Sri Padmanabha Estates Pvt.Ltd., Hyderabad V. DCIT, Cir-3(2), Hyderabad

ITA 1315/HYD/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53833 (ITAT-HYDERABAD)
• Duration Of Justice: 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 12-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B V PRASAD REDDY
• Assessee Lawyers: C S SUBRAMANYAM
• Keywords: Sale consideration of property below Jantri Value; Related party transaction; Fair market value
• Section: 50C; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, A.M. & SMT. ASHA VIJAYARAGHAVAN, J.M. ITA NO.1315/HYD/2011 ASSESSMENT YEAR 2006-07 SHRI PADMANABHA ESTATES P LTD., HYDERABAD (PAN AAGCS4922A) VS THE DCI T, CIRCLE 3(2), HYDERABAD APPELLANT RESPONDENT APPELLANT BY : SHRI C.S. SUBRAMANYAM RESPONDENT BY : SHRI B.V. PRASAD REDDY DATE OF HEARING : 3.11.2011 DATE OF PRONOUNCEMENT : 27.12.2011 ORDER PER ASHA VIJAYARAGHAVAN, JM: THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER PASSED BY THE CIT(A) IV, HYDERABAD DATED 15.4.2011 AND IT PERTAINS TO THE ASSESSMENT YEAR 2006-07. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE. THE ASSESSING OFFICER NOTED FROM T HE DIRECTORS REPORT THAT THE ASSESSEE COMPANY HAD SOLD 5 PLOTS TO THE DIRECT ORS AND THEIR RELATIVES AT CONCESSIONAL RATES. IN THE AUDIT REPORT, THE AUDIT ORS HAD QUANTIFIED THE CONCESSION AT RS 10 LAKHS ON THE REGISTRATION OF TH E 5 PLOTS. APART FROM THE ABOVE PLOTS, THE ASSESSEE COMPANY SOLD 6 PLOTS AT A DISCOUNT RATE AND THE AUDITORS QUANTIFIED SUCH DISCOUNT AT RS. 6 LAKHS. 3. IT WAS STATED BY THE ASSESSEE THAT ONE OF THE D IRECTORS SRI BLK REDDY HAD ADVANCED RS 55 LAKHS TO THE COMPANY TO MEET THE CAPITAL REQUIREMENT ON WHICH NO INTEREST WAS PAID TO THE DIRECTOR. IT WAS SUBMITTED THAT THE ITA NO.1315/H/2011 SHRI PADMANABHA ESTATES (P) LTD., HYD. 2 CONCESSION OF RS 10 LAKHS HAD BEEN GIVEN BY THE COM PANY AS A CONSIDERATION TOWARDS THE INTEREST FREE ADVANCE AND THEREFORE COULD NOT HAVE BEEN CONSIDERED AS INCOME. 4. HOWEVER THE ASSESSING OFFICER DID NOT FIND THE CONTENTION OF THE ASSESSEE ACCEPTABLE. HE FELT THAT IF THE CONCESSION SO GIVEN IS TO BE TREATED AS A CONSIDERATION FOR THE INTEREST FREE LOAN SUCH CON CESSION WOULD HAVE TO BE TREATED AS PAYMENT OF INTEREST ON THE LOAN TAKEN FR OM THE DIRECTOR WHICH IN TURN WOULD ATTRACT THE TDS PROVISIONS. HOWEVER THE ASSESSEE COMPANY HAD NOT MADE ANY TDS THEREON. THE ASSESSING OFFICER OP INED THAT IN VIEW OF NON DEDUCTION OF TDS, THE AMOUNT WILL BE AUTOMATICALLY DISALLOWABLE UNDER SEC. 40(A)(IA). 