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Income Tax Appellate Tribunal, DELHI BENCH “G”: NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI L.P. SAHU
The aforesaid appeal has been filed by the assessee against impugned order dated 13.2.2019, passed by Ld. CIT (Appeals)-8, New Delhi for the quantum of assessment passed u/s.143(3) for the Assessment Years 2015-16. In the grounds of appeal, the assessee has raised the following grounds:-
“1 That the learned CIT(A) has erred both on facts and in law in confirming the order of assessment without appreciating the facts and circumstances of the instant case. 1.1 That the learned CIT(A) has failed to appreciate that the AO had exceeded in his jurisdiction in framing the impugned order of assessment and that the assessment had been framed without giving a fair, proper and meaningful opportunity of being heard and as such the order of assessment made was vitiated order in law. 1.2 That the learned CIT(A) having admitted the additional evidence furnished by the assessee, failed to comprehend such evidences more particularly when no adverse comments had been made by the AO in his report in respect of such evidences and as such the findings recorded by the learned CIT(A) in his order while confirming the order of assessment and holding that ‘said transaction’ is not genuine is apparently arbitrary and is thus misconceived both on facts and in law. In fact the findings recorded by the learned CIT(A) in his order are highly vague. 1.3 That the learned CIT(A) has further erred when he held that the documentary evidences have been created only to create smoke screen, is based on no material. No such adverse finding could have been recorded by him without bringing any evidence whatsoever. The findings are based on mere assumptions and presumptions and upon ignoring documentary evidences furnished by the assessee.
2. That the learned CIT(A) has erred both on facts and in law in sustaining the disallowance of loss of Rs. 103.50 crores out of the loss suffered of Rs. 104.50 crores on redemption of debentures. The findings thus are apparently contradictory to the conclusion arrived at by him. 2.1 That the learned CIT(A) has further failed to appreciate that the assessee had issued debentures which had been subscribed by a public limited company namely M/s Indiabulls Housing Finance Ltd. who had subscribed to such debentures and acquired them on 07.12.2014.
2.2 That the learned CIT(A) has also failed to comprehend that such debentures were further traded between independent parties and as such no adverse inferred could have been drawn against the assessee either without examining such debenture holders or bringing any positive material to substantiate that the transaction was non- genuine. 2.3 That the findings of the learned CIT(A) that the assessee had not made any transaction in past, is highly vague and without appreciating facts and circumstances of the case, which otherwise too is factually incorrect and is contrary to record. 2.4 That the findings of the learned CIT(A) in para 4.1.3 that advancing of funds by the assessee to M/s Winston Developers Private Limited, M/s Avenio Developers Private Limited and M/s Famous Dwellers Private Limited was not genuine is by overlooking the documentary evidence which established and beyond doubt that the assessee had advanced the money out of the sums received on the issue of debentures for the purpose of its business when it had sought the assistance of such companies to acquire the land on its behalf. 2.5 That the findings of the learned CIT(A) that none of the companies were capable of purchasing land as they had no asset base, is contrary to material on record. Such evidences as were placed on record, had been completely ignored and findings have been arrived at without appreciating the material placed by the assessee on record. 2.6 That the learned CIT(A) has failed to appreciate that no adverse finding could have been recorded by him without examining such of the companies or even by looking to their annual accounts and other documentary evidences, the genuineness whereof had not been disputed which were placed to substantiate that such companies were engaged in acquiring the land for others also. 2.7 That the findings of the learned CIT(A) that appellant could not submit any details of any land parcel which it was 3 planning to purchase is factually incorrect and was recorded by completely overlooking the written submissions and documentary evidences placed on record. 2.8 That the learned CIT(A) has erred in placing to reliance on the judgments referred to by him in para 4.1.6 which have no semblance of resemblance with the facts of the instant case. 2.9 That the findings recorded by the learned CIT(A) confirming a disallowance of Rs. 103.50 crores is contradictory since the loss suffered by the assessee aggregated to Rs. 104.50 crores. In fact, in the absence of any adverse finding in respect of the transaction where assessee had earned a gain of Rs. 1 crores on sale of debentures subscribed by it, the findings recorded by the learned CIT(A) is without application of mind.
3. That the learned CIT(A) has further erred in sustaining an addition of Rs. 13.92 crores and that too on an assumption that there was an obligation of the assessee to deduct tax at source in respect of expenditure incurred by M/s DLF Universal Ltd.; whereas neither there was any such obligation to deduct tax at source by the assessee nor there was any failure to do so.
4. That the learned CIT(A) has thus grossly erred thus in sustaining the addition made of Rs. 13.92 crores and disregarding that the assessee had offered the income as accrued and received by it from M/s DLF Universal Ltd. under an agreement dated 14.02.2007.
5. That the learned CIT(A) has further erred in sustaining an addition of Rs. 18.90 lacs allegedly representing deemed rental income. He has failed to appreciate that the property held by it was being used for the purpose of its business and as such there was no justification to have brought to tax the aforesaid sum and that too, by making addition of Rs. 18.90 lacs which far exceed the Annual Letting Value.
6. That the learned CIT(A) has thus grossly erred both on facts and in law in arbitrarily confirming the order of 4 assessment by overlooking the assessee’s submission which had been supported by evidences, in a highly mechanical manner and the order passed by the learned CIT(A) is untenable and the additions thus sustained, deserves to be deleted.”
2. The facts in brief are that the appellant company is engaged in the business of real estate, which had filed its return of income on 30.9.2015 declaring total income of Rs. 20,57,48,260/-. This return of income was subject to scrutiny and assessment order was passed vide dated 31.12.2017 under section 143(3) of the Act. The assessed income of the appellant assessee was determined at Rs. 1,38,18,38,260/-, on account of following additions to the declared income by the assessee company: (a) Disallowance of expenditure incurred under the head ‘finance cost’ of Rs. 103.50 crores and held to be a contrived loss; (b) Disallowance of expenditure incurred of Rs. 13.92 crores claimed to be incurred on account of marketing expenditure by DLF Ltd.; (c) Addition on account of notional value of property held by the assessee.
3. In the first appeal, all the aforesaid additions were confirmed by the learned Commissioner of Income Tax (Appeals) in the impugned order and hence this appeal before us.
4. Before us Shri C.S. Aggarwal, learned Senior Advocate appeared on behalf of the appellant company and Shri S.S. Rana, learned CIT DR argued on behalf of the revenue. On behalf of the appellant company written synopsis and a snapshot separately alongwith three Paper Books have placed before us; and the revenue has also placed on record their written submission supported by charts and judgments.
We have considered the oral arguments and written submission and material placed on record by both the sides. Both the assessee and revenue have contended on merits of the disallowances/addition made by authorities below. No submissions were made in respect of Grounds No. 1 to 1.3 of Grounds of Appeal separately and otherwise too are general and therefore dismissed as such.
6. Ground Nos. 2 to 2.9 relates to disallowance of expenditure incurred of Rs. 103.50 crores under the head ‘finance cost’ by the assessee company. Relevant facts qua this issue are that the assessee company during the year, had issued secured unrated fully transferable unlisted 9,500 debentures of face value of Rs. 10 lacs each aggregating to Rs. 950 crores at a discount of Rs. 3,62,421/- per debenture aggregating to total discount of Rs. 350 crores, i.e., at net issue price of Rs. 6,31,579/- per debenture, aggregating to Rs. 600 crores for a tenure of three years at a coupon rate of 2% per annum to M/s. India Bulls Housing Finance Ltd. These debentures were issued on 17.12.2015 and redeemed from the open market from 30.3.2015 at a price of Rs. 104.50 crores. Thus, as a consequence of redemption of debentures, the appellant incurred expenditure on redemption of debentures of Rs. 104.50 crores (704.50 crores – 600 crores).
6.1 Apart from the above, during the year, the assessee also made an investment in purchase of 13,750 debentures issued by M/s. Vatika Ltd. for a sum of Rs. 588 crores. These debentures were redeemed by M/s. Vatika Ltd. for Rs. 589 crores and as such, the appellant made a gain of Rs. 1 crores on redemption of debentures by M/s. Vatika Ltd. (589 crores – 588 crores). The assessee thus had two independent set of transactions, one set of transaction of issue of debentures by the appellant to M/s. India Bulls Housing Finance Ltd. by raising funds of Rs. 600 crores and thereby incurring expenditure of Rs. 104.50 crores on redemption of debentures. The second set of transaction in respect of the investment in debentures of M/s. Vatika Ltd. for Rs. 588 crores which was redeemed by M/s. Vatika Ltd. for Rs. 589 crores and thereby appellant made a gain of Rs. 1 crore.
6.2 In the return of income furnished for the instant year, the expenditure on redemption of debentures issued by the assessee company of Rs. 104.50 crores was claimed as deduction as premium on redemption of debentures under the head finance cost under section 36(1)(iii) of the Act. Further, so far as the income earned on investment in debentures of M/s. Vatika Ltd. of Rs. 1 crore, the same was offered for tax as business income in the computation of income. It has been stated that during the course of assessment proceedings, the same was offered for tax under the head ‘short term capital gain’.
