S.Malla Reddy, Hyderabad V. Income Tax Officer, Hyderabad

ITA 1293/HYD/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6412 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 9 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 02-06-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 26-09-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B KURMI NAIDU
• Assessee Lawyers: S RAMA RAO
• Keywords: Capital asset
• Section: 143(3); 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1293/HYD/2013 ASSESSMENT YEAR: 2009-10 ` S. MALLA REDDY, HYDERABAD PAN AAVHS 8207 E VS. INCOME-TAX OFFICER, WARD 8(3), HYDERABAD. (ASSESSEE) (RESPONDENT) ASSESSEE BY : SHRI S. RAMA RAO REVENUE BY : SHRI B. KURMI NAIDU DATE OF HEARING 02-06-2016 DATE OF PRONOUNCEMENT 29-06-2016 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST T HE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX -III, HYDERA BAD FOR AY 2009- 10 RAISING THE FOLLOWING GROUNDS OF APPEAL: 1) THE ORDER OF THE LEARNED CIT (A) IS ERRONEOUS T O THE EXTENT IT IS PREJUDICIAL TO THE ASSESSEE HEREIN. 2) THE LEARNED CIT (A) ERRED IN CONFIRMING THE ACTI ON OF THE ASSESSING OFFICER IN ASSUMING RS.32,50,000/- AS LON G TERM CAPITAL GAIN ARISING OUT OF THE TRANSFER OF 'GOODWI LL'. 3) THE LEARNED CIT (A) IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN ASSUMING THE RECEIPTS OF RS.3,12,000/- A S INCOME UNDER THE HEAD 'OTHER SOURCES'. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSE SSEE IS A HUF AND NOTICE U/S 148 OF THE ACT WAS ISSUED ON 04/03/2011. IN RESPONSE, ASSESSEE FILED RETURN OF INCOME FOR THE AY 2009-10 ON 02/04/2011 ADMITTING TOTAL RENTAL INCOME OF RS. 1,18,760/-. TH E AO COMPLETED THE 2 ITA NO. 1293/H/13 S. MALLA REDDY (HUF), HYD. ASSESSMENT ON 21/12/2011 U/S 143(3) R.W.S. 147 OF T HE ACT AND DETERMINED TOTAL INCOME AT RS. 35,71,955/- BY MAKIN G THE FOLLOWING ADDITIONS: I) ADDITION TOWARDS GOODWILL RS. 32,50,000 II) ADDITION TOWARDS INCOME FROM OTHER SOURCES RS. 3,12,000 III) ADDITION TOWARDS INTEREST RS. 9,555/-. 3. AS REGARDS THE ADDITION OF RS. 32,50,000/- ON AC COUNT OF RECEIPT OF 'GOODWILL' BY THE ASSESSEE, THE FACTS ARE THAT THE ASSESSEE ALONG WITH HIS BROTHER HAD SOLD THE PROPERTY JOINTLY. THE ASSESSING OFFICER FOUND THAT AS PER THE MOU EXECUTED ON 09.01.2008 TH E ASSESSEE AND HIS BROTHER HAD RECEIVED A TOTAL AMOUNT OF RS. 65 L AKHS AS GOODWILL. HE HELD THAT THE ASSESSEE HAD RECEIVED GOODWILL AND NOT ADVANCE. ACCORDINGLY, HE ASSESSED THE GOODWILL 50% IN THE HA NDS OF THE ASSESSEE AND THE BALANCE IN THE HANDS OF THE ASSESS EE'S BROTHER DURING THE