Gregory Mathias, Mangalore V. JCIT, Mangalore

ITA 641/BANG/2010

• Counselvise Citation: 64121114 RSA 2010
• Duration Of Justice: 1 year(s) 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 24-05-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 10-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G V GOPALA RAO CITI
• Assessee Lawyers: S VENKATESAN
• Keywords: Capital asset; Depreciation; Source of fund; Deemed to accrue or arise in india; Cost of acquisition; Deemed dividend
• Section: 54F; 234B; 32

Judgement Text

PAGE 1 OF 22 ITA NO.641/BANG/2010 1 IN THE INOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SMT. P MADHAVI DEVI, J.M. AND SHRI A MOHAN ALANKAMONY, A.M. ITA NO.641/BANG/2010 (ASST. YEAR 2007-08) SHRI GREGORY MATHIAS, CITY POINT, KIDIALBAIL, MANGALORE-3. -APPELLANT VS THE JOINT COMMISSIONER OF INCOME TAX, RANGE-2, MANGALORE. - RESPONDENT DATE OF HEARING : 24/05/2011 DATE OF PRONOUNCEMENT : 26/8/2011 APPELLANT BY : SHRI S VENKATESAN, C.A. RESPONDENT BY : SHRI G V GOPALA RAO, CIT-I O R D E R PER P MADHAVI DEVI : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A), MANGALORE DATED 05/03/2010 FOR THE A SST. YEAR 2007-08. 2. IN THIS APPEAL, THE ASSESSEE HAS RAISED THE FOL LOWING GROUNDS OF APPEAL:- 1) THE ORDERS OF THE AUTHORITIES BELOW IN SO FAR AS THEY ARE AGAINST THE APPELLANT, ARE OPPOSED TO LAW, EQUITY, WEIGHT OF EVIDENCE, PROBABILITIES, FACTS AND CIRCUMSTANCES OF THE CASE,. 2) (A) THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN ADDING A SUM OF RS.1,38,56,695/- AS DEEMED PAGE 2 OF 22 ITA NO.641/BANG/2010 2 DIVIDEND U/S 2(22)(E) OF THE ACT, UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE. (B) THE AUTHORITIES BELOW FAILED TO APPRECIATE THAT THE PROVISIONS OF SEC,2(22)(E) OF THE ACT WERE INAPPLICABLE TO THE FACTS OF THE APPELLANTS CASE A S THE AMOUNTS ARE BUSINESS OR TRADE ADVANCES AND NOT IN THE NATURE OF A LOAN TO ATTRACT THE PROVISIONS O F SEC.2(22)(E) OF THE ACT AND CONSEQUENTLY, THE IMPUGNED ADDITION MADE IN UNWARRANTED AND LIABLE TO BE DELETED. (C) THE AUTHORITIES BELOW FAILED TO APPRECIATE THAT EVEN IN EXTREME CASE THERE IS NO ACCUMULATED PROFIT AT ALL IF SUCH TRADE ADVANCES ARE TO BE TREATED AS LOANS ATTRACTING THE PROVISIONS OF SEC.2(22)(E) OF THE ACT AS A SUM OF RS.1,24,28,928.44 IS THE OPENING BALANCE AND IF IT IS CONSIDERED THERE IS NO ACCUMULATED PROFIT TO ATTRACT THE PROVISIONS OF SEC.2(22)(E) OF THE ACT I N RESPECT OF THE ADVANCES MADE DURING THE YEAR. (D) WITHOUT PREJUDICE TO THE ABOVE, THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN CONSIDERING THE CURRENT YEARS PROFIT AND SUBSIDY RECEIVED AS ITEM OF ACCUMULATED PROFITS WHILE CONSIDERING THE APPLICATION OF SEC,2(22)(E) OF THE ACT. 3) (A) THE AUTHORITIES BELOW ARE NOT JUSTIFIED UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE IN CONSIDERING THE DIFFERENCE BETWEEN THE DEVELOPMENT CHARGES COLLECTED AND DEVELOPMENT CHARGES PAID IN RESPECT OF THE PROPERTY SUBJECT MATTER OF CAPITAL GAINS AS THE INCOME LIABLE UNDER THE HEAD OTHER SOURCES AND NOT UNDER THE HEAD CAPITAL GAINS AND THUS DENYING THE BENEFIT OF INDEXATION OF THE COST AND DEDUCTION U/S 54F OF THE ACT. PAGE 3 OF 22 ITA NO.641/BANG/2010 3 (B) THE AUTHORITIES BELOW FAILED TO APPRECIATE THAT THE DEVELOPMENT CHARGES ARE NOT SEPARATE ITEM OF ASSET INDEPENDENT FROM THE CAPITAL ASSET TRANSFERRED AND THESE DEVELOPMENT CHARGES WAS WITH REFERENCE TO THE PROPERTY SUBJECT MATTER OF CAPITAL GAINS AND FORMS PART OF COST AND PART OF TH E SALE CONSIDERATION AND IS LIABLE TO TAX WITH APPROPRIATE INDEXATION AS CAPITAL GAINS ONLY. 4) THE AUTHORITIES BELOW FAILED TO APPRECIATE THAT FOR THE PURPOSES OF SECTION 54F OF THE ACT WHAT IS RELEVANT IS THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF A CAPITAL ASSET AND FURTHER FAILED TO APPRECIATE THAT THE AMOUNT OF RS.36,61,600/- WAS RECEIVED BY THE APPELLANT FROM THE PURCHASER AS DEVELOPMENT CHARGES WHICH IS IN FACT PART OF THE TOTAL CONSIDERATION RECEIVED FOR THE TRANSFER OF THE CAPITAL ASSET AND FURTHER FAILED TO APPRECIATE THAT THE SAID AMOUNT HAS BEEN RECEIVED ON THE SAME DAY OF THE EXECUTION OF THE RELEVANT SALE DEED AND IT I S IN CONNECTION WITH THE DEVELOPMENT OF THE SAME CAPITAL ASSET AND THUS FORMS PART OF THE FULL VALUE OF CONSIDERATION OF THE CAPITAL ASSET TRANSFERRED UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE. 5) THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN NOT ALLOWING THE DEDUCTION CLAIMED BY THE APPELLANT U/S 54F OF THE ACT ENTIRELY UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE AND RESTRICTING TO A SUM OF RS.7,67,081/- BY IGNORING THE DEVELOPMENT CHARGES PAID AT THE TIME OF ACQUISITION OF THE PROPERTY AND THE AMOUNT COLLECTED BY WAY OF DEVELOPMENT CHARGES AT THE TIME OF SALE IN RESPECT OF THE SAME PROPERTY. 6) THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN DISALLOWING THE CLAIM OF DEPRECIATION TO THE EXTENT PAGE 4 OF 22 ITA NO.641/BANG/2010 4 OF RS.7,64,151/- UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE. 7) WITHOUT PREJUDICE TO THE RIGHT TO SEEK WAIVER WITH THE HONBLE CCIT/DG, THE APPELLANT DENIES HIMSELF LIABLE TO BE CHARGED TO INTEREST U/S 234B AND 234D OF THE ACT WHICH UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE AND THE LEVY DESERVES TO BE CANCELLED. 8) FOR THE ABOVE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL, YOUR APPELLANT HUMBLY PRAYS THAT THE APPEAL MAY BE ALLOWED AND JUSTICE RENDERED AND THE APPELLANT MAY BE AWARDED COSTS IN PROSECUTING THE APPEAL AND ALSO ORDER FOR THE REFUND OF THE INSTITUTION FEES AS PART OF THE COSTS. 3. GROUND NOS.1 AND 8 ARE GENERAL IN NATURE AND THEREFORE, NEEDS NO ADJUDICATION. 4. AS REGARDS GROUND NO.2, BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, AN INDIVIDUAL, IS A DEALER IN FU RNITURE, TANKS, ELECTRONIC GOODS AND IS ALSO A REAL ESTATE DEVELOPE R. HE FILED HIS RETURN OF INCOME ON 31.10.2007 DECLARING A TOTAL IN COME OF RS.6,52,530/-. DURING THE ASSESSMENT PROCEEDINGS U /S 143(3), THE AO OBSERVED THAT THE ASSESSEE IS A PROMOTER AND MAJ OR SHARE HOLDER OF A COMPANY M/S MATHIAS ALUMINIUM SYSTEMS PVT . LTD. HOLDING 3950 SHARES OUT OF ISSUED SHARES OF 4300. HE OBSERVED THAT THE ASSESSEE HAS BEEN TAKING ADVANCES FROM THE COMPANY AND MAKING REPAYMENTS FROM TIME TO TIME AND DURING THE YE AR, THE ASSESSEE HAS TAKEN AN ADVANCE OF RS.3,13,52,620/- F ROM THE PAGE 5 OF 22 ITA NO.641/BANG/2010 5 COMPANY AND HAS REPAID RS.86,00,488/- AND THE NET AD VANCE AT THE END OF THE CURRENT YEAR WAS RS.2,27,52,132/-. 4.1 HE OBSERVED THAT WHEN A SHAREHOLDER, WHO HOLDS MORE THAN 10% OF THE SHARES ISSUED BY THE COMPANY, TAKES L OANS OR ADVANCES FROM THE COMPANY, IT IS TO BE DEEMED AS DIV IDEND U/S 2(22)(E) OF THE I T ACT AND IS AN INCOME IN THE HAN DS OF THE SHAREHOLDER. THEREFORE, HE ADDED THE SAME TO THE T OTAL INCOME OF THE ASSESSEE. AFTER GOING THROUGH THE BALANCE SHE ET OF THE COMPANY, THE AO OBSERVED THAT THE ACCUMULATED PROFIT AS ON 1/4/2006 WAS RS.1,02,54,554/-, PROFIT FOR THE FINAN CIAL YEAR 2006- 07 WAS RS.36,02,141/- AND THE CAPITAL RESERVE ON ST ATE GOVERNMENT SUBSIDY WAS RS.11,24,500/-, TOTALING TO RS.1,49,81,1 95/-. THUS, HE HELD THAT THE ASSESSEE HAS TAKEN ADVANCES FROM THE COMPANY OVER AND ABOVE THE RESERVES AND SURPLUS I.E. FROM THE FU NDS OF SECURED AND UNSECURED LOANS AND THEREFORE, THE PROVISIONS O F SECTION 2(22)(E) APPLY ONLY TO THE PROFITS OF THE COMPANY AND RESTRICTED THE DEEMED DIVIDEND TO RS.1,38,56,695/- (RS.1,02,54 ,554 + RS.36,02,141). 4.2 AGGRIEVED BY THE ASSESSMENT, THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(A) STATING THAT THE ASSESS EE DOES NOT FALL WITHIN THE MISCHIEF OF SECTION 2(22)(E), AS THE TRA NSACTIONS WERE BETWEEN THE COMPANY AND M/S MATHIAS PROPERTIES AND NOT BETWEEN THE COMPANY AND THE ASSESSEE. HE ALSO SUBMITTED THA T THE TRANSACTION WAS NOT IN THE NATURE OF ADVANCE OR LOA N BUT IT WAS AN PAGE 6 OF 22 ITA NO.641/BANG/2010 6 ADVANCE UNDER AN AGREEMENT OF SALE OF PROPERTY IN TH E COURSE OF BUSINESS OF M/S MATHIAS PROPERTIES AS A REAL ESTATE DEVELOPER. HE SUBMITTED THAT THE ACCUMULATED PROFITS OF THE COMPA NY FOR EARLIER YEARS HAD ALREADY BEEN ADVANCED TO THE SHAREHOLDERS A ND THERE REMAINED NO FURTHER ACCUMULATED PROFITS THAT COULD BE TREATED AS DEEMED DIVIDENDS. HE ALSO RELIED UPON VARIOUS DECI SIONS WHICH HAVE BEEN CONSIDERED BY THE CIT(A) IN HIS ORDER. 