P.Sukumar, CHENNAI V. ITO, Salem

ITA 442/CHNY/2013

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7487 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 29-12-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 14-03-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R. DURAI PANDIAN
• Keywords: Diversion of income; Cost of acquisition; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 43

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , .. ' #$, & '( BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO.442/MDS/2013 * +* / ASSESSMENT YEAR : 2009-10 SHRI P. SUKUMAR, BANGALORE AUTO DIESEL WORKS, OMALUR MAIN ROAD, SALEM 636 004. PAN : AGUPS 0835 P V. THE INCOME TAX OFFICER, WARD I(1), SALEM. (-./ APPELLANT) (/0-./ RESPONDENT) -. 1 2 / APPELLANT BY : SHRI S. SRIDHAR, ADVOCATE /0-. 1 2 / RESPONDENT BY : SHRI R. DURAI PANDIAN, JCIT ' 1 3& / DATE OF HEARING : 29.12.2016 45+ 1 3& / DATE OF PRONOUNCEMENT : 17.03.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), SALEM, DA TED 04.01.2013 AND PERTAINS TO ASSESSMENT YEAR 2009-10. 2. THE ONLY ISSUE ARISES FOR CONSIDERATION IS ASSES SMENT OF CAPITAL GAIN ON SALE OF PROPERTY BY THE BANK. 2 I.T.A. NO.442/MDS/13 3. SHRI S. SRIDHAR, THE LD.COUNSEL FOR THE ASSESSEE , SUBMITTED THAT THE ASSESSEE IS A DIRECTOR IN A COMPANY BY NAM E ASSOCIATED BUSINESS CREDITS LTD. THE COMPANY ASSOCIATED BUSIN ESS CREDITS LTD. AVAILED A LOAN FROM KARNATAKA BANK LTD. ON MOR TGAGE OF PROPERTY BELONGING TO THE ASSESSEE. THE LD.COUNSEL CLARIFIED THAT THE LOAN WAS NOT AVAILED BY THE ASSESSEE. THE PROP ERTY BELONGING TO THE ASSESSEE WHICH WAS GIVEN AS A SECURITY FOR A VAILING THE LOAN BY THE COMPANY. SINCE THE COMPANY COULD NOT REPAY THE MONEY, THE PROPERTY WAS SOLD BY THE BANK AND THE SALE CONS IDERATION WAS NOT RECEIVED BY THE ASSESSEE. SINCE THE ASSESSEE H AS NOT RECEIVED ANY SALE CONSIDERATION, ACCORDING TO THE LD. COUNSE L, THERE CANNOT BE ANY ASSESSMENT OF CAPITAL GAIN IN THE HANDS OF T HE ASSESSEE. THE LD.COUNSEL SUBMITTED THAT CAPITAL GAIN WAS RECE IVED BY THE BANK, WHICH IS A DIVERSION OF INCOME BY OVERRIDING TITLE. THEREFORE, THE CAPITAL GAIN CANNOT BE ASSESSED IN THE HANDS OF THE ASSESSEE AT ALL. THE LD.COUNSEL PLACED HIS RELIANCE ON THE UNR EPORTED ORDER OF THIS TRIBUNAL IN SIVANANDHA MILLS LTD. V. ACIT IN I .T.A. NOS.1216 & 2106/MDS/2013 DATED 17.06.2016, A COPY OF WHICH HAS BEEN FILED BY THE LD.COUNSEL FOR THE ASSESSEE. 