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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
आदेश / O R D E R
PER G.MANJUNATHA, AM: These two appeals filed by the Revenue and one appeal filed by the assessee are directed against separate, but identical orders of the learned Commissioner of Income Tax(Appeals)-2, Coimbatore, both dated 28.02.2017 and pertain to assessment years 2011-12 & 2012-13. Since, facts are identical and issues are common, for the sake of convenience, these appeals are heard together and are being disposed off, by this consolidated order.
At the outset, we find that there is delay of 7 days in filing both the appeals filed by the Revenue and 21 days delay in the appeal filed by the assessee. The learned DR submitted that due to non-availability of assessment records and transfer of the Assessing Officer, the revenue could not file appeals within the time allowed under the Act, therefore prays that delay may be condoned in these appeals. The learned A.R for the assessee submitted that on account of ill-health of the assessee, there is a delay of 21 days in filing the appeal by the assessee. Therefore, the learned AR prays that delay may be condoned.
Having heard both sides and considered the petition filed by the revenue as well as the assessee for condonation of delay, we are of the considered view that reasons given by both the parties for not filing these appeals within the time allowed under the Act comes under reasonable cause as provided under the Act for condonation of delay and hence, delay in filing of above appeals is condoned and appeals filed by the revenue as well as assessee are admitted for adjudication.
The Revenue has more or less filed common grounds of appeal for both assessment years, therefore, for the sake of brevity, grounds of appeal filed for the assessment year 2011- 12 are reproduced as under:-
“I. The order of the learned Commissioner of Income-tax (Appeals) is against the law and facts of the case.
2. The Ld. CIT(A) has erred in deleting the addition of Rs. 26,34,72,011/- which is 75% of expenditure incurred on leased unit by the assessee.
3. The Ld. CIT(A) has also erred in law and also facts of the case in not considering the fact that the assessee was one of the trustees of the trust to whom the lease rent is paid. And hence the transaction squarely falls within the meaning of Person mentioned in section 40A(2)(a) of the Income tax Act, 1961.
4. The Ld. CIT(A) has failed to appreciate that the lease rent fixed by the concerns is purely an arrangement to avoid the income component in the hands of the assessee.
5. For these and other grounds, that may be adduced at the time of hearing, the order of the Ld. CIT(A) may be cancelled and that of the assessing officer may be restored.”
Brief facts of the case extracted from for the assessment year 2011-12 are that the assessee is engaged in river sand and blue metal mining business filed its return of income for the assessment year 2011-12 on 28.09.2011 admitting total income of Rs.1,30,36,990/-. The assessee Shri M.Palanisamy has entered into lease agreement dated 19.07.2010 with Sree Vijayalakshmi Charitable Trust for blue metal quarrying in the lands owned by the trust measuring 14.86 acres. As per registered lease agreement in document No.3342/10 dated 19.07.2010, lease rent was fixed at Rs.14,860/- per annum.
The assessee claims to have entered into unregistered lease deed with the trust on 29.01.2010 and modified terms of such agreement dated 19.07.2010 and fixed yearly lease rent of Rs.14,860/- plus 75% of gross receipts earned by the assessee from mining activity to be paid as additional lease rent on six monthly basis. During the financial year relevant to assessment year 2011-12, the assessee had declared sales of silica and blue metal at Rs.1,58,05,89,196/- from mining in leasehold lands. The assessee has worked out 75% of gross sales of revenue which works out to Rs.1,23,02,45,578/- and claimed as lease rent paid to the lessee Sree Vijayalakshmi Charitable Trust. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has not considered various other expenses incurred for mining of blue metal and silica. It was further noted that the assessee is having three different business segments, i.e., business from mining and sale of river sand; income from mining at silica and blue metal & income from TAN India Ltd. for sale of Myrobalan / wattle. The Assessing Officer further noted that to excavate/ mine minerals from leasehold land and transport the same, the assessee needs to incur various expenses. However, the assessee has considered only minimum expenses to arrive at maximum lease rent to be paid to lessor. Therefore, the Assessing Officer called upon the assessee to explain as to why lease rent paid to lessee @ 75% of gross revenue receipts from sale of silica & blue metal cannot be treated as excessive and unreasonable. In response, the assessee has submitted that although, it has entered into registered lease agreement and specified lease rent of Rs.14,860/-, but before that the assessee had entered into unregistered contract deed dated 29.01.2010 and fixed lease rent of 75% of gross sale value to be paid as additional lease rent on the basis of minerals and resources available in the said land. The assessee further submitted that it has debited relevant expenses incurred for the business of mining of silica & blue metal and also river sand mining considering nature of business and thus, argued that lease rent paid to the lessor is not excessive and unreasonable.
Further, in his reply dated 18.03.2014, the assessee has furnished details of expenses incurred for mining at leased land at Palathurai and also explained each and every expenses incurred for silica & blue metal mining.