4.3 THE CIT(A), AFTER CONSIDERING THE ASSESSEES SUBMISSIONS, HELD THAT THE ASSESSEES CONTENTION TH AT M/S MATHIAS PROPERTIES HAS RECEIVED THE ADVANCE UNDER AN AGREEM ENT OF SALE OF PROPERTY IN THE COURSE OF COMPANYS BUSINESS AS A REA L ESTATE DEVELOPER, IS NOT TENABLE, AS THE ACTUAL OWNER OF T HE PROPERTY WAS ONE SHRI DANIEL MATHIAS, WHO WAS IN ACTUAL POSSESSI ON THEREOF AND IT IS THE SAME PROPERTY WHICH IS SOUGHT TO BE SOLD TO M /S MATHIAS ALUMINIUM SYSTEMS PVT. LTD. AND THEREFORE, THERE WAS NO REASON WHY THE COMPANY COULD NOT MAKE PAYMENT DIRECTLY TO SHRI DANIEL MATHIAS. HE HELD THAT A PAYMENT MADE FOR PURCHASE O F SOMETHING THAT DID NOT EVEN BELONG TO THE SO-CALLED VENDOR, C ANNOT BE HELD TO BE AN ADVANCE MADE IN THE NORMAL COURSE OF BUSINESS . HE THEREFORE HELD THAT THE PAYMENT MADE IS AN ADVANCE AND IS DEEM ED DIVIDEND U/S 2(22)(E) OF THE I T ACT. 4.4 AS REGARDS THE ASSESSEES CONTENTION THAT THE AO FAILED TO WORK OUT THE ACCUMULATED PROFITS OF THE C OMPANY ON EACH DAY OF THE ADVANCE, THE CIT(A) HELD THAT THE SAID CO MPUTATION IS PAGE 7 OF 22 ITA NO.641/BANG/2010 7 NOT NECESSARY. HE ACCORDINGLY UPHELD THE ADDITION OF RS.1,38,56,695/- AS DEEMED DIVIDEND WITHIN THE MEAN ING OF SECTION 2(22)(E) OF THE I T ACT. 4.5 AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL BE FORE US. 4.6 THE LEARNED COUNSEL FOR THE ASSESSEE SHRI VENK ATESAN VEHEMENTLY REITERATED THE SUBMISSIONS MADE BY THE ASS ESSEE BEFORE THE AUTHORITIES BELOW AND ALSO RAISED THE FO LLOWING LEGAL POINTS:- 1) IT WAS NOT THE ASSESSEE WHO HAD TAKEN THE ALLE GED LOAN OR ADVANCE FROM M/S MATHIAS ALUMINIUM SYSTEMS P VT. LTD. BUT IT WAS M/S MATHIAS PROPERTIES, WHICH HAD TAKEN THE ALLEGED LOAN OR ADVANCE. HE DREW OUR ATTENTION TO THE LEDGER ACCOU NT AVAILABLE OF M/S MATHIAS PROPERTIES IN THE COMPANYS BOOKS FILED IN THE PAPER BOOK TO DEMONSTRATE THAT IT IS RUNNING A CURRENT AC COUNT AS THERE WAS AN OPENING BALANCE OF RS.1,24,28,928/- AS ON 1/ 4/2006 AND THERE WERE VARIOUS PAYMENTS AND RECEIPTS DURING THE RELEVANT PERIOD. HE SUBMITTED THAT THESE PAYMENTS THEREFORE CANNOT BE TREATED AS LOANS OR ADVANCES BUT ARE TO BE TREATED AS PAYMENTS ON CURRENT ACCOUNT. HE ALSO SUBMITTED THAT THE ASSESS EE, BEING A SHAREHOLDER AND ALSO A DIRECTOR OF THE COMPANY AND H AS ALSO RECEIVED SALARY AS A DIRECTOR, HAS WITHDRAWN THESE M ONIES FROM THE COMPANY IN THE CAPACITY OF A DIRECTOR AND THEREFORE, IT CANNOT BE HELD TO BE A LOAN OR ADVANCE. PAGE 8 OF 22 ITA NO.641/BANG/2010 8 4.7 THIS CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE HAS BEEN REFUTED BY THE LEARNED DR STATING THAT ANY AMOUNT TAKEN BY THE DIRECTOR OR THE SHAREHOLDER OR A NY CONCERN IN WHICH A SHAREHOLDER HAS SUBSTANTIAL INTEREST, HAS T O BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE I T ACT. HE SU BMITTED THAT MATHIAS PROPERTIES IS A PROPRIETARY CONCERN OF THE A SSESSEE HEREIN AND THE ASSESSEE ALSO HAS GOT SUBSTANTIAL INTEREST IN THE COMPANY WHICH HAS ADVANCED THE FUNDS. THUS, ACCORDING TO H IM, THE PROVISIONS OF SECTION 2(22)(E) ARE APPLICABLE. 4.8 AFTER HEARING BOTH THE PARTIES, WE FIND THAT T HE LEDGER ACCOUNT IN THE BOOKS OF ACCOUNT OF M/S MATHI AS ALUMINIUM SYSTEMS PVT. LTD. IS OF M/S MATHIAS PROPERTIES, WHIC H IS THE PROPRIETARY CONCERN OF THE ASSESSEE. IT IS ALSO NO T UNDER DISPUTE THAT THE ASSESSEE IS THE MAJOR SHAREHOLDER OF THE C OMPANY WHICH IS GIVING LOANS AND ADVANCES. THUS LOANS/ADVANCES GIV EN TO M/S MATHIAS PROPERTIES ATTRACTS THE PROVISIONS OF SECTI ON 2(22)(E) OF THE ACT. A LOAN OR ADVANCE GIVEN FOR A PARTICULAR PERIOD NEED NOT ALWAYS BE INTEREST BEARING. THEREFORE, WE CANNOT AG REE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT SINCE IT IS A RUNNING ACCOUNT AND NOT INTEREST BEARING, IT CANNOT BE SAID TO BE A LOAN OR ADVANCE. IF THERE WAS ANY TRADING ACTIVITY B ETWEEN THE ASSESSEE AND THE SAID COMPANY, THEN ONLY IT CAN BE H ELD THAT THE ADVANCE AND RECEIPTS ARE ON ACCOUNT OF TRADING ACCO UNT WHICH COULD NOT FALL WITHIN THE AMBIT OF SECTION 2(22)(E) OF TH E I T ACT. PAGE 9 OF 22 ITA NO.641/BANG/2010 9 4.9 THE NEXT LEGAL POINT RAISED BY THE LEARNED COUN SEL FOR THE ASSESSEE IS THAT EVEN IF IT IS TO BE CONSIDERED AS PAYMENT TO THE ASSESSEE, THEN IT IS FOR THE PURPOSE OF PURCHASE OF A PROPERTY AND THEREFORE, IT IS A BUSINESS TRANSACTION AND IS NOT A LOAN OR ADVANCE. HE SUBMITTED THAT M/S MATHIAS PROPERTIES, BEING IN THE REAL ESTATE DEVELOPMENT BUSINESS, HAD ENTERED INTO AN AGREEMENT OF SALE WITH MR. DANIEL MATHIAS FOR PURCHASE OF A PROPERTY AND IN ORDER TO AVOID THE STAMP DUTY, IT IS THE USUAL PRACTICE IN THE REAL ESTATE BUSINESS TO ACQUIRE THE DEVELOPMENT RIGHTS AND ACCORDINGLY, M /S MATHIAS PROPERTIES HAS ALSO ACQUIRED THE DEVELOPMENT RIGHTS . HE SUBMITTED THAT THEREAFTER THE ASSESSEE HAD AGAIN ENTERED INTO AN AGREEMENT OF SALE WITH M/S MATHIAS ALUMINIUM SYSTEMS PVT. LTD. FOR THE SALE OF THE LAND FOR WHICH PURPOSE THE SAID COMPANY HAS A DVANCED THE FUNDS TO MATHIAS PROPERTIES. THUS, ACCORDING TO HI M, THIS IS A BUSINESS TRANSACTION AND CANNOT BE TREATED AS DEEME D DIVIDEND. 