5. IT WAS ALTERNATIVELY ARGUED BEFORE THE ASSESSIN G OFFICER THAT THE AMOUNTS HAD BEEN RECEIVED FROM THE DIRECTORS DURING THE YEARS 2003 AND 2004, AT THE THEN PREVAILING RATES. HE TRIED TO EXP LAIN THAT NO CONCESSION WAS GIVEN TO THE DIRECTORS. HOWEVER, THE ASSESSING OFFICER FELT THAT IN SUCH A CASE THE ASSESSEE WOULD HAVE REGISTERED THE LAND SOON AFTER RECEIPT OF THE CONSIDERATION, WHICH WAS NOT DONE. ACCORDINGLY, HE CONCLUDED THAT IN THE ABSENCE OF REGISTRATION, AS ALSO NON PRODUCTION OF AGREEMENTS FOR SALE THE AMOUNTS ORIGINALLY RECEIVED WERE LOANS ONLY WHEREAS THE SALE TRANSACTION HAD TAKEN PLACE DURING THE YEAR UNDER CONSIDERATION . 6. IT WAS ALSO CLAIMED BY THE ASSESSEES REPRESENT ATIVE THAT THE DIFFERENCE OF RS 10 LAKHS IS THE DIFFERENCE BETWEEN THE AMOUNT RECEIVED AND THE REGISTERED VALUE OF THE PROPERTY AND SINCE THE PROP ERTY IS STOCK IN TRADE, STATUTORY PROVISIONS, WHICH IMPOSE TAX LIABILITY BY DEEMING ARE NOT APPLICABLE, MEANING THEREBY THAT THE PROVISIONS OF SEC 50C WOULD NOT APPLY TO STOCK IN TRADE. HOWEVER THE ASSESSING OFFICER C ONCLUDED THAT SUCH ARGUMENT WAS NOT ACCEPTABLE, AS THE ISSUE INVOLVED WAS NOT OF CAPITAL GAIN, BUT THAT OF SALE TO A RELATED PARTY. HE NOTED THAT AS PER THE DIRECTORS REPORT, THE 5 PLOTS HAD BEEN OFFERED TO THE PROMOTE R DIRECTOR AT A ITA NO.1315/H/2011 SHRI PADMANABHA ESTATES (P) LTD., HYD. 3 CONCESSIONAL RATE WITH A VIEW TO REWARD HIM AND SUC H REWARD INDEED CREATED A CHARGE ON THE PROFIT OF THE BUSINESS. CONCLUDING THAT THE PROVISIONS OF SEC 40A WERE ATTRACTED HE DISALLOWED THE DISCOUNT OF RS .16 LAKHS. 7. DURING THE COURSE OF APPELLATE PROCEEDINGS IT WAS SUBMITTED BY THE REPRESENTATIVE OF THE ASSESSEE THAT THE DETAILS IN RESPECT OF THE DISCOUNT OF RS.16 LAKHS HAD BEEN DISCLOSED IN THE ASSESSEES AN NUAL REPORT BY PUTTING THE UNDER MENTIONED NOTE. DURING THE YEAR THE COMPANY HAS SOLD 5 PLOTS TO TH E DIRECTORS AND RELATIVES OF THE DIRECTORS FOR WHICH THE AGGREGATE CONSIDERATION RECEIVED IS RS 20,00,000/- AS AGAINST THE AGGREGATE MARKET VALUE OF RS 30,00,000/- ADOPTED FOR THE PURPOSE OF REGISTRAT ION WHICH IS YET TO BE RATIFIED BY THE BOARD. FURTHER THE COMPANY HA S ALLOWED DISCOUNT OF RS 6,00,000/- ON SALE OF 6 PLOTS DURIN G THE YEAR WHICH IS YET TO BE RATIFIED BY THE BOARD. 8. IT WAS SUBMITTED THAT IT HAD BEEN EXPLAINED BEF ORE THE ASSESSING OFFICER THAT THE CONCESSION WAS A GESTURE ON THE PA RT OF THE ASSESSEE COMPANY TO ACKNOWLEDGE THE TIMELY ACTION OF THE PER SONS CONCERNED IN ENABLING THE COMPANY TO TIDE OVER FINANCIAL CRISIS BY INFUSING FUNDS. IT WAS CLARIFIED THAT THE ASSESSEE HAD NOT RECEIVED ANY AM OUNT OVER AND ABOVE WHAT WAS DECLARED IN THE RESPECTIVE SALE DEEDS, AND THEREFORE THE DIFFERENCE ON ACCOUNT OF CONCESSION BEING THE DIFFERENCE BETWE EN THE AGGREGATE CONSIDERATION AND THE AGGREGATE MARKET VALUE ADOPTE D FOR REGISTRATION PURPOSE DID NOT REPRESENT PROFIT OF THE ASSESSEE. 