YEAR. HOWEVER, THE ASSESSING OFFICER ADM ITTED THAT OUT OF THE ASSESSEE'S SHARE OF RS. 32,50,000/- AN AMOUNT O F RS. 10 LAKHS HAD ACTUALLY BEEN RECEIVED IN THE EARLIER YEAR. HE HOWEVER ASSESSED THE ENTIRE AMOUNT IN THE CURRENT YEAR. 4. ON AN APPEAL BEFORE THE CIT(A), THE ASSESSEE VE HEMENTLY ARGUED THAT THE GOODWILL RECEIVED WAS IN THE NATURE OF ADVANCE AND WAS A PART AND PARCEL OF THE AMOUNT RECEIVED FOR T RANSFER OF THE CAPITAL ASSET. HENCE, IT COULD NOT BE BROUGHT TO TA X WITH RESPECT TO CAPITAL GAINS, BEING ONLY IN THE NATURE OF AN ADVAN CE. THE CIT(A) EXTRACTED THE IMPORTANT PORTIONS OF THE WRITTEN SUB MISSIONS FILED BY THE ASSESSEE IN HIS ORDER AT PAGES 3 TO 5 OF HIS OR DER. 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) DISCUSSED THE ISSUE AT LENGTH AND EXAMINED THE SAME WITH VARIOUS CASE LAWS AND CONFIRMED THE ADDITION TO THE EXTENT OF RS. 27,50,000/-, THE AMOUNT OF WHICH WAS RECEIVED DURING THE CURRENT YEAR, BY OBSERVING AS UNDER: 3 ITA NO. 1293/H/13 S. MALLA REDDY (HUF), HYD. 5.12 APPLYING ALL THE AFOREMENTIONED LEGAL CANNONS AND DECISIONS TO THE CASE OF THE ASSESSEE, I FIND THAT THERE IS NO DOUBT ABOUT THE FACT THAT THE TRANSFER OF PROPERTY TOOK PLACE. THE ASSESSEE HAS RECOGNISED THAT THE TRANSFER TOOK PLAC E. THE ONLY BONE OF CONTENTION IS WHETHER THE AMOUNT OF GOODWIL L RECEIVED BY THE ASSESSEE WAS IN THE NATURE OF ADVANCE OR IT WAS A PART AND PARCEL OF THE CONSIDERATION FOR TRANSFER. AS DISCUS SED ABOVE, THERE IS ABSOLUTELY NO INDICATION IN ANY OF THE MOU S THAT THE GOODWILL IS BEING RECEIVED FOR A FUTURE PERFORMANCE OF A DUTY OR THE SERVICE OR FOR A FUTURE SUPPLY OF GOODS. INTERE STINGLY, BOTH THE MOUS REFERRED TO THE ADVANCE AS BEING 'NON-REFUNDAB LE' .THIS WORD NEGATES THE VERY MEANING OF THE WORD 'ADVANCE' . THIS IMPLIES THAT WHATEVER HAS BEEN PAID OR RECEIVED IS NON- NEGOTIABLE AND FINAL. IN OTHER WORDS, THE AMOUNT PA ID BY THE BUILDER HAS ALSO ACCRUED TO THE ASSESSEE. 5.13 IT IS VERY CLEAR FROM THE ABOVE THAT THE WORD 'ADVANCE' APPEARS IN THE AGREEMENTS ONLY FOR THE PURPOSE OF G ETTING OUT OF THE LIABILITY TO PAY TAXES ON THESE AMOUNTS. IN ESS ENCE, THE AGREEMENTS DISCLOSE AND EXPOSE THE TRUE NATURE OF T HE TRANSACTION. THEY CLEARLY STATE THAT THE AMOUNT REC EIVED AS GOODWILL IS NON-REFUNDABLE. IN OTHER WORDS IT IS A PART AND PARCEL OF THE TOTAL TRANSACTION OF TRANSFER OF PROPERTY. I T IS NOT IN THE NATURE OF ADVANCE AS ALREADY DISCUSSED IN DETAIL SU PRA. 5.14 ON THE BASIS OF THE ABOVE DISCUSSIONS I HOLD T HAT THE GOODWILL IN QUESTION IS TAXABLE AS A PART AND PARCE L OF THE TRANSFER OF PROPERTY AND THE ASSESSING OFFICER HAS RIGHTLY BROUGHT TO TAX AS CAPITAL GAINS. HOWEVER, THE ASSESSEE HAS RECEIVED ONLY RS. 27,50,000/- DURING THE CURRENT YEAR. THEREFORE, ONLY THIS AMOUNT IS TO BE BROUGHT TO TAX DURING THE YEAR SINC E THE AMOUNTS RECEIVED WERE NON-REFUNDABLE AND ACCRUED TO THE ASS ESSEE AT THE TIME OF PAYMENT. THESE GROUNDS OF APPEAL ARE DE CIDED IN FAVOUR OF REVENUE. 