The Assessing Officer, however, was not convinced with explanation furnished by the assessee and according to the Assessing Officer, claim of the assessee towards expenditure incurred for mining river sand is excessive and unreasonable, when compared to industrial standards and thus, analyzed expenses debited by the assessee in light of sales and revenue generated from two different segments and opined that on analysis of details of expenses of two segments, it can be seen that expenditure of river sand mining is approximately 150% higher than the sales, whereas on contrary, sales from silica & blue metal mining is 1500% higher than the expenditure. Therefore, the Assessing Officer opined that anomaly in allocation of expenses is due to payment of huge lease rent to the lessor of the land. The Assessing Officerhas analyzed expenditure in light of nature of activity and necessary materials and plant required for excavation of sand and blue metals and finally arrived at a conclusion that claim of the assessee that it has incurred expenses of Rs.9.98 crores on total sale of Rs.158.05.crores is very less, which is contrary to the industrial standards. The Assessing Officer further noted that claim of the assessee that it had incurred expenses of Rs.72.19 crores against sale of river sand of Rs.48.27 crores is unreasonable and excessive, which is against industrial standards. Therefore, the Assessing Officer worked out unreasonable and excessive lease rent payment to the lessor of land on the basis of average net profit declared by the assessee in the immediate preceding two financial years 2007-08 and 2008-09 from river sand mining business which is at 2.6% and on the basis of average net profit of immediately preceding two years, has arrived at net profit of 1.22 crores from river sand mining business. The Assessing Officer further arrived at expenses of Rs.47.05 crores and then compared with total expenses and claimed to have incurred by the assessee for total business has arrived at total expenses to be allocated to sand mining division at Rs.35.13 crores. Since, the assessee has agreed to pay 75% of gross receipts as lease rent, the Assessing Officer has determined 75% of excess expenses claimed by the assessee to river sand mining business and has determined total amount to be reduced from lease rent payment to the lessor at Rs.26.35 crores. The relevant findings of the Assessing Officer are as under:-
“6.8. The written reply filed by the assessee has been considered carefully. The claim of assessee as expenses incurred towards Palathurai mining unit of Rs.9,98,85,9571-, is not acceptable, for the following reasons; i). In this instant case, it is an undisputed fact that, the assessee is involving in two kinds of sand business viz, river sand and mining sand/silica & blue metal. The sale/income and expenditure admitted for both the units can be analyzed in the following manner. ii). The sale/income of the said two units are easily identified and appeared in the P & L A/c, is as under; v). On analysis of the above table, it can be seen that the expenditure of river sand unit is approximately 150% higher than respective sales. On contrary, in the mining unit, the sale is 1500% higher than the expenditure. THIS ANOMALY IS DUE TO CLAIM OF LESS EXPENSE FOR MINING LAND. Considering the quantum of sales in two divisions, the expenditure admitted by the assessee, towards mining land is very less. vi). In both the divisions, the assessee is dealing sand and the vehicles (lorries, tipper, poclain) are the main component in the business. Hence, the expenses like repairs & maintenance, Diesel & lorry hire charges, depreciation and driver salaries, could be common for both the units. vii). In view of the facts and circumstances discussed herein above, the expenses incurred towards sand unit at Rs. 72,19,39,936/- and at Rs. 9,98,85,957 I- towards mining unit, AS CLAIMED BY THE ASSESSEE, is neither correct nor acceptable. The claim of assessee for expenses towards mining unit of Rs.9,98,85,9571- is not supported by any documentary evidence. And he has not maintained any separate account for mining unit expenses. The expenses of mining unit culled out from the combined expense account. Hence the ration adopted by the assessee, to arrive the expenses incurred towards mining land, is purely on the estimation basis.
7.0. Determination of expenses of mining unit on the basis of average net profit method:
7.1. During the AY 2008-09 & 2009-10, the assessee was involving in the river sand business alone. The net profit declared by the assessee, for the above said AY’s as under:
7.2. From the above table, it is evident that, the assessee had involved in the sand lifting and selling alone during the AY’s.2008-09 & 2009-10. Based on the net profit admitted by the assessee in the earlier two AY’s, the average net profit for river sand business is arrived @ 2.6%.
7.3. During the AY 2011-12, the assessee is involving in the business of both river sand and mining sand sales. The river sand business in earlier AY’s was profit making and the average profit was 2.6%.Hence, the expenses incurred towards river sand unit and profit thereon, of the AY 2011-12 is arrived by considering the following factors; a. Nature and profit component of the sand business in open market b. On due consideration of Depreciation and other expenses, incidental to the river sand business c. By applying the average profit shown in earlier years
7.4. The profit from the river sand division, is arrived at Rs1,22,33,777!- by applying the average profit of earlier two years at 2.6% and the expenses related to river sand business is arrived at Rs. 47,05,29,878/-.The total expenses debited by the assessee in P & L a/c. is of Rs. 82,18,25,893/-. The expenses incurred towards the mining sand division is arrived at Rs.35,12,96,015/- accordingly.
7.5. The lease rent has been fixed by both the lessor and lessee,@ 75% of gross receipts of sale from mining land. The lease rent fixed at the said manner is excessive & unreasonable and it is not an acceptable commercial/business practice in commercial/business. In view of the facts discussed herein above, the lease rent fixed by the concerned parties is purely an arrangement, to avoid the income component in the hands of assessee.
7.6. Any voluntary arrangement which leads to minimize the income component of the assessee is not acceptable. The expenses incurred towards the mining land have to be considered for arriving the reasonable lease rent. The expenses incurred towards mining land was arrived as above in Para7.4, and 75% of expenses are worked out to Rs.26,34,72,011/- accordingly The lease rent claim is reduced to this extent of Rs. 26,34,72,011/- and added back to the total income since the claim of assessee for lease rent is excess and unreasonable.”
Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee has reiterated his arguments made before the Assessing Officer in disallowance of certain expenses incurred towards river sand mining business and argued that bifurcation of expenses of two divisions on the basis of net profit of immediately two preceding years is arbitrary and contrary to books of account maintained by the assessee. The assessee has filed detailed written submissions before the learned CIT(A) in light of certain judicial precedents and argued that when the Assessing Officer has accepted earlier unregistered lease deed as genuine and parties have acted upon, then the Assessing Officer cannot question payment of lease rent only on the ground that the assessee has shown less expenses for silica & blue metal mining segment.
The learned CIT(A), after considering relevant arguments of the assessee and also taken note of certain judicial precedents, including decision of the Hon'ble Supreme Court in the case of CIT Vs. Gupta Global Exim P.Ltd. (2008) 305 ITR 132 (SC) observed that the Assessing Officer proceed to make disallowance of lease rent by alleging that arrangement of parting 75% of gross sale value of minerals to the lessor as lease rent without recovering equivalent proportion of mining expenditure from lessor is an arrangement through which appellant is paying excessive and unreasonable lease rent.
The learned CIT(A) has discussed the issue in light of nature of activities carried out by the assessee from two segments and argued that when the parties has reduced terms & conditions of sharing of revenue for leased land, then the Assessing Officer cannot question commercial wisdom of parties merely for the reason that the assessee has earned more or less profit from particular segment of business. Therefore, the learned CIT(A) opined that quantification made by the Assessing Officer towards excessive and unreasonable lease rent is contrary to general practices followed by businessmen and thus, opined that the Assessing Officer has made disallowance without carrying out any comparable study of lease rent paid by the some third parties in same business to hold that lease rent paid by the assessee is excessive and unreasonable, when compared to market rate. Without making any such exercise, the Assessing Officer held that lease rent paid by the assessee is excessive. Therefore, the learned CIT(A) opined that disallowance worked out by the Assessing Officer is purely on suspicious, surmises and conjecture basis. Accordingly, the learned CIT(A) deleted additions made by the Assessing Officer towards disallowance of excessive lease rent paid to lessor on leasehold land. The relevant findings of the learned CIT(A) are as under:-
“4.0. I have considered the grounds, arguments and submissions made by AR on the above issues. I have also carefully gone through the assessment order and considered the arguments taken by the AO for making the above disputed additions. On disallowance of excess depreciation on lorries I tippers, the appellant’s contention is that on some of the vehicles owned by him and used in sand business, normal depreciation at 15% was claimed whereas only on other vehicles which were let out on hire, higher depreciation was claimed. So, the issue to be decided is whether the vehicles on which higher depreciation was claimed are used in the business of hiring. On a careful consideration of the business of the appellant, it is understood that the appellant’s basic business is sand business where he buys sand from PWD as per the rates fixed by Tamil Nadu Government and lifts the sand from the river bed using his own trucks I tippers and transports sand to his stockyard from where the sand is sold to the customers and delivered at the customers place. For delivering the sand sold at the customers place, the appellant uses his own trucks and tippers. The sale price charged to the customers is for the sand as well as for delivery at the customers place. So, it is a composite price on which VAT is charged. Though the price charged includes amount charged for delivery i.e., towards transport of material from appellant’s stockyard to the customers place, the appellant’s revenue is not springing from letting out the vehicles on hire to the customers. The starting point is sale of sand and the delivery at the customers place is incidental to that sale. It is a service extended to the customer for which the appellant is charging some unspecified amount as part of sale price. However, rendering of that service of delivery of sand at the customers place is not the appellant’s core business. So, transportation activity in the course of the appellant’s sand business is only an incidental activity. That is the reason why transport charges are not separately shown in the invoice. It is a composite price charged for the material and delivery charges. The appellant is not letting out its vehicles on hire to the customers, rather those vehicles are only used in his main business of sand purchase and sales for delivering the sand sold. In the case of hiring of vehicles, the vehicles are kept at the disposal of the customers for transporting goods belonging to the customers to a specified destination and charges are collected for transporting those goods. In the appellant’s case, the material transported does not belong to the customers until it is delivered at their place. The sale is complete only after making delivery of sand at the customers place. So, there is a difference in use of vehicles in a hiring business and other businesses.
