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ORDER
PER N.K. PRADHAN, AM
1. The captioned cross appeals- one by the Revenue and the other by the assessee – are directed against the order of the Commissioner of Income Tax (Appeals)-28, Mumbai [in short CIT(A)] and arise out of the assessment completed u/s 143(3) of the Income Tax Act 1961 (the ‘Act’). As common issues are involved, we are proceeding to dispose them off by this consolidated order for the sake of convenience. Assessment Year: 2011-12 2. The grounds of appeal
filed by the revenue read as under:
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to delete the addition of Rs.97,87,565/- being the closing balance of unsecured loan from the assessee's father, Shri V.U. Jhaveri without appreciating the facts that - (i) The assessee has failed to discharge his onus of proving the genuineness of the loan and the creditworthiness of Shri V.U. Jhaveri, in that, during the course of assessment proceedings, investigations of the bank account of Shri V.U. Jhaveri revealed that the opening balance of Rs.45.15 Lakhs was subjected to sundry credits of Rs.120,77 Lakhs und debits of Rs.64.04 Lakhs during the year; and the assessee utterly failed to explain the nature and cause of these entries, which fact has also been acknowledged by the Ld. CIT(A) in his appellate order, (ii) It has been judicially held in the cases of CIT Vs. Mihir Kanti Hazra, 375 ITR 555, (Calcutta), CIT vs. Maithan International, 375 ITR 123 and a catena of other decisions that the Assessing Officer could not accept genuineness of loan taken by assessee from various creditors merely on basis of their bank Mr. Ashutosh V. Jhaveri 3 & 5122/Mum/2016 statement and letter of confirmations, as he was required to examine creditworthiness of said creditors as well, and it has been further held that where assessee received unsecured loans and Assessing Officer made addition on ground that creditworthiness of alleged creditors was not proved, appellate authorities were not justified in deleting said addition without examining correctness of views expressed by Assessing Officer.
2. The appellant prays that the order of the A.O. should be restored and order of the CIT(A) should be set aside.
3. Briefly stated, the facts are that during the course of assessment proceedings, the Assessing Officer (AO), on verification of balance sheet of M/s Sanjay Steel Company (proprietorship concern of the assessee) found that the assessee had taken unsecured loan of Rs.97,87,565/- from Mr. Vrajlal U. Jhaveri. In response to a query raised by the AO, the assessee filed loan confirmation along with loan statement of Mr. Vrajlal U. Jhaveri, father of the assessee. The AO noted that Mr. Vrajlal U. Jhaveri is assessed to tax in his Ward. However, Mr. Jhaveri had not filed his return of income from the AY 2007-08 onwards. Thus the AO arrived at a finding that the source of income and creditworthiness of Mr. Vrajlal U. Jhaveri could not be verified. Further, the AO having examined the loan confirmation filed by the assessee observed that no clarification in respect of credit and debit entries had been furnished. On the basis of the above reasons, the AO held the entire loan as non-genuine and made an addition of Rs.97,87,565/- to the income shown by the assessee.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that the Ld. CIT(A) vide order dated 19.05.2016 held as under:
Mr. Ashutosh V. Jhaveri 4 & 5122/Mum/2016 “I find from the assessment order that this is the only reason for the AO to doubt the creditworthiness of Mr. V U Jhaveri. I am afraid these reasons are not sufficient enough to add a loan in the hands of the appellant and that too the closing balance without examining the accretion if any to the loan taken during the year. If Mr. V U Jhaveri has not filed his ROI with the same AO, it was for the AO to take appropriate action in the case of Mr. V U Jhaveri. The AO has ignored the fact that the appellant has taken a loan from his father whose identity is proved and all evidence such as bank statement, confirmation etc are before him. If the AO doubts the source of funds in the hands of the father, then appropriate proceedings under the Act have to be initiated in the hands of the father. In any case, no addition can be made in the hands of the son. I therefore delete the addition of Rs.97,87,565/- made on this count . It is clarified that the AO is free to take appropriate action in the case of Mr. V U Jhaveri as the same is assessed with him.”
