M/s. Mali Florex Ltd., Hyd, Hyderabad V. DCIT, Central Circle-6, Hyderabad

ITA 891/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66332 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 4 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 12-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V SRINIVAS
• Keywords: Capital asset; Business expenditure; Valuation report
• Section: 153A; 234B; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER I.T.A. NO. 891/HYD/2011 ASSESSMENT YEAR 2008-09 M/S. MALI FLOREX LTD. HYDERABAD PAN: AACCM8205A VS. DY. CIT CENTRAL CIRCLE-6 HYDERABAD APPELLANT RESPONDENT I.T.A. NO. 1018/HYD/2011 ASSESSMENT YEAR 2008-09 DY. CIT CENTRAL CIRCLE-6 HYDERABAD VS. M/S. MALI FLOREX LTD. HYDERABAD PAN: AACCM8205A APPELLANT RESPONDENT I.T.A. NO. 1017/HYD/2011 ASSESSMENT YEAR 2007-08 DY. CIT CENTRAL CIRCLE-6 HYDERABAD VS. M/S. MALI FLOREX LTD. HYDERABAD PAN: AACCM8205A APPELLANT RESPONDENT ASSESSEE BY: SRI K.C. DEVDAS REVENUE BY: SRI V. SRINIVAS DATE OF HEARING: 2 9.0 8 .2012 DATE OF PRONOUNCEMENT: 28.09.2012 O R D E R PER CHANDRA POOJARI, AM: ITA NO. 891/HYD/2011 AND ITA NO. 1018/HYD/2011 ARE CROSS APPEALS FOR THE ASSESSMENT YEAR 2008-09. ITA NO. 1 017/HYD/2011 IS APPEAL BY THE REVENUE FOR THE ASSESSMENT YEAR 2007- 08. SINCE THESE APPEALS BELONG TO THE SAME ASSESSEE, THESE ARE CLUB BED AND HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON O RDER FOR THE SAKE OF CONVENIENCE. I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 2 2. FIRST WE WILL TAKE UP ITA NO. 1017/HYD/2011. THE R EVENUE RAISED THE GROUND THAT THE CIT(A) ERRED IN DELETING THE CAPITAL GAINS OF RS. 1,90,14,870 WHICH WAS ARRIVED ON THE BASIS OF A N AGREEMENT OF SALE ENTERED INTO BY THE ASSESSEE WITH SRI B. MOHAN REDD Y. 3. BRIEF FACTS OF THE ISSUE ARE THAT THERE WAS SEARCH ACTION U/S 132 OF THE ACT ON THE BUSINESS PREMISES OF THE ASSESSEE ON 17/10/2007. DURING THE COURSE OF SEARCH ACTION IT CAME TO THE K NOWLEDGE OF THE DEPARTMENT THAT THE ASSESSEE ENTERED INTO SALE AGRE EMENT FOR SALE OF 15 ACRES 39 GUNTAS OF LAND TO SRI B. MOHAN REDDY FOR A CONSIDERATION OF RS. 2.24 CRORES. OUT OF THIS, THE ASSESSEE HAS RECE IVED RS. 8 LAKHS AS ADVANCE CONSIDERATION ON 3/2/2007 AND THE BALANCE A MOUNT IS PAYABLE WITHIN A PERIOD OF SIX MONTHS OR IN THE EVENT OF DE FAULT THE VENDEE SHALL BE LIABLE TO PAY AN INTEREST @ 18 % FOR A MAXIMUM E XTENDED PERIOD OF ONE MONTH. THE AGREEMENT OF SALE IS DULY REGISTERED ON 25/2/2007. ACCORDING TO THE ASSESSING OFFICER THERE IS A RELIN QUISHMENT OF RIGHT OVER THE ASSET BY THE ASSESSEE TO THE PURCHASER. B EING SO, HE WAS OF THE OPINION THAT THERE IS A TRANSFER IN VIEW OF PROVISI ON OF SEC. 2(47) OF THE ACT AND LEVIED TAX ON CAPITAL GAIN ACCORDINGLY. 4. ON APPEAL THE CIT(A) OBSERVED THAT AGAINST THE AGRE ED TOTAL SALE CONSIDERATION OF RS. 2,24,00,000, ONLY A PALTRY ADV ANCE OF RS. 8 LAKH WAS RECEIVED BY THE ASSESSEE. THE ASSESSING OFFICER HAS CONSIDERED THE TRANSACTION AS 'TRANSFER' WITHIN THE MEANING OF SEC . 2(47) OF THE IT ACT ON THE GROUND THAT THE VENDOR HAD AGREED TO EXECUTE THE SALE DEED AS PER THE TERMS OF THE AGREEMENT OF SALE AND THAT THE RE WAS A CLAUSE ALLOWING THE VENDEE TO ENTER INTO FURTHER AGREEMENT IN RESPECT OF THE SCHEDULED PROPERTY. CONSIDERING THE SAME, THE ASSES SING OFFICER HELD THAT THE ASSESSEE HAD RELINQUISHED HIS RIGHTS IN TH E PROPERTY IN FAVOUR OF THE PURCHASER WHICH COMES WITHIN THE MEANING OF SEC . 2(47) OF THE ACT. 5. THE CIT(A) OBSERVED THAT AS PER SEC. 2(47) 'TRANSFE R' IN RELATION TO A CAPITAL ASSET INCLUDES SALE, EXCHANGE, OR RELI NQUISHMENT OF THE ASSET OR THE EXTINGUISHMENT OF ANY RIGHT THEREIN OR COMPU LSORY ACQUISITION I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 3 THEREOF UNDER ANY LAW. IN THE CASE UNDER CONSIDERA TION IT IS NOT DISPUTED THAT THERE WAS ONLY AN AGREEMENT OF SALE F OR WHICH A MEAGRE ADVANCE OF RS. 8 LAKH WAS RECEIVED BY THE ASSESSEE AS AGAINST THE TOTAL CONSIDERATION OF RS. 2.24 CRORE. IT IS ALSO A FACT NOT DISPUTED THAT THERE WAS NO SALE OR EXCHANGE OR COMPULSORY ACQUISITION O F THE PROPERTY. THIS LEAVES WITH ONLY TWO OPTIONS I.E. 'RELINQUISHMENT O F THE ASSET' AND 'EXTINGUISHMENT OF ANY RIGHT THEREIN' SO AS TO INVO KE THE PROVISION OF SEC. 2(47) OF THE ACT. AS PER LEGAL INTERPRETATION , 'RELINQUISHMENT' MEANS FORSAKING, ABANDONING OR GIVING OVER WHICH IS BASICALLY A VOLUNTARY ACT. ON THE OTHER HAND 'EXTINGUISHMENT' MEANS EXTINCTION, OR ANNIHILATION OF A RIGHT, ESTATE ETC BY MEANS OF ITS BEING MERGED IN OR CONSOLIDATED WITH ANOTHER GENERALLY A GREATER OR MO RE EXTENSIVE RIGHT OR ESTATE. WHEREVER A RIGHT, TITLE OR INTEREST IS DEST ROYED OR TAKEN AWAY BY THE ACT OF GOD OR OPERATION OF LAW OR ACT OF THE PA RTY THE SAME IS CALLED EXTINGUISHMENT (REFERENCE LAW LEXICON). THUS, TO BR ING THE TRANSACTION WITHIN THE MEANING OF SEC. 2(47) IT IS REQUIRED TO BE EXAMINED WHETHER THERE WAS ANY RELINQUISHMENT OF TH E ASSET BY THE ASSESSEE OR THERE WAS EXTINGUISHMENT OF THE RIGHT T HEREIN. THE CIT(A) OBSERVED THAT SINCE THE ASSESSEE HAD NOT HANDED OVE R THE POSSESSION OF THE PROPERTY AND ONLY AN AGREEMENT OF SALE WAS ENTE RED, THE ASSESSEE REMAINED THE LEGAL OWNER OF THE PROPERTY FOR ALL PR ACTICAL PURPOSE. EVEN IF THE VENDEE IN THE AGREEMENT OF SALE HAD BEE N GIVEN PERMISSION TO ENTER INTO FURTHER AGREEMENT THAT DOES NOT MEAN THAT THE VENDEE HAD ABSOLUTE RIGHT TO TRANSFER THE PROPERTY TO ANY OTHE R PERSON ON HIS OWN WILL. THUS, THERE WAS NO 'RELINQUISHMENT OF THE ASS ET' BY THE ASSESSEE. 