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2013 (12) TMI 58 - AT - Income TaxCommission whether remuneration or income from salary Held that - Following Sajid Mowjee vs. ITO 2005 (8) TMI 94 - CALCUTTA High Court - The appointment of director is a contract of employment not a contract for employment -The company could be an employer while appointing one of its directors as whole time director on a particular remuneration and prescribing the terms and conditions of his appointment - The whole time director may not be an employee but even then the character of the receipt or remuneration come within the definition of salary under s. 17(1)(iv) being a fee or remuneration in whatever name it is called and not being excluded by the Expln. 2 to s. 15 - The remuneration received by the assessee cannot be treated to be anything other than income under the head salary - The receipt comes under the head salary The issue was restored for fresh decision. Interest on bank loan Expansion of activities Held that - Following SA Builders Ltd. vs. CIT(A) and another 2006 (12) TMI 82 - SUPREME COURT - If the directors of the sister-concern utilise the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency - Where it is obvious that a holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would be entitled to deduction of interest on its borrowed loans Decided in favour of assessee. Disbursement of funds wind-up of company The assessee along with his NRI friends floated the company - The company did not perform as planned due to the changed circumstances, the Directors decided to wind-up the company and distributed the funds invested back to the Directors and shareholders while refunding the funds to one of the NRI investor The assessee received funds on behalf of his cousin and reflected the same in his books in the name of the company wounded up - Held that - The assessee has produced the statement of P & L account of GMS Medimall Pvt. Ltd., his own balance sheet from April, 2007 to March, 2008 - The assessee also submitted the certificate/confirmation from NRI investor - The actual owner of the funds has been identified and certificate has been obtained from the owner The issue was restored for fresh examination. Undisclosed long term capital gains Held that - The sale documents executed in favour of buyers of flats clearly shows that the vendors viz., Smt. G. Niveditha Reddy and Sri G. Radhacharan Reddy have obtained permission from the Kukatpally Municipality for construction of multi-storeyed building and also started constructing the building complex - It is also clear from the sale documents that the above mentioned vendors have offered to sell out of their 40% share the semi finished flats for consideration which total to ₹ 68,00,000 - The onus is on the assessee to show that the development agreement is a sham transaction - The cost of construction as on the date of agreement is ₹ 1,10,00,000/- as per the Sub Registrar s valuation as mentioned in the Encumbrance Certificate, the same is considered as consideration for determining capital gains in the A.Y. 2006-07 Decided against assessee. Short term capital gains Held that - The Assessing Officer worked out the Short Term Capital Gain for the Financial Year 2005-06 and 2006- 07 based on the cost of acquisition for the total construction area of 11,972 square feet being ₹ 44 lakhs Whereas the CIT(A) worked out the cost of acquisition on the basis of Sub Registrar value shown in the Encumbrance Certificate - The assessee could not furnish any evidence to establish that the same was lower than that However Tribunal is of the view that the cost of construction should be worked out based on cost of construction of M/s. VNR Constructions i.e. the developer The issue was restored for fresh decision. Sale of terrace rights Held that - - As per the development agreement, the terrace rights were with the land owners - The assessee and his wife had constructed a flat on the 6th floor and sold the same to M/s. Charans Life Devices Pvt. Ltd. - As the property was constructed on the terrace, the owners were having the title and the rights over the same - The terrace rights have been sold and accounted by VNR Constructions - The consideration paid to VNR Constructions towards the flat has been shown in the books of Charans Life Devices Pvt. Ltd - The terrace rights cannot be retained by any one except the prospective purchasers - The circumstances in the case are ambiguous The issue was restored for fresh decision. Advance to directors Transfer the property to the Company to obtain loan facility from the Banks, Financial Institutions for conducting the business - To facilitate the transfer of the properties to the company, advances were paid by the company to the Directors Even after six years, the transfer of the properties to the company has not been effected - Held that - Following Pradeep Kumar Malhotra 2011 (8) TMI 16 - CALCUTTA HIGH COURT - For retaining the benefit of loan availed of from the bank if decision was taken to give advance to the assessee such decision was not to give gratuitous advance to its shareholder but to protect the business interest of the company - The transaction was for the purpose of business which is a non-gratuitous advance which should not be treated as deemed dividend Decided in favour of assessee.
Issues Involved:
1. Disallowance of commission payment under section 40(a)(ia) of the Income Tax Act. 2. Disallowance of interest on borrowed capital. 3. Addition of undisclosed investment. 4. Addition of undisclosed long-term and short-term capital gains. 5. Addition of deemed dividend under section 2(22)(e) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowance of Commission Payment under Section 40(a)(ia): The assessee, M/s. Charans Life Devices Pvt. Ltd., paid Rs.25 lakhs as commission to its Director, Mr. Radha Charan Reddy, without deducting TDS. The Assessing Officer disallowed this expenditure under section 40(a)(ia). The assessee argued that the commission was part of the Director's salary and had been offered as income by the Director. The CIT(A) upheld the disallowance, stating that there was no employer-employee relationship and no TDS was deducted under section 192. The Tribunal directed the Income Tax Officer to verify if the amount was declared as salary income in the Director's return and decide accordingly. 2. Disallowance of Interest on Borrowed Capital: For the assessment year 2010-11, the assessee claimed Rs.13,21,936/- as interest on borrowed capital used for investment in a subsidiary, PHEPL. The Assessing Officer disallowed this interest, stating it was not related to the assessee's business. The CIT(A) upheld the disallowance, noting that the investment in PHEPL did not augment the assessee's business. The Tribunal, referencing the Supreme Court decision in SA Builders Ltd., allowed the interest deduction, stating it was for business purposes. 3. Addition of Undisclosed Investment: For the assessment year 2005-06, the Assessing Officer added Rs.11,64,800/- as undisclosed investment in GMS Medimall Pvt. Ltd. The assessee claimed this amount was a refund from an NRI investor, Mr. P. Venugopal Reddy, but recorded under GMS Medimall Pvt. Ltd. The CIT(A) upheld the addition, stating the certificate from Mr. Reddy was insufficient. The Tribunal set aside the issue to the Assessing Officer for verification. 4. Addition of Undisclosed Long-term and Short-term Capital Gains: For the assessment years 2006-07 and 2007-08, the Assessing Officer added long-term and short-term capital gains from the sale of property and flats, based on a registered development agreement. The assessee argued the gains were already declared based on an unregistered agreement of sale. The CIT(A) upheld the additions, stating the development agreement was enforceable by law. The Tribunal directed the Assessing Officer to adopt the cost of construction based on the developer's cost and verify the sale proceeds from the terrace rights. 5. Addition of Deemed Dividend under Section 2(22)(e): For the assessment year 2009-10, the Assessing Officer added Rs.94,75,000/- as deemed dividend, stating it was an advance from M/s. Charans Life Devices Pvt. Ltd. to its Director, Mr. Radha Charan Reddy. The assessee argued this was an advance for the sale of property, which could not be completed due to mortgage issues. The Tribunal, referencing the Calcutta High Court decision in Pradip Kumar Malhotra, held that the advance was for business purposes and not a gratuitous advance, thus not a deemed dividend. Conclusion: The Tribunal provided relief to the assessees on several grounds, directing the Assessing Officer to verify and reconsider certain issues, and allowing certain claims based on legal precedents.
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