6.3 During the course of assessment proceedings, the learned Assessing Officer examined both the aforesaid claims made by the assessee. To appreciate the above claim made by the appellant, the learned Assessing Officer has prepared three flow charts in the order of assessment, flow chart ‘A’ represents the money trail on 17.12.2014; flow chart ‘B’ represents the money trail on 30.3.2015; and flow chart ‘C’ represents money trail on 10.12.2014. On the basis of the aforesaid flow charts, the learned Assessing Officer has arrived at a conclusion that it is a case of contrived loss and not a case of deduction which is allowable under the Act. The learned Assessing Officer has held that from flow chart A, it is quite evident that the money received by the assessee on 17.12.2014 as a borrowing against the issue of debentures from India Bulls Group of companies (M/s. India Bulls Housing Finance Ltd. Rs. 600 crores) has gone back to India Bulls Group companies, M/s. India Bulls Housing Finance Ltd. (Rs. 550 crores) and M/s. India Bulls Infrastructure Ltd. (Rs. 50 crores). Likewise, he has held that from the flow chart B, even on redemption of debentures, i.e., on 30.3.2015, the money originating from M/s. India Bulls Group companies, India Bulls Housing Finance Ltd. – Rs. 550 crores and M/s. India Bulls Commercial Rs. 50 crores has been routed through the same companies to which the assessee had given loans and finally it is finding its way back to M/s. India Bulls Housing Finance Ltd (Rs. 703.61 crores). He also held that from flow chart C, it is evident that the assessee company took advances aggregating to Rs. 588 crores from five independent entities namely, Mendell Developers (P) Ltd., Caspar Developers (P) Ltd., Espo Developers (P) Ltd., Sanaskar Buidtech (P) Ltd., Nakshtra Buildcon (P) Ltd. and paid Rs. 588 crores to Dewu Developers Pvt. Ltd. It has been stated that even in the aforesaid layers of transactions, it will be seen that through a web of companies, the funds originated from M/s. Vatika Ltd. on 10.12.2014 were channeled back to M/s. Vatika Ltd. on the same day. Thus, it has been held that even the above mentioned companies are nothing but conduit companies which has enabled the assessee company to facilitate the transactions of investment in debentures of M/s. Vatika Ltd.
6.4 Assessing Officer has thus concluded that if a complete analysis is done, the debentures of M/s. Vatika Ltd. and the debentures issued by the assessee company both through the intricately woven web of companies are colourable transaction in order to create artificial loss in the hands of the appellant company. The learned Assessing Officer also made enquiries from the companies under section 133(6) of the Act and on the basis thereof, concluded that the companies are created and maintained by the management of M/s Vatika Ltd. and acted as conduit companies for facilitating and routing the financial transaction with the aim to disguise the transaction as genuine transaction. It has also been held that though the assessee has contended that the money was borrowed from M/s. India Bulls Finance Ltd. and advanced to three companies namely, M/s. Winston Developers (P) Ltd., M/s. Avenio Developers (P) Ltd. and M/s. Famous Dwellers (P) Ltd. for arranging land, but it has been found that the many of these companies are having similar address as was that of appellant company and also the common email-id, and were controlled by the same person and group entities. He has held that their paid up and authorized capital are meagre for the companies transacting in hundreds of crores of rupees and hence this gives credence to the fact that these companies are nothing but conduit companies which were used by the assessee company to create such fictitious expense. He has finally concluded that the loss incurred and claimed is artificial, contrived and non genuine emanating from colourable arrangement with the intention to reduce taxable income in the hands of the appellant company and therefore, such expenditure as claimed is not related to business of the assessee and are not allowable expenditure and accordingly he made an addition of Rs. 103.50 crores to the total income of the appellant.
In first appeal, the learned CIT (A) has confirmed the disallowance made in the impugned order by holding as under: “The AO after doing a detailed fact finding as well as a speaking, well reasoned order had disallowed the such loss and had held that such los is a contrived loss. The AO had found that (which is a matter of record): Many companies have similar addresses. In fact the undersigned would like to mention that more apt word is same address for most companies; Common email id meaning thereby that they are being controlled b the same person and are group entities. The undersigned agrees this factual observation of the AO; and The capital base of these companies is very low meagre, meaning that such companies have been working as a pure conduits to create fictitious expenses. The undersigned agreed to till observation of the AO. The AO has done an extremely essential exercise and has mapped the money trail in the assessment order, by way of detailed flowchart showing the movement of money from the Indiabulls groups of companies and he receipt of money 10
back to the Indiabulls groups of companies. The whole chain of events shows that the assessee had some preconceive notion to siphon off money and book losses to evade tax. This fact is further strengthened by the fact which has also. been mentioned in the assessment order by the AO, that the dates of the events in terms of banking transactions activities at ground level took place prior to the date of such minutes of the board meeting or the passing of the boar resolution, which only hints to the fact that the documentary evidence have been created only to create a smoke screen in front of the statutory authorities, especially the income tax auth make that thing genuine, which in essence is not. Hence, the undersigned finds the said trans-action is not genuine. 4.1.4 The AO has also evaluated the real purpose of advancing money, As contended by the appellant that the said money was advanced for the purpose of purchasing land. The AO has held that none of the companies is capable of purchasing land as they have no assets base of their own, no employee base (either sales related or legal base related) who could help in the business of the company, no advertising related activity happened no premises whether owned or rented, I view of the AO as the appellant had smart as the appellant had smartly created a jigsaw puzzle, which once completed would highlight the real mala-fide intention of theappellant. The appellant had failed to bring on record either during the assessment proceedings or during the appellate Proceedings, any such trail of business activities which would help its argument better. The basic purpose for which the money was alleged to advanced is 'P rchase of Land', however, the appellant could not submit any details of th details of any land parcel which it was planning to purchase, or any e arts related to which it was supposed to be purchased. The appellant ha1i also not submitted nay government or local authority related bid documents, which would help its argument. 4.4.5 Further, the appellant had also argued that due TDS was made as per the relevant provisions of Chapter XVII-B of the Act and that the same should not be evaluated further. The appellant, being a corporate and having a 11 battery of legal and technical personnel on board or its advisory panel Is aware about the fact that computation of total income is governed by the Chapter - IV of the Act, and the TDS compliances are governed by the Chapter XVII-B of the Act. The allow ability of art expense / claim is of wide nature and may or may include any compliance under Chapter XVII-B, and failure of any compliance under Chapter XVII-B would lead to other severe consequences like penalty u/s 271C or prosecution proceedings etc. Hence, this argument of the appellant totally fails.”
Before us, the learned Senior Advocate for the appellant assessee contended that the authorities below have failed to appreciate the factual matrix of the claim of the appellant company and also the statutory provisions of law. He submitted that the appellant had issued debentures on 17.12.2014 to M/s. India Bulls Housing Finance Ltd. and same were redeemed on 30.3.2015. It was contended that the amount borrowed had been utilized for the purpose of business and it was supported by documents placed on record in the Paper Book. It was also submitted that the utilization of funds was done for the purpose of business by advancing the same to three companies for the purpose of acquiring the land. The details of the advances made in the agreements as tabulated in the synopsis is as under: Sr. Particulars Amount Date of Copy of No. (Rs. in agreement agreement crores) i) M/s Winston 70 15.8.2013 232-235 Developers 236-237 Pvt. Ltd ii) Avenio 340 14.10.2013 239-242 Developers Pvt. Ltd. iii) Famous 190 20.11.2013 244-247 8.1 It was thus submitted that the appellant had borrowed money for the purpose of arranging and acquiring the land and therefore, any expenditure incurred on raising such borrowings is eligible business expenditure. It was further contended that the appellant was unaware as to how and for what purpose the vendor companies had utilized the said sum and therefore, subsequent use of money by the vendor companies to whom the amounts had been advanced cannot be made any ground to hold that money borrowed by the appellant were not for the purpose of business of the appellant company. He contended that each and every transaction is separate transaction and all transactions cannot be clubbed so as to deny the legitimate expenditure claimed by the appellant company. It was also submitted that prior to the borrowings, the appellant had also made an investment of Rs. 588 crores in the purchase of 10750 debentures floated by M/s. Vatika Ltd. by raising funds and such debentures as acquired on 10.12.2014 were disinvested which resulted into gain of Rs. 1 crores and out of the funds raised on redemption of debentures, the same were refunded to the five companies from whom it had received advances. Reliance was placed on the judgment of Bombay High Court in the case off CIT v. Bombay Samachar Ltd. reported in 74 ITR 723 to contend that once the intention of raising the funds is for the purpose of business then any such expenditure incurred, is eligible business expenditure. He contended that the revenue had not shown that the funds borrowed and advanced to the three vendor companies 13 were diverted by three vendor companies at the direction of the assessee company or at the behest of assessee and in absence of any direction or other material to show that they were not utilized for the purpose of business of the assessee, the denial of claim was not in accordance with law. It was further submitted that the learned Assessing Officer has made no enquiries in respect of evidences furnished to prove utilization of funds and therefore, in light of the judgments of Hon’ble Delhi High Court in the case of CIT vs. Fair Finvest Ltd. reported in 357 ITR 146 and Pr. CIT vs. Laxman Industrial Resources Ltd. reported in 397 ITR 106, the revenue was incorrect to deny the claim of deduction made by the appellant company. As regards flow charts prepared and relied in the order of assessment, in the written submissions it has been submitted as under: “I Flow Chart ‘A’ prepared by the AO allegedly reflects the money trail on 17.12.2014 (copy enclosed as Annexure “A” of synopsis). Findings of AO: The learned Assessing Officer has held the said chart establishes the amounts advanced to the assessee of Rs. 600 crores on 17.12.2014 by M/s Indiabulls Housing Finance Ltd. had reached back to M/s Indiabulls Housing Finance Ltd. Contention of the appellant: The case of the assessee is that in so far as the said chart is concerned, it shows the utilisation of the funds by the assessee which itself establishes that it had advanced the said sum to the three companies for the purpose of its business who had further advanced the amounts from the sums received by it from the assessee. On the contrary it establishes that monies received and were utilised by it for the purpose of business. The mere fact the amounts were received by M/s Indiabulls Group of companies in no manner shows that the assessee has not received the funds or that it had not been utilised by it for the purpose of its business.