4. ON THE CONTRARY, SHRI R. DURAI PANDIAN, THE LD. DEPARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE PROPERTY IN QUES TION BELONGS TO 3 I.T.A. NO.442/MDS/13 THE ASSESSEE IN HIS INDIVIDUAL CAPACITY. THE ASSES SEE GAVE THE PROPERTY AS SECURITY / MORTGAGE FOR THE LOAN AVAILE D BY THE COMPANY, NAMELY, ASSOCIATED BUSINESS CREDITS LTD. NOW THE C OMPANY COULD NOT REPAY THE AMOUNT, THEREFORE, THE PROPERTY WAS S OLD BY THE BANK AND THE SALE PROCEEDS WERE ADJUSTED TOWARDS BANK LO AN. THEREFORE, THE ASSESSEE HAS NOT RECEIVED ANY MONEY ON SALE OF PROPERTY. NOW THE ASSESSEE CLAIMS BEFORE THIS TRIBUNAL THAT THE C APITAL GAIN ON SALE OF PROPERTY WAS DIVERTED TO THE BANK BY OVERRI DING TITLE. THEREFORE, THERE CANNOT BE ANY ASSESSMENT IN ITS HA ND. THE LD. D.R. PLACED HIS RELIANCE ON THE ORDER OF THIS TRIBU NAL IN SIVANANDHA MILLS LTD. (SUPRA). REFERRING TO THE ORDER OF THIS TRIBUNAL, THE LD. D.R. SUBMITTED THAT THE ORDER OF THIS TRIBUNAL WAS PASSED IGNORING THE JUDGMENT OF APEX COURT IN CIT V. ATTILI N. RAO (2001) 252 ITR 880. THE LD. D.R. FURTHER SUBMITTED THAT THE JUDGM ENT OF MADRAS HIGH COURT HAS ALSO BEEN MISQUOTED BY THE TRIBUNAL IN SIVANANDHA MILLS LTD. (SUPRA). THEREFORE, THE ORDER OF THIS T RIBUNAL IS NOT APPLICABLE TO THE FACTS OF THE CASE. ACCORDING TO THE LD. D.R., THERE CANNOT BE ANY OVERRIDING TITLE ON SALE OF PROPERTY. AT THE BEST, IT CAN BE SAID THAT IT IS AN APPLICATION OF INCOME BY THE ASSESSEE. THE VOLUNTARY ACT OF CREATING SECURITY OR ENCUMBRANCE O F PROPERTY AFTER PURCHASE CANNOT BE CONSTRUED AS OVERRIDING TITLE. ACCORDING TO THE LD. D.R., IF THE PROPERTY WAS SUBJECT TO MORTGAGE A T THE TIME OF 4 I.T.A. NO.442/MDS/13 PURCHASE/ACQUISITION/INHERITANCE AND THE ASSESSEE R ECEIVED THE PROPERTY SUBJECT TO LOAN/CHARGE/MORTGAGE, WE MAY SA Y THAT REPAYMENT OF SUCH LOAN WAS BY OVERRIDING THE TITLE. IN THIS CASE, THE PROPERTY WAS MORTGAGED SUBSEQUENT TO ITS ACQUISITIO N FOR THE PURPOSE OF AVAILING LOAN BY THE COMPANY. IT IS NOT A PRE-EXISTING LOAN/CHARGE. THEREFORE, ACCORDING TO THE LD. D.R., IT CANNOT BE A CASE OF OVERRIDING TITLE, IT CAN ONLY BE AN APPLICA TION OF INCOME. THEREFORE, THE CAPITAL GAIN ON SALE OF PROPERTY IS LIABLE TO BE ASSESSED TO TAX. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE PROPERTY IN QUESTION IS BELONGED TO THE ASSESSEE. THE SAME WAS GIVEN AS SECURITY FOR THE PURPOSE OF AVAILING LOAN BY THE CO MPANY, ASSOCIATED BUSINESS CREDITS LTD. NOW THE PROPERTY WAS SOLD BY THE BANK AND SALE PROCEEDS WERE ADJUSTED BY THE BANK TOWARDS LOA N OUTSTANDING IN THE HANDS OF ASSOCIATED BUSINESS CREDITS LTD. T HE QUESTION ARISES FOR CONSIDERATION IS WHETHER THE SALE CONSID ERATION APPROPRIATELY BY THE LOAN TOWARDS THE OUTSTANDING L OAN ASSESSED CAN BE CONSIDERED APPLICATION OF INCOME BY OVERRIDI NG TITLE? 