ITO WD - 1(4) KOLKATA, KOLKATA vs. M/S PENNAR TRADING PVT LTD, KOLKATA

Promoters Ltd and Appeal No. 46/CIT(A)-I/Wd-1(4)/08-09 dated 08-08-2012 for AY 2006-07 in the case of M/s. Delight Suppliers Pvt. Ltd against the respective assessment order passed by the ld.AO u/s. 143(3) of the Income-tax Act, 1961 ( hereinafter referred to as the ‘Act‘).

2.1 The first issue to be decided in these appeals is with regard to the treatment of rental receipts of Rs. 49,49,677/- for the purpose of Income-tax.

2.2 The brief facts of this issue are that the assessee along with other parties i.e. M/s. Santosh Promoters Ltd and M/s. Delight Suppliers Ltd had entered into a tenancy agreement with M/s. Suparshwa Distributors Pvt Ltd (In Short ‘SDPL’) on 18-08-2005. Pursuant to this agreement the tenant is supposed to carry out the construction of incomplete super structure in the building at its own cost and is not entitled to claim reimbursement of the same from the assesses herein ( i.e the landlords). In other words, the assesses sought to let out the partially completed building to M/s SDPL and balance construction was agreed to be completed by the tenant without any right of seeking reimbursement of cost from the assesses. The monthly rental was agreed at Rs.11,20,000/-. The tenancy is for a period of 11 years. The assessee had loan dues payable to SBI and decided to utilize the rental receipts towards loan repayment to State Bank of India (In short ‘SBI’). Later at the instance of State Bank of India, which agreed to grant loans to the assesses for completing the balance super structure in the subject mentioned building situated at 145, Rash Behari Avenue, Kolkata-29, the assesses entered into a modified tenancy agreement on 18-08-2005. Under the said modified tenancy agreement, which has been mutually agreed between the assesses and M/s. SDPL, the assessee(s) shall complete the entire M/s. Pennar Trading P.Ltd 2 1660/Kol/12-M/s. Santosh Promoters Ltd & 1661/Kol/12-M/s. Delight Suppliers Ltd A-AM construction of the super structure ( i.e. incomplete portion). It was also mutually agreed in the modified tenancy agreement that in case if the assesses were not able to complete the balance super structure of the building within the stipulated time i.e by 31.12.2005, then the rentals paid by the tenant as per the original tenancy agreement shall be treated as advance and the same shall become recoverable from the assesses by the tenant. Both the original agreement and the modified tenancy agreement are subjected to Notarial Certificate pursuant to section 8 of the Notaries Act, 1952. For the sake of convenience, the relevant clauses of the original tenancy agreement dated 18-08-2005 are reproduced herein below :- AND WHEREAS the said Tenancy is granted on ‘as is where is basis’ since some completion job is yet to be carried out.

AND WHEREAS the Tenants have agreed that they will complete the demised premises and/or building in all respect and all the expenses on that account shall be borne by the tenant.

2.2.1 Following clauses in the modified tenancy agreement dated 18-08-2005 shall be pertinent herein which are reproduced below:- AND WHEREAS, the owner have agreed that they will complete the demised premises and/or building in all respect by 31st day of December, 2005 and all the expenses on that account shall be borne by the owner.

That the owner shall complete the pending construction work, such as Flooring, Electrical Work, Lift, Escalator, Brick, Sanitary, Plumbing, Drainage and other finishing works and make the premises habitable by 31st December, 2005 and the owner shall handover the peaceful possession of the let-out portion by 1st January, 2006. However, tenancy shall be treated to have commenced with effect from 19th day of August, 2005. It is agreed between the Owner and the Tenant that the Owner will submit the Completion Certificate to be issued by the concerned authority prior to handing over the possession of the let out portion and in case of failure on the part of the owner to furnish the completion certificate, the rent paid by the tenant shall be treated as advance and tenant will be entitled and reserve the right to recover the same from the owner and/ or also cancel the tenancy agreement. M/s. Pennar Trading P.Ltd 3 1660/Kol/12-M/s. Santosh Promoters Ltd & 1661/Kol/12-M/s. Delight Suppliers Ltd A-AM

The said tenancy is granted on ‘as is where is basis’ since some completion job is yet to be carried out and tenancy shall be treated to have commenced immediately, subject to the terms and conditions hereinafter agreed.

2.3 Admittedly the copy of the modified tenancy agreement was not submitted by the assesses before the ld.AO. The assesses treated the entire receipts from M/s. SDPL amounting to Rs.49,49,677/- as advance in view of the fact that the assesses could not complete the construction work by 31-12-2005 as per the modified tenancy agreement. The ld.AO treated the same as income from other sources. According to him, the rent was paid by the tenant as per the original tenancy agreement after subjecting the same after due deduction of tax at source and story of the modified tenancy agreement is only an afterthought.

