ITO 8(2)(2), MUMBAI vs. KHAYBER PROPERTIES & INVESTMENTS P.LTD, MUMBAI

आदेश / O R D E R PER R.C.SHARMA (A.M):

Khayber Properties & Investments 2. We have gone through the orders of the authorities below and found that in the scrutiny assessment framed u/s.143(3), AO made addition of Rs.1,31,00,000/- u/s.40A(2)(b). By the impugned order CIT(A) deleted the same after observing as under:- I have considered the submissions of the Ld. Counsel, the facts brought on record and case laws cited and relied upon by the Ld. Counsel - which clearly show that the appellant has made the payment to two directors/ share holders - since, they are tenants holding the tenancy rights in respect of commercial shop and also holding possession of large area of land appurtenant thereto - behind the commercial shop and it is the sole and absolute responsibility of the intending developers to settle with the tenants, provide the compensation to the tenants for temporary alternate accommodation and finally to provide permanent alternate accommodation at the entire cost and expenses of the developer and for that appellant has submitted the documentary evidence and further A.O. has erroneously come to the conclusion that each and every tenant were settled @ Rs. 2,50,000/- against the surrender of the tenancy right of the tenants in the present case - appellant has not incurred 1,71,19,700/ - to settle the 69 tenants but the said amount is nothing but work in progress - since, 1992-93 to 2006-07 and for that Ld. Counsel has submitted the details of work in progress and further Ld. Counsel has without prejudice produced the ready recknor for 2007 and estimated value also as per recknor comes to Rs. 74,52,000/- for the areas of 675 sq. ft. carpet and in the present case appellant has received only Rs. 68,00,000/- - and it is to settle this that the appellant has paid independently the said two tenants - each of them a sum of Rs.68,00,000/- aggregating to Rs. 1,36,00,000/- and A.O. has deducted Rs. 2,50,000/- for each tenant and made the addition of Rs. 1,31,00,000/- without any basis and factual aspect. 1.6 Hence, in view of the above facts, it is clear that the case of the appellant for making these payments is not hit by the provisions of Section 40(A)(2b). Hence, the A.O. is directed to delete the addition / disallowance of Rs. 1,31,00,000/-. Hence, this ground of appeal is allowed.

Khayber Properties & Investments 3. Addition of Rs.1,16,00,000/- made by AO on account of sale value of undisclosed area of 2750 sq.ft was deleted by CIT(A) after observing as under:- The Ld. Counsel has further submitted as follows: Undisclosed income of RS.1.16 crore on sale of undisclosed additional area. The AO has carried out addition of RS.1.16 crore on account of sale value of undisclosed area of 2750 square feet by alleging that though the Appellant has surrendered the said area to Lokhandwala Kataria Builders Private Limited vide surrender deed dated 28.07.2006, has failed to otter the said income in its return. This allegation of the AO is baseless as the said transaction stood disclosed in the books of the Appellant as also in the return of income filed. The AO has failed to verify and correlate the same with the final accounts and the return of income and has merely rushed through the addition on a notional basis without any corroborative material or cogent evidence to support his unwarranted action. The discussion in the assessment order on this issue clearly suggests that the AO has carried out this addition merely on presumption, suspicion, guess work, conjectures and surmises and on failure to consider relevant material on record, which is legally not sustainable. Kindly refer to Dhakeshwari Cotton Mills Ltd. v. CIT - 26 ITR 775 (Supreme Court), Umacharan Shaw & Bros. v. CIT - 37 ITR 271 (Supreme Court). 2.3. I have considered the submissions of the Ld. Counsel and since, the appellant himself has duly disclosed in the books of account, the sum of Rs. 1,16,00,000/- - which has been clearly proved by the appellant - the A.O. is 'directed to delete this addition/disallowance of Rs. 1,16,00,000/-. Hence, this ground of appeal is allowed.

4. Against the above order of CIT(A), revenue is in further appeal before us. We have considered rival contentions and found from record that AO has made addition of Rs.1,31,00,000/- on the plea that assessee has given this amount to its two Directors, therefore, covered by provisions of Section 40A(2b) of the IT Act, accordingly, he disallowed the same. From Khayber Properties & Investments the record, we found that the assessee is a Private Limited company and engaged in the business of buying and selling of immoveable properties, During the relevant Assessment Year, the assessee has debited the development expenses amounting to Rs. 3,06,87,851/ -. During the relevant Assessment Year, Mr. A.M. Lala and Mr. Z. M. Lala have surrendered the tenancy rights in their individual capacity in respect of the premises which they are holding in their individual capacity in favour of the assessee, Mr. A. M. Lala and Mr. Z. M. Lala are also Directors and share holders of the assessee company. As per the Development Control Regulations for Greater Bombay 33(7), the developers has to submit the consent of all tenants/ occupants to the Municipal Corporation of Greater Mumbai and/ or such other concerned authorities and on the basis of such consent, the approval will be granted by the Municipal Corporation of Greater Mumbai. Initially Mr. Z. M. Lala and Mr. A. M. Lala had given their consent to acquire the premises equivalent to 225 square feet instead of 675 square feet i.e. as per the rules and regulations of the Development Control Regulations 33(7). As per the said rule, even if the Occupants/ tenants are acquiring the premises more than 225 square feet, in that case also, the Developers shall not grant more than area admeasuring 225 square feet.

