M/s Davanam construction P. Ltd., V. D.C.I.T.,

ITA 149/BANG/2014

• Counselvise Citation: 14921114 RSA 2014
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-08-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 27-01-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Cost of acquisition; Fair market value; Corroborative evidences
• Section: 153A; 234B; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NOS. 149 TO 151/BANG/2014 ASSESSMENT YEARS : 2007-08, 2009-10 & 2010-11 M/S. DAVANAM CONSTRUCTIONS (P) LTD., # 148, SURVEYORS STREET, BASAVANGUDI, BANGALORE - 560 004. PAN : AABCD 3880H VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI ZAIN AHMED KHAN, C.A. RESPONDENT BY : SHRI FARAHAT HUSSAIN QURESHI, CIT-II(DR) DATE OF HEARING : 19.08.2014 DATE OF PRONOUNCEMENT : 28.08.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER ITA NOS. 149 & 150/BANG/2014 ARE APPEALS BY THE A SSESSEE AGAINST THE COMMON ORDER DATED 13.11.2013 OF THE CIT(APPEAL S)-VI, BANGALORE RELATING TO ASSESSMENT YEARS 2007-08 & 2009-10. IT A 151/BANG/2014 IS AN ITA NO.149 TO 151/BANG/2014 PAGE 2 OF 21 APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 12.1 1.2013 OF THE CIT(APPEALS)-VI, BANGALORE RELATING TO ASSESSMENT Y EAR 2010-11. ITA NOS. 149 & 150/BANG/2014 2. FIRST, WE WILL TAKE UP FOR CONSIDERATION ITA NO. 149 & 150/BANG/2014. GROUNDS NO. 1 TO 3 RAISED BY THE ASSESSEE IN THESE APPEALS ARE GENERAL AND CALLS FOR NO ADJUDICATION. 3. GROUND NO.7 RAISED BY THE ASSESSEE IN ITA NO.149 /14 AND GROUND NO.5 RAISED BY THE ASSESSEE IN ITA NO.150/14 RELATE S TO CHARGING OF INTEREST U/S. 234A AND 234B OF THE ACT. THE PRAYER OF THE ASSESSEE IN THESE GROUNDS OF APPEAL IS ONLY FOR CONSEQUENTIAL R ELIEF. WE ARE OF THE VIEW THAT THE AO, WHILE GIVING EFFECT TO THE ORDER OF TH E TRIBUNAL, WILL GIVE CONSEQUENTIAL RELIEF IN THE MATTER OF CHARGING OF I NTEREST U/S. 234A & 234B OF THE ACT. 4. GROUND NO. 4 RAISED BY THE ASSESSEE IN ITA NO.14 9/14 AND GROUND NO.4 RAISED BY THE ASSESSEE IN ITA NO.150/14 READ A S FOLLOWS:- A.Y. 2007-08 4. THE CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS.9,49,677/- WITHOUT APPRECIATING THE FACT THAT TH E CONSIDERATION RECEIVED ON SALE OF TDR RIGHTS IS NOT TAXABLE UNDER THE PROVISIONS OF THE INCOME TAX ACT AND THE CIT(A) FURTHER ERRED IN NOT APPRECIATING THE DECISIONS RELIED ON BY THE APPELLA NT. ITA NO.149 TO 151/BANG/2014 PAGE 3 OF 21 A.Y. 2009-10 4. THE CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS.1,09,00,785/- WITHOUT APPRECIATING THE FACT THAT THE CONSIDERATION RECEIVED ON SALE OF TDR RIGHTS IS NOT TAXABLE UNDER THE PROVISIONS OF THE INCOME TAX ACT AND THE CIT(A) FURTHER ERRED IN NOT APPRECIATING THE DECISIONS RELIED ON B Y THE APPELLANT. 5. THE AFORESAID GROUNDS OF APPEAL ARISE UNDER IDEN TICAL FACTS AND CIRCUMSTANCES AND THEREFORE CAN BE DEALT WITH TOGET HER. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PROPERTY DEVELOP MENT. THERE WAS A SEARCH U/S. 132 OF THE ACT IN THE CASE OF THE ASSES SEE ON 2.9.2010. IN VIEW OF THE PROVISIONS OF SECTION 153A OF THE ACT, THE A SSESSING OFFICER ISSUED NOTICES FOR MAKING ASSESSMENT OF THE TOTAL INCOME O F THE ASSESSEE FOR SIX ASSESSMENT YEARS IMMEDIATELY PRECEDING THE ASSESSME NT YEAR RELEVANT TO PREVIOUS YEAR IN WHICH THE SEARCH WAS CONDUCTED. I N THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASS ESSEE HAD RECEIVED A SUM OF RS.9,49,677 IN A.Y. 2007-08 AND A SUM OF RS. 1,09,00,785 IN A.Y. 2009-10. THE AFORESAID PAYMENTS WERE RECEIVED BY T HE ASSESSEE ON SALE OF TRANSFERABLE DEVELOPMENT RIGHTS (TDRS). THE ASS ESSEE PURCHASED LAND BELONGING TO MINERVA MILLS AT BANGALORE FROM NATION AL TEXTILES CORPORATION DURING