6. HE ALSO OBSERVED THAT THERE WAS NO EXTINGUISHMENT O F RIGHT OF THE ASSESSEE IN THE SAID PROPERTY. ACCORDING TO THE CIT(A), THE ASSESSMENT ORDER DOES NOT THROW ANY LIGHT THAT THER E WAS ANY EXTINGUISHMENT OF RIGHT OF THE ASSESSEE IN THE PROP ERTY REFERRED TO. IT IS BECAUSE THE ASSESSEE REMAINED THE LEGAL OWNER AND T HERE WAS NO EXTINGUISHMENT OF ANY TYPE BY AN ACT OF GOD OR OPER ATION OF LAW. THE ASSESSING OFFICER HAS INVOKED THE PROVISION OF SEC. 2(47) OF THE IT ACT STATING THAT THERE WAS RELINQUISHMENT OF RIGHT BY T HE ASSESSEE. SEC. I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 4 2(47) DOES NOT SPEAK OF 'RELINQUISHMENT OF RIGHT' A T ALL. EITHER IT HAS TO BE 'RELINQUISHMENT OF ASSET' OR 'EXTINGUISHMENT OF RIGHT THEREIN'. THUS, CONSIDERING THE FACT IN TOTALITY, THE CIT(A) WAS OF THE OPINION THAT THERE WAS NO JUSTIFICATION ON THE PART OF THE ASSES SING OFFICER FOR INVOKING THE PROVISION OF SEC. 2(47) OF THE IT ACT SIMPLY ON THE BASIS OF THE AGREEMENT OF SALE SINCE NONE OF THE CONDITIONS RELATING TO THE 'TRANSFER' ENUMERATED IN SEC. 2(47) WERE FULFILLED. OTHERWISE ALSO, AS STATED BY THE ASSESSEE, NO PRUDENT PERSON SHALL HAN D OVER THE POSSESSION OF THE PROPERTY AND TRANSFER THE OWNERSH IP ON PAYMENT OF A PALTRY SUM OF RS. 8 LAKHS WHEN THE MARKET VALUE OF THE PROPERTY IS AROUND RS. 2.24 CRORE. ACCORDINGLY, HE HELD THAT T HE ASSESSING OFFICER WAS NOT JUSTIFIED IN TREATING THE TRANSACTION AS TR ANSFER WITHIN THE MEANING OF SEC. 2(47) OF THE IT ACT SO AS TO LEVY C APITAL GAIN THEREON. THUS THE COMPUTATION OF CAPITAL GAIN MADE BY THE AS SESSING OFFICER AND ADDING THE SAME TO THE TOTAL INCOME IS HELD TO BE U NJUSTIFIED AND DIRECTED TO BE DELETED. AGAINST THIS THE REVENUE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THE ASSESSEE ENTERED INTO SALE AGREEMENT O N 25/2/2007 FOR SALE OF LAND ADMEASURING 15 ACRES 39 GUNTAS. THE AS SESSEE RECEIVED RS. 8 LAKHS OUT OF TOTAL CONSIDERATION OF RS. 2.24 CROR ES. ACCORDING TO THE ASSESSING OFFICER THERE IS A RELINQUISHMENT OF RIGH T OVER THE PROPERTY TO THE PURCHASER WHICH AMOUNTS TO TRANSFER U/S. (47) O F THE INCOME-TAX ACT, 1961. IN OUR OPINION THE CONCLUSION OF THE ASS ESSING OFFICER IS FARFETCHED. THE ASSESSEE RECEIVED ONLY A MEAGRE CON SIDERATION OF RS. 8 LAKHS AND ALSO THE ASSESSEE STILL OWNER OF THE PROP ERTY. IT IS ALSO BROUGHT TO OUR NOTICE THAT THE ASSESSEE NOT PARTED THE POSS ESSION OF THE PROPERTY. IN SUCH CIRCUMSTANCES TREATING THE TRANSA CTION AS TRANSFER BY HOLDING AS A RELINQUISHMENT OF RIGHT OVER THE PROPE RTY IS NOT JUSTIFIED. IN THE PRESENT CASE, THE ASSESSEE EXECUTED ONLY SAL E AGREEMENT ON 3/2/2007 WITH THE STIPULATION OF EXECUTING THE SALE DEED WITHIN A PERIOD OF 6 MONTHS ON TERMS AND CONDITIONS STIPULAT ED THERE IN, WITHOUT TRANSFERRING ANY RIGHT OF OWNERSHIP, USE OR POSSESS ION OF THE PROPERTY, OR TRANSFERRING ANY RIGHT OVER THE INCOME ARISING F ROM SUCH PROPERTY TO I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 5 THE PURCHASER AND HAVING DECIDED TO EXECUTE THE SAL E DEED IN A FUTURE DATE THE TRANSACTION OF SALE OF PROPERTY WAS NOT CO MPLETED IN TERMS OF SECTION 2(47) OF THE ACT., SPECIFICALLY, READ WITH THE SEC 53A OF TRANSFER OF PROPERTY ACT, 1882. WE PLACE RELIANCE ON THE JU DGEMENT OF PATNA HIGH COURT IN THE CASE OF SMT. RAJ RANI DEVI RAMNA VS. CIT ( 201 ITR 1032) WHEREIN IT WAS HELD THAT SALE DEED, THOUGH RE GISTERED, STIPULATING A CONDITION PRECEDENT THAT THE PROPERTY SHALL PASS ONLY ON RECEIPT OF SALE CONSIDERATION, TRANSACTION DID NOT TAKE PLACE ON THE DATE OF REGISTRATION OF SALE DEED. WE ALSO PLACE RELIANCE O N THE ORDER OF THE DELHI TRIBUNAL IN THE CASE OF ITO VS. SMT. SATWAVAT I DEVI VERMA (124 ITD 467) WHEREIN HELD THAT THE ASSESSEE HAVING EXEC UTED THE AGREEMENT, WHICH ONLY CONTEMPLATED THE SALE PROPERT Y TO THE PURCHASER ON A FUTURE DATE ON CERTAIN TERMS WITHOUT TRANSFERR ING ANY RIGHT OF OWNERSHIP, AND NO POSSESSION OF PROPERTY IS GIVEN O R RIGHT TO USE THE PROPERTY OR RIGHT RECEIVED INCOME ARISING IN THE PR OPERTY ALSO NOT GIVEN TO THE PURCHASER, IN SUCH CIRCUMSTANCES, IT IS NOT A TRANSFER IN TERMS OF SECTION 2(47) OF THE IT ACT, 1961. WE ALSO PLACE RELIANCE ON THE DECISION OF CIT VS. RASIKLAL MANEKLAL (HUF) (177 IT R 198)(SC) WHEREIN THE APEX COURT HELD, AFFIRMING THE DECISION OF THE HIGH COURT, THAT THERE WAS NEITHER AN 'EXCHANGE' NOR A 'RELINQUISHME NT' AND NO CAPITAL GAINS AROSE FROM THE TRANSACTION. AN 'EXCH ANGE' INVOLVES THE TRANSFER OF PROPERTY BY ONE PERSON TO ANOTHER AND R ECIPROCALLY THE TRANSFER OF PROPERTY BY THAT OTHER TO THE FIRST PER SON. THERE MUST BE A MUTUAL TRANSFER OF OWNERSHIP OF ONE THING FOR THE O WNERSHIP OF ANOTHER. A 'RELINQUISHMENT' TAKES PLACE WHEN THE O WNER WITHDRAWS HIMSELF FROM THE PROPERTY AND ABANDONS HIS RIGHTS T HERETO. IT PRESUMES THAT THE PROPERTY CONTINUES TO EXIST AFTER THE RELINQUISHMENT. WHERE, UPON AMALGAMATION, THE COMPANY IN WHICH THE ASSESSEE HOLDS SHARES STANDS DISSOLVED, THERE IS NON 'RELINQUISHME NT' BY THE ASSESSEE. IN VIEW OF THE ABOVE DISCUSSION, THERE IS NO RELINQ UISHMENT OF RIGHT OVER THE PROPERTY. ACCORDINGLY, THE APPEAL OF THE REVEN UE IS DISMISSED. I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 6 ITA NOS. 1018 AND 891/HYD/2011: 8. THE ASSESSEE RAISED THE FOLLOWING GROUNDS IN ITA NO . 