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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SMT. BEENA PILLAI & SHRI LAXMI PRASAD SAHU
O R D E R Per Laxmi Prasad Sahu, Accountant Member :-
This appeal is filed by the assessee against the order passed by the CIT(A), Gulbarga dated 30.3.2018 with the following grounds of appeal:-
“1. The impugned order of the learned Assessing Officer under section 143(3) dated : 25-11-2016 of the Act is opposed to law, facts and circumstances of the case, and therefore liable to be cancelled.
Page 2 of 18 SCOPE OF VERIFICATION.
2. The Authorities below failed to appreciate that the scope of examination in the assessment was limited and confined to the purpose for which the case was selected for scrutiny in CASS, and did not extend to the examination of the Long Term Capital Gain / loss declared in the return of income. RECOMPUTATION OF CAPITAL GAIN. 3.1. The LearnedA.O erred in recomputing the income under the head, Capital Gains, at Rs.2,60,46,1841-, as against the capital loss of Rs.97,97,9151- declared in the return of income. 3.2. The Learned A.O erred in disallowing and restricting the commission paid to the Directors of the company for sale of land applying section 40A(2)(b) of the Act. 3.3. The Learned A.O as well as the Learned CIT(A) ought to have appreciated that section 40(A)(2)(b) has no application for computation of Long Term Capital Gain and therefore, the commission paid to the Directors for sale of land could not be disallowed. 3.4. The Learned Authorities failed to appreciate that the commission paid to the Directors for sale of land is shown as income in the individual returns of income of the concerned Directors and as such, the payment of comtnission was not a devise of tax evasion. 3.5. The Learned Authorities below failed to appreciate that cost of acquisition varies from property to property and therefore, the cost of acquisition of Rs.251- per sft. could not be restricted based on the alleged cost of the property on the relevant date as per records of the registration Authority. 3.6. The Learned A. 0 violated the principles of natural justice in using the information obtained by him u/s.133(6) of the Act relating to cost of acquisition against the assessee-appellant, without giving an opportunity of rebuttal to the assessee- appellant.
4. The Grounds of Appeal are taken without prejudice to one another, and the Appellant seeks leave to add, alter, amend or delete any of the grounds urged at the time of hearing. For these and other grounds that may be taken and urged at the time of hearing, it is prayed that the Hon'ble ITAT may be Page 3 of 18 pleased to allow the appeal and order the deletion of the additions made to the total income declared.”
Brief facts of the case are that the assessee filed return of income on 11/10/2014 declaring a total income of Rs.4,45,681/-. The case was selected for scrutiny based on the issues which were supporting and statutory notices were issued to the assessee. From the return of income, it was observed by the AO that the company has declared income from business and income from long term capital gains. The details were furnished with the financial statements. As per the financial statement and tax audit report, it was observed by the AO that the company paid to the related persons of the company, wherein provisions of sec.40A(2)(b) of the Act squarely applies. The company had debited the following amounts to its directors/persons, which is as under:-
2.1 It was observed that the payment of sales commission paid to 3 directors amounting to 9.50,000/- is a new entry noted by the AO compared to the last year. In this regard the details were verified by the AO and found that the sales commission paid to 3 directors came upto Rs.28,50,000/- out of sale of free hold land of the company. The AO after detailed verification noted that the sales commission debited Page 4 of 18 in the books of accounts of the company resulted that the said expenditure is excessive as compared to the normal commission provided in the open market, which works out to 7% to 8 % of the sale proceeds of the said land. Therefore, The AO noted that the sales commission debited was just to reduce the capital gain. Accordingly, he restricted the disallowance to the extent of Rs.7,99,760/- and balance amount Rs.20,50,240/- (Rs.7,99,760 x 3) was added into the total income of the assessee. Further, he observed from the return of income that the assessee has computed long term capital gain on selling of 2 capital assets and in this regard the assessee has taken FMV of the property as on 01/04/1981 at Rs.25/sft since property was purchased before 01/04/1981. The AO was not satisfied from the rate adopted by the assessee @ Rs.25/sft for cost of acquisition of the property as on 01/04/2981. Accordingly, the AO invoked the provisions of sec.133(6) of the Act for calling information from the sub registrar/stamp value authorities for determining the FMV as on 01/04/1981. Based on the information received from the sub-registrar, the value suggested by him was at Rs.7/sft. Accordingly, the AO taken the valuation for cost of acquisition as on 1/4/1981 for computation of capital gain at Rs.7/sft and the long term capital gain was calculated at Rs.2,60,66,184/- and added the long term capital gain into total income of the assessee whereas the assessee had calculated long term capital loss of Rs.97,97,916/-. 2.2 Aggrieved from the order of the AO, the assessee filed appeal before the CIT(A), who dismissed the appeal of the assessee.