F.YS. 2004-05 & 2005-06 AT A PUBLIC AUCTION. OUT OF THE TOTAL EXTENT PURCHASED BY THE ASSESSEE, AN EXTENT OF 58,378.49 S Q.FT. OF LAND AT MUNICIPAL NO.19, PART OF CTS-2, LA NO. 56, GOPALAPU RA, MINERVA MILLS, BANGALORE WAS GIVEN TO BRUHAT BANGALORE MAHANAGARA PALIKE (BBMP) FOR ITA NO.149 TO 151/BANG/2014 PAGE 4 OF 21 PUBLIC PURPOSE VIZ., ROAD WIDENING. IN LIEU OF PAY MENT OF COMPENSATION FOR SURRENDER OF THE AFORESAID AREA OF LAND, BBMP GAVE TDRS. 6. DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2007-0 8, THE ASSESSEE SOLD PART OF THE TDRS FOR RS.25 LAKHS. IN THE PREV IOUS YEAR RELEVANT TO A.Y. 2009-10, THE ASSESSEE SOLD TDRS FOR A SUM OF RS.1,9 0,99,999. THE ASSESSEE RECORDED EXPENDITURE IN THE FORM OF COST O F TDRS AT RS.1,51,50,323 AND RS.81,99,214 RESPECTIVELY IN A.Y . 2007-08 AND 2009- 10 IN ITS BOOKS OF ACCOUNTS. THE AO SOUGHT TO TAX THE DIFFERENCE BETWEEN THE SALE VALUE AND THE COST AS RECORDED IN THE BOOK S OF ACCOUNTS AS BUSINESS INCOME. THE ASSESSEE IN BOTH THE ASSESSME NT YEARS DID NOT OFFER THE INCOME ON SALE OF TDRS TO TAX ON THE GROUND THA T SALE OF TDRS GIVES RISE TO CAPITAL GAINS AND SINCE THERE IS NO COST OF ACQUISITION OF TDRS, IT IS NOT POSSIBLE TO COMPUTE CAPITAL GAIN AND THEREFORE RECEIPT IN QUESTION CANNOT BE BROUGHT TO TAX. THE NOTE FILED BY THE AS SESSEE IN THIS REGARD ALONG WITH THE RETURN OF INCOME READS THUS:- NOTE ON TAXABILITY OF SALE OF TRANSFERRABLE DEVELO PMENT RIGHTS DAVANAM CONSTRUCTIONS PRIVATE LIMITED IS A COMPANY WHOSE MAIN OBJECT IS IN THE ACTIVITY OF REAL ESTATE PROPE RTY DEVELOPMENT. DURING THE FINANCIAL YEAR 2005-06 (AS SESSMENT YEAR 2006-07) SOLD THE TRANSFERRABLE DEVELOPMENT RI GHTS AND HAS RECEIVED CONSIDERATION AMOUNTING TO RS.22,50,00 0/-. THE RIGHTS ARE ACQUIRED BY VIRTUE OF PROVISIONS OF SECT ION 14-B OF KARNATAKA TOWN & COUNTRY PLANNING ACT, 1961 AND RUL ES THEREIN RELATING TO GRANTING TRANSFERRABLE DEVELOPMENT RIGH TS TO THE OWNERS OF THE LAND AGAINST COMPULSORY ACQUISITION OF LAND. UNTIL THE POINT OF TIME THESE DEVELOPMENT REGULATION CAME INTO EXISTENCE, THE ASSESSEE DID NOT HAVE RIGHT TO RECEI VE AND APPLY THE ITA NO.149 TO 151/BANG/2014 PAGE 5 OF 21 TRANSFERABLE DEVELOPMENT RIGHTS. IT IS THESE RIGHT S ON THE ASSIGNMENT OF WHICH THE ASSESSEE HAS RECEIVED THE I MPUGNED AMOUNT. HENCE, UNDER THE PROVISIONS OF INCOME TAX ACT, 1961 THE SAID CONSIDERATION IS NOT CHARGEABLE TO TAX UNDER T HE HEAD CAPITAL GAINS. TO SUBSTANTIATE THE ABOVE POINTS, WE RELY O N THE FOLLOWING JUDGMENTS. 1. JETHALAL D. MEHTA VS. DEPUTY COMMISSIONER OF INC OME- TAX (2005) 002 SOT 0422 (MUM.) 2. CIT VS. B.C. SRINIVAS SETTY 128 ITR 204 (SC) 3. SYNDICATE BANK LTD. V. ADDL. CIT (1985) 155 ITR 681 (KAR.) 4. SYNDICATE BANK LTD. VS. ADDL. CIT (1985) 155 ITR 681 (KAR.) 5. B.G. SHAH VS. CIT (1986) 162 6. CIT VS. H.H. MAHARAJA SAHIB SHRI LOKENDRA SINGHA L (1986) 162 ITR 93 (M.P.) 7. CIT VS. KARK 165 ITR 336 (A.P.) 8. RAJABALI NAZARALI & SONS VS. CIT (1987) 163 ITR 7 (GUJ.) 9. GODREJ & CO. VS. CIT (1959) 37 ITR 381. 10. CIT VS. PANHARI TEA CO. LTD. (1965) 57 ITR 422. 7. THE AO, HOWEVER, DID NOT ACCEPT THE AFORESAID CL AIM OF THE ASSESSEE. THE AO FIRSTLY NOTICED THAT SALE OF TDRS WILL GIVE RISE TO BUSINESS INCOME AND NOT CAPITAL GAIN. FOR ARRIVIN G AT THE AFORESAID CONCLUSION, THE AO EXAMINED THE OBJECTS OF THE COMP ANY AS ENSHRINED IN ITS OBJECTS CLAUSE OF MEMORANDUM OF ASSOCIATION, WH ICH IS TO UNDERTAKE CONSTRUCT AND MAINTENANCE OF AND ACQUISITION BY PUR CHASE, LEASE, EXCHANGE OF PROPERTIES BUILDINGS AND ESTATES AND TO SELL, MORTGAGE OR OTHERWISE DISPOSE OF PROPERTIES. THE AO, THEREFORE , HELD THAT THE ASSESSEE WAS IN REAL ESTATE BUSINESS. THE AO ALSO FOUND THA T THE ASSESSEE