2018 (3) TMI 1522 - AT - Income Tax

Non-application of funds accumulated u/s 11(2) - Non utilization of the accumulated funds within a period of 5 years from the date of accumulation as provided u/s. 11(2) - as per revenue construction of the building did not started before 2013 and hence the said payment cannot be allowed as application of accumulated funds - Held that - The drafts were made by the assessee on 30.03.2011 by debit to its bank account on 30-03-2011 and the builder has issued receipt on 05.04.2011. The AO has not brought on record any evidence/material to prove that the said receipt dated 05.04.2011 were bogus/non-genuine. The enquiry conducted by the AO u/s. 133(6) as well as report of the inspector deputed to conduct field enquiries were not made available to the assessee and no cross examination was allowed to the assessee of the builder or of the inspector who conducted enquiries. It is not the case of the revenue that these demand drafts were subsequently cancelled at the behest of the assessee and also it is also not the case of the Revenue that the said commercial space was ultimately cancelled by the assessee and in fact the assessee got the possession of the said premises in the year 2016. Under these circumstances bona-fide of the assessee could not be doubted and more so there is no incriminating material on record to prove/show that said drafts were cancelled later on or the said booking was cancelled. Assessee on the other hand made statement before the bench that the assessee got the premises in 2016 after building was completed by M/s. Deal-Well Developers. The contentions of Revenue that since construction of the building did not started before 2013 and hence the said payment cannot be allowed as application of accumulated funds can also not be accepted and is a fallacious argument as the spaces / flats/floors in commercial/residential building has two elements namely building as well proportionate land underneath the said space/floors/flats. The purchaser has to pay for not only the constructed area but also towards the proportionate land underneath said flats/floor/space. We are inclined to accept the contentions of the assessee based on the material on record and the appeal of the assessee stood allowed and the benefit of an application of the income be allowed to the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Sustaining the addition of ?51,50,000 due to alleged non-application of funds accumulated under Section 11(2).
2. Disregarding the payment of ?1,00,00,000 made by the appellant to the builder and considering it as an application of funds accumulated under Section 11(2).
3. Validity of the Assessing Officer's finding that payments were made to the builder only after 31/03/2011 despite sufficient documentary evidence provided by the assessee.

Detailed Analysis:

Issue 1: Sustaining the Addition of ?51,50,000
The AO observed that the assessee had accumulated ?51,50,000 during AY 2005-06, which should have been utilized by 31-03-2011 as per Section 11(2) of the Income-tax Act, 1961. The assessee claimed to have utilized the amount by making a payment of ?1 crore to M/s. Deal-Well Developers for constructing a new school building. The AO, however, noted that the payment was made via Demand Draft on 30-03-2011, and the builder received the payment in August 2011. The AO concluded that the amount was not utilized within the stipulated period and added ?51,50,000 to the income of the assessee.

Issue 2: Disregarding the Payment of ?1,00,00,000
The assessee argued that the payment of ?1 crore was made as an advance for booking three floors and a terrace in a building to be constructed by the builder, which was adjacent to the existing school. The AO questioned the timing and method of payment, suggesting that the use of Demand Draft instead of a cheque indicated an attempt to manipulate the application of income. The AO also noted that the builder confirmed no transaction took place in FY 2010-11, and the payment was credited in FY 2011-12. The CIT(A) upheld the AO's decision, leading to the appeal before the tribunal.

Issue 3: Validity of the AO's Findings
The tribunal examined whether the payment made by Demand Draft on 30-03-2011, which was debited from the assessee's bank account before 31-03-2011, could be considered as an application of income. The tribunal noted that while the builder received the payment in August 2011, the drafts were issued and debited from the assessee's account on 30-03-2011. The tribunal found the AO's argument that the payment should have been made by cheque instead of Demand Draft to be without merit, as the method of payment is at the discretion of the assessee.

The tribunal also noted that the enquiry conducted by the AO under Section 133(6) and the inspector's report were not made available to the assessee, denying them the opportunity to cross-examine the builder. The tribunal emphasized that the benevolent provisions of Section 11(2) should be construed liberally and that the assessee's bona fides were not in question, as there was no evidence of the drafts being canceled or the booking being fraudulent.

Conclusion:
The tribunal allowed the appeal, accepting the assessee's contention that the payment of ?1 crore made by Demand Draft on 30-03-2011 constituted an application of income within the stipulated period. The tribunal ordered that the benefit of an application of the income be allowed to the assessee, thereby resolving the issues in favor of the assessee.

Order Pronounced:
The appeal of the assessee is allowed. Order pronounced in the open court on 27.03.2018.