4.0.1 In the case of Kailash Chand Bagaria vs. CIT [2001] 249 ITR 720 (MP), where the assessee was engaged in the business of manufacture and trading in limestone, the Hon’ble Madhya Pradesh High Court held that the dominant purpose for which the assessee used the trucks has been found to be for his own business and hence the assessee is not entitled to higher rate of depreciation. A similar view was expressed by the Hon’ble Karnataka High court in the case of Veeneer Mills vs. CIT [1993] 201 ITR 764 (Karn.). Relying on these decisions, the Cochin Bench 1TAT, in the case of Baliapatam Tile Works Ltd. Vs. DCIT [2014] 51 taxmann.com 47, held after considering the facts of the case that where the appellant’s business of transportation of metal is incidental to the business of sale of metal to railways / public, it cannot be held as business of running the vehicles on hire. The Madras High Court in the case of CIT vs. South India Viscose Ltd., [2005] 272 ITR 115 held as below while deciding the issue of hiring:
“The fact that the assessee here chose to lease out the vehicles does not on that score disentitle the assessee to c/aim the benefit of the higher depreciation. The lease of the of the vehicles enables the lessee to have possession of the vehicle and have the right to use the vehicle as the lessee wishes, subject to the terms of any contract between the parties. The lessee during the period of user is also likely to have to maintain the vehicles subjected to the terms of the contract between the parties. For having the benefit of the use of the vehicle, the lessee is required to pay a price which is the lease amount, whether called rent or hire charges. The terminology used for describing the payment makes no difference in substance. What is paid is an amount in consideration of the right obtained from the owner to have the use of the vehicle for the benefit of the lessee for the stated period, and, or the stated purpose, whether or not by employing his own drivers, and whether or not also undertaking to maintain the vehicle during the period of the lease or hire.
The word ‘hire’ used in this entry is only meant to denote that the use of the vehicle is not by the owner himself for his own purposes, but it is given to another for use for a limited period of that other for a consideration. For the purpose of this entry there is no qualitative difference between lease of the vehicle for a specified period for consideration and letting the vehicle on hire for short duration on payment of hire charges”
In the appellant’s case herein, the vehicles were never given to the customers for transportation of sand, rather they were used in its own sand business for delivery purpose. Therefore, the lorries / tippers cannot be claimed as used in the business of hiring.
4.0.2 In the case of CIT vs. Gupta Global Exim (P) Ltd V. CIT [2008] 305 ITR 132, the Hon’ble Supreme Court held that relevant consideration for allowing a higher depreciation on trucks is whether the assessee is engaged in the business of running the trucks on hire. Mere inclusion of transportation income in the total business income was not the determinative factor for deciding whether trucks were used by the assessee during the relevant year in a business of running them on hire. The principle laid down in this decision has been applied by various Courts and Tribunals and depending on the facts of the case on hand, decisions have been rendered. So, unless the facts are identical, those decisions cannot be taken support of to argue the matter in the appellant’s case. On the other hand, the facts of the appellant’s case herein are indeed quite similar to the facts in the case of Gupta Global Exim Ltd. (supra) where the decision of Hon’ble Supreme Court is against the assessee. In that case, the assessee was a timber trader and on sale of the stock delivering the timber at the customers place using their own trucks. In the instant case, the appellant is a sand trader and also delivering sand to the customers by using his own trucks / tippers. The hiring income shown was only Rs.39,92,579/- during this year but even that was not proved to be derived from the vehicles on which higher depreciation was claimed. It was a miniscule portion of overall business of the appellant. Keeping in view of the detailed discussion of the appellant’s business made herein above, I am of the considered view that the appellant is not engaged in the business of running trucks / tippers on hire. In conclusion, I agree with the AD’s action of disallowing excess depreciation and uphold the same. The relevant grounds 5 to 12 are dismissed.
4.1 With regard to disallowance of lease rent of Rs.26,34,72,011/-, the AO proceeded to make this disallowance by alleging that the arrangement of parting 75% of gross sale value of minerals to the lessor as lease rent without recovering equivalent proportion of mining expenditure from the lessor is an arrangement through which appellant is paying excessive and unreasonable lease rent. Further, AO held that such an arrangement is not an acceptable commercial I business practice as it is depriving the appellant of the income component from the sale of minerals. Based on this premise, the AO quantified 75% of mining expenditure as expenditure ought to have been borne by the lessor and to that extent reduced the lease rent and disallowed it. However, the AO failed to show any material whatsqeve edn which, thbe conclusion was arrived at. Therefore, it was just an opinion or at best a guess work of the Assessing Officer.
4.1.0 The transaction of leasing of mining land is a commercial understanding agreed between the appellant and the Trust and the same has been reduced into writing in a valid lease agreement duly registered. Under this agreement, the appellant should pay the Trust 75% of gross sale value of minerals as lease rent. The AO has not pointed out any terms of this agreement under which lessor was also expected to bear a portion of expenditure incurred by the appellant on mining. In such circumstances, the has no basis to interpret that 75% of the mining expenditure should have been borne by the lessor. The commercial dealings between any two independent parties cannot be dictated by the AO. It has been held by Hon’ble Supreme Court in the case of S.A. Builders Ltd., Vs. CIT [2007] 288 ITR 1 as below:
“We agree with the view taken by the Delhi High Court in CIT V. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.”
As per the above judgment, the AC cannot determine income ought to have been earned and assess it to tax. This is what the.AO did in the instant case by disallowing a portion of lease rent. The AO also failed to show how the income assessed accrued to the appellant and how it was applied in any undisclosed investments or expenditures of the appellant or how the appellant got benefited by paying excess lease rent to the Trust. Further, no basis was shown for the quantification of excess lease rent at 75% of mining expenditure incurred by the appellant. Normally, while granting mining rights in a land, lease rent is fixed either at a lump sum amount or variable amount based on output or sales. The lessor is not concerned about the cost incurred by the lessee on mining. The lease rent is fixed after considering the expected revenues on sale of minerals as per prevailing market rates and expected expenditure and after allowing some margin to the lessee for undertaking mining activity. This takes place after prolonged discussions and negotiations. Once the lease rent is fixed and mining starts, it is the lessee’s job to exercise cost controls to maximise his profits after parting lease rent to the lessor. The cost incurred by the lessee has nothing to do with the lessor who is interested only in getting the pre-determined lease rent. Therefore, I do not agree with the AO’s view that lessor’s expenditure burden has also been borne by the appellant resulting in excessive payment of lease rent.
