The DCIT, Central Circle, Guntur V. M/s Gowtham Residential Junior College, Gudavalli

ITA 295/VIZ/2010

• Counselvise Citation: 29525314 RSA 2010
• Duration Of Justice: 4 year(s) 6 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 01-12-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 18-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K V N CHARYA
• Keywords: Capital asset; Question of law; Fair market value; Valuation report; Right to appeal
• Section: 143(3); 133A; 153A; 234B; 131

Judgement Text

ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER ITA NO.288/VIZAG/2010 ASSESSMENT YEAR : 2003 - 04 GOWTHAM RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI VS. ACIT CENTRAL CIRCLE VIJAYAWADA (APPELLANT) (RESPONDENT) PAN NO.AAEFG 4399L ITA NO.295/VIZAG/2010 ASSESSMENT YEAR : 2003-04 DCIT CENTRAL CIRCLE VIJAYAWADA VS. GOWTHAM RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI C. SUBRAHMANYAM, AR REVENUE BY: SHRI K.V.N. CHARYA, DR DATE OF HEARING : 01.12.2014 DATE OF PRONOUNCEMENT : 05.12.2014 ORDER PER D. MANMOHAN, VICE PRESIDENT:- THESE CROSS APPEALS, PERTAINING TO THE ASSESSMENT YEAR 2003-04, ARE DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A), VI JAYAWADA. FACTS NECESSARY FOR THE DISPOSAL OF BOTH THE APPEALS ARE STATED IN BRIEF. 2. THE ASSESSEE FIRM IS ENGAGED IN THE ACTIVITY OF RUNNING EDUCATIONAL INSTITUTIONS. A SEARCH & SEIZURE OPERATION WAS CON DUCTED AT THE RESIDENTIAL PREMISES OF THE PARTNERS OF THE FIRM AND OTHER CONN ECTED CASES OF GOWTHAM GROUP ON 24.7.2006. SIMULTANEOUS SURVEY OPERATIONS U/S 133A OF THE INCOME TAX ACT, 1961, WERE ALSO CONDUCTED IN THE BUS INESS PREMISES OF THE ASSESSEE FIRM. IT WAS NOTICED, FROM THE SEIZED DOC UMENTS AND BOOKS OF ACCOUNTS THAT THERE WAS TRANSFER OF ASSET BY THE FI RM AT THE TIME OF RETIREMENT OF ONE GROUP OF PARTNERS COMPRISING OF THREE FAMILY MEMBERS OF ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 2 SHRI K. KOTESWARA RAO. THE FIRM CONSISTS OF NINE P ARTNERS WHO IN TURN RELATE TO THREE FAMILY GROUPS. 3. BASED ON THE INCRIMINATING MATERIAL FOUND AT THE TIME OF SEARCH, THE A.O. ISSUED A NOTICE U/S 153C R.W.S. 153A OF THE AC T CALLING UPON THE ASSESSEE TO DECLARE THE CORRECT INCOME IN THE HANDS OF THE FIRM. IN RESPONSE THERETO, THE ASSESSEE DECLARED INCOME OF RS.94,31,5 60/-. IT DESERVES TO BE NOTICED THAT SAME INCOME WAS DECLARED IN THE ORIGIN AL RETURN OF INCOME. 4. THE ASSESSEE OBJECTED TO THE ISSUANCE OF NOTICE U/S 153C OF THE ACT ON THE GROUND THAT THERE WAS NO SEIZURE OF ANY CASH, J EWELLERY OR OTHER VALUABLE DOCUMENTS AND HENCE THE AO CANNOT ASSUME JURISDICTI ON U/S 153C OF THE ACT. 5. THE A.O. OBSERVED THAT DURING THE COURSE OF SEAR CH AND SURVEY, A MOU WAS FOUND WHICH SPECIFIES THAT THREE PARTNERS WERE RETIRING W.E.F. 01.04.2003. HE FURTHER OBSERVED THAT IN THE MEMORANDUM OF UNDER STANDING BETWEEN THE EXISTING PARTNERS AND RETIRING PARTNERS, LOT OF FIN ANCIAL TRANSACTIONS SHOWING PAYMENT OF CERTAIN MONIES OVER AND ABOVE THE CREDIT BALANCES OF THE RETIRING PARTNERS WERE MENTIONED WHICH CAN BE CONSIDERED AS A VALID INCRIMINATING MATERIAL FOR REOPENING THE ASSESSMENT. 