4.10 THE LEARNED DR SHRI G V GOPALA RAO STATED THA T THE SAID TRANSACTION CANNOT BE ACCEPTED AS GENUINE FOR THE REASON THAT THE TRANSACTION WAS ALLEGEDLY BETWEEN MR. DANIEL MAT HIAS AND MATHIAS PROPERTIES AND THEREAFTER BETWEEN MATHIAS P ROPERTIES AND M/S MATHIAS ALUMINIUM SYSTEMS PVT. LTD. AND MR. DANI EL MATHIAS, WHO IS THE OWNER OF THE PROPERTY, HAS NOT BEEN MADE A PARTY TO THE AGREEMENT OF SALE BETWEEN MATHIAS PROPERTIES AND M/ S MATHIAS ALUMINIUM SYSTEMS PVT. LTD. THUS, ACCORDING TO HIM, THESE DOCUMENTS ARE SELF-SATISFYING AND THE ASSESSEE HAS N EVER PRODUCED THE AGREEMENT OF SALE BETWEEN THE ASSESSEE AND MR. DANIEL PAGE 10 OF 22 ITA NO.641/BANG/2010 10 MATHIAS BEFORE THE AUTHORITIES BELOW. THUS, ACCORD ING TO HIM, THIS TRANSACTION IS NOT TO BE CONSIDERED. 4.11 HAVING HEARD BOTH THE PARTIES AND HAVING CONS IDERED THEIR RIVAL CONTENTIONS, WE FIND THAT THE AGREEMENT OF SALE BETWEEN MR. DANIEL MATHIAS AND M/S MATHIAS PROPERTIES HAS N OT BEEN PRODUCED BEFORE ANY OF THE AUTHORITIES BELOW OR BEF ORE US. IT IS ONLY THE AGREEMENT OF SALE BETWEEN M/S MATHIAS PROPE RTIES AND M/S MATHIAS ALUMINIUM SYSTEMS PVT. LTD. THAT WAS PRO DUCED BEFORE THE CIT(A) AND BEFORE US. AS RIGHTLY POINTED OUT BY THE LEARNED DR, THE SCHEDULE OF PAYMENT GIVEN IN THE SCHEDULE I SHOWS VARIOUS PAYMENTS AND DATES WHICH DO NOT CORRESPOND TO THE DA TES OF ADVANCES IN THE LEDGER ACCOUNT. FURTHER, AS RIGHT LY POINTED OUT BY THE LEARNED DR, MR. DANIEL MATHIAS, WHO IS THE REAL OWNER AND POSSESSOR OF THE PROPERTY HAS NOT BEEN MADE A PARTY T O THE AGREEMENT OF SALE BETWEEN M/S MATHIAS PROPERTIES AN D M/S MATHIAS ALUMINIUM. THROUGH THE AGREEMENT OF SALE, M/S MATHIAS PROPERTIES DOES NOT BECOME THE OWNER OF THE PROPERT Y BUT WOULD BECOME ONLY AN INTERESTED PARTY AND CANNOT TRANSFER T HE PROPERTY. THUS, IT IS VERY NECESSARY TO MAKE THE OWNER OF THE PROPERTY MR. DANIEL MATHIAS ALSO A PARTY TO THE AGREEMENT OF SALE BETWEEN THE ASSESSEE AND M/S MATHIAS PROPERTIES. IT IS ALSO NO T SHOWN THAT THIS TRANSACTION HAS ULTIMATELY MATERIALIZED IN EXECUTION OF THE SALE DEED IN FAVOUR OF M/S MATHIAS ALUMINIUM SYSTEMS PVT. LTD. THEREFORE WE ARE NOT INCLINED TO ACCEPT THIS CONTEN TION OF THE ASSESSEE. PAGE 11 OF 22 ITA NO.641/BANG/2010 11 5. THE NEXT LEGAL POINT RAISED BY THE LEARNED COUNS EL FOR THE ASSESSEE IS THAT EVEN IF THE AMOUNTS RECEIVED B Y THE ASSESSEE IS TO BE CONSIDERED AS LOANS OR ADVANCES, THEN U/S 2(22)(E) OF THE ACT, THE LOANS OR ADVANCES HAVE TO BE OUT OF ACCUMU LATED PROFITS OF THE COMPANY AND NOT OUT OF THE CURRENT PROFITS. HE SUBMITTED THAT THE ACCUMULATED PROFITS OF THE COMPANY TILL 31.3.200 6 WAS RS.1,02,54,554/- WHILE THE ADVANCES TAKEN BY THE ASS ESSEE AS ON 31.3.2006 ITSELF WAS TO THE TUNE OF RS.1,24,28,928/ -. THUS, ACCORDING TO HIM, THE ACCUMULATED PROFITS HAVE ALRE ADY BEEN EATEN AWAY BY THE ADVANCES TAKEN BY M/S MATHIAS PROPERTIOES TILL 31.3.2005 AND THEREFORE, THERE ARE NO ACCUMULATED P ROFITS OUT OF WHICH ADVANCES CAN BE GIVEN IN THE CURRENT YEAR. 5.1 AS REGARDS THE CURRENT PROFITS TAKEN INTO CONSIDERATION BY THE AO, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS NOT TO BE TAKEN INTO CONSIDERA TION AS THE CURRENT PROFITS WOULD ARISE ONLY AT THE END OF THE R ELEVANT ASST. YEAR AND NOT AT ANY INTERMEDIATE STAGE. FOR THE PRO POSITION THAT THE TERM ACCUMULATED PROFITS IN SECTION 2(22)(E) OF THE ACT CANNOT INCLUDE CURRENT PROFITS, THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE FOLLOWING DECISIONS:- I) CIT, KERALA V V DAMODARAN 121 ITR 572 (SC); II) CIT, KERALA V V DAMODARAN 85 ITR 590; III) P K BADIANI V CIT, BOMBAY 105 ITR 642 (SC); IV) CIT, BOMBAY V P K BADIANI 76 ITR 369 (BOM.); V) M B STOCK HOLDING (P) LTD. V ACIT 84 ITD 542 (AHD.); PAGE 12 OF 22 ITA NO.641/BANG/2010 12 VI) CIT, TAMIL NADU V G NARASIMHAN 118 ITR 60 (MAD.); VII) DY.CIT V MAIPO INDIA LTD. 116 TTJ (DEL.) 791 & VIII) MTAR TECHNOLOGIES (P) LTD. V ASST. CIT, HYD. IN ITA NO.1002 TO 1004, 1162, 1163 AND 1166 (HYD.) OF 2008 AND 787(HYD.) OF 209 DT.13.4.2010. 