4.1.1 The AO alleges that the arrangement of leasing of the mine by the Trust to the appellant and parting 75% of sale proceeds as lease rent is an arrangement guided by non- business considerations. However, no basis or material has been shown for such conclusion. On the other hand, the appellant claims at Ground No.20 that Trust is a separate entity registered u/s.12A and receipts are utilized by it solely for the charitable objects and that no person derives either direct or indirect benefit out of the lease. In the absence of any material to the contrary, the AO’s comments can only be understood as an opinion not based on facts.
4.1.2 The AO has not disputed the genuineness of lease rent expenditure but the finding is only that it is excessive. The AO has not established that the parties are related to call for any disallowance of this nature. Alternatively, the AO could have intimated to the AO of the Trust about the transaction and enquired about whether the appellant is an interested party to part such lease rent to Trust and whether any benefits indirectly derived from him have come to his notice. Neither did the AO undertake comparative study to hold that lease rent was excessive as compared to market rate. Without making any such study, the AO simply held that lease rent paid was excessive and disallowed some expenditure on estimate basis. It is an established law that any disallowance of expenditure cannot be made unless it is backed by provisions of law. It cannot be made on the basis of surmises and conjectures of the Assessing Officer.
4.1.3 It is also relevant to mention that the disallowance of lease rent was quantified by applying a percentage on the expenditure incurred by the appellant in mining division. This expenditure has been arrived at by a deductive logic of first arriving at expenditure incurred in sand division by applying average NP rate of that division and subtracting that expenditure from overall expenditure on the ground that separate accounts of these divisions were not maintained. According to me, this is an over-simplified method even if no separate accounts were maintained. The Assessing Officer considered entire expenditure debited to P&L account in both the divisions including depreciation of 17.08 crores also. This is a major notional cost and largely relates to lorries and tippers used in sand business. In this assessment order itself, the AO gave a finding that depreciation to the extent of 11.16 crores claimed at 30% on lorries and tippers used in sand business was excessive and disallowed excessive depreciation of 5.58 crores. Besides this depreciation, the appellant claimed depreciation on other lorries and tippers used in sand business at 15% and that was also part of overall depreciation of 17.08 crores. So, whole of this expenditure could not have been considered for arriving at expenditure in mining division. It is also relevant to mention that in the subsequent year i e, AY 2012-13, the AO did not follow this method but considered only 75% of expenditure shown by the appellant in mining business and made disallowance of only 7.82 crores (approx.) though the lease rent in that year was also roughly the same. The appeal for that year also has been heard simultaneously and is being disposed off along with this order. Notwithstanding the method followed for subsequent year, for the reasons mentioned in this para, I am also not convinced with the method followed for arriving at expenditure of mining division this year. 4.1.4 Lastly, in this matter, it needs to be mentioned that the disallowance of 75% of mining expenditure incurred on Palathurai land made in AY.2010-11 on identical reasoning in the appellant’s case has been deleted by my predecessor vide order in ITA.No.38A113-14 dated 12.06.2015. In that order also, my predecessor held a similar view that the AD cannot assume that the contract is guided by non-business motive without bringing out any evidence and deleted the disallowance. In the light of the above detailed discussion, I am of the considered view that the AC was not justified in making the disallowance of lease rent and delete the same. The relevant grounds 16 to 26 are allowed.”
The learned DR submitted that the learned CIT(A) erred in deleting additions made by the Assessing Officer towards excessive and unreasonable lease rent paid to the lessor without appreciating fact that parties have entered into lease agreement and further, same was registered as per which lease rent was fixed at Rs.14,860/- per annum, whereas parties claims to have entered into unregistered lease agreement prior to registered lease agreement and argued that they agreed to share 75% gross receipts from business as lease rent. But, said arrangement was made to avoid payment of taxes by the assessee by diverting substantial portion of income generated from mining activity to the trust, which claims exemption u/s.11 of the Income Tax Act, 1961, where the assessee was one of the trustee. The learned DR further submitted that the learned CIT(A) erred in not considering fact that the assessee was one of the trustees of the trust to whom lease rent is paid and thus, transaction squarely falls within the meaning of person as mentioned u/s.40A(2)(a) of the Act, and thus, the Assessing Officer has very right in comparing lease rent paid by the assessee in light of industrial standards and market rate, but the learned CIT(A) by disregarding reasons given by the Assessing Officer has deleted additions made by the Assessing Officer towards quantification of excessive and unreasonable lease rent. The learned DR further submitted that so called unregistered contract deed prior to registered lease deed was an afterthought and arrangement between the parties to avoid income in the hands of the assessee, because lease rent paid to the trust was exempt by virtue of the trust claimed exemption u/s.11 of the Act. Therefore, transaction between the assessee and the trust was squarely covered under the provisions of section 40A)(2) and thus, reasons given by the Assessing Officer was not well appreciated by the learned CIT(A) and deleted additions towards unreasonable lease rent.