6. WITH REGARD TO THE BACKGROUND OF THE ASSESSEE FI RM AND ITS PARTNERS, THE A.O. NOTICED THAT IT WAS CARRYING ON BUSINESS I N INTENSIVE COACHING TO THE SCHOOL AND COLLEGE STUDENTS OFFERING BOARDING AND L ODGING FACILITIES SINCE 1996. THE FIRM WAS ALSO RUNNING AN EDUCATIONAL INS TITUTION UNDER THE NAME AND STYLE OF GOWTHAM RESIDENTIAL JUNIOR COLLEGE A T GUDAVALLI, VIJAYAWADA. THE FIRM CONSISTED OF NINE PARTNERS, EACH FAMILY GR OUP HAVING 33.33/34% OF SHAREHOLDING. HE ALSO NOTICED THAT THE ABOVE GROUP OF PERSONS WERE ALSO RUNNING TWO MORE EDUCATIONAL INSTITUTIONS IN THE NA ME OF M/S. GOWTHAM EDUCATIONAL ENTRANCE COLLEGE AND M/S. GOWTHAM ACA DEMY, WHEREIN THE CONSTITUTION OF PARTNERS WAS SLIGHTLY DIFFERENT. D URING THE YEAR UNDER REFERENCE, SHRI K. KOTESWARA RAO, ONE OF THE PARTNE RS OF THE ASSESSEE FIRM RETIRED FROM M/S. GOWTHAM ACADEMY W.E.F. 1.4.2002. SIMILARLY, ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 3 SHRI K. KOTESWARA RAO AND SHRI G. KRISHNA MOHAN (BR OTHER-IN-LAW OF K. KOTESWARA RAO) RETIRED FROM GOWTHAM RESIDENTIAL ENT RANCE COLLEGE W.E.F. 1.4.2002. SHRI K. KOTESWARA RAO AND TWO OF HIS FAM ILY MEMBERS RETIRED FROM THE ASSESSEE FIRM W.E.F. 1.4.2003 AND THE CHANGE IN THE CONSTITUTION OF THE ASSESSEE FIRM WAS RECORDED BY WAY OF NEW PARTNERSHI P DEED DRAWN ON 17.9.2003. ACCORDING TO THIS MOU, SHRI K. KOTESWAR A RAO AND TWO OTHER PARTNERS, BELONGING TO ONE FAMILY GROUP, HAVE EXPRE SSED THEIR INTENTION TO DISCONTINUE THEIR SHARE IN THE COLLEGE EXCLUSIVELY RUN FOR GIRLS SO AS TO CONTINUE IN THE COLLEGE RUN FOR BOYS. SUBSEQUENTLY , THERE WAS A GUARANTEE DEED DRAWN BY THE ABOVE PARTIES FOR HONOURING THE P AYMENTS AGREED UPON BY THE SECOND PARTY TO THE MOU. THUS, THE OUTGOING PA RTNERS WERE PAID OVER AND ABOVE THEIR CREDIT BALANCE IN THE CAPITAL ACCOU NT ALONG WITH FURTHER SUMS OF RS.77 LAKHS; AS PER CLAUSE IV OF THE MEMORANDUM, THE PARTY NO.2 (REMAINING PARTNERS) HAVE AGREED TO GIVE THE LAND S ITUATED AT GUDAVALLI VILLAGE, KRISHNA DISTRICT ADMEASURING 4.62 ACRES, B ELONGING TO THE FIRM, AS A WHOLE. THIS APART THE SECOND PARTY ACCEPTED TO PAY GOODWILL TO THE TUNE OF RS.60 LAKHS IN TWO INSTALMENTS UPON RETIREMENT OF T HE FIRST GROUP OF THREE PARTNERS. THE ABOVE SAID GOODWILL WAS TO BE PAID O N 15.07.2004 AND 15.07.2005. IF THERE IS FAILURE TO PAY THE AMOUNT W ITHIN THE STIPULATED DATE, INTEREST @ 18% WAS TO BE PAID BY THE FIRM. THE AO ALSO NOTICED THAT THE ABOVE SAID MOU WAS HONOURED BY THE PARTIES BY MAKIN G PAYMENT OF MONEY TO THE RETIRING PARTNERS IN ADDITION TO HANDING OVE R THE LAND BELONGING TO THE FIRM. THE PAYMENTS WERE MADE BETWEEN 09.10.2002 TO 17.09.2003. IN OTHER WORDS, THOUGH THE MOU SPEAKS OF THE RETIREMENT DATE AS 1.4.2003 BUT HONOURING THE MOU, AMOUNT WAS PAID TO OUTGOING PART NERS FROM 09.10.2002 ONWARDS, WHICH FALLS WITHIN THE PREVIOUS YEAR RELEV ANT TO THE ASSESSMENT YEAR 2003-04. THE ASSESSING OFFICER WAS OF THE OPINION THAT THERE WAS DISTRIBUTION OF PROFIT BY REVALUATION OF ASSETS OUTSIDE THE BOOK S OF ACCOUNTS. THE CLAIM THAT THE LAND TRANSFERRED WAS NOT AN AGRICULTURAL L AND SINCE IT IS WITHIN 8 KMS. FROM URBAN AGGLOMERATION IS PROVED BY THE CERTIFICA TE OF THE MRO. THE EXPRESSION OTHERWISE USED IN SECTION 45(4) OF THE ACT TAKES INTO ITS FOLD THE DISTRIBUTION OF THE FIRMS ASSETS BETWEEN PARTY 1 C ONSISTING OF THREE PARTNERS AND PARTY 2 CONSISTING OF SIX PARTNERS HAVING 66.67 % SHARE IN THE DISTRIBUTION. ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 4 THE IMMOVABLE PROPERTY I.E. LANDS AND BUILDINGS WER E ALSO DISTRIBUTED IN THEIR PROFIT SHARING RATIO WHICH IS FORTIFIED BY THE STAT EMENT OF SHRI N. CHOWDHARY BABU, MANAGING PARTNER OF THE FIRM VIDE HIS SWORN S TATEMENT DATED 7.9.2006. AFTER CONSIDERING THE ISSUES IN DETAIL, THE AO MADE THE FOLLOWING ADDITIONS TO THE RETURNED INCOME. 