TMI Blog2013 (12) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... RT] - If the directors of the sister-concern utilise the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency - Where it is obvious that a holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would be entitled to deduction of interest on its borrowed loans – Decided in favour of assessee. Disbursement of funds – wind-up of company –The assessee along with his NRI friends floated the company - The company did not perform as planned due to the changed circumstances, the Directors decided to wind-up the company and distributed the funds invested back to the Directors and shareholders while refunding the funds to one of the NRI investor – The assessee received funds on behalf of his cousin and reflected the same in his books in the name of the company wounded up - Held that:- The assessee has produced the statement of P & L account of GMS Medimall Pvt. Ltd., his own balance sheet from April, 2007 to March, 2008 - The assessee also submitted the certificate/confirmation from NRI investor - The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces in the case are ambiguous – The issue was restored for fresh decision. Advance to directors –Transfer the property to the Company to obtain loan facility from the Banks, Financial Institutions for conducting the business - To facilitate the transfer of the properties to the company, advances were paid by the company to the Directors – Even after six years, the transfer of the properties to the company has not been effected - Held that:- Following Pradeep Kumar Malhotra [2011 (8) TMI 16 - CALCUTTA HIGH COURT] - For retaining the benefit of loan availed of from the bank if decision was taken to give advance to the assessee such decision was not to give gratuitous advance to its shareholder but to protect the business interest of the company - The transaction was for the purpose of business which is a non-gratuitous advance which should not be treated as deemed dividend – Decided in favour of assessee. - ITA. No. 162 & 163/Hyd/2013, ITA.No.373, 374 & 375/Hyd/2013, ITA.No.376/Hyd/2013, ITA.No.377, 378 & 379/Hyd/2013 - - - Dated:- 31-10-2013 - Shri Chandra Poojari And Smt. Asha Vijayaraghavan,JJ. For the Petitioner : Shri A. V. Raghuram (A.R.) For the Respondent : Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidend in the hands of Shri G.Radhacharan Reddy. The balance Rs.25 lakhs was the amount adjusted by the assessee towards commission paid to him whereon no TDS was deducted. Accordingly, considering the same as not allowable u/s.40(a)(ia), the Assessing Officer added the amount of Rs.25 lakhs to the income returned. 0.5.0. By way of written submissions, the Authorised Representative of the assessee submitted that out of the Rs.65 lakhs appearing in the ledger a/c, Rs.25 lakhs pertained to loan taken from Kotak Mahindra Bank Ltd for the purpose of payment of commission to Sri Reddy. He explained that the assessee had repaid four monthly instalments of Rs.3,53,883/- during the year against the said loan and the same was adjusted towards commission paid to the director for the Assessment Year 2008-09, totalling to Rs.14,15,532/-. He submitted that this amount was shown by Shri G. Radhacharan Reddy as income in his income tax return for the Assessment Year 2008- 09, whereas the balance amount of Rs.10,84,468/- was carried to the next year and recorded as commission paid for the Assessment Year 2009-10, wherein again, the same was shown as income in the return of income. The Authorised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act also. Therefore, even from this angle, the assessee has failed to comply with the provisions of sec. 40(a)(ia) during the year and consequently, is not eligible for claiming deduction of expenditure of Rs.25 lakhs. The CIT(A), therefore, upheld the disallowance and decided the appeal against the assessee. 5. The learned Counsel for the assessee Shri A.V. Raghuram, pointed out at page 263 of the paper book the resolution with respect to Mr. Radha Charan Reddy, Managing Director of the Company that the Directors are eligible to take commission on achievement of target set by the Principal- Company from the Financial Year 2007-08 onwards. The learned Counsel for the assessee relied on the decisions in the case of CIT vs. Indian Engineering Commercial Corporation Pvt. Ltd. (1993) 201 ITR 723 (SC), Rohit Pulp Paper Mills Ltd. vs. CIT (1995) 215 ITR 919 (Bom.) The Learned Counsel for the assessee Shri A.V.Raghuram relied on the decision of the Calcutta High Court decision in the case of Sajid Mowjee vs. ITO (2005) 279 ITR 467 (Cal.) wherein the Hon'ble High Court held as follows : "Board of Directors of a company having appointed assessee as a wholetime director and san ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed the issue at length and the relevant findings of the Hon'ble Calcutta High Court are extracted hereunder : "The company is a juristic person and it is governed by the board of directors and is altogether independent entity other than the directors. Board of directors may control the company but such directors might have dual capacity, one as member of the board of directors and the other as an employee of the company or being in charge of the administration of the company as an independent administrator in the capacity of a director. The appointment of one of the members of the board of directors as wholetime director involved certain kind of responsibility to be carried out in terms of his appointment whether specified or not. The board has a right to appoint. It has a right to give directions, it may not have right to take disciplinary action. But it has right to prescribe conditions of service. It has right to determine the nature of the duties to be performed by the wholetime directors. It has right to determine the salary to be paid. Therefore, the company could be an employer while appointing one of its directors as wholetime director on a particular remuneration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des other life saving appliances since 1986. He submitted that the return of income for the Assessment Year 2010-11 was filed on 15-10-2010 i.e. after the search and seizure action in the assessee's case in Aug. 2009. He submitted that since the assessee is in the business of health care, it had desired to develop a HealthCare Unit, which prevents health problems, and had accordingly promoted a company by the name Proquest Health Enterprises (PHEPL) and invested in its share capital, as an ongoing business in the line of health care. He averred that the business conducted in the said company is similar to the assessee's business of protecting the health. The Authorised Representative argued that the investment so made in the subsidiary was diversification of the activity in the same life saving and medical category and since the assessee did not want to divert his own funds in large volumes at a time, which would have affected the liquidity of his company, the loan was obtained from Citi Bank, so that repayment can be made in a phased manner. He added that since the said company did not have assets like land and building to offer as collateral security, the directors offered their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ern did with the money so advanced and whether it is for business purpose, the CIT(A) pointed out that in the instance case, though it is claimed that PHEPL, was to develop a health care unit, it has not been demonstrated that the borrowed money diverted to them was actually utilized for such business purpose. Accordingly, CIT(A) rejected the contentions of the assessee and sustained the addition of Rs.13,21,936/- on account of claim of interest on bank loan and the grounds raised in this appeal were decided against the assessee. 17. On appeal before us, it was submitted by learned Counsel for the assessee Shri A.V. Raghuram that the subsidiary company M/s. Proquest Health Enterprises Pvt. Ltd. was formed for the diversification of the activity in the same life saving and medical category. The company did not have assets like land and building which can be offered as collateral security as demanded by the panel for financing and the Directors of the company offered their personal assets as collateral security. The interest paid to the banker for the land utilised for investment in share capital of the subsidiary company which is in similar line of business is an allowable expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3/Hyd/2013 - A.Y. 2005-2006 (Shri G. Radhacharan Reddy) 23. ITA.No.373/Hyd/2013 - A.Y. 2005-06 : Brief facts of the case are that the assessee is an individual and Director of M/s. Charan Life Devices Private Limited since inception of the company and a search operation was conducted in the residential premises of the assessee in the month of August, 2009. The DCIT, Central Circle-2 assessed the income of the assessee under section 153A of the Income Tax Act. The assessee filed return of income for the assessment year 2005-2006 on 7.12.2005 declaring income of Rs.28,13,266/-. In the month of August, 2009 the Assessing Officer issued a notice under section 153A of the Income Tax Act, 1961. The assessee filed return under section 153A of the I.T. Act on 16.6.2010 declaring income of Rs.25,61,650/-. During the assessment