II Flow Chart ‘B’ allegedly reflects that as on 30.03.2015 when the assessee had redeemed the debentures, the funds were received by it from M/s Indiabulls Housing Finance Ltd. (copy enclosed as Annexure “B” of synopsis) Contention of the appellant: This assertion of the AO is faulty since the said chart itself reflects that the assessee had received the amounts from the concerns i.e. vendor companies to whom it had advanced the funds for the purpose of its business. III In so far as Flow Chart ‘C’ is concerned (copy enclosed as Annexure “C” of synopsis), said chart is allegedly a money trail as on 10.12.2014. From the said chart the AO has attempted to show that the amount of Rs. 600 crores advanced to the assessee came from M/s Vatika Ltd. Contention of the appellant. In so doing the learned Assessing Officer has failed to comprehend that there were two independent transactions, one wherein Indiabulls Housing Finance Ltd. it had advanced on 12.06.2014 Rs. 600 crores to M/s Vatika Ltd. against the issue of debentures by M/s Vatika Ltd. and another where M/s Indiabulls Housing Finance Ltd. had advanced to the assessee on 17.12.2014 Rs. 600 crores against the issue of debentures by the appellant company. The learned Assessing Officer has mixed-up both the transactions. He has not appreciated that there are two different and independent companies and assessee had no role to play or was associated with M/s Vatika Ltd. when it had obtained the loan on the issue of debentures on 12.06.2014. Thus the aforesaid flow chart prepared cannot be made any basis.”
8.2 In view of the aforesaid, it was prayed that the expenditure incurred on borrowings and redemption of debentures is allowable eligible business expenditure and also the business income earned on purchase and sale of redemption of debentures of M/s. Vatika Ltd. was correctly declared as business income of the appellant.
The learned CIT DR on the other hand contended that claim of deduction was correctly denied in the order of assessment and also by the learned CIT (A). He submitted that the loan raised on 17.12.2014 against issue of debentures from M/s. India Bulls Housing Finance Ltd. on the same date to M/s. India Bulls Housing Finance Ltd. and likewise even on the redemption of debentures, the money flew was actually reversed in as much as money originated from M/s. India Bulls Housing Finance Ltd. was returned to M/s. India Bulls companies. In the written submissions filed by the learned CIT DR, it was contended as under: “1. The assessee has claimed deduction of Rs. 1,03,50,00,000 2. The assessee had taken loan of Rs. 6,00,00,000 against issue of debentures from India Bulls Housing Finance Ltd. on 17.12.2014. As per flow chart “A” in assessment order, the entire amount went back to India Bulls Group Companies (India Bulls Housing Finance Ltd. and India Bulls Infrastructure) on the same date i.e. 17.12.2014 through a maze of companies. Mainly conduit companies. 3. The assessee redeemed debentures on 30.3.2015. As per flow chart “B” in assessment order, the money flow was actually reversed. This time money originated from to India Bulls Group Companies (India Bulls Housing Finance Ltd. and India Bulls Commercial). 4. As per flow chart “C” in assessment order, it is evident as to how assessee company took advances from Mendell, Caspar, Espo, Sanaskar, Nakshtra and paid to Dewu developers Pvt. Ltd. It will be seen that through a web of companies the funds originated from M/s Vatika Ltd. on 10.12.2014 and were channeled back to M/s Vatika Ltd. on same day. Thus, above companies are nothing but conduit companies.
5. The details of bank accounts depicting money trail on 10.12.2014, 17.12.2014 & 30.3.2015 is enclosed as Annexure-A duly verified by the Assessing Officer.
As mentioned in para 3.16 to 3.19 notices u/s 133(6) were issued to 8 parties (all group companies). Reply of only two companies was received. In 6 cases, notice was received back with remark item unclaimed. 7. As mentioned in para 3.18 from reply of two companies it is observed that their financials are extremely weak. No prudent business man would advance them crores of rupees. 8. As mentioned in para 3.21, data was collected from MCA website as per which: i) Most companies have similar address to that of assessee company ii) All of them have common e-mail id meaning that they are controlled by same person and are group entities. iii) Their paid up and authorized capital meager for companies transaction in hundreds of crores of rupees showing that they are conduit companies used to create fictions expense. 9. As mentioned in para 3.24 on 4.12.2014 minutes of meeting of Board of Directors of Vatika Ltd. entails approval for redemption of its debentures from Shiv Sagar Builders Pvt. Ltd. i.e. even before deciding, by the board of the assessee company about purchase of dentures of Vatika Ltd. the minutes of board of directors of Vatika Ltd. had already decided to redeem its debentures from assessee. This proves that the whole transaction was per-mediated. 10. As mentioned in para 3.26, the transactions carried out for acquisition of land has not been executed. 11. As mentioned in para 3.28, none of the companies to whom money was advanced is capable of purchasing any land. They have no employees, no assets, no premise of their own.
12. As mentioned in para 3.29 the agreement no where specifies what land will be bought upon.
13. As mentioned in para 3.30, agreement entered upon by assessee company is not a registered agreement. 14. As mentioned in para 3.34, detailed reasons have been given by AO as to how transactions were not at arm’s length. 15. As mentioned in para 3.35, the transaction was SHAM because. i) The money originated from India Bulls and went back to India Bulls Group of companies on the same day. ii) When money was to be returned on 30.3.2015, money originated from India Bulls and went back to India Bulls Group of companies iii) Money was channeled through various conduit companies without any approval of board or agreement or agreement or any other documentation. 16. As mentioned in para 3.36, the assessee has treated income as capital receipts, expenses have been treated as business loss/interest expense. 17. As mentioned in para 3.39, in no money lending business, interest rates are as high as 70% which assessee has paid to India Bulls.”
9.1 The learned CIT DR further placed reliance on the following judgments: 1. CIT Vs. Durga Prasad More (82 ITR 540) (SC) 2. ITO Vs. Shiva Gases (1 SOT 21) (Delhi) 3. CIT Vs. Wipro Ltd. ( 50 Taxman.com 421) (KHC) DCIT Vs. Pawan Kumar Malhotra [2 ITR (T) 250] (Delhi) 4.
We have considered the rival submissions and perused the relevant material placed on record. The undisputed factual matrix is that during the year, the appellant had raised borrowings of Rs. 600 crores from M/s. India Bulls Housing Finance Ltd. These borrowings were raised on 17.12.2014. The claim of the appellant is that money has been raised in the course of business for development of real estate. It is also a matter of record that the aforesaid debentures issued on 10.12.2014 were redeemed on 30.3.2015 for a sum of Rs. 704.50 crores. The claim of the appellant is that it had incurred an expenditure of Rs. 104.50 crores for the business of the appellant company and therefore, was eligible business expenditure. On the other hand, the revenue has contended that since the money originated from M/s. India Bulls Housing Finance Ltd. and were returned on the same date to M/s. India Bulls group of companies and therefore, the expenditure so incurred is not eligible business expenditure under section 36(1)(iii) of the Act.
First of all, it would be relevant to look into Section 36(1)(iii) of the Act, which provides as under: “36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 …. (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.
Explanation.—Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; 11.1 The Hon’ble Bombay High Court interpreating the above provision in the case of CIT v. Bombay Samachar Ltd. reported in 74 ITR 723 has held as under: “In our opinion the view taken by the Income-tax Officer is clearly unsustainable. As has been pointed out by the Madhya Pradesh High Court in Ram Kishan Oil Mills v. Commissioner of Income-tax [1965] 56 ITR 186 the only conditions required to be satisfied in order to enable the asseesee to claim a deduction in respect of the interest under section 10(2)(iii) are, firstly, that money must have been borrowed by the assessee ; secondly, it must have been borrowed for the purpose of business and, thirdly, the assessee must have paid interest on the said amount and claimed it as a deduction. It is not the requirement of the provision that the assessee must further show that the borrowing of the capital was necessary for the business so that if at the time of borrowing the assessee had sufficient amount of its own, the deduction could not be allowed. Similarly, the Madras High Court in Amna Bai Hajee Issa v. Commissioner of Income-tax [1964] 51 ITR 835 has held that in deciding whether a claim for interest on borrowing can be allowed the fact that the assessee had ample resources at its disposal and need not have borrowed, is not a relevant matter for consideration. The matter to be decided is whether the amount of interest was paid in fact in respect of the capital borrowed for business.
11.2 Likewise Hon’ble Delhi High Court in the case of CIT vs. Regal Theatres reported in 225 ITR 205 in the above context has held as under: “…..
Conditions for getting deduction in respect of interest are (i) money must have been borrowed by the assessee, (ii) it must have been borrowed for the purpose of business, and (iii) the assessee must have paid interest on the said amount and claimed it as deduction - See Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 at p. 208. …. The learned Judges held that the view taken by the ITO was unsustainable, that as had been pointed out by the Madhya Pradesh High Court in Ram Kishan Oil Mills v. CIT [1965] 56 ITR 186, the only conditions required to be satisfied in order to enable the assessee to claim deduction in respect of interest under section 10(2)(iii) of the Act were, firstly, that the money must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business, and thirdly, the assessee must have paid interest on the said amount and claimed it as a deduction. It is not the requirement of the law that the assessee must further show that the borrowing of the capital was necessary for the business so that if at the time of borrowing, the assessee had sufficient amount of its own, the deduction could not be allowed. The learned Judges also relied upon a judgment of the Madras High Court in Amna Bai Hajee Issa v. CIT [1964] 51 ITR 835 which held that in deciding whether a claim for interest on borrowing could be allowed, the fact that the assessee had ample resources at its disposal and need not have borrowed was not a relevant matter for consideration. The question to be decided was whether the amount of interest was paid in fact on the capital borrowed for the business.”