6. BEFORE US, THE LD. AR SUBMITTED THAT THE ASSESSE E SHRI S. MALLA REDDY ALONG WITH SHRI POCHI REDDY, WHO ARE THE ABSO LUTE OWNERS OF THE LAND ADMEASURING 6500 SQ.YDS. IN PART SURVEY NO . 495, 496, 505, 506 AND 515 AT ATTAPUR, RAJENDRA NAGAR MANDAL, R.R. DISTRICT, HYDERABAD. FURTHER, HE SUBMITTED THAT THEY HAVE ENT ERED INTO DEVELOPMENT AGREEMENT WITH SHRI S. PANDU RANGA REDD Y AND SHRI K. KRISHNA REDDY FOR THE PURPOSE OF CONSTRUCTING MULTI PLEX CINEMA THEATRE AND AS PER THE TERMS OF THE AGREEMENT DEVEL OPMENT RATIOS ARE FIXED AT 50:50 BETWEEN THE FIRST PARTY AND SECOND P ARTY. ASSESSEE ALSO AGREED TO RECEIVE DEVELOPMENT GOODWILL ( NON-R EFUNDABLE AMOUNT 4 ITA NO. 1293/H/13 S. MALLA REDDY (HUF), HYD. OF RS. 1.20 CRORES) WITH THE PAYMENT SCHEDULE OF RS . 10 LAKHS TO BE PAID AT THE TIME OF SIGNING MOU I.E. ON 09/01/2008 AND BALANCE SHALL BE PAID AT THE TIME OF COMMENCEMENT OF THE WORK. HE , HOWEVER, EMPHASIZED THAT THE ABOVE AGREEMENT IS UNREGISTERED . 6.1 THE LD. AR FURTHER SUBMITTED THAT ASSESSEE ENTE RED INTO SUPPLEMENTAL MOU WITH SHRI S. PANDU RANGA REDDY AND SHRI K. KRISHNA REDDY ON 21/07/08. AS PER THE AGREEMENT, IT WAS AGREED BETWEEN THE PARTIES THAT THE SECOND PARTY WILL PAY RS. 1.20 CRORES AS PER THE BELOW PAYMENT SCHEDULE: A) ASSESSEE HAS ALREADY PAID RS. 10 LAKHS. B) SECOND PARTY WILL PAY RS. 40 LAKHS ON 30/06/08 AS A PART OF GOODWILL. C) SECOND PARTY SHALL PAY BALANCE GOODWILL AMOUNT OF RS. 70 LAKHS ON OR BEFORE EXECUTION OF REGISTERED DEVELOP MENT AGREEMENT-CUM-GPA. LD. AR SUBMITTED THAT ASSESSEE HAS ENTERED INTO REG ISTERED DEVELOPMENT AGREEMENT-CUM-GPA ON 15/12/2010 WITH TH E FOLLOWING PARTIES: 1. SRI SEKURSA MALLA REDDY, S/O LATE SRI S. SRISAI LAM REDDY 2. SMT. SEKURSA PREMALATHA REDDY, W/O SRI S. MALLA REDDY 3. SRI SEKURSA PRADEEP REDDY, S/O SRI S. MALLA RED DY 4. SMT. VANGATE DIVYA REDDY, W/O SRI V. BALA KRISH NA REDDY 5. SRI SEKURSA POCHI REDDY, S/O LATE SRI S. SRISAI LAM REDDY 6. SMT. SEKURSA VEDHAVATHI REDDY, W/O SRI S. POCHI REDDY 7. KUM. SEKURSA VIVITHA REDDY, D/O SRRI S. POCHI R EDDY 8. MASTER SEKURSA VIVEK REDDY, (MINOR), D/O. SRI S. POCHI REDDY. 