Chaitanya Builders & Leasing (P) Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1595/CHNY/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7862 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-03-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-12-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 10-07-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN IRS
• Assessee Lawyers: T N SEETHARAMAN
• Keywords: Depreciation; Opportunity of being heard; Fair market value
• Section: 14A; 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , ! . ! ' # , $ #% BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO.1595/MDS/2015 $ & !'& / ASSESSMENT YEAR : 2008-09 CHAITANYA BUILDERS & LEASING (P) LTD, C/O. T.N. SEETHARAMAN, ADVOCATE NO.384, OLD NO.196, LLOYDS ROAD, CHENNAI 600 086 VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(3) CHENNAI. [PAN AAACC 1338E] ( / APPELLANT) ( /RESPONDENT) () * + / APPELLANT BY : SHRI. T.N. SEETHARAMAN, ADV. ,-() * + /RESPONDENT BY : SHRI. P. RADHAKRISHNAN, IRS, JCIT. ' ! * . / DATE OF HEARING : 14-12-2015 /0' * . / DATE OF PRONOUNCEMENT : 08-03-2016 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THE ASSESSEE FILED AN APPEAL AGAINST ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-1, CHENNAI IN ITA NO.284/2010-11/A-I, DT. 29.05.2015 FOR THE ASSESSME NT YEAR 2008- ITA NO.1595/MDS/2015 :- 2 -: 2009 PASSED U/S.143(3) AND 250 OF THE INCOME TAX A CT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT). 2. THE ASSESSEE HAS RAISED THREE SUBSTANTIVE GROUNDS (I) DISALLOWANCE INVOKING PROVISIONS U/S. 14A R.W.R.8D (II) COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE FIN DINGS OF THE ASSESSING OFFICER AS DIRECTOR PERSONAL EXPENDITURE IN DISALLOWING ;54,33,987/- (III) COMMISSIONER OF INCOME TAX (APPE ALS) ERRED IN CONFIRMING THE DIFFERENCE IN THE COST OF ALLOTMENT OF THE FLAT TO THE DIRECTORS ;16,30,050/- U/SEC. 37(1) OF THE ACT. 3. THE BRIEF FACTS OF THE CASE, THE ASSESSEE IS IN TH E BUSINESS OF CONSTRUCTION OF REAL ESTATE AND COMMERCIAL BUILD INGS FILED RETURN OF INCOME ON 05.01.2009 WITH TOTAL INCOME OF ;19,36,81 9/-. SUBSEQUENTLY, THE CASE WAS TAKEN UP FOR SCRUTINY. IN COMPLIANCE TO NOTICE, THE ASSESSEE FURNISHED STATEMENTS, AUDITED REPORT, COPY OF THE INCOME TAX RETURN FILED AND LD. ASSESSING OFFICER ISSUED QUESTIONNAIRE ALONGWITH NOTICE U/S.143(2) OF THE ACT. THE LD. AUT HORISED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND SUBMITTED RELEVANT DOCUMENTS ALONGWITH BOOKS OF ACC OUNTS AND RECORDS FOR VERIFICATION. THE ASSESSING OFFICER O N VERIFICATION OF THE FINANCIAL STATEMENT FOUND THAT ASSESSEE COMPANY HAS RECEIVED ;25,72,756/- AS DIVIDEND AND CLAIMED EXEMPTION U/S. 10(34) OF THE ACT ITA NO.1595/MDS/2015 :- 3 -: AND ALSO RECEIVED SHARE OF PROFIT FROM THE FIRM ;85 ,98,768/- AND CLAIMED EXEMPT U/S.10(2A) OF THE ACT. THE ASSESSIN G OFFICER NOTICED THAT ASSESSEE COMPANY HAS LOAN BEARING FUNDS OF ;3 ,86,38,759/- AND MADE INVESTMENTS ;17,63,52,362/-. THE FUNDS OF THE COMPANY HAVE BEEN UTILIZED FOR MAKING INVESTMENTS SINCE MAJOR PO RTION OF THE SOURCE BEING LOAN BEARINGS FUNDS. THE ASSESSING OFFICER F OUND INTEREST EXPENDITURE WAS INCURRED FOR EARNING EXEMPTED INCOM E AND PROPORTIONATE COST OF INTEREST IS TO BE TREATED AS INDIRECT EXPENDITURE AND RELIED ON THE DECISION OF DELHI TRIBUNAL IN ESCORTS LTD. VS. ACIT 102 TTJ 522 AND ALSO KERALA HIGH COURT DECISION OF SMT. LEENA RAMACHANDRAN AND CONCLUDED THAT PROVISIONS OF SECTION 14A SHALL APPLY AND FURTHER ON PERUSAL OF THE PROFIT AND LOS S ACCOUNT , THE ASSESSING OFFICER FOUND AN INTEREST OF ;95,75,865/- ATTRIBUTABLE AND APPLIED RULE 8D PROVISIONS WITH THREE LIMBS AND CAL CULATED DISALLOWANCE OF ;15,21,944/-. THE ASSESSING OFFICE R HAS NOT CONSIDERED THE CONTENTIONS OF THE ASSESSEE THAT RUL E 8D HAS COME INTO EFFECT FROM 23.03.2008 AND APPLICABLE FROM ASSESSME NT YEAR 2009- 2010 AND LD. ASSESSING OFFICER RELIED ON DECISION O F MUMBAI HIGH COURT IN THE CASE OF M/S. GODREJ & BOYCE LTD WHERE THE PROVISIONS ARE ENFORCEABLE FROM ASSESSMENT YEAR 2008-09. AGGRIE VED BY THE ABOVE ADDITION, THE ASSESSEE FILED AN APPEAL BEFORE THE C OMMISSIONER OF INCOME TAX (APPEALS). ITA NO.1595/MDS/2015 :- 4 -: 4. IN THE APPELLATE PROCEEDINGS, THE LD. AUTHORISED REPRESENTATIVE REITERATED SUBMISSIONS MADE BEFORE T HE ASSESSING OFFICER. THE ASSESSEE HAS CHALLENGED THE VALIDITY OF APPLICATION OF RULE 8D AS THE AMENDMENT OF RULES EFFECTIVE FROM 24.03.2008 AND SHALL NOT BE APPLICABLE FOR THE ASSESSMENT YEAR AND DISALLOWANCE UNDER SEC. 14A R.W. RULE 8D IS INCORRECT AND EXCESSIVE ON COMPARISON WITH THE ACTUAL RECEIPT OF DIVIDEND INCOME. THE LD. COM MISSIONER OF INCOME TAX (APPEALS) BASED ON THE OBSERVATIONS OF THE ASSESSING OFFICER AND WRITTEN SUBMISSIONS AND EXPLANATIONS ON INVESTMENTS AND LIABILITIES AS PER BALANCE SHEET FOUND THAT THE ASSESSING OFFICER HAS MADE DISALLOWANCE BY INVOKING RULE 8D(2) AND RELI ED ON THE DECISION OF JURISDICTIONAL HIGH COURT AND COMPARED THE SHA RE CAPITAL, RESERVE AND SURPLUS AND CURRENT LIABILITIES AND SECURED LOA NS. THE COMMISSIONER OF INCOME TAX (APPEALS) ASSUMED THAT A SSESSEE IS NOT HAVING SUFFICIENT FUNDS GENERATED FROM OWN SOURCE A ND ALSO RELIED ON THE JUDICIAL DECISIONS AND DISTINGUISHED FACTS AND CONFIRMED THE ADDITION. AGGRIEVED BY THE ORDER OF THE COMMISSION ER OF INCOME TAX (APPEALS), THE ASSESSEE HAS ASSAILED AN APPEAL BEF ORE TRIBUNAL 5. BEFORE US, THE LD. AUTHORISED REPRESENTATIVE REITER ATED HIS SUBMISSIONS MADE BEFORE ASSESSING OFFICER AND COMMI SSIONER OF INCOME TAX (APPEALS) IN THE APPELLATE PROCEEDINGS S UPPORTING HIS ITA NO.1595/MDS/2015 :- 5 -: ARGUMENTS WITH THE GROUNDS AND JUDICIAL DECISIONS. THE LD. AUTHORISED REPRESENTATIVE ARGUED THAT COMMISSIONER OF INCOME T AX (APPEALS) HAS TAKEN A DIFFERENT VIEW, AS THE ENTIRE INVESTME NT ARE FROM INTEREST FREE FUNDS AND NO EXPENDITURE WAS INCURRED IN RELAT ION TO INVESTMENTS FOR APPLICABILITY OF PROVISIONS OF SEC. 14A. THE PROVISIONS OF RULE 8D ARE NOTIFIED FROM 24.03.2008 AND DOES NOT APPLY FOR PREVIOUS YEAR 01.04.2007 TO 23.03.2008 AND SUPPORTED HIS SUBMISSI ONS WITH THE DECISION OF DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENTS LTD VS. CIT (2012) 347 ITR 272 AND CO-ORDINATE BENCH DECISION IN THE CASE OF TVS INVESTMENTS LTD VS. ACIT, IN ITA NO.1609/MDS/20 12 APPLICABLE FOR ASSESSMENT YEAR 2008-09. THE LD. COMMISSIONER OF I NCOME TAX (APPEALS) RELIED ON THE JURISDICTIONAL HIGH COURT D ECISION IN THE CASE OF BEACH MINERALS COMPANY PVT. LTD IN T.C.(APPEAL) NO. 681 OF 2013, DATED 02.12.2013 ON DIFFERENT SET OF FACTS. THE LD. AUTHORISED REPRESENTATIVE DISTINGUISHED THE FINDINGS OF THE C OMMISSIONER OF INCOME TAX (APPEALS) AND DOES NOT HAVE IMPACT ON F INANCIAL STATEMENTS OF THE COMPANY AND PRAYED FOR DELETION O F DISALLOWANCE U/S.14A OF THE ACT. 6. CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDERS OF THE LOWER AUTHORITIES AND VEHEMENTLY ARGU ED THAT THE PROVISIONS ARE APPLICABLE FOR THIS ASSESSMENT YEAR AND DECISIONS RELIED ITA NO.1595/MDS/2015 :- 6 -: BY THE COMMISSIONER OF INCOME TAX (APPEALS) ARE DI RECTLY ON THE ISSUE AND APPEAL OF THE ASSESSEE BE DISMISSED. 7. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIA L ON RECORD, JUDICIAL DECISIONS AND PROVISIONS OF FINANC E ACT. THE LD. AUTHORISED REPRESENTATIVE REITERATED HIS SUBMISSION S NON APPLICABILITY OF PROVISIONS OF RULE 8D AND WAS IMPLEMENTED ON FRO M 24.03.2008. THE ASSESSEE COMPANY IS HAVING ADEQUATE FUNDS GENER ATED THROUGH OWN SOURCES AND NO EXPENDITURE WAS INCURRED FOR EAR NING EXEMPTED INCOME. THE ASSESSING OFFICER APPLIED THE PROVISIO NS OF RULE 8D (2) AND CALCULATED THE DISALLOWANCE. AS PER FINANCE AC T 2008, DISALLOWANCE UNDER RULE 8D HAS TO BE CONSIDERED FR OM 24.03.2008 TO 31.03.2008 AND WAS HELD BY THE HIGH COURTS AND CO -ORDINATE BENCH OF THE TRIBUNAL IN TVS INVESTMENTS LTD (SUPRA) WER E THE SAME SHALL NOT APPLY. WE FOUND THERE IS A NEXUS OF THE EXP ENDITURE AND DIVIDEND INCOME EARNED AND THE DISALLOWANCE U/S.14A OF THE ACT SHALL BE APPLICABLE. WE RELY ON THE JURISDICTIONAL HIGH C OURT DECISION OF SIMPSON AND CO. LTD VS. DCIT IN TAX T.C.(A) NO.2621 OF 2006 DATED 15.10.2012 WERE HELD TO DISALLOW 2% OF EXEMPTED INCOME AS DISALLOWANCE U/S.14A OF THE ACT. ACCORDINGLY BY AP PLYING RATIO, WE DIRECT THE ASSESSING OFFICER TO DISALLOW 2% OF EXEM PTED INCOME AS ITA NO.1595/MDS/2015 :- 7 -: DISALLOWANCE U/S. 14 R.W.R.8D AND PARTLY ALLOW THE GROUND OF THE ASSESSEE. 8. THE SECOND GROUND BEING THE ASSESSEE ENTERED INTO P ROJECT EXOTICA FOR DEVELOPMENT ON VENKATANARAYANA ROAD, CHENNAI. THE DIRECTORS OF THE COMPANY SHRI. VASANTHA KUMAR REDDY , SURESH KUMAR REDDY, HARI KUMAR REDDY HAVE BROUGHT FIFTH AND SIXT H FLOORS OF THE PROPOSED BUILDING @ ;3,300/- PER. SQ.FT, WHILE SEVE NTH FLOOR IS SIMILAR AREA WAS SOLD FOR ;5,000 PER SQ.FT. THE LD. ASSESS ING OFFICER FOUND THAT CUSTOMERS OF THE PROJECT HAVE PAID SUBSTANTIA L AMOUNT AS CONSIDERATION. BUT THE DIRECTORS HAVE PAID ONLY MEA GRE AMOUNT TOWARDS PURCHASE OF PROPERTIES AND FOUND FALL IN PR OFITS DURING THE YEAR ARE DUE TO DIRECTORS HOLDING THE FLATS AT COST MUCH LESS THAN ACTUAL COST. SUBSEQUENTLY TWO DIRECTORS SHRI. SURESH KUMA R REDDY AND HARI KUMAR REDDY HAVE CANCELLED THEIR PURCHASE IN THE PR OJECT WERE AS DIRECTOR SHRI VASANTHA KUMAR REDDY CONTINUED WITH THE PROJECT OF FLAT. THE LD. ASSESSING OFFICER ON PERUSAL OF STATE MENT OF PROJECT COST OF EXOTICA FOUND THE TOTAL PROJECT COST WORKED OU T BE ;12,37,27,052/- FOR CONSTRUCTION OF BUILT UP AREA OF 37,646 SQ.FT A ND THE COST OF CONSTRUCTION WORKED OUT TO ;3,120/- PER SQ.FT AND A LSO FOUND THAT AREA ALLOTTED TO DIRECTOR SHRI. VASANTHA KUMAR REDDY BE ING BUILT UP AREA OF 3656 SQ.FT AMOUNTING ;59,72,733/- AND COST PER SQ.F T BEING ;1,633/-. ITA NO.1595/MDS/2015 :- 8 -: THE LD. ASSESSING OFFICER CALCULATED THAT COMPANY HAS SPENT ADDITIONAL ;1486 PER SQ.FT TOWARDS AREA ALLOTTED TO THE DIRECT OR AND SUCH EXTRA EXPENDITURE IS OF PERSONAL NATURE FOR THE AREA ALLO TTED TO SHRI. VASANTHA KUMAR REDDY AND CALCULATED ;54,33,987/- AS SUCH EXPENDITURE CANNOT BE ALLOWED U/S.37(1) OF THE ACT. THE ASSESSEE COMPANY DUE TO FALL IN REAL ESTATE MARKET WAS NOT I N A POSITION TO ABSORB LOSSES AND ENTERED INTO ADDITIONAL SUPPLEMEN TARY AGREEMENT ON 16.11.2009 WITH DIRECTOR SHRI. VASANTHA KUMAR REDD Y TOWARDS ADDITIONAL AMOUNT OF ;67,02,000/- FOR ALLOTMENT OF COMMERCIAL SPACE IN EXOTICA. THE AMOUNT IS IN ADDITION TO THE EAR LIER AMOUNT OF ;59,72,733/- ALLOTTED TO THE DIRECTOR ON CONSTRUCTI ON AGREEMENT DATED 23.11.2006. THE DISPUTED ISSUE BEFORE ASSESSING OFF ICER THAT ADDITIONAL EXPENDITURE WAS INCURRED BY THE COMPANY ON ALLOTMEN T AREA OF DIRECTOR WAS COMPENSATED AND OFFERED TO TAX IN THE ASSESSMENT YEAR 2010-2011. THE SUPPLEMENTARY AGREEMENT WAS ENTERED ON 23.11.2009 AND RECOGNISED AS REVENUE. THE CONTENTI ON OF LD. ASSESSING OFFICER AS CONSIDERATION PAID IN SUPPLEME NTARY AGREEMENT HAS TO BE CONSIDERED AS INCOME IN THE ASSESSMENT YE AR 2008-09 AND AS THE ASSESSEE IS FOLLOWING PERCENTAGE METHOD OF C ONSTRUCTION AND ACCOUNTING STANDARDS OF ICAI. THE ASSESSING OFFI CER ON SUBMISSIONS OF THE ASSESSEE ON THE REVENUE RECOGNITION HAS NOT ACCEPTED THE EXPLANATIONS OF OFFERING INCOME IN ASSESSMENT YEAR 2010-2011 AND ITA NO.1595/MDS/2015 :- 9 -: DISALLOWED A SUM OF ;54,33,987/- PERTAINING TO DIFF ERENTIAL COST IN CONSTRUCTION INCURRED BY THE ASSESSEE COMPANY. AG GRIEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE FILED AN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). 9. IN THE APPELLATE PROCEEDINGS, THE COMMISSIONER OF I NCOME TAX (APPEALS) ON PERUSAL OF THE GROUNDS AND FINDING S OF THE ASSESSING OFFICER DEALT IN DETAIL ON THE APPLICABILITY OF PRO VISIONS OF SEC. 40A(2) AND SEC. 37(1) OF THE ACT. THE LD. AUTHORISED REP RESENTATIVE OF ASSESSEE SUBMITTED LETTER DATED 10.08.2010, EXPLAIN ING TRANSACTION COULD NOT BE BROUGHT TO TAX UNDER THE PROVISIONS OF SEC.40A(2) OF THE ACT. THE LD ASSESSING OFFICER HAS MISCONCEIVED THE FACTS AS THE ASSESSEE COMPANY ENTERED INTO SUPPLEMENTARY AGREEM ENT ON 16.11.2009 WITH SHRI. VASANTHA KUMAR REDDY WHO AGRE ED TO PAY ADDITIONAL AMOUNT OF ;67,00,200/- TOWARDS ALLOTMENT OF COMMERCIAL SPACE MEASURING 3633 SQ.FT ON THE 6 TH FLOOR INSTEAD OF 3656 SQ.FT ON THE 5 TH FLOOR AS PER THE BUILDERS AGREEMENT DATED 23.11.20 06 IN BUILDING AND ASSESSEE COMPANY HAS OFFERED ;67,00 ,200/- IN THE ASSESSMENT YEAR 2010-2011 AND TOTAL CONSIDERATION R ECEIVED FROM SHRI. VASANTHA KUMAR REDDY AGGREGATING TO ;1,26,72,933/- . THE CONTENTION OF THE ASSESSING OFFICER BEING THE AMOUNT PAID AS PER SUPPLEMENTARY AGREEMENT SHOULD BE BROUGHT TO TAX IN THE ASSESSMEN T YEAR 2008-09. ITA NO.1595/MDS/2015 :- 10 -: THE LD. COMMISSIONER OF INCOME TAX (APPEALS) OBSERV ED THE FINDINGS AND EXPLANATIONS AND DISMISSED THE GROUND AS UNDER :- I HAVE GONE THROUGH THE FACTS AND CIRCUMSTANCES O F THE CASE. FROM THE FACTS IT IS NOTICED THAT THE APPELLA NT HAS SOLD THE PROPERTY TO ONE OF ITS DIRECTORS SHRI VASA NTHA KUMAR REDDY @ RS.3,300 PER SFT IN 5 TH FLOOR WHEN SIMILAR AREA IN 7TH FLOOR WAS SOLD AT RS.5,000 PER SFT TO OUTSIDERS. WHEN THE COST OF CONSTRUCTION TO THE APPELLANT IS RS . 3 , 120/- AS PER ITS OWN ACCOUNTS, THE AREA OF 3,656 SFT SOLD TO SHRI REDDY SHOULD FETCH ATLEAS T RS.1,14,06,720, WHEREAS THE AMOUNT PAID BY SHRI RED DY IS ONLY RS . 59 , 22 , 733/- . THEREFORE, THE DIFFERENCE OF AMOUNT OF RS . 54,33,987 IS AN ADDITIONAL COST WHICH WAS INCURRED BY THE COMPANY ON BEHALF OF SHRI. REDDY. IN OTHER WORDS, THE FLAT WAS SOLD BY THE APPELLANT TO SHRI. REDDY, THE DIRECTOR FOR THE PRICE WHICH IS LESS THA N FAIR MARKET VALUE THEREBY ATTRACTING THE PROVISIONS OF SE.40A(2). I FULLY AGREE WITH THE CONCLUSIONS ARRI VED AT BY THE ASSESSING OFFICER AND CONFIRM THE ADDITION. THE GROUND IS DISMISSED. AGGRIEVED BY THE ORDER OF THE COMMISSIONER OF INCOM E TAX (APPEALS), THE ASSESSEE ASSAILED AN APPEAL BEFORE THE TRIBUNAL . 10. BEFORE US, THE LD. AUTHORISED REPRESENTATIVE REITER ATED THE SUBMISSIONS MADE IN ASSESSMENT PROCEEDINGS AND CO MMISSIONER OF INCOME TAX (APPEALS) ON THE ACTION OF THE ASSESSING OFFICER DISALLOWING ;54,33,987/- AS PERSONAL EXPENDITURE OF THE DIRECTOR. THE DIFFERENCE AMOUNT IS ONLY NOTIONAL AMOUNT CALCULATE D BY THE ASSESSING OFFICER WITHOUT CONSIDERING BASIC FACTS OF AGREEMEN T ENTERED IN 2006 AND A SUPPLEMENTARY AGREEMENT DATED 16.11.2009. T HE LD.CIT(A) HAS ITA NO.1595/MDS/2015 :- 11 -: NOT DISPUTED THE DIRECTOR SHRI. VASANTHA KUMAR REDD Y ALLOTMENT WHO ENTERED INTO AGREEMENT ON 23.11.206 FOR THE BUILT U P AREA 3656 SQ.FT ON THE FIFTH FLOOR EXOTICA FOR AGREED CONSIDERA TION OF ;59,72,733/- BUT DUE TO CHANGE OF FLOOR SUPPLEMENTARY AGREEMENT DATED 16.11.2009 WAS ENTERED BY THE DIRECTOR FOR AREA 363 3 SQ.FT IN THE SIXTH FLOOR AND PAID ADDITIONAL SUM OF ;67,00,200/- WHICH WAS OFFERED TO TAX IN ASSESSMENT YEAR 2010-2011. THE ADDITIONAL CONSI DERATION PAID BY THE DIRECTOR IS HIGHER THAN THE DISALLOWANCE PROPOS ED BY THE ASSESSING OFFICER. THE FACTS ARE THAT THE AGREEMENT WAS ENTE RED IN THE YEAR 2006 FOR THE CONSIDERATION AND DUE TO CHANGE IN REA L ESTATE MARKET ANOTHER SUPPLEMENTARY AGREEMENT WAS ENTERED FOR ADD ITIONAL SPACE ON SIXTH FLOOR AND THE AMOUNT PAID TOWARDS THE 5TH FLOOR AREA IS TREATED AS ADVANCE. THE ALTERNATIVE CONTENTION BEIN G SINCE THE SUPPLEMENTARY AGREEMENT WAS ENTERED FOR DIFFERENT A REA IN THE SAME BUILDING AND INCOME SHOULD BE OFFERED IN TOTALITY I N ASSESSMENT YEAR 2010-2011. THE LD. AUTHORISED REPRESENTATIVE DREW ATTENTION TO THE PAPER BOOK WITH AGREEMENTS ENTERED WITH SHRI. VASAN THA KUMAR REDDY ON 23.11.2006 AND SUPPLEMENTARY AGREEMENT DATED 16 .11.2009 AND PRAYED FOR DELETING THE ADDITION AS INCOME HAS BEE N RECONCILED AND OFFERED TO TAX. ITA NO.1595/MDS/2015 :- 12 -: 11. CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE RELIE D ON THE FINDINGS OF ASSESSING OFFICER AND ORDER OF THE COMM ISSIONER OF INCOME TAX (APPEALS) AND OPPOSED THE GROUNDS. 12. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIA L ON RECORD, JUDICIAL DECISIONS AND AGREEMENTS SUBMITTED IN THE COURSE OF HEARING. THE LD. AUTHORISED REPRESENTATIVE CONTENTI ON BEING DUE TO CHANGE OF ALLOTMENT SPACE THE AMOUNT RECEIVED BY AG REEMENT DATED 23.11.2006 IS SUPPLEMENTED BY SECOND AGREEMENT DATE D 16.11.2009 AND TOTAL CONSIDERATION PAID BY THE DIRECTOR IS ;1, 26,72,933/-, WHICH IS IN CONTINUATION OF AGREEMENT ENTERED WITH THE COMPA NY THOUGH THE ALLOTMENT OF SPACE OF 5 TH FLOOR WAS CANCELLED AND ADDITIONAL AMOUNT RECEIVED FOR ALLOTMENT IN 6 TH FLOOR WAS OFFERED TO TAX IN ASSESSMENT YEAR 2010-2011. THE CONTENTION OF THE ASSESSING OF FICER THAT THE ASSESSEE COMPANY HAS PROVIDED CONCESSIONAL CONSTRU CTION COST TO THE DIRECTORS AND TREATED THE DIFFERENCE OF ;54,33,987/ - AS PERSONAL EXPENDITURE INCURRED ON BEHALF OF THE DIRECTOR BUT THE SAME CANNOT BE CONSIDERED IN LIEU OF CHANGE IN TERMS OF AGREEMENT AND ADDITIONAL AMOUNT PAID IS MORE THAN THE ADDITION PROPOSED BY T HE ASSESSING OFFICER. THE LD. AUTHORISED REPRESENTATIVE DEMONST RATED ON TERMS OF AGREEMENT ENTERED ON BOTH THE DATES AND WE FOUND AT PAGE 49 & 50 OF PAPER BOOK THE AMOUNT PAID BY THE DIRECTOR IN A DDITION TO THE ITA NO.1595/MDS/2015 :- 13 -: AMOUNT STIPULATED IN BUILDERS AGREEMENT ON 23.11.20 06 AND ALSO AS PER CLAUSE 06 AT PAGE 50 AS UNDER:- 06. EXCEPT THE AFORESAID CHANGES, ALL THE OTHER TERMS AND CONDITIONS IN THE AFORESAID BUILDERS AGREEMENT DATED 23.11.2006 STAND UNALTERED . WE ARE OF THE OPINION THAT MATTER HAS TO BE RE-EXAM INED BY THE ASSESSING OFFICER TAKING INTO CONSIDERATION THE TER M OF AGREEMENT ENTERED IN TWO DIFFERENT FINANCIAL YEARS AND THE AS SESSEE COMPANY COULD NOT EXPLAIN ACTUAL RECEIPT OF CONSIDERATION F ROM DIRECTOR AS PER AGREEMENT IN THE RELEVANT ASSESSMENT YEAR. THEREFO RE, WE REMIT THE ISSUE IN DISPUTE TO THE FILE OF THE ASSESSING OFFIC ER AND ASSESSING OFFICER SHALL PROVIDE ADEQUATE OPPORTUNITY OF BEING HEARD BEFORE PASSING THE ORDERS. THE GROUND OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 13. THE LAST GROUND RAISED BY THE ASSESSEE BEING DISALL OWANCE U/S.37(1) OF THE ACT. THE LD. ASSESSING OFFICER ON VERIFICATION OF AGREEMENT EXECUTED BY THE ASSESSEE COMPANY JOINT VENTURE PROJECT AT ROYAPETTAH HIGH ROAD TO CONSTRUCT 12,498 SQ.FT, HE FOUND THAT DIRECTORS OF THE COMPANY ARE ALLOTTED APARTMENT NOS .40S-1 AND 40S-2 EACH MEASURING 3,003 SQ.FT AND THE BALANCE AREA OF THE PROJECT OF 6,492 SQ.FT WAS SOLD TO MARINE CONTAINER SERVICES S OUTH P. LTD FOR A CONSIDERATION OF ;.3,73,29,000/- AND PER SQ.FT WOR KED OUT ;5,750/- WHEREAS THE DIRECTORS WERE ALLOTTED AT ;3,150/- PER SQ.FT. THE LD. ITA NO.1595/MDS/2015 :- 14 -: AUTHORISED REPRESENTATIVE SUBMITTED THAT THE DIRECT OR WERE ALLOTTED SPACE ON 23.11.2006 WHEREAS THE OUTSIDE PARTY PURCH ASED ON 5.10.2007. THE INCREASE IN RATE IS DUE TO EFFLUX OF TIME. THE LD. ASSESSING OFFICER CALCULATED THE ADDITIONAL COST A ND WORKED OUT ;1261 PER SQ.FT IN RESPECT OF ALLOTMENT OF FLATS TO THE D IRECTORS AND THE TOTAL CONSTRUCTED AREA 6006 SQ.FT WORKED OUT TO ;75,73,56 6/-. THE LD. ASSESSING OFFICER FOUND THAT COMPANY HAS NOT BORNE IN DIRECT COST OF CONSTRUCTION ON BEHALF OF DIRECTORS AND CALCULATED ON THE BASIS OF OPERATIVE AND INDIRECT EXPENSES INCURRED TOWARDS EM PLOYEE COST, ADMINISTRATIVE EXPENSES, INTEREST AND FINANCE CHARG ES AND DEPRECIATION. THE ASSESSING OFFICER HAS CALCULATED DIRECT AND INDIRECT EXPENSES OF THE CONSTRUCTION AND ON COMPARISON OF V ALUE OF COST OF CONSTRUCTION ALLOTTED TO THE DIRECTOR DIFFERENTIAL CONSTRUCTION COST WORKED OUT TO ;16,30,050/- AND WAS TREATED AS PERSO NAL EXPENDITURE INCURRED BY THE COMPANY. THE ASSESSING OFFICER GAVE FINDING ON CALCULATION OF ALLOCATION OF INDIRECT EXPENSES IS N OT TAKEN UP IN THE CASE OF SHRI. VASANTHA KUMAR REDDY REFERRED IN EARLIER ISSUE WERE HE HAS COMPENSATED THE COMPANY BY WAY OF SUPPLEMENTARY AGR EEMENT DATED 16.11.2009 TOWARDS ENHANCED COST OF CONSTRUCTION. WITH THESE FINDINGS, THE ASSESSING OFFICER MADE ADDITION OF ; 16,30,050/- TO THE RETURNED INCOME. AGGRIEVED BY THE ORDER OF THE ASSE SSING OFFICER, THE ITA NO.1595/MDS/2015 :- 15 -: ASSESSEE FILED AN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). 14. IN THE APPELLATE PROCEEDINGS, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ON PERUSAL OF THE OBSERVATIONS OF THE ASSESSING OFFICER IN ASSESSMENT ORDER FOUND THE ALLOCATION O F EXPENDITURE AND DIFFERENTIAL DATES OF ALLOTMENT TO THE OUTSIDE PART IES AND PRICE BEING ;3150SQ.FT TO THE DIRECTOR AND OUTSIDE PARTY OFFERE D AT ;5,750/- SQ.FT. THE LD. AUTHORISED REPRESENTATIVE ARGUED THAT THE ASSESSING OFFICER HAS ERRED ININCLUDING INDIRECT COST ON ALLOTMENT AR EA TO THE DIRECTOR AND COMMISSIONER OF INCOME TAX (APPEALS)OBSERVED AT PARE 6.2 AS UNDER:- I HAVE GONE THROUGH THE FACTS AND CIRCUMSTANCES O F THE CASE. AS SEEN FROM THE FACTS OF THE CASE LIKE IN TH E CASE OF THE PROJECT NAMED 'EXOTICA' AT VENKATNARAYANAN ROAD , THE APPELLANT HAS ALLOWED IN THE PROJECT AT ROYAPETTAH HIGH ROAD TWO APARTMENTS TO TWO OF ITS DIRECTORS SHRI SU RESH KUMAR REDDY AND SHRI JAYA KUMAR REDDY AT A PRICE LO WER THAN THE PRICE AT WHICH IT WAS SOLD TO THE OUTSIDER S. THE AO HAS WORKED OUT THE COST, BOTH DIRECT AND INDIRECT, OF THE FLATS SOLD TO THESE DIRECTORS AND MADE THE ADDITION SINCE TO THAT EXTENT THERE IS A LOSS TO THE APPELLANT. THE A O HAS NOTICED THAT THE TWO FLATS MEASURING 3003 SFT. EACH WAS SOLD BY THE APPELLANT @ RS.38,93,1 08 TO THE DIRECTORS, AMOUNTING TO RS.77,86,216 (RS.1 ,296 X 6006 SFT.). THE AO HAS ALSO WORKED OUT COST OF THE FLATS SOLD TO THESE DIRECTORS INCLUDING INDIRECT COST AT RS.94,16,266. THE DIFFER ENCE OF AMOUNT RS.16,30,050 (RS.94, 16,266 - RS.77,86,216) WAS BROUGHT TO TAX BY THE AO U/S 37(1) HOLDING THAT THE APPELLANT CANNOT SELL THE PR OPERTY TO ITS DIRECTORS AT A PRICE LESSER THAN THE COST INCUR RED BY THE APPELLANT. THE LOGIC OF THE AO IN MAKING THE DISALL OWANCE IS IN ORDER. I, THEREFORE, CONFIRM THE DISALLOWANCE MA DE BY THE AO. THE GROUND IS DISMISSED. ITA NO.1595/MDS/2015 :- 16 -: AGGRIEVED BY THE ORDER OF THE COMMISSIONER OF INCOM E TAX (APPEALS), THE ASSESSEE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL . 15. BEFORE US, THE LD. AUTHORISED REPRESENTATIVE REITER ATED HIS SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER AND C OMMISSIONER OF INCOME TAX (APPEALS). THE LD. ASSESSING OFFICER HA S MADE AN ADDITION OF ;16,30,050/- ON THE GROUND OF ALLOTMENT OF SPACE TO THE DIRECTOR AT THE LOWER RATE COMPARED TO OUTSIDERS. THE ASSESSEE COMPANY HAS NOT FAVOURED THE DIRECTOR BY SELLING THE BUILT UP AREA BELOW COST PRICE BUT THE ASSESSING OFFICER CALCULATED INDIRECT COST I N THE ASSESSMENT ORDER AND ARRIVED AT HIGHER COST PER SQ.FT. AND THE DIFFE RENCE IN RATE ON COMPARISON WITH DIRECTOR AND OUTSIDE PARTY IS DUE T O CHANGE OF TIME. THE REAL ESTATE TREND DURING THE PERIOD 2006 AND 20 07 GLOBALLY WAS DOWNWARD AND DELAY IN PROJECTS DUE TO FINANCIAL CRI SIS AND ALSO DUE TO LESS DEMAND OR BOOKING OF FLATS BY CUSTOMERS AND PR AYED FOR THE DELETION OF ADDITION. 16. CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE OPPOS ED THE GROUND AND ARGUED THAT THE TIME DIFFERENCE IS LESS THAN ONE YEAR FROM THE ALLOTMENT DATES OF THE DIRECTOR AND OUTSIDE PA RTIES AND ALSO NO POSITIVE TREND IN REAL ESTATE SECTOR IN THE YEAR 2007 DUE TO GLOBAL RECESSION IN REAL ESTATE BUSINESS. ITA NO.1595/MDS/2015 :- 17 -: 17. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL ON RECORD. CONSIDERING THE APPARENT FACTS AND MARKET CONDITIONS THE ALLOTMENT OF BUILDING SPACE TO DIRECTOR AT LOWER RA TE COMPARED TO OUTSIDERS IS NOT PROPER AND THE DIRECTORS ARE ALLOT TED SPACE ON 23.11.2006 AT THE RATE OF ;3,150/- PER SQ.FT. WEREA S MARINE CONTAINER SERVICES SOUTH P. LTD PURCHASED FROM THE COMPANY ON 5.10.2007 AT THE RATE OF ;5,750/- PER SQ.FT. CONSIDERING THE RE AL ESTATE MARKET TREND IN THE YEAR 2006 AND 2007 AND THE LD. ASSESSI NG OFFICER HAS WORKED OUT THE COSTING BASED ON FINANCIAL STATEMENT S. HENCE, WE ARE NOT INCLINED TO INTERFERE WITH THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) WHO HAS EXAMINED THE ISSUE AND UPHOLD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) O N THIS GROUND. THIS GROUND OF THE ASSESSEE IS DISMISSED. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON TUESDAY, THE 8TH DAY OF MA RCH, 2016, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ! ' # ) (G. PAVAN KUMAR) /JUDICIAL MEMBER / CHENNAI 1 / DATED:08.03.2016 KV 2 * ,$.34 54'. / COPY TO: 1. () / APPELLANT 3. ' 6. () / CIT(A) 5. 4!9: ,$.$ / DR 2. ,-() / RESPONDENT 4. ' 6. / CIT 6. :;& < / GF