11.3 A reading of the above would mandate that a deduction under the aforesaid provision can be claimed on satisfaction of the following conditions; a) That appellant must have borrowed funds; b) That such borrowing should be for the purpose of business of appellant company and, c) That interest should have been paid on the aforesaid borrowings.
Applying the aforesaid conditions in the instant case, the issue to be appreciated is, whether the utilization of funds raised by the appellant company is for the purpose of business or not. The borrowings by the appellant company from M/s. India Bulls Housing Finance Ltd. through the issue of debentures is neither denied nor has been disputed by the authorities below. According to the appellant, the aforesaid sums raised through the debentures have been utilized for advanced to the three companies namely, M/s. Winston Developers Pvt. Ltd., M/s. Avenio Developers Pvt. Ltd. and M/s. Famous Dwellers Pvt. Ltd. It is also not in dispute that there are three different agreements entered into by the appellant company with each of the aforesaid three entities. One of the agreements is dated 18.8.2013 and the addendum to the agreement is dated 1.9.2014 with M/s. Winston Developers Pvt. Ltd. Likewise, agreement with M/s. Avenio Developers Pvt. Ltd. is dated 14.10.2013 and agreement with M/s. Famous Dwellers Pvt. Ltd. is dated 20.11.2013. Each of the aforesaid agreements were for purchase of land situated at Sectors 88A, 888B and 93, Gurgaon, Near Dwarka. Expressway had been entered much prior to the issue of debentures by the appellant company on 17.12.2014. It is further noted that under the aforesaid arrangement with M/s. Winston Developers Pvt. Ltd., the appellant company had advanced a sum of Rs. 11,40,00,000/- in financial year 2013-14 itself and another sum of Rs. 20 crores in financial year 2014-15 prior to the issue of debentures. In other words, on the date of issue of debentures, total sum outstanding against the advances given by the appellant to M/s. Winston Developers Pvt. Ltd. was Rs. 26.16 crores, as out of the sum advanced, sum of Rs. 5.23 crores had also been repaid by M/s. Winston Developers Pvt. Ltd. Apart from the above agreement, confirmations from all the three parties as to utilization of funds towards purchase of utilization has also been placed in the Paper Book by the three companies, on which our attention was drawn. All the three companies are separately assessed to tax with separate PAN numbers. Further, the correspondence exchanged between the appellant company and aforesaid three vendor companies utilizing the funds for business purposes and various evidences filed before the authorities below, which has also been placed in the paper book are tabulated as under: Sr. Date Particulars Pages of No. paper Book-II M/s Winston Developers (P) Ltd. i) 18.7.2013 Copy of letter from M/s 467 Winston Developers (P) Ltd. for offering service for purchase of agricultural land in Sectors 88A, 88B, 89A and 89B, Gurgaon ii) 28.7.2013 Copy of letter to M/s Winston 468 Developers (P) Ltd. regarding terms and conditions for acquiring land iii) 15.9.2013 Copy of letter to appellant 469-473
company from Winston Developers (P) Ltd. enclosing original agreement dated 15.8.2013 signed by them iv) 3.12.2013 Copy of letter to Winston 474 Developers (P) Ltd. by the appellant company for receiving of agreement and further request for identifying the land parcels as per the agreement v) 15.3.2014 Copy of letter from M/s 475-481 Winston Developers (P) Ltd. for details of around 28 acres land at Sectors 88B and 89A , Gurgaon enclosing land schedule, jamanbandi, site plan highlighting the location etc. vi) 12.7.2014 Copy of letter to Winston 482 Developers (P) Ltd. by the appellant company vii) 25.7.2014 Copy of letter from M/s 483 Winston Developers (P) Ltd. for details of around 40 acres land enclosing jamanbandi viii) 15.8.2013 Copy of addendum agreement 484-485 ix) 20.11.2014 Copy of letter from M/s 486-491 Winston Developers (P) Ltd. enclosing site plan of the land and request for payment x) 9.12.2014 Copy of letter to M/s Winston 492 Developers (P) Ltd. from appellant company enclosing fund transfer letter dated 11.12.2014 xi) 18.3.2015 Copy of letter to M/s Winston 493 Developers (P) Ltd. from appellant company requesting cancellation of agreement dated 15.8.2013 due to 24 peculiar economical, commercial and political scenario xii) 30.3.2015 Copy of letter from M/s 494 Winston Developers (P) Ltd. to appellant company for refund of advance M/s Avenio Developers (P) Ltd. xiii) 10.9.2013 Copy of letter from M/s Avenio 591 Developers (P) Ltd. for offering service for purchase of agricultural land in Sectors 88A, 88B, 89A, 89B and 93, Gurgaon xiv) 3.10.2013 Copy of letter to M/s Avenio 592 Developers (P) Ltd. regarding terms and conditions for acquiring land xv) 12.11.2013 Copy of letter to appellant 593-597 company from M/s Avenio Developers (P) Ltd. enclosing original agreement dated 14.10.2013 signed by them xvi) 11.12.2013 Copy of letter to M/s Avenio 598 Developers (P) Ltd. by the appellant company for receiving of agreement and further request for identifying the land parcels as per the agreement xvii) 17.3.2014 Copy of letter from M/s Avenio 599-601 Developers (P) Ltd. for land parcel at Sectors 93 , Gurgaon enclosing land detail xviii) 22.7.2014 Copy of letter to M/s Avenio 602 Developers (P) Ltd. by the appellant company xix) 25.11.2014 Copy of letter from M/s Avenio 603-606 Developers (P) Ltd. providing 25 details of land admeasuring 37.618 acres owned by Ramprastha group of companies and requesting for advance of payment xx) 9.12.2014 Copy of letter to M/s Avenio 607 Developers (P) Ltd. from appellant company enclosing copy of cheque no. 234649 dated 11.12.2014 of Rs 340 crores xxi) 17.3.2015 Copy of letter to M/s Avenio 608 Developers (P) Ltd. from appellant company requesting cancellation of agreement dated 15.8.2013 due to peculiar economical, commercial and political scenario xxii) 30.3.2015 Copy of letter from M/s Avenio 609 Developers (P) Ltd. to appellant company for refund of advance Famous Dwellers (P) Ltd. xxiii) 18.9.2013 Copy of letter from M/s 746 Famous Dwellers (P) Ltd for offering service for purchase of agricultural land in Sectors 89A, and 89B , Gurgaon xxiv) 12.10.2013 Copy of letter to M/s Famous 747 Dwellers (P) Ltd regarding terms and conditions for acquiring land xxv) 24.11.2013 Copy of letter from appellant to 748-752 Famous Dwellers (P) Ltd. for signing of agreement dated 20.11.2013 xxvi) 14.1.2014 Copy of letter to appellant 753 company from M/s Famous Dwellers (P) Ltd. enclosing original agreement dated 20.11.2013 signed by them 26 xxvii) 2.3.2014 Copy of letter to Famous 754 Dwellers (P) Ltd. by the appellant company xxviii) 20.7.2014 Copy of letter from Famous 755-764 Dwellers (P) Ltd providing details of land admeasuring 54 acres xxix) 22.9.2014 Copy of letter to Famous 765 Dwellers (P) Ltd by the appellant company disapproving the aforesaid proposed land xxx) 25.10.2014 Copy of letter to Famous 766 Dwellers (P) Ltd by the appellant company xxxi) 20.7.2014 Copy of letter from Famous 767-784 Dwellers (P) Ltd providing details of land admeasuring 48 acres having access to the land Dwarka Expressway xxxii) 25.11.2014 Copy of letter to Famous 785 Dwellers (P) Ltd by the appellant company xxxiii) 2.12.2014 Copy of letter from Famous 786 Dwellers (P) Ltd. to appellant company for request of advance payment xxiv) 11.12.2014 Copy of letter to Famous 787 Dwellers (P) Ltd. from appellant company enclosing copy of cheque no. 2346509 dated 11.12.2014 of Rs 190 crores xxv) 14.3.2015 Copy of letter to Famous 788 Dwellers (P) Ltd. from appellant company requesting cancellation of agreement dated 20.11.2013 due to peculiar economical, commercial and political scenario xxvi) 30.3.2015 Copy of letter from Famous 789 27
Dwellers (P) Ltd. to appellant company for refund of advance 12.1 The aforesaid evidences were also forwarded to the learned Assessing officer by the Ld. CIT (A) for his remand report, who initially objected to admission of additional evidence under Rule 46A of the Income Tax Rules. However, in subsequent report dated 27.11.2018, it is seen that, Assessing Officer without making any enquiries has reiterated his earlier conclusion that the loss / expenditure claimed is a contrived/artificial loss to evade the tax. It is thus matter of record now that so far as evidences furnished by the appellant company before the authorities below, have remained un-rebutted in respect of utilization of the funds for the business of the appellant company and therefore, in absence of any enquiries having been made so as to negate the above evidences furnished by the appellant company, prima facie utilization of funds for the business of the appellant company cannot be denied.