5 ITA NO. 1293/H/13 S. MALLA REDDY (HUF), HYD. 9. KUM. SEKURSA VINITHA REDDY (MINOR), D/O SRI S. POCHI REDDY THE FIRST PARTY NOS. 8 & 9 ARE MINORS. BEING TH E MINORS UNDER THE GUARDIANSHIP OF THEIR NATURAL GUARDIAN/FATHER: SRI SEKURSA POCHI REDDY, S/O LATE SRI S. SRISAILAM REDDY. THE SAID DEVELOPMENT AGREEMENT WAS ENTERED WITH THR EE PARTIES AS UNDER: M/S K. KRISHNA REDDY CONTRACTORS. REPRESENTED BY ITS MANAGING PARTNERS: 1. SRI KONDAKALLA KRISHNA REDDY, S/O SRI AGI REDDY 2. SRI KONDAKALLA VIKRAM REDDY, S/O SRI K. KRISHNA REDDY 3. SRI KONDAKALLA CHAKRADHAR REDDY, S/O SRI K. KRI SHNA REDDY 6.2 THE LD. AR SUBMITTED THAT IN THE EARLIER TWO UN REGISTERED AGREEMENTS THE DEVELOPERS WERE SHRI S. PANDU RANGA REDDY AND SHRI K. KRISHNA REDDY, WHEREAS, IN THE REGISTERED DOCUMENT/AGREEMENT, DEVELOPERS WERE DIFFERENT I.E. M/S K. KRISHNA REDDY CONTRACTORS. MOREOVER, THE AGREED GOODWILL AL SO REDUCED TO RS. 65 LAKHS. AS PER THE REGISTERED AGREEMENT, CONT RACTORS HAS PAID CASH ON 09/01/08 RS. 10 LAKHS AND THE BALANCE OF RS . 55 LAKHS PAID DURING THE YEAR 2008-09. HE VEHEMENTLY ARGUED THAT GOODWILL IS PART AND PARCEL OF PURCHASE CONSIDERATION AND NOT A SEPA RATE ASSET AS STAND ALONE, WHICH IS ELIGIBLE FOR TRANSFER. FURTHE R, THE LD. AR SUBMITTED THAT REGISTERED DOCUMENT WAS SIGNED ON 15 /12/2010, WHICH SHOWS THAT THERE IS NO VALID AGREEMENT PENDING FOR THE AY 2009-10, WHICH DOES NOT REQUIRE OR CALLED FOR ANY ADDITION TO BE MADE IN THIS AY 2009-10. 7. LD. DR, ON THE OTHER HAND, SUBMITTED THAT ASSESS EE HAS RECEIVED PAYMENT IN FY 2008-09 AND HE HAS SUBMITTED THAT PAYMENTS WERE MADE WITHOUT RELYING ON THE NEW AGREEMENT. HE FURTHER RELIED ON THE ORDERS OF REVENUE AUTHORITIES. 6 ITA NO. 1293/H/13 S. MALLA REDDY (HUF), HYD. 8. IN THE REJOINDER, THE LD. AR OF THE ASSESSEE BRO UGHT TO OUR NOTICE THAT PROPERTY OF THE ASSESSEE WAS HANDED OVE R FOR DEVELOPMENT DURING 2010-11. IN FACT, THE LAND WAS H ANDED OVER FOR DEVELOPMENT ONLY AFTER SIGNING THE REGISTERED DOCUM ENT ON 15/12/2010. ( REFER PAGE 15 OF THE PAPER BOOK). 9. WE HAVE CONSIDERED THE RIVAL SUBMISSION AND PER USED THE MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF R EVENUE AUTHORITIES. THE ASSESSEE HAS ENTERED INTO DEVELOPMENT AGREEMENT WITH M/S KRISHNA REDDY CONSTRUCTIONS TO DEVELOP THE LAND UND ER THEIR FAMILIES DISPOSAL. IN THAT PROCESS, THEY AGREED TO RECEIVE D EVELOPMENTAL GOODWILL OF RS. 65 LAKHS, OUT OF WHICH RS. 10 LAKHS WERE RECEIVED DURING PREVIOUS AY AND BALANCE RS. 55 LAKHS DURING THE CURRENT AY 2009-10. THE MAIN ISSUE BEFORE US IS, WHETHER THESE RECEIPTS OF RS. 55 LAKHS ARE IN THE NATURE OF ADVANCE OR GOODWILL. ALSO, WHETHER THE GOODWILL IS SEPARATE FROM THE