PARTICIPATED IN A PUBLIC AUCTION AND PURCHASED THE PROPERTY IN THE NORMAL COURSE OF BUSINESS WITH THE INTENTION OF EXPLOITING IT COMMERCIALLY FOR PROFITS. ITA NO.149 TO 151/BANG/2014 PAGE 6 OF 21 THE AO ALSO REFERRED TO THE FACT THAT SUBSEQUENTLY THE ASSESSEE ENTERED INTO A JOINT DEVELOPMENT AGREEMENT DATED 12.10.2005 WITH M/S. SOBHA DEVELOPERS LTD. FOR CONSTRUCTING A SHOPPING MALL ON THE LAND. A PORTION OF THE PROPERTY WAS ACQUIRED BY BBMP FOR ROAD WIDENING AND THE ASSESSEE WAS GIVEN TDRS IN LIEU OF PAYMENT OF COMPENSATION. THE AO ALSO MADE A REFERENCE TO THE FACT THAT IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE, WHEREIN IN THE PROFIT & LOSS ACCOUNT, THE ASSESSEE RECORDED EXPENDITURE FOR ACQUIRING TDRS AND CORRESPONDING SALE PROCEEDS ON S ALE OF TDRS. ACCORDING TO THE ASSESSEE, THE INTENTION OF THE ASS ESSEE AT THE TIME OF ACQUIRING THE PROPERTY WAS TO COMMERCIALLY EXPLOIT IT IN BUSINESS AND NOT TO HOLD IT AS INVESTMENT I.E., CAPITAL ASSET. IN THIS REGARD, THE AO FOUND THAT A PART OF THE PROPERTY ACQUIRED FROM MINERVA MILLS HA D BEEN SOLD AND THE SALE PROCEEDS HAVE BEEN OFFERED BY THE ASSESSEE AS BUSIN ESS INCOME AND NOT AS CAPITAL GAINS. HENCE, ACCORDING TO THE AO, TDRS ARISING FROM ACQUISITION OF THE VERY SAME PROPERTY SHOULD ALSO BE CONSIDERED AS INCOME FROM BUSINESS. THE AO ALSO REFERRED TO THE FACT THAT IN THE ORIGINAL RETURN OF INCOME FILED FOR A.Y. 2009-10, PROFITS FROM SALE OF TDRS WAS OFFERED AS BUSINESS INCOME. FOR ALL THE ABOVE REASONS, THE AO HELD THAT INCOME ON SALE OF TDRS HAS TO BE ASSESSED UNDER THE HEAD INC OME FROM BUSINESS. CONSEQUENTLY, THE AO REJECTED THE CLAIM OF THE ASSE SSEE THAT INCOME FROM SALE OF TDRS GIVES RISE TO CAPITAL GAIN AND SINCE T HE COMPUTATION OF CAPITAL GAINS IS NOT POSSIBLE, THERE COULD BE NO CHARGE TO TAX ON CAPITAL GAINS ON SALE OF TDRS. ITA NO.149 TO 151/BANG/2014 PAGE 7 OF 21 8. AGGRIEVED BY THE ACTION OF THE AO, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(APPEALS). THE CIT(A) CONFIRMED THE ACTION OF THE AO FOR THE FOLLOWING REASONS:- THE FACTS WHICH EMERGE ARE :- (I) THE ASSET IN QUESTION WAS ACQUIRED BY THE APPE LLANT AND UTILIZED FOR BUSINESS PURPOSE. (II) THE APPELLANT HAD ENTERED INTO A BUSINESS TRA NSACTION (JOINT DEVELOPMENT AGREEMENT WITH M/S SOBHA DEVELOPERS IN RESPECT OF THE SAID PROPERTY). (III) THE APPELLANTS LANDS WERE COMPULSORILY ACQUIR ED BY THE LOCAL AUTHORITIES (BBMP) FOR WHICH THE APPELLANT HA S BEEN AWARDED TDRS. (IV) THE SAID ASSET I.E. TDR RIGHTS HAVE BEEN VALUE D BY THE APPELLANT IN ITS BOOKS OF ACCOUNT (V) THE COST OF TDR IS THE MARKET VALUE OF THE LAN D AS ON DATE OF EXCHANGE. SINCE THE MARKET VALUE OF THE LAND EXC HANGED FOR TDR REMAINED THE SAME AS IT EXISTED AT THE TIME OF ITS PURCHASE, THE COST OF TDR IS THE SAME AS THAT OF TH E COST OF LAND ACQUIRED BY BBMP. (VI) THE APPELLANT ITSELF HAS DECLARED INCOME FROM SALE OF PART OF THE LAND ACQUIRED AS BUSINESS INCOME IN A.Y. 200 4-05. (VII) THE APPELLANT ITSELF FOR A.Y. 2009-10 HAD INITIALLY DECLARED BUSINESS INCOME IN RESPECT OF THIS TRANSAC TION. FROM THE ABOVE FACTS, IT IS CLEAR THAT THE APPELL ANT HAS EARNED PROFIT ON SALE OF TDRS AND THE PROFIT THERE FROM IS LIABLE TO TAX. THE ALTERNATIVE FINDINGS OF THE ASSESSING O FFICER THAT EVEN IF THE SAME WAS TO BE TAKEN AS CAPITAL GAINS, THE C OST OF ACQUISITION WOULD BE THE COST WHICH IS DEBITED IN T HE APPELLANTS ACCOUNT BEING THE FAIR MARKET VALUE OF THE PROPERTI ES ACQUIRED ARE ALSO IN ORDER. ITA NO.149 TO 151/BANG/2014 PAGE 8 OF 21 THE TREATMENT GIVEN BY THE ASSESSING OFFICER UNDER THE FACTS OF THE CASE. THAT BUSINESS INCOME ACCRUES TO THE APPELLANT, IS IN ORDER AND IS UPHELD. 9. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REIT ERATED THE STAND OF THE ASSESSEE AS WAS PUT FORTH BY THE ASSESSEE BEFOR E THE AO/CIT(A). 10. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE ST AND TAKEN BY THE ASSESSEE IN THIS REGARD. WE HAVE ALSO SEEN THE BAL ANCE SHEET AS ON 31.3.2007. THE TDRS HAVE NOT BEEN RECOGNIZED AS CA PITAL ASSET IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. ON THE OTHER HAN D, THE TREATMENT GIVEN BY THE ASSESSEE IN THE BOOKS OF ACCOUNTS WHEN TDRS WERE SOLD CLEARLY SHOW THAT THE SAME WERE CONSIDERED AS BUSINESS ASSE T OF THE ASSESSEE. THE OTHER CIRCUMSTANCES BROUGHT OUT BY THE AO IN TH E ORDER OF ASSESSMENT, WHICH WE HAVE ALREADY NARRATED IN THE EARLIER PARAG RAPHS OF THIS ORDER ALSO GO TO SUPPORT THE CONCLUSION OF THE AO THAT INCOME ON SALE OF TDRS WAS IN THE NORMAL COURSE OF BUSINESS AND HAD TO BE CONSIDE RED AS INCOME FROM BUSINESS. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE ASSESSEE IS NOT IN THE BUSINESS OF DEAL ING IN TDRS AND THEREFORE INCOME FROM SALE OF TDRS CANNOT BE REGARD ED AS INCOME FROM BUSINESS. WE ARE OF THE VIEW THAT THE AFORESAID AR GUMENTS OF THE LD. COUNSEL FOR THE ASSESSEE CANNOT BE ACCEPTED. ADMIT TEDLY, THE PROPERTY IN QUESTION WAS TREATED AS BUSINESS ASSET AND ON ITS T RANSFER, THE ASSESSEE DERIVED TDRS. WHEN SUCH TDRS WERE SOLD, IT CANNOT B E SAID THAT THE SALE PROCEEDS OF TDRS ARE NOT INCOME FROM BUSINESS. IN OUR VIEW, THE TDRS ITA NO.149 TO 151/BANG/2014 PAGE 9 OF 21 HAVE A DIRECT NEXUS WITH THE BUSINESS OF THE ASSESS EE AND CANNOT BE TREATED AS ANY OTHER SOURCE OF INCOME. WE THEREFOR E CONFIRM THE ORDER OF THE CIT(APPEALS) AND DISMISS THE RELEVANT GROUNDS O F APPEAL RAISED BY THE ASSESSEE IN THIS REGARD. 11. THE ONLY OTHER GROUND THAT REMAINS TO BE DECIDE D IN THESE TWO APPEALS IS GROUND NO.5 & 6 RAISED BY THE ASSESSEE I N ITA NO.149/BANG/2014. THESE GROUNDS READ AS FOLLOWS:- 5. THE CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS.4,00,00,000/- AS REIMBURSEMENT OF INTEREST FREE REFUNDABLE DEPOSIT PAYABLE UNDER THE PRINCIPAL LEASE DEED. 6. THE CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS.34,85,870/- ON THE GROUND THAT THE APPELLANT HAS NOT FURNISHED ANY DETAILS. 12. THE FACTS REGARDING THE AFORESAID GROUND ARE AS FOLLOWS. THE ASSESSEE IN THE COURSE OF ITS BUSINESS ENTERED INTO A LEASE AGREEMENT WITH RBBPANM PUBLIC CHARITIES (CHARITIES FOR SHORT) ON 22.8.2005, WHEREBY THE ASSESSEE TOOK ON LEASE FOR A PERIOD OF 63 YEARS FROM 22.8.2005 A VACANT SITE KNOWN AS ANNASWAMY MUDALIAR PLACE BELON GING TO CHARITIES, MEASURING ABOUT 78,249 SQ.FT. AT ST. MARKS ROAD, BA NGALORE. UNDER THE LEASE AGREEMENT, THE ASSESSEE PAID A SUM OF RS.4 CR ORES AS INTEREST FREE REFUNDABLE DEPOSIT AND ANOTHER SUM OF RS.6 CRORES A S NON-REFUNDABLE DEPOSIT TO THE CHARITIES. ITA NO.149 TO 151/BANG/2014 PAGE 10 OF 21 13. ON 30.12.2006, THE ASSESSEE SUB-LET THE AFORESA ID PROPERTY TO M/S. SOBHA DEVELOPERS LTD. FOR THE REMAINING TENURE OF T HE LEASE FROM 30.12.2006. ON 27.1.2007, A SUPPLEMENTARY LEASE AG REEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND M/S. SOBHA DEVELOPERS LTD. AS PER THE SAID SUPPLEMENTARY AGREEMENT, SOBHA DEVELOPERS LTD. PAID THE FOLLOWING AMOUNTS TO THE ASSESSEE:- A. RS. 6,00,00,0000 ( SIX CRORE) TOWARDS REIMBURSEM ENT OF THE NON-REFUNDABLE DEPOSIT PAYABLE UNDER THE PRINCI PAL LEASE DEED TO THE TRUST; B. RS.4,00,00,000/- (FOUR CRORE) TOWARDS REIMBURSE MENT OF INTEREST FREE REFUNDABLE DEPOSIT PAYABLE UNDER THE PRINCIPAL LEASE DEED TO THE TRUST; C. RS. 4,0000,000/- ( FOUR CRORE) TOWARDS REIMBURS EMENT OF THE AMOUNTS SPENT BY THE LESSORS IN SECURING VACANT POSSESSION OF THE SCHEDULE PROPERTY FROM THE TENANT S/UN- AUTHORISED OCCUPANTS THEREIN. D. RS. 19,17,70,000/- (NINETEEN CRORES SEVENTEEN LA KHS SEVENTY THOUSAND) TOWARDS INTEREST FREE REFUNDABLE DEPOSIT IN TERMS OF THIS AGREEMENT. 