Moreover, it appears that the revenue has tried to examine the entire transaction in a truncated manner. The case of the revenue flows from the emphasis that the money never remained with the appellant company and therefore, there could not be any occasion for the appellant company to have utilized the funds for the purpose of the business of the appellant company and as such, the expenditure so incurred and claimed is a mere colourable device which is not allowable expenditure and or is a contrived loss. The fallacy in the aforesaid view becomes so apparent in the face of order of assessment dated 29.12.2017 in the case of M/s Dreamcart Reality Services Pvt. Ltd. It would be pertinent to state the relevant facts on which our attention was drawn and are necessary in the aforesaid context. It is seen from the records that debentures had been issued on 17.12.2014 by appellant company to M/s. India Bulls Housing Finance Ltd. As a result of the aforesaid issue of debentures, M/s. India Bulls Housing Finance Ltd. became the debentures holder of the debentures issued by appellant company. These debentures held by M/s. India Bulls Housing Finance Ltd. were transferred by them to M/s. Youthstar Trade-link (P) Ltd. for Rs. 703.60 crores who had further transferred the same to M/s Dreamcart Reality Services Pvt. Ltd. for Rs. 704 crores and thus, on the date of redemption of debentures by the appellant company on 30.3.2015, debentures were held by M/s Dreamcart Reality Services Pvt. Ltd. and since M/s Dreamcart Reality Services Pvt. Ltd. had purchased the debentures for Rs. 704 crores from M/s. Youthstar Trade-link (P) Ltd. and these were redeemed by the appellant company for Rs. 704.50 crores, M/s Dreamcart Reality Services Pvt. Ltd. had earned an income of Rs. 50 lacs on redemption of debentures by the appellant company in respect of investment in debentures by M/s Dreamcart Reality Services Pvt. Ltd.. In the order of assessment of M/s Dreamcart Reality Services Pvt. Ltd. dated 29.12.2017; the aforesaid income has been brought to tax as capital gain by the Assessing Officer after observing and holding as under: “The return of income in this case was e-filed on 28.09.2015 vide acknowledgement no. 824984641280915 declaring income of Rs. 49,58,050/-. The case was selected for Limited Scrutiny under Company Assisted Scrutiny Selection (CASS) with following reasons: A. High ratio of refund to TDS B. Large increase in investment in unlisted equities during the year Accordingly, notice u/s 143(2) of the Income Tax Act, 1961 was issued on 19.09.2016 by the ITO, Ward-7(4), New Delhi, which was duly served on the assessee. Further, the case was transferred to Circle-7(2), New Delhi and subsequently, a notice u/s 142(1) of the Income Tax Act, 1961 was issued on 14.07.2017 and duly served upon the assessee. In response to the notices issued to the assessee, AR of the assessee, Shri. Sandeep Bhasin, CA attended the proceedings and the case was discussed with him. The details asked for have been submitted by the AR and duly placed on records.
During the year under consideration, the assessee company is engaged in the business of real estate.
During the course of assessment proceedings, it is observed that assessee has purchased debentures of Shivsagar Builder Private Limited in total purchase consideration of Rs. 7,04,00,00,000/- from M/s Youthstar Tradelink Private Limited and the same were redeemed in total consideration of Rs. 7,04,50,00,000/-. In the total transaction assessee earned profit of Rs. 50,00,000/- and treated it as its capital gain. The above said debenture in initially purchased by M/s Indiabullls Housing Finance Limited and subsequently sold it to M/s Youthstar Tradelink Private Limited. However, as per CBDT Circular dated 15.02.2002, the profit from redemption of debenture by intermediate purchaser will be taxable as interest or business income. The relevant portion of the same is being reproduced as under: “6.1 Where the bond is redeemed by an intermediate purchaser, the difference between the redemption price and the cost of the bond to such purchaser will be taxable as interest or business income, as the case may be.”
In the view of the same, vide note sheet entry dated 08.12.2017, the AR of the assessee was asked to why the income of RS. 50 lac on the redemption of debenture of M/s Shivsagar Builders Private Limited should not be treated as per the CBDT circular dated 15.02.2002. In response, the AR of the assessee company did not reply. In view of the above, capital gain of Rs. 50,00,000/- is to be treated as interest income in the hands of assessee.
After considering and verifying the details furnished, supported with relevant evidences w.r.t. the CASS reasons mentioned above and after discussion, the returned income of Rs. 49,58,050/- is hereby accepted.
5. Accordingly, assessee’s income is assessed at a total income of Rs. 49,58,050/-. Interest u/s 234A, 234B, 234C and 34D, if any, is also charged. ITNS 150, ITS 7 (notice u/s 156) and necessary challans are also issued to assessee.”
13.1 Likewise, it is a matter of record and not denied by the revenue that balance Rs. 104 crores has been shown as income either by M/s. India Bulls Housing Finance Ltd. and M/s. Youthstar Trade-link (P) Ltd. Infact, M/s. Youthstar Trade-link (P) Ltd. has declared income of Rs. 39 lacs and balance Rs. 103.61 crores has been shown as income by M/s. India Bulls Housing Finance Ltd. Thus, once entire income of Rs. 104.50 crores has been brought to tax either as income in the hands of M/s. India Bulls Housing Finance Ltd. or M/s. Youthstar Trade-link (P) Ltd. or M/s Dreamcart Reality Services Pvt. Ltd., then it would be too farfetched and unjustified for the revenue to contend that the expenditure incurred of Rs 104.50 crores on borrowing made by issue of redemption of debentures to M/s. India Bulls Housing Finance Ltd. is either a contrived loss or an artificial loss. For that would be contrary to well known adage that an egg cannot be used partly for eating and partly for hatching. In other words, what is true for the income cannot be said to be an artificial for the expenditure. In our opinion, once income is accepted on the basis of borrowings and redemption of debentures then both logically and legally and consequently, expenditure in the shape of interest is a natural outcome and could not be regarded as artificial claim as a contrived claim by the appellant company more particularly when M/s. India Bulls Housing Finance Ltd. is an independent company and big reputed company.
There could be another angle to analyse the so called colourable transaction solely to contrived loss by the assessee company to reduce its taxable income. Firstly, Assessee Company would pay huge sum by way of interest on debenture, (which is akin to a loan) from its own capital duly disclosed in the books of account in the garb of business expenditure to a reputed public limited company, M/s. India Bulls Housing Finance Ltd. Secondly, M/s. India Bulls Housing Finance Ltd. in return would have paid equal amount in cash back to the assessee, i.e., facilitating some kind of accommodation entry; and Lastly, M/s. India Bulls Housing Finance Ltd. will then pay huge taxes on the entire interest received from assessee. Such an arrangement is unfathomable, firstly, for the reason that no material has been brought on record to allege such kind of arrangement; neither there has any been inquiry conducted by the revenue from M/s. India Bulls Housing Finance Ltd. to prove such colorable transaction. Secondly, why a public limited company like India Bulls Finance Ltd. would connive with assessee and pay not only cash in return but also pay taxes on the interest received. Lastly, why would Assessee Company wipe out its capital shown in the books to convert into cash? Such transaction is inconceivable sans any material brought on record.
The revenue has also laid much emphasis on the flow charts as referred in the assessment order. There are three flow charts in the order of assessment. First flow chart represents money trail on 17.12.2014 and based on the said flow chart, it has been concluded that no real funds were raised since money has been received had actually gone back to M/s. India Bulls Housing Finance Ltd. on the very same day, which in our opinion is a misconceived assertion. So far as we have concerned, it is not denied that the appellant had issued debentures and once appellant had issued debentures, then money is raised by the appellant company from M/s. India Bulls Housing Finance Ltd. It is also a matter of record that the money so raised had been credited to the account of the appellant company and thereafter, utilized for giving advances to three companies namely M/s. Winston Developers Pvt. Ltd. (Rs. 68.99 crores), M/s. Avenio Developers Pvt. Ltd. (Rs. 340 croeres) and M/s. Famous Dwellers Pvt. Ltd. (Rs. 190 crores) and thereafter, utilization of money of the aforesaid three companies could not be attributed as any basis much less a valid basis to suggest that no money were raised by the appellant company so as to suggest that the expenditure incurred on the borrowing is an artificial borrowing more particularly when income originated out of the borrowings has been taxed as income in the hands of M/s. India Bulls 33 Housing Finance Ltd. Infact, it would be pertinent to state and add here that there are two independent transactions, one where M/s. India Bulls Housing Finance Ltd. provided funds to the appellant company on 17.12.2014 on issue of debentures by the appellant company in respect of which appellant incurred expenditure of Rs. 104.50 crores on redemption of debentures on 30.3.2015. There is another set of transaction in respect of borrowing by M/s. Vatika Ltd. by issuing debentures of Rs. 500 crores to M/s. India Bulls Housing Finance Ltd. which were redeemed by M/s. Vatika Ltd. on 17.12.2014. It is not in dispute that M/s. Vatika Ltd. incurred an expenditure of Rs. 88 crores on the aforesaid debentures issued by M/s. Vatika Ltd. to M/s. India Bulls Housing Finance Ltd. This expenditure in the hands of M/s. Vatika Ltd. has been allowed as business expenditure and has been accepted by the revenue. Thus, once the revenue accepts the set of transaction of issue of debentures of M/s. Vatika Ltd. to M/s. India Bulls Housing Finance Ltd. as genuine transaction whereby expenditure incurred by M/s. Vatika Ltd. for issue of debentures is genuine expenditure then having the same parallel, it would be incorrect for the revenue to contend that the expenditure incurred by the appellant on issue of redemption of debentures to M/s. India Bulls Housing Finance Ltd. is a contrived expenditure. In our considered opinion, the revenue merely by relying on flow charts could not have fairly treated the expenditure claimed as an artificial expenditure which is not allowable as genuine business expenditure.
