K. PREMANATHAN,,TRICHY vs. DCIT, CIRCLE-3,, TRICHY

आदेश /O R D E R

PER MAHAVIR SINGH, VICE PRESIDENT:

6 & 3403/Chny/2019 4.4 During the course of assessment proceedings of Shri K Premanathan, Ld. AO issued summons u/s.131 to other investors namely Shri K. G. Ramesh and Shri N. Narahari Prasad on 16.04.2014 & 17.04.2014. Shri K. G. Ramesh, managing partner of M/s Altech Fabricators admitted to have made investment in purchase of land from SIDCO by making advance of Rs.45 Lacs by way of DD issued on 27.03.2006 from the current account of the firm M/s. Altech Fabricators. It was admitted by Shri K. G. Ramesh that this transaction was duly admitted in the return of income of M/s Altech Fabricators for the financial year 2005-06 relevant to AY 2006-07. Shri K. G. Ramesh also admitted receipt of consideration of Rs.50 Lacs on 31.03.2009 through the firm M/s Altech Fabricators out of sale of shares and also further sum of Rs.61.40 Lacs on 08.09.2009 from AEPPL to M/s. Altech Fabricators. In other words, Shri K. G. Ramesh admitted to have received a sum of Rs.111.50 Lacs in the firm M/s Altech Fabricators from AEPPL. 4.5 Similarly, statement of Shri N. Narahari Prasad, Managing Director of M/s.Jay Engineering was also recorded. He admitted to have received a sum of Rs.1.30 Crores from AEPPL. The relevant replies given by him, as extracted in the assessment order, are as under:-

7 & 3403/Chny/2019 I am not having any shares in M/s. Asian Asbestos Cement Industries Limited. I have received a sum of Rs.1.30 crores on the following dates from M/s. Anand Engineering Products Pvt. Ltd. 01/12/2008 Rs.30,00,000 01/01/2009 Rs.50,00,000 01/01/2009 Rs.50,00,000 As on 01/04/2008, M/s. Anand Engineering Products Private Limited had to pay my firm M/s. Jay Engineering to Rs.85 lakhs as trade debtors. I could not segregate the amount received from M/s.Anand Engineering Products Private Limited, whether it relates to the opening trade debtor due or towards the sale proceeds of said land belongs to M/s.Asian Asbestos Cement Industries Limited.

The Ld. AO, upon perusal of copy of accounts, Ledger etc. noted that the above transaction was not entered with regular business transactions and the consideration amount was kept separately. 4.6 A summon u/s 131 was also issued to the purchaser Shri V. Ramakrishnan, Managing Director of VESPL. He admitted thathe and his wife purchased 9365 shares of AACIL from Shri K.Premanathan by paying a sum of Rs.6.14 Crores for agreeing to transfer the right of allotment of 13.65 acres of land allotted by SIDCO in favour of VESPL. It was admitted that this was done through share transfer for which no separate amount was paid. Consequently, as per MoU dated 04.09.2008, the land measuring 13.64 acre, which was allotted to AACIL by SIDCO was transferred to VESPL. Shri V. Ramakrishnan admitted this fact in his statement recorded on 8 & 3403/Chny/2019 22.02.2016 and the relevant answer as reproduced in the order of assessment, reads as under:- M/s. Asian Asbestos Cement Industries Limited was not having any right to transfer the allotment to them at any point of time. It is SIDCO who had the sole right to permit the transfer of land allotted to one person. M/s. Asian Asbestos Cement Industries Limited has only agreed for such transfer in favour of M/s. Vessons Energy Systems P. Ltd. M/s. Asian Asbestos Cement Industries Limited was at no point of time having any right of ownership over 13.6 acres of land. M/s. Asian Asbestos Cement Industries Limited was only an allottee by M/s. SIDCO and they had no right whatsoever even for the transfer of such right of allotment. It is only for the conveyance of the willingness of M/s. Asian Asbestos Cement Industries Limited for transfer of allotment by SIDCO to M/s. Vessons Energy Systems Private Limited, a sum of Rs.6.14 Crores was paid to Mr. K. Premanathan.