Before us, the Ld. DR supports the order passed by the AO. On the other hand, the Ld. counsel of the assessee relies on the order passed by the Ld. CIT(A). The Ld. counsel further submits that the case of Mr. Vrajal U. Jhaveri for the AY 2011-12 has been reopened by the revenue u/s 147 of the Act.
We have heard the rival submissions and perused the relevant materials on record. In the instant case, as mentioned hereinbefore in response to a query raised by the AO, the assessee filed before him loan confirmation along with loan statement of his father Mr. Vrajlal U. Jhaveri. Instead of verifying those details, the AO jumped into a conclusion that the entire loan is not genuine. It is found that the case of Mr. Vrajlal U. Jhaveri for the AY 2011-12 has been reopened by the revenue u/s 147 of the Act. We find the reasons given by the Ld. CIT(A), Mr. Ashutosh V. Jhaveri 5 ITA Nos. 4837 & 5122/Mum/2016 while deleting the addition of Rs.97,87,565/- made by the AO to be in order. The same we have extracted at length at para 4 hereinbefore. As the addition made by the AO is based on surmises, we uphold the order of the Ld. CIT(A). 7. In the result, the appeal filed by the revenue is dismissed. Then we discuss below the grounds of appeal
filed by the assessee. Assessment Year: 2011-12
8. The 1st ground of appeal: 1.01 On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the action of the AO in disallowing the appellant's one- third share of long term capital loss of Rs.39,631/- from sale/transfer of jointly owned residential flat under construction and instead assessing 100% of income of short term capital gains of Rs.31.18.122/-. 1.02 On the facts and circumstances of the case, the AO has erred, both on facts and in law m assessing the short term capital gains of the appellant at Rs.31,18,122/- as against long term capital loss of Rs.39,631/- declared by the Appellant 1.03 The appellant prays that the addition of Rs.31,18,122/- as short term capital gains may be deleted and the appellant's one-third share of long term capital loss may be restored as declared in the return of income.
9. In a nutshell, the facts are that during the course of assessment proceedings, the AO found that the assessee had booked the flat in Ekta Supreme Housing on 02.10.2006 by giving cheque No. 841933 dated Mr. Ashutosh V. Jhaveri 6 ITA Nos. 4837 & 5122/Mum/2016 02.10.2006 amounting to Rs.1,00,000/- for the flat No. 1405, 14th floor, ‘A’ Wing Building, Lake Primorse, situated at Lake Homes, Off Adi Sankaracharya Marg, Powai, Mumbai 400076 as a token amount for total consideration of Rs.87,52,758/-. The AO further observed that the booking amount of Rs.1,00,000/- paid by the assessee on 02.10.2006 and receipt of the same given by the developer is against the intent of the assessee to reserve the apartment. The receipt of Rs.1,00,000/- does not contain any installment schedule or other terms and conditions of allotment. Consequently, it cannot be stated to have conferred any right on property to the assessee. It also precludes the assessee’s case from being covered under transfer by part performance as per section 53A of the Transfer of Property Act, 1951. On the basis of the above facts, the AO held the asset under consideration as short term capital asset for the reason that the assessee had purchased the flat No.1405 as per purchase agreement dated 24.02.2011 registered on 08.03.2011 for a purchase price of Rs.85,76,500/-. The flat has been sold vide agreement of sale dated 11.03.2011. The AO thus observed that the period of holding of the immovable property by the assessee is less than 36 months and hence it was a short term capital gain. The AO thus brought to tax the short term capital gain of Rs.31,18,122/- to tax.
10. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A) and submitted that he sold property being Mr. Ashutosh V. Jhaveri 7 & 5122/Mum/2016 residential flat under construction booked jointly in his name, his father Mr. Vrajlal U. Jhaveri and his brother Mr. Sanjay Jhaveri (each having 1/3rd share) as per the details mentioned below:
Sr. No. Date Events
05/10/2006 Property being residential flat under construction booked jointly in the name of Ashutosh Jhaveri, Vrajlal Jhaveri and Sanjay Jhaveri (each having 1/3 share) for Rs.87,76,500/- from Builder, Ekta Supreme Housing;
23/02/2011 Stamp duty of Rs.5,97,875/- paid on purchase agreement for flat under construction allotted in October 2006. Bank statement highlighting payment of stamp duty paid is submitted along with letter no VJC-HO/176/01/2014 dated January 27, 2014
24/02/2011 Purchase Agreement executed for flat under construction for consideration of Rs.87,76,500/- as per allotment in 2006
08/03/2011 The registration of purchase agreement for market value of 2011 is mentioned in the ITS as purchase market value; Copy of registered purchase agreement dated February 24, 2011 is submitted along with letter No. VJC-HO/176/01/2014 dated January 27, 2014
5. 11/03/2011 The rights in residential flat under construction (not residential flat) sold for Rs.1,25,00,000/- However, the Ld. CIT(A) found the case of the assessee identical to the facts in the decision in Lata Vasudeva (2011) 10 taxmann.com 96 (Mumbai). The Ld. CIT(A) held as under:
It could be observed from the above, that the facts are identical to the facts of the present case. In the instant case too, the appellant has made a booking and payments also to the builder which has been duly acknowledged. It must also be noted that neither does the appellant have an allotment letter and also that the appellant sold this flat before even taking possession. The appellant obtained substantial and complete rights over the property only on Mr. Ashutosh V. Jhaveri 8 & 5122/Mum/2016 its registration in Feb. 2011. Similarly at the time of demand notices issued by the builder, the asset being the flat was not in existence and neither was the possession handed over to the appellant. In fact in the present case, there is no allotment letter also. I therefore hold that the appellant has purchased the property only in Feb 2011 on its registration and therefore the period of holding is less than 36 months. The gain is assessable as short term capital gains. The addition made by the AO of Rs.31,18,122/- towards short term capital gain is therefore upheld.
Before us, the Ld. counsel of the assessee files a Paper Book (P/B) containing inter-alia (i) Premises owner ledger in the books of builder, Ekta Supreme Housing, (ii) Receipt No. 147 dated 05.10.2006 for Rs.1,00,000/- issued by builder, Ekta Supreme Housing, (iii) Demand letter dated 21.06.2007 from builder, Ekta Supreme Housing, (iv) Receipts dated 24.07.2007 issued by builder, Ekta Supreme Housing, (v) Agreement dated 11.03.2011 for sale of writes, (vi) Agreement dated 24.02.2011 with builder and Ekta Supreme Housing. 11.1 The Ld. counsel of the assessee argues that the period of holding should be computed from the date of allotment of the property and not the date of registration. For this proposition, he files a copy and relies on the decision in Pr. CIT vs. Vembu Vaidyanathan (ITA No. 1459 of 2016) by the Hon’ble Bombay High Court dated 22.01.2019; order dated 13.02.2017 of the ITAT “H” Bench, Mumbai in the case of Anita D. Kanjani vs. ACIT (ITA No. 2291/Mum/2015 for AY 2011-12); order dated 14.08.2018 of ITAT “C” Bench Mumbai in the case of Shri Sanjay Kumar Footermal Jain vs. ITO (ITA No. 4853/Mum/2016 for AY 2012- 13) and order dated 22.03.2017 of the ITAT “H” Bench Mumbai in the Mr. Ashutosh V. Jhaveri 9 ITA Nos. 4837 & 5122/Mum/2016 case of ACIT vs. Shri Kiran G. Gadhia (ITA No. 4021/Mum/2015 for AY 2010-11). Relying on the above decision, the Ld. counsel submits that in the present case, the period of holding should be computed from the date of allotment of the property and not date of registration. 11.2 Thus the Ld. counsel submits that the subject of transfer giving rise to capital gains is allotment of flat under construction and the date of acquisition of the capital asset which comprise of rights is to be reckoned from the date of booking i.e. 05.10.2006. 11.3 Further, the Ld. counsel submits that the business of M/s Sanjay Steel Co. is a joint family business although the investment is shown in the balance sheet of the business. In view of the legal agreement, also being executed in the joint names, the property has been acquired jointly with equal i.e. 1/3rd share for each and hence the long term capital loss to the extent of the assessee 1/3rd share be allowed. The Ld. counsel thus submits that considering the period of capital asset, being rights in flat under construction, being held for more than 36 months from the date of acquisition on 05.10.2006, the capital gains arising therefrom are long term and benefit of indexation may allowed to the extent of 1/3rd share as claimed in the return of income.