The learned A.R for the assessee, on the other hand, supporting order of the learned CIT(A) submitted that the Assessing Officer never disputed agreement between the parties, including unregistered contract deed entered into by the assessee with the trust prior to date of registered lease deed, which is evident from fact that the Assessing Officer had acted upon unregistered lease deed. Therefore, once the Assessing Officer having accepted lease deed between the parties as genuine, was erred in quantifying excessive lease rent by apportionment of operating expenses incurred by the assessee to two segments of business without understanding complexity and processes involved in two business segments.
The learned A.R for the assessee further submitted that the Assessing Officer has doubted expenses allocated by the assessee to river sand mining business only because revenue from silica & blue metal mining segment was more, without appreciating fact that expenses incurred in the business is purely relates to the activity carried out by the assessee and meticulous plan executed for the business. But, just because revenue from one segment is more and expenses is less, the Assessing Officer cannot allege that the assessee has allocated more expenses to one segment to derive undue tax advantage, unless the Assessing Officer brings on record to allege that transactions between the assessee and the lessor of land is sham transaction. The learned A.R. further referring to the decision of the ITAT, Chennai, in the assessee’s own case for assessment year 2010-11 submitted that the Tribunal has considered an identical issue on the basis of very same lease agreement between the parties and after considering relevant facts held that additions cannot be made in the hands of the assessee towards excessive and unreasonable lease rent, because entire amount was transferred to the trust and the assessee is retaining only minimum amount for himself. Since the issue is already covered by the decision of the Tribunal for earlier assessment year, order of the learned CIT(A) may be upheld.
We have heard both the parties, perused material available on record and gone through orders of the authorities below. There is no dispute with regard to fact that the assessee had entered into two separate lease agreements with the lessor of the land for mining activity. The facts borne out from records clearly indicate that the assessee has entered into unregistered contract deed dated 29.01.2010 with M/s.
Vijayalakshmi Trust for mining silica & blue metal in a land owned by the trust to the extent of 22.68 acres in punjai land.
The assessee had also entered into unregistered contract deed dated 17.05.2010 for mining silica& blue metal to the extent of 14.86 acres of punjai land. As per unregistered agreement between the parties, lease rent was fixed at Rs.22,680/- per annum plus 75% of gross revenue generated from mining activity for Rs.22.68 acres of land and for 14.86 acres of land lease rent was fixed at Rs.14,860/- plus 75% of gross revenue generated from mining activity from the said lands. The assessee claimed that although, there was registered agreements subsequent to unregistered agreement, but terms & conditions of both agreements are one and the same except lease rent to be paid to lessor and further, as per registered lease deed, lease rent was fixed at minimum to reduce payment of stamp duty. The Assessing Officer did not dispute two lease agreements entered into by the assessee with the trust. In fact, the Assessing Officer has acted upon on unregistered contract deed entered into between the assessee and the trust. But, the Assessing Officer has disputed quantum of lease rent paid by the assessee to the lessor and held that lease rent payment of 75% of gross revenue generated from mining activity is unreasonable and excessive. The Assessing Officer has arrived at above conclusion on the basis of relationship of the assessee with the trust, allocation of expenses between river sand mining segment and silica & blue metal mining segment and analyzed each and every expenditure claims to have incurred by the assessee for both segments and opined that the assessee has under-stated expenses for silica & blue metal mining segment and over-stated expenses for river sand mining segment.
Finally, the Assessing Officer has concluded that lease rent paid by the assessee to the lessor is unreasonable and excessive and thus, worked out excessive and unreasonable lease rent by taking into average net profit declared by the assessee for immediately preceding two financial years from river sand mining business alone, because the assessee was engaged only in river sand mining business for immediate two financial years and disallowed excessive lease rent paid to lessor.
11. We have given our thoughtful consideration to the arguments of the learned A.R for the assessee, in light of various reasons given by the Assessing Officer to determine excessive and unreasonable lease rent payment to lessor and we ourselves subscribe to the reasons given by the Assessing Officer to arrive at a conclusion that lease rent payment fixed by the assessee @ 75% of gross sales revenue generated from silica & blue metal mining segment is excessive and unreasonable, because if you consider nature of business carried out by the assessee in both segments and then compare with a similar industry and industrial averages, then claim of the assessee that it has paid 75% of gross revenue generated from mining segments as lease rent is prima-facie, excessive and unreasonable. We are surprised to see the claim of the assessee that it has paid 75% of gross revenue generated from mining business as lease rent. In our considered view, this is something special and definitely, there is no error in the reasons given by the Assessing Officer to hold that lease rent paid is excessive and unreasonable, more so, when there is relationship between the assessee and the trust.