Moreover, emphasis has also been made is the common addresses of various companies to whom advances had been given by the appellant company. This fact does raises some doubt, but that alone on the facts of the case cannot be conclusive to draw adverse inference as no further logical inquiry has been done to implicate assessee’s involvement. In this regard, it would be relevant to refer to the ratio laid down by Hon’ble Delhi High Court in case of CIT vs. Winstral Petrochemicals (P) Ltd. reported in 330 ITR 603 wherein it has been held as under: “9. The finding of fact recorded by the Tribunal, which is the final fact finding-authority, cannot be said to be perverse merely because some of the applicants had a common address and the Inspector deputed by the Assessing Officer to make field inquiries did not find five applicants functioning at the addresses provided to him. There is no legal bar to more than one companies being registered at the same address. Since the applicant companies were duly incorporated, were issued PAN cards and had bank accounts from which money was transferred to the assessee by way of payee accounts cheque, they cannot be said to be non-existent, even if they, after submitting the share application had changed their address or had stopped functioning.”
Thus, applying the above pronouncement mere common addresses could not be a ground to deny utilization of funds by the appellant company in wake of plethora of evidences adduced by the assessee as tabulated above. It is a matter of record that utilization of funds is supported by agreements, resolutions and correspondences which have been placed on record and which have not been enquired into despite remand report having been specifically sent by the learned Officer in the remand 35 proceedings; and thus once the documentary evidence as furnished by the appellant remain un-rebutted the revenue cannot simply rely upon extraneous considerations to hold that legitimate claim made by the assessee is an artificial claim or a fabricated one and that too without leading any material. The burden was on the revenue to have rebutted the documentary evidence by leading further documentary evidence or by making enquires so as to suggest that the claim made by the appellant is not a genuine claim. Section 142(2) of the Act provides for powers with the learned Assessing Officer to conduct enquiries in respect of evidences furnished or claims made by the appellant company and if the learned Assessing Officer has not invoked those powers then it would be unfair, improper and also unjustified approach to permit the revenue to contend to the contrary to the claim made by the appellant company. It is well settled law that suspicion however strong may be cannot partake the character of evidence of proof. Here, the appellant company has discharged its onus by placing on record material to prove utilization of funds for the purpose of business of the appellant company and the revenue merely on theoretical surmises and hypothetical presumptions has proceeded to deny the claim. In our opinion, half baked enquires without taking them to a logical conclusion and proceeding on notions which are contrary to the evidence on record does not form part of due process of rule of law and therefore, could not be a foundation to deny the claim of the appellant company.
The next related aspect of the matter is in respect of investment made in debentures by the appellant company. The appellant has contended that M/s. Vatika Ltd. had issued debentures on 13.6.2014 to M/s. India Bulls Housing Finance Ltd. for Rs. 500 crores. It has been further stated that these debentures were transferred by M/s. India Bulls Housing Finance Ltd. to M/s. Sunrise Stock Broking (P) Ltd. and M/s. Tower Securities Services (P) Ltd. and on 14.7.2014, aforesaid companies transferred the same to M/s. Dewu Developers (P) Ltd. for Rs. 587.92 crores. The appellant company on 10.12.2014 borrowed money aggregating to Rs. 588 crores from the following five companies: Sr. No. Particulars Amount (Rs. in crores) i) Mendell Developers (P) Ltd. 100 ii) Casper Developers (P) Ltd. 110 iii) ESPO Developers (P) Ltd. 115 iv) Sanskar Buildtech (P) Ltd. 115 v) Nakshatra Buildcon (P) Ltd. 148 Total 588 18.1 The aforesaid funds as borrowed were utilized to purchase debentures of M/s. Vatika Ltd. from M/s. Dewu Developers (P) Ltd. on 10.12.2014. On 17.12.2014, the aforesaid debentures are redeemed by M/s. Vatika Ltd. and appellant received Rs. 589 crores from M/s. Vatika Ltd. and therefore, earned income of Rs. 1 crores of redemption of debentures by M/s. Vatika Ltd. and sum of Rs. 589 crores was utilized to repay/rebut the money borrowed for purchase of debentures of Rs. 588 crores and Rs. 1 crores earned on redemption of debentures were utilized in the manner hereunder: Sr. Particulars Amount No. (Rs. in crores) i) Mendell Developers (P) Ltd. 100 ii) Casper Developers (P) Ltd. 110 iii) ESPO Developers (P) Ltd. 115 iv) Sanskar Buildtech (P) Ltd. 115 v) Nakshatra Buildcon (P) Ltd. 148 vi) Aspire Promoters (P) Ltd 1 Total 589
It was therefore, contended by the assessee that this independent transaction was offered as short term capital gain in the course of assessment proceedings, and ought to have assessed as such. The revenue however, has said that aforesaid investment and disinvestment in debentures of M/s. Vatika Ltd. was also part of the contrived loss claimed on issue of debentures by the appellant company. It is a matter of record that the appellant had purchased debentures of M/s. Vatika Ltd. from independent entity M/s. Dewu Developers Pvt. Ltd. on a payment of consideration of Rs. 588 crores after deduction of TDS of Rs. 8.89 crores. This purchase has neither been disputed either in the order of assessment or in the order of CIT (A). It is also not in dispute that the debentures purchased by the appellant had been redeemed by M/s. Vatika Ltd. It is also a matter of record that on the redemption of debentures, bank account of the appellant had been credited by the sums received of Rs. 589 crores. Furthermore, no enquiries have been made or referred in the order of assessment to suggest that the income earned on issue of investment and disinvestment in the above debentures was 38 also a contrived income. The issue of debentures is otherwise too supported by documentary evidence which includes terms and conditions of the issue of debentures and Board resolutions of M/s Vatika Ltd. including resolution filed with the Registrar of Companies of Vatika Ltd. Demat statement of investment in debentures is also placed on record and thus having regard to the aforesaid, in our considered opinion, there is no justification to mix two independent transactions of issue and redemption of debentures by the appellant company and investment and disinvestment of debentures of M/s. Vatika Ltd. by the appellant company. Both are independent transactions and had to be holistically examined independently and therefore, revenue was therefore, entirely incorrect to have regarded the same as one transaction and denying the legitimate claim incurred by the appellant company.
One of the arguments raised during course of hearing by the ld. CIT DR was based on the quantum of borrowing made together with the period of borrowings and that such rates of interest are highly excessive. The aforesaid argument though attractive at first blushes but on a closer examinaiton is without substance. The Hon’ble Apex Court in the case of S. A. Builders Pvt. Ltd. vs. CIT reported in 288 ITR 1 affirming the judgement of Hon’ble Delhi High Court in the case of CIT vs. Dalmia Cement (P.) Ltd. reported in 254 ITR 377 has held as under: “34. 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 already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.” 20.1 It has thus been held by their Lordships that the commerciality of the transaction is only in the domain of an assessee and it is not for the revenue to sit in the arm chair of a businessman while examining the claim of deduction u/s 36(1)(iii) of the Act. Once it had been established that appellant raised funds for purpose of its business then interest paid is an allowable deduction. In the instant case sequence of events show that the entire purpose of issue of debentures by the appellant was to borrow the funds for the purpose of its business. The appellant in the business of real estate it intended to acquire Gurgaon and for financing such project needed sufficient funds and had approached the vender companies after identifying such vender certain companies, who were involved in such activity and had thus entered into agreements, when it sought the assistance of such companies.
Another contention raised by the revenue is that the borrowing raised by the appellant did not materialise into any tangible business venture in as much as advances paid to three companies for purchase of land were repaid prior to redemption of debentures. In our opinion, the relevant test is the borrowing and utilisation for the purpose of business. The fact that aforesaid funds utilised for the purpose business did not result into any income or any tangible business assets is not a relevant consideration. The Hon’ble Apex Court in the case of Apex Court in the case of CIT v. Rajendra Prasad Mody reported in 115 ITR 519 has held that relevant consideration is purpose test and not fulfillment of not “fulfillment of purpose test”. While holding so, their lordships held as under: “4. What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. Sec. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical views was taken by this Court in Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1 (SC): TC41R.491, where interpreting the corresponding provision in s. 12(2) of the Indian IT Act, 1922, which was ipsissima verba in the same terms as s. 57(iii), Bose J., speaking on behalf of the Court, observed: "It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned."
The Ld. CIT DR has taken support of the decision rendered by Hon'ble Supreme Court in the case of CIT vs. Durga Prasad More (supra). However, the facts prevailing in the instant case would show that the appellant has adduced all the evidences to support the claim of deduction u/s 36(1)(iii) of the Act. None of those evidences were proved to be false by the tax authorities. It is also pertinent to note that the tax authorities have not reached at a logical conclusion which disproves the evidence placed on record. Under these set of facts, we are of the view that the Ld CIT DR is not justified in placing reliance on the decision of Hon'ble Supreme Court rendered in the case of Durga Prasad More (supra) to simply brush aside the evidences furnished by the appellant.
22.1. The Ld. CIT DR further taken support of the decision rendered by Coordinate bench of Delhi Tribunal in the case of Assessing Officer vs. Shiva Gases (Supra). In the said case as noted by Assessing Officer was that sale of shares on which loss has been claimed was non-genuine transaction and had been manipulated with the sister concern with a view to reduce the liability. However, the facts prevailing in the instant case would show that the debentures were issued to independent entities and that independent entities are duly assessed to tax. Under these set of facts, we are of the view that the Ld CIT was not justified in placing reliance on the decision of Hon'ble Delhi bench of Tribunal rendered in the case of Assessing Officer vs. Shiva Gases (Supra).