2.4. On first appeal, before the ld. CIT(A) the assessee produced all relevant documents i.e. original tenancy agreement, modified tenancy agreement, all the correspondences exchanged between the assesses and the tenant which eventually led to cancellation of the modified tenancy agreement, among others. The assesses also pleaded before the ld.CIT(A) that all the aforesaid documents were duly submitted before the ld.AO except the modified tenancy agreement. The ld.CIT(A) duly called for the remand report from the ld.AO in due compliance of Rule 46A of the IT Rules. In the said remand report, the ld.AO did not dispute the contents and genuineness of the modified tenancy agreement, but only sought to raise a technical ground on admission of the additional evidences by the ld.CIT(A). The ld. CIT(A) having satisfied with the various documents as submitted by the assessee before him and undisputed findings of the ld.AO in the remand report agreed with the contentions of the assesses that the subject mentioned receipts from M/s. SDPL amounting to Rs.49,49,677/- shall be treated only as advances as the assesses have not honoured - M/s. Pennar Trading P.Ltd 4 1660/Kol/12-M/s. Santosh Promoters Ltd & 1661/Kol/12-M/s. Delight Suppliers Ltd A-AM their commitment of building the construction by 31-12-2005 as per the modified tenancy agreement. Aggrieved, the revenue is in appeal before us on the following grounds:-

“1. The ld. CIT(A) has erred in law and on the facts & circumstances in this case by deleting the addition of ‘rental receipts’ for Rs. 49,49,677/- as ‘Income from Other Sources’ by entertaining & admitting fresh evidences violating the provisions of Rule 46A of I.T Rules.

2.5. The Learned DR argued that the assesses were in receipt of rentals from the tenant after TDS. Hence he argued that the Ld. AO was right in treating the same as income from other sources as the property was still under construction. He further argued that the modified agreement was not to be given any credence. Accordingly, he prayed before us for restoration of ld. AO’s order.

2.6. In response to this, the Learned AR argued that at the outset, there is no violation of Rule 46A of the I.T Rules as pleaded by the revenue in their grounds of appeal, as in the instant case, the ld.CIT(A) had duly admitted the additional evidences filed before him and obtained the remand report. He argued that Rule 46A only states that any additional evidence filed before the ld.CIT(A) for the first time shall not be directly entertained by the ld.CIT(A) unless the ld.AO is given due opportunity to confront those evidences. He argued that the ld.AO having submitted the remand report also having had the benefit of verification of all the documents during the remand proceedings, ought not to have raised any ground for violation of Rule 46A of the I.T Rules. On merits of this issue, the ld.AR further argued that the assesses had duly acted as per the terms of the modified tenancy agreement. The assesses admittedly could not comply with the completion of construction of building by 31-12-2005. In view of this, the tenant stopped to pay rentals. In other words, the assesses were in receipt of monies only from 19-08-2005 to 31-12-2005 amounting to Rs. 49,49,677/-. At this juncture, a specific query was raised on the Ld AR by the - M/s. Pennar Trading P.Ltd 5 1660/Kol/12-M/s. Santosh Promoters Ltd & 1661/Kol/12-M/s. Delight Suppliers Ltd A-AM bench as to why the tenant chose to pay the rentals when the property itself was not occupied by it. With regard to this, the ld.AR replied that property is situated in a posh locality in the city of Kolkata at vantage location and would be useful for the purpose of business of the tenant and the tenant was not willing to withdraw from the contract permanently. He also argued that the tenant in order to have control over the subject mentioned property sought to pay the monies for the period of 4 months and 13 days, which in any case is repayable by the assessee to the tenant if the property is never let out to tenant and hence the interest of the tenant is protected. Accordingly, he pleaded before us that the ld.CIT(A) has rightly approached the entire gamut of transactions and vehemently supported the order of the ld.CIT(A).

2.7. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. The facts mentioned herein above remain undisputed and hence the same are not re-iterated for the sake of brevity. We find lot of force in the arguments of the Learned AR. We find that the tenant had paid these monies with bonafide belief that the assesses would be able to complete the construction sooner or later so that the property in a prime locality would not go out of their hands which in turn would turn detrimental to the business interest of the tenant. We also find that the payment of Rs. 49,49,677/- was directly made by the tenant to SBI towards loan dues payable by the assesses to SBI pursuant to tripartite agreement entered on 19-08-2005 between the assesses, M/s. SDPL & SBI. We hold that the modified tenancy agreement, which completely changed the scope of obligations to be discharged by the parties cannot be brushed aside just like that as the assesses have admittedly borrowed the money from SBI in order to complete the incomplete portion of the construction for the subject mentioned property situated at 145, Rash Behari Avenue, Kolkata-29. It is also undisputed fact that the rentals agreed to be paid by the tenant was directly remitted to the SBI on behalf of the respective assesses towards loan dues as per the modified tenancy agreement. Relevant clauses of the modified tenancy agreement as reproduced hereinabove clearly M/s. Pennar Trading P.Ltd 6 1660/Kol/12-M/s. Santosh Promoters Ltd & 1661/Kol/12-M/s. Delight Suppliers Ltd A-AM stipulate that in the event of assesses not discharging its contractual obligation by handing over the peaceful possession of the property with the completion certificate thereon together with other amenities on or before 31.12.2005, the monies received by the assesses from the tenant shall only remain as advance and the tenant has got every right to recover the same from the assesses. We also find from the page 57 of the paper book that the tenant had not taken over the possession of the subject mentioned property, which is in dispute before us. The relevant paragraph addressed by the tenant to one of the assessees herein vide letter dated 2-1-2006 is reproduce herewith:- “We have, therefore been compelled to revoke/suspend the agreement dt.18.08.05 for your defaults, lapses and batches to comply with the terms of the agreement with retrospective i.e. 18.08.2005. We are thus not liable to make payment of monthly rentals in terms Tripartite agreement and the amount already paid by us will be treated as Advance and we reserve the right to recover the same from you.”