under section 143(3) read with section 153A of the I.T. Act, the Assessing Officer passed assessment order adding the amount of Rs.11,64,800/- as undisclosed investment in GMS Medimall Pvt. Ltd. The facts are that the assessee along with his NRI friends had floated the company in the name of GMS Medimall Pvt. Ltd. Since the company did not perform as planned due to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of assessment proceedings. Even otherwise, the contents of the said certificate are not sufficient to examine and establish the genuineness of transactions stated therein. Mr. P. Venugopal Reddy has not mentioned any details regarding mode of investment and his capacity to do so. Moreover, he is not even seen to be sure about the exact amount receivable by him. Under the circumstances, firstly, the additional evidence in the shape of "certification/confirmation" does not deserve to be admitted. On the other hand, it is also clear that the company GMS Medi Mall Pvt. Ltd. already stands wound-up, and therefore, the liability has been indeed shown by the appellant in respect of a non-existent entity in the present year, genuineness whereof cannot be established. The treatment of such credit of Rs.11,64,800/- as unexplained is therefore upheld and the ground raised in this regard is decided against the appellant." 24. Aggrieved, the assessee preferred appeal before us and submitted the ledger account of GMS Medimall Pvt. Ltd. at page 286 of the paper book. The learned Counsel for the assessee has also produced the statement of P L account as on 31.03.2003 of GMS Medimall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... besides being absolute owners of terrace rights. It was also mentioned therein that a sum of Rs.6 lakhs had been received as advance by cheque. On successful completion of the construction or during the period of construction, the said 8 flats were sold to the customers for a total sale consideration of Rs.68 lakhs and registered. 28. The Assessing Officer observed that as against the Long Term Capital Gains shown by the assessee and her husband on the basis of above mentioned unregistered agreement of sale, they had got 40% of the constructed area in the apartment "Srinivasa Residency", Hasmathpet, as per the agreement and the long Term Capital Gain had been estimated in their hands by taking 40% of the cost estimated (Rs.1,10,00,000 x 40% = Rs.44,00,000/-), computed in the Development Agreement cum General Power of Attorney, as consideration for transfer of the Long Term Capital Asset. The cost of acquisition for the assessee and her husband was Rs.2,62,782/- before indexation and accordingly, the Long Term Capital Gain was Rs.41,37,218/-. However, both of them had admitted Long Term Capital Gain of Rs.15,23,221/- only in their return of income. 28.1. Before the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was taxed in the hands of Smt. G.Niveditha Reddy. 30. Before the CIT(A), the learned A.R. reiterated that the assessee and her husband has entered into an agreement of sale on 21.12.2005 but, the agreement of sale was not registered under the A.P. Stamp Act. The learned A.R. submitted that the assessee and her husband had disclosed capital gains as per the said sale deed and the purchaser had paid the sale proceeds to them as envisaged in the agreement. Accordingly, he claimed that in view of the said agreement of sale, possession of the property had already been transferred to the purchaser. The Authorised Representative submitted that as per the clauses of the said agreement of sale, the assessee entered into a Development Agreement later, which had to be registered. He claimed that the said Development Agreement was entered into with a view to avoid payment of property registration charges twice over. He contended that the value of Rs.1,10,00,000/- was affixed to the proposed flats for paying the registration charges, which was arbitrarily adopted by the Assessing Officer for working out the capital gains. It was also contended that the cheque of Rs.6 lakhs was mentioned in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f transfer effected by way of the Development Agreement is upheld. 06.1. As regards the computation of such Long Term Capital Gain, it is seen that the cost of construction as on the date of agreement was taken up at Rs.1,10,00,000/- as per the Sub- Registrar's valuation, as mentioned in the Encumbrance Certificate. Accordingly, no infirmity can be said to exist in adoption of such cost also for working out the consideration received by the assessee and her husband. However, the Assessing Officer is directed to allow the benefit of indexation while working out the Capital Gains. The ground raised in this regard is, therefore, partly allowed. 