22.2 The learned CIT DR during the course of proceedings has relied on the judgment of Karnataka High Court in the case of CIT vs. Wipro Ltd. In the said case, the assessee was engaged in the business of software exports, computer peripherals, manufacture and sale of various products etc. It acquired shares of a company on 31.3.1999 namely WNL for a consideration of Rs. 15.11 crores. It sold certain shares on 5.8.1999 to KPN for a consideration of Rs. 20.31 crores. Further shares were also sold on 28.12.1999 to ICICI Ltd. for a consideration of Rs. 99.42 crores. Therefore, assessee declared short term capital gains of Rs. 109.54 crores under section 48 of the Act from sale of shares. Further, during the said year, the appellant also claimed to have incurred long term capital loss of Rs. 107.97 crores on sale of shares of WFL, a non-banking financial company, whose registration before RBI was withdrawn and was a subsidiary of Assessee Company. The claim of the assessee was that short term capital gain be set off against the long term capital loss incurred by the appellant. The Assessing Officer however held that sale of shares of WFL was a sham transaction and was intent to set off under section 70 of the Act against short term capital gain on sale of shares by the appellant company. On appeal, the Hon’ble High Court confirmed the aforesaid action by concluding in para 52 as under: “52. The aforesaid undisputed and admitted material on record discloses that the purchase of shares of Wipro Finance Limited at premium in one breadth and selling the shares of the said company for a pittance at the rate of less than a paisa in other breadth, which clearly shows the intention behind this arrangement. Secondly, the said shares are sold to the ex-employees who continued to hold the said shares without bringing any fresh capital for conducting the business of Wipro Finance Limited. Thirdly, though it is contended that a sum of Rs.95 crores is infused to meet the requirement of company under the RBI Act, as demanded by the Reserve Bank of India, the amount of Rs.95 crores infused is withdrawn on the very same day towards the repayment of the debt by Wipro Finance Limited to the assessee clearly demonstrates the intention behind such arrangement. Fourthly, as it is clear from the contention of the assessee that the capital gains was accrued to them because of wind fall profits by selling of shares of Wipro Net Limited, the quantum of short term capital gains disclosed by the assessee was a staggering amount of excess of Rs.100 crores. The loss was generated by disinvestment of assessees share owned in subsidiary Non Banking Finance Company. The fact that three persons/ex-employees who had rewarding association with the assessee group for a long period of time, cast a shadow on the genuineness of the transaction as the shares were sold at a throw away price, when earlier to the sale, the assessee had purchased the shares of Wipro Finance Limited at a premium. Despite disinvesting the shares on such a throw away price under the guise of complying with the legal requirements as directed by RBI, the assessee chose to infuse fresh capital to the extent of Rs.95 crores at par on the same day and took back the amount on the same day under different head. In the end, they did not comply with the procedures of the law. On the contrary, application filed to the RBI was withdrawn. These undisputed facts borne out from the record clearly establishes the real intention underlying this scheme which they have propounded.”
It will be apparent that the facts of the said case and the facts in the case of appellant are totally distinguishable. Here it is not a case that the transaction of issue of debentures by the appellant company and thereafter, redemption of debentures with M/s. Indiabulls Housing Finance Ltd. is a sham transaction. It is a matter of record that M/s. Indiabulls Housing Finance Ltd. is a well recognized company in the field of housing finance. There is 44 no relationship either pointed out or alleged between the appellant company and M/s. Indiabulls Housing Finance Ltd. On the contrary, in respect of expenditure incurred by the appellant company on borrowings and redemption of debentures, corresponding income declared by M/s. Indiabulls Housing Finance Ltd. and two other entities namely M/s. Youthstar Trade Link (P) Ltd. and Dreamcart Realty Services (P) Ltd. stand accepted. In such circumstances, mere fact that appellant incurred loss on issue and redemption of debentures to well recognized independent and unrelated companies after complying with all the statutory regulations and in accordance with law, then the commerciality of the transaction and the legal effect of the transaction cannot be denied. Further even otherwise, Vatika Ltd. in an identical transaction had incurred expenditure on interest of Rs. 89 crores on borrowings made from M/s. Indiabulls Housing Finance Ltd. and such borrowings have been held to be allowable expenditure. It would be thus incorrect for the revenue to suggest that in respect of debentures alone, M/s. Indiabulls Housing Finance Ltd. has declared income of Rs. 103.61 crores in respect of debentures issued by the appellant company and Rs. 87 crores in respect of debentures issued by Vatika Ltd. and as such stand accepted. Furthermore, expenditure inured on borrowings by Vatika Ltd. stand allowed. Here what is being sought to be disallowed is the expenditure on borrowings incurred by the appellant company. In such circumstances, in our considered opinion, once borrowing has been made through the debentures and utilized for the purpose of business, it has been established through documentary evidence in the shape of agreements and correspondences for which, no contrary evidence has been placed on record, then surmises, conjectures and suspicion should not be made a basis to reject the claim of the appellant company. Thus, the judgment as relied upon has no application to the facts of the instant case.
Another decision relied upon by the Ld. DR is in the case of DCIT vs. Pawan Kumar Malhotra reported in 2 ITR (Trib) 250 (Delhi). Here too, the facts are totally distinguishable in as much as this was a case of purchase of shares from employees and thereafter, sale the same. In the said case, purchase of shares was done from two persons who did not file any particulars about the purchase and sale of shares in their returns. Also, share price of the company was neither known nor reported and there was no basis to suggest that how the share price of a company could increase more than 70 times when these shares were neither quoted nor listed. Thus, the facts as apparently are completely distinguished from the case of appellant company and therefore, could not be made a basis to reject the claim made by the appellant company.
In view of the foregoing, we conclude that the appellant is entitled to deduction of Rs. 104.50 crores incurred on redemption of debentures under section 36(1)(iii) of the Act. Furthermore, we also hold that Rs. 1 crores earned by the appellant on redemption of debentures by M/s. Vatika Ltd. in respect of investment made by the appellant company was taxable as business income as declared in the return of income. As a result, grounds raised by the appellant are allowed. 46
Grounds No. 3 and 4 relate to addition of Rs. 13.92 crores in respect of sale of commercial area by the appellant company. The factual matrix is that appellant in 2006, acquired 10.356 acres of land at Gurugram. On 14.2.2017, a collaboration agreement was also entered between the appellant and M/s. DLF Ltd. to develop the aforesaid land. According to the aforesaid agreement, M/s. DLF Housing Ltd. was to act as developer to develop the commercial projects with its own investment and in view of the aforesaid, it would be entitled to retain 55% of the total super area of the said land and balance 45% of the super area to be handed over to the appellant. On 19.3.2008, license was granted by the Director, Town and Country Planning, Haryana. On 13.11.2008, a supplementary agreement was entered between by the appellant company and developer DLF. According to the said agreement, developer was authorized to receive payments of all sale consideration for the area in its own name and deposit the same in the account alongwith the proceeds received for the share of the developer. It was also agreed that the developer shall settle the amount of the loan account on quarterly basis and reimburse to the appellant company as the land owner after adjusting the proportionate expenditure on account of advertisement and marketing.
26.1 Having regard to the aforesaid on 11.12.2014, an audited and certified statement was made available where it was noted that out of the total saleable area of 26,16,824 square feet, the area pertained to the appellant was 2,00,225 square feet and proportionate sale proceeds was Rs. 103.42 crores. M/s. DLF deducted Rs. 13.92 crores out of the aforesaid proportionate sale proceeds and credited Rs. 89.50 crores to the account of the appellant company. The appellant declared an income of Rs. 89.50 crores and receipts from sale of commercial area in the financial results for the year under consideration. The learned Assessing Officer however held that the assessee had a right to receive an amount of Rs. 103.42 crores but what is seen is that it has only accounted for an amount of Rs. 89.50 crores in its books of account and therefore, Rs. 13.92 crores was to be added as income of the appellant. It has been held that the expense of Rs. 13.92 crores has not been routed through profit & loss account of the appellant and appellant company has also not furnished the details required to examine the veracity of the claim of the appellant. It has been held that appellant has only relied upon the CA certificate regarding the claim of expense and expects the revenue to accept the same without examining its allowability which is not a justified basis to allow the same.
The CIT (A) also upheld the addition by observing that since the claim of the appellant is not supported by adequate evidences therefore, expenditure incurred by DLF was not an eligible expenditure and therefore, confirmed the addition.
Before us, the learned Senior Advocate contended that Assessing Officer had made addition on the premise that the appellant has yet to receive Rs. 103.42 crores which was based on an erroneous assumption as under the agreement with the DLF, appellant was entitled to only Rs. 89.50 crores and not Rs. 103.42 crores. It was submitted that the reply dated 24.1.2019 from M/s. DLF under section 133(6) of the Act clarified that DLF had paid only Rs. 89.50 crores to the appellant and therefore, this amount of Rs. 13.92 crores had been offered for tax by DLF under the percentage of completion method which has been duly assessed to tax in their order of assessment. In such circumstances, it was prayed that addition so made and sustained was not in accordance with law and therefore, may kindly be deleted. The learned CIT DR on the other hand supported action of the authorities below and prayed for confirmation of the action.
We have considered rival submissions, perused the material placed on record. The essential controversy involved is in respect of the disallowance of the amount accrued to the appellant on sale of commercial area by DLF in respect of commercial projects developed by DLF on the land owned by the appellant company. According to the appellant company, gross receipt taxability in the hands of the appellant was Rs. 89.50 crores whereas claim of the revenue is that sum taxed as gross receipts is Rs. 103.42 crores. According to the supplementary agreement dated 13.11.2008 between the appellant company and DLF Ltd., it is provided as under: “7. The Developer shall reimburse to the Land Owner proportionate revenue proceeds of the said 200225 sq. feet after adjusting proportionate expenses on account of advertising & Marketing and other expenses whether actually incurred or to be incurred in future like stamp duty and registration charges and other incident and allied cost. rebates, lock in incentives, refunds, cancellation charges, expenses of all agreements, deeds, documents, collected and recovered from prospective Transferees amounts that are received on a refundable basis or the service/maintenance 49
charges, the brokerage paid or to be paid and service tax payable on any receivable as may be in the case of the Developer. It is specifically agreed between the parties that the provision for all the expenses / adjustments to be incurred for the succeeding quarter shall be made in the advance in the statement of account prepared for the preceding quarter.”
