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TMI Blog2013 (12) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 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 state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholder 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... hat this amount was shown by Shri G. Radhacharan Reddy as income in his income tax return for the Assessment Year 2008- 09, whereas the balance amount of Rs.10,84,468/- was carried to the next year and recorded as commission paid for the Assessment Year 2009-10, wherein again, the same was shown as income in the return of income. The Authorised Representative argued that since Rs.25,00,000/- was paid as commission to the Director and the Director admitted the same as income, there is no loss to the Revenue and the commission has already been taxed in the hands of the Director. He argued that it is an accepted principle that similar amount shall not be taxed twice when there is proof of payment of taxes by the receiver (Director) for the expenditure claimed by the assessee. In this regard, he relied on the decision in the case of Hindustan Coca Cola Beverages (P) Ltd Vs. Commissioner of Income-tax 293 ITR 226 (SC). 06.0 The Authorised Representative alternatively argued that disallowance of provisions of sec.40(a)(ia) are not applicable to salary payments and the commission paid to the Director based on the turnover of the company, is part of salary only. He pointed out that in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1995) 215 ITR 919 (Bom.) The Learned Counsel for the assessee Shri A.V.Raghuram relied on the decision of the Calcutta High Court decision in the case of Sajid Mowjee vs. ITO (2005) 279 ITR 467 (Cal.) wherein the Hon'ble High Court held as follows : "Board of Directors of a company having appointed assessee as a wholetime director and sanctioned his remuneration in terms of articles of association, it was a contract of employment and not for employment and, therefore, remuneration received by the assessee, by whatever name called, falls within the definition of salary under s. 17(1)(iv) and was assessable as such, and not as income from other sources." 6. Aggrieved, assessee filed appeal before us and has raised the following grounds of appeal before the Tribunal. 1. "On the facts and in the circumstances of the case the order of the learned CIT(A) is erroneous and unsustainable in law and on facts. 2. The CIT(A) erred in sustaining the disallowance of Rs.25,00,000/- made by the Assessing Officer under the provisons of section 40(a)(ia) of the I.T. Act. 3. The CIT(A) failed to appreciate that the amount of Rs. 25,00,000/- paid to Director of the Company is part of salary and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. But it has right to prescribe conditions of service. It has right to determine the nature of the duties to be performed by the wholetime directors. It has right to determine the salary to be paid. Therefore, the company could be an employer while appointing one of its directors as wholetime director on a particular remuneration and prescribing the terms and conditions of his appointment. In common parlance the wholetime director may not be an employee but even then the character of the receipt or remuneration having 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 income cannot be treated as income from other sources. The facts disclose that the appointment is a contract of employment not a contract for employment. Therefore, the receipt comes under the head salary.--Ram Prashad vs. CIT 1972 CTR (SC) 97 : (1972) 86 ITR 122 (SC) relied on; State of Gujarat & Anr. vs. Raman Lal Keshav Lal Soni & Ors. AIR 1984 SC 161 distinguished. 9. In these circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his own funds in large volumes at a time, which would have affected the liquidity of his company, the loan was obtained from Citi Bank, so that repayment can be made in a phased manner. He added that since the said company did not have assets like land and building to offer as collateral security, the directors offered their personal assets in this regard. He added that for obtaining the loan and for providing the collateral mortgage, commission charges had to be paid to the property holder as per the normal business scheme. The Authorised Representative averred that as held in the case of Commissioner of Income-tax Vs. Tulip Star Hotels Ltd (338 ITR 442) (Del), if borrowed funds are invested in equity capital of subsidiary company, expenditure incurred would be for business purpose only. 14. On appeal before the CIT(A), the learned CIT(A) held that it is an undisputed fact that the borrowed capital, on which interest of Rs.13,21,936/- was paid, had been utilized for the purpose of investment in PHEPL and the same had not been utilized directly for the own business of the assessee company. As regards the contention that the business of the company being so promoted by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as collateral security as demanded by the panel for financing and the Directors of the company offered their personal assets as collateral security. The interest paid to the banker for the land utilised for investment in share capital of the subsidiary company which is in similar line of business is an allowable expenditure. It was also submitted that the clients of the sister concern may also become the clients of the assessee company at one point of time and with this motive the assessee felt that there was business expediency in the investment. The learned Counsel for the assessee, relied on the decision of SA Builders vs. CIT and another 288 ITR 1 (S.C.) and the decision of the CIT vs. Tulip Star Hotels Ltd. 338 ITR 482 (Del.). The assessee also relied on the decision of the coordinate Bench of the Tribunal in the case of Vishnu Cements in ITA.No.1211/Hyd/2004 dated 09.01.2009. 18. The learned D.R. submitted that the CIT(A) was right in upholding the disallowance as the object of the sister concern is to prevent health problem which was not the interest or objectives of the assessee company. 