Page 5 of 18 3. Aggrieved by the order of the CIT(A), the assessee is before Income-tax Appellate Tribunal.
The ld.AR filed written submission, which is as under:- “1. The appellant-assessee most respectfully submits that the following issues are involved in the appeal: (I). In view of the binding Instructions of the Board in No.5/2016 dated, 14-07-2016 read with Instruction No.20/2015 dated, 29-12-2015 directing the assessing officer to restrict the scope of enquiry in the assessment proceedings to the subject matter of its selection: (a). Whether the learned assessing officer, where the case is selected for "LIMITED SCRUTINY", is correct in travelling beyond the subject matter of its selection and making additions? (b). Without prejudice to the above, whether the learned assessing officer is correct in disallowing the sale commission of land of Rs.20,50,240/- by applying section 40A(2)(b) on the ground that it is excessive and accordingly re-computing the LTCG, whereas the issue is not the subject matter of selection for scrutiny? (ii). Whether the learned assessing officer is justified in disallowing commission paid to the directors for sale of land whereas the said commission income is added back by the assessee-company itself in the statement of computation of income annexed to the return of income? (iii). Whether the learned AD is justified in adding the commission paid to the Directors in the hands of the assessee- company when the income is declared/assessable in the hands of the Directors of the company? SUBMISSIONS ON THE GROUNDS OF APPEAL TAKEN Ground No.1 Ground No.1 is general and therefore no specific submissions are made. Ground No.2 SCOPE OF VERIFICATION.
Page 6 of 18 "2. The Authorities below failed to appreciate that the scope of examination in the assessment was limited and confined to the purpose for which the case was selected for scrutiny in CASS, and did not extend to the examination of the Long Term Capital Gain/loss declared in the return of income." 2.1 It is submitted that the case was selected for "limited scrutiny through CASS" and the reasons for the same are mentioned in para 3 of 2 of the assessment order. The same is reproduced below: "The reason for the selection of the case for scrutiny in CASS is to verify the details of mismatch in sales turnover reported in audit report and ITR, mismatch in amount paid to related persons u/s 40A(2)(b) reported in ITR and audit report and ITR to verify the income under the other heads" 2.2. It was found by the learned AD during the assessment proceedings that there was no mismatch between the sales turnover reported in audit report and ITR, and also between the amounts paid to persons referred to in section 40A(2)(b) as per the ITR and the Audit Report in Form No.3CD. For the sake of ready reference, the explanations offered before the learned AD and accepted by him are briefly submitted in the Annexure-A, enclosed herewith. 2.3. However the learned AD has made the following additions which are not the subject matter of 'Limited Scrutiny' assessment:
2.4. The issue was agitated before the learned CIT(A) vide Ground No.4.1 (reproduced) in para 2.0 of page 4 of the CIT(A)'s order. The findings of the learned 01(A) are available in para 7.0 of page 6 of his order, wherein it is held that both the issues - section 40A(2)(b) and capital gains are recorded as reasons for scrutiny. It is respectfully submitted that as may be seen from the impugned assessment order itself, section 40A(2)(b) only for the purpose of mismatch between the amounts reported in Audit Report (Form No.3CD) and ITR. 2.5. But there is no mention of capital gains/LTCG in the reasons cited for selection of the case for scrutiny. As submitted under the appropriate headings and context, even the disallowance u/s 40A(2)(b) is totally unwarranted as the assessee itself has disallowed the entire commission of Rs.28,50,000/- in the 'Statement of Computation of Income' annexed to the return of income filed. 2.6. It is submitted that:
Page 8 of 18 (i). The mandate for the learned AD in the 'Limited Scrutiny' assessment was to examine the mismatch between the amounts shown in the audit report filed u/s 44AB in Form No.3CD and the ITR. This mismatch was explained and stood accepted. Hence the learned AD could not have travelled beyond the scope of 'Limited Scrutiny' and examined whether the commission paid to the directors was excessive or otherwise. Two directors out of three, have filed the returns disclosing the commission income and the same have attained finality. One of the directors, Mr. Agadi Marisiddeshwara, assessed vide PAW ABWPM8596L, has filed the return of income under the jurisdiction of the same assessing officer i.e., ITO, Ward- 1, Bellary which has been accepted. (ii). The examination of LTCG was not the subject matter of 'Limited Scrutiny' at all and in view of the binding Circulars/Instructions of the CBDT, the learned AO should not have disallowed part of the cost of acquisition and accordingly recomputed the LTCG. 2.7. It is submitted that when the "mismatches/differences" mentioned above and the subject matter of selection for scrutiny stood explained, it was incumbent on the part of the learned AO to accept the return in view of the binding instructions of the Central Board of Direct Taxes (CBDT). The appellant-assessee relies on the following: (i). The Hon'ble Tribunal, Chandigarh in Rajesh lain vs. ITO [2007] 162 Taxman 212 (Chnd)(Mag.) The assessing officer completed the 'Limited Scrutiny' examining the issue of claim of depreciation in respect of the Plinth constructed by him for storage of the food-grains. The assessing officer disallowed the claim of depreciation in respect of the said Plinth area and also the depreciation related to the Furniture. Aggrieved by the order, the assessee preferred the appeal before the CIT(A). The CIT(A) issued the enhancement Notice on the ground that the income from letting out of plinth should be assessed under the head, 'Income from other sources', and the depreciation could be considered u/s 57(u) of the Act.
Page 9 of 18 The Hon'ble Tribunal referred to the Circular of the CBDT in No.8/2002, dated, 27-08-2002 and held that the power of the assessing officer was restricted to the examining the issues for which the case was selected under 'Limited Scrutiny' and the power of the CIT(A) could not be enlarged beyond the power of the assessing officer. The underlying principle is that the assessing officer is not emoowered to examine the issues that are not the sublect matter of 'Limited Scrutiny'. (ii). The Hon'ble Tribunal Delhi Bench 'H' in Gift Land Handcrafts (2008) 19 SOT 5 (DELHI)(URO). The Hon'ble Tribunal held that the Commissioner was not justified in invoking jurisdiction u/s 263 on issues other than those decided in 'Limited Scrutiny' assessment. 2.8. It is submitted that the ratio of these decisions equally applies to the present case also, since the Central Board of Direct Taxes (CBDT) had directed, vide Instruction No.2012015 dated, 29-12-2015 read with Instruction No.512016, dated, 14-07-2016, to strictly confine the assessment oroceedin&s to the issues for which the case was selected for scrutiny. 2.9. In view of the above, it is submitted that the additions of income made in the impugned assessment order are unsustainable on facts and in law, and therefore liable to be deleted. Ground No.3 3.1. The Ground Nos. 3.1 to 3.6 are in respect of disallowance of commission paid to the Directors for sale of land and disallowance of part of cost of acquisition of the capital asset in computing the Longterm capital gain (LTCG). 3.2. The Ground Nos. 3.2 to 3.4 relate to the disallowance and restriction of commission paid to the Directors of the company for sale of land applying section 40A(2)(b) of the Act. The Ground Nos. 3.2 to 3.4 are as under: "3.2. The Learned AD erred in disallowing and restricting the commission paid to the Directors of the company for sale of land applying section 40(A)(2)(b) of the Act.
Page 10 of 18 3.3. The Learned AD as well as the Learned CIT(A) ought to have appreciated that section 40A(2)(b) has no application for computation of Long Term Capital Gain and therefore, the commission paid to the Directors for sale of land could not be disallowed. 3.4. The Learned Authorities failed to appreciate that the commission paid to the Directors for sale of land is shown as income in the individual returns of income of the concerned Directors and as such, the payment of commission was not a devise of tax evasion" 3.3. It is submitted that since the assessee had disallowed the said amount of Rs.28,50,000/- in the statement of computation of income, no further disallowance is warranted. As noted in the impugned assessment order as well as the CIT(A)'s order, the genuineness of the payment was not doubted. It is also not in dispute that TDS was made u/s 194H in respect of these payments to three Directors of the company.
As already mentioned, the commission income is declared in the _s of income filed by two Directors of the company. If commission income is declared in the hands of the Directors, the same income cannot be added in the hands of assessee- company. Reliance is placed on the ' decision of the Hon'ble Jurisdictional High Court of Karnataka in the case of Asgar join vs. CIT [2008] 298 ITR 60 (Karnataka). 3.5 Hence it is submitted that the disallowance of Rs.20,50,240/- added in the impugned assessment order as business income may be t ordered o be deleted. TRIPLE TAXATION. 4.1 It is submitted that the said amount of Rs.28,50,000/- was first Debited to the Profit & Loss account, but added back in the said statement of computation of income. However by inadvertence, the words, 'Less' was shown instead of 'Add' in the computation, giving an incorrect impression that the amount was reduced from the income computed under the head, ‘Profits & Gains from Business or Profession'. This fact was not noticed by the lower authorities and the assessee also did not bring this fact to the notice of the lower authorities. It may be noted that the learned AO has Page 11 of 18 disallowed this this amount to the extent of Rs.20,50,240/- and accordingly enhanced the business income, which has resulted in double taxation of the same amount. 4.2 Further, the learned AO has restricted the sale commission to 2% of sale price in computing the LTCG as could be seen from Annexure-1 to the impugned assessment order (Page 5), which resulted in taxing the said amount again. For the sake of ready reference, the disallowances are tabulated below:”
4.1 The ld.AR reiterated the submission made before the lower authorities and further submitted that the case was selected for limited scrutiny, accordingly the AO cannot decide the issue which were not the part of the limited scrutiny in regard to the long term capital gain tax as computed by the AO. Further, he contended that the disallowance in payment of commission to the Director which does not come u/s 40A(2)(b) of the Act. The expenditure incurred towards commission to the Directors was on the sale of capital asset but not for the business purpose and sec. 40A2(b) shall apply for the business purposes only. He further submitted that the recipients have paid income tax on commission income @ 30%, whereas in the long term capital gain it is 20%. Accordingly, there is no loss to the revenue. In respect of long term capital gain, he submitted that the AO has violated the principal of natural justice after he has considered the 3rd party evidences for making addition under the long term capital gain regarding valuation of the said property as on 1/4/1981 at Rs.7/sft, therefore, he should have given proper opportunity to the assessee for Page 12 of 18 rebuttal of the evidence relied on by the AO. Therefore, the addition made is not sustainable .
The ld.DR relied on the order of the lower authorities. He also produced the reasons for selection of scrutiny and the points raised are as under:- “Long Term Capital Lose on sale of property Mismatch in sales turnover reported In Audit Report and ITR Mismatch In amount paid to related persons u/s 4OA2)(b) reported In Audit Report and ITR Mismatch between income / receipt credited to Profit & Loss account considered under other heads of income and income from heads of Income other than business / profession”
5.1 As per the above reasons, the long term capital loss on sale of property was specifically mentioned in the reasons stated above, therefore, the argument advanced by the AR of the assessee that the AO has acted beyond his jurisdiction is not correct and he has filed written synopsis, which is as under:-
“Note: The reasons for selection of the case for scrutiny as per CASS are: a) to verify the details of mismatch in sales turnover reported Page 13 of 18 in Audit Report and ITR, b) Mismatch in amount paid to related persons U/s 40A(2)(b), reported in audit report, and c) Mismatch between income/receipt credited to P & L account considered under other heads of income and income from Heads of income other than business/profession It is submitted that since the additions made in the Asst order are in the criteria for which the case was selected for scrutiny under limited bracket, conversion of case from lithited category to complete category was not required and as such, the AO did not obtained approval from the competent authority. In other words, it is clear from the reasons that AO has not made any verification beyond the limits. The detailed analysis for each reason is discussed below.
Mismatch in sales turnover reported in Audit Report and ITR : It is clear from the statements that there was mismatch in the figures of sales reported in Audit report as compared to the ITR. As per JTR the turnover is at Rs.5209160/- whereas total turnover as per audit report in 3CA is NIL. This is mainly due to fact that the sale of fixed assets of Rs. 39977239/- is involved. The same is classified separately and deducted from the Business income. Hence the same is verified.