891/HYD/2011: 1. THE ORDER OF THE CIT(A)-I, HYDERABAD IN CONFIRMING THE PAYMENTS MADE TO SYED NASER AND DILIP KUMAR AT RS. 5 LAKHS IS UNSUSTAINABLE IN LAW. 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENDITURE OF RS. 19,81,519 WHICH PARTOOK THE CHARACTER OF AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN THE COURSE OF CARRYING ON THE APPELLANT'S BUSINESS. 3. THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF SITE-LEVELLING EXPENDITURE AT RS. 13,90,000. 4. THE ORDER OF THE LEARNED CIT(A) IN CONFIRMING THE DISALLOWANCE OF PAYMENTS TO SUB-AGENTS AT RS. 87 LAKHS, 71 LAKHS AND 40.10 LAKHS ON WHICH TAX WAS DEDUCTED AT SOURCE BEING TOTALLY CONTRARY TO THE FA CTS AND EVIDENCE ON RECORD IS UNSUSTAINABLE. 5. THE LEARNED CIT(A) ERRED IN DISALLOWING THE ARCHITECT'S FEE PAID AT RS. 19 LAKHS. 6. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF TECHNICAL EXPENDITURE AT RS. 4,96,5 62. 7. THE LEARNED CIT(A) ERRED IN SUSTAINING IN PAR THE VIDEO SURVEILLANCE CHARGES AT RS. 28,99,100. 9. THE REVENUE IS AN APPEAL WITH REGARD TO CANCELLATIO N OF PROTECTIVE ASSESSMENT IN THE HANDS OF THE ASSESSEE AS THE ADDITION OF RS. 125.74 CRORES WAS MADE IN THE HANDS OF M/S. DEMI RE ALTORS ON SUBSTANTIVE BASIS. 10. WE WILL TAKE UP ASSESSEE'S APPEAL. THE FIRST GROUND IS WITH REGARD TO CONFIRMING THE ADDITION TOWARDS PAYMENT MADE TO SYED NASER AND DILIP KUMAR @ RS. 5 LAKHS. THE ASSESSEE CLAIMED THE PAYMENT OF RS. 5 LAKHS SAID TO HAVE BEEN MADE TO SYED NASER AND DIL IP KUMAR AND THE PAYMENT WAS SAID TO BE MADE BY A/C PAYEE CHEQUES. T HE ADDITION WAS SUSTAINED IN THE HANDS OF THE ASSESSEE ON THE REASO N THAT IT WAS DELETED IN THE HANDS OF THE RECIPIENTS. ACCORDING TO THE L EARNED AR THE ASSESSEE I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 7 MADE TOTAL PAYMENT OF RS. 30 LAKHS. THE CIT(A) ALLO WED RS. 25 LAKHS AND DISALLOWED ONLY RS. 5 LAKHS. THERE IS NO REASON TO SUSTAIN THIS RS. 5 LAKHS AND THE PAYMENT IS NOT DOUBTED ONLY QUANTUM I S DOUBTED THOUGH THE PAYMENT WAS MADE BY A/C PAYEE CHECKS. THE CIT(A ) ACCEPTED THE PAYMENT OF RS. 20 LAKHS TO M/S. RADHA REALTORS THRO UGH MOU DATED 28/7/2007. HE ALSO ACCEPTED THE PAYMENT OF RS. 5 L AKHS TO MR. VITTAL REDDY VIDE CHEQUE NO. 673835. HOWEVER, ONLY HE DOU BTED THE PAYMENT OF RS. 5 LAKHS TO SYED NASER AND DILIP KUMA R. WHEN THE PAYMENT OF THIS AMOUNT AROSE OUT OF THE SAME TRANSA CTION, IN OUR OPINION, THIS PAYMENT ALONE CANNOT BE DISALLOWED. MORE SO, ALL THESE PERSONS HAD CLAIMED THE RIGHT OVER THE PROPERTY WHI CH THE ASSESSEE DEALT WITH BY SELLING THE SAME TO DLF GROUP OF COMP ANIES. AT THAT TIME, THEY INITIATED CIVIL LITIGATION AND THIS EXPE NDITURE, IN OUR OPINION, IT IS INCURRED BY THE ASSESSEE ON ACCOUNT OF BUSINE SS AND COMMERCIAL EXIGENCIES FOR THE PURPOSE OF BUSINESS. THE DELETIO N OF THE ADDITION BY CIT(A) IN THE HANDS OF RECIPIENTS MAY BE ON VARIOUS REASONS, BUT THAT ITSELF CANNOT BE A REASON TO SUSTAIN THE SAME IN TH E HANDS OF THE ASSESSEE WHO HAS INCURRED THIS EXPENDITURE WHOLLY A ND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE INCLINED TO DELETE THE ADDITION. 11. THE NEXT GROUND IS WITH REGARD TO CONFIRMING THE AD DITION OF RS. 19,81,519. BRIEF FACTS OF THE ISSUE ARE THAT THE A SSESSEE CLAIMED THE ABOVE EXPENDITURE AS PROJECT EXPENDITURE. ACCORDIN G TO THE ASSESSING OFFICER, THE ASSESSEE IS FOLLOWING MERCANTILE SYSTE M OF ACCOUNTING AND THIS EXPENDITURE IS RELATING TO EARLIER ASSESSMENT YEAR AND THE SAME WAS DISALLOWED. THE CIT(A) CONFIRMED THE SAME. 12. LEARNED AR REITERATED THE SAME SUBMISSIONS AS STATE D BEFORE THE ASSESSING OFFICER. HE SUBMITTED THAT THE ASSESSEE ENTERED INTO AN MOU WITH DLF IN THE YEAR 2007 AND IN TERMS OF THE SAME, COMMENCED ITS BUSINESS ACTIVITY OF PROCURING SUITABLE LAND FOR DL F. THE ADMINISTRATIVE EXPENDITURE OF RS. 19,81,519 WAS INC URRED OVER THE PAST I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 8 3 YEARS FOR THE PROJECT AND THE SAME WAS DEBITED DU RING THE ACCOUNTING YEAR 2007-08 WHEN THE PROJECT RESULTED IN INCOME. 13. THE DR SUBMITTED THAT IT IS ADMITTED BY THE ASSESSE E THAT THE EXPENDITURE OF RS. 19,81,519 RELATED TO EARLIER YEA RS. THE ASSESSEE ITSELF HAVE STATED THAT AFTER ENTERING MOU WITH DLF, IT CO MMENCED ITS BUSINESS ACTIVITY FOR PROCURING THE LAND FOR DLF AN D IN THE PROCESS, HAD APPOINTED LOT OF STAFF, ETC. SINCE THE EXPENDITURE RELATED TO EARLIER 3 YEARS, THEN OBVIOUSLY, THE SAME DOES NOT PERTAIN TO THIS PROJECT AS THE MOU RELATING TO THIS PROPERTY WAS ENTERED IN 2007 O NLY. ACCORDINGLY, THE EXPENDITURE DEBITED BY THE ASSESSEE IS NOT AN A DMISSIBLE EXPENDITURE BEING UNRELATED TO THE PROJECT/BUSINESS FOR WHICH THE INCOME HAS BEEN SHOWN. OTHERWISE ALSO, AS PER THE MERCANTILE SYSTEM OF ACCOUNTING, THE EXPENDITURE OF EARLIER YEAR CANN OT BE ALLOWED IN THE YEAR UNDER CONSIDERATION ESPECIALLY WHEN THE ASSESS EE HAS NOT BEEN ABLE TO SPECIFICALLY POINT OUT THAT THE LIABILITY F OR THE EXPENDITURE HAS CRYSTALLISED IN THE YEAR UNDER CONSIDERATION. ACCO RDINGLY, THE DR SUBMITTED THAT THE DISALLOWANCE OF RS. 19,81,519 MA DE BY THE ASSESSING OFFICER AND CONFIRMED BY THE CIT(A) IS JUSTIFIED. 