14. THE ASSESSEE HAD TO ACCOUNT FOR THE INCOME FROM TRANSACTION OF SUB-LEASE OF THE PROPERTY. THE ASSESSEE DECLARED A SUM OF RS.59,59,272. THE ASSESSEE HAD RECOGNIZED THE RECEIPTS FROM THE A CTIVITY OF LEASING AND SUB-LEASING UNDER THE HEAD INCOME FROM BUSINESS A ND RECORDED THE RECEIPTS AND EXPENDITURE AS FOLLOWS:- ITA NO.149 TO 151/BANG/2014 PAGE 11 OF 21 CREDIT SIDE TRANSFER OF LEASE (NON REFUNDABLE DEPOSIT) RS.11,46 ,38,000 DEBIT SIDE COST OF LEASE COST OF LEASE RS.10,86,78,729 15. THE FIRST ISSUE THAT THE AO TOOK UP WAS THAT TH E ASSESSEE RECEIVED A NON-REFUNDABLE DEPOSIT OF RS.14 CRORES, WHEREAS IT HAS RECOGNIZED RS.11,46,38,000 AS INCOME IN THE CREDIT SIDE OF THE PROFIT & LOSS ACCOUNT. THE AO IN THIS REGARD REFERRED TO THE SUPPLEMENTARY AGREEMENT DATED 27.7.2007 WHEREIN THE SUM OF RS.14 CRORES WAS GIVEN AS REIMBURSEMENT OF REFUNDABLE AND NON-REFUNDABLE DEPOSIT WHICH THE ASS ESSEE HAD PAID TO CHARITIES, VIZ., RS.6 CRORES AND RS.4 CRORES RESPEC TIVELY AND ANOTHER SUM OF RS.4 CRORES TOWARDS REIMBURSEMENT OF AMOUNTS SPE NT BY THE ASSESSEE IN SECURING VACANT POSSESSION OF THE PROPERTY FROM THE TENANTS/ UNAUTHORIZED OCCUPANTS. THE AO ACCORDINGLY WORKED OUT THE REVISED CONSIDERATION RECEIVED ON TRANSFER OF LEASE AS FOLL OWS:- CONSIDERATION RECEIVED ON TRANSFER OF LEASE WAS REV ISED AS UNDER: NON REFUNDABLE PORTION TAKEN INTO ACCOUNT BY THE ASSESSEE RS.11,46,38,000 ADD: OMISSION OF RS.4,00,00,000/- AS MENTIONED ABOVE RS. 4,00,00,000 REVISED CONSIDERATION RECEIVED ON TRANSFER OF LEASE RS.15,46,38,000 16. THE NEXT ASPECT THAT WAS LOOKED INTO BY THE AO WAS THE BREAK UP OF EXPENSES OF RS.10,86,78,729 GIVEN BY THE ASSESSEE W HICH WAS AS FOLLOWS:- ITA NO.149 TO 151/BANG/2014 PAGE 12 OF 21 (A) EVICTION CHARGES THE ASSESSEE HAD FURNISHED THE FOLLOWING BREAK UP OF COST OF THE LEASE DEBITED TO ITS P & L ACCOUNT AMOUNTING TO RS.10,86,78,728/-, VIDE ITS LETTER DATED 03.01.2013 . SL NO. PARTICULARS AMOUNT (RS) 1 LEASE NON REFUNDABLE 6,00,00,000 2 STAMP DUTY 2,60,23,000 3 REGISTRATION AND OTHER FEE 57,17,682 4 EVICTION CHARGES PAID TO TENANTS OF RBBPANM 1,33,00,000 5 LICENSE FEE & OTHER EXPENSES 10,52,176 6 FEASIBILITY STUDY EXPENSES & OTHER RELATED EXPENSES 25,86,670 TOTAL 10,86,78,728 17. THE AO ON AN ANALYSIS OF EXPENDITURE AS AFORESA ID, CAME TO THE CONCLUSION THAT A SUM OF RS.34,85,870 OUT OF THE EX PENDITURE OF RS.10,86,78,728 HAD NOT BEEN PROVED BY THE ASSESSEE TO HAVE BEEN INCURRED BY IT IN CONNECTION WITH THE LEASE. ACCOR DINGLY, THE AO COMPUTED THE INCOME FROM TRANSACTION OF SUB-LEASE AS FOLLOWS :- COST OF LEASE AS PER ASSESSEES WORKING RS.10,86, 78,728 LESS: EXCLUSION FROM COST OF LEASE AS DISCUSSED ABOVE RS. 34,85,870 REVISED COST OF LEASE RS.10,51,92,858 AS A CONSEQUENCE, THE INCOME FROM ABOVE SUBLEASE WA S RECOMPUTED BY THE AO AS UNDER: ITA NO.149 TO 151/BANG/2014 PAGE 13 OF 21 REVISED CONSIDERATION RECEIVED FROM LEASE RS.15,46 ,38,000 LESS: REVISED COST OF LEASE RS.10,51,92,858 PROFIT/INCOME FROM SUBLEASE RS. 4,94,45,142 DUE TO THE ABOVE RECOMPUTATION OF NET INCOME FROM S UB-LEASE WAS ARRIVED AT BY THE AO AT RS.4,94,45,142 AS AGAINST NET INCOM E FROM SUB-LEASE OF RS.59,49,272; AN ADDITION OF RS.4,34,85,870 WAS MAD E TO THE RETURNED INCOME. 18. ON APPEAL BY THE ASSESSEE, THE CIT(A) CONFIRMED THE ACTION OF THE AO, EXCEPT FOR SOME RELIEF GIVEN IN THE MATTER OF D ISALLOWANCE OF EXPENSES OUT OF RS.34,85,870. 