2016 (6) TMI 1401 - AT - Income Tax

Disallowance of payment incurred for the transfer of land paid to the Bank of Baroda and payment of workmen compensation for settlement - Company is in the process of winding up - HELD THAT - It cannot be disputed that the property in dispute was mortgaged with Bank of Baroda. They also taken the symbolic possession of the assets charged to them under the provisions of SARFAESI 2002 which is evidenced from the letter dated 7.7.2007 kept. Further, they have also given possession notice vide letter dated 7.7.2007 which is kept on record at page 3 of the paper book. Thus, it cannot be disputed that unless the assessee had settled the dispute with Bank of Baroda, the sale transaction with M/s. Alliance Mall Developers Co. Pvt. Ltd. vide sale deed dated 11th June, 2008 could not have materialized, there would perhaps have no question of capital gains. The expression in connection with such transfer is, in our opinion, certainly wider than the expression for the transfer . Once again, we are of the view that any amount the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by this clause. In other words, if, without removing any encumbrance, sale or transfer could not be effected, the amount paid for removing that encumbrance will fall under clause (i). In this case, sale of transfer could not be effected and the amount paid for removing that encumbrance will fall under clause (i) of sec.48 of the Act. We are of the opinion that the above two payments to be allowed. It is needless to say that had the assessee not paid to the workmen, who had taken the possession of factory premises of the assessee could not be allowed to transfer the said capital asset. However, if the assessee had claimed any amount out of this, in any assessment year , same to be reduced from this amount by AO while giving effect to this order. Accordingly, the grounds relating to these issues are allowed. Disallowance of commission payment - contention of the ld. DR is that these payments are not properly vouched and doubted the services rendered by the recipient - HELD THAT - CIT(Appeals) has given a finding that the assessee has not produced brokers to show that they have rendered services. The power of the CIT(Appeals) is coterminous that of the AO and he should have issued summons, once the assessee has furnished the names and addresses of the parties. This exercise has not been done by the revenue authorities. Hence, out rightly disallowing the entire commission payment is not appropriate. However, there is lapse on the assessee also as noticed by the AO as mentioned in earlier para. In our opinion, the payment of commission is very excessive. As per trade practice, when the transaction of such volumes took place, usually in real estate field, commission payment is at one percent of the sale value of the property would be paid. Accordingly, we direct the AO to allow one percent of the total sale value of the property as commission payment towards transfer of property. This ground is partly allowed. Disallowance of claim of set off of business expenditure against long term capital gains - According to the revenue authorities, the assessee has stopped manufacturing of yarn since 1993 and the liabilities and expenditure relating to those earlier years have been claimed as expenditure in the assessment year 2009-10 - HELD THAT - There is nothing on record to show that the assessee has completely closed the business of the assessee. However, the copy of the assessment order for the assessment year 2012-13 to show that wherein the AO taxed the cessation of liability u/s.41(1) of the Act. The ld. AR submitted that the expenditure claimed by the assessee was capitalized in the assessment year under consideration. Being so, in our opinion, this issue requires re-examination by the AO. Since the above evidence was brought on record, we suggest that the company only withhold the business activity due to strike and other factors and there was no intention to carry on the business activity, for the time being and it was not wound up the business. Therefore, issue is to be reexamined by the AO, whether it is reasonable or excessive. Accordingly, he is directed to disallow only that portion of the expenditure if he finds any amount excessive or unreasonable. Further, regarding the claim of bad debts, the same to be examined in terms of sec.36(1)(vii) r.w.sec. 36(2) of the Act. With regard to statutory liability like sales tax, ESI, PF etc., is to be allowed on actual payment basis in the assessment year under consideration in terms of sec.43B of the Act. Hence, we remit this issue to the file of the AO for fresh consideration. Business income in the form of interest receipts - business loss arising out of the business activities should be set off against the capital gain on sale of business assets - HELD THAT - The assessee deposited certain fund out of the amount received from sale of land and interest earned from that deposit as income from other sources and in view of the judgment in the case of Tuticorin Alkali Chemicals And Fertilizers Ltd. v. CIT 1997 (7) TMI 4 - SUPREME COURT wherein it was held that interest earned by the assessee on short term deposit in bank out of term loan is income under the head other sources . Hence, this issue is dismissed. Disallowance of the claim of expenditure towards payment of commission at 100% and site clearing charges at 75% while calculating long term capital gains - HELD THAT - The assessee had to engage personnel specially skilled in doing such kind of jobs who were illiterate and working in an unorganized manner. These personnel did not normally come and work regularly but were coming and working erratically. Besides they had to be paid in cash only. However the CIT (A) has allowed only 25% of the expenditure for the cleaning charges. The CIT (A) ought to have allowed fully the expenditure. According to the ld. AR the CIT (A) wrongly allowed only 25% Learned Assessing Officer has grossly erred in disallowing all the claims of the Assessee on the commission payment made to facilitate conclusion of the sale of immovable property u/s 48(i) and site clearing charges also under sec. 48(i) of the Act, drawing untenable non-existent inference, purely based on suspicions, surmises, conjectures, presumption of bad faith etc., which runs contrary to the facts obtaining very much from the return of income and explanations offered. Disallowance of expenses which was no nexus with manufacturing of yarn - HELD THAT - This issue is remitted to the AO to disallow only the expenditure which he finds excessive or unreasonable.