14. WE HAVE HEARD THE PARTIES. ADMITTEDLY, THIS EXPEND ITURE WAS INCURRED NOT IN THE ASSESSMENT YEAR UNDER CONSIDERA TION AND IT WAS RELATED TO EARLIER 3 YEARS. BEING SO, IT CANNOT BE SAID THAT IT IS ALLOWABLE IN THIS ASSESSMENT YEAR UNDER CONSIDERATION, AS THE DLF PROJECT WAS COMMENCED VIDE MOU ENTERED ON 23/6/2007. IF IT IS INCURRED PRIOR TO THE COMMENCEMENT OF THE BUSINESS, AND IT IS INCURRE D NOT FOR CARRYING ON THE BUSINESS OF THE ASSESSEE BUT FOR SETTING UP THE BUSINESS. ACCORDINGLY IT CANNOT BE CONSIDERED AS BUSINESS EXP ENDITURE TO ALLOW THE DEDUCTION. THE ADDITION IS SUSTAINED. 15. THE NEXT GROUND IS WITH REGARD TO SUSTAINING DISALL OWANCE OF SITE LEVELLING EXPENDITURE AT RS. 13.90 LAKHS. BRIEF FA CTS OF THE ISSUE ARE THAT DURING THE ASSESSMENT PROCEEDINGS THE ASSESSING OF FICER REQUESTED THE ASSESSEE TO FURNISH THE DETAILS REGARDING SITE LEVE LLING EXPENSES. AFTER I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 9 VERIFYING THE DETAILS FILED BY THE ASSESSEE THE ASS ESSING OFFICER FOUND THAT RS. 6,33,924 WAS PAID TO LUMBINI FILLING STATI ONS TOWARDS FUEL EXPENSES AND ALL THE PAYMENTS WERE MADE INC ASH IN EXCESS OF RS. 20,000. THE ASSESSING OFFICER OBSERVED THAT THE PA YMENTS CLEARLY ATTRACTED THE PROVISION OF SECTION 40A(3). A REGAR DS THE BALANCE EXPENSES, THE ASSESSING OFFICER ALSO OBSERVED THAT THE PAYMENTS WERE MADE BY CASH THOUGH THE SAME WAS BELOW RS. 20,000. THE ASSESSING OFFICER ALSO OBSERVED THAT IN THE CASE OF DEMI REAL TORS A REFERENCE WAS MADE TO THE VALUATION OFFICER TO VERIFY WHETHER ANY DEVELOPMENT EXPENDITURE WAS INCURRED IN RESPECT OF THE LAND SOL D TO THE DLF COMPANY AND IT WAS REPORTED BY THE VALUATION OFFICE R THAT NO DEVELOPMENTAL EXPENSES WERE INCURRED ON THE LAND SO LD. THE ASSESSING OFFICER ALSO OBSERVED THAT IN THE MOU THERE IS NO C LAUSE FOR DEVELOPMENT OF THE LAND TO BE SOLD TO DLF COMPANY. FURTHER, AS PER THE VOUCHERS, THE PAYMENTS WERE APPEARING IN JANUAR Y AND FEBRUARY 2008 WHEREAS THE LAND WAS SOLD TO DLF IN AUGUST, 20 07. THE ASSESSING OFFICER, THEREFORE, CONCLUDED THAT THE CA SH VOUCHERS IN RESPECT OF THE SITE LEVELLING EXPENSES WERE NOT GEN UINE. HE, THEREFORE, DISALLOWED THE EXPENDITURE OF RS. 13,90,000. 16. THE LEARNED AR SUBMITTED THAT AS PER THE TERMS OF T HE MOU WITH DLF THE ASSESSEE COMPANY WAS RESPONSIBLE FOR MUTATI ON OF THE LAND REGISTERED IN FAVOUR OF DLF. POSSESSION AND DEMARC ATION NEEDS TO BE PROVED TO THE MANDAL REVENUE OFFICER FOR EFFECTIVE MUTATION OF THE LAND IN FAVOUR OF DLF. IT WAS STATED THAT THE MUTATION OF THE LAND IN FAVOUR OF DLF WAS EFFECTED 3 TO 6 MONTHS AFTER REGISTRATIO N. THEREFORE, THE ASSESSING OFFICER WAS NOT JUSTIFIED TO DISALLOW THE EXPENSES MECHANICALLY. 17. THE DR SUBMITTED THAT THE MEMORANDUM OF UNDERSTANDI NG WAS ENTERED BETWEEN THE ASSESSEE, DEMI REALTORS AND DLF COMMERCIAL DEVELOPERS. AS PER THE SAID MOU, THE ASSESSEE ALON G WITH DEMI REALTORS HAD APPROACHED DLF WITH A PROPOSAL TO PROC URE LAND ON BEHALF OF THE DLF. AS PER THE SCHEDULE, THE LAND T HAT WAS TO BE I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 10 PROCURED BY THE ASSESSEE FOR DLF WAS APPROXIMATELY 6 ACRES 32 GUNTAS IN SURVEY NO. 217, 220 TO 224 AT NARSINGI VILLAGE A ND APPROXIMATELY 3 ACRES 27 GUNTAS IN SURVEY NO. 226 AND 227 AT NARSIN GI VILLAGE. AS PER THE MOU THE ASSESSEE SHALL ARRANGE AND ENSURE THAT ALL THE LAND OWNERS SHALL ENTER INTO SALE DEEDS DIRECTLY WITH THE SECON D PARTY AND SHALL ENSURE THE EXECUTION AND REGISTRATION OF THE SALE D EED IN RESPECT OF THE SCHEDULED LAND IN FAVOUR OF DLF I.E. SECOND PARTY D IRECTLY FROM ALL LAND OWNERS. THE ASSESSEE WAS TO ENSURE THAT THERE WAS A CLEAR AND MARKETABLE TITLE TO THE LAND WITHOUT ANY ENCUMBRANC E. THUS IT IS CLEAR FROM THE MOU THAT THE RESPONSIBILITY OF THE ASSESSE E IS LIMITED TO COMPLETION OF THE LEGAL FORMALITIES FOR SMOOTH TRAN SFER OF LAND FROM THE LAND OWNERS/CLAIMANTS TO THE PURCHASERS I.E. DLF GR OUP OF COMPANIES. THE MOU DOES NOT SPEAK ANYTHING SPECIFIC REGARDING ANY SITE LEVELLING EXPENSES OR ANY OTHER EXPENDITURE OF SIMILAR NATURE . AS PER THE PAPER BOOK FILED BY THE ASSESSEE THE SALE DEEDS HAD BEEN EXECUTED IN THE MONTH OF AUGUST 2007 WHEREAS MOST OF THE EXPENDITUR E CLAIMED BY THE ASSESSEE, AS POINTED OUT BY THE ASSESSING OFFICER, RELATED TO EARLY PART OF 2008. FURTHER, THE ASSESSING OFFICER HAS ALSO REFE RRED TO THE REPORT OF THE VALUATION OFFICER WHO HAD CONFIRMED THAT NO SUC H DEVELOPMENTAL ACTIVITY HAD ACTUALLY TAKEN PLACE. THUS CONSIDERIN G THE TOTALITY OF THE FACTS AS EMERGING FROM THE DISCUSSION MADE BY THE A SSESSING OFFICER IN THE ASSESSMENT ORDER, THE CLAIM OF SITE LEVELLING E XPENDITURE IS NOT ADMISSIBLE TO THE ASSESSEE. THEREFORE, THE ADDITION MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE CIT(A) IS JU STIFIED. 18. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON THE RECORD. ACCORDING TO THE DEPARTMENT THE ASSESSEE H AS NOT INCURRED THIS EXPENDITURE AS PER THE MOU. BUT IN OUR OPINION, EVE RY EXPENDITURE INCURRED BY THE ASSESSEE CANNOT BE FORESEEN AND TO SPECIFY IN A MOU ENTERED BY THE ASSESSEE WITH THE DLF GROUP ON 23/6/ 2007. AS THE SITUATION WARRANTS THE ASSESSEE MUST HAVE INCURRED THE EXPENDITURE. THE REASON FOR DISALLOWANCE IS THAT INCURRING OF TH E EXPENDITURE IS NOT STIPULATED IN MOU. THE DEPARTMENT NOT DOUBTED INCUR RING OF THE EXPENDITURE. WHEN THE ASSESSEE HAS INCURRED THE EXP ENDITURE WHOLLY I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 11 AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS IT CANN OT BE DISALLOWED ON THE REASON THAT IT IS NOT STIPULATED IN THE MOU. TH E ASSESSING OFFICER ALSO STATED THAT THE VALUATION REPORT DOES NOT MENT ION INCURRING OF THE EXPENDITURE. IF THE ASSESSEE INCURRED THE EXPENDIT URE IN THE YEAR UNDER CONSIDERATION BEFORE EXECUTING THE SALE DEED IN THE MONTH AUGUST 2007 THE SAME HAS TO BE ALLOWED. WE PLACE RELIANCE ON TH E ORDER OF THE SUPREME COURT IN THE CASE OF CIT VS. MALAYALAM PLAN TATIONS LTD. (53 ITR 140) (SC). THIS GROUND IS PARTLY ALLOWED. 19. THE NEXT GROUND IS WITH REGARD TO CONFIRMING THE DI SALLOWANCE OF PAYMENT TO SUB-AGENTS AT RS. 87 LAKHS, RS. 71 LAKHS AND RS. 40.10 LAKHS ON WHICH TAX WAS DEDUCTED AT SOURCE. 20. BRIEF FACTS OF THE ISSUE, AS OBSERVED BY THE ASSESS ING OFFICER, ARE THAT THE ASSESSEE HAD CLAIMED SUB-AGENTS' FEE OF RS . 2.10 CRORE IN RESPECT OF THE SALE OF THE LAND OF ARAVIND BABU GRO UP. THE ASSESSEE WAS REQUESTED TO FILE THE PARTY-WISE DETAILS OF THE PAY MENTS AND THE NATURE OF SERVICES RENDERED BY THE PAYEES. THE ASSESSEE F ILED THE PARTY-WISE DETAILS AS BELOW: 1. J. SUMANTHA - RS. 15 LAKHS 2. J. RAGHAVENDRA PRASAD - RS. 31 LAKHS 3. P. PARAMESWARI DEVI - RS. 15 LAKHS 4. P. HIRANMAYEE - RS. 20 LAKHS 5. P. PHANIPRIYA - RS. 17 LAKHS 6. P. NAGARAJU - RS. 52 LAKHS 7. P. NAGA HARITHA - RS. 20 LAKHS 8. A. VENKATESWAR REDDY - RS. 40 LAKHS 21. THE ASSESSEE SUBMITTED THAT TAX WAS DEDUCTED AT SOU RCE ON THE ABOVE PAYMENTS AND THE RECEIPTS ISSUED BY THE ABOVE PERSONS SHOW THAT THE PAYMENTS WERE MADE IN CONNECTION WITH THEIR SER VICES IN RESPECT OF SALE OF PROPERTY OF ARAVIND BABU. THE ASSESSING OF FICER OBSERVED THAT THE LAND BELONGING TO ARAVIND BABU GROUP WAS UNDISP UTED AND HAVING CLEAR TITLE AND THE ASSESSEE COMPANY HAD DIRECTLY E NTERED INTO MOU DATED 25-3-2007 WITH ARAVIND BABU FOR PURCHASE OF H IS LANDS AND THE MOU WAS SILENT ON ANY PAYMENT TO BE MADE TO ANY SUB -AGENTS. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE PAYMENT S WERE MADE TO THE I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 12 ABOVE PARTIES IN SEPTEMBER AND NOVEMBER 2007 AND TH ERE WERE NO AGREEMENTS WITH THE ABOVE PARTIES FOR PROVIDING ANY SERVICE IN CONNECTION WITH PURCHASE OF LAND FOR THE ARAVIND BA BU GROUP. THE ASSESSING OFFICER ALSO OBSERVED THAT THE ASSESSEE C OMPANY HAD NOT FILED ANY EVIDENCE TO PROVE THAT THE ABOVE PARTIES HAVE A DMITTED THE ABOVE INCOME IN THEIR TAX RETURNS. ACCORDINGLY, HE DISALL OWED THE ENTIRE AMOUNT AND ADDED TO THE TOTAL INCOME. 22. THE LEARNED AR SUBMITTED THAT IN ALMOST ALL REAL ES TATE TRANSACTIONS INVOLVEMENT OF INTERMEDIARY AGENTS/BRO KERS IS ALWAYS THERE. THE EXTENT OF BUSINESS ACTIVITY CARRIED ON B Y THE ASSESSEE IS VOLUMINOUS AND IT CANNOT BE CARRIED ON BY A SINGLE PERSON. THIS APART, THE PROPERTY IN QUESTION HAD CHANGED HANDS BY WAY O F GPA. FURTHER, SUB-AGENTS WERE ENTRUSTED WITH THE WORK OF IDENTIFY ING SUITABLE LANDS. FOR THIS PURPOSE, THE ASSESSEE HAD TO TAKE ASSISTAN CE OF 9 PERSONS TO WHOM AN AMOUNT OF RS. 2.10 CRORE WAS PAID IN AGGREG ATE. THE SAID AMOUNT WAS PAID IN VIEW OF THE SERVICES RENDERED BY THEM TO THE ASSESSEE IN EXECUTION OF SEVERAL WORKS IN THE MATTE R OF PROCURING THE LAND AND ITS MUTATION IN FAVOUR OF DLF COMPANIES. THE PAYMENTS WERE MADE BY CHEQUE AND TAX WAS ALSO DEDUCTED AT SOURCE ON THE PAYMENTS EFFECTED. FURTHER, ALL THE RECEIPTS ISSUED BY THE SUB-AGENTS WERE FOUND DURING THE SEARCH. THEREFORE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DISALLOWING THE SAID PAYMENT. 23. THE LEARNED DR SUBMITTED THAT THE ASSESSEE HAD MADE PAYMENTS TO 8 PERSONS AS COMMISSION FOR THE LAND DEAL WITH A RAVIND BABU GROUP. AS PER THE DETAILS FILED, THE PAYMENTS HAD BEEN MAD E BY CHEQUE AND TAX HAS ALSO BEEN DEDUCTED AT SOURCE. BUT THAT DOES NO T NECESSARILY MEAN THAT THE PAYMENT HAS BEEN MADE FOR THE REQUIRED SER VICES. IT IS ALSO NOT KNOWN AS TO WHAT SERVICES HAD BEEN RENDERED BY THE 8 PERSONS TO WHOM SUCH HUGE PAYMENTS WERE MADE AS COMMISSION. INTERES TINGLY, J.SUMATHA AND J.RAGHAVENDRA PRASAD APPEAR TO BE BEL ONGING TO THE SAME FAMILY SHOWING THE SAME ADDRESS. J. SUMATHA A S THE NAME SUGGESTS IS A LADY AND IT IS QUITE UNBELIEVABLE THA T SHE COULD HAVE I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 13 RENDERED ANY SERVICE IN A REAL ESTATE DEAL. SIMILA RLY, P. PARAMESWARI DEVI, P. HIRANMAYEE, P. PHANI PRIYA, P. NAGA HARITH A AND P. NAGARAJU APPEAR TO BE BELONGING TO THE SAME FAMILY AND AS PE R THE DETAILS FILED IN THE PAPER BOOK OF THE SAME ADDRESS AT SAI JYOTHI TO WERS, AMEERPET. OUT OF THE 5, AS THE NAME SUGGESTS, PARAMESWARI DEV I, HIRANMAYEE, PHANIPRIYA AND NAGA HARITHA ARE LADIES AND THEIR RO LE IN THE REAL ESTATE DEAL IS NOT BELIEVABLE. FURTHER, ALL THE PAYMENTS HAVE BEEN MADE AFTER THE DEAL WAS OVER AND THE SALE DEEDS WERE EXECUTED. FURTHER, AS OBSERVED BY THE ASSESSING OFFICER, THE LAND BELONGI NG TO ARAVIND BABU GROUP IS CLEAR AND UNDISPUTED AND THERE WERE NO CLA IMANTS WHATSOEVER. IN SUCH A SITUATION, PAYMENT OF SUCH A HUGE COMMISS ION IS QUITE UNLIKELY. THUS, THE PAYMENTS MADE TO J. SUMATHA, P . PARAMESWARI DEVI, P. HIRANMAYEE, P. PHANIPRIYA AND P. NAGA HARI THA CANNOT BE SAID TO BE FOR ANY SERVICES RENDERED AND HENCE THE CLAIM OF THE COMMISSION AGENTS CANNOT BE ALLOWABLE. NO SPECIFIC EVIDENCE RE LATING TO SERVICES RENDERED BY THESE PERSONS HAS BEEN FILED EITHER DUR ING THE ASSESSMENT OR APPELLATE PROCEEDING. THUS, THE ADDITION MADE B Y !HE ASSESSING OFFICER TO THE TUNE OF PAYMENTS MADE TO LADIES AMOU NTING TO RS. 87,00,000 IS JUSTIFIED. 