ACIT CIR 1, MUMBAI vs. KARNAWAT & ASSOCIATES, THANE

Revenue by : Shri B.D. Naik (DR) Assessee by : Shri Ravi K. Mulchandani (AR) Date of hearing : 18.05.2016 Date of Order : 22.06.2016

O R D E R

PER PAWAN SINGH, JM:

1. On the facts of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 40,00,000/- made v/s 68 of the I.T. Act, 1961 being compensation paid to shop purchaser an cancellation of deal.

2. On the facts of the case and in law, the Ld. CIT(A) erred in not considering the fact that the agreement to sell was cancelled vide letter dated 04/08/2007, therefore the liability to return the advance payment and compensation accrued as on 31/03/2008 which pertains to A.Y. 2008-09. Further, a total amount of Rs. 85,00,000/- was shown payable to the purchaser under sundry creditor for A.Y. 2008-09 as per the mercantile system of Accounting followed by the assessee. 3. On the facts of the case and in law, the Ld. CIT(A) also failed to consider the facts that the assessee had failed to justify the reasonableness of the compensation paid with reference to the trend in market. 4. The appellant craves leave to add, amend alter or delete any ground of appeal.

2. The brief facts of the case are the assessee is engaged in building construction, filed return of income on 30.09.2008 declaring total income of Rs. 1,03,47,970/-. The return of income was selected for scrutiny. The Assessing Officer (AO) while framing assessment besides other disallowance, made an addition of Rs. 40 Lakhs u/s 68 of the Act, in its order dated 31.12.2010. Aggrieved by the order of AO, the assessee filed appeal before the CIT (A) and succeeded therein. Aggrieved by the order of CIT (A), the Revenue has filed the present appeal before us.

3. Sole ground for our consideration is, if ld CIT(A) erred in deleting the addition of Rs.40,000/- made by AO u/s 68 of Income Tax Act. We have heard the Departmental Representative (DR) for Revenue and Authorized Representative (AR) for assessee and perused the material available on record. We have noticed that during the assessment proceeding, the AO asked the assessee to justify the entry under the head Sundry Creditor ( Rs. 40 Lakhs) appearing against the name of Sh. V.A. Paradkar (HUF). Assessee in reply of queries of AO submitted that V.A. Paradkar (HUF) entered into agreement for sale of Shop No.9 in FY 2005-06 and agreed to purchase a shop for a consideration of Rs. 51.40 Lakhs out of which Rs. 45 Lakh was paid till January 2006. The price of property appreciated and the purchaser decided to cancel the allotment. In lieu of cancellation of the allotment, the assessee paid compensation of Rs. 40 Lakhs over and above the purchase price. The contention of assessee was not accepted by AO. AO concluded that the addition of extra payment of Rs. 40 Lakhs as a compensation agreed upon having become liability of the assessee been actual liability to a gratuitous payment and same was added to the income of assessee u/s 68 of the Act. Before CIT(A), it was argued by assessee that price of the property appreciated and considering the prevailing market price and expected market rent, the assessee had taken commercial decision to pay the addition amount of Rs. 40 Lakhs, so that the said shop can be sold by assessee at a better price in future. Accordingly, the assessee had agreed to such offer because the assessee-firm was intended to give the entire floor on rent to M/s Gateway Multichannel Retails Ltd. as tenant. The area in shop No. 9 of the said purchaser was a part of floor. Keeping in view the above, assessee-firm had taken a commercial decision to pay the compensation of Rs. 40 Lakhs in order to get better returns in future. The compensation in question has been paid in FY-2008-09 and not in the period under consideration i.e. in FY-2007-08. After considering the factual background of the case, the CIT(A) deleted the addition holding as under: “6.3. I have gone through the assessment order passed by the AO and have also considered the above submissions of the appellant and there is a substance in the arguments of the AR of the appellant. On perusal of the Balance Sheet as well as the P&L a/c. filed before me, it can be observed that the appellant firm has not debited the compensation amount of Rs. 40,00,000/- as expenditure during the period under consideration i.e. the F.Y. 2007-08 relevant to the AY. 2008-09.-As the compensation amount as not been paid in the period relevant to AY. 2008-09 and no such amount has been claimed as expenditure or liability, there arises no question of disallowing the same expenditure and treating it as income for the period under consideration. 6.4. The AR of the appellant has placed on record a copy of the registered Declaration cum Indemnity Bond dated 15/05/2008, wherein all the details regarding the payments made for the acquisition of shop no. 9 and also the details of receipts of money amounting to Rs. 85,00,000/- (cost of the shop Rs. 45,00,000/- and the compensation of Rs. 40,00,000/-) have been mentioned. There is no reason to disbelieve the contents of the above registered document unless and until it is proved that the contents of the documents are not true. In the absence of placing any such evidence on record, it is difficult to accept the conclusions of the AO that the payment of Rs. 40,00,000/- is nothing but a non- existing liability created by the assessee for reasons not attributable to the business. 6.5. There is a merit in the arguments of the appellant that paying the amount of Rs.40,00,000/- was a profitable commercial decision. From the details filed, it can be observed that the buying back of the shop helped the appellant not only to earn the good rental income in the succeeding years but also later on when this shop no. 9 was sold along with the shop no. 10 in the F.Y. 2010-11, it fetched the appellant a handsome sale price of Rs. 3,89,88,000/-. Therefore, it is clear from the above that buying back the shop and paying a compensation amount of Rs. 40,00,000/- to the purchaser was a commercially profitable decision. There is no reason for non- existing liability being created by the appellant as alleged by the AO. 6.6. The action of the AO making addition of Rs. 40,00,000/- as per provisions of section 68 is also not correct. Section 68 comes into play only when any sum is found credited in the books of the assessee maintained for any previous year for the source and nature of which either no explanation is offered by the assessee or the explanation offered by the assessee is not satisfactory. Thus, section 68 gets activated only when any sum is found credited in the books of the assessee. [Banshidher Agarwal Panna vs. CIT (1983) 36 CTR (MP) 94: (1984) 148 ITR 523 (MP) : TC42R.1071]. Where the relevant amount is not credited in the assessee's books, section 68 does not come into play [Baladin Ram vs. CIT (1969) 71 ITR 427 (SC): TC42R.1072 and Laxmi Narain Gupta vs. CIT (1980) 15 CTR (Pat) 306 : (1980) 124 ITR 94 (Pat) : TC42R.1076]. 6.7. All the reasons given by the AD to add back the amount of Rs. 40,00,000/- are general observations, like creation of non-existing liability; assessee is in mood of generosity; assessee being generous for accepting the staggered payments and these are not substantiated by any evidence placed on record. 6.8. In view of the facts and circumstances explained above, in my opinion, the decision of the AO adding back the amount of Rs. 40,00,000/- paid by the appellant as compensation to the purchaser of the shop, is not justified and therefore the addition made is deleted.”