6. WE HAVE CAREFULLY GONE THROUGH THE JUDGMENT OF M ADRAS HIGH COURT IN CIT V. BRADFORD TRADING COMPANY PVT. LTD. (261 ITR 5 I.T.A. NO.442/MDS/13 222). IN THE CASE BEFORE MADRAS HIGH COURT, THE AS SESSEE- COMPANY PURCHASED A PLOT OF LAND FOR THE PURPOSE OF CONSTRUCTING A STAR HOTEL. THE ASSESSEE BECAME HEAVILY INDEBTED T O INDIAN OVERSEAS BANK AND IN NEED OF FURTHER FINANCE AND AL SO EXPERTISE TO COMPLETE THE CONSTRUCTION OF HOTEL SO AS TO MAKE IT A COMMERCIAL VENTURE. ACCORDINGLY, THE ASSESSEE APPROACHED ONE HOTELIER BY NAME SHRI A.M. BUHARI TO PARTICIPATE IN THE VENTURE AND TAKE OVER THE MANAGEMENT OF THE HOTEL. SHRI A.M. BUHARI AGRE ED TO ADVANCE A SUM OF ` 5 LAKHS TO THE ASSESSEE-COMPANY AND HE WAS ALLOTTED 2500 SHARES IN THE ASSESSEE-COMPANY. ACCORDINGLY, THERE WAS AN AGREEMENT THAT THE HOTEL SHOULD BE SOLD TO SHRI A.M . BUHARI FOR A SUM OF ` 43 LAKHS AND HE SHOULD BE MADE AS MANAGING DIRECTOR . IN THE MEANTIME, THE CHAIRMAN OF THE ASSESSEE-COMPANY SHRI ABDUL AZIZ ENTERED INTO NEGOTIATIONS WITH INDIA TOBACCO C OMPANY LTD. FOR SALE OF ENTIRE UNDERTAKING FOR A TOTAL CONSIDERATIO N OF ` 46 LAKHS AND AN AGREEMENT WAS ALSO ENTERED INTO THAT EFFECT. SH RI A.M. BUHARI DISSENTED THE AGREEMENT AND HE FILED A COMPANY PETI TION BEFORE THE HIGH COURT TO SET ASIDE THE AGREEMENT BETWEEN THE C HAIRMAN OF THE ASSESSEE-COMPANY AND INDIA TOBACCO COMPANY LTD. ON THE GROUND THAT THE DECISION TO TRANSFER THE UNDERTAKING WAS T AKEN BEHIND HIS BACK AND IF THE TRANSFER TAKES PLACE, IT WOULD AFFE CT HIS RIGHTS AS A MINORITY SHAREHOLDER AND HIS INTEREST IN THE COMPAN Y WOULD BE 6 I.T.A. NO.442/MDS/13 SERIOUSLY JEOPARDIZED. THE SAID SHRI A.M. BUHARI A LSO FILED AN APPLICATION FOR TEMPORARY INJUNCTION RESTRAINING TH E CHAIRMAN OF THE COMPANY FROM IMPLEMENTING THE AGREEMENT WITH INDIA TOBACCO COMPANY LTD. INDIA TOBACCO COMPANY LTD. SUBMITTED BEFORE THE HIGH COURT THAT IT WAS PREPARED TO GO THROUGH THE S ALE TRANSACTION SUBJECT TO ALL RISKS IN THE PROCEEDING INITIATED BY SHRI A.M. BUHARI. ON THE BASIS OF SAID SUBMISSION MADE BY INDIA TOBAC CO COMPANY LTD., THE LD. SINGLE JUDGE OF HIGH COURT DISMISSED THE COMPANY PETITION. SHRI A.M. BUHARI SUBSEQUENTLY FILED APPE AL BEFORE DIVISION BENCH OF THE HIGH COURT. DURING PENDENCY OF APPEAL , THE PARTIES TO THE PROCEEDING SETTLED THE DIFFERENCE BETWEEN THEMS ELVES AND ENTERED INTO A COMPROMISE. A COMPROMISE MEMO WAS F ILED BEFORE THE HIGH COURT PRAYING FOR DECREE IN TERMS OF THE C OMPROMISE ENTERED INTO. IN THE COMPROMISE, SHRI A.M. BUHARI WAS REQUIRED TO TRANSFER 2500 SHARES HELD BY HIM TO THE WIFE OF SHR I ABDUL AZIZ FOR CONSIDERATION OF ` 2,50,000/- AND THE ASSESSEE-COMPANY SHOULD REPAY A SUM OF ` 2,50,000/- TO SHRI A.M. BUHARI. IN CONSIDERATION O F THAT, SHRI A.M. BUHARI WITHDREW THE COMPANY PETITIO N FILED IN THE APPEAL PROCEEDING. IN FACT, THE ASSESSEE-COMPANY P AID ` 2 LAKHS TO SHRI A.M. BUHARI IN FULL AND FINAL SETTLEMENT OF AL L CLAIMS, DEMANDS AND OUTSTANDINGS AGAINST ALL THE RESPONDENTS INCLUD ING THE ASSESSEE-COMPANY. INDIA TOBACCO COMPANY LTD. AGREED TO 7 I.T.A. NO.442/MDS/13 REIMBURSE ` 1,50,000/- TO THE ASSESSEE