THE ACIT, CIRCLE-1(2), AHMEDABAD vs. NEPTUNE PLASTIC CORPORATION, AHMEDABAD

Now, the Revenue is in second appeal before us. The following grounds have been taken in this appeal:

Shri Rignesh Das, Ld. Sr. DR appearing for Revenue submitted that all the grounds taken by the Revenue are interconnected and pertain to short term capital gain arising on sale of immovable property. The Ld. SR. DR has painstakingly taken us through the assessment order. The facts that are relevant to decide the issues arising in this appeal are as under:

The Ld. Sr. DR explained that all the agreements between the assessee and True Value and between True Value and ASPL were made after the actual sale of property by the assessee and were sham and bogus agreements. He submitted that even if True Value had exclusive booking right of Neptune Harmony, such right could not have been exercised by True Value in respect of the property already acquired by the assessee. Therefore, True Value had no locus standi to enter into any agreement as the booking agent. He further submitted that as per the sale deed executed by the assessee with CGPL, the entire sale consideration of Rs.5,04,80,000/- was received by the assessee only vide RTGS on 17.05.2013. Therefore, the AO had rightly treated the sale consideration of the property at Rs.5,04,80,000/-. The payment [ACIT vs. Neptune Plastic Corporation] A.Y. 2014-15 - 6 – of Rs.2.39 Crores to True Value could had to be considered only as commission payment. The Ld. Sr. DR submitted that the AO had rightly disallowed the expense as commission payment of more than 50% of sale consideration was unheard of. He, therefore, strongly supported the disallowance of expenditure of Rs.2.39 Crores and Rs.15 Lacs paid to True Value, which was non-genuine and sham transaction. He further submitted that the AO had rightly treated the sale consideration of property at Rs.5,04,80,000/- and reduced it from WDV of block of assets. Accordingly, the disallowance of depreciation of Rs.25,48,000/- on account of reduction of WDV was also justified.

Per contra, Shri Saurabh Soparkar, Ld. Sr. Counsel appearing for the assessee strongly supported the order of the Ld. CIT(A). He submitted that the initial agreement made by the assessee with True Value for sale of property to the prospective buyer i.e. ASPL was for a consideration of Rs.3 Crores only. Subsequently, the buyer had transferred its right to its sister concern CGPL and, therefore, the second jump in the price of the property did not belong to the assessee at all but it belonged to the prospective buyer i.e. ASPL. He further submitted that the payment of Rs.35 Lacs to True Value was rightly held by the Ld. CIT(A) as the cost of transfer. This payment was necessitated in order to sell the property by the assessee. The Ld. Sr. Counsel further submitted that the AO was not correct in making addition of Rs.2.54 Crores on account of disallowance of expense as well as addition of Rs.25,48,000/- in respect of disallowance of depreciation. The Ld. Sr. Counsel explained that the gain arising on the sale of property was short term capital gain and the sale [ACIT vs. Neptune Plastic Corporation] A.Y. 2014-15 - 7 – consideration was required to be reduced from the WDV. Accordingly, when the entire sale consideration of Rs.5,04,80,000/- was reduced from WDV and depreciation was disallowed, there was no question of separate addition of Rs.2.54 Crores on account of disallowance of expenses.

We have carefully considered the rival submissions. The basic fact that the cost of shops was disclosed as work-in- progress and that only short-term capital gain arose on sale of Shop No.4 on ground floor of Neptune Harmony, is not under dispute. Since, this is a case of short-term capital gain, the entire sale consideration was required to be reduced from the block of assets and the effect of disallowance, if any, was restricted to disallowance of depreciation. The action of the AO in reducing the WDV of stock-in-trade and disallowing the depreciation as well as the disallowance of expenses, both cannot be held as correct.

The moot issue to be decided in this appeal is as to what was the actual sale consideration received by the assessee on the sale of shop number 4 on the ground floor of Neptune Harmony. A copy of the purchase deed as well as the sale deed of the property under question has been brought on record in the paper book filed by the assessee. It is found that the Shop No.4 of Neptune Harmony was purchased by the assessee on 28.09.2011 from AIPL for a consideration of Rs.2.50 Crores. The contention of the assessee is that when it wanted to sale this property, it had to approach True Value for the reason that the booking right for sale of property was only with True Value. From the evidences [ACIT vs. Neptune Plastic Corporation] A.Y. 2014-15 - 8 – as brought on record, this contention of the assessee is not found correct. The sale deed dated 28.09.2011 for purchase of property was executed directly between AIPL as vendor and Neptune Plastic Corporation, the assessee, as purchaser. We do not find mention of True Value anywhere in the sale deed, as exclusive booking agent of ASPL. Neither True Value was signatory of this document as a booking agent. Further, clause-12 of the sale deed regarding permission of the vendor for sale of property stipulated as under:

It is, thus, found that the assessee was required to obtain permission of the management body/vendor for sale of Shop No.4 and there was no stipulation that the permission has to be obtained from True Value as booking agent or that the booking agent was required to be involved in the future sale transactions. Thus, the contention of the assessee that it could not have sold the property without making an agreement with True Value is not found correct. As rightly held by the AO, neither the True Value had exclusive selling right of the property nor any such right could have been exercised in respect of the property already [ACIT vs. Neptune Plastic Corporation] A.Y. 2014-15 - 9 – acquired by the assessee. Therefore, the involvement of True Value in the sale transaction of the property by the assessee has to be treated in the capacity of a mere agent only.