4. Ld DR for the Revenue argued that CIT (A) wrongly deleted the addition made by AO. Ld DR argued that it is not believable that assessee agreed to pay almost equal amount of deposited received at the time of allotment. No allotment letter was produced by the assessee, assessee has not submitted any communication between periods of allotment till its cancellation, and the assessee allegedly received the payment of Rs. 40 Lakhs over a period of 7 month. Such the substantial investment was lying un-executed for a period of two years. The cancellation dated 04.08.2007, there is no proof of receiving the amount. The amount of Rs. 40 Lakhs is nothing but non- existence liability created by assessee for reasons not attributable to business expediencies. AR of the assessee argued that assessee received Rs. 40 Lacks as advance from V.A. Paradkar (HUF) against the sale of Shop No.9. The said shop was booked in FY 2005-06. However, V.A. Paradkar opted for cancellation of the sale agreement and after mutual discussion the assessee-firm had paid compensation of Rs. 40 Lacks to V.A. Paradkar (HUF) in FY-2008-09 and not in FY 2007-08. All necessary documentary evidence in respect of transaction were submitted during the course of assessment proceeding along with letter dated 30.12.2010 and Ledger account of V. A. Paradkar (HUF) in the books of assessee from FY 2005- 06 to 2007-08 which reflects that the payment of Rs. 40 Lakhs has been made from 30.06.2005 to 28.01.2006. The agreement was to be executed between the assessee and the purchaser after paying the required stamp duty and registration charges, however, it was postponed as the commercial interest of both the parties were not affected, the assessee has received Rs. 40 Lacks from V.A. Paradkar (HUF) as an advance and additional amount of Rs. 40 Lacks paid in FY 2008-09 on the basis of commercial decision taken by assessee at the time of agreeing for such payment. The assessee - firm was negotiated with M/s Gateway Multichannel Retails Ltd. The case of premises on rent and in absence of right over Shop No.9, the assessee- firm would not have enable to give the premises on rent basis. And the decision to make the compensation was a conscious decision for business expediencies.

5. We have considered the rival contention of the parties and carefully gone through the order passed by lower authorities. The assessee is engaged in business of building contract and the purpose of every businessman is to earn the profit by taking and executing the conscious decision. By making compensation of Rs. 40 Lacks to the purchaser, the assessee has sold the shop along with shop no.10 in FY 2010-11 at handsome sale price of Rs.3,89,88,000/- in FY2010-11. All the transactions have been consistently shown by assessee in his books of account. We have seen the contents of copy of Declaration-cum-Indemnity Bond dated 15.05.2008 duly notarized (page no.32 to 35 of PB) wherein the details regarding the payment for acquisition of the shop and the details of receipt of payment of Rs. 85 Lakhs (cost of shop Rs. 45 Lakhs + compensation of Rs. 40 Lakhs) is mentioned. We have also noticed that the contents of Declaration-cum- Indemnity Bond, which is a buy back agreement by assessee with the purchaser. Moreover, applicability of section 68 of the Act, in the present case is wrong. Section 68 came in to play, only when some money is found to be credited in the books of assessee for the relevant FY, and the identity, creditworthiness of creditor and the genuineness of transaction is found to be not satisfactory. Further, even if considered as a case of disallowances, i.e., a wrong mention of section, the deduction for Rs. 40 lacs has been claimed by the assessee-respondent only for FY-2010-11, i.e., A.Y. 2011- 12.

6. In view of the above factual discussion, we find that AO was not justified while making addition of Rs.40,00,000/- under section 68 of the Act, and the same was correctly deleted by Ld CIT(A) in impugned order. Thus we do not find any illegality or infirmity in the order passed by CIT(A), the order accordingly.