On the other hand, the Ld. DR submits that as mentioned by the Ld. CIT(A), the assessee made payments to the builder for purchase of a flat and instead of having an allotment letter in his name, he has only demand notices from the builder and the receipt of payments. The assessee sold the flat before even taking possession. The above being the Mr. Ashutosh V. Jhaveri 10 & 5122/Mum/2016 facts, the Ld. DR argues that the Ld. CIT(A) has rightly held that the assessee purchased the property only in February 2011 on its registration and therefore, the period of holding is less than 36 months and the gain is rightly assessable as short term capital gains.
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. We discuss herein the case laws relied on by the Ld. counsel. In the case of Vembu Vaidyanathan (supra), the assessee had filed the return of income for the AY 2009-10 and claimed LTCG arising out of capital asset in the nature of a residential unit. The controversy between the assessee and the revenue revolves around the question as to when the assessee can be stated to have acquired the capital asset. The assessee argued that the residential unit in question was acquired on the date on which the allotment letter was issued by the builder which was on 31.12.2004. The AO however contended that the transfer of the asset in favour of the assessee would be complete only on the date of agreement which was executed on 17.05.2008. The Hon’ble High Court referring to the CBDT Circular No. 471 dated 15.10.1986 and No. 672 dated 16.12.1993 held that “it can thus be seen that the entire issue was clarified by the CBDT in its abovementioned two Circulars dated 15.10.1986 and 16.12.1993. In terms of such clarifications, the date of allotment would be the date on which the purchaser of a residential unit can be stated to have acquired the property. There is nothing on record to suggest that the allotment in construction scheme promised by the builder in the present case was materially different from the terms of Mr. Ashutosh V. Jhaveri 11 & 5122/Mum/2016 allotment and construction by DDA. In that view of the matter, CIT(A) and Tribunal correctly held that the assessee had acquired the property in question on 31.12.2004 on which the allotment letter was issued.” In the instant appeal, the issue is not the allotment in construction scheme promised by the builder which is materially same as the terms of allotment and construction by DDA. Thus the case of the assessee in the instant case is distinguishable from the decision in Vembu Vaidyanathan (supra) relied on by the Ld. counsel. In the case of Anita D Kanjani (supra), during the course of assessment proceedings, it was noted by the AO that though the allotment of the said office unit was done prior to 36 months from the date of sale, but the agreement to sale was registered during the period of 36 months only, therefore, he computed the holding period from the date of registration of the agreement and accordingly it was held that the said asset was ‘short term capital asset’. Thereafter, the AO relying on the judgment of the Hon’ble Supreme Court in M/s Suraj Lamps and Industries Pvt. Ltd. vs. State of Haryana 304 ITR 1 (SC) held that the transfer of an immovable property is effective only from the date on which it is registered with the Sub-Registrar, which is competent authority to register the documents for transfer of immovable properties. Accordingly, the AO found that the said property was ‘short term capital asset’ and the resultant gain was assessed as short term capital gains. The Tribunal held that the holding period should be computed from the date of issue of allotment letter.