5.2 THE LEARNED DR, HOWEVER, REFUTED THIS ARGUMENT BY STATING THAT THE ACCUMULATED PROFITS INCLUDE THE CU RRENT PROFITS AS SEEN FROM EXPLANATION 2 TO SECTION 2(22)(E) OF THE ACT, WHEREIN IT IS PROVIDED THAT ACCUMULATED PROFITS INCLUDE THE CU RRENT PROFITS TILL THE DATE OF ADVANCE. THUS, ACCORDING TO HIM, THE A O WAS JUSTIFIED IN CONSIDERING THE CURRENT PROFITS ALSO. 5.3 AFTER GOING THROUGH THE ABOVE DECISIONS AND AF TER CONSIDERING THE ASSESSEES AS WELL AS REVENUES CON TENTIONS, WE FIND THAT SEC. 2(22)(E) PROVIDES THAT WHERE THE COMPANY M AKES ANY PAYMENTS TO ANY SHAREHOLDER HOLDING NOT LESS THAN TEN PERCENT OF THE VOTING POWER OR TO ANY CONCERN IN WHICH THE SHAR E HOLDER HAS SUBSTANTIAL INTEREST, OUT OF ITS ACCUMULATED PROFIT S, IT SHALL BE DEEMED TO BE DIVIDEND AND IS TAXABLE AS SUCH IN THE HANDS OF THE SHAREHOLDER. MEANING OF TERM ACCUMULATED PROFITS, HAS BEEN CONSIDERED IN MANY CASES BY VARIOUS HIGH COURTS AS WE LL AS THE APEX COURT. THIS TERM ACCUMULATED PROFITS HAD OCCURRE D EVEN IN SEC. 2(6A)E OF 1922 ACT, WHEREIN SIMILAR PROVISION OF D EEMED DIVIDEND WAS PROVIDED FOR. THE HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. V DAMODARAN AND THE HONBLE BOMBAY HIGH COUR T IN THE PAGE 13 OF 22 ITA NO.641/BANG/2010 13 CASE OF P.K BADIANI VS. CIT (CITED SUPRA) RESPECTIV ELY HAVE HELD THAT THE ACCUMULATED PROFITS CANNOT MEAN TO INCL UDE THE CURRENT PROFITS ALSO. IT HAS BEEN HELD THEREIN THAT ACCUM ULATED NORMALLY MEANS HEAPED UP, STORED UP OR PUT BY AND IT INDICA TES AN EFFORT ON THE PART OF THE PERSON IN THAT DIRECTION. WHILE CUR RENT PROFIT IS WHAT ACCRUES IN PRAESENTI, ACCUMULATED PROFITS RELA TES TO THE PAST AND, THEREFORE, CURRENT PROFIT CANNOT BE INCLUDED I N THE TERM ACCUMULATED PROFIT. THESE DECISIONS HAVE BEEN CO NFIRMED BY THE HONBLE SUPREME COURT IN THE CASES CITED SUPRA. HO WEVER, THESE DECISIONS RELATED TO SEC. 2(6A)E OF THE 1922 ACT, W HEREIN A SIMILAR PROVISION SUCH AS EXPLANATION (2) OF SEC. 2(22)(E) OF THE 1961 ACT WAS NOT THERE. THIS PROVISION OF ACCUMULATED PROFI TS U/S 2(22)(E) AND THE EXPLANATION (2) THERETO HAS BEEN CONSIDERED BY B BENCH OF THE ALLAHABAD TRIBUNAL IN THE CASE OF M.B STOCK HOL DING PVT. LTD (CITED SUPRA). THE TRIBUNAL AFTER CONSIDERING THE D ECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF DAMODARAN AND P.K BADIANI AS WELL AS THE DECISION OF THE HONBLE MADRAS HIGH COU RT IN THE CASE OF G NARASIMHAN (CITED SUPRA) HAS HELD THAT IT CANNOT BE SAID THAT THE EXPLANATION (2) TO SEC. 2(22)(E) IS ORIGINATED AND IT IS BOUND TO BE FOR A SPECIFIC PURPOSE. IT WAS HELD THAT THE QUESTI ON FOR DETERMINATION IN THAT CASE WAS AS TO WHAT IS THE PU RPOSE FOR WHICH THIS EXPLANATION (2) HAS BEEN INCORPORATED, WHEN TH E HONBLE SUPREME COURT IN THE CASE OF ASHOKBHAI CHIMANBHAI REPORTED IN 56 ITR 42 HAS ALREADY HELD THAT THE PROFITS OF THE BUSI NESS DO NOT ACCRUE FROM DAY TO DAY OR EVEN FROM MONTH TO MONTH AN D HAVE TO BE ASCERTAINED BY A COMPARISON OF ASSETS AT TWO STAT ED POINTS AND PAGE 14 OF 22 ITA NO.641/BANG/2010 14 UNLESS THE RIGHT TO PROFIT COMES INTO EXISTENCE, TH ERE IS NO ACCRUAL OF PROFITS AND THE DESTINATION OF PROFITS MUST BE DETERMINED BY THE TITLE THERETO ON THE DAY ON WHICH THEY ARISE. T HE TRIBUNAL HAS TAKEN THE VIEW THAT THE LEGISLATURE HAS TAKEN INTO ACCOUNT THE ABOVE FACT AND THAT WHEREAS THE PROFIT FROM BUSINES S FOR THE CURRENT YEAR MAY NOT BE DETERMINABLE IN THE MIDDLE OF THE YEAR, THERE ARE CERTAIN SOURCES OF INCOME, THE INCOME FRO M WHICH IS CAPABLE OF DETERMINATION WHICH, ACCORDING TO THE LE GISLATIVE INTENT, SHOULD ALSO BE TAKEN INTO ACCOUNT WHILE DETERMINING THE ACCUMULATED PROFITS ON THE DAY OF ADVANCING THE LOA N. IT WAS HELD THAT THE COMPANY IS A PERSON AND IT MAY CARRY ON BUS INESS AND MAY ALSO DERIVE INCOME FROM VARIOUS OTHER SOURCES, SUCH AS CAPITAL GAINS OR INCOME FROM OTHER SOURCES, WHICH MAY NOT HAVE T O WAIT FOR DETERMINATION TILL THE END OF THE YEAR. TRIBUNAL HEL D THAT SUCH INCOME