2. Amount Paid to related persons U/s 40A(2)(b) reported in audit report and ITR : As per ITR the amount paid to related persons was shown at NIL. Whereas, as per audit report a sum of Rs. 2850000/- was reflected towards the payment made to the related persons. This is due to payment of commission to directors/ related persons of the company. Since the Commission debited in the name of related party is more than the market rates, the same is restricted by invoking the provisions of section 40A (3) of the Act.
To verify the income under the other Heads: Since the sale proceeds of Land is included under the head "other income", the same is verified and proceedings were finalized by reworking the capital gain tax on the basis of value suggested by the Sub- registrar, Bellary vide his office letter dated 24.06.2016 in respect of cost price of the Property.
Page 14 of 18 In view of the above, it can be considered that there is no deviation by the AO in finalisation of assessment proceedings and is in accordance with the reasons recorded for scrutiny.
5.3 In addition to the written synopsis, he further submitted that in regard to the commission paid to the directors of Rs.9,50,000/- to 3 directors, the AO has not accepted the commission amount because it was very excessive as per the prevailing market rate. Generally, the commission in the real estate as per liaisoner and parties is 1 to 3% of the purchase/sale value, whereas in the assessee’s case he has paid 7 to 8% which is very excessive. Accordingly, the orders of the lower authorities are justified for disallowing the excess commission paid. He further submitted that the assessee had taken FMV as on 1/4/1981 at Rs.25/sft is also without any basis and he could not submit any credible evidence, therefore, the information was obtained from the sub-registrar office and based on the documents issue by the SRO. Therefore, the lower authorities were justified.
We have heard the rival submissions and carefully considered the same along with the order of the authorities below as well as the documents referred to and relied on before us during the course of the hearing. In pursuant to the information/documents submitted by the ld.DR, we do not find any merit on the arguments of the ld.AR case the reasons for selection of scrutiny as covered the objections raised by the assessee. Therefore, ground No.1 is dismissed.
Page 15 of 18 6.1 In respect of ground No.2, as per the arguments advances by both the sides, we observe that the commission paid is 7 to 8% which is very excessive but the ld.AR stated that the AO has made disallowance as per sec.40A2(b) which is beyond the scope for expenditure claimed for computation of capital gain and he has also submitted that the recipient have offered the commission amount and had paid taxes @30% which is more than the rate of capital gain tax rate, which is also not acceptable because the tax should be charged in the right hand who is actually liable for the payment of taxes. As per the order of the CIT(A), the tax payment made by the recipient is at the higher rate but amount has been disallowed by the AO for excessive and higher sales expenditure claimed by the assessee and ld.DR has also pointed out that in the real estate business, the commission for sale/purchase of the property is in the range of 1 to 3% is generally paid. The payment to the directors by the company is governed by the article of association of the company in any form. Since the assessee is a company accordingly first it has to be examined that the payment made to the directors are governed by the article of association or not and this fact has not been examined at any stage and the AR of the assessee is not brought any material in this regard. Considering the facts of the case, we send this issue to the file of AO for denovo assessment after verifying the article of association of the company for the relevant period. The assessee is directed to produce the documents for substantiating his case and not to seek unnecessary adjournment for Page 16 of 18 early disposal of his case and AO is directed to provide 3 effective opportunities to the assessee. 6.2 This ground is allowed for statistical purposes.
In respect of ground No.3 to 3.6, the ld.AR assessee has raised ground that the AO has violated the principle of natural justice for rebuttal of the evidence used by the assessee for determining the cost of acquisition as on 1/4/1981. From the order of lower authorizes, it is not clear whether the opportunity was given to the assessee or not. The AO u/s 133(6) of the Act obtained information from the SRO for determining of the FMV as on 1/4/1981 but it was not confronted to the assessee and the assessee has also raised a ground before us in this regard. Therefore, considering the prayer of the assessee, we think it fit that the assessee should be given an opportunity of being heard for rebuttal of evidence relied on by the AO for determining the FMV as on 1/4/1981. The assessee should be given liberty for producing evidence in support of his arguments. Accordingly, we are sending back ground Nos.2 & 3.6 to the file of the AO for denovo assessment.
7.1 Since the issue sent back to the file of the AO for denovo examination, it is directed that the assessee should be given 3 effective opportunities to substantiate his case and the assessee is directed not to seek adjournment unnecessarily for speedy disposal of the appeal of the assessee.