M/s. B.N. Rathi Securities Ltd., Hyderabad V. Dy. CIT, Circle-1(3), Hyderabad

ITA 1494/HYD/2013

• Counselvise Citation: 149422514 RSA 2013
• Duration Of Justice: 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 11-11-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: V SIVA KUMAR
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Proportionate interest; Wholly owned subsidiary; Fair market value; Bad and doubtful debts
• Section: 50C; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.1494/HYD/2013 ASSESSMENT YEAR 2010-2011 M/S. BN RATHI SECURITIES LTD., HYDERABAD. PAN AABCB-6140-Q VS. DCIT, CIRCLE 1 (3) HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE MR. V. SIVA KUMAR FOR REVENUE MR. R. MOHAN REDDY DATE OF HEARING 30.06.2014 DATE OF PRONOUNCEMENT 27.08.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY ASSESSEE IS AGAINST THE ORDER OF CIT(A)-II, HYDERABAD DATED 28.08.2013 FOR THE A.Y. 2010-2011. ASSESSEE HAS RAISED 12 GROUNDS ON THREE ISSUES. 2. WE HAVE HEARD THE LD. COUNSEL AND LD. D.R. IN DETAIL AND PERUSED THE PAPER BOOK PLACED ON RECORD. 3. WITH RESPECT TO ISSUE OF SHORT TERM CAPITAL GA IN OF RS.32.73 LAKHS COVERED IN GROUND NOS. 2 TO 6, BRIEF LY STATED FACTS ARE ASSESSEE IS A DEALER IN SECURITIES, PURCH ASED LAND ADMEASURING 590 SQ. YARDS IN JUMERATH BAZAR OF HYDE RABAD ON 02.05.2007 FOR CONSIDERATION OF RS.43,52,000/-. THIS PROPERTY WAS SOLD ON 04.02.2010 FOR A CONSIDERATION OF RS.46,00,000/- AND THE RESULTANT GAIN WAS SHOWN UND ER THE 2 ITA.NO.1494/HYD/2013 M/S. BN RATHI SECURITIES LTD., HYDERABAD. HEAD OTHER INCOME IN THE P & L ACCOUNT OF THE ASS ESSEE COMPANY. A.O. NOTICED THAT THE PROPERTY WAS VALUED BY THE SUB REGISTRAR FOR REGISTRATION PURPOSE AT RS.77,74, 000/-. A.O. SHOW CAUSED WHY THE CAPITAL GAIN SHOULD NOT BE TAXE D ADOPTING THE SRO VALUE. IT WAS SUBMITTED BY THE ASS ESSEE THAT THE PROPERTY WAS HELD AS STOCK-IN-TRADE AND THEREFO RE, PROVISIONS OF SECTION 50C DOES NOT APPLY FOR TRANSA CTIONS OF STOCK-IN-TRADE. WITHOUT PREJUDICE ASSESSEE ALSO SUB MITTED THAT THERE IS NO SANCTITY FOR THE GUIDELINE VALUE ADOPTE D BY THE SUB REGISTRAR AND PROVISIONS OF SECTION 50C CANNOT BE A PPLIED. FURTHER, IT ALSO MADE ALTERNATE CONTENTION THAT THE GUIDELINE VALUE DOES NOT REPRESENT THE CORRECT MARKET VALUE F OR ASSESSMENT PURPOSES. A.O. HOWEVER, REJECTED THE ASS ESSEES CONTENTIONS AND HELD THAT THE PROPERTY WAS CAPITAL ASSET AND APPLIED PROVISIONS OF SECTION 50C AND BROUGHT TO TA X THE DIFFERENCE OF RS.32,72,800/- AS SHORT TERM CAPITAL GAIN AND TAXED ACCORDINGLY. 4. ASSESSEE REITERATED ITS SUBMISSIONS BEFORE THE LD. CIT(A). LD. CIT(A) OBSERVED THAT THOUGH THE MEMORAN DUM OF UNDERSTANDING AND ARTICLES OF ASSOCIATION OF THE CO MPANY INCLUDED PURCHASE AND SALE OF MOVABLE AND IMMOVABLE PROPERTIES, THE MAIN BUSINESS OF THE ASSESSEE WAS P URCHASE AND SALE OF SHARES. LD. CIT(A) HELD THAT THERE IS N O HISTORY OF FREQUENT BUYING AND SELLING OF IMMOVABLE PROPERTIES IN EARLIER YEARS AND AS SEEN FROM THE BALANCE SHEET THE PROPER TY WAS HELD AS FIXED ASSET AND NOT AS STOCK-IN-TRADE. FURT HER, CONSIDERING THAT ASSESSEE ITSELF DECLARED THE GAIN ON SALE OF THE IMPUGNED LAND UNDER THE HEAD CAPITAL GAINS IN THE COMPUTATION OF INCOME FILED ALONG WITH THE RETURN, LD. CIT(A) CONFIRMED THE ACTION OF THE A.O. 3 ITA.NO.1494/HYD/2013 M/S. BN RATHI SECURITIES LTD., HYDERABAD. 5. BEFORE US, IT WAS SUBMITTED THAT THE PROPERTY I N QUESTION WAS STOCK-IN-TRADE AND IN THE ALTERNATE AS SESSEE VIDE ITS LETTER DATED 04.01.2013 FILED BEFORE THE A.O. C LAIMED THAT THE VALUE ADOPTED BY THE STAMP VALUATION AUTHORITY EXCEEDS THE FAIR MARKET VALUE OF THE PROPERTY, THEREFORE, A .O. OUGHT TO HAVE REFERRED THE VALUATION OF THE IMPUGNED PROPERT Y TO VALUATION OFFICER AS LAID DOWN IN SECTION 50C(2). S INCE A.O. FAILED TO FOLLOW THE MANDATORY PROVISIONS OF SECTIO N 50C THE ADDITION MADE BY THE A.O. IS VITIATED. 6. CONSIDERING THE RIVAL CONTENTIONS AND PERUSING THE RECORD, WE AGREE WITH THE LD. CIT(A) ON THE ISSUE O F ASSET BEING CAPITAL ASSET. ASSESSEE HAS OFFERED THE INCOME UNDE R THE HEAD CAPITAL GAINS ONLY AND FURTHER IN THE P & L ACCOU NT ALSO THE INCOME WAS SHOWN AS OTHER INCOME BUT NOT AS BUSI NESS INCOME. MOREOVER, AS RIGHTLY POINTED OUT BY THE LD . CIT(A) THE PROPERTY IN QUESTION WAS SHOWN UNDER THE HEAD FIXE D ASSETS NOT AS STOCK-IN-TRADE. JUST BECAUSE A.O. ISSUED A SHOW CAUSE NOTICE FOR INVOKING THE PROVISIONS OF SECTION 50C, WE ARE OF THE OPINION THAT ASSESSEE CHANGED ITS STAND AND SOUGHT TO ESCAPE PROVISIONS OF SECTION 50C BY SUBMITTING THE PROPERT Y IN QUESTION WAS STOCK-IN-TRADE. SINCE THE RECORD INDIC ATES THAT THE PROPERTY WAS NOT TREATED AS STOCK-IN-TRADE, THI S ISSUE RAISED BY THE ASSESSEE CANNOT BE ACCEPTED. ORDER OF THE CIT(A) TO THAT EXTENT IS CONFIRMED. 6.1. HOWEVER, THE ALTERNATE CONTENTION OF THE ASSE SSEE REQUIRES CONSIDERATION. ASSESSEE DID IN FACT OBJECT TO THE VALUATION ADOPTED BY THE REGISTRATION AUTHORITIES B EFORE THE A.O. THE A.O. UNDER THE PROVISIONS OF SECTION 50C(2 ) SHOULD HAVE REFERED THE PROPERTY TO VALUATION OFFICER TO D ETERMINE THE MARKET VALUE. SINCE THIS EXERCISE WAS NOT UNDERTAKE N BY THE 4 ITA.NO.1494/HYD/2013 M/S. BN RATHI SECURITIES LTD., HYDERABAD. A.O. WE DIRECT THE A.O. TO REFER THE PROPERTY TO TH E VALUATION OFFICER AND RE-DETERMINE THE VALUE OF PROPERTY UNDE R THE PROVISIONS OF SECTION 50C. EVENTHOUGH ASSESSEE CONT ENDED THAT FAILURE TO FOLLOW THE PROVISIONS OF SECTION 50 C MAKES THE ADDITION VITIATED, WE ARE NOT IN AGREEMENT WITH THE ARGUMENT. IT IS ONLY A DEFECTIVE PROCEDURE ADOPTED BY THE A.O . THEREFORE, WE DEEM IT FIT TO SET ASIDE THE ISSUE TO THE FILE O F A.O. TO FOLLOW THE MANDATORY PROVISIONS OF SECTION 50C AND TO REFE R THE VALUATION OF THE PROPERTY TO VALUATION OFFICER AND THEN DECIDE THE ISSUE OF SHORT TERM CAPITAL GAIN. THEREFORE, GR OUND NOS. 2 TO 6 TO THAT EXTENT ARE ALLOWED. 7. THE NEXT ISSUE FOR CONSIDERATION IS ABOUT BAD DEBTS WRITTEN OFF TO AN EXTENT OF RS.3,33,775/- IN THE P & L ACCOUNT. A.O. HAS DISALLOWED THE AMOUNT ON THE REAS ON THAT THIS AMOUNT REPRESENT TREATING LOSSES OF ASSESSEES CLIENTS APPEARING IN THE BOOKS OF ASSESSEE COMPANY, BUT NOT THAT OF ASSESSEE. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT THESE BAD DEBTS ARISE IN THE COURSE OF TRADING ACTI VITY OF PURCHASE AND SALE OF SHARES. A.O. WAS OF THE OPINIO N THAT THIS LOSSES/BAD DEBTS PERTAIN TO CLIENTS AND DOES NOT PE RTAIN TO ASSESSEE COMPANY. 8. LD. CIT(A) ALSO CONFIRMED THAT PROVISIONS OF SE CTION 36(2) DOES NOT APPLY TO THE FACTS ON RECORD. ASSESS EE FURTHER SUBMITTED THAT THESE ARE BAD DEBTS AND IN FACT SOME AMOUNT RECOVERED FROM ONE MS. SANGEETA BHANDARI OF RS. 1 L AKH WAS OFFERED AS INCOME IN THE LATER YEAR. IN SPITE OF TH AT, LD. CIT(A) DID NOT ALLOW. 9. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE OPINION THAT BAD DEBTS CLAIMED IS TO BE ALLOWED AS SUCH. 5 ITA.NO.1494/HYD/2013 M/S. BN RATHI SECURITIES LTD., HYDERABAD. THIS ISSUE WAS CONSIDERED BY THE ITAT, SPECIAL BENC H AND FURTHER AS APPROVED BY THE HONBLE BOMBAY HIGH COUR T IN THE CASE OF CIT VS. SHREYS S. MORAKHIA (2012) 342 ITR 2 85 (BOM.) THE AMOUNT ARE ARISING OUT OF THE ASSESSEES BUSINE SS TRANSACTIONS THEREFORE, ALLOWABLE AS BAD DEBT/BUSIN ESS LOSS. THE SAME PROPOSITION WAS ALSO HELD BY THE HONBLE D ELHI HIGH COURT IN THE CASE OF CIT VS. BONANZA PORTFOLIO LTD. , (2010) 320 ITR 178 (DEL.). CONSIDERING THE PRINCIPLES OF LAW A ND THE FACT THAT THE AMOUNT HAS BECOME BAD IN THE COURSE OF ASS ESSEES TRADING ACTIVITY, WE DIRECT THE A.O. TO ALLOW THE A MOUNT. ASSESSEE MADE AN ALTERNATE SUBMISSION THAT IN CASE THE AMOUNT IS NOT ALLOWED AS BAD DEBT THE SAME SHOULD B E ALLOWED AS BUSINESS LOSS FOLLOWING THE PRINCIPLES LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HARSHAD J CHOKSI VS. CIT 349 ITR 250 (BOM.). SINCE THE AMOUNT IS ALL OWED AS BAD DEBT AS IT SATISFIES THE CONDITIONS UNDER SECTI ON 36(2), THERE IS NO NEED TO CONSIDER THE ALTERNATE CLAIM AS BUSINESS LOSS. A.O. IS DIRECTED TO ALLOW THE SAME AS CLAIMED . GROUND NOS. 7, 8 AND 9 RAISED IN THIS REGARD ARE ALLOWED. 10. WITH RESPECT TO ISSUE OF DISALLOWANCE UNDER SECTION 14A VIDE GROUNDS NO. 10 AND 11 OF RS.2,01,2 10/-, FACTS RELATING TO THE DISALLOWANCE WAS THAT ASSESSEE HAS INVESTED AN AMOUNT OF RS.99,99,800/- IN A 100% SUBSIDIARY OF AS SESSEE COMPANY NAMELY M/S. B.N. RATHI COMTRADE P. LTD., DU RING THE YEAR. ON THE REASON THAT THE DIVIDEND IF ANY, RECEI VED BY THE ASSESSEE FROM ITS SUBSIDIARY WOULD BE EXEMPT FROM T AX, A.O. INVOKED RULE 8D AND MADE DISALLOWANCE OF RS.2,01,21 0/- AS PER RULE 8D(2)(II) AND 8D(2)(III). IT WAS SUBMITTED BEFORE THE LD. CIT(A) THAT NO EXPENDITURE WAS INCURRED, NO DIVIDEN D WAS RECEIVED AND FURTHER THERE WAS NO BORROWED FUNDS WH ICH ARE 6 ITA.NO.1494/HYD/2013 M/S. BN RATHI SECURITIES