1. SHORT TERM CAPITAL GAINS ON REVALUATION OF ASSE TS - RS.4,78,21,420/- 2. LONG TERM CAPITAL GAINS ON TRANSFER OF LAND - RS.9,50,83,507/- 3. PROFITS DISTRIBUTED OUTSIDE THE BOOKS - RS.1,47,37,059/- 7. AGGRIEVED, ASSESSEE CONTENDED BEFORE THE CIT(A) THAT THE PROCEEDINGS U/S 153C OF THE ACT ARE NOT VALID SINCE THE INFORMA TION AVAILABLE DURING THE COURSE OF SURVEY PROCEEDINGS WERE ALREADY ON RECORD BEFORE THE TAX AUTHORITIES. 8. WITH REGARD TO ADDITION OF RS.4.78 CRORES TOWARD S SHORT TERM CAPITAL GAINS ON REVALUATION OF ASSETS, THE CASE OF THE ASS ESSEE WAS THAT THERE WAS NO TRANSFER OF CAPITAL ASSET BY THE FIRM UPON DISSO LUTION, SINCE THE FIRM CONTINUED TO EXIST; OUT OF NINE PARTNERS, ONLY THRE E PARTNERS HAVE EXITED. IT WAS CONTENDED THAT THE DVO HAS GIVEN AN ARBITRARY V ALUATION REPORT ONE DAY BEFORE THE ASSESSMENT IS GOING TO BE BARRED BY LIMI TATION, WHEREIN THE VALUE OF BOTH LAND AND BUILDING WAS ESTIMATED AT RS.19.53 CRORES VIDE LETTER DATED 30.12.2008. VALUATION REPORT BEING A CRYPTIC LETTE R, IT IS NOT UNDERSTOOD AS TO HOW HE HAS ARRIVED AT THAT FIGURE. 9. LD. CIT(A) OBSERVED THAT DURING THE COURSE OF SE ARCH, IN A STATEMENT U/S 131 OF THE ACT, SHRI CHOWDHARY BABU, MANAGING P ARTNER OF THE ASSESSEE FIRM WAS REQUIRED TO EXPLAIN THE TRANSACTIONS RECOR DED IN THE SEIZED MOU DATED 1.4.2002 AND OTHER DOCUMENTS, WHEREIN HE ADMI TTED THAT THERE WAS AN ORAL DISSOLUTION OF THE FIRM AND AFTER REVALUING TH E ASSETS, EXCEPT LAND, THE SHARE OF THE RETIRING PARTNERS WAS PAID TO THEM. T HERE IS NO DISPUTE THAT THERE WAS DISTRIBUTION OF PROFITS BY REVALUATION OF ASSETS OUTSIDE THE BOOKS OF ACCOUNTS AND NO CONSIDERATION WAS PAID FOR THE TRAN SFER OF LAND IN THE SALE DEED. ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 5 10. LD. COMMISSIONER REFERRED TO THE PROVISIONS OF SECTION 45(4) OF THE ACT AND THE EXPRESSION OTHERWISE WHICH WAS USED AS AN ALTERNATIVE TO THE WORDS ON DISSOLUTION AND BY REFERRING TO THE JUDG EMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. A.N. NAIK ASSOCIATES 265 ITR 346, HE CONCLUDED THAT SECTION 45(4) OF THE ACT IS APPLI CABLE IN CASES INVOLVING TRANSFER OF CAPITAL ASSETS ON RETIREMENT OF THE FIR M UNDER THE CLAUSE OR OTHERWISE, DISTINCT FROM INSTANCES OF DISSOLUTION OF THE FIRM. HE ALSO DISTINGUISHED THE CASE LAW RELIED UPON BY THE LD. C OUNSEL, ON FACTS. HIGHLIGHTING THE FACTS OF THE PRESENT CASE AS A WHO LE, LD. COMMISSIONER OBSERVED THAT THE MOU RECOVERED DURING THE COURSE O F SEARCH WAS ENTERED INTO ON 1.4.2002. AS PER BOTH THE MOUS, THE THREE RETIRING PARTNERS WERE ENTITLED TO RECEIVE 4.62 ACRES LAND AT GUDAVALLI VI LLAGE BELONGING TO THE ASSESSEE FIRM AND CASH OF ONLY RS.77 LAKHS IN VIEW OF THE RELINQUISHMENT OF THEIR RIGHTS IN THE ASSETS BELONGING TO THE GIRLS U NIT AND ALSO FOR RESTRICTING 33.1/3% OF PROFIT OR LOSS IN THE BOYS COLLEGE. SUB SEQUENT TO THIS I.E. ON 24.12.2002, LAND ADMEASURING 4.62 ACRES WAS TRANSFE RRED BY THE ASSESSEE FIRM TO THE THREE RETIRING PARTNERS FOR A CONSIDERA TION OF RS.8,50,500/-. AS PER THE RECITAL IN THE SALE DEED, THE CONSIDERATION WAS RECEIVED BY WAY OF DRAFT DATED 24.12.2002 BY THE ASSESSEE FIRM. 11. IN THE BACKDROP OF THESE FACTS, HE OBSERVED THAT THOUGH THE FIRM CONTINUES TO BE IN EXISTENCE AND THE CLAUSE RELATIN G TO DISTRIBUTION OF ASSETS ON THE DISSOLUTION OF THE FIRM IS NOT APPLICABLE, I N THE LIGHT OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF A.N. N AIK ASSOCIATES (SUPRA), SECTION 45(4) OF THE ACT IS APPLICABLE ON THE GROUN D THAT IT WAS A CASE OF TRANSFER OF CAPITAL ASSET ON RETIREMENT FROM THE FI RM SINCE SECTION 45(4) OF THE ACT USES THE