SHALL ALSO HAVE TO BE TAKEN INTO ACCOUNT IN DETERMINING THE ACCUMULATED PROFITS AS IT IS NOT TO WAIT FOR DETERM INATION OF PROFIT AT THE CLOSE OF THE YEAR. HOWEVER, TRIBUNAL BY FOLLO WING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F V. DAMODARAN (CITED SUPRA) HAS HELD THAT THERE IS A DISTINCTION BETWEEN THE ACCUMULATED PROFITS AND THE CURRENT YEARS BUSINESS P ROFITS AND THEREFORE TO HOLD THAT CURRENT YEARS BUSINESS PROFI TS ARE TO BE INCLUDED IN THE ACCUMULATED PROFITS WOULD BE CONTRA RY TO THE ABOVE MENTIONED DECISION OF THE HONBLE SUPREME COURT. TH E TRIBUNAL ALSO REFERRED TO THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF NAVNITLAL C JAVERI VS. AAC, 56 ITR 198, WHEREIN IT WAS HELD THAT PROFITS ACCRUE ONLY AT THE END OF THE YEAR AND IT IS INCONCEIVABLE PAGE 15 OF 22 ITA NO.641/BANG/2010 15 THAT FOR THE PURPOSES OF APPLICATION OF SEC. 2(22)( E) AN EXERCISE SHALL HAVE TO BE TAKEN TO WORK OUT THE BUSINESS PRO FITS OF THE COMPANY ON EACH DAY THE LOAN IS ADVANCED AND WORKING THE PROFITS IN THE MIDDLE OF THE YEAR IS A COMPLICATED AFFAIR IN CO NTRAST TO WORKING OUT THE ACCUMULATED PROFITS ON THE DATE OF LOAN WITH REFERENCE TO THE ACCUMULATED PROFITS OF THE PRECEDI NG YEAR TO WHICH CERTAIN ADJUSTMENTS ARE TO BE MADE. 5.4 THE TRIBUNAL ULTIMATELY HELD AS UNDER : 30. ON ANALYSIS OF THE AFOREMENTIONED DISCUSSION IN OUR VIEW, THE FOLLOWING PRINCIPLES EMERGE :- (I) THAT FOR THE PURPOSES OF SEC. 2(22)(E), ACCUMULATED PROFITS ARE TO BE WORKED OUT UP TO THE DATE OF EACH PAYMENT/ADVANCEMENT OF THE LOAN. (II) THAT THERE IS DISTINCTION BETWEEN THE ACCUMULATED PROFIT OF THE BUSINESS AND THE CURRENT YEARS PROFITS OF THE BUSINESS. (III) THAT THE PROFITS OF BUSINESS ACCRUED AT THE END OF THE PREVIOUS YEAR (IV) THAT LOAN OR ADVANCE ARE TREATED AS DEEMED INCOME UP TO THE DATE OF FRESH LOAN WHICH IS TO BE REDUCED FROM ACCUMULATED PROFITS AND (V) THAT THE REPAYMENT OF LOAN DURING THE SAME YEAR IS NOT TO BE DEDUCTED FROM THE ACCUMULATED PROFITS. 31. WHEN ONE KEEPS ALL THE ABOVE FOUR PRINCIPLES OF LAW IN MIND, IT WILL NOT BE DIFFICULT TO APPRECI ATE THAT THE EXPLANATION 2 TO SECTION 2(22)(E) DOES NOT HAVE THE EFFECT OF INCLUSION OF CURRENT YEARS BUSIN ESS PROFITS. THESE ARE CERTAIN EXAMPLES TO SHOW THAT EXPLANATION 2 TO SECTION 2(22)(E) DOES NOT BECOME PAGE 16 OF 22 ITA NO.641/BANG/2010 16 REDUNDANT IN THE LIGHT OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF V DAMODARAN (SUPRA). 32. THEREFORE, WHEREAS THE AFOREMENTIONED ADJUSTMENTS AND OTHER ADJUSTMENTS AS MAY BE PERMISSIBLE IN LAW ARE TO BE MADE AND, ACCORDINGLY, ACCUMULATED PROFITS WORKED OUT ON EACH DAY OF LOAN O R ADVANCE IS MADE TO THE SHAREHOLDER, WE ARE OF THE FIRM VIEW THAT ALL THE PROFITS THAT HAVE NOT ACCRUE D TO THE COMPANY ADVANCING THE LOAN UPTO THE ACH DAY OF ADVANCE/LOAN HAVE TO BE TAKEN INTO ACCOUNT IN WORK ING THE ACCUMULATED PROFITS WITHIN THE MEANING OF SECTI ON 2(22)(E). BUT SINCE THE BUSINESS PROFITS OF THE COMPANY ACCRUE ONLY AT THE END OF THE YEAR, THE CURRENT YEARS BUSINESS PROFITS ARE NOT TO BE INCLUD ED. WE WOULD, THEREFORE, IN THE INTEREST OF JUSTICE, RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFF ICER FOR THE PURPOSE OF WORKING OUT THE ACCUMULATED PROFITS ON EACH DAY OF ADVANCING THE LOAN TO THE APPELLANT AND APPLY SECTION 2(22)(E) TO SUCH LOANS SUBJECT TO THE MAXIMUM OF ACCUMULATED PROFITS UP TO THE DATE OF ADVANCEMENT OF THE LOAN. 5.5 THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO PLACED RELIANCE ON THE DECISION OF THE D BENCH OF TRIBUN AL IN THE CASE OF MICO INDIA LTD., WHEREIN IT HAS BEEN HELD THAT THE AMOUNT REPRESENTING SHARE PREMIUM CANNOT FORM PART OF AC CUMULATED PROFITS AND, THEREFORE, LOANS AND ADVANCES RECEIVED BY THE ASSESSEE COMPANY OUT OF THAT COULD NOT BE TREATED AS DEEMED D IVIDEND U/S 2(22)(E) OF THE INCOME-TAX ACT. 5.6 IN THE CASE BEFORE US WE FIND THAT AS ON 31.3. 