As per facts brought out by the Assessing Officer, the assessee had entered into lease agreement with the trust which is claiming benefit of exemption u/s.11 of the Income Tax Act, 1961. Admittedly, the assessee was one of the trustees in the trust. But, before entering into lease agreement with the trust for carrying out mining activities, the assessee has resigned from the trust. From the above, it is very clear that the assessee and the trust are related parties and thus, transactions between the assessee and the trust on lease rent payment should be examined with reference to provisions of section 40A(2) of the Act, to determine whether lease rent paid by the assessee is reasonable, when compared to market rate or excessive and unreasonable. Therefore, it is necessary to examine reasons given by the Assessing Officer to hold lease rent payment to lessor is unreasonable and excessive in light of expenses claimed by the assessee for both segments of business.
The mining of silica & blue metal and mining of river sand are two different activities. The river sand mining is a simple process, which does not require heavy machineries or materials to mine sand from the river bed, whereas mining of silica & blue metal is complex process, which involves blasting of heavy rocks into small stones of various sizes which requires heavy plant & machinery and materials. Therefore, obviously processing expenditure involved in river sand mining is very minimum, when compared to processing expenses involved in mining of silica & blue metal. In the present case, the assessee has derived huge revenue from silica & blue metal mining activity and claims to have incurred very very minimum expenses. If you compare revenue generated from silica & blue metal segment of Rs.158.05 crores with expenses claimed to have incurred by the assessee of Rs.9.98 crores, then revenue is almost 1500% higher than the expenditure incurred for that segment which is quite abnormal. Similarly, the assessee has generated sales revenue of 48.27 crores from river sand mining and claims to have incurred Rs.72.19 crores expenditure. If you consider nature of activity carried out for river sand mining, we are of the considered view that expenditure shown by the assessee for river sand mining is abnormal which is 150% higher than the sales. From the facts brought out by the assessee and on analysis of sale and expenditure figures, we are of the considered view that everything is not right in books of account of the assessee and claim of expenditure for both segments. If you analyze expenditure claimed by the assessee for silica & blue metal mining segment, in light of revenue generated from that segment, then definitely, one can reach to a conclusion that the assessee has suppressed or under-stated various expenses incurred for mining to make huge payment of lease rent to the lessor of the land. Therefore, to that extent, in our considered view, reasons given by the Assessing Officer to hold that lease rent paid by the assessee to the lessor of land is excessive and unreasonable cannot be faulted. The learned CIT(A), without appreciating facts has turned down reasons given by the Assessing Officer and deleted additions made towards excessive and unreasonable lease rent without any cogent reasons.
Having held so, let us examine method and manner in which the Assessing Officer determined excessive and unreasonable lease rent paid by the assessee to the lessor.
There is no doubt with regard to findings of the Assessing Officer that the assessee has paid excessive and unreasonable lease rent to the lessor, because of their proximate relationship and also the trust claiming benefit of exemption u/s.11 of the Income Tax Act, 1961. But, methodology adopted by the Assessing Officer to determine excessive and unreasonable lease rent is not in accordance with standard procedure required to be followed for determining such expenses. It is an admitted fact that once particular expenditure is considered in light of provisions of section 40A(2) of the Act, to be held as excessive and unreasonable, then the Assessing Officer should give proper reasoning to arrive at such conclusion. Further, reasons given by the Assessing Officer should support with necessary evidences. There are certain methods provided for determining and comparing expenses incurred by the assessee, if the Assessing Officer finds that such expenditure is excessive and unreasonable. One method can be adopted to determine such excessive and unreasonable expenses is comparison of expenses incurred by the assessee with some third party having similar kind of business. The other method can be adopted to determine excessive and unreasonable expenses is industrial standards and profit margin from the respective segment of business. In this case, the Assessing Officer neither followed any of the method nor has given any proper reasoning for ascertaining excessive and unreasonable expenses on lease rent. The Assessing Officer neither bring on record some cases of similar nature, even though there may be multiple or number of assessees involved in this line of business. The Assessing Officer had also not laboured much to verify claim of the assessee with standards of industry. But, went on to determine excessive and unreasonable lease rent by adopting average profit method by taking into account previous two years net profit declared by the assessee from river sand mining segment. In our considered view, method adopted by the Assessing Officer may be one of the permissible method, but before going into this method, the Assessing Officer should have tried and determined excessive and unreasonable lease rent by any one of the methods discussed hereinabove. No doubt, average profit method may give indication of profit derived by the assessee from a particular business segment but, in our considered view, it is not a conclusive, because profit of particular year depends upon various factors, including increase in processing expenses or reduction in selling price of products. In our considered view, unless she brings on record some evidences to show that there is no change in facts and circumstances of the case for the present year, when compared to earlier year, simply the Assessing Officer cannot adopt average profit method by taking into account previous years net profit declared by the assessee. To this extent, we are not in agreement with the reasoning given by the Assessing Officer to determine excessive and unreasonable lease rent.