The assessee has filed a copy of booking agreement dated 1st March, 2012 between True Value and ASPL in respect of Shop No.4 at Ground Floor of Neptune Harmony. It is mentioned in the said agreement that True Value was having absolute right to give booking in the building Neptune Harmony by virtue of an agreement made on 20.03.2011 between True Value and AIPL. Even if it is accepted that True Value had a booking right arrangement, such right was not applicable in respect of the premises already sold by AIPL to third party buyers. On the date of this agreement i.e. on 01.03.2012, the premises of Shop No.4 was owned by the assessee and not by the AIPL. Therefore, the booking agreement made between True Value and AIPL was non- enforceable in respect of this property. In fact, the name of the owner of the shop i.e. the assessee was nowhere appearing nor there was reference of any arrangement between the assessee and True Value for sale of this property in the booking agreement dated 01.03.2012. There was no fiduciary relationship between True Value and the assessee and in the absence of any such relationship True value either explicitly or implicitly couldn’t have agreed to act on behalf of the assessee to sale the property owned by the assessee. It is also mentioned in this agreement that the booking price of Rs.75 Lacs paid on 26.03.2012 by ASPL was received by True Value. Since, the True Value was neither the owner of the property nor power of attorney holder on behalf of the assessee and no reference of any agreement between the True [ACIT vs. Neptune Plastic Corporation] A.Y. 2014-15 - 10 – Value and the assessee was appearing in this booking agreement, the payment of Rs.75 Lacs could not have been received by True Value. In the absence of any evidence on record that True Value was an agent of the assessee, the booking agreement dated 1st March, 2012 was not at all enforceable and binding on the assessee.

In the sale deed executed between the assessee and CGPL dated 28.05.2013 as well, there is no reference of any role played by True Value in this transaction. The Clause 3 of this sale deed reads as under:

The assessee had also filed a copy of agreement dated 31.05.2013, as per which the assessee had agreed to return the excess sale consideration of Rs.2,39,80,000/- after deduction of expenses of stamp duty and registration fee of Rs.15 Lacs, to True Value. As rightly pointed out by the AO, this agreement was post the date of execution of sale deed by the assessee. As already [ACIT vs. Neptune Plastic Corporation] A.Y. 2014-15 - 11 – discussed earlier, True Value had no booking right in the property already acquired by the assessee and there was no question of any payment to True Value for release of its right. Even if there was an oral understanding between the assessee and True Value, the nature of payment had to be considered only as commission payment. As rightly held by the AO, the commission payable to the agent for providing professional assistance was in the range of 2 to 5% and the payment of 50% of the sale consideration as commission to the agent was not justified. As already discussed earlier True Value had no locus standi in the transaction. Neither it was having any booking rights in respect of this property nor it was authorized by the assessee to sell the property on its behalf, by way of any power of attorney. All the arrangements were made post the date of actual sale of the property with an intention to divert the sale consideration and to reduce the tax liability. Therefore, the AO was correct in treating the transaction as sham transaction and in holding that the payment made by the assessee to True Value was not genuine. To that extent, the finding of the AO is upheld.

From the documents brought on record and the facts as discussed above, it is evident that the sale consideration of Rs.5,04,80,000/- was received by the assessee and True Value had no locus standi to make any agreement on behalf of the assessee. Therefore, the AO was correct in treating the sale consideration of property at Rs.5,04,80,000/-. As the profit derived from sale of property was in the nature of short-term capital gain, the same was required to be reduced from WDV of the block of assets. Accordingly, the action of the AO in [ACIT vs. Neptune Plastic Corporation] A.Y. 2014-15 - 12 – reducing the sale consideration of Rs.5,04,80,000/- from WDV of block of assets and thereby disallowing excess depreciation of Rs.25,48,000/- is upheld. However, the action of the AO in making separate addition of Rs.2.54 Crores on account of disallowance of expenditure cannot be held as correct. It has not been made out by the Revenue that this expenditure of Rs.2.54 Crores was separately debited in the P&L account of the assessee. Therefore, the addition of Rs.2.54 Crores in respect of disallowance of expense is deleted and the ground taken by the Revenue in this regard is dismissed. In case it is found that this expenditure was separately deleted to P&L account, then Revenue is free to approach us on this issue.

In the result, the appeal filed by the Revenue is partly allowed.