24. THE DR FURTHER SUBMITTED THE IT IS NOT CLEAR AS TO WHAT SERVICES WERE RENDERED BY THE REMAINING PARTIES VIZ., J. RAG HAVENDRA PRASAD, P. NAGARAJU AND A. VENKATESWARA REDDY. FURTHER, THE S IGNATURE OF J. RAGHAVENDRA PRASAD AND SRI A. VENKATESWARA REDDY AS APPEARING IN THE RECEIPT DOES NOT TALLY AT ALL WITH THE SIGNATUR E AS APPEARING IN THE TDS CERTIFICATES. CONSIDERING ALL THIS, THE PAYMEN T CLAIMED TO HAVE BEEN MADE BY THE ASSESSEE DO NOT APPEAR TO BE GENUI NE. HENCE, THE PAYMENT OF RS. 71,00,000 MADE TO J. RAGHAVENDRA PRA SAD AND A. VENKATESWARA REDDY ARE TREATED AS NOT GENUINE. OTH ERWISE ALSO, SRI A.VENKATESWARA REDDY IN THE MONEY RECEIPT HAD SHOWN TO HAVE RENDERED SERVICES IN RELATION TO THE PROPERTY IN PU PPALAGUDA AND NARSINGI VILLAGE. SINCE THE ASSESSEE WAS NOT CONCE RNED WITH ANY LAND DEAL AT PUPPALAGUDA THE QUESTION OF PAYMENT OF ANY COMMISSION FOR THE SAME DOES NOT ARISE AT ALL. IN OTHER WORDS, DISALL OWANCE MADE BY THE I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 14 ASSESSING OFFICER OF THE PAYMENT OF COMMISSION TO J . RAGHAVENDRA PRASAD AND A. VENKATESWARA REDDY AMOUNTING TO RS. 7 1,00,000 IS JUSTIFIED. 25. THE DR FURTHER SUBMITTED THAT, AS REGARDS PAYMENT T O P. NAGA RAJU, THE ASSESSEE HAS CLAIMED TO HAVE PAID RS. 52 LAKHS TOWARDS THE SERVICES RENDERED. FROM THE DETAILS FILED BY THE A SSESSEE BEFORE THE LOWER AUTHORITIES, IT CAN BE SEEN THAT THE ASSESSEE HAD ORGANIZED FOR PURCHASE OF 5 ACRES OF LAND ON BEHALF OF DLF FROM A RAVIND BABU GROUP FOR WHICH THE TOTAL CONSIDERATION WAS RS. 62.50 CRO RES OUT OF WHICH THE ASSESSEE'S SHARE WAS RS. 11.90 CRORES. IF AT ALL AN Y COMMISSION IS REQUIRED TO BE PAID BY HIM, THE ASSESSEE IS TO PAY FROM OUT OF ITS SHARE. FROM THE PAPER BOOK IT CAN BE SEEN THAT P. NAGARAJU APPEARS TO BE A COMMISSION AGENT AS EVIDENT FROM THE CORRESPONDENCE WITH DLF. APPARENTLY, DLF HAD AGREED FOR A COMMISSION OF ONE PER CENT. IF THE PAYMENT OF COMMISSION CLAIMED BY THE ASSESSEE IS CO NSIDERED, THAT COMES TO ABOUT 4.37% ON THE AMOUNT RECEIVED BY THE ASSESSEE WHICH IS MUCH HIGHER THAN THE RATE OF COMMISSION ACCEPTED BY DLF. ACCORDINGLY, ONE PER CENT ON THE AMOUNT RECEIVED BY THE ASSESSEE ON THE LAND DEAL WOULD BE REASONABLE WHICH COMES TO RS . 11.90 LAKHS. THUS FROM OUT OF THE PAYMENT MADE TO NAGARAJU, RS. 11.90 LAKH IS CONSIDERED REASONABLE AND BALANCE CAN BE DISALLOWED . 26. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN THIS CASE THE DEPARTMENT NOT DOUBTED TH E PAYMENT, AND THE PAYMENT WAS MADE BY CHEQUES. THE PAYMENT WAS ALSO S UBJECTED TO TDS. ACCORDING TO THE REVENUE AUTHORITIES THE PROPE RTY WHICH WAS SOLD BY THE ASSESSEE TO DLF IS HAVING CLEAR TITLE AND TH E MOU ENTERED WITH THE CONCERNED PARTIES DOES NOT SHOW PAYMENT TO SUB- AGENTS. BEING SO IT WAS DISALLOWED. IN OUR OPINION, THE ASSESSEE INCUR RED THE EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THE PAYMENT WAS NOT DOUBTED BY THE REVENUE, BUT ONLY RENDERING OF S ERVICE BY THESE PARTIES WAS DOUBTED. IN THIS LINE OF BUSINESS WHEN THE ASSESSEE DOING SUCH A VOLUMINOUS BUSINESS IN REAL ESTATE THERE IS EVERY CHANCE OF I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 15 TAKING THE ASSISTANCE OF VARIOUS PERSONS TO TRACE T HE PROSPECTIVE BUYERS AND AT THIS POINT OF TIME USUALLY AGENTS ARE CHARGI NG 1 TO 2 PERCENT OF THE VALUE OF THE PROPERTY BOUGHT AND SOLD. IN THIS CASE, DURING THE COURSE OF SEARCH ACTION, THE DEPARTMENT FOUND MATER IAL IN THE FORM OF RECEIPTS FOR PAYMENTS MADE THROUGH ACCOUNT-PAYEE-CH EQUES TO SUB- AGENTS TO THE TUNE OF RS. 1.70 CRORES AND THE SAME WAS SEIZED. THIS PAYMENT WAS SUBJECTED TO TDS. THE SUB-AGENTS HAVE FILED THEIR RETURNS OF INCOME AFTER PAYMENT OF ADVANCE TAX AS APPLICABL E. EVEN DURING THE COURSE OF INVESTIGATION, THE ASSESSEE PLACED NECESS ARY EVIDENCE BEFORE THE INVESTIGATING AUTHORITY EXPLAINING THE PAYMENT. THEREAFTER THE ASSESSEE ALSO FILED ACKNOWLEDGEMENT FOR RECEIPT OF COMMISSION. BEING SO, THE DEPARTMENT NOT GOT ANYTHING ON RECORD TO SH OW THAT THE PAYMENT IS EXCESSIVE OR IT IS MADE TO RELATIVES OF DIRECTOR OF THE ASSESSEE-COMPANY. WE ARE NOT IN A POSITION TO CONF IRM THE ADDITIONS MADE BY THE LOWER AUTHORITIES. CONSIDERING THE FA CTS OF PRESENT CASE WE ARE OF THE OPINION THAT THE CLAIM OF THE ASSESSE E HAS TO BE ALLOWED PLACING RELIANCE ON THE DECISION OF SUPREME COURT I N THE CASE OF MALAYALAM PLANTATIONS (SUPRA). 