From the above, it can safely be concluded that possession of the property was not taken by the tenant. Hence, the monies received by the assesses will not take the character of rentals and this is further strengthened by the relevant clause of the modified tenancy agreement herein. The monies received shall get converted as an advance and repayable by the assesses. Hence, it does not take the character of income.

2.8 The assessees have received the monies subject to fulfillment of certain conditions on its part. These conditions ( i.e. completion of the building construction) are not satisfied by the assesses and hence the subject mentioned receipt changes its colour and character and accordingly gets converted into advance till the date of completion of the construction of building. We also find from the remand report that the ld.AO in his remand report had not objected to the contents mentioned in the modified tenancy agreement, correspondences exchanged between the assesses and the tenant. The said modified tenancy agreement has been cancelled by the tenant due to failure on the part of the assesses to complete M/s. Pennar Trading P.Ltd 7 1660/Kol/12-M/s. Santosh Promoters Ltd & 1661/Kol/12-M/s. Delight Suppliers Ltd A-AM the construction in time. In these circumstances, we find no infirmity in the order of the ld.CIT(A). We uphold the same. Ground no.1 raised by the revenue is dismissed.

3.1. The brief facts of this issue is that the assesses received fresh share capital in their respective companies amounting to Rs. 25,55,000/- each during the assessment year under appeal. The assessment was represented by the accountant of the assesses and when the Learned AO wanted him to prove the genuineness and creditworthiness of the shareholders, the same could not be satisfactorily proved before the Learned AO. Accordingly, the Learned AO treated the receipt as unexplained cash credit u/s 68 of the Act. On first appeal, certain details were filed before the Learned CITA, who in turn admitted the same as additional evidences and sought to provide opportunity to the Learned AO in terms of Rule 46A of the IT Rules by calling for a remand report. The Learned AO during the remand proceedings issued notices u/s 133(6) of the Act to the shareholders and on receipt of details and confirmation from the shareholders reported in his remand report as below:- “in view of the documents and paper filed and subsequent enquiries conducted by undersigned, the receipt of share application money by issue of further shares stand explained.”

The Learned CITA based on this remand report deleted the addition made u/s 68 of the Act . Aggrieved, the revenue is in appeal before us for all the assesses by raising the following ground:- 2. The ld. CIT(A) has erred in law and on the facts & circumstances in this case by deleting the addition of ‘fresh share capital’ of Rs. 25,55,000/- as ‘Unexplained cash credit’ by entertaining & admitting fresh evidences violating the provisions of Rule 46A of I.T Rules. M/s. Pennar Trading P.Ltd 8 1660/Kol/12-M/s. Santosh Promoters Ltd & 1661/Kol/12-M/s. Delight Suppliers Ltd A-AM 3.2. The Learned DR argued that no details of shareholders were produced by the assesses before the Learned AO and accordingly had not satisfied the three necessary ingredients of section 68 of the Act viz identity, genuineness and creditworthiness of the shareholders. In response to this, the Learned AR argued that the entire details of shareholders were given before the Learned CITA who in turn called for a remand report from the Learned AO. The Learned AO also obtained direct confirmations from the shareholders by calling for information u/s 133(6) of the Act. He argued that the Learned AO had actually accepted the receipts as genuine and no adverse comments were given regarding the same.

3.3. We have heard the rival submissions and perused the materials available on record. We find that the Learned AO had clearly stated in his remand report dated 4.5.2012 that from the documents and papers filed and subsequent enquiries conducted by him in remand proceedings, the receipt of share application money by issue of further shares stand explained. In these circumstances, we hold that there is no reason for the revenue to be aggrieved as the Learned AO himself had given a categorical finding that the receipt of share capital stands explained pursuant to his independent verification. We have already held in the previous ground in favour of the assessee that there is no violation of Rule 46A of the IT Rules by the Learned CITA in as much as the remand report has been called for by the Learned CITA only after admission of additional evidences by him and Learned AO had been given due opportunity on the additional evidences. Hence we hold that the receipt of share capital stands clearly explained in all the cases before us and there is no need to make an addition u/s 68 of the Act. Accordingly, the ground no. 2 raised by the revenue is dismissed in all the cases. - M/s. Pennar Trading P.Ltd 9 1660/Kol/12-M/s. Santosh Promoters Ltd & 1661/Kol/12-M/s. Delight Suppliers Ltd A-AM

ORDER PRNOUNED IN THE OPEN COURT ON 16 /12/2015