4.7 Shri V. Ramakrishnan admitted that Shri K. Premanathan was holding 9365 shares in Asian Asbestos Cement Industries Ltd., and balance shares were held by other persons, the details for which was not available. The details of share transaction and holding pattern as tabulated in the assessment order was as under:- Sl.No. Transferor Transferee Consideration No.of shares amount 1. K. Premanathan V. Ramakrishnan Not mentioned 7000 2. K. Premanathan M. Ramakrishnan Not mentioned 2365 3. K. Premanathan V. Shanker Not mentioned 1350 4. K. Premanathan S. Ramya Not mentioned 1350 5. K. Premanathan R.Manoj Not mentioned 1350 6. K. Premanathan Vasu Not mentioned 1365 7. K. Premanathan Subramanian Not mentioned 50 Total 14830

9 & 3403/Chny/2019 4.8 In the above background, Ld. AO noted that the land ad measuring 13.64 acres was allotted by SIDCO to AACIL and due to financial crunch, three persons namely Shri K. Premanathan, Shri K. G. Ramesh and Shri N. Narahari Prasad made payment directly to SIDCO for discharging the liabilities of the company. They sold this property by virtue of transfer of shares to VESPL through its managing director Shri V. Ramakrishnan for a total consideration of Rs.6,13,80,000/- which was shared amongst them in following proportions:- Mr. K. Premanathan Rs.4,01,11,830/- Mr. N. Narhari Prasad Rs.1,01,27,700/- Mr. K. G. Ramesh Rs.1,11,40,470/- 4.9 The AO of Shri K. Premanathan noted that the assessee declared sale consideration of Rs.401.11 Lacs and offered to tax Long Term Capital Gain of Rs.248.13 Lacs. However, Ld. AO computed Long Term Capital Gains of Rs.254.68 Lacs by deducting indexed cost of acquisition from sale consideration of Rs.401.11 Lacs and added the differential of Rs.6.55 Lacs to the income of the assessee. The Ld. AO also made protective addition of Rs.219.23 Lacs by taking entire sale consideration of Rs.613.80 Lacs in the case of this assessee.

10 & 3403/Chny/2019 4.10 On the same set of facts, AO of M/s. Altec Fabricators(whose partner was Shri K.G. Ramesh), noted that the investment was made from the firm. The firm received sum of Rs.50 Lacs on 31.03.2009 as well as another sum of Rs.61.40 Lacs on 08.09.2009 from AEPPL. This amount was adjusted against opening debtors since this firm had to receive certain amount from AEPPL. The firm could not segregate the amount received from AEPPL i.e., whether the same relates to opening debtors or relate to sale consideration of land. However, Ld. AO held that the amount received by the firm was unexplained credit and accordingly, the amount of Rs.61.40 lacs as received in this year was added as ‘income from other sources’. 4.11 The AO of M/s Jay Engineering Industries framed an assessment for AY 2009-10 u/s 143(3) r.w.s. 147 on 27.12.2016.A notice u/s 148 was issued on 31.03.2016 (apparently wrongly mentioned as 31.03.2014 in the assessment order) on formation of belief of escapement of income. It transpired that the assessee had kept the amount of Rs.130 Lacs as received from AEPPL separately under the head of ‘creditors’. Shri N. Narahari Prasad admitted to have made investment of Rs.30 Lacs from the firm which was paid to SIDCO for discharging the liability of AACIL. The amount of Rs.130 Lacs was received, however, the same could not be 11 & 3403/Chny/2019 segregated i.e. whether it relates to opening debtors or relate to sale proceeds of land. The amount of Rs.30 Lacs was received on 01.12.2008 and the amount of Rs.100 Lacs was received on 01.01.2009. The Ld. AO rejected the plea of the assessee and held that difference of the two amounts i.e.. Rs.130 Lacs and opening balance of Rs.48.06 Lacs would be unexplained credit in the hands of the assessee. The same resulted into an addition of Rs.81.93 Lacs in the hands of the assessee. Proceedings before first appellate authority 5. Aggrieved as aforesaid, all the three assessees as well as Shri K.G. Ramesh and Shri N. Narahari Prasad filed appeal before CIT(A). In case of Shri K. Premanathan, Ld. CIT(A) adjudicated the issue as under: - 14(a) The main contention of the Mr. A.S. Ramakrishnan CA is that Mr. K. Premanathan had 9365 shares while the other two parties combined had 5465 shares and that all three of them had become directors in AACIL and that it was only with the consent of other two parties that Shri K. Premanathan entered into an MOU with M/s. Veesons and that though the entire payment was received in AEPPL the payment to Shri Narahari Prasad was made by making endorsement of checks received from M/s. Veesons and intention of assessee was not to enter into realestate business. This can be contrasted from grounds of appeal given above in the hands of other two parties who allege that no shares were transferred by them and the entire consideration and dealing was done only by Mr. K. Premanathan. If KP has borrowed amounts from other two parties then in computing the business profits, he will beallowed deduction only of his investments and of interest payments attributed to amounts given by KGR and by NP. Taking into account business environment interest due is calculated at annual rate of interest of 18%.