EXPRESSION OR OTHERWISE. THE LD. CI T ALSO TOOK NOTE OF THE FACT THAT DURING THE ACCOUNTING PERIOD RELEVANT TO THE ASSESSMENT YEAR 2003-04, THE CONSTITUTION OF ASSESSEE FIRM DID NOT UNDERGO ANY CHANGE BUT THE FACT REMAINS THAT PURSUANT TO THE MOU DATED 1.4 .2002, THE AMOUNTS DUE WERE RECEIVED BY THE THREE RETIRING PARTNERS DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2003-04. HE EXTRACTED THE R ELEVANT PORTION FROM THE ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 6 MOU TO HIGHLIGHT THAT AT THE REQUEST OF THE THREE R ETIRING PARTNERS, THE LAND IS REGISTERED BY WAY OF SALE DEED THOUGH THE TRANSACTI ON PER SE WAS AN INTEGRAL PART OF THE MOU AND ITS IMPLEMENTATION. IN THE LIG HT OF THE MOU, THERE IS NO SCOPE FOR INTERPRETATION THAT THE AGREEMENT WAS TO SELL THE LAND TO THE THREE RETIRING PARTNERS, WHICH CAN BE CULLED OUT FROM THE FACT THAT IN THE EVENT OF SALE, THE VALUE OF THE LAND WOULD HAVE BEEN QUANTIF IED AND SPECIFIED IN THE MOU; IN FACT THE PURPOSE OF DRAWING OF MOU WAS TO S ETTLE ALL ACCOUNTS AND DUES BETWEEN THE ASSESSEE FIRM AND THE RETIRING PAR TNERS. HE THUS CONCLUDED THAT AFTER MOU WAS AGREED UPON, THE TRANSFER OF TIT LE OF THE LAND TO THE THREE PARTNERS WAS HANDED OVER BY PROJECTING IT AS AN IND EPENDENT SALE TRANSACTION, WHICH IS NOTHING BUT A COLOURABLE DEVICE TO AVOID T AX. BY PLACING RELIANCE UPON THE DECISION OF THE APEX COURT IN THE CASE OF MCDOWELL & CO. LTD. VS. CTO 154 ITR 148, THE LD. CIT(A) CONCLUDED THAT THE TRANSFER OF LAND SHOULD BE CONSIDERED AS A PART OF THE IMPLEMENTATION OF TH E MOU. VIEWED FROM THIS ANGLE, ALL ACTIONS TAKEN IN PURSUANCE TO THE MOU FR OM 1.4.2002 TO 1.4.2003 SHOULD BE CONSIDERED AS A WHOLE, HAVING EMANATED FR OM THE MOU, AND THUS HE HELD THAT THERE WAS TRANSFER OF THE LAND BEING A CAPITAL ASSET OF THE ASSESSEE FIRM, IN THIS YEAR WHICH FALLS WITHIN THE MEANING OF EXPRESSION OTHERWISE U/S 45(4) OF THE ACT. 12. TO EMPHASISE THAT IT WAS A CASE OF DISTRIBUTION OF ASSETS U/S 45(4) OF THE ACT, HE HIGHLIGHTED THE FACTUAL MATRIX OF THE C ASE IN PARA 27 ONWARDS, WHEREIN HE OBSERVED THAT BUT FOR THE IDEA TO AMICAB LY PART WAYS WITH OTHER GROUP OF PARTNERS, IT WOULD BE IMPRACTICABLE TO PRE SUME THAT HAVING ENTERED INTO MOU ON 1.4.2002, NO STEPS WERE INITIATED TO GI VE EFFECT TO THE AGREEMENT TILL THE FORMAL RETIREMENT OF THE PARTNERS ON 01.04 .2003. AS PER THE MOU, THE THREE RETIRING PARTNERS WERE ENTITLED TO RECEIVE RS .77 LAKHS CASH IN ADDITION TO LAND ADMEASURING ACRES 4.62 AND ALSO TO RECEIVE A T OTAL CONSIDERATION OF RS.2 CRORES OUT OF WHICH RS.41 LAKHS WAS TO BE PAID BY G OWTHAM RESIDENTIAL ENTRANCE COLLEGE, RS.14.57 LAKHS FROM GOWTHAM ACADE MY, HYDERABAD AND RS.144.43 LAKHS FROM GOWTHAM RESIDENTIAL JUNIOR COL LEGE, GUDAVALLI. HE HAS ALSO OBSERVED THAT THE TRANSFER OF LAND BY THE ASSE SSEE-FIRM TO THE THREE RETIRING PARTNERS IS TO BE CONSIDERED AS PARTIAL FU LFILLMENT OF THE CONDITIONS AGREED UPON IN THE MOU. AS THE LAND WAS TRANSFERRE D ON 24.12.2002, CAPITAL ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 7 GAINS, IN TERMS OF SECTION 45(4) OF THE ACT, WOULD ARISE FOR THE ASSESSMENT YEAR 2003-04 ONLY. HE ALSO CLARIFIED THAT THE LAND WAS WITHIN 8 KMS. FROM THE MUNICIPAL LIMITS AND HENCE IT HAS TO BE TREATED AS CAPITAL ASSET FOR THE PURPOSE OF CAPITAL GAINS, IN WHICH EVENT THE FAIR M ARKET VALUE OF THE ASSET ON THE DATE OF TRANSFER HAS TO BE TAKEN AS THE FULL VA LUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF TRANSFER. THE VALUE OF THE LAND OF 4.62 ACRES TRANSFERRED TO