DEVELOPMENT OF LAND. IT IS FACT THAT THE ASSESSEE HAD RECEIVED RS. 65 LAKHS AS GOODWILL, (NO T REFUNDABLE). WHETHER MERE RECEIPTS OF RS. 65 LAKHS AS GOODWILL A MOUNTS TO TRANSFER AS SEPARATE ASSESSABLE ASSET IS THE MAIN Q UERY. IN OUR CONSIDERED VIEW, THE GOODWILL IS GENERATED ONLY BEC AUSE THE ASSESSEE HAD ENTERED INTO THE DEVELOPMENT AGREEMENT NOT OTHERWISE. HENCE, THE ASSETS UNDER CONSIDERATION ARE COMPOSITE ASSETS LINKED TO DEVELOPMENT OF LAND. HENCE, IT CANNOT BE SEPARATED. IN THIS CASE, ASSESSEE HAD RECEIVED THE GOODWILL AND HANDED OVER THE LAND FOR DEVELOPMENT. THE PAYMENT OF GOODWILL IS PRIOR CONDI TION FOR HANDING OVER OF LAND FOR DEVELOPMENT. THIS BEING THE CASE, THE EXPRESSION GOODWILL IS NOTHING BUT PART PERFORMANCE TOWARDS DE VELOPMENT OF LAND. IT HAS TO BE PART AND PARCEL OF THE PURCHASE CONSIDERATION ACCEPTED FOR THE WHOLE PROJECT. TILL THE PROJECT IS COMPLETE, THE PAYMENT WILL REMAIN AS ADVANCE TOWARDS THE PROJECT. AS EXPLAINED, THE TERM GOODWILL CANNOT BE VIEWED OR ASSESSED SEPA RATELY. IT CAN BE ASSESSED ALONG WITH THE OTHER PURCHASE CONSIDERATIO N RECEIVED BY THE ASSESSEE, WHEN THE ACTUAL OWNERSHIP PASSES TO THE B UYERS. IN THIS SITUATION, PAYMENT RECEIVED AS GOODWILL CANNOT BE C HARGED TO TAX 7 ITA NO. 1293/H/13 S. MALLA REDDY (HUF), HYD. EVEN THOUGH IT IS RECEIVED DURING THIS AY. WE NEED TO CONSIDER THE ACTUAL PERFORMANCE OF THE WHOLE CONTRACT RATHER THA N ACTUAL RECEIPT OF PART PAYMENT. IN VIEW OF THE ABOVE DISCUSSION, IN O UR CONSIDERED VIEW, THE GOODWILL RECEIPT IS ONLY AN ADVANCE AND C AN BE CHARGEABLE TO TAX AS PART OF TOTAL SALE CONSIDERATION, WHEN TH E OWNERSHIP GET TRANSFERRED. HENCE, ADDITION MADE BY THE AO IS DELE TED. 10. AS REGARDS THE ADDITION TOWARDS INCOME FROM OTH ER SOURCES OF RS. 3,12,000/-, THE LD. AR HAS NOT ARGUED DURING TH E APPEAL PROCEEDINGS ON THIS ADDITION AND, THEREFORE, THIS G ROUND IS DISMISSED AS NOT PRESSED. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 29 TH JUNE, 2016 SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHM AN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 29 TH JUNE, 2016 KV COPY TO:- 1) SHRI S. MALLA REDDY (HUF), C/O SRI S. RAMA RAO, ADVOCATE, FLAT NO. 102, SHRIYAS ELEGANCE, H. NO. 3-6-643 , ST. NO. 9, HIMAYAT NAGAR, , HYDERABAD 500 029 2) ITO, WARD 8(2), SIGNATURE TOWERS, KONDAPUR, HY DERABAD 3) CIT(A) - III, HYDERABAD 4) CIT - II, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 8 ITA NO. 1293/H/13 S. MALLA REDDY (HUF), HYD. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./ P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER S