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Income Tax Appellate Tribunal, “B” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश /O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of Commissioner
of Income Tax (Appeals)-13, Chennai in ITA No. 231/A-13/2011-12 dated
08.03.2016 for assessment year 2011-12.
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In the assessment made for assessment year 2011-12 in this assessee
Smt. K. BadalBai, the L/H of Late Shri A. Kewalchand who died on 14.02.2012
leaving behind his wife and children, the AO made a disallowance of Rs.
22,00,000/- u/s. 40A(3) on the cash payment made for purchase of land,
treating the land as stock in trade. The assessee filed income and
expenditure a/c wherein receipt from agriculture was shown at Rs.
28,68,214/-, claimed expenses of Rs. 8,45,622/- and declared a net
agricultural income at Rs. 20,22,592/-. However, in the computation of total
income, she declared the agricultural income of Rs. 18,22,519/-only. When
the AO sought details, the assessee submitted that Shri A. Kewalchand has
not maintained books and hence the AO treated the entire agricultural income
as income from other sources. Further, he found that the assessee had
invested in immovable property, diamonds, shares, gold jewellery etc., and
the total of such investments as on 31.03.2010 was Rs. 60,87,958/- and for
the year ended 31.03.2011 was at Rs. 60,81,178/-. Since the assessee has
claimed Rs. 34,69,014/- interest payment to various parties. The AO found
that such interest was not directly attributable to any particular income or
receipt. He considered that the income from these investments do not or shall
not form part of total income and hence applying section 14A r.w.r. 8D(2)(ii)
& (iii) disallowed interest of Rs. 3,56,347/-. Aggrieved, the assessee filed an
appeal before the CIT(A) and the CIT(A) confirmed all the above
disallowances/additions.
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Aggrieved, the assessee filed this appeal with the following grounds of
appeal:
“ 1.1 The learned CIT(A)-13, Chennai has erred in confirming the disallowance under section 40A(3) amounting to Rs. 22,00,000 for the impugned reason that the land purchased in cash is treated as 'stock in trade'. 1.2 The impugned finding of the learned CIT(A) that land purchased in cash is treated as 'stock in trade' is factually incorrect as the said land purchased in cash was held as 'capital asset' and shown as investment under immovable properties in the balance sheet. 1.3 On facts and circumstances of the case and law applicable and there being no claim of deduction under Chapter IVD in respect of the impugned expenditure incurred in cash, addition of Rs. 22,00,000 under section 40A(3) is bad in law and liable to be deleted. 2.1 The learned CIT(A)-13, Chennai has erred in confirming the action of the learned AO in treating gross agricultural income of Rs. 28,68,247 as Income from other sources for the mere reason that no books were maintained in respect of the agricultural income and expenditure. 2.2 On facts and circumstances of the case and law applicable, the addition of Rs. 28,68,247 as Income from other sources is contrary to facts, without any finding that the impugned addition represents taxable income chargeable under the head 'Income from other sources', contrary to the rule of consistency, bad in law and liable to be quashed. 3.1 The learned CIT(A)-13, Chennai has erred in confirming the action of the learned assessing officer in making disallowance under section 14A read with rule 8D of the IT Rules totally amounting to Rs. 3,56,347. In the absence of any exempt income during the previous year, the disallowance made under section 14A read with rule 8D is bad in law. 3.2 In any case and without prejudice, the entire basis / rationale of making disallowance under section 14A read with rule 8D is factually and legally incorrect and bad in law. 3.3 The decisions relied on by the learned AO and CIT(A) are not applicable to the present case and hence distinguishable.
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3.4 The learned CIT(A) has erred in not appreciating that CBDT Circulars are not binding on the appellate authorities, Tribunal, Courts and the assessee. 3.5 Without prejudice, computation of disallowance under rule 8D is also incorrect as immovable property, diamond, shares and gold jewellery have been considered as assets, income from which does not form part of total income. 4 The learned AO has erred in levying interest under section 234B of the IT Act, 1961. On facts and circumstances of the case and law applicable, interest under section 234B is not leviable. The appellant denies its liability to pay interest under section 234B. 5 In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned CIT(A)-13, Chennai to the extent prejudicial to the appellant be quashed or in the alternative, disallowance under section 40A(3), addition of gross agricultural income as income from other sources, disallowance made under section 14A read with rule 8D and levy of interest under section 234B be deleted. The assessee prays accordingly.”
The assessee filed a petition for admission of additional grounds with
papers containing copies of additional evidence. The additional grounds are
extracted as under:
“ 1. The above referred appeal is filed against the order passed by the learned CIT (A) - 13, Chennai wherein the disallowance made by the learned AO under section 40A (3), 14A and the gross agricultural income treated as income from other sources was confirmed by the learned CIT(A).
Ground No. 2.1 and 2.2 of the appeal deals with the addition of Rs.28,68,214 wherein the learned AO has treated the gross agricultural income for the year as income from other sources and assessed the same to tax.
The learned AO has treated the gross agricultural income ofRs.28,68,214 as income from other sources and assessed the same to tax for the impugned reason that the books of account are not maintained for agricultural activity.
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It was therefore concluded that the assessee has not carried out agriculture activity, it is only an imaginary amount to show unaccounted sources of income in the form of agricultural income. The learned CIT (A) also confirmed the impugned findings of the learned AO.
During the assessment proceedings, the legal heir filed letter stating that her husband Late Sri AKewalchand has not maintained books for agriculture income as the legal heir could not found them during the course of assessment. The legal heir submits that she could now trace the accounts maintained in respect of agriculture activity made by her husband Late Sri A Kewalchand based on which the statement of income and expenditure a/c, capital ale and statement of affairs were prepared for agriculture activities. The delay in submission of relevant documents was only due to reasonable cause and not deliberate or intentional. Merely because accounts are not produced for agriculture activities the learned AO has treated the agricultural income as income from other sources.
The certificate issued by a trader for the purchase of agriculture produce is enclosed. The legal heir submits that as and when the agriculture produce were sold the same were regarded in the books.
The appellant humbly prays before the Hon'ble bench to kindly admit the additional evidence in the interest of justice and equity and to do the needful. The appellant prays accordingly.”
We heard the rival contentions on the additional grounds and on due
consideration admit them.
The AR submitted that the assessee being one of the legal heir of Late
Sri A. Kewalchand. Sri A. Kewalchand started the business in real
estate only in F.Y 2010-11 and in previous F.Ys he was dealing only in
jewellery, finance business and doing agricultural activitiesfor more than 3
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decades. He filed his return of income in the status of individual for the F.Y
ended 31.03.2011 relevant to A.Y 2011-12 on 27.01.12. Late Sri A.
Kewalchand was following cash method of accounting and not mercantile
basis as mentioned in the assessment order. The finding that Late Sri A.
Kewalchand carried on real estate business in earlier years is also incorrect. In
this regard, the AR invited our attention to column 8(b) of Form No. 3CD,
wherein the Auditor has for the column (b) : if there is any change in the
nature of business or professions, the particulars of such change certified that
“sale of land & shares commenced during the year” and invited our attention
to the P&L a/c for the year ended 31.03.2011 wherein, apart from the profit
arrived from the businesses of gold and silver jewellery and share trading
profit arrived from land account was also there. Inviting our attention to the
closing stock value at Rs.19,44,702/-, the AR submitted that the impugned
land was shown under the head immovable properties and kept under Asset
side of the Balance Sheet. Thus, the AR submitted that the assessee has
treated land purchased during the year as an asset and kept it under the
head Fixed Assets and by this treatment it is proved that the impugned land
is not a stock in trade as the value of the closing stock does not include the
land purchased during the year. Inviting our attention to the Board Circular
No. 4/2007 dated 15.06.2007 and Circular no. 6/2016 dated 29.02.2016, the
AR submitted that the impugned asset is nothing but capital asset.
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Further, he invited our attention to Para 2 ofthe Circular No. 34[F.No.
13A/92/69-IT(A-III)], dated 05.03.1970 which is extracted as under:
“ Theprovisions of section 40A(3) would apply in computing the income under the heads “profits and gains of business or professions” and “income from other sources” as per section 58(2). All payments in excess of Rs. 2,500 at one time whether for goods or services obtained for cash or credit, which are deductible in computing the income, have to be made by crossed cheque or bank draft. Thus, the price of goods purchased for resale or use in manufacturing process or payments for services will be covered by the provisions of section 40A(3). However, the section will not apply to repayment of loans or payment towards the purchase price of capital assets such as plant and machinery notfor resale.”
6.1 Further, the A R submitted that the investment of Rs.22,00,000/-
made in purchase of land which was reflected under the head immovable
properties in the statement of affairsas on 31.03.11, it was not claimed as an
expenditure and it is a capital asset. Relying on the above circular, he
submitted that section 40A (3) will not apply to the purchases made in
connection with capital assets and hence the said addition made u/s 40A
(3) needs deletion. In support of his contention, he relied on various
decisions. Per contra, the DR supported the orders of the CIT (A)/AO.
7 We have considered the rival submissions. In the assessment order,
the AO records that“in the earlier assessment years, statement on oath was
recorded from ShriKewal Chand and he has stated that he is into real estate
business, i.e., buying and selling of plots. Since, the assessee has expired
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the Assessing Officer is left with only option of going by records to prove that
the assessee is into real estate as stated supra. Thus, the assessee’s AR
contention that he only invested only for investment purpose is not
considered. Accordingly, the payment made for purchased of land by cash to
the extent of Rs. 22,00,000/- in violation of section 40(A)(3) of I.T. Act.
Accordingly, the same was added to the returned income and brought to tax”.
In support of agricultural income, the assessee filed certain evidences which
include the order passed by the CIT(A) for assessment year 2009-10 in the
case of Shri Kewal Chand in ITA No. 318/11-12 dated 21.12.2012. In this
order, the CIT(A) has taken note of the facts recorded by the Assessing
Officer as under:
“ Nature of the assessee’s business:
ShriKewal Chand, the assessee had in his sworn statement u/s.
131 dated 16.12.2011, stated that he was carrying on real estate
business for the past 25 years. Verification of the Income tax records
of the assesssee for the earlier assessment years showed that he has
been purchasing and selling agricultural lands on a regular basis, as
given below:
F.Y Total area of land sold Total Consideration
2007-08 20.95 acres Rs. 7,28,000
2006-07 About 25 acres Rs. 12,03,409’
2005-06 336.625 sq.ft. Rs. 41,666
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2004-05 Not known Rs. 4,31,666
The above facts go in consonance with the assessee’s sworn statement that
he is carrying on real estate business for the past 25 years. It can, therefore,
be strongly presumed that the assesssee purchased the land with the
intention of reselling it.” And after considering various other factors the
Commissioner records a finding in para 8.2 that “appellant has been in the
real estate business for the past several years. Therefore, the gains on sale
proceeds pertaining to property situated at Arasakuppam in HosurTaluk are
necessarily be considered as business profits of the appellant and hence the
property sold should be treated as business asset.” In the above facts and
circumstances, it is clear that the nature this particular transaction has not
been properly appreciated by the lower authorities. In the facts and
circumstances, we deem it fit to remit this issue back to the AO for due
examination, afresh, to determine the character of the impugned transaction
i.e., whether the property was acquired for capital purpose or for sale etc.,
from the documents and as well as the other evidences which are essential
for deciding this issue . Hence this issue is remitted back to the AO to decide
the issue in accordance with law, after affording adequate opportunity to the
assessee. The assessee’sgrounds of appeal on this issue is treated as allowed
for statistical purposes.
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On the disallowance of agricultural income, the AR submitted that the
assessee’s husband was carrying on agricultural activities for more than 3
decades and the addition of the gross agricultural income of Rs.28,68,214/- as
income from other sources is incorrect for the reason that regular books for
agricultural activity is not maintained. The AR submitted that the assessee’s
husband died on 14.02.12and she could not locate the details in respect of
agricultural income and hence could not be furnished. Now, she has located
and furnished through the additional ground and pleaded as extracted , supra,
which has been admitted also. The AR submitted that in the earlier scrutiny
assessments also agricultural income was shown and the same were accepted
with addition however the said addition were deleted in the Appeals. The AR
submitted that agricultural income was inadvertently mentioned as
Rs.18,22,590/- instead of Rs.20,22,590/- which mistake was inadvertent ,
neither deliberate nor intentional. Under the said circumstance, the addition
of entire gross agricultural income as income from other sources is contrary to
facts. Relying on various case laws, the AR pleaded to delete this addition. Per
contra, the DR supported the orders of the CIT(A)/AO.
We have considered the rival contentions and gone through the orders
of the lower authorities. The assesse is right, on the above facts, that her
husband’s agricultural income cannot be disallowed fully. It is seen from the
orders that the authorities had no occasion to consider the claim properly for
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the reason that the assessee failed to furnish them the required evidences.
Further, there were apparent mistakes in the quantum of agricultural income
claim also. Since, the assessee has submitted additional evidence before us,
for the first time, they require appreciation at the AO level. This issue is
remitted back to the AO for a fresh examination. After affording adequate
opportunity to the assessee, the AO shall pass appropriate order. The
assessee’s grounds of appeal on this issue is treated as allowed for statistical
purposes.
The next issue is disallowance u/s. 14A r.w.r. 8D. The AR submitted
that for the purpose of making disallowance under rule 8D(2)(ii), the AO
considered that the interest expenditure debited to P&L account at
Rs.34,69,014. The average of value of assets, income from which does not
form part of total income, for the purpose of rule 8D(2)(ii) and (iii) was
computed by considering the following assets.