THREE PARTNERS WORKS OUT TO RS .55,90,200/-. THE CASE OF THE ASSESSEE WAS THAT ALL THE ASSETS OF THE FIRM CA NNOT BE SUBJECT TO TAX WITHOUT ESTABLISHING THAT ALL THE ASSETS WERE EITHE R DISTRIBUTED OR TRANSFERRED DURING THE RELEVANT PERIOD. OTHER THAN 4.62 ACRES, THE LAND CONTINUED TO REMAIN WITH THE ASSESSEE FIRM AS ON DATE AND WAS BE ING DULY REFLECTED IN THE BALANCE SHEET AND ASSESSMENTS COMPLETED SUBSEQUENTL Y ON THE ASSESSEE-FIRM ACCORDINGLY. IT WAS THEREFORE CONTENDED THAT THE AO CANNOT ROPE IN THE ENTIRE LAND OF 19.77 ACRES. 13. THE LD. CIT(A) OBSERVED THAT THE CHANGE IN OWNE RSHIP OF THE REMAINING ACRES OF LAND, FROM THE ASSESSEE-FIRMS H ANDS TO THE PARTNERS, HAVING NOT BEEN ESTABLISHED AND IN FACT CONTINUED T O BE DISCLOSED BY THE ASSESSEE FIRM, THE ACTION OF THE AO IN SUBJECTING A LL THE ASSETS TO CAPITAL GAINS WAS HELD TO BE NOT JUSTIFIED. HE THEREFORE DIRECTE D THE AO TO LEVY LONG TERM CAPITAL GAINS ARISING IN ASSESSMENT YEARS 2003-04 T O THE EXTENT OF THE LAND TRANSFERRED TO THREE PARTNERS I.E. VALUE OF 4.62 AC RES. 14. THE NEXT ISSUE IS REGARDING ADDITION OF RS.1.47 CRORES TOWARDS PROFITS DISTRIBUTED OUTSIDE BOOKS. THE CASE OF AO IS THAT THE RETIRING PARTNERS WERE PAID AN AMOUNT OF RS.49,22,353/- UNDER THE HEAD OV ERDRAWINGS FROM THEIR CAPITAL ACCOUNTS. ACCORDING TO THE ASSESSEE FIRM, THE WITHDRAWAL BY THE THREE RETIRING PARTNERS, IN EXCESS OF THEIR CREDIT BALANC ES IN THE CAPITAL ACCOUNTS WAS DONE BY MISUSING THEIR POSITION AND HENCE THE AMOUN T WAS SHOWN AS RECOVERABLE FROM THEM. IT WAS THEREFORE CONTENDED T HAT IT CANNOT BE TREATED AS AN AMOUNT PAID TO THEM. THE LD. CIT(A) SET ASID E THE ADDITION OF RS.1.47 CRORES REFERABLE TO NOTIONAL DISTRIBUTION OF PROFIT S OUTSIDE THE BOOKS OF ACCOUNTS BY OBSERVING IN PARA-34 AS UNDER: ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 8 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE IN THIS REGARD. AS SEEN FROM THE ACCOUNT COPIES OF SRI K. KOTESWARA RA O, SMT. K. VARALAKSHMI AND SMT. K. DURGA RANI FOR THE F.Y. 2002-03 RELEVAN T TO THE A.Y. 2003-04 IN THE BOOKS OF THE APPELLANT FIRM THE CLOSING CREDIT BALANCES ARE RS.44,40,983/-, RS.23,64,914/- & RS.28,70,377/- RESPECTIVELY. THER E ARE NO DEBIT BALANCES OR OVERDRAWINGS DURING THE PERIOD RELEVANT TO THIS APP EAL, AS HAS BEEN OBSERVED BY THE AO IN THE ASSESSMENT ORDER. THE A.O. IS, TH EREFORE, NOT JUSTIFIED IN CONCLUDING THAT THE EXCESS WITHDRAWALS IN THIS YEAR REPRESENT THE SECRETED PROFITS FROM THE GIRLS UNIT. HOWEVER, THE OVERDRAW INGS WERE MADE IN THE SUBSEQUENT ACCOUNTING PERIOD RELEVANT TO THE A.Y. 2 004-05. EVEN ON MERITS, THE ACTION OF THE A.O. ANNOT BE SUSTAINED FOR THE P ROFIT FROM BOTH THE GIRLS UNITS AND BOYS UNITS ARE REFLECTED IN THE REGULAR B OOKS OF ACCOUNTS AS EVIDENCED BY THE AUDITED PROFIT & LOSS A/C. AND RE LEVANT SCHEDULES PRODUCED DURING THE APPEAL PROCEEDINGS. ON THE CONTRARY, TH E A.O. HAS NOT BROUGHT ANY EVIDENCE ON RECORD TO SHOW THAT THE APPELLANT H AD COLLECTED RECEIPTS FROM THE GIRLS UNITS OUTSIDE THE BOOKS OF ACCOUNT. I AG REE WITH THE ARGUMENT OF THE APPELLANT THAT NO PRODUCE BUSINESS MAN WOULD GI VE AWAY SHARE IN SECRETED PROFITS, IF ANY, OUT OF TAX PAID INCOMES T HROUGH THE BOOKS OF ACCOUNT. FURTHER, THE CONCLUSION OF THE A.O. THAT SECRETED P ROFITS FROM THE GIRLS UNIT WAS PAID TO THE THREE RETIRING PARTNERS IS ITSELF I N CONTRADICTION TO THE MOU WHICH STIPULATES THAT THE RETIRING PARTNERS HAVE NO SHARE IN THE PROFITS ARISING FROM THE GIRLS UNIT. IN SUCH CIRCUMSTANCES, THE AD DITION OF RS.1,47,37,059/- TOWARDS NOTIONAL DISTRIBUTION OF PROFITS OUTSIDE TH E BOOKS OF ACCOUNT IS NOT SUSTAINABLE AND IS, THEREFORE, DELETED. THIS GROUN D IS ALLOWED. 