERED AND QUANTUM OF MONEY GIVEN TO HIM CAN ONLY BE EQUATED WITH OWNING A LOTTERY, WHICH IS A VERY UNLIKELY AND UN-PROBABLE DEVELOPMENT UNLESS SAME IS SUBSTANTIATED BY DETAILS AND DOCUMENTS. FROM THE FACTS AND CIRCUMSTANCES AS DISCUSSED ABOVE IT IS QUITE CLEAR THAT IT IS A CASE OF CLAIMING DISPRO PORTIONATE EXPENSES CLAIMED BY ASSESSEE WHICH IS HIGHLY EXCESSIVE AND UNREASONABLE . IT APPEARS THAT IN ORDER TO REDUCE THE PROFIT AS INFLATED THE EXPE NSES UNDER THIS HEAD. APPARENTLY, ASSESSEE WAS IN SEARCH OF A PERSONS ON WHOM ASSESSEE HAS CONTROL. HERE ASSESSEE PAID M/S TRANS CORPORATE ` . 52 LAKHS AND ITS EMPLOYEE ` .29 LAKHS AND ASSESSEE HAS CONTROL OVER HIM THROUGH ITS EMPLOYER. OUT OF TOTAL EXPENDITURE OF ` . 29 LAKHS, PAYMEN T TO THE EXTENT OF ` . 5 LAKHS, BEING PAYMENT OF REMUNERATION @ ` .50,000/- P.M. TO MR. JAGADISH FOR HIS SERVICES OVER A PERIOD OF 10 MONTHS, IS ALLOWED AS RELEVANT AND REASONABLE EXPENSES ITA NO. 1145/MDS/10 30 AND THE BALANCE EXPENSES OF ` .24 LAKHS CONSIDERED AS EXCESSIVE AND UNREASONABLE AND NOT PAID OUT OF BUSINE SS INTEREST AND SO DISALLOWED AS PER PROVISION OF SECTION 37 OF THE IT ACT. THUS. AN AMOUNT OF ` . 24 LAKHS IS ADDED ON THIS HEAD. 8.6 AND THE LD. CIT(A) DELETED SUCH ADDITION BY HOLDING THAT THE ASSESSSEE FIRM WAS MEDIATOR IN T HE PROPERTY TRANSACTION OF ` .250 CRORES IN WH ICH PROFIT OF ` . 14.11 CRORES HAS BEEN EARNED. THE ASSESSE E FIRM WAS ALSO FINANCE MEDIATOR FOR PURCHASER TO ARRANGE FUNDS FROM INVESTOR S FROM MUMBAI, SO IT HAS ENGAGED THE SERVICES OF SAID MR. M. JAGADISH FO R PREPARATION OF PR OJECT REPORT AND THE ASSESSING OFFICER HAS NOT MADE OUT A CASE THAT THE SAID PERSON WAS RELATED TO THE ASSESSEE FIRM, THUS THE PAYMENT IS EXCESSIVE UNDER SECTION 40A(2B). 8.7 FROM THE ABOVE FINDINGS OF THE A SSESSING OFFICER AND THE LD. CIT(A), IT APPEARS THAT THE ASSESSING OFFICER MADE THE ADDITION BUT TREATIN G THE EXPENDITURE AS EXCESSIVE AND UNREASONABLE AND HAVING NOT PAID OUT OF BUSINESS INTEREST AND DISALLOWED PART OF THIS UNDER SECTION 37, WHEREAS, THE LD. CIT( A) HAS DELETED THE IMPUGNED ADDITION SOLELY ON TH E GROUND THAT THE PARTNERS ARE NOT RELATED TO MR. JAGADISH, SO IT IS NOT EXCESSIVE UNDER SECTION 40A(2B) WHEN THE ASSESSING OFFICER DID NOT MAKE SUCH BASIS FOR MA KING OF THE IMPUGNED AD DITION FROM THE ORDERS OF THE AUTHORITIES BELOW, WE FIND T HAT THE ASSESSING OFFICER IS STATED TO HAVE ISSUED NOTICE FOR TREATING 50% OF SUCH AMOUNT AS DISALLOWABLE BEING EXCESSIVE, WHEREAS WHILE MAKING T HE ADDITION, IT HAS BEEN MADE ON HIGHER AMOUNT AND THE LD. CIT(A) HAS NOT APPROP RIATELY DEALT WITH THE ISSUE AND HAS GONE ON A DIFFERENT BASIS AND REASONING WITH OUT PLACING ANY MATERIAL OR RECORD OR REFERENCE TO ANY RELEVANT PAPER IN THIS R EGARD. THEREFORE, CONS IDERING THE ENTIRETY ITA NO. 1145/MDS/10 31 OF FACTS, CIRCUMSTANCES AND MATERIAL ON RE CORD, WE FIND IT JUST AND APPROPRIATE TO SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW ON THIS ISSUE AND RESTORE THE MATTER BACK ON THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO RE-DECIDE THE SAME AFRESH AFTER GIVING DUE OPPORTUNITY TO THE ASSESSEE AND CONS IDERING THE NOTICE ISSUED FOR DISALLOWANCE OF 50% OF THE EXPENDITURE CLAI MED IN THIS REGARD GIVING BASIS FOR EXCESSIVENESS OF THE EXPENDITURE . WE HOLD AND DIRECT ACCORDINGLY. 8.8 AS A RESULT, THE APPEAL OF THE REV ENUE GETS ACCEPTED PARTLY/ FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 08.04.2011. SD/- SD/- (ABRAHAM P. GEORGE) ACCOUNTANT MEMBER (U.B.S. BEDI) JUDICIAL MEMBER CHENNAI, DATED, THE 08.04.2011. VM/- COPY TO : APPELLANT/RES PONDENT/CIT(A)- /CIT, /DR