07.0. As far as the addition of Rs.7,87,000/- on account of Short Term Capital Gain is concerned, as discussed above, the assessee and her husband had sold the 8 flats for a total sale consideration of Rs.68 lakhs, Rs.43 lakhs pertaining to the Financial Year 2005-06 and Rs.25 lakhs to Financial Year 2006-07. Considering the cost of acquisition for the total construction area of 11,972 square feet being Rs.44 lakhs, value per square foot was worked out at Rs.367.52. Accordingly, the Assessing Officer worked out the Short Term Capital Gain f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'Transfer' under the said development agreement. 5. On the facts and in the circumstances of the case the CIT(A) erred in sustaining the levy of short term capital gains of Rs.7,41,160/- in the hands of the appellant. 6. Without prejudice to above ground, the CIT(A) erred in upholding the value per square foot worked out by the A.O. at Rs.367.52. The CIT(A) failed to appreciate that the cost of construction should be worked out based on the cost of construction to VNR Construction/Developer and doing so the same would be Rs.782 per square foot". 32.1. Ground No. 1 is general in nature and therefore, it needs no adjudication. 33. With respect to grounds 2 to 6, the Learned Counsel for the assessee, reiterated the submissions made before the lower authorities. Before us, it was submitted by the learned Counsel for the assessee that the learned CIT(A) has erred in sustaining the addition of Rs.12,67,790/- towards the alleged undisclosed long term capital gains in the hands of the assessee. The learned Counsel for the assessee further contended that the CIT(A) has failed to appreciate that the assessee based on the agreement of sale dated 21.2.2005 had admitted long term capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopment agreement dated 21.1.2006 is registered. It is clear from the sale documents executed in favour of buyers of flats that the vendors viz., Smt. G. Niveditha Reddy and Sri G. Radhacharan Reddy have obtained permission from the Kukatpally Municipality for construction of multi-storeyed building and also started constructing the building complex known as Srinivasa Residency. It is also clear from the sale documents that the above mentioned vendors have offered to sell out of their 40% share the semi finished flats for consideration which total to Rs.68,00,000/-. The onus is on the assessee to show that the development agreement is a sham transaction. Hence, the contentions of the assessee that he/she is not liable to capital gains on transfer of property as per development agreement cannot be accepted. Since the cost of construction as on the date of agreement is Rs.1,10,00,000/- as per the Sub Registrar's valuation as mentioned in the Encumbrance Certificate, the same is considered as consideration for determining capital gains in the A.Y. 2006-07. Accordingly, capital gains works out to Rs.44,00,000/- (40% of constructed area) minus Rs.2,62,782/-, which comes to Rs.41,37,218/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 378/Hyd/2013 for the assessment year 2007-2008, the assessees' have raised common grounds. For the sake of brevity, we are reproducing grounds raised in ITA.No.375/Hyd/2013 : "1. On the facts and in the circumstances of the case, the order of the CIT(A)-I, Hyderabad is erroneous, illegal and unsustainable in law. 2. The CIT(A) erred in sustaining the assessability of capital gains based on the development agreement dated 31.01.2006 when the appellant had already sold the property by virtue of agreement of sale dated 21.12.2005. 3. On the facts and in the circumstances of the case the CIT(A) erred in sustaining the levy of short term capital gains of Rs.4,49,020/- in the hands of the appellant. 4. Without prejudice to the above ground, the CIT(A) erred in upholding the value per square foot worked out by the A.O. at Rs.367.52. the CIT(A) failed to appreciate that the cost of construction should be worked out based on the cost of construction to VNR Construction/Developer and doing so the same would be Rs.782 per sq. foot. 5. The CIT(A) erred in sustaining the addition of Rs.15,45,000/- made on account of alleged undisclosed sale of terrace rights. The CIT(A) failed to appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of accounts M/s. Charans Life Devices Ltd., the consideration was shown at Rs.30 lakhs. The learned Counsel for the assessee submitted that the consideration paid to VNR Constructions towards the flat has been shown in the books of Charans Life Devices Pvt. Ltd. The Assessing Officer noted that the flat had