2005, THE ASSESSEE HAD ACCUMULATED PROFITS OF RS.1,02,54, 554/-. DURING THE RELEVANT ASST. YEAR, THE ASSESSEE HAS TAKEN ADVA NCES AND THE PAGE 17 OF 22 ITA NO.641/BANG/2010 17 CLOSING BALANCE AS ON 31.3.2006 WAS RS.2,27,52,132/ -. THE ASSESSEES CONTENTION IS THAT THE ADVANCE OF RS.1,2 4,28,928/-, WHICH IS THE CLOSING BALANCE AS ON 31/3/2006, HAS T O BE SET OFF FROM THE ACCUMULATED PROFITS AND THEREFORE, THERE R EMAINS NIL OR NO ACCUMULATED PROFITS OUT OF WHICH THE ADVANCE CAN BE SAID TO HAVE BEEN GIVEN TO THE ASSESSEE DURING THE PREVIOUS YEAR 2006-07 AND THEREFORE THE PROVISIONS OF SECTION 2(22)(E) AR E NOT ATTRACTED. WE CANNOT ACCEPT THIS CONTENTION OF THE ASSESSEE. THE ADVANCES TAKEN BY THE ASSESSEE DURING THE FINANCIAL YEAR 2006- 07 HAVE TO BE OUT OF ACCUMULATED PROFITS OF THE FINANCIAL YEAR 200 5-06 TILL THE DATE OF PAYMENT. THE ASSESSEE HAS GOT THE ACCUMULATE D PROFITS OF RS.1,02,54,554/- AS ON 31.3.2005. THE ACCUMULATED PROFITS AVAILABLE AS ON THE DATE OF PAYMENT ARE TO BE CONSID ERED FOR THE PURPOSE OF APPLYING THE PROVISIONS OF SECTION 2(22)( E) AND THEREFORE, WE HOLD THAT TO THE TUNE OF ACCUMULATED PROFITS AVAILABLE AS ON THE DATE OF PAYMENT OF EACH LOAN AS HELD BY THE TRIBUNAL IN THE CASE OF M B STOCK (HOLDINGS) (CITED SUPRA), THE ADVANCES ARE TO BE DEEMED AS DIVIDEND U/S 2(22)(E) OF THE ACT AND THE ASSESSEE, BEING THE SHAREHOLDER, IS LIABLE TO P AY TAX ON THE SAME. ACCORDINGLY, THE GROUND OF APPEAL NO.2 IS ALL OWED IN PART AND THE AO IS DIRECTED TO COMPUTE THE DEEMED DIVIDEND I N ACCORDANCE WITH THE DECISION OF THE TRIBUNAL IN THE CASE OF M B STOCK HOLDINGS (SUPRA). AS REGARDS THE RELIANCE OF THE ASSESSEE I N THE CASE OF MICO INDIA LTD. (CITED SUPRA) IS CONCERNED, WE HOLD THAT IT IS IRRELEVANT TO THE FACTS OF THE CASE BEFORE US AND H ENCE, NOT APPLICABLE. PAGE 18 OF 22 ITA NO.641/BANG/2010 18 6. COMING TO GROUNDS NO.3 TO 5, BRIEF FACTS ARE TH AT THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.33,95,026/- U/ S 54F OF THE I T ACT. THE AO OBSERVED THAT THE ASSESSEE HAS PUR CHASED A PLOT NEAR BANGALORE ON 5.3.2002 AND ALSO ANOTHER PROPERT Y ON 9/10/2005. HE THEREAFTER SOLD BOTH THE PROPERTIES ON 1/9/2006 AND 18.9.2006 RESPECTIVELY AND INVESTED THE SALE CON SIDERATION OF THE TWO PROPERTIES ON CONSTRUCTION OF A HOUSE AND C LAIMED DEDUCTION U/S 54F OF THE ACT. HE OBSERVED THAT THE SALE CONSIDERATION ON SALE OF BOTH THE PROPERTIES PUT TO GETHER IS RS.17,02,500/- AND THE ASSESSEE HAS CLAIMED THE SAL E CONSIDERATION OF THE FIRST PROPERTY AS RS.45,84,100/- AND CLAIMED HIGHER DEDUCTION. WHEN ASKED TO EXPLAIN, THE ASSESSEE CLA IMED THAT HE PAID RS.7,37,400/- OVER AND ABOVE THE SALE CONSIDER ATION MENTIONED IN THE PURCHASE DEED FOR PURCHASING THE FIRST PROPE RTY AND SIMILARLY, HE ALSO RECEIVED RS.36,61,600/- OVER AND ABOVE THE SALE CONSIDERATION MENTIONED IN THE SALE DEED. THUS, AC CORDING TO HIM, THESE ARE TOWARDS THE DEVELOPMENTAL CHARGES AND HAV E TO BE CONSIDERED AS COST OF ACQUISITION AND ALSO THE SALE CONSIDERATION RESPECTIVELY AND DEDUCTION U/S 54F GRANTED ON THE SU M ARRIVED AT AFTER CONSIDERING THE ABOVE FIGURES. THE AO HOWEVE R HELD THAT THESE DEVELOPMENTAL CHARGES HAVE NOTHING TO DO WITH THE PURCHASE CONSIDERATION OR SALE CONSIDERATION OF THE PROPERTI ES AS THEY ARE NOT PART OF PURCHASE OR SALE DEEDS AND THEREFORE, H E HELD THAT THE DIFFERENCE OF RS.29,24,200 BETWEEN THE DEVELOPMENTA L CHARGES PAID AND RECEIVED ARE TO BE CONSIDERED IS AS INCOME FROM OTHER PAGE 19 OF 22 ITA NO.641/BANG/2010 19 SOURCES. HE THEREFORE RESTRICTED THE CLAIM OF DEDU CTION U/S 54F TO RS.7,67,081/- ONLY. 6.1 AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BE FORE THE CIT(A), WHO CONFIRMED THE ORDER OF THE AO AND T HE ASSESSEE IS IN SECOND APPEAL BEFORE US. 6.2 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS PAID DEVELOPMENTAL CHARGES AS ON T HE DATE OF THE PURCHASE ITSELF AND THEREFORE, IT FORMS PART OF COS T OF ACQUISITION TO THE ASSESSEE AND LIKEWISE, THE ASSESSEE HAS ALSO RECEIVED THE DEVELOPMENT CHARGES WHICH HAVE TO BE CONSIDERED AS PART OF SALE CONSIDERATION AND THE ASSESSEE HAS TO BE GIVEN DEDU CTION U/S 54F ACCORDINGLY. 6.3 THE LEARNED DR, HOWEVER, REFUTED THIS ARGUMENT AND STATED THAT THESE DEVELOPMENT CHARGES BOTH PAID AND RECEIVED HAVE NOT BEEN REFLECTED IN THE RESPECTIVE SALE DEEDS. H E SUBMITTED THAT THE ASSESSEE HAS ALSO NOT PRODUCED ANY EVIDENCE TO S HOW THAT ANY DEVELOPMENT ACTIVITY HAS BEEN CARRIED OUT IN THE SAI D SITE FOR WHICH THESE PAYMENTS HAVE BEEN PAID OR RECEIVED. THEREFOR E, ACCORDING TO HIM, THE DIFFERENCE BETWEEN THE DEVELOPMENT CHAR GES PAID AND RECEIVED HAS BEEN RIGHTLY TREATED AS INCOME FROM OTH ER SOURCES. 