FOR THE PAYMENT OF ` 2 LAKHS TO BE MADE TO SHRI A.M. BUHARI. SHRI A.M. BUHARI H AS CONFIRMED THAT ON RECEIPT OF PAYMENT, HE WOULD NOT MAKE ANY C LAIM AGAINST THE SHARES OF THE ASSESSEE-COMPANY OR ITS ASSETS. IN T HOSE FACTUAL CIRCUMSTANCES, THE HIGH COURT FOUND THAT THE PAYMEN T OF ` 2 LAKHS TO SHRI A.M. BUHARI BY THE ASSESSEE-COMPANY IS AN EXPE NDITURE INCURRED IN CONNECTION WITH TRANSFER OF UNDERTAKING . IN THE CASE BEFORE THE HIGH COURT, ADMITTEDLY, THE PROPERTY OF THE ASSESSEE- COMPANY WAS TRANSFERRED AND SHRI A.M. BUHARI IS A S HAREHOLDER, THEREFORE, IN ORDER TO RELINQUISH THAT TRANSFER, TH E PAYMENT WAS MADE SO THAT THE PROPERTY CAN BE TRANSFERRED BY THE CHAI RMAN OF COMPANY TO INDIA TOBACCO COMPANY LTD. IT IS NOT A CASE OF GIVING THE PROPERTY ON MORTGAGE BY LANDLORDS FOR THE LOAN AVAI LED BY A THIRD PARTY COMPANY. THEREFORE, THE JUDGMENT OF MADRAS H IGH COURT IN BARDFORD TRADING CO. PVT. LTD. (SUPRA) IS NOT AT AL L APPLICABLE TO THE FACTS OF THE CASE. THE FACTUAL DIFFERENCE AROSE IN THE CASE BEFORE MADRAS HIGH COURT WAS NOT BROUGHT TO THE NOTICE OF THE BENCH OF THIS TRIBUNAL WHICH DECIDED CASE IN SIVANANDHA MILL S LTD. (SUPRA). THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINI ON THAT THE JUDGMENT OF MADRAS HIGH COURT IN BRADFORD TRADING C O. PVT. LTD. (SUPRA) IS NOT AT ALL APPLICABLE TO THE FACTS OF TH E PRESENT CASE. 8 I.T.A. NO.442/MDS/13 7. WE HAVE ALSO CAREFULLY GONE THROUGH THE JUDGMENT OF APEX COURT IN CIT V. ATTILI N. RAO (SUPRA). IN THE CASE BEFORE APEX COURT, THE ASSESSEE CARRIED ON ABKARI BUSINESS. THE ASSESS EE MORTGAGED IMMOVABLE PROPERTY TO THE EXCISE DEPARTMENT OF THE STATE OF ANDHRA PRADESH AS SECURITY FOR THE AMOUNTS OF KIST DUE TO THE STATE. THE STATE GOVERNMENT SOLD THE IMMOVABLE PRO PERTY BY AUCTION AND A SUM OF ` 5,62,980/- WAS REALIZED. FROM AND OUT OF SALE PROCEEDS OF ` 5,62,980/-, THE STATE GOVERNMENT DEDUCTED A SUM OF ` 1,29,020/- DUE TOWARDS KIST AND REPAID BALANCE TO THE ASSESSEE. IN COMPUTING THE CAPITAL GAIN FROM THE S ALE OF PROPERTY, THE ASSESSEE SOUGHT DEDUCTION OF ` 1,29,020/-. THE APPELLATE TRIBUNAL UPHELD THE CLAIM OF THE ASSESSEE ON THE GR OUND THAT THE MORTGAGE OVER THE PROPERTY AND AMOUNT REALIZED NEVE R REACHED THE ASSESSEE, BUT REACHED TO STATE GOVERNMENT BY OVERRI DING TITLE. THEREFORE, THE ASSESSEE CANNOT BE ASSESSED TO CAPIT AL GAIN. ON A REFERENCE TO HIGH COURT, THE HIGH COURT FOUND THAT BY MORTGAGE, THE INTEREST WAS CREATED IN FAVOUR OF STATE GOVERNMENT. WHEN THE PROPERTY WAS SOLD BY AUCTION, ITS VALUE HAD TO BE R EDUCED TO THAT EFFECT AND CREATED IN FAVOUR OF STATE GOVERNMENT. ON FURTHER APPEAL BEFORE THE APEX COURT, IT WAS HELD WHAT WAS SOLD ON AUCTION WAS THE IMMOVABLE PROPERTY BELONGED TO THE ASSESSEE AND OUT OF 9 I.T.A. NO.442/MDS/13 THE PRICE