been purchased by them for Rs. 30 lakhs but the document showed a sum of Rs. 9 lakhs only. Accordingly, the Assessing Officer treated the difference as short term capital gains in proportion to the share holding in ladn of the assessee and his wife, whereby, the assessee's 48.5% share worked out to Rs.14,55,000/-. During the appellate proceedings before the CIT(A), the CIT(A) held as under : "15. I have gone through the facts of the case and the submissions of the appellant. It is clear that as per the Development Agreement seized as pages 74 to 84 of Annexure A/GRCR/RES/03, the terrace rights were to vest with the land owners only. Even if it is not permissible under the A.P. Apartments Act to retain the terrace rights by any person other than the prospective purchasers, it is clear that the stipulation in this regard in the Development Agreement had been consciously made, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddy and ITA.No.378/Hyd/2013 of Smt. Niveditha Reddy are partly allowed for statistical purposes. ITA.No.376/Hyd/2013 - A.Y. 2009-2010 Sri G. Radhacharan Reddy and ITA.No.379/Hyd/2013 - A.Y. 2008-2009 of Smt. G. Niveditha Reddy 49. In both the appeals i.e., ITA.No.376 379/Hyd/2013 for the assessment year 2009-2010, the assessees' have raised common grounds. For the sake of brevity, we are reproducing grounds raised in ITA.No.376/Hyd/2013 : "1. On the facts and in the circumstances of the case, the order of the CIT(A)-1, Hyderabad is perverse, illegal and unsustainable in law. 2. The CIT(A) erred in sustaining the addition of Rs.94,75,000/- made by invoking the provisions of section 2(22)(e) of the Act. The CIT(A) failed to appreciate that the amounts advanced by M/s. Charans Life Devices Pvt. Ltd., was towards sale of properties and consequently the same could not have been considered as deemed dividend. 3. The CIT(A) failed to appreciate that the transactions of agreement of sale could not fructify into sale as the property in respect of which agreement was entered into were mortgaged with the Citi Bank". 50. The brief facts are that the assessee is one of the Directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that it was the intention of the Directors to transfer the property to the company for which the advances were received. The registration process could not be completed as the original documents were pledged with the Bank for the purpose of obtaining loan for the business purposes of M/s. Charans Life Devices Pvt. Ltd. It was also submitted that the Directions have decided to transfer the office property jointly owned by them and the company has advanced a sum of Rs.60,50,000/- for this purpose. The learned Counsel for the assessee submitted that since M/s. Charan's Life Devices Pvt. Ltd. were not having any landed property or building of their own, they were facing hurdles in obtaining loans and financial assistance from banks/financial institutions for their business. Therefore, the Directors themselves were mortgaging their personal properties for obtaining cash credit facilities/term loans etc., for the purpose of company's business since the beginning. In order to change the process, the Directors decided to transfer their personal assets to company and entered into an agreement to sell. It was further submitted that in order to consider the loans and advances to Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom mortgage. Consequently, the Board of Directors of the Company passed a resolution authorising the assessee to obtain from the company interest free deposit up to Rs. 50 lakhs as and when required. During the previous year relevant to the assessment year 1999-2000, the assessee obtained from the company a sum of Rs.20,75,000/- by way of security deposit and out of this amount, a sum of Rs. 20 lakhs was subsequently returned by the assessee to the company. In the assessment made for the assessment year 1999-2000, the Assessing Officer added a sum of Rs.20,75,000/- as deemed dividend. On appeal before the High Court, The Calcutta High Court in the case of Pradip Kumar Malhotra vs. CIT (2011) 338 ITR 538 (Cal.) held as under : "Held, allowing the appeal, that for retaining the benefit of loan availed of from the bank if decision was taken to give advance to the assessee such decision was not to give gratuitous advance to its shareholder but to protect the business interest of the company. The sum of Rs.20,75,000/- could not be treated as deemed dividend." 57. In the case of the assessee before us the situation is similar. Hence, we are of the opinion that the transaction was fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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