Allu Aravind Babu, CHENNAI V. ACIT, CHENNAI

ITA 1254/CHNY/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8840 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 31-05-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 25-05-2015
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH JCITD R
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Reopening of assessment; Bad and doubtful debts
• Section: 10(10D); 10

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : CHENNAI , ! ' . #$ % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.1253 & 1254 /MDS./2015 / ASSESSMENT YEARS : 2006-07 & 2007-08 SHRI ALLU ARAVIND BABU , 98,KAMDAR NAGAR, MAHALINGAPURAM, CHENNAI 600 034. VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, NON-CORPORATE CIRCLE-20(1), CHENNAI-34. [PAN ADAPA 9507 B ] ( () / APPELLANT) ( *+() /RESPONDENT) / APPELLANT BY : MR.R.VIJAYARAGHAVAN,ADVOCATE /RESPONDENT BY : MR.A.V.SREEKANTH,JCIT,D.R / DATE OF HEARING : 31 - 05 - 201 6 / DATE OF PRONOUNCEMENT : 15 - 07 - 2016 , / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE TWO APPEALS OF THE ASSESSEE ARE DIRECTED AG AINST THE COMMON ORDER OF THE COMMISSIONER OF INCOME-TAX (APP EALS)-14, CHENNAI DATED 20.03.2015 PERTAINING TO ASSESSMENT Y EARS 2006-07 & 2007-08 RESPECTIVELY. 2. FIRST WE TAKE UP ITA NO.1253/MDS./15 (A.Y. 2006 -07). ITA NOS.1253 & 1254/MDS./15 :- 2 -: 3. THE FIRST GROUND IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE OF NOTIONAL EXPENDITURE AT ` 2,84,062/- U/S.14A OF THE ACT. 4. THE FACTS OF THE ISSUE ARE THAT THE AO HAD DISA LLOWED NOTIONAL EXPENDITURE AT ` 2,84,062/- U/S.14A OF THE ACT. THE ASSESSEE HAD INVESTED IN SHARES AND HAD EARNED DIVIDEND INCOME. THE AO FOUND THAT THE ASSESSEE HAD NOT CLAIMED ANY EXPENDITURE R ELATABLE TO EXEMPTED INCOME. THERE IS TOTAL CUMULATIVE INVESTME NT UP TO THE END OF FINANCIAL YEAR AMOUNTING TO ` 5,68,12,236/-. THEREFORE, THE AO HAD DISALLOWED 0.5% OF INVESTMENTS I.E. ` 5,68,12,236/-, THAT COMES TO ` 2,84,062/-. AGGRIEVED, THE ASSESSEE CARRIED THE APP EAL BEFORE THE LD.CIT(A). ON APPEAL, THE LD.CIT(A) AFTER PLACING R ELIANCE ON THE VARIOUS JUDGEMENTS, OBSERVED THAT THERE IS NO EXEMP TED INCOME, THE SOURCE FOR GENERATING INCOME WAS ALREADY CREATED BY MAKING HUGE INVESTMENTS AND CONSIDERING THE HUGE INVESTMENTS OF ` 5,68,12,236/-, THE DISALLOWANCE UNDER THE HEAD ADMINISTRATIVE EXPE NSES AS DETERMINED BY THE AO IS CONFIRMED. AGAINST THIS, TH E ASSESSEE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ASSESSMENT YEAR INVOLVED HEREIN IS 2006 -07 AND RULE-8D CAME INTO STATUTORY BOOK ONLY WITH EFFECT FROM 24.0 3.2008. THUS, THE RULE-8D IS APPLICABLE FROM ASSESSMENT YEAR 2008-09 ONLY AND NOT APPLICABLE TO THE ASSESSMENT YEAR 2006-07. BEING SO , PLACING RELIANCE ITA NOS.1253 & 1254/MDS./15 :- 3 -: ON THE JURISDICTIONAL HIGH COURT IN THE CASE OF SIM PSON & CO. LTD. V. DCIT IN TAX CASE NO.2621 OF 2006 DATED 15.10.2002, WE DIRECT THE AO TO DISALLOW 2% OF EXEMPTED INCOME TOWARDS NOTIONAL EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING THIS INCOME. T HIS GROUND IS PARTLY ALLOWED. 