19. BEFORE US, THE ASSESSEE HAS CHALLENGED THE ORDE R OF THE CIT(APPEALS), INSOFAR AS IT RELATES TO ADDING A SUM OF RS.4 CRORES AS RECEIPTS ON SALE OF SUB-LEASE BY THE ASSESSEE. ACC ORDING TO THE ASSESSEE, THOUGH IN THE SUPPLEMENTARY AGREEMENT DATED 27.1.20 07, THE SUM OF RS.4 CRORES IS STATED TO BE TOWARDS REIMBURSEMENT OF INT EREST FREE REFUNDABLE DEPOSIT PAYABLE BY THE ASSESSEE TO CHARITIES, THE S AME IS ALSO REFUNDABLE BY THE ASSESSEE TO M/S. SOBHA DEVELOPERS LTD. AND T HEREFORE THE SAME SHOULD BE EXCLUDED FROM THE RECEIPTS. IN THIS REG ARD, THE SUBMISSION WAS THAT THE REFUNDABLE DEPOSIT CANNOT BE REGARDED AS I NCOME. 20. TO APPRECIATE THE ABOVE CONTENTION OF THE ASSES SEE, WE NEED TO EXTRACT THE RELEVANT CLAUSE OF SUPPLEMENTARY AGREEM ENT OF 27.1.2007, WHICH READS AS FOLLOWS:- ITA NO.149 TO 151/BANG/2014 PAGE 14 OF 21 2) THAT IN PURSUANCE OF THE AFORESAID AGREEMENT A ND IN CONSIDERATION OF THE LESSORS GRANTING SUB-LEASE OF THE SCHEDULE PROPERTY TO THE SUB-LESSEES IN TERMS OF THE SUB-LEA SE DEED DATED 30/12/2006 REGISTERED AS DOCUMENT NO.SHV-1- 04177/2006-07 IN BOOK-I AND STORED IN C.D.NO.SI-IVD 74, IN THE OFFICE OF THE SUBREGISTRAR, SHIVAJINAGAR, BANGALORE , THE SUB- LESSEES HAVE AGREED TO PAY THE LESSORS A SUM OF RS 33,17,70,000/-(RUPEES THIRTYTHREE CRORES SEVENTEEN LAKHS SEVENTY THOUSAND ONLY) WHICH CONSISTS OF THE FOLLOW ING AMOUNTS: A) RS.6,00,00,000/- (RUPEES SIX CRORES ONLY) TOWAR DS REIMBURSEMENT OF THE NON-REFUNDABLE DEPOSIT STIPULA TED UNDER THE PRINCIPAL LEASE DEED TO THE TRUST; B) RS.4,00,00,000/- (RUPEES FOUR CRORES ONLY) TOWA RDS REIMBURSEMENT OF INTEREST FREE REFUNDABLE DEPOSIT P AYABLE UNDER THE PRINCIPAL LEASE DEED TO THE TRUST; C) RS.4,00,00,000/- (RUPEES FOUR CRORES ONLY) TOWA RDS REIMBURSEMENT OF THE AMOUNTS SPENT BY THE LESSORS I N SECURING VACANT POSSESSION OF THE SCHEDULE PROPERTY FROM THE TENANTS/UN-AUTHORISED OCCUPANTS THEREIN; D) RS.19,17,70,000/- (RUPEES NINETEEN CRORES SEVEN TEEN LAKHS SEVENTY THOUSAND ONLY) TOWARDS INTEREST FREE REFUNDABLE DEPOSIT IN TERMS OF THIS AGREEMENT; 21. A PERUSAL OF THE AFORESAID CLAUSE WOULD CLEARL Y SHOW THAT A SUM OF RS.4 CRORES IS GIVEN AS REIMBURSEMENT AND THERE IS NOTHING ON RECORD TO SHOW THAT THIS SUM WAS REFUNDABLE BY THE ASSESSEE T O SOBHA DEVELOPERS. IT IS RIGHTLY TREATED AS INCOME OF THE ASSESSEE BY THE REVENUE AUTHORITIES. 22. THE LD. COUNSEL FOR THE ASSESSEE, HOWEVER, SOUG HT TO RELY ON A LETTER DATED 4.8.2007 BY SOBHA DEVELOPERS TO THE ASSESSEE WHEREBY THEY HAVE CONFIRMED AS FOLLOWS:- ITA NO.149 TO 151/BANG/2014 PAGE 15 OF 21 DEAR SIR, SUB: BALANCE CONFIRMATION AS ON 31-03-2007 WITH REFERENCE TO THE ABOVE SUBJECT, WE HAVE PAID A N AMOUNT OF RS.56,28,70,000 (RUPEES FIFTY SIX CRORES TWENTY EIG HT LAKHS SEVENTY THOUSAND ONLY) AS ON 31 ST MARCH 2007 TOWARDS REFUNDABLE DEPOSIT AND ADVANCE TOWARDS THE PROPERTY AS GIVEN B ELOW: SL NO. PROPERTY AMOUNT 1 MINERVA MILLS PROPERTY 24,60,00,000 2 ST MARKS PROPERTY 31,68,70,000 23. IT IS NOT CLEAR FROM THE AFORESAID LETTER AS TO WHETHER THE REFERENCE TO THE BALANCE CONFIRMED IS WITH REFERENCE TO RS.4 CRO RES WHICH THE AO HAS POINTED OUT IN THE ORDER OF ASSESSMENT. THEREFORE, THIS CONFIRMATION LETTER, IN OUR VIEW, CANNOT BE THE BASIS TO COME TO THE CON CLUSION THAT A SUM OF RS.4 CRORES WAS ALSO REFUNDABLE DEPOSIT BY THE ASSE SSEE TO SOBHA DEVELOPERS. IN THE ABSENCE OF THE CLEAR RECITALS I N THE SUPPLEMENTARY AGREEMENT DATED 27.1.2007, WE ARE OF THE VIEW THAT THE CONCLUSIONS OF THE REVENUE AUTHORITIES DO NOT CALL FOR ANY INTERFERENC E. 24. AS FAR AS THE EXPENDITURE IN CONNECTION WITH SU B-LEASE OF THE PROPERTY IN QUESTION IS CONCERNED, THOUGH IN GROUND NO.6, THE ASSESSEE HAS CHALLENGED THE ENTIRE ADDITION OF RS.34,85,870 BEFORE THE TRIBUNAL, THE LD. COUNSEL FOR THE ASSESSEE PRESSED FOR DELETION O F AN