LTD., HYDERABAD. INVESTED IN THE SUBSIDIARY COMPANY. SINCE THERE IS NO RELATIONSHIP BETWEEN EXPENDITURE INCURRED AND EXEMP T INCOME IF ANY, NO DISALLOWANCE WAS REQUIRED TO BE MADE HO WEVER, LD. CIT(A) DID NOT ACCEPT ASSESSEES CONTENTION AND CON FIRMED THE DISALLOWANCE. IT WAS THE SUBMISSION OF LD. COUNSEL THAT THERE IS NO INCOME RECEIVED DURING THE YEAR WHICH WAS CLA IMED EXEMPT. ACCORDINGLY, ON THE PRINCIPLES LAID DOWN BY THE HONBLE HIGH COURT OF GUJRAT IN THE CASE OF CIT VS. CORRTECH ENERGY P. LTD. 45 TAXMANN.COM 116 (GUJ.), THERE MAY NOT BE ANY DISALLOWANCE IF ASSESSEE DID NOT MAKE ANY CLAIM OF EXEMPTION OF ANY INCOME FROM PAYMENT OF TAX. 11. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE AR E OF THE VIEW THAT THIS ISSUE REQUIRES RE-EXAMINATION. O N SEEING THE DETAILS OF INTEREST PAID PLACED IN LEDGER ACCOUNT I N THE PAPER BOOK, WE ARE OF THE OPINION THAT INTEREST PAYMENT R EQUIRES EXAMINATION WHETHER THERE ARE ANY BORROWALS FOR THE PURPOSE OF INVESTMENT IN THE SUBSIDIARY. IF THERE ARE ANY B ORROWALS, PROPORTIONATE INTEREST REQUIRES TO BE DISALLOWED. A S SEEN THERE SEEMS TO BE A SHORT PERIOD OF OVERDRAFT AVAILED BY THE ASSESSEE FOR INVESTMENT IN SUBSIDIARY AS EXPLAINED IN THE CO URSE OF ARGUMENTS. THEREFORE, WHETHER ANY INTEREST WAS PAID ON THE BORROWED AMOUNTS FOR INVESTMENT, REQUIRES TO BE EXA MINED AND IF SO, WHETHER PROVISIONS OF SECTION 36(1)(III) / 14A WILL APPLY REQUIRES RE-EXAMINATION. MOREOVER, ASSESSEE A LSO HAS SPENT SOME AMOUNT FOR INVESTMENT IN THE SUBSIDIARY COMPANY AS CAN BE SEEN FROM THE NOTES TO THE ACCOUNTS WHICH INDICATED THAT PRELIMINARY EXPENSES OF RS.76,236/- AND EXPENS ES OF RS.75,000/- WERE INCURRED IN CONNECTION WITH INCREA SE IN AUTHORISED CAPITAL AND WERE DEBITED TO P & L ACCOUN T. IN VIEW OF THESE FACTS, SINCE A.O. SIMPLY INVOKED RULE 8D W ITHOUT 7 ITA.NO.1494/HYD/2013 M/S. BN RATHI SECURITIES LTD., HYDERABAD. EXAMINATION OF FACTS, WE CANNOT UPHOLD THE DISALLOW ANCE SO MADE. A.O. IS DIRECTED TO EXAMINE THE FACTS AND DIS ALLOW THE INTEREST AND OTHER EXPENDITURE IF ANY, AS REQUIRED UNDER THE PROVISIONS. WITH REFERENCE TO DISALLOWANCE UNDER SE CTION 14A ALSO, A.O. IS DIRECTED TO EXAMINE WHETHER PROVISION S OF SECTION 14A CAN BE INVOKED ON THE FACTS OF THE CASE. FOR TH IS PURPOSE, SINCE ISSUE IN GROUND 2 TO 6 IS RESTORED TO THE FIL E OF A.O., THIS ISSUE ALSO WAS DIRECTED TO BE RE-EXAMINED FOR WHICH , ORDERS OF THE A.O. AND LD. CIT(A) ARE SET ASIDE AND GROUNDS A RE ALLOWED FOR STATISTICAL PURPOSES. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27.08.2014. SD/- SD/- (SAKTIJIT DEY) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 27 TH AUGUST, 2014. VBP/- COPY TO 1. M/S. BN RATHI SECURITIES LTD., D.NO.6-3-352, KA UTILYA, AMRUTHA ESTATES, SOMAJIGUDA, HYDERABAD. 2. DCIT, CIRCLE 1(3), AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD 500 004. 3. CIT(A)-II, HYDERABAD 4. CIT-I, HYDERABAD 5. D.R. ITAT A BENCH, HYDERABAD.