6. THE NEXT GROUND IN THIS APPEAL IS WITH REGARD T O CONFIRMING THE DISALLOWANCE OF COMPENSATION. 7. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE IS THE PROPRIETOR OF NEST FOUNDATIONS WHICH IS ENGAGED IN DEVELOPMENT OF PROP ERTIES. THE ASSESSEE HAS ENTERED INTO A DEVELOPMENT AGREEMENT WITH MR. C SRIRAMULU, LANDLORD TO DEVELOP A BUILDING AT ERRAMANJALI, HYDERABAD VIDE D EVELOPMENT AGREEMENT DATED 02.11.1998. AS PER THE TERMS OF AGREEMENT, TH E ASSESSEE HAD PAID A SUM OF RS.30,00,000 TOWARDS SECURITY DEPOSIT, WHICH SHALL BE REFUNDED BY THE LANDLORD ON SATISFACTION OF THE TERMS OF THE CO NTRACT. AS PER TERMS OF THE CONTRACT, THE ASSESSEE IS UNDER OBLIGATION TO CONST RUCT A PENT HOUSE BUT DUE TO NON- APPROVAL OF THE PERMISSION FROM LOCAL AUTHO RITIES, THE ASSESSEE COULD NOT CONSTRUCT THE PENT HOUSE. HENCE, IT IS CLAIMED THAT THE LANDLORD DID NOT RETURN THE DEPOSIT AS THE ASSESSEE FAILED TO SATISF Y THE TERMS OF THE AGREEMENT. RELEVANT PORTIONS OF THE AGREEMENT ARE A S FOLLOWS: 10. THE SECOND PARTY HAS PAID AN AMOUNT OF RS.30,0 0,000/- (RUPEES THIRTY LAKHS ONLY) BY WAY OF CHEQUES AS SEC URITY DEPOSIT INTEREST FREE FOR DUE PERFORMANCE OF THE CONTRACT W HICH THE FIRST PARTY SHALL RETURN WITHOUT INTEREST AFTER COMPLETIO N OF THE FIRST ITA NOS.1253 & 1254/MDS./15 :- 4 -: PARTYS SHARE OF THE TOTAL BUILT UP AREA INCLUDING THE PENTHOUSE AS PER THE SPECIFICATIONS AND ACCEPTANCE THEREOF BY TH E SECOND PARTY AND IN THE CASE THE PENTHOUSE IS NOT CONSTRUC TED FOR WANT OF PERMISSION THE SETTLEMENT IS MADE AS PER CONDITI ON MENTIONED IN CLAUSE 7. 7. THE SECOND PARTY HAS ALSO AGREED TO CONSTRUCT A PENTHOUSE EXCLUSIVELY FOR THE FIRST PARTY ADINEASURING 1250 S Q.FT OUT OF WHICH 1000 SQ.FT AT ITS OWN COST AND FOR THE BALANCE 250 SQ.FT THE COST OF CONSTRUCTION WILL BE BORNE BY THE FIRST AND SECOND PARTY EQUALLY. THE CONSTRUCTION OF THE PENTHOUSE BY THE SECOND PAR TY SHALL BE MADE BY TAKING NECESSARY PERMISSION FOR CONSTRUCTIO N FROM MCH OR ANY OTHER CONCERNED AUTHORITY. IN THE EVENT OF P ERMISSION FOR CONSTRUCTION OF THE PENTHOUSE FROM MCH OR ANY OTHER CONCERNED AUTHORITIES COULD NOT BE OBTAINED, THE SECOND PARTY SHALL COMPENSATE THE FIRST WITH EQUIVALENT AREA BY ALLOTT ING THE SAME AT FIRST INSTANCE OUT OF THE TOTAL CONSTRUCTED AREA AR ID THE BALANCE SHALL BE SHARED EQUALLY BY BOTH THE PARTIES. THE ASSESSING OFFICER DID NOT ALLOW THE CLAIM OF TH E ASSESSEE ON THE GROUND THAT IT IS A PROVISION AND THE AMOUNT IS STILL RE TAINED IN THE BALANCE SHEET OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF LD. ASSESS ING OFFICER, THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A). 