ADDITION OF RS.13 LAKHS AND ANOTHER ADDITION OF RS.13,90,000. WE WIL L DEAL WITH THESE ADDITIONS IN THE FOLLOWING PARAGRAPHS. ITA NO.149 TO 151/BANG/2014 PAGE 16 OF 21 25. EXPENDITURE OF RS.13 LAKHS : THE ASSESSEE CLAIMED THAT IT HAD PAID A SUM OF RS.13 LAKHS TO UNAUTHORIZED OCCUPANTS AND SLUM DWELLERS OF THE PROPERTY. THE ASSESSEE COULD NOT PRODUCE ANY EVIDE NCE IN THIS REGARD. THE LD. COUNSEL FOR THE ASSESSEE, HOWEVER, SOUGHT T O PLEAD BEFORE US THAT SUCH EXPENSES ARE ROUTINE IN PROPERTIES WHICH ARE E NCROACHED. ACCORDING TO HIM, IT IS ONLY BECAUSE OF THE ENCROACHMENT THAT THE ASSESSEE WAS ABLE TO GET LEASE OF THE PROPERTY FROM CHARITIES AND THE SE EXPENSES HAD TO BE NECESSARILY INCURRED BY THE ASSESSEE. WE ARE OF TH E VIEW THAT IN THE ABSENCE OF ANY SUPPORTING EVIDENCE, THE CLAIM OF TH E ASSESSEE WAS RIGHTLY REJECTED BY THE REVENUE AUTHORITIES. 26. FEASIBILITY STUDY REPORTS : RS.13,90,900 : THE ASSESSEE CLAIMED THAT IT HAD CARRIED OUT FEASIBILITY STUDY OF THE CO NSTRUCTION ON THE PROPERTY ACQUIRED ON LEASE BY ENGAGING SERVICES OF M/S. BERG ER DEVINE YAEGER INC. USA. THE ASSESSEE HAD TOTALLY PAID A SUM OF RS.17, 90,000. THE ASSESSEE COULD PRODUCE INVOICES FROM THE AFORESAID US COMPANY TO THE EXTENT OF US $ 10,000 AND TO THIS EXTENT, THE AO AL LOWED THE CLAIM OF THE ASSESSEE FOR EXPENSES. WITH REGARD TO THE REMAININ G PAYMENT, THE AO DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION FOR THE REASON THAT THE INVOICES RAISED BY M/S.BERGER DEVINE YAEGER INC., U SA HAD NOT BEEN FILED BY THE ASSESSEE TO PROVE THE NATURE OF PAYMENTS MAD E TO THE NON-RESIDENT. 27. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEFO RE US THAT IN RESPECT OF THE FURTHER PAYMENTS MADE TO THE NON-RESIDENT, T HE ASSESSEE HAD FILED ITA NO.149 TO 151/BANG/2014 PAGE 17 OF 21 CERTIFICATE OF CA OBTAINED AT THE TIME OF MAKING RE MITTANCES TO THE NON- RESIDENT AND THIS SHOULD BE SUFFICIENT TO SHOW THAT THE ASSESSEE ACTUALLY INCURRED THE EXPENSES. THE NON-RESIDENT WAS ENGAGE D FOR ARCHITECTURAL STUDY AND THE PAYMENT WAS ARCHITECTURAL FEE. BASED ON THE CERTIFICATE OF THE CA OBTAINED AT THE TIME OF MAKING REMITTANCES T O THE NON-RESIDENT AND THE OTHER SURROUNDING CIRCUMSTANCES, IT WAS SUBMITT ED THAT THE REVENUE AUTHORITIES OUGHT TO HAVE ALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION. 28. THE LD. DR RELIED ON THE ORDER OF THE REVENUE A UTHORITIES. 29. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. IT IS NOT IN DISPUTE THAT THE NON-RESIDENT WAS AN ARCHITE CT AND ENGAGED BY THE ASSESSEE FOR THE PURPOSE OF CARRYING OUT THE ARCHIT ECTURAL STUDY FOR DEVELOPMENT OF THE PROPERTY OBTAINED ON LEASE. A P AYMENT EQUIVALENT TO US $ 10,000 WAS ALLOWED BY THE AO AS THERE WAS A SU PPORTING INVOICE FROM THE NON-RESIDENT. A PERUSAL OF THE SAID INVOICE, A COPY OF WHICH IS PLACED AT PAGE 44 OF THE ASSESSEES PAPERBOOK SHOWS THAT PAYM ENT TO THE NON- RESIDENT IS THE FIRST INSTALMENT FOR ARCHITECTURAL FEE. LATER ON, THE ASSESSEE MADE THREE PAYMENTS TO THE NON-RESIDENT OF US $ 10, 000, US $ 7500 AND US $ 10,000 AS SECOND, THIRD AND FOURTH INSTALMENTS . WHILE MAKING REMITTANCES OF THESE PAYMENTS TO THE NON-RESIDENT, THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE AND IN THIS REGARD FILED A CER TIFICATE OF CA FOR NON- DEDUCTION OF TAX AT SOURCE. IN THIS CERTIFICATE, T HE FACT THAT THE PAYMENT WAS SECOND, THIRD AND FOURTH INSTALMENT HAS BEEN DULY R ECORDED. IT IS THEREFORE ITA NO.149 TO 151/BANG/2014 PAGE 18 OF 21 CLEAR THAT THE PAYMENT IN QUESTION WAS FOR ARCHITEC TURAL FEE AND HAD TO BE ALLOWED AS A DEDUCTION TO THE ASSESSEE. WE THEREFO RE HOLD THAT THE ASSESSEE BE ALLOWED A FURTHER DEDUCTION OF RS.13,90 ,900 AS EXPENDITURE IN THE MATTER OF DETERMINATION OF INCOME FROM SUCH LEA SE OF THE PROPERTY. WE HOLD AND DIRECT ACCORDINGLY. 