27. THE NEXT GROUND IS WITH REGARD TO DISALLOWANCE OF A RCHITECT FEE AT RS. 19 LAKHS. FACTS OF THE CASE ARE THAT THE ASSESS EE HAD CLAIMED PAYMENT OF ARCHITECT FEE OF RS. 19 LAKHS IN RESPECT OF THE LAND SOLD TO DLF. IN RESPONSE TO THE QUERY BY THE ASSESSING OFFI CER, THE ASSESSEE FILED THE DETAILS AND SUBMITTED THAT TAX WAS DEDUCT ED AT SOURCE ON THE SAID PAYMENT. THE ASSESSEE SUBMITTED THAT THE ARCHI TECT PROVIDED CONSULTANCY SERVICES IN PROVIDING THE SITE PLAN, SE Z SPECIFIC BUILDING PLAN, ETC. HOWEVER, THE ASSESSING OFFICER REJECTED THE CLAIM STATING THAT THE ASSESSEE WAS NOT REQUIRED TO PROVIDE ANY SUCH S ERVICES AS PER THE MOU. THE ASSESSING OFFICER OBSERVED THAT THOUGH TAX WAS DEDUCTED AT SOURCE TO MAKE THE TRANSACTION APPEAR GENUINE, BUT THE EXPENDITURE WAS NOT RELATED TO THE ASSESSEE'S BUSINESS. ACCORDI NGLY, A DISALLOWANCE OF RA. 19 LAKH WAS MADE. I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 16 28. THE LEARNED AR SUBMITTED THAT ALL THE PAYMENTS TO T HE ARCHITECTS WERE MADE BY CHEQUES AND AFTER DEDUCTING TAX AT SOU RCE THERE ON. EVEN THE INVOICES AND THE RECEIPTS FROM THE VENDORS WERE FILED BEFORE THE ASSESSING OFFICER AND HENCE THE EXPENDITURE SHOULD HAVE BEEN ALLOWED. 29. THE DR SUBMITTED THAT WHILE DECIDING THE ISSUE RELA TING TO SITE LEVELLING EXPENDITURE, THE CIT(A) HAS DISCUSSED IN DETAIL THE SCOPE OF WORK OF THE ASSESSEE IN TERMS OF THE MOU ENTERED BY DLF. THE QUESTION OF PAYMENT OF ANY ARCHITECT FEE, IF AT ALL IT IS THERE, WOULD ARISE IN THE CASE OF THE PERSON WHO INTENDS TO SET UP THE SEZ AND THAT IS POSSIBLE ONLY WHEN THE PURCHASER OF THE LAND BECOME S THE LEGAL OWNER. BEFORE THAT, ANY SUCH PAYMENT IS NOT REQUIRED SINCE IT IS NOT KNOWN WHETHER THE LAND CAN BE REGISTERED IN THE NAME OF T HE PURCHASER AT ALL ESPECIALLY IN A CASE LIKE THE PRESENT ONE, WHERE DL F WAS TO ACQUIRE 26 ACRES OF LAND FOR ITS SEZ PROJECT AND WHERE THERE W ERE LOT OF LITIGATIONS INVOLVING NUMBER OF CLAIMANTS AND LAND OWNERS. OTH ERWISE ALSO, AS PER THE MOU THE ASSESSEE WAS NOT SUPPOSED TO SPEND ANYT HING ON ACCOUNT OF ARCHITECT FEE BECAUSE IT WAS OBLIGED TO ARRANGE ONLY PURCHASE OF LAND FOR THE DLF GROUP COMPANIES. THE ADDITION MADE IS JUSTIFIED ON THIS COUNT AND PRAYED TO SUSTAIN IT. 30. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AND RECORD. IN THIS CASE THE ASSESSEE FILED ALL THE REQ UISITE DETAILS IN THE FORM OF BILL AND RECEIPT FROM THE ARCHITECT. PAYMENT WAS MADE BY CHEQUE AND ALSO SUBJECTED TO TDS. THE EXPENDITURE WAS INCURRED TOWARDS CONSULTING SERVICES PROVIDED BY THE ARCHITECT WITH REGARD TO SITE PLAN, SEZ SPECIFIC BUILDING PLAN. IN OUR OPINION THE EXPE NDITURE HAS TO BE ALLOWED AS BUSINESS EXPENDITURE AND THE SAME IS ALL OWED. MORE SO, THE DEPARTMENT HAS NOT BROUGHT ANYTHING TO SHOW THAT TH E ASSESSEE HAS NOT INCURRED THIS EXPENDITURE FOR THE PURPOSE OF THE BU SINESS AND IT IS PRESUMED THAT IT IS INCURRED FOR THE PURPOSE OF BUS INESS AND SAME HAS TO BE ALLOWED. 31. THE NEXT GROUND IS WITH REGARD TO DISALLOWANCE OF R S. 4,96,562 WITH REGARD TO TECHNICAL EXPENDITURE. THE ASSESSEE CLAIMED THE ABOVE I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 17 EXPENDITURE BUT NOT FILED EXPLANATION REGARDING THI S EXPENDITURE AND ALSO NOT FILED PROOF FOR HAVING SPENT THIS EXPENDIT URE. THIS EXPENDITURE IS RELATING TO EARLIER YEAR AND SAME WAS DISALLOWED . BEFORE US ALSO NO EVIDENCE WAS PRODUCED BY THE ASSESSEE AS A PROOF FO R INCURRING THIS EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. BEING SO THIS GROUND IS DISMISSED. 32. THE LAST GROUND IS WITH REGARD TO DISALLOWANCE OF E XPENDITURE OF RS. 28,99,100 TOWARDS VIDEO SURVEILLANCE CHARGES. T HE ASSESSEE CLAIMED THE EXPENDITURE OF RS. 35,72,100 TOWARDS VIDEO SURV EILLANCE CHARGES. THE CIT(A) ALLOWED AN EXPENDITURE OF RS. 6.73 LAKHS ONLY ON THIS COUNT. THE PLEA OF THE ASSESSEE IS THAT DUE TO BOOM IN REA L ESTATE THERE WAS HEAVY THREAT TO THE LAND AND KEEPING CONSTANT SURVE ILLANCE OVER THE LAND IS NECESSARY. FOR THIS PURPOSE THE ASSESSEE IN STALLED SURVEILLANCE CAMERAS AROUND THE PROPERTY AND INCURRED THIS AMOUN T. AS A PROOF OF THIS ASSESSEE FURNISHED RECEIPT FROM CINEMA PARADIS O INDIA PRIVATE LIMITED REGARDING THE PAYMENT. ACCORDING TO THE DR THIS EXPENDITURE WAS INCURRED TOWARDS 26 ACRES OF LAND BELONGING TO PUPPALAGUDA AND NARSINGI VILLAGES AND AS SUCH THE PROPERTY WHICH WA S DEALT BY THE ASSESSEE IS 5 ACRES THAT IS SAID TO BE PURCHASED BY DLF AND THE PROPORTIONATE AMOUNT OF RS. 6.73 LAKHS IS ALLOWED. 33. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN OUR OPINION IF THE EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF BUSINESS IN THE ASSESSMENT YEAR UNDER CO NSIDERATION IT HAS TO BE ALLOWED AS BUSINESS EXPENDITURE WHILE DETERMI NING THE INCOME FROM THE BUSINESS. ACCORDINGLY IF THIS EXPENDITURE BY THE ASSESSEE WAS FOR THE PURPOSE OF THE BUSINESS IT HAS TO BE ALLOWE D THOUGH THE ENTIRE PROPERTY WAS NOT SOLD BY THE ASSESSEE IN THE YEAR U NDER CONSIDERATION. ONLY INCURRING EXPENDITURE WHOLLY AND EXCLUSIVELY F OR THE PURPOSE OF THE BUSINESS IS IMPORTANT. ACCORDINGLY PLACING RELI ANCE ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF MALAYALAM PLANTATIONS LTD. (SUPRA) WE ALLOW THE CLAIM OF THE ASSESSEE AS INCUR RING OF EXPENDITURE I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 18 BY THE ASSESSEE WAS FOR THE PURPOSE OF BUSINESS IS NOT DOUBTED. THIS GROUND OF APPEAL IS ALLOWED. 34. THE ASSESSEE RAISED ADDITIONAL GROUND IN ITA NO. 89 1/HYD/2011 AS FOLLOWS: 1. WITHOUT PREJUDICE TO ANY OF THE GROUNDS RAISED ORIGINALLY, THE APPELLANT DENIES ITS LIABILITY TO B E ASSESSED TO THE LEVY OF INTEREST U/S. 234A / B OF T HE INCOME-TAX ACT, 1961 AS CREDIT FOR PAYMENT OF RS. 2,70,00,000 TOWARDS ADVANCE TAX WAS NOT GIVEN CREDI T. 2. THE INTEREST U/S. 234A AND 234B IS TO BE CALCULATED AFTER GIVING CREDIT FOR THE AFORESAID PAYMENT OF RS . 