Details of assets As on As on 31.03.2010 (Rs) 31.03.2011 (Rs) Immovable property 48,36,216 50,04,828 Diamond 30,000 30,000 Shares 1,75,392 - Gold Jewellery 10,46,350 10,46,350 Total 60,87,958 60,81,178
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10.1 The AR further submitted that the capital of the assessee was
sufficient to cover the investment in the assets considered for the purpose of
disallowance u/s 14A and hence, no disallowance could be made under
section 14A. The value of diamond Rs.30,000/- are appearing in the
statement since F. Y 1992-93 and out of the value of gold jewellery
Rs.10,46,350/- , Rs.1,11,000/- value of gold jewellery owned by the assesse
since F.Y 1992-93 and balance value of gold jewellery of Rs.9,35,350/- ere
offered as income in FY 1998-99 under KVSS-1999 and hence the same
should not be considered for the purpose of disallowance of interest u/s 14A
and further as and when it is sold will attract only taxable capital gains and
not exempted income. The investment made in purchase of agriculture land
on 10.03.2011 at the end of the FY are out of his own funds and his capital as
on 31.03.2011 is Rs.4,07,50,530 which is more than the loan creditors of
Rs.2,03,12,610 and hence the aforesaid total of Rs.60,81,178 considered by
the AO for making disallowance under section 14A is incorrect and requires
deletion. In other words, the investment in immovable properties as and when
it is sold will be subject to tax under the head capital gains and no tax free
income will arise and hence the disallowance of interest in respect of value of
immovable properties is incorrect and requires deletion. The sale of capital
asset in F. Y 2010-11 out of immovable properties were offered under the
head capital gains. In fact the CIT (Appeal) in ITA No.318/11-12,
Dt.21.12.2012 in AY 2009-10 deleted the disallowance made u/s 14A r.w.
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Rule 8D amounted to Rs.220737/- in the AY 2009-10 in respect of similar
assets of AY 2009-10 on the ground that the sale of the said assets will yield
only taxable income and no nexus has been established between borrowed
fund and investment with regard to immovable property, shares, gold
jewellery and diamond. Relied CIT v. Reliance Utilities and Power Ltd. [2009]
313 ITR 340 (Born), wherein it has been held that if funds are available both
interest-free and overdraft and/or loans taken, then a presumption would
arise that investments would be out of the interest-free funds generated or
available with the company, if the interest-free funds were sufficient to meet
the investments. The High Court concurred with the views of the CIT(A) and
the Tribunal that there was sufficient interest free funds to make investments
and accordingly upheld the deletion of disallowance of interest. The above
decision was followed in CIT v SBI DHFL Ltd [2015] 376 ITR 296 (Bombay)
and HDFC Bank Ltd v DCIT [2016] 383 ITR 529 and it was held that in these
decisions that no disallowance of interest paid should be made under section
14A under these circumstances. The Gujarat High Court in CIT v UTI Bank Ltd
[2013] 32 taxmann.com 370 it was held that if there are sufficient interest
free funds to meet tax free investments, they are presumed to be made from
interest free funds and not loaned funds and no disallowance can be made
under section 14A and the Jurisdictional High Court decision in Redington
(India)Ltd v Addl CIT, Co Range-V, Chennai in TCA No 520 of 2016 dt
23.12.2016. Per contra, the DR supported the orders of the CIT (A)/AO.
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We have considered the rival contentions and gone through relevant
material. The assesse is right in her submissions, supra, that part of the
impugned investments are assessable, part of it was acquired long back and
not out of borrowed funds, even otherwise , on the above facts , her
husband had adequate capital to cover the impugned transactions. No
disallowance is warranted u/s 14A r.w. Rule 8D. The assessee’s grounds of
appeal on this issue is allowed.
In the result, the assessee’s appeal is allowed/ treated as allowed.
Order pronounced on Wednesday, the 10th day of January, 2018 at Chennai.
Sd/- Sd/- (एन.आर.एस. गणेशन) (एसजयरामन) (N.R.S. GANESAN) (S. JAYARAMAN) !या�यकसद"य/Judicial Member लेखासद"य/Accountant Member
चे�नई/Chennai, 1दनांक/Dated:January , 2018 JPV आदेशक'*�त2ल3पअ4े3षत/Copy to: 1. अपीलाथ&/Appellant 2. *+यथ&/Respondent 3. आयकरआयु5त (अपील)/CIT(A) 4. आयकरआयु5त/CIT 5. 3वभागीय*�त�न�ध/DR 6. गाड8फाईल/GF
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