6.4 HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THE MATERIAL ON RECORD, WE FIND THAT THE DEVELOPMEN T CHARGES PAID BY THE ASSESSEE TO THE PURCHASER WOULD BECOME PART O F THE COST OF PAGE 20 OF 22 ITA NO.641/BANG/2010 20 IMPROVEMENT TO THE SITE AND THUS, PART OF COST OF A CQUISITION. SIMILARLY, THE DEVELOPMENT CHARGES RECEIVED BY HIM AL SO HAVE TO BE CONSIDERED AS SALE CONSIDERATION FOR THE PROPERTY. IN SUCH CASE, THE DEDUCTION U/S 54F ALSO WILL HAVE TO BE COMPUTED AFTER TAKING INTO ACCOUNT THE COMPOSITE SUMS. THIS GROUND IS AC CORDINGLY ALLOWED. 7. AS REGARDS THE NEXT GROUND OF APPEAL I.E. GROUN D OF APPEAL NO.6, BRIEF FACTS ARE THAT THE ASSESSEE OWNS A PORTION OF PROPERTY IN A COMMERCIAL COMPLEX AT MANGALORE, WHICH HE WAS USING FOR HIS BUSINESS. ON 1/12/2006, THE ASSESSEE TRANS FERRED THE SAID BUSINESS TO A COMPANY CALLED M/S MATHIAS ALUMINIUM S YSTEMS PVT. LTD. IN WHICH HE IS A MAJOR SHAREHOLDER BY TRANSFER RING ASSETS AND LIABILITIES AT BOOK VALUE. IN THIS BACKGROUND, TH E ASSESSEE CLAIMED DEPRECIATION ON THE BUILDING FOR A PERIOD OF 8 MONT HS AS HE WAS USING THE SAME FOR HIS BUSINESS. SIMILARLY, HE ALSO CLAIMED DEPRECIATION ON PLANT AND MACHINERY FOR THE PERIOD OF 8 MONTHS. THE AO HOWEVER HELD THAT THE ASSESSEE HAVING TRANSF ERRED HIS BUSINESS ON 1/12/2006, THE ASSETS CEASES TO BE BUSI NESS ASSETS AS ON 31.3.2007 AND THEREFORE, DEPRECIATION ON THESE A SSETS CANNOT BE ALLOWED AS PER THE PROVISIONS OF THE INCOME TAX ACT . 7.1 THIS DISALLOWANCE WAS CONFIRMED BY THE CIT(A) A ND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 7.2 THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE PROVISO 5 TO SECTION 32 WHEREIN IT IS PROVIDED THAT PAGE 21 OF 22 ITA NO.641/BANG/2010 21 ON SUCCESSION REFERRED TO IN CLAUSE (XIII) AND CLAU SE (XIV) OF SECTION 47 OR SECTION 170 OR DEMERGER OR AMALGAMATION, DEPR ECIATION ON THE ASSETS SHALL NOT EXCEED IN ANY PREVIOUS YEAR THE DEDU CTION CALCULATED AT THE PRESCRIBED RATES AS IF THE SUCCES SION OR THE AMALGAMATION OR THE DEMERGER, HAD NOT TAKEN PLACE A ND SUCH DEDUCTION SHALL BE APPORTIONED BETWEEN THE PREDECES SOR AND THE SUCCESSOR IN THE RATIO OF NUMBER OF DAYS FOR WHICH T HE ASSETS WERE USED BY THEM. THUS, ACCORDING TO THE LEARNED COUNSE L FOR THE ASSESSEE, THE ASSESSEE HAS CLAIMED DEPRECIATION ONL Y FOR THE PERIOD FOR WHICH THE ASSESSEE HAS USED THE ASSETS FOR THE PURPOSE OF HIS BUSINESS AND IT IS TO BE ALLOWED ACCORDINGLY. 7.3 THE LEARNED DR, HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 7.4 HAVING HEARD BOTH THE PARTIES, WE FIND THAT TH E ASSESSEES CLAIM OF DEPRECIATION ON THE ASSETS USED BY HIM DURING THE PERIOD IN WHICH HE WAS THE OWNER OF THE ASSETS WAS NOT ALLOWED AS THE ASSETS CEASED TO EXIST IN THE BALANCE SHEET OF THE ASSESSEE ON THE CLOSING DAY OF THE RELEVANT PREVIOUS YEAR. THE RELIANCE OF THE ASSESSEE IS ON THE 5 TH PROVISO TO SECTION 32 AS IN THAT PROVISO, THE SUCCESSION RELATED TO SUCCESSION OF A FIRM BY A COMP ANY OR WHERE A SOLE PROPRIETARY CONCERN IS SUCCEEDED BY A COMPANY AND TO A CASE OF SUCCESSION TO BUSINESS OTHERWISE THAN ON DEATH. IN THE CASE BEFORE US, THERE IS A TRANSFER OF ASSETS AND LIABILITIES B Y THE ASSESSEE TO THE COMPANY AT THE BOOK VALUE. IT IS NOT CLEAR AS T O WHETHER THE PAGE 22 OF 22 ITA NO.641/BANG/2010 22 ASSESSEE WAS RUNNING THE BUSINESS OF COMMERCIAL COM PLEX AS A SOLE PROPRIETOR. IN THAT CASE, IT WOULD BE A CASE OF TR ANSFER OF BUSINESS OF A SOLE PROPRIETOR TO THE COMPANY WHICH CONTINUES TO CARRY ON THE BUSINESS AND IT WOULD BE A CASE FALLING UNDER CLAUS E (XIV) OF SECTION 47 OF THE ACT. THIS LEGAL ISSUE WAS NOT RAISED BEF ORE THE AUTHORITIES BELOW. THEREFORE, WE DEEM IT FIT AND P ROPER TO REMIT THIS ISSUE TO THE FILE OF THE AO TO CONSIDER IT AFR ESH IN THE LIGHT OF OUR ABOVE OBSERVATIONS AND IN ACCORDANCE WITH LAW. THIS GROUND IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 8. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED ON FRIDAY, THE 26 TH DAY OF AUGUST, 2011 AT BANGALORE. SD/- SD/- (A MOHAN ALANKAMONY) (P MADH AVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMB ER COPY TO : 1) THE ASSESSEE (2) THE REVENUE (3) THE CIT(A) CONCERNED. (4) THE CIT CONCERNED. (5) THE DR (6) GUARD FILE. MSP/ BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.