2,70,00,000 WHICH WAS SPECIFICALLY REQUESTED TO BE ADJUSTED TOWARDS ADVANCE TAX FOR THE ASSESSMENT YEA R 2008-09. 35. THE LEARNED AR RELIED ON THE JUDGEMENT OF DELHI HIG H COURT IN THE CASE OF CIT VS. KK MARKETING (278 ITR 596). HE ALSO RELIED ON THE JUDGEMENT OF DELHI HIGH COURT IN THE CASE OF VISHWA NATH KHANNA VS. UNION OF INDIA (335 ITR 548) AND ON THE JUDGEMENT O F P & H HIGH COURT IN THE CASE OF CIT VS. ASHOK KUMAR (334 ITR 3 55). 36. THE LEARNED DR SUBMITTED THAT ADJUSTMENT OF SEIZED AMOUNT CANNOT BE GIVEN AND IT CANNOT BE TREATED AS RECOVER Y TOWARDS ADVANCE TAX AND IT HAS TO BE ADJUSTED TOWARDS EXISTING LIAB ILITIES. ACCORDING TO THE DR PROVISIONS OF SECTION 132B ARE APPLICABLE AN D IT HAS TO BE ADJUSTED TOWARDS EXISTING LIABILITIES OF THE ASSESS EE. 37. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OPINI ON THAT THE SEIZED AMOUNT HAS TO BE ADJUSTED IN TERMS OF SECTIO N 132B OF THE ACT. HOWEVER, AFTER ADJUSTING EXISTING LIABILITIES, IF A NY AMOUNT REMAINS, THE SAME HAS TO BE ADJUSTED TOWARDS OUTSTANDING TAX REL ATING TO THE ASSESSMENT COMPLETED U/S. 153A OF THE ACT. ACCORDI NGLY, WE DIRECT THE ASSESSING OFFICER TO RECALCULATE THE INTEREST U/S. 234A AND 234B OF THE ACT. IN THE RESULT, ITA NO. 891/HYD/2011 IS PARTLY ALLOWED. I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 19 38. NOW WE WILL TAKE UP THE REVENUE APPEAL IN ITA NO. 1018/HYD/2011. THE ISSUE HEREIN IS WITH REGARD TO C ANCELLATION OF PROTECTIVE ASSESSMENT IN THE HANDS OF THE ASSESSEE AS SUBSTANTIVE ASSESSMENT WAS MADE IN THE HANDS OF M/S. DEMI REALT ORS. 39. BRIEF FACTS OF THE ISSUE ARE THAT IN THE ASSESSMENT ORDER THE ASSESSING OFFICER MADE A DETAILED DISCUSSION ABOUT THE COMPUTATION OF INCOME PROPOSED IN THE HANDS OF M/S. DEMI REALTORS WHO WERE ALSO ONE OF THE ASSOCIATES IN ARRANGING LAND FOR DLF GRO UP OF COMPANIES. AFTER MAKING DETAILED DISCUSSION IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAD COMPUTED THE INCOME IN THE HANDS OF DEM I REALTORS AT RS. 125,74,44,335/-. THE ASSESSING OFFICER APPLYING THE PRINCIPLE OF LIFTING THE CORPORATE VEIL, HELD THAT THE SAID INCOME COMPU TED IN THE HANDS OF DEMI REALTORS SHOULD BE TAXED IN THE HANDS OF THE A SSESSEE COMPANY ON PROTECTIVE BASIS. NEEDLESS TO SAY THAT THE ASSESSI NG OFFICER HAD TAXED THE INCOME SUBSTANTIVELY IN THE HANDS OF DEMI REALT ORS FOR THE SAME ASSESSMENT YEAR. 40. THE LEARNED DR SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 41. THE LEARNED AR SUBMITTED THAT THE REASON GIVEN BY T HE ASSESSING OFFICER HOLDING DEMI REALTOR AS A DUMMY CONCERN OF THE ASSESSEE ARE TOTALLY ON PRESUMPTION, APPREHENSION, SURMISES AND ARE NOT BASED ON ACCEPTABLE EVIDENCE. THE ASSESSEE AND DEMI REALTOR S ARE TWO DIFFERENT AND SEPARATE ENTITIES. THE COMPANY WAS INCORPORATE D WAY BACK IN THE YEAR 1995 AND HAD BEEN IN THE FIELD OF REAL ESTATE BUSINESS. NONE OF THE DIRECTORS OF THE COMPANY HAD ANY SHARE IN THE PARTN ERSHIP CONCERN DEMI REALTORS. NOR THE PARTNERS OF DEMI REALTORS OR THEIR RELATIVES HAD ANY SHARE HOLDING IN THE APPELLANT COMPANY. BOTH TH E COMPANY AND THE PARTNERSHIP FIRMS WERE DISTINCT PERSONS AND THERE W AS NO CASE OF EITHER COMMON MANAGEMENT, COMMON BUSINESS ORGANIZATION, CO MMON FUND OR COMMON PLACE OF BUSINESS WITH INTERLACING AND IN TERDEPENDENCE OF BUSINESS. EVEN THE AREA OF OPERATION TO PROCURE TH E LAND UNDERTAKEN BY BOTH THE CONCERNS WAS DIFFERENT. THE ASSESSEE COMPA NY LOOKED AFTER THE I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 20 LAND PROCUREMENT AT NARSINGI VILLAGE BELONGING TO C . ARAVIND BABU GROUP AND OTHERS WHEREAS THE PARTNERSHIP FIRM DEMI REALTORS HAD TAKEN UP PROCUREMENT OF LAND FOR DLF AT PUPPALAGUDA VILLAGE AND PARTLY AT NARSINGI VILLAGE. THE BUSINESS ACTIVITY O F THE PARTNERSHIP CONCERN WAS NEVER UNDER THE CONTROL OF THE COMPANY OR THROUGH PERSONS APPOINTED BY IT. IN EFFECT THE COMPANY DID NOT HAVE EFFECTUAL OR OTHERWISE CONTROL OVER THE AFFAIRS OF THE PARTNERSH IP FIRM DEMI REALTORS. EVEN PAYMENTS MADE TO DEMI REALTORS AND T HE ASSESSEE WAS DISTINCT AND SEPARATE. CONSIDERING ALL THIS, THE PR OTECTIVE ADDITION MADE BY THE ASSESSING OFFICER IS UNJUST, ARBITRARY AND C ONTRARY TO THE FACT AND EVIDENCE ON RECORD. 42. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN THIS CASE ASSESSMENT WAS MADE SUBSTANTIV ELY IN THE HANDS OF DEMI REALTORS. THE ISSUE IS NOW PENDING BEFORE THE CONCERNED CIT(A). BEING SO, AT THIS POINT OF TIME IT IS PREPOSTEROUS TO DECIDE THIS ISSUE AND WE ARE INCLINED TO REMIT THE ISSUE RAISED BEFORE US TO THE FILE OF CIT(A) TO DECIDE IN WHOSE HANDS THE IMPUGNED EDITION HAS T O BE MADE. APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PU RPOSES. 43. IN THE RESULT, ITA NO. 1017/HYD/2011 BY THE REVENUE IS DISMISSED, ITA NO. 891/HYD/2011 (ASSESSEE) AND 1018 /HYD/2011 (REVENUE) ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH SEPTEMBER, 2012. SD/ - (SAKTIJIT DEY) JUDICIAL MEMBER SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED 28 TH SEPTEMBER, 2012 TPRAO I.T.A. NO. 891/HYD/2011 & ORS M/S. MALI FLOREX LTD. ======================== 21 COPY FORWARDED TO: 1. M/S. MALI FLOREX LTD., 4 - 51/L/88, PLOT NO. 88, LUMBINI SLN SPRINGS, GACHIBOWLI, HYDERABAD-500 032. 2. THE DY. CIT, CENRAL CIURCLE - 6, HYDERABAD. 3. THE CIT(A) - I, HYDERABAD. 4. THE CIT (CENTRAL), HYDERABAD. 5 . THE DR A BENCH, ITAT, HYDERABAD