8. ON APPEAL, THE LD.CIT(A) OBSERVED THAT THE BALA NCE SHEET OF M/S.NEST FOUNDATION THAT IS THE PROPRIETORSHIP CONCERN OF TH E ASSESSEE CLEARLY REFLECTS ` 30 LAKHS AS PROVISION FOR CLAIMS AND COMPENSATION. THE P&L A/C FOR THE ITA NOS.1253 & 1254/MDS./15 :- 5 -: ACCOUNT YEAR ENDING 31 ST MARCH 2006, SHOWS THE SAME AMOUNT UNDER THE HEAD PROVISIONS FOR CLAIMS AND COMPENSATION. FURT HER CIT(A) OBSERVED THAT THE SAID AMOUNT IS A PROVISION FOR COMPENSATION. T HIS CANNOT BE TREATED AS BAD DEBT WRITTEN OFF, AS IT IS STILL APPEARING IN T HE BALANCE SHEET. THIS IS ALSO CANNOT BE TREATED AS A TRADING LOSS. THIS AMOUNT WA S DEPOSITED AS SECURITY DEPOSIT. THEREFORE,, IT IS CAPITAL IN NATURE. THUS CIT(A) OBSERVED THAT THE SAID AMOUNT CANNOT BE HELD AS AN EXPENDITURE AND CO NFIRMED THE ORDER OF AO. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE AMOUNT OF ` 30 LAKHS WAS STILL APPEARING IN THE BALANCE SHEET OF ASSESSEE UNDER THE HEAD PROVISIONS FOR CLAIMS AND COMPENSA TION AND IT WAS NOT WRITTEN OFF IN THE BOOKS OF ACCOUNTS OF ASSESSEE. BEING SO, IT CANNOT BE TREATED AS BAD DEBT IN THE ASSESSMENT YEAR UNDER CO NSIDERATION. ACCORDINGLY, PLACING RELIANCE ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF M/S.T.R.F. LTD., REPORTED IN [2010] 323 ITR 397(SC) WHEREIN HELD THAT:- AFTER THE AMENDMENT OF SECTION 36(1)(VII) OF THE I NCOME-TAX ACT, 1961, WITH EFFECT FROM APRIL 1, 1989, IN ORDER TO O BTAIN A DEDUCTION IN RELATION TO BAD DEBTS, IT IS NOT NECESSARY FOR T HE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECO VERABLE : IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERA BLE IN THE ACCOUNTS OF THE ASSESSEE. ACCORDINGLY, THIS GROUND IS DISMISSED. ITA NOS.1253 & 1254/MDS./15 :- 6 -: 10. THE LAST GROUND IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE OF LAND LEASE CHARGES OF ` 2,40,000/- THOUGH THE PROVISIONS OF THE SECTION 194 I OF THE ACT IS NOT APPLICABLE. AT THE TIME OF HEARING, THE LD.A.R HAS NOT PRESSED THIS GROUND. ACCORDINGLY THIS GROUND IS DISMISSED AS NOT PRESSED. 11. IN THE RESULT, ITA NO.1253/MDS./15 STANDS DISMI SSED. NOW WE TAKE UP ITA NO.1254/MDS./15 (A.Y. 2007-08). 12. THE FIRST GROUND IN THIS APPEAL IS WITH REGARD TO REOPENING OF ASSESSMENT. AT THE TIME OF HEARING, THE LD.A.R HAS NOT PRESSED THIS GROUND. ACCORDINGLY THIS GROUND IS DISMISSED AS NO T PRESSED. 13. THE SECOND GROUND IN THIS APPEAL IS WITH REGAR D TO CONFIRMING THE ADDITION MADE IN RESPECT OF SURRENDER VALUE OF KEY MAN INSURANCE POLICY AS INCOME OF ASSESSEE. 14. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS THE MANAGING DIRECTOR OF ALLU ENTERTAINMENT PRIVATE LTD.