2016 (10) TMI 927 - AT - Income Tax

Addition u/s 68 - AO has made the addition u/s 68 crores as undisclosed cash credit in the hands of assessee on the ground that assessee has made the sale of the impugned property without recording the same in its books of account - CIT(A) deleted the addition made by AO by observing that assessee in the instant case was a confirming party and it has not made any sale - Held that - The assessee initially advanced the money to MAESL which was returned back to assessee and MNI. Now the question before us arise so as to whether assessee has made any sale of the impugned property without recording the impugned sale in its books of account. From the facts, we find that provision of Sec. 68 of the Act are attracted only in a case where any credit entry found in the books of account of assessee which is not explained by assessee. In the instant case, no such entry was detected by AO. In our considered view, the provisions of Sec. 68 are not applicable in the present case. Similarly, from the details submitted by assessee, we find that assessee has given advanced money for the purchase of impugned property and same money was returned. In this point, Ld. DR has not brought anything on record to the finding of Ld. CIT(A). We also find that AO before making such addition on the basis of ITS information from the office of Sub Registrar should have issued a notice u/s. 133(6) of the Act. The AO has not exercised his power u/s. 133(6) of the Act. In this view of the matter, we find no reason to interfere with the findings arrived by the Ld. CIT(A). Addition u/s 36 - Held that - We find that assessee in the instant case, has incurred interest expenditure on the money borrowed for an amount of ₹ 2,47,91,689/- and assessee claimed the interest expenditure as revenue expenditure. However, the AO disallowed the same by holding that assessee has no experience of property business, therefore, it should have been treated as investment in assessee s business. Therefore, the interest expenditure incurred on the borrowed fund utilized for the purpose of investment cannot be allowed as deduction. However, Ld. CIT(A) deleted the addition made by AO by observing that assessee has treated the same as stock-in-trade in its books of account. Now the issue before us arise so as to whether the interest expenditure is business expenditure or part of investment. From the facts, we find that the activities for the property business are duly covered in the Memorandum & Articles of Association of the assessee in terms of its clause-4. Besides, we also find that assessee during the year has earned a sum of ₹ 40,500/- by way of storage charges which has been offered as income under the head business & profession . We further also find that assessee has shown the property as stock-intrade in its books of account. From the facts, we find that assessee has shown the impugned property as stock-in-trade and AO cannot step in the shoes of assessee to decide whether it is capital asset or stock-in-trade.

Summary

Issues Involved:
1. Deletion of addition on account of sale of property.
2. Deletion of addition made under Section 36(1)(iii) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Sale of Property:

The Revenue challenged the deletion of ?68,03,07,175/- by the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the monetary involvement of the assessee in the property deal was confirmed by the Sub Registrar Office and ITS details. The assessee, a Private Limited Company and a Non-Banking Financial Corporation, had shown a loss of ?99,72,509/- under "business and profession" in its return of income. The case was scrutinized, and notices under Sections 143(2) and 142(1) of the Income Tax Act were issued.

The Income Tax Department, through ITS, found that the assessee, along with M/s Neptune Infrastructure (MNI), purchased a property for ?111,43,65,000/- and sold it for ?68,03,07,175/-. The Assessing Officer (AO) noted that the sale was not recorded in the books of account and treated the sale amount as undisclosed cash credit under Section 68 of the Act.

The assessee contended before the CIT(A) that it was only a confirming party in the sale transaction, which was actually executed by M/s Ambala Sarabhai Enterprises Ltd. (MASEL) to a third party in Pune. The CIT(A) called for a remand report from the AO, who confirmed that the assessee and MNI were confirming parties and had advanced money to MASEL, which was later returned. The CIT(A) observed that the assessee was not the seller but a confirming party, and the amount received was duly accounted for in the books. Thus, the addition made by the AO was deleted.

Upon appeal, the Tribunal upheld the CIT(A)'s decision, noting that the AO should have issued a notice under Section 133(6) to verify the transaction details from the Sub Registrar. The Tribunal found no reason to interfere with the CIT(A)'s findings and dismissed the Revenue's appeal on this issue.

2. Deletion of Addition Made Under Section 36(1)(iii) of the Income Tax Act:

The Revenue contested the deletion of ?2,47,91,689/- by the CIT(A), arguing that the assessee, engaged in trading shares and securities, was not in the business of dealing in property transactions. The assessee had purchased a property jointly with MNI for ?111 crores, financed through borrowed funds, and incurred interest expenditure of ?2,47,91,689/-. The property was shown as stock-in-trade.

The AO disallowed the interest expenditure, considering the property as an investment rather than stock-in-trade, and capitalized the interest as per Section 36(1)(iii). The assessee argued that the property was purchased with the intention of venturing into real estate business and was shown as closing stock. The CIT(A) accepted this explanation, noting that the property was intended for commercial exploitation and the interest expenditure was allowable under Section 36(1)(iii).

The Tribunal upheld the CIT(A)'s decision, emphasizing that the property was shown as stock-in-trade and the assessee's intention to venture into real estate was clear from the Memorandum & Articles of Association. The Tribunal found that the AO could not substitute his criteria for the assessee's treatment of the property. Consequently, the Tribunal dismissed the Revenue's appeal on this issue.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The assessee's treatment of the property as stock-in-trade and the deletion of the addition made under Section 36(1)(iii) were found to be justified. The Tribunal emphasized the importance of verifying transaction details through proper channels and respecting the assessee's business decisions as reflected in their books of account.