Mr. Ashutosh V. Jhaveri 12 & 5122/Mum/2016 In the case of Shri Sanjay Kumar Footermal Jain (supra), the Tribunal observed that (i) the assessee had purchased the long term capital asset being godown as per agreement dated 24.04.2008, (ii) the assessee had made initial payment of Rs. 1,26,000/- as against the purchase consideration of Rs. 12,26,000/- with the promise to make balance payment on or before 03.05.2008; as against the agreement for sale and part payment dated 24.07.2008, the transferor has transferred all the right, title and interest in favour of the transferee including five shares under share certificate No. 1/87 bearing distinctive No. 11 to 15 allotted to transferor by the society, (iii) the assessee had paid stamp duty on the said agreement dated 24.04.2008 on the same date, (iv) as a consequence to the agreement dated 24.04.2008, the balance of payment was received and agreement was subsequently registered with stamp duty authority on 11.07.2008. In the above case, the AO held that since the registration of original asset was completed on 11.07.2008, the long term capital assets sold subsequently on 30.04.2011 was held for a period less than 36 months and therefore the capital gain arising out of the sale of the capital assets was short term capital gains. However, the Tribunal held that: “In the instant case, it is crystal clear that by virtue of agreement for sale dated 24.04.2008 and making a part payment, the assessee has acquired irrevocable right, title and interest including possession in the house property in the form of godown. The registration of the property which was done subsequently on 11.07.2008 was only a formality and therefore the Mr. Ashutosh V. Jhaveri 13 ITA Nos. 4837 & 5122/Mum/2016 period of 36 months of holding of long term capital assets should be reckoned from 24.04.2008 and not from 11.07.2008 as wrongly adopted by the AO”. The ‘date of purchase agreement’ shall be the guiding factor in the instant case and hence there is no disagreement. In the case of Shri Kiran G. Gadhia (supra), the assessee by allotment letters dated 18.06.2006 and 29.12.2006 purchased the properties situated in Sarvodaya Co-operative Housing Society Ltd. and Shop at JS Towers respectively. By virtue of these allotment letters issued by the builder, the assessee entered into the agreement for purchase of Flat No. 1102 at Sarvodaya CHSL on 22.10.2008 and Shop No. 10 at JS Towers on 12.02.2008. The Tribunal held that the holding period of the properties is to be computed from the date of issue of allotment letter. 13.1 At this juncture, we may refer here to the purchase agreement dated 24.02.2011 between Ekta Supreme Housing (the Developer) and Mr. Ashutosh V. Jhaveri, Mr. Vrajlal U Jhaveri and Mr. Sanjay V. Jhaveri (the purchaser). As per it, the Purchaser has requested the Developer to sell to the purchaser on ownership basis Flat No. 1405 on the 14th Floor in ‘A’ wing of the said building to be known as “Lake Primrose”. As per para 7 of the said agreement, the Purchaser shall pay to the Developer the sum of Rs. 85,76,500/- as the purchase price in respect of the said Flat. The purchase price of Rs. 85,76,500/- is inclusive of the proportionate price of common areas and facilities of the said buildings. The said purchase price shall be paid by the Purchaser to the Developer as per the installments as under:-
Mr. Ashutosh V. Jhaveri 14 & 5122/Mum/2016 (a) Rs. 77,70,320/- paid as earnest money; (b) Rs. 8,06,180/- as further part payment on or before the execution of this agreement. In National Cement Mines Industries Ltd. v. CIT [1961] 42 ITR 69 , Justice J.C. Shah (as His Lordship then was) speaking for the Hon’ble Supreme Court emphasized the principles of interpretation to be adopted by the Court in construing a commercial transaction : "the true nature and character of the transaction have to be ascertained from the covenants of the contract in the light of the surrounding circumstances." It is settled law that immovable property is conveyed by a duly registered deed. Further, it is the date of execution of registered document, not the date of delivery of possession or the date of registration of document which is relevant. Once the executed documents are registered, the transfer will take place on the date of execution of documents and not on the date of registration of documents as held by the Hon’ble Supreme Court in Alapati Vekataramiah v. CIT (1965) 57 ITR 185 (SC) and CIT v. Podar Cements Pvt. Ltd. (1997) 226 ITR 625 (SC). In the instant case the purchase agreement being executed on 24.02.2011, that would be the date for reckoning the period of holding. Consequently, respectfully following the ratio laid down in the above decisions by the Hon’ble Supreme Court, we uphold the order of the Ld. CIT(A) and dismiss the 1st ground of appeal.