29.1 Furthermore, in an independent confirmation under section 133(6) of the Act, M/s. DLF Ltd. had specifically clarified as under: “In view of above, it is clear that an amount of Rs. 89.50 Cr. Was agreed as a full and final settlement towards revenue share of 2,00,225 sq ft of area and Rs. 63.55 Cr. was agreed as compensation towards delay in handing over of the 2,24,565 sq ft area. The landowner has been reimbursed from time to time for the proportionate revenue proceeds as mutually decided, details of payments made to SBPL amounting to Rs. 153.05 Cr. (Rs. 89.50 Cr. plus Rs. 63.55 Cr) is given in Annexure 3. On perusal of said details, your goodself can observe that the pending full & final payment of Rs. 11.04.Cr was made by the company after the decree of compromise agreement. Copy of the Compromise which is duly decreed by the Court is has already been enclosed. So far as, treatment in assessee’s books is concerned, it is submitted that all the transactions are duly recorded in the audited financials of the DHDL and the amount of Rs. 13.92 Cr has duly been offered to tax as part of overall revenue of the project bases Percentage of completion method (POCM) on year to year basis as per the applicable laws. It is worthwhile to mention here that the assessee company was duly been assessed u/s 143(3) for AY 2015-16. Even, Scrutiny assessment for AY 2016-17 has also been concluded by DCIT, Circle 7(2), New Delhi. All the assessment orders are part of departmental record.”
Thus, having regard to the aforesaid agreements supported by independent confirmation obtained under section 133(6) of the Act by the learned Officer in the remand proceedings, to which, no contrary evidence has been placed on record, we are of the opinion sum taxable is Rs. 89.50 crores and not at Rs. 103.42 crores as taxed in the impugned orders. In our considered opinion, income accrued is only Rs. 89.50 crores which is also supported by an audited certified statement and thus, addition so made is not in accordance with law and therefore, is deleted. Grounds raised by the appellant are allowed.
Ground No. 5 relate to addition of Rs. 18.90 lacs representing the addition made under the head ‘income from house property’. The facts in brief are that, ld. Assessing officer during assessment proceedings issued show cause notice dated 22.12.2017 stating that appellant is having a residential property at Vasant Vihar which has been left vacant and not forming part of block of assets and shown under the head ‘inventory’. In reply thereto appellant vide its reply dated 27.12.2017 submitted that the said property had been acquired with the intention of selling the same as one of the object of the appellant company is to deal in the real estate and it is for this purpose said property was not shown in block of assets and shown under the head inventory. However, ld. Assessing Officer rejected the claim of appellant and made addition at notional rent by applying the provision of section 23(1) of the Act. Assessing officer has held that company cannot self occupy a property u/s 23(2) of the Act. The CIT (A) too has confirmed the aforesaid action.
We have considered the rival submissions and perused the relevant finding given in the impugned orders. A plain reading of clauses (a) and (b) of sub-sec. (1) of sec. 23 makes it manifest that the annual value of the property for determining the income from house property is deemed to be the sum for which the property might be expected to let from year to year or where the property is let and the annual rent received or receivable is in excess of the sum, the amount so received or receivable. In the present case, we are concerned with the property which is purchased for the purpose of resale and lying vacant under head ‘inventory’ and meanwhile used for purpose of business. The FMV of the property used by appellant for business purpose admittedly cannot be determined u/s 23(1) of the Act. In identical case coordinate bench of Delhi Tribunal in case of Ashok Kumar Gupta vs. ITO reported in 167 ITD 165 has held that FMV of properties used by appellant for business purpose could not be determined u/s 23(1) of the Act. In the said case, properties under consideration were the properties which which are lying vacant or were under construction or were let out or were self occupied for the purpose of business purpose and in respect of properties which were used by the assessee for his own office/ business purpose it was held that FMV of the properties used by the assessee for business purpose admittedly cannot be determined u/s 23(1) of the Act. It has been held as under: “6. However, nowhere the Assessing Officer has given any basis for determination of fair market rent, that is, from which source or information he has arrived at the market rent. He has also not excluded the properties which were; firstly, under construction as mentioned in the earlier table; and secondly, one shop which was used by the 52
assessee for his own office/business purpose. The FMV of the properties under construction and property/shop used by assessee for business purpose admittedly cannot be determined u/s 23(1). The Assessing Officer is thus directed to exclude the ALV of the two properties which were under construction and also the property which was used by the assessee for his own business/profession purposes….” 32.1 Even otherwise as brought to our notice by the Ld. Sr. Counsel that, coordinate bench of Pune in case of Shree Balaji Ventures vs. ITO in dated 19.2.2019 held that annual letting Value in respect of unsold properties lying with the assessee as a stock in trade should not be determined u/s. 23(1) of the Act. Relevant finding of the order is reproduced hereunder: “4. I have heard the rival submissions and perused the relevant material on record. It is an undisputed fact that the assessee, a Builder and Developer, was holding two properties as its stock in trade, from which the deemed rental income has been computed u/s 23 of the Act and added to its total income. The AO has made out a case that levy of income tax in respect of properties held by the assessee as an owner, cannot be marred even if the same have been held as stock in trade. The bedrock of the action of the authorities below is certain decisions which, in turn, are based on the judgments of Hon’ble Supreme Court in East India Housing & Land Development Trust VS. CIT (1961) 42 ITR 49 (SC) and S.G. Mercantile Corporation Pvt. Ltd. Vs. CIT (1972) 83 ITR 700 (SC). It has been held in the latter decision that where a builder, being, owner lets out property for some time pending sale, the income so derived is to be taxed under the head “Income from house property” and not as “Business income”. So the ratio is that even if a builder lets out his property, held as stock in trade, income there from will be chargeable under the head `Income from house property’ and not as `Business income’. It is pertinent to note that such a legal position has undergone some transformation. In Chennai Properties and Investments Ltd. Vs. CIT (2015) 373 ITR 673 (SC), the assessee whose business was to acquire properties, let out certain properties and the rental income as received therefrom was declared as business income. The AO held such income to be chargeable to tax under the head “Income from house property”. The Hon’ble Supreme Court held that the deciding factor for determining as to whether the income is to be charged under the head “Income from house property” is not the ownership of property but the nature of operations in relation to them. Considering the objects of the company, the Hon’ble Supreme Court held that such income was chargeable to tax under the head “Profits and gains from business or profession”. More recently, the Hon’ble Supreme Court in Rayala Corporation Pvt. Ltd. Vs. ACIT (2016) 386 ITR 500 (SC) considered a situation in which the assessee was engaged in the business of renting its properties. The assessee claimed such rental income as falling under the head “Profits and gains of business or profession”. The AO denied such a treatment. When the matter finally came up before the Hon’ble Supreme Court, it considered both the judgments, namely, S.G. Mercantile Corporation (supra) and Chennai Properties and Investments Ltd (supra) and thereafter held that : `the law laid down by this Court in the case of Chennai Properties (supra) shows the correct position of law’. That is how, their Lordships held that the income was to be charged to tax under the head “Profits and gains of business or profession”. 5 In view of the foregoing discussion, it is apparent that the view point bolstered by the authorities that Annual Letting Value in respect of unsold properties lying with the assessee as a stock in trade, should be determined u/s. 23 of the Act, cannot be countenanced in the hue of the later judgments of the Hon’ble Summit Court. Once it is held that the income of a Builder in respect of letting out of the properties is chargeable under the head “Profit and gains of business or profession”, the provisions enshrined in Chapter IV-D get magnetized and not those under the head “Capital gains”. It is no doubt true that section 23 of the Act deems the determination of income from house property, which is not let out, but it is equally trite that a deeming provision cannot be extended beyond its ambit, so as to cover the heads of income or the sections, to which it does not operate. My attention has not been drawn by the ld. DR towards any specific provision under Chapter 54 IV-D of the Act which deems rental income on the properties held as stock in trade, waiting for sale and not actually let out, as chargeable to tax under the head “Profit and gains of business or profession”. As the assessee admittedly did not earn any rental income from letting out of these two units, which position has also not been disputed by the AO, in my considered opinion, taxing any hypothetical income, which is otherwise not sanctioned by any provision under Chapter IV- D, cannot be permitted.
6. Even otherwise, section 5 of the Act clearly stipulates that a person who is a resident can be subjected to tax in respect of income from whatever source which is received or is deemed to be received in India or accrues or arises or deemed to accrue or arise to him in or outside India during such year. As the instant imaginary income charged to tax by the AO is neither a deemed income under the head `Business income’ nor is received or deemed to be received or accruing or arising or deemed to accrue or arise, not falling in any of the categories given in clauses (a) to (c) of section 5(1), I hold that there is no rationale in charging it to tax. I, therefore, overturn the impugned order and direct to delete the addition of Rs.34.35 lakh.
For the aforesaid reasons we are of the opinion that addition made by erroneously determining annual value u/s 23(1) of the Act is not in accordance with law and is therefore deleted. Ground raised by the appellant is allowed.
In the result appeal of the appellant assessee is allowed.