(AEPL). DURING THE F.Y 2004- 05, AEPL HAS TAKEN TWO KEY MAN INSURANCE POLICIES E ACH AMOUNTING TO ` 100 LAKH ON THE LIFE OF THE ASSESSEE. OF WHICH, ON E POLICY WAS ASSIGNED IN FAVOUR OF THE ASSESSEE ON 31.03.2006. THE SURRENDERED VALUE OF THE POLICY AMOUNTING TO ` 58,74,752/- WAS OFFERED AS INCOME TAXABLE AS PERQUISITE U/S.173(3) OF THE ACT IN THAT YEAR ITSELF I.E. ITA NOS.1253 & 1254/MDS./15 :- 7 -: ASSESSMENT YEAR 2006-07. SUBSEQUENTLY, THE ASSESSE E EN-CASHED THE POLICY AT ` 97,03,083/- ON 29.06.2006. THE AO HAS ADDED THE SU M OF ` 38,28,331( ` 97,03,083 ` 58,74,752). AGAINST THIS, ASSESSEE CARRIED THE APPEAL BEFORE THE CIT(A). 15. ON APPEAL, THE LD.CIT(A) OBSERVED THAT SECTION 10 IS THE FIRST SECTION IN CHAPTER III ENTITLED INCOMES WHICH DO N OT FORM PART OF TOTAL INCOME. IN SECTION 10, VARIOUS KINDS OF INCOMES ARE STIPULATED, WHICH ARE NOT TO BE INCLUDED IN TOTAL INCOME. THIS SECTION EXCLUD ES THOSE SUMS FROM INCOME, WHICH ARE RECEIVED UNDER A LIFE INSURANCE P OLICY, INCLUDING THE SUM ALLOCATED BY WAY OF BONUS OF SUCH POLICY. HOWEVER, THERE ARE CERTAIN SUMS, WHICH ARE SPECIFICALLY EXCLUDED MEANING THEREBY THO SE SUMS ARE NOT EXCLUDED FROM INCOME. SUB-CLAUSE (B) OF CLAUSE (1OD ) MENTIONS ANY SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY. IT WOULD FOLLOW THAT SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY IS NOT TO BE EXCLUD ED FROM TOTAL INCOME AND IT WOULD BE TREATED AS INCOME. THAT IS PROVIDED BY CLAUSE (XI) OF SECTION 2(24). EXPLANATION TO CLAUSE (XI) STATES THAT KEYMA N INSURANCE POLICY SHALL HAVE THE SAME MEANING AS ASSIGNED TO IT IN EXPLANAT ION TO CLAUSE (10D) OF SECTION 10. THIS EXPLANATION GIVES THE MEANING TO KEYMAN INSURANCE POLICY AND THAT SUM RECEIVED UNDER THIS POLICY WOULD BE TR EATED AS INCOME. BUT TO CIRCUMVENT THIS PROVISION COLOURABLE DEVICE WAS ADO PTED TO EVADE TAX. THE AO HAD EXTENSIVELY DEALT WITH THIS SCHEME IN HIS OR DER IN PAGE. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE LD.A.R RELIED ON THE CASE OF RAJAN ITA NOS.1253 & 1254/MDS./15 :- 8 -: NANDA [2012] 18 TAXMANA.COM 98 (DELHI). BUT THE AO DISTINGUISHED THIS CASE ON THE LINES THAT NO PREMIUM WAS PAID BY THE A SSESSEE TO CONTINUE THE POLICY AFTER ASSIGNMENT AND ONLY ENCASHED THE SURRE NDER VALUE. IN THE ABOVE MENTIONED CASE THERE ARE TWO SITUATIONS AFTER ASSIG NMENT. (1) EMPLOYEE DOES NOT CONTINUE THE POLICY AND DOES NOT PAY FURTHER PREMIUMS, THEN HE WOULD GET ONLY SURRENDER VALUE; OR (II) EMPLOYEE CONTINUES THE POLICY AND PAYS SUBSEQU ENT PREMIUMS, THEN HE WOULD GET FULL AMOUNT ON MATURITY . IN THE CASE OF RAJAN NANDA SUPRA, SECOND SITUATION HAS OCCURRED AS ON ASSIGNMENT, THE DIRECTOR ASSESSEE DID NOT SURRENDER THE SAME TO THE LIC AND CHOSE TO CONTINUE WITH THE POLICY BY MAKING PAYMENT FOR REMAINING PERIOD OF THE POLICY. IN THAT CASE THE COURT HELD THAT THE CH ARACTER OF