9. THE ASSESSEES REPRESENTATIVE SUBMITTED THAT TH E ASSESSING OFFICER DISALLOWED THE DISCOUNT CONTEMPLATING THE SECTION 4 0A(2)(A). HOWEVER THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE OR OUTGOI NG MUCH LESS EXPENDITURE/ OUTGOING IN CONNECTION WITH THE SALE O F PLOTS AND THEREFORE THE ADDITION IS NOT SUSTAINABLE UNDER SEC 40A. ITA NO.1315/H/2011 SHRI PADMANABHA ESTATES (P) LTD., HYD. 4 10. IT WAS ALSO ARGUED THAT THERE WAS NO PAYMENT OF ANY INTEREST AND HENCE SEC 40A(IA) HAD NO APPLICATION. 11. THE ASSESSEE SUBMITTED THAT IT HAD ALSO FURNIS HED INSTANCES OF FEW SALES REGISTERED IN AUGUST 2004 TO SHOW THAT THE VA LUES IN 2004 COMPARE FAVOURABLY WITH THE CONSIDERATION COLLECTED BY THE ASSESSEE. HE MAINTAINED THAT IT WAS NOT THE CASE THAT THE 6 PLOTS HAD BEEN SOLD FOR A HIGHER AMOUNT THAN THE ASSESSEE CONSIDERATION RECORDED. THE REPRE SENTATIVE ARGUED THAT THE DELAY IN REGISTRATION OF PLOTS COULD NOT HAVE B EEN SUFFICIENT REASON FOR REJECTING THE CONTENTION REGARDING GENUINE DISCOUNT . 12. THE CIT(A) HELD AS FOLLOWS:- I HAVE GONE THROUGH THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE ASSESSEE. ADMITTEDLY THE 5 PLOTS SOLD TO THE DIREC TORS WITH A CONCESSION OF RS 10 LAKHS AND THE 6 OTHER PLOTS SOL D AT DISCOUNT OF RS 6 LAKHS., WERE PART OF THE STOCK IN TRADE OF THE AS SESSEE COMPANY. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT TH E 5 PLOTS WERE SOLD TO THE DIRECTORS AND THEIR RELATIVES AT A DISCOUNT OF RS 10 LAKHS. AS REGARDS THE 6 PLOTS SOLD AT A DISCOUNT OF RS 1 LAKH EACH, ON GOING THROUGH THE FACTS OF THE CASE AS ALSO THE RELEVANT PORTION OF THE DIRECTORS REPORT IT IS SEEN THAT EVEN THE DISCOUNT OF RS 6 LAKHS HAS BEEN MENTIONED UNDER THE HEAD RELATED PARTY TRAN SACTIONS. UNDER THE CIRCUMSTANCES THE ASSESSING OFFICER CANNO T BE SAID TO BE INCORRECT IN CONSIDERING THE PROVISIONS OF SEC 40A IN RESPECT OF THESE 6 PLOTS ALSO. SINCE THE 11 PLOTS SO TRANSFERRED TO RELATED PARTI ES, FORMED STOCK IN TRADE OF THE ASSESSEE COMPANY AND THE ASSESSEE SOLD THEM AT A DISCOUNT IT CANNOT BE DENIED THAT THERE WAS AN INDI RECT CHARGE ON THE PROFITS OF THE COMPANY, EVEN IF THE DISCOUNT WAS NO T SPECIFICALLY DEBITED TO THE P & L ACCOUNT AFTER ADOPTING THE AGG REGATE MARKET VALUE ADOPTED FOR REGISTRATION PURPOSES. ADMITTEDLY THE DISCOUNT IN RESPECT OF 5 PLOTS SOLD TO DIRECTORS AND THEIR RELA