30. THUS, ITA NO. 149/BANG/2014 IS PARTLY ALLOWED, WHILE ITA NO.150/BANG/2014 IS DISMISSED. ITA NO.151/BANG/2014 31. IN THE A.Y. 2010-11, THE ASSESSEE FILED A RETUR N OF INCOME U/S. 153A OF THE ACT DECLARING A TOTAL INCOME OF RS.1,71,57,6 16. THE AO PASSED AN ORDER OF ASSESSMENT DATED 19.3.2013 DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT RS.4,33,49,750. 32. AGGRIEVED BY THE ADDITIONS MADE BY THE AO IN TH E ORDER OF ASSESSMENT, THE ASSESSEE PREFERRED APPEAL BEFORE TH E CIT(A). 33. THE CIT(A) NOTICED THAT THE ASSESSEE HAD NOT PA ID THE TAXES DUE ON THE RETURNED INCOME AND THEREFORE INVOKING THE PROV ISIONS OF SECTION 249(4)(A) OF THE ACT, THE CIT(A) REFUSED TO ADMIT T HE APPEAL OF THE ASSESSEE FOR ADJUDICATION. THE PROVISIONS OF SECTI ON 249(4) READ AS FOLLOWS:- ITA NO.149 TO 151/BANG/2014 PAGE 19 OF 21 249. (1) EVERY APPEAL UNDER THIS CHAPTER SHALL BE IN TH E PRESCRIBED FORM AND SHALL BE VERIFIED IN THE PRESCR IBED MANNER [AND SHALL, IN CASE OF AN APPEAL MADE TO THE COMMIS SIONER (APPEALS) ON OR AFTER THE 1ST DAY OF OCTOBER, 1998, IRRESPECTIVE OF THE DATE OF INITIATION OF THE ASSESSMENT PROCEEDING S RELATING THERETO BE ACCOMPANIED BY A FEE OF, .. . [(4) NO APPEAL UNDER THIS CHAPTER SHALL BE ADMITTED UNLESS AT THE TIME OF FILING OF THE APPEAL, ( A ) WHERE A RETURN HAS BEEN FILED BY THE ASSESSEE, T HE ASSESSEE HAS PAID THE TAX DUE ON THE INCOME RETURNED BY HIM; OR ( B ) WHERE NO RETURN HAS BEEN FILED BY THE ASSESSEE, THE ASSESSEE HAS PAID AN AMOUNT EQUAL TO THE AMOUNT OF ADVANCE T AX WHICH WAS PAYABLE BY HIM: PROVIDED THAT, [IN A CASE FALLING UNDER CLAUSE ( B ) AND] ON AN APPLICATION MADE BY THE APPELLANT IN THIS BEHALF, T HE [COMMISSIONER (APPEALS)] MAY, FOR ANY GOOD AND SUFF ICIENT REASON TO BE RECORDED IN WRITING, EXEMPT HIM FROM T HE OPERATION OF THE PROVISIONS OF [THAT CLAUSE]. 34. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REL IED ON THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF D. KOMALAKSHI V. DCIT, 292 ITR 99 (KARN.) , WHEREIN THE HONBLE HIGH COURT HELD THAT IF THE ADMITTED TAXES ARE PAID, THEN THE APPEAL SHOULD BE ADMITTED FOR ADJUDICATION. THE LD. COUNSEL FOR THE ASSESSEE BRO UGHT TO OUR NOTICE THAT A SUM OF RS.52,28,419 WAS TAX DEDUCTED AT SOURCE. TH E ASSESSEE HAS MADE A FURTHER PAYMENT OF RS.12,68,858 AND FILED A COPY OF THE CHALLAN. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE TDS AND THE TAX ITA NO.149 TO 151/BANG/2014 PAGE 20 OF 21 PAID BY THE ASSESSEE (ON 24.6.2013) WOULD BE EQUAL TO THE TAX PAYABLE ON THE RETURNED INCOME AND THEREFORE THE APPEAL OF THE ASSESSEE SHOULD BE ADMITTED FOR ADJUDICATION BY THE CIT(APPEALS) AND T HE APPEALS DECIDED ON MERITS. 35. KEEPING IN VIEW THE DECISION OF THE HONBLE HIG H COURT OF KARNATAKA AND ALSO TAKING NOTE OF THE SUBSEQUENT PAYMENT OF T AXES ON THE RETURNED INCOME, WE ARE OF THE VIEW THAT THE ORDER OF THE CI T(APPEALS) SHOULD BE SET ASIDE AND HE BE DIRECTED TO ADMIT AND DECIDE THE AP PEAL ON MERITS. THE CIT(APPEALS) WILL, HOWEVER, VERIFY AS TO WHETHER TH E TDS AND THE TAX PAID WOULD BE SUFFICIENT COMPLIANCE OF THE PROVISIONS OF SECTION 249(4) OF THE ACT. WE HOLD AND DIRECT ACCORDINGLY. THUS, ITA NO .151/B/2014 IS ALLOWED. 36. IN THE RESULT, ITA NO.149/BANG/2014 IS PARTLY ALLOWED , ITA NO.150/BANG/2014 IS DISMISSED AND ITA NO.151/BANG/2014 IS ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF AUGUST , 2014 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 28 TH AUGUST , 2014 . /D S/ ITA NO.149 TO 151/BANG/2014 PAGE 21 OF 21 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.