BELONGED TO THE ASSESSEE, THE STATE DEDUC TED ITS DUES TOWARDS KIST. THEREFORE, CAPITAL GAIN HAS TO BE COMPUTED ON FULL PRICE. IN FACT, THE APEX COURT HELD AT PAGE 883 AS FOLLOWS:- WE ARE OF THE VIEW THAT THE TRIBUNAL AND THE HIGH COURT WERE IN ERROR. WHAT WAS SOLD BY THE STATE AT THE AUCTION WAS THE IMMOVABLE PROPERTY THAT BELONGED TO THE ASSESSEE. THE PRICE THAT WAS REALISED THEREFOR BELO NGED TO THE ASSESSEE. FROM OUT OF THAT PRICE, THE STATE DEDUCTED ITS DUES TOWARDS KIST AND INTEREST DUE F ROM THE ASSESSEE AND PAID OVER THE BALANCE TO HIM. THE CAPITAL GAIN THAT THE ASSESSEE MADE WAS ON THE IMMOVABLE PROPERTY THAT BELONGED TO HIM. THEREFORE, IT IS ON THE FULL PRICE REALISED (LESS ADMITTED DEDUCTIONS) THAT THE CAPITAL GAIN AND THE TAX THEREON HAS TO BE COMPUTED. 8. THIS JUDGMENT OF APEX COURT IN ATTILI N. RAO (SU PRA) PRESUMABLY WAS NOT BROUGHT TO THE NOTICE OF DIVISIO N BENCH OF THIS TRIBUNAL WHILE DECIDING THE CASE IN SIVANANDHA MILL S LTD. (SUPRA). IN VIEW OF THIS JUDGMENT OF APEX COURT IN ATTILI N. RA O (SUPRA), THE DECISION OF THIS TRIBUNAL IN SIVANANDHA MILLS LTD. (SUPRA) CANNOT BE SAID TO APPLICABLE TO THE CASE OF THE PRESENT ASSES SEE. IN FACT, THE DECISION OF THIS BENCH OF THE TRIBUNAL IN SIVANANDH A MILLS LTD. (SUPRA) RUNS TOTALLY CONTRARY TO THE JUDGMENT OF AP EX COURT IN ATTILI N. RAO (SUPRA). 9. THE APEX COURT HAD AN OCCASION TO CONSIDER IDENT ICAL FACTS IN V.S.M.R. JAGDISHCHANDRAN (DECD.) V. CIT (1997) 2 27 ITR 240 AS 10 I.T.A. NO.442/MDS/13 WELL. THE APEX COURT FOUND THAT WHERE THE MORTGAGE WAS CREATED BY THE ASSESSEE HIMSELF, THEN THE EXPENDITURE INCUR RED BY THE ASSESSEE TO REPAY THE MORTGAGE DEBT CANNOT BE HELD TO BE THE COST OF ACQUISITION OR COST OF IMPROVEMENT ALLOWABLE UND ER SECTION 48(II) OF THE ACT. THEREFORE, IT IS OBVIOUS THAT WHEREVER THERE WAS REPAYMENT OF MORTGAGE DEBT, IT CANNOT BE ALLOWED EI THER AS EXPENDITURE FOR IMPROVEMENT OR COST OF ACQUISITION. THE ENTIRE CAPITAL GAIN IN SUCH CASE IS ASSESSABLE TO TAX. TH IS JUDGMENT OF THE APEX COURT IN V.S.M.R. JAGDISHCHANDRAN (SUPRA) WAS ALSO NOT BROUGHT TO THE NOTICE OF THE TRIBUNAL IN SIVANANDHA MILLS LTD. (SUPRA). IN VIEW OF THE JUDGMENT OF APEX COURT IN ATTILI N. RAO (SUPRA) AND V.S.M.R. JAGDISHCHANDRAN (SUPRA), THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY AND ACCORDINGLY THE SAME IS CONFIRMED. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS DISMISSED. ORDER PRONOUNCED ON 17 TH MARCH, 2017 AT CHENNAI. SD/- SD/- ( . . ' #$ ) ( . . . ) (D.S. SUNDER SINGH) (N.R.S. GANESAN) & / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 7 /DATED, THE 17 TH MARCH, 2017. KRI. 11 I.T.A. NO.442/MDS/13 1 /3#8 98+3 /COPY TO: 1. -. /APPELLANT 2. /0-. /RESPONDENT 3. ' :3 () /CIT(A), SALEM 4. ' :3 /CIT, SALEM 5. 8; /3 /DR 6. * < /GF.