Mr. Ashutosh V. Jhaveri 15 & 5122/Mum/2016 We also want to make it clear that all the cases relied on by both the sides have been duly taken into consideration while deciding the matter. The omission of reference to some of such cases in the order is either due to their irrelevance or to ease the order from the burden of the repetitive ratio decidendi laid down in such decisions. 14. The 2nd ground of appeal
2.01 The Ld. CIT(A) erred in law and on facts in upholding the disallowance of Rs.7,35,642/- under section 40A(2) of the Income Tax Act 1961. 2.02 On the facts and in the circumstances of the case and in law, the AO erred invoking provisions of section 40A(2) of the Income Tax Act, 1961 and in making the disallowance of Rs.7,35,642/- to the declared income. 2.03 The appellant submits that the disallowance of Rs.7,35,642/- under section 40A(2) of the Income Tax Act is baseless, arbitrary, unjustified and bad in law and hence may be deleted.
15. During the course of assessment proceedings, the AO observed that the assessee had made payments towards salary/share of profit to Sanjay Jhaveri of Rs.4,41,385/- and Vrajlal U. Jhaveri of Rs.2,94,257/-. In response to a query raised by the AO to furnish the justification for the payments along with salary register, appointment letter, nature of duties, educational qualification etc, the assessee filed a reply vide submission dated 13.03.2014 which has been extracted by the AO at page 8-9 of the assessment order dated 20.03.2014. However, the AO was not convinced with the said explanation of the assessee for the reason that the assessee failed to maintain salary register, appointment letter etc. The AO thus came to a finding that the amount was debited to Mr. Ashutosh V. Jhaveri 16 ITA Nos. 4837 & 5122/Mum/2016 reduce the profit and therefore, he disallowed the above sum of Rs.7,35,642/-.
16. In appeal, the Ld. CIT(A) held that (i) the computation of the sum of Rs.4,41,385/- paid to the brother Mr. Sanjay Jhaveri and Rs.2,94,257/- paid to the father Mr. V U Jhaveri indicate that the same is calculated as a percentage of the sales and debited under the head ‘salary’, (ii) no TDS has been effected on these payments whatsoever and therefore, the provisions of section 40(a)(ia) is attracted. On the basis of above reasons, the Ld. CIT(A) confirmed the disallowance of Rs.7,35,642/- made by the AO.
Before us, the Ld. counsel of the assessee reiterates that for all purposes, the business of M/s Sanjay Steel Co. is family run business wherein the assessee along with his father Mr. V U Jhaveri and younger brother Mr. Sanjay V. Jhaveri are actively involved. It is stated that the compensation to the family members viz. his father and younger brother is therefore, by way of salary and commission since the last 8-10 years and the fixed salary is payable on regular basis during the financial year and commission is calculated and accrued after the accounts are closed and audited. Reliance is placed by him on the decision by the Hon’ble Bombay High Court in Pr. CIT v. M/s Quest Investment Advisors Pvt. Ltd. (ITA No. 280 of 2016) stating that rules of consistency be followed.
On the other hand, the Ld. DR relies on the order of the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. We may state here that in the Income Tax Act, each Mr. Ashutosh V. Jhaveri 17 & 5122/Mum/2016