TIVES HAD BEEN GIVEN ITA NO.1315/H/2011 SHRI PADMANABHA ESTATES (P) LTD., HYD. 5 IN RECOGNITION OF THEIR CONTRIBUTION. HOWEVER THE A SSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE AS TO HOW THEIR CONTRIBUT ION WAS CONSIDERED SUFFICIENT TO JUSTIFY THE DISCOUNT OF RS 10 LAKHS. AS REGARDS THE DISCOUNT IN RESPECT OF THE 6 OTHER PLOTS NO SUCH JU STIFICATION HAS BEEN EXTENDED AT ALL. UNDER THE CIRCUMSTANCES FINDING NO INFIRMITY IN THE ACTION OF THE ASSESSING OFFICER IN INVOKING THE SEC 40A AND CONSEQUENTLY DISALLOWING THE DISCOUNT OF RS 16 LAKH S, THE GROUNDS TAKEN IN THIS APPEAL ARE DECIDED AGAINST THE ASSESS EE. 13. AGGRIEVED THE ASSESSEE IS ON APPEAL BEFORE US AND REITERATED THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI C.S.SUBRAMANYAM RELIED ON THE DEC ISIONS IN UNITED EXPORTS VS CIT 185 TAXMANN 375 (DEL) AND HEERA T EXTILES VS ITO 39 ITD 319 (MUM). THE LEARNED DEPARTMENTAL REPRESENTATIVE SHRI B.V.PRASAD REDDY RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 14. WE HEARD BOTH THE PARTIES. WE FIND THAT DURIN G THE PREVIOUS YEAR 5 PLOTS WERE SOLD TO DIRECTOR AT RS 4 LAKHS FOR WHICH THE REGISTRATION VALUE WAS RS.6 LAKHS PER PLOT. THE DIFFERENCE OF RS. 2 LAKHS (IE 2 LAKHS X 5 ) WERE REPORTED IN THE DIRECTORS REPORT AND THE AMOUNT OF RS.5 LAKHS PER PLOT WAS RECOGNISED AS SALE IN THE PROFIT AND LOSS ACCOUNT, THE SALE WAS RECORDED AT THE ACTUAL AMOUNT RECEIVED. FURTHER, THE SAME WAS D ISCLOSED AS PART OF RELATED PARTY TRANSACTION IN THE NOTES TO ACCOUNT. 15. WITH RESPECT TO SALE OF PLOTS TO OUTSIDERS, TH E AMOUNT FOR THE SALE RECEIVED IS IN THE YEAR 2003-04 AND THE SALES WERE MADE AT AGREED PRICE OF RS.4 LAKHS PER PLOT. IN THIS CASE, GROSS SALE WAS RECORDED AS RS.5 LAKHS AND RS. 1 LAKHS WAS SHOWN AS DISCOUNT FOR THE PURPOSE O F ACCOUNTING. HOWEVER IT HAS BEEN DISCLOSED AS RELATED PARTY TRANSACTION IN THE NOTES TO ACCOUNTS SINCE RATIFICATION WAS REQUIRED THAT THOUGH PARTIES ARE NOT RELATED PARTIES. 16. WE ALSO FIND THAT THE COMPARABLE SALE VALUE OF THE PLOTS SOLD TO OUTSIDERS IN 2004 WAS LESS THAN RS.4 LAKHS. FROM THE FACTS OF THE CASE, WE ARE OF THE OPINION THAT THE TRANSACTION OF SALE OF 6 PLOTS TO OUTSIDERS ARE WITH ITA NO.1315/H/2011 SHRI PADMANABHA ESTATES (P) LTD., HYD. 6 PERSONS WHO ARE TOTALLY UNRELATED TO THE DIRECTORS AND HENCE, THE TRANSACTION CANNOT BE BROUGHT WITHIN THE PURVIEW OF SECTION 40A(2). AS REGARDS THE 5 PLOTS SOLD TO THE DIRECTORS THE ASSES SEE HAS OFFERED TO SELL THE PLOTS AT A DISCOUNT. IT IS A REDUCTION OF SALE PRIC E AND IS NOT AN EXPENDITURE. THE ACTUAL DISCOUNTED SALE PRICE RECEIVED CONSTITUT ES THE INCOME. AS THE ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE IN CONNECT ION WITH THE SAID SALES, PROVISIONS OF SEC 40A(2) ARE NOT APPLICABLE TO DISC OUNTS OFFERED ON SALES. FURTHER, IN THE ABSENCE OF FINDING BY THE DEPARTMEN T THAT BENEFIT HAS ACCRUED MORE THAN WHAT IS RECORDED IN THE BOOKS THE ASSESSEE CANNOT SAID TO HAVE MADE PROFIT OUT OF THE TRANSACTIONS. 