15. THE NEXT ISSUE RELATES TO CHARGING OF INTEREST U/S 234B OF THE ACT. THE LD. CIT(A) OBSERVED THAT THE CHARGING OF INTEREST I S MANDATORY IN NATURE AND THE ASSESSEE HAS NO RIGHT OF APPEAL AND THUS REJECT ED THE CONTENTION OF ASSESSEE. 16. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE A SSESSEE AS WELL AS THE REVENUE PREFERRED APPEALS BEFORE THE TRIBUNAL. FOL LOWING GROUNDS WERE URGED BY THE ASSESSEE: 1. THE CIT(A) ERRED IN CONFIRMING THE APPELLANT FIRM A S A CONNECTED PERSON UNDER SECTION 153C SO AS TO BE ASSESSED UNDE R THE PROVISIONS OF SECTION 153A. 2. THE CIT(A) ERRED IN CONFIRMING THE ASSESSMENT MADE ON THE APPELLANT UNDER SECTION 153A ON LEGAL GROUND THEREB Y FORMING A SECOND OPINION AND ASSUMING JURISDICTION WHICH THE DEPARTMENT IS NOT DIRECTLY EMPOWERED TO DO SO. 3. THE CIT(A) ERRED IN CONFIRMING THE ASSESSMENT ORDER U/S 143(3) WHICH IS PASSED WITHOUT ISSUANCE OF NOTICE UNDER SE CTION 143(2). ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 9 4. THE CIT(A) ERRED IN TREATING THE DIRECT SALE OF LAN D ADMEASURING AC.4.62 CENTS TO A PARTNER OF THE FIRM DULY EVIDENC ED BY A SALE DEED AS A DISTRIBUTION OF ASSET THEREBY TREATING TH E SALE TRANSACTION ATTRACTING SEC 45(1) AS FALLING IN THE RIGORS OF SE C 45(4). 5. THE CIT(A) AND THE LOWER AUTHORITY ERRED IN ADOPTIN G SALE CONSIDERATION OF LAND AS VALUED BY A DEPARTMENTAL V ALUATION OFFICER AS AGAINST THE GUIDELINE VALUE AVAILABLE AS PER SUB -REGISTRAR OFFICE AT WHICH THE SALE TOOK PLACE WITHOUT GRANTING A PRO PER OPPORTUNITY BEFORE ADOPTING THE ARBITRARY VALUATIONS MADE BY TH E DEPARTMENTAL VALUATION OFFICER. 6. THE CIT(A) INSPITE OF APPRECIATING THE LEGAL POSITI ON ERRED IN NOT PASSING PROPER DIRECTIONS REGARDING CHARGING OF INT EREST UNDER SECTION 234B WRONGLY FROM THE 1 ST DAY OF THE ASSESSMENT YEAR AS AGAINST THE SAME BEING CHARGEABLE FROM THE DATE OF ORIGINAL ORDER UNDER SECTION 143(3) BY OPERATION OF SECTION 234B(3 ). FOLLOWING GROUNDS WERE URGED BY THE REVENUE: 1. THE CIT(A) HAS ERRED BOTH ON QUESTION OF LAW AND FA CTS. 2. THE CIT(A) IS NOT JUSTIFIED IN DELETING THE ADDITIO N MADE TOWARDS DISALLOWANCE OF SHORT TERM CAPITAL GAINS ON REVALUA TION OF ASSETS. 3. THE CIT(A) IS NOT JUSTIFIED IN DELETING LONG TERM C APITAL GAIN ON TRANSFER OF LANDS. 4. THE CIT(A) IS NOT JUSTIFIED IN DELETING THE ADDITIO N MADE TOWARDS PROFITS DISTRIBUTED OUTSIDE THE BOOKS OF ACCOUNT. 17. LD. COUNSEL SUBMITTED THAT A REGULAR ASSESSMENT WAS COMPLETED PRIOR TO SURVEY, WHEREIN ALL THE FACTS WERE AVAILABLE ON RECORD. NO DOUBT ASSESSEE DID NOT DECLARE THE VALUE OF 4.62 ACRES THINKING TH AT IT IS AN AGRICULTURAL LAND. BUT THE FACT REMAINS THAT AGRICULTURAL LAND WAS ALR EADY DECLARED AND HENCE BASED ON SURVEY AND SEARCH & SEIZURE OPERATION, NO INCRIMINATING MATERIAL WAS GATHERED SO AS TO INVOKE PROVISIONS OF SECTION 153C OF THE ACT. WITH REGARD TO THE PAYMENT OF RS.60 LAKHS, IT WAS SUBMIT TED THAT THIS AMOUNT WAS PAID IN THE SUBSEQUENT YEAR. AS REGARDS THE REVALU ATION OF ASSETS BY REFERRING THE MATTER TO THE VALUATION CELL, LD. COUNSEL SUBMI TTED THAT SECTION 55A DOES NOT CONTEMPLATE REFERENCE TO DVO IN THE CASE OF SAL E OF A PARTICULAR ASSET. HE THUS CONTENDED THAT THE REFERENCE ITSELF IS BAD IN LAW. AS REGARDS THE VIEW TAKEN BY THE TAX AUTHORITIES THAT IT WOULD AMOUNT T O TRANSFER WITHIN THE MEANING OF SECTION 45(4) OF THE ACT, LD. COUNSEL RE LIED UPON VARIOUS DECISIONS INCLUDING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. R. ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 10 LINGMALLU RAGHUKUMAR 247 ITR 801 TO SUBMIT THAT UPO N RETIREMENT OF PARTNERS ASSETS CANNOT BE REVALUED. HE ALSO SUBMIT TED THAT THE INTEREST CHARGED U/S 234B FROM THE FIRST DAY OF THE ASSESSME NT YEAR AS AGAINST THE SAME BEING CHARGEABLE FROM THE DATE OF ORIGINAL ORD ER U/S 143(3) OF THE ACT, IS BAD IN LAW. 17.1 WITH REGARD TO THE DEPARTMENTAL APPEAL, THE LD . COUNSEL STRONGLY RELIED UPON THE ORDER BY THE CIT(A). 18. ON THE OTHER HAND, THE LD. D.R. SUBMITTED, VIS- -VIS THE APPEAL FILED BY THE ASSESSEE, THAT MOU WAS FOUND AND SEIZED DURING SEARCH AND AS PER THE MOU DATED 1.4.2002 THE THREE OUTGOING PARTNERS WERE TO BE GIVEN LAND. THE ASSESSEE ADOPTED A COLOURABLE DEVICE OF SHOWING IT A SALE OF AGRICULTURAL LAND WITHOUT MENTIONING THE VALUE OF THE LAND IN THE MOU AND THUS AO AS WELL AS THE LD. CIT(A) WERE JUSTIFIED IN HOLDING THAT THERE IS SUFFICIENT INCRIMINATING MATERIAL TO PROCEED U/S 153C OF THE ACT AND THE EXP RESSION DISSOLUTION OR OTHERWISE REFERS TO SUCH CASES OF TRANSFER OF ASSE TS. HE ALSO SUBMITTED THAT IN ALL THE CASES RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE, INCLUDING THE DECISION OF THE APEX COURT CITED SUPRA, IT WAS A ME RE CASE OF PAYMENT OF MONEY TO THE OUTGOING PARTNERS TOWARDS THEIR SHARE OF PROFIT ETC. AND IN NONE OF THE CASES AN ASSET OF THE PARTNERSHIP WAS TRANSF ERRED AND THAT TOO FOR A LESSER CONSIDERATION. SECTION 55A OF THE ACT MAY NOT BE APPLICABLE WHEN THE ASSETS ARE REVALUED/NOT TRANSFERRED BUT, IN THE INS TANT CASE, PART OF THE ASSET OF THE FIRM WAS TRANSFERRED TO THREE PARTNERS AND I N THE PECULIAR CIRCUMSTANCES, THE AO WAS JUSTIFIED IN REFERRING TH E MATTER TO DVO U/S 55A OF THE ACT. 19. AS REGARDS THE INTEREST CHARGED U/S 234B OF THE ACT, HE STRONGLY RELIED UPON THE ORDER PASSED BY THE LD. CIT(A). SIMILARLY , WITH REGARD TO THE ISSUES ARISING OUT OF THE APPEAL FILED BY THE REVENUE, THE LD. CIT(DR) RELIED UPON THE ORDER PASSED BY THE ASSESSING OFFICER. ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 11 20. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE RECORD. THE LD. CIT(A) HIGHLIGHTED THE FACTUAL MAT RIX OF THE CASE WHICH REVEALS THAT THERE IS SUFFICIENT INCRIMINATING MATE RIAL FOUND DURING THE COURSE OF SEARCH. THEREFORE, IN OUR OPINION, THE CIT(A) W AS JUSTIFIED IN HOLDING THAT THE AO HAS CORRECTLY INVOKED THE PROVISIONS OF SECT ION 153C OF THE ACT IN THE INSTANT CASE. SIMILARLY, WITH REGARD TO THE LAND C LAIMED TO BE AGRICULTURAL LAND, THE AO AS WELL AS CIT(A) HAVE CORRECTLY BROUG HT OUT THE FACTS TO SUPPORT THEIR STAND THAT IT IS A CAPITAL ASSET FALLING WITH IN 8 KMS. FROM THE URBAN AGGLOMERATION. IN FACT THE ASSESSEE DID NOT DISPUT E THAT THE AGRICULTURAL LAND IS A CAPITAL ASSET. 21. IT DESERVES TO BE NOTICED THAT THE ASSESSEE RAIS ED GROUND NO.3 WHEREIN IT WAS STATED THAT THE ASSESSMENT ORDER WAS PASSED WITHOUT ISSUANCE OF NOTICE U/S 143(2) OF THE ACT. HOWEVER, NO ARGUMENT S WERE ADVANCED ON THIS POINT AND THEREFORE GROUND NO.3 IS REJECTED. 