Coming back to case laws cited by the learned A.R for the assessee. The learned A.R for the assessee took support from the decision of ITAT., Chennai in assessee’s own case for assessment years 2010-11 in dated 09.09.2016 and argued that the Tribunal has considered similar issue on identical set of facts and held that no additions can be made on this issue, because the assessee has parted with major portion of revenue generated. We have gone through reasons given by the co-ordinate Bench of the ITAT., Chennai, in light of facts brought out by the Assessing Officer and reasons given by the Assessing Officer to hold expenses incurred by the assessee for payment of lease rent as excessive and unreasonable, and we ourselves are not inclined to follow decision of the co-ordinate Bench for simple reason that findings given by the Tribunal to delete additions made by the Assessing Officer and facts brought out by the Assessing Officer to hold expenses incurred by the assessee as excessive and unreasonable are quite contradictory. The Assessing Officer, on one side had given various reasons, including proximate relationship of assessee with the trust and comparison of expenses incurred for two segments of business to arrive at conclusion that the assessee has allocated more expenses to river sand mining business to make payment of lease rent to the related party to claim tax benefit. However, the Tribunal has given a finding that if at all, payment made by the assessee to the trust for lease rent should be taxed in the hands of the trust, even though the trusts enjoys benefit of exemption u/s.11 of the Act, by virtue of proviso to section 2(15) of the Act, because sub-leasing of land by the trust is nothing but commercial transaction which is distinct from its charitable activities. With due respect, we are not going to follow findings of the Tribunal for simple reason that case before the Tribunal was taxability of certain income of the assessee, whereas the Tribunal has given a finding to tax particular income of the assessee in the hands of the trust, which is quite surprising for us. The reasons given by the Tribunal to sustain order of the learned CIT(A) in deleting additions made by the Assessing Officer towards excessive and unreasonable lease rent payment to the trust is not in accordance with the scheme of taxation and also contrary to facts brought out by the Assessing Officer on record. Hence, we are not inclined to follow decision of the co-ordinate Bench, even though it has rendered in assessee’s own case for earlier year 2010-11, because in our considered view, the decision of the Tribunal for assessment year 2010-11 is contrary to facts .
In this view of the matter and considering facts and circumstances of the case, we are of the considered view that the learned CIT(A) has erred in deleting additions made by the Assessing Officer towards disallowance of excessive and unreasonable lease rent payment to the trust for lease hold land. Hence, we set aside order passed by the learned CIT(A) and restore the issue back to the file of the Assessing Officer and direct the Assessing Officer to redo assessment de-novo, in accordance with law and also by considering observations given by us in preceding paragraph to determine excessive and unreasonable lease rent.
In the result, appeal filed by the revenue for assessment year 2010-11 is treated as allowed for statistical purposes.
The only issue that came up for our consideration from the assessee appeal is additions towards unproved sundry creditors u/s.68 of the Income Tax Act, 1961. During the course of assessment proceedings, the Assessing Officer on the basis of confirmation letters filed by Shri Venkateswara Traders and M/s.Venkateswara Building Material Supplies noticed that there is a difference in closing balance of sundry creditors, as per books of account of the assessee and closing balance as confirmed by the creditor in their books of account amounting to Rs.1,07,31,189/-. The assessee claimed that there is difference between books of account of the assessee and confirmation filed by the creditor, in balance of sundry creditors account for the year under consideration and further, difference is due to mismatch in opening balance of sundry creditors and thus, same cannot be added for the year under consideration. The Assessing Officer was not satisfied with the explanation furnished by the assessee and according to him, the assessee has not able to explain difference between sundry creditors balance shown in books of account with that of sundry creditors balance confirmed by 2 parties and thus, made additions towards difference in two sundry creditors account amounting to Rs.1,07,31,189/-.
The learned A.R for the assessee submitted that the learned CIT(A) erred in not appreciating fact that difference between the accounts of sundry creditors and with that of appellant did not arise on account of any omission or failure on account of any transactions carried out in the year of account and hence, the learned CIT(A) ought to have deleted additions made by the Assessing Officer towards difference in sundry creditors account u/s.68 of the Act.
The learned DR, on the other hand, supporting order of the learned CIT(A) submitted that the assessee failed to file necessary reconciliation explaining reasons for difference in sundry creditors account as appeared in its books of account and with that of confirmation filed by creditors and thus, there is no error in the reasons given by the learned CIT(A) to sustain additions made by the Assessing Officer .
We have heard both the parties, perused material available on record and gone through orders of the authorities below. Although, the assessee claims to have explained reasons for difference in sundry creditors account in the books of account of the assessee, when compared to confirmation filed by two parties and argued that difference is on account of opening balance carried forward from earlier years, but there is no difference in transactions for the year under consideration, but failed to file any reconciliation between books of account of the assessee and confirmation filed by the creditor before the Assessing Officer as well as learned CIT(A). Even before us, the assessee did not file any reconciliation explaining difference between sundry creditors balance appeared in his books of account with that of balance as per books of account of the creditors, except stating that there is no difference of transactions carried out during the year under consideration, but difference is on account of opening balance carried forward from earlier financial years. Therefore, for this reason above, the arguments of the assessee should be rejected. But, facts of the matter is that, we had restored the appeal filed by the Revenue for assessment year 2011-12, to the Assessing Officer and direct him to redo the assessment, de novo, we are of the considered view that, this issue can also go back to the Assessing Officer to give one more opportunity to the assessee to explain difference in sundry creditors accounts with evidence. Hence, we set aside the issue to the file of the Assessing Officer and direct the A.O. to reconsider the issue in accordance with law.
In the result, appeal filed by the assessee is allowed for statistical purposes.
To sum up, both the appeals filed by the Revenue for assessment years 2011-12 & 2012-13 are allowed for statistical purposes and appeal filed by the assessee for assessment year 2011-12 is also allowed for statistical purposes.