Summary

Issues Involved:
1. Disallowance of payment for transfer of land and workmen compensation.
2. Disallowance of claim of set-off of business expenditure against long-term capital gains.
3. Disallowance of bad debts.
4. Disallowance of commission payments.
5. Disallowance of site clearing charges.
6. Disallowance of business expenditure/loss against long-term capital gain.
7. Treatment of interest receipts as income from other sources.

Detailed Analysis:

1. Disallowance of Payment for Transfer of Land and Workmen Compensation:
The assessee argued that payments made to workmen (?8,07,43,083) and to the secured creditor (Bank of Baroda, ?18 crores) should be allowed as deductions under section 48(i) of the Income Tax Act, 1961, as these were "expenditure incurred wholly and exclusively in connection with such transfer." The Tribunal agreed, noting that without settling these payments, the sale transaction would not have materialized. The Tribunal cited various judgments, including CIT v. Shakuntala Kantilal and CIT v. Bradford Trading Co. P. Ltd., which support the deduction of such payments as they were necessary to effect the transfer of the property.

2. Disallowance of Claim of Set-Off of Business Expenditure Against Long-Term Capital Gains:
The assessee claimed set-off of business expenditure against long-term capital gains, arguing that the business was only temporarily suspended and not wound up. The Tribunal remitted this issue to the Assessing Officer (AO) for re-examination, directing that only excessive or unreasonable amounts should be disallowed. The Tribunal emphasized that the existence and continuity of the business should be inferred, and statutory liabilities like sales tax, ESI, PF should be allowed on an actual payment basis as per section 43B of the Act.

3. Disallowance of Bad Debts:
The Tribunal noted that the CIT(A) had confirmed the disallowance of bad debts on the ground that the assessee did not furnish details to show these amounts were offered as income in earlier years. The Tribunal directed the AO to examine the claim of bad debts in terms of section 36(1)(vii) read with section 36(2) of the Act, considering relevant judgments such as TRF Limited v. CIT and Southern Technologies Limited v. Joint CIT.

4. Disallowance of Commission Payments:
The assessee claimed commission payments totaling ?1,98,17,992, which were disallowed by the AO and CIT(A) on grounds of lack of evidence and the fact that many recipients were related to the Managing Director. The Tribunal found the outright disallowance inappropriate, noting that it is not unusual for both the buyer and seller to have separate brokers. The Tribunal directed the AO to allow commission payments at 1% of the total sale value of the property, considering trade practices in real estate transactions.

5. Disallowance of Site Clearing Charges:
The assessee claimed site clearing charges, which were partly disallowed by the CIT(A) due to lack of evidence. The Tribunal remitted this issue to the AO, directing the assessee to provide necessary evidence to support the claim.

6. Disallowance of Business Expenditure/Loss Against Long-Term Capital Gain:
The Tribunal noted that the assessee had claimed business expenditure during a period of business lull, arguing that the business was not wound up but temporarily suspended. The Tribunal remitted this issue to the AO for re-examination, directing that only excessive or unreasonable amounts should be disallowed.

7. Treatment of Interest Receipts as Income from Other Sources:
The assessee argued that interest receipts should be treated as business income and set off against business losses. The Tribunal dismissed this claim, citing the Supreme Court judgment in Tuticorin Alkali Chemicals And Fertilizers Ltd. v. CIT, which held that interest earned on short-term deposits should be treated as income from other sources.

Conclusion:
The Tribunal allowed the assessee's appeal partly, directing the AO to re-examine certain claims and allow deductions as per the Tribunal's directions. The issues of commission payments, site clearing charges, and business expenditure/loss were remitted to the AO for fresh consideration. The Tribunal upheld the treatment of interest receipts as income from other sources.