17. THE DELHI HIGH COURT IN THE CASE OF UNITED EXP ORTS VS CIT 185 TAXMANN 375 (DEL) HAS HELD THAT: THE PROVISIONS OF SECTION 40A(2)(A) PERTAINS TO DI SALLOWANCE TO AN EXPENDITURE WHICH IS MADE BY THE ASSESSEE I.E, AN A MOUNT ACTUALLY SPENT BY THE ASSESSEE AS AN EXPENDITURE. THE EXPRES SION USED IN THAT PROVISION IS INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON. THE EMPHASISE D WORDS CLEARLY SHOW THAT ACTUAL PAYMENT MUST BE MADE AND THERE HAS TO BE AN EXPENDITURE INCURRED BEFORE THE PROVISION CAN BE SA ID TO BE APPLICABLE. ADMITTEDLY, IT WAS NOT IN DISPUTE THAT THE SUBJECT MATTER OF THE CLAIM WAS A TRADE DISCOUNT, AND NOT AN EXPENDITURE AND CL EARLY, THEREFORE, THERE DID NOT ARISE THE QUESTION OF APPLICABILITY O F SECTION 40A(2)(B). IN VIEW OF THE ABOVE, THE TRIBUNAL WAS NOT JUSTIFIE D IN ALLOWING A TRADE DISCOUNT AT ONLY 5 PER CENT AS COMPARED TO 11 PERC ENT AS CLAIMED BY THE ASSESSEE. THE PROVISION OF SECTION 40A(2) DID NOT APPLY TO THE FACTS OF THE INSTANT CASE INASMUCH AS THE TRADE DISCOUNT IS NOT AN EXPENDITURE WHICH IS INCURRED OR WITH RESPECT TO W HICH A PAYMENT IS MADE. ITA NO.1315/H/2011 SHRI PADMANABHA ESTATES (P) LTD., HYD. 7 18. FURTHER IN THE CASE OF HEERA TEXTILES VS ITO 39 ITD 319 (MUM) THE COURT HAS HELD THAT THE MAIN CONTENTION OF THE ASSE SSEE THAT WHAT WAS PAID WAS IN THE NATURE OF REBATE OR DISCOUNT AND THE ITO HAS NOT ESTABLISHED THAT THE EXPENDITURE WAS EXCESSIVE OR UNREASONABLE HAVIN G REGARD TO THE FAIR MARKET VALUE OF GOODS. IN THIS CASE ALSO THE REBAT E OR DISCOUNT GIVEN TO THE DIRECTORS DOES NOT SEEM EXCESSIVE SINCE IT IS A FAC T THAT THE PLOT HAS BEEN SOLD AT RS.4 LAKHS EVEN OUTSIDERS IN 2004. WE THE REFORE HOLD THAT THE AO AND THE CIT(A) HAVE WRONGLY INVOKED THE PROVISIONS OF SECTION 40A(2) IN THE ASSESSEES CASE. 19. IN THE RESULT THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT 27.12.20 11 SD/- SD/- (CHANDRA POOJARI) ( (ASHA VIJAYA RAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 27 TH DECEMBER, 2011 COPY FORWARDED TO: 1. SHRI PADMANABHA ESTATES (P) LTD., 103, REGENCY HOUS E, SOMAJUGUDA, HYDERABAD 2. THE DCIT, CIRCLE 3(2), HYDERABAD 3. THE CIT(A)- IV 4. THE CIT, HYDERABAD 5. THE DR, ITAT, HYDERABAD NP/