2015 (12) TMI 1120 - AT - Income Tax

Treatment of rental receipts for the purpose of Income-tax - Held 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.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 the construction in time. In these circumstances, we find no infirmity in the order of the ld.CIT(A) deleting the addition of rental receipts as Income from Other Sources - Decided against revenue Fresh share capital received by the assesses - unexplained cash credit u/s 68 - Held that - 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 - Decided against revenue

Summary

Issues Involved:
1. Treatment of rental receipts for the purpose of Income-tax.
2. Justification of treating fresh share capital received as unexplained cash credit under Section 68 of the Income-tax Act.

Detailed Analysis:

Issue 1: Treatment of Rental Receipts for the Purpose of Income-tax
Facts and Arguments:
- The assessee, along with other parties, entered into a tenancy agreement with M/s. Suparshwa Distributors Pvt Ltd (SDPL) on 18-08-2005, where the tenant agreed to complete the construction of an incomplete building at its own cost without reimbursement.
- The monthly rental was agreed at Rs. 11,20,000, and the tenancy was for 11 years.
- A modified tenancy agreement on the same date stipulated that the assessee would complete the construction by 31-12-2005, failing which the rent paid would be treated as an advance recoverable by the tenant.
- The assessee did not complete the construction by the stipulated date and treated the rental receipts of Rs. 49,49,677 as an advance.
- The Assessing Officer (AO) treated the receipts as income from other sources, arguing that the modified agreement was an afterthought.
- On appeal, the CIT(A) admitted additional evidence, including the modified tenancy agreement, and ruled that the receipts should be treated as advances due to the assessee's failure to complete the construction.

Tribunal's Findings:
- The Tribunal found that the tenant paid the amount with the belief that the construction would be completed, and the property was in a prime location beneficial for the tenant's business.
- The payment was made directly to SBI towards the assessee's loan dues as per a tripartite agreement.
- The Tribunal held that the modified tenancy agreement could not be disregarded and that the rental payments were to be treated as advances since the construction was not completed, and the tenant did not take possession of the property.
- The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal on this ground.

Issue 2: Justification of Treating Fresh Share Capital as Unexplained Cash Credit under Section 68
Facts and Arguments:
- The assessee received fresh share capital amounting to Rs. 25,55,000 each during the assessment year.
- The AO treated the receipt as unexplained cash credit under Section 68 due to the failure to prove the genuineness and creditworthiness of the shareholders.
- On appeal, the CIT(A) admitted additional evidence and called for a remand report from the AO, who verified the details and confirmed the genuineness of the share capital.

Tribunal's Findings:
- The Tribunal noted that the AO had accepted the receipts as genuine in his remand report after verifying the shareholders' details.
- The Tribunal held that there was no violation of Rule 46A by the CIT(A) as the AO was given due opportunity to verify the additional evidence.
- The Tribunal concluded that the receipt of share capital was satisfactorily explained and dismissed the revenue's appeal on this ground.

Conclusion:
- The Tribunal dismissed the revenue's appeals, upholding the CIT(A)'s decisions on both the treatment of rental receipts and the justification of fresh share capital as explained cash credit. The rental receipts were treated as advances due to non-completion of construction, and the share capital receipts were verified and found genuine.