22. AS REGARDS GROUND NO.4, THE CASE OF THE ASSESSE E IS THAT IT WAS A DIRECT SALE OF LAND ADMEASURING 4.62 ACRES TO THREE PARTNE RS OF THE ERSTWHILE FIRM AND IT WAS DULY EVIDENCED BY A SALE DEED. IN THIS R EGARD, WE MAY OBSERVE THAT SECTION 45(4) OF THE ACT USES THE EXPRESSION DISSOLUTION OR OTHERWISE AND THE SAID EXPRESSION WAS CORRECTLY ANALYSED BY H ONBLE BOMBAY HIGH COURT (SUPRA), WHEREIN THEIR LORDSHIPS OBSERVED THA T IN A CASE WHERE THE LAND IS TRANSFERRED UPON RETIREMENT OF CERTAIN PARTNERS, IT FALLS WITHIN THE EXPRESSION OTHERWISE; ONCE THERE IS DISTRIBUTION OF ASSET UPON RETIREMENT, SECTION 55A OF THE ACT GETS ATTRACTED AND THE AO WA S JUSTIFIED IN REFERRING THE MATTER TO THE VALUATION CELL TO FIND OUT THE FAIR M ARKET VALUE. IN THE INSTANT CASE, THE ASSESSEE HAS NOT FURNISHED ANY EVIDENCE T O SHOW THAT THE FAIR MARKET VALUE, AS ARRIVED AT BY THE DVO, IS EXCESSIV E OR ARBITRARY. WE ARE THEREFORE OF THE OPINION THAT THE LD. CIT(A) WAS JU STIFIED IN BRINGING TO TAX THE FAIR MARKET VALUE OF THE 4.62 ACRES OF LAND WHI CH WORKS OUT TO RS.55,90,200/-. ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 12 23. VIDE GROUND NO.6, THE ASSESSEE CONTENDS THAT IN TEREST WAS WRONGLY CHARGED FROM THE FIRST DAY OF ASSESSEMENT YEAR. AT THE TIME OF HEARING, LD. COUNSEL DID NOT ADVANCE ANY ARGUMENT CHALLENGING TH E CORRECTNESS OF THE INTEREST CHARGED BY THE AO/CIT(A). WE THEREFORE RE JECT GROUND NO.6 OF THE ASSESSEE. 24. THIS TAKES US TO THE APPEAL FILED BY THE REVENU E. AS REGARDS THE DELETION OF THE ADDITION MADE TOWARDS DISALLOWANCE OF SHORT TERM CAPITAL GAINS ON REVALUATION OF ASSETS, THE LD. CIT(A) HAS CORRECTLY APPRECIATED IN PARA 29 OF HIS ORDER THAT ONLY LAND ADMEASURING 4.6 2 ACRES WAS TRANSFERRED TO THE OUTGOING PARTNERS AND HENCE NO TRANSFER TOOK PL ACE WITH REGARD TO THE BALANCE PORTION OF THE LAND WHICH IS STILL SHOWN IN THE BOOKS OF THE FIRM. LD. D.R. COULD NOT SUBSTANTIATE HIS ARGUMENTS WITH ANY CASE LAW ON THIS ASPECT TO CONTRADICT THE VIEW TAKEN BY THE LD. CIT(A). UNDER THESE CIRCUMSTANCES, WE UPHOLD THE ORDER OF LD. CIT(A) AND REJECT GROUND NO S.2 & 3 OF THE REVENUE. VIDE GROUND NO.4, THE REVENUE CONTENDS THAT THE CIT (A) WAS NOT JUSTIFIED IN DELETING THE ADDITION MADE TOWARDS PROFITS DISTRIBU TED OUTSIDE THE BOOKS OF ACCOUNTS. THIS ASPECT WAS CONSIDERED BY THE CIT(A) FROM PARA 31 TO 34 AND AFTER ANALYSING THE FACTS, HE HAD COME TO THE CONCL USION THAT ADDITION TOWARDS NOTIONAL DISTRIBUTION OF PROFITS, OUTSIDE THE BOOKS OF ACCOUNTS, IS NOT SUSTAINABLE. EVEN OTHERWISE, THE OVERDRAWINGS WERE MADE IN THE SUBSEQUENT ASSESSMENT YEAR RELEVANT TO THE ASSESSMENT YEAR 200 4-05. THE LD. CIT (DR) COULD NOT CONTRADICT FINDINGS OF THE LD. CIT(A). U NDER THESE CIRCUMSTANCES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A) AND THEREFORE WE REJECT GROUND NO.4 OF THE REVENUE. 25. IN THE RESULT, APPEALS FILED BY THE REVENUE AS W ELL AS THE ASSESSEE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 5 TH DECEMBER14 SD/- SD/- (J. SUDHAKAR REDDY) (D. MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT VG/SPS VISAKHAPATNAM, DATED 5 TH DECEMBER, 2014 ITA NOS.288&295/VIZAG/2010 GOWTHAMI RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 13 COPY TO 1 GOWTHAM RESIDENTIAL JUNIOR COLLEGE, GUDAVALLI 2 THE ACIT, CENTRAL CIRCLE, VIJAYAWADA 3 THE DCIT, CENTRAL CIRCLE, VIJAYAWADA 3 THE CIT, VIJAYAWADA 4 THE CIT(A), VIJAYAWADA 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM SL. NO. DESCRIPTION DATE INITIALS 1. DATE OF DICTATION BY THE AUTHOR SR.PS 2. DRAFT PLACED BEFORE THE DICTATING MEMBER SR.PS 3. DRAFT PLACED BEFORE THE SECOND MEMBER SR. PS 4. DRAFT APPROVED BY THE SECOND MEMBER SR. PS 5. DATE OF APPROVED ORDER COMES TO THE SR. PS SR. PS 6. DATE OF PRONOUNCEMENT OF ORDER SR. PS 7. DATE OF FILE SENT TO THE BENCH CLERK SR. PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK HD. C LK 9. DATE OF DISPATCH OF ORDER SR. PS