12 & 3403/Chny/2019 14(b). In light of above the income of Shri K. Premanathan is computed as under:- Total Consideration Rs.6,13,80,000/- M Investment / Principal payment made Rs.42,40,000/- A by Shri K. Premanathan Interest amount for 4 years from AY Rs.32,40,000/- B 2005-06 to AY 2009-10 for Mr.K.G. Ramesh computed at 18% per annum (72%) of Rs.45,00,000/- Interest amount for 4 years from AY Rs.21,60,000/- C 2005-06 to AY 2009-10 for Mr.Narahari Prasath / Jay Engineering computed at 18% per annum (72%) of Rs.30,00,000/- Total (A+B+C) Rs.96,40,000/- Business Income M minus (A+B+C) Rs.5,17,40,000/-

Thus, Ld. CIT(A), in the case of Shri K. Premanathan, held that the amount received from other parties was to be treated as loan transactions carrying interest rate of 18%. The deduction of this expenditure would be available to the assessee against sale consideration of Rs.613.80 Lacs and the income would be computed as ‘business income’.

13 & 3403/Chny/2019 6. In the case of Shri K. G. Ramesh, Ld. CIT(A) held that any excess amount received by Shri K. G. Ramesh over its investment was to be treated as interest which would be ‘income from other sources’. However, since the payment was received by M/s Altech Fabricators, the said amount would be taxed as ‘business income / income from other sources’ in the hands of M/s Altech Fabricators. The Ld. AO was directed to reopen the assessment of M/s Altech Fabricators for AY 2009-10. However, these directions have already been quashed by the Tribunal in the case of M/s Altech Fabricators vide its order dated 13.02.2020.

14 & 3403/Chny/2019 8. The aforesaid adjudication has given rise to present appeals before us. The three assessee assails the findings rendered by Ld. CIT(A) in their respective cases. Our findings and Adjudication 9. From the facts, it emerges that the three individuals viz. Shri K. Premanathan, Shri K.G. Ramesh and Shri N. Narahari Prasad have joined hands to make certain investment in certain land allotted by SIDCO to AACIL since AACIL could not discharge its liability to SIDCO. The investment was made by three individuals in certain proportion as tabulated in precedingpara 4.1. The investment so made by them revived the rights of AACIL in acquiring the said land from SIDCO. Since AACIL did not commence business, SIDCO did not register the land in its name. In due course, these three persons became additional directors of AACIL in the land. Shri K. Premanathan was appointed as joint MD of AACIL and he was holding entire shareholding of AACIL. Subsequently, the right held by AACIL has been sold to VESPL by MOU dated 04.09.2008 wherein the right in land has been transferred against sale consideration of Rs.613.80 Lacs. The sale consideration has been paid by VESPL to AEPPL whose Managing Director was Shri K. Premanathan. The transfer has been facilitated through transfer of 9365 shares held by Shri K. Premanathan in AACIL. This fact has 15 ITA Nos. 3218,3357 & 3403/Chny/2019 already been confirmed by Shri V. Ramakrishnan (MD of VESPL). The land has finally been re-allotted to VESPL on 02.07.2010. In the above background, the only conclusion that could be drawn was that the series of aforesaid transactions was nothing but acquisition of right in land by three persons and subsequent transfer of right in land in favor of VESPL against sale consideration of Rs.613.80 Lacs. In such a case, any consequential assessment framed has to assess the resultant income as ‘Capital Gains’ or ‘Business Income’ only, as the case may be. It could also be seen that the contribution made by Shri K. G. Ramesh and Shri N. Narahari Prasad could not be termed as loan transaction to Shri K. Premanathan since none of the facts on records as well as various statements recorded by Ld. AO support this proposition. The statements given by these two persons make it very clear that the two persons perceived the transaction to be acquisition of right in certain land which is further evidenced by the fact that Shri K. G. Ramesh as well as Shri N. Narahari Prasad became additional directors of AACIL and entered into MOU as owner and not as money lender. The only reason adduced by the said persons not to offer the transaction to capital gain was the fact that the amount received by the firms could not be segregated i.e., how much related to business transaction and how much related to sale consideration of land. Therefore, the conclusion of Ld. CIT(A) in 16 & 3403/Chny/2019 the impugned order that the two persons merely acted as money lender, could not be sustained. In the above background, the issues are adjudicated as under.