5. In the course of assessment, AO made addition of Rs.1,31,00,000/- towards the disallowance of expenditure under Section 40A(2)(b) of the Income Tax Act, 1961 merely on the ground that payments made to the related concerned persons. We found that assessee was holding area of Khayber Properties & Investments 675 sq.ft. The learned Assessing Officer has disallowed the expenditure on the basis of compensation granted to the other occupants, those who are holding area less than 225 sq.ft. We found that the initially the assessee has entered into a Memorandum of Understanding with Lokhandioala Kataria Constructions Private Limited by virtue of Memorandum of Understanding dated 28.9.2001 and pursuant to the said Memorandum of Understanding, the assessee has submitted the Form 37-1 as required under the provisions of Section 269UC of the Income Tax Act, 1961, a copy of Form No. 37-I, duly filled in and signed by the parties hereto along with the Memorandum of Understanding were fixed before lower authorities. The learned Assessing Officer in his finding himself stated that "It was further discovered that to settle the 69 tenants, the assessee had incurred a total expenses of Rs. 1,71,19,700/- (including the cost of the property and other expenses") i.e. "each of the tenants has received maximum of Rs. 2,50,000/-" and on the basis of the same erroneous findings, the learned Assessing Officer had disallowed the sum of (Rs.1,36,00,000/- - Rs.5,00,000/-) = Rs. 1,31,00,000/- on account of payment made to 2 share holders/ Directors, who were also the tenants, and who have also consented to receive the area of 225 square feet in the redeveloped property as final settlement of their claim. The assessee has entered into Memorandum of Understanding on 28/09/2001 according to which 2 tenants, who are the Directors/ share holders of the appellant are holding the Tenancy Right in respect of Commercial shops premises, and also holding possession of large area of Khayber Properties & Investments land, appurtenant thereto, and behind the commercial shops, and ,to settle the same, it is the sole and absolute liability and responsibility of the assessee and therefore the assessee have settled independently with the said two tenants and paid the sum of Rs. 68,00,000/- (Rupees Sixty Eight Lakhs Only) to each of the tenants. The list of the tenants are clearly mentioned in list of tenants being part and parcel of the Memorandum of Understanding dated 28.9.2001 and the learned Assessing Officer merely on plain reading of the formal consent, submitted by Mr. Z. M. Lala and accepted the area to the extent of 225 square feet, since simultaneously parallel understanding was also done by and between the tenants, who are occupying commercial premises and the assessee. as per the said Memorandum of Understanding, the permanent alternate accommodation is to be granted to the tenants by the Developers, which is more particularly mentioned in Clause No. 10 of the said Memorandum of Understanding.

6. We found that the assessee has paid compensation of Rs.68,00,000/- each to two shareholders- directors for surrendering their tenancy rights. Both the directors were entitled to receive area of 675 square feet in the redeveloped property but instead opted for receiving area of 225 square feet. The AO has observed that the other 69 tenants were paid compensation of Rs.2.50,000/- for surrendering their tenancy rights and based on the same arrived at the conclusion that the payments made to the said shareholders-directors in excess of Rs. 2,50,000/- were excessive, unwarranted and unreasonable. This view of the AO was Khayber Properties & Investments highly subjective and fails to consider the commercial reality involved in the transaction. While invoking provisions of Section 40A(2)(a), the AO has overlooked all the three ingredients of Section 40A(2)(a) and his order is silent about the concrete/convincing reasons for forming the opinion that payment of compensation to shareholders- directors is unreasonable having regard to the three stipulated conditions, The Assessing Officer also failed to appreciate that there cannot be same fair market value of tenancy rights surrendered at all times. The Assessing Officer has also not given proper consideration to the legitimate business needs and benefit aspect of the assessee. The AO has failed to appreciate that the shareholders-directors being in better position to know the benefit accruing to the assessee have in turn struck a better bargain with the assessee at relevant time as compared to the other tenants. The assessee has paid higher compensation to the shareholders-directors considering the legitimate business needs and the benefit derived by the assessee from such payment. It is also a matter of common knowledge that comparison can be made at all times with the like ones only. In the present case, there cannot be any comparison of shareholders-directors with the other tenants as the benefit accruing to the assessee from shareholders-directors is far more than the other tenants and they stand on different footing.