THE INSURANCE POLICY CHANGES AND IT GETS CONVERTED INTO AN ORDINA RY POLICY. THE CIT(A) OBSERVED THAT IN THE PRESENT CASE BEFORE CIT(A) NO PREMIUMS WAS PAID BY THE ASSESSEE TO CONTINUE THE POLICY AFTER ASSIGNMEN T AND ONLY EN-CASHED THE POLICY AT ` 97,03,083/-. HENCE, CIT(A) OBSERVED THAT IN THE LI GHT OF ABOVE THE DIFFERENCES OF THE AMOUNT THAT IS NOT BROUGHT T O TAX IN THE QUANTUM OF SURRENDER ENCASHMENT SHOULD BE TAXED. HENCE, ADDITI ON MADE BY THE AO IS SUSTAINED. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEF ORE US. 16. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. LD.A.R RELIED ON THE JUDGEMENT OF CIT VS. R AJAN NANDA & ORD. REPORTED IN (2012) 349 ITR 008 WHEREIN HELD THAT TH E PAYMENT WHICH ITA NOS.1253 & 1254/MDS./15 :- 9 -: IS RECEIVED BY EMPLOYEE UNDER KEY MAN INSURANCE POL ICY, CAN BE TAXED IN THE HANDS OF EMPLOYEE U/S.17(3)(II) OF THE ACT. HOWEVER, WHERE NO SUCH AMOUNT WAS RECEIVED AT TIME OF ASSIGNMENT OF P OLICY BY EMPLOYER COMPANY, AS EMPLOYEE, NOTHING COULD BE TAXED IN ASS ESSEES HANDS U/S.17(3)(II) OF THE ACT. FURTHER, ONCE THERE IS A N ASSIGNMENT OF KEY MAN INSURANCE POLICY BY EMPLOYER COMPANY TO EMPLOYE E, INSURANCE POLICY GETS CONVERTED INTO AN ORDINARY POLICY AND H ENCE, IN THAT CASE, MATURITY VALUE RECEIVED BY EMPLOYEE WOULD NOT BE S UBJECT O TAX IN VIEW OF SECTION 10(10D) OF THE ACT. IN OUR OPINION, THE ARGUMENT OF ASSESSEES COUNSEL IS TOTALLY MISPLACED THAT THE TW O INSURANCE POLICIES WERE TAKEN IN THE NAME OF MANAGING DIRECTOR OF THE ASSESSEE COMPANY I.E. PRESENT ASSESSEE FOR AMOUNTING TO ` 100 LAKHS EACH. THE SAID POLICY WAS ASSIGNED TO THE ASSESSEE ON 31.03.2006, AND THE SURRENDER THE VALUE OF THAT POLICY AMOUNTING TO ` 58,74,752/- WAS OFFERED AS INCOME AS PERQUISITE U/S. 17(3) OF THE ACT FOR ASSESSMENT YEAR 2006-07. SUBSEQUENTLY, WITHIN A SHORT TIME, THE SAID POLICY WAS ENCASHED AT ` 97,03,083/- ON 29.06.2006. IN OUR OPINION, THE DEV ICE ADOPTED BY THE ASSESSEE BY ASSIGNING THE POLICY AND ENCAHSING THE SAME IS NOTHING BUT COLORABLE DEVICE ADOPTED TO EVADE TAX A ND WE DO NOT FIND ANY MERIT IN THE ARGUMENT OF ASSESSEES COUNSEL. T HE LD.CIT(A) HAS TAKEN THE CORRECT VIEW OF THE FACTS OF THE CASE AND AS DISCUSSED BY THE ITA NOS.1253 & 1254/MDS./15 :- 10 - : CIT(A) IN PARA NOS. 9.1. TO 9.6, THE SAME IS CONFIR MED. THIS GROUND OF APPEAL IS DISMISSED. 17. IN THE RESULT, ITA NO.1254/MDS./15 STANDS DIS MISSED. 18. IN THE RESULT, BOTH THE APPEALS OF THE ASSESS EE ARE DISMISSED. ORDER PRONOUNCED ON 15 TH JULY, 2016, AT CHENNAI. SD/ - SD/ - ! ' # . $ %& ' ( DUVVURU RL REDDY ) ) % / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER () / CHENNAI *+ / DATED: 15 TH JULY, 2016 K S SUNDARAM +,-- ./-0/ / COPY TO: - 1 . / APPELLANT 4. - 1 / CIT 2. / RESPONDENT 5. /23- 4 / DR 3. - 1-!' / CIT(A) 6. 3&-5 / GF