19. The learned Counsel for the assessee in the rejoinder stated that both the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T. Act, the Assessing Officer passed assessment order adding the amount of Rs.11,64,800/- as undisclosed investment in GMS Medimall Pvt. Ltd. The facts are that the assessee along with his NRI friends had floated the company in the name of GMS Medimall Pvt. Ltd. Since 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 Shri P. Venugopal Reddy. As per his instructions GMS Medimall Pvt. Ltd. refunded the investment to his cousin Shri G. Radhacharan Reddy the assessee herein. The assessee has collected the same and recorded in his books. The Assessing Officer was of the opinion that the amount has been exhibited in the name of GMS Medimall Pvt. Ltd. but not in the name of Shri P. Venugopal Reddy. It was submitted before the CIT(A) that as GMS Medimall Pvt. Ltd. paid the money to assessee, the assessee recorded the money received from GMS Medimall Pvt. Ltd. which is not in existence by error. This was only an error but not concealment or unexplained investment. The investment was made by Shri P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his regard is decided against the appellant." 24. Aggrieved, the assessee preferred appeal before us and submitted the ledger account of GMS Medimall Pvt. Ltd. at page 286 of the paper book. The learned Counsel for the assessee has also produced the statement of P & L account as on 31.03.2003 of GMS Medimall Pvt. Ltd. at page 342 of the paper book, balance sheet of Shri G.Radhacharan Reddy assessee herein from April, 2007 to March, 2008 at page 609 of the paper book. The assessee also submitted the certificate/confirmation from Mr. P. Venugopal Reddy at page 285 of the paper book. We are of the opinion that as the actual owner of the funds has been identified and certificate has been obtained from the owner, the explanation given by the assessee can be verified by the Assessing Officer and the matter shall be set aside to the file of the Assessing Officer for reconciliation to be done after perusing the account of Shri G. Radhacharan Reddy the assessee herein. Needless to mention herein that a reasonable opportunity of being heard to be given to the assessee. 25. In the result, ITA.No.373/Hyd/2013 of the assessee is allowed for statistical purposes. ITA.No.374/Hyd/2013 - A.Y. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Asset. The cost of acquisition for the assessee and her husband was Rs.2,62,782/- before indexation and accordingly, the Long Term Capital Gain was Rs.41,37,218/-. However, both of them had admitted Long Term Capital Gain of Rs.15,23,221/- only in their return of income. 28.1. Before the Assessing Officer, the assessee submitted that the long term capital gain had already been disclosed in the A.Y. 2006-07. The assessee claimed that M/s. VNR Constructions, represented by its proprietor, G. Venkateswara Rao, his friend, had shown his interest in construction of apartment on the land. Though the property was not legally approved for such construction, G. Venkateswara Rao had requested the assessee not to register the plot. The assessee submitted that Shri Rao wanted to use the assessee's name in the development agreement, which was to be registered, as it would be more legal and convincing to customers. The assessee submitted that in view of the legal problems, this was agreed upon. The assessee contended that they had not received any sale proceeds as per the registered development agreement and that all the sale proceeds were received by VNR Constructions. 29. The Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion charges twice over. He contended that the value of Rs.1,10,00,000/- was affixed to the proposed flats for paying the registration charges, which was arbitrarily adopted by the Assessing Officer for working out the capital gains. It was also contended that the cheque of Rs.6 lakhs was mentioned in the development agreement only for the registration purpose and the said cheques, which were dated one year backwards, are not reflected in the books of the assessee, as those were never received. It was submitted that registering the development agreement could not mean that the assessee was delivering possession of land to the purchasers first time, as possession was already given on 21-12-2005. It was also stated by the learned A.R. that all the sale proceeds for the developed area, along with land cost, were collected by the developer and exhibited in his books and returns. In this process, the developer collected Rs.2,18,25,564/- in 2 years. The learned A.R. therefore, claimed before the CIT(A) that the Development Agreement was entered and executed only in the process of sale of the residential flats, while the assessee never had the idea of entering into any development agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial Year 2005-06 and Rs.25 lakhs to Financial Year 2006-07. Considering the cost of acquisition for the total construction area of 11,972 square feet being Rs.44 lakhs, value per square foot was worked out at Rs.367.52. Accordingly, the Assessing Officer worked out the Short Term Capital Gain for the Financial Year 2005-06 and 2006-07 at Rs.15,25,164/- and Rs.8,71,886/-, respectively. 07.1. On being confronted with the above working, the assessee contended that the cost of construction should be adopted at Rs.782/- per sq. fool on the basis of total cost to VNR Construction. It was claimed that the calculations made by the Assessing Officer are based on assumptions. However, the assessee's contention was not accepted by the Assessing Officer for the reason that the cost of construction for 40% of share worked out to Rs.367.52 per square feet on the basis of cost shown in the Encumbrance Certificate of Rs.1,10,00,000/- for the total constructed area of 29,930 square feet. Accordingly, the Assessing Officer made addition of Rs. 7,41,160/- in the assessment year 2006-07 in the hands of Shri Reddy and of Rs.7,87,000/- in the hands of the assessee. Likewise, additions of Rs.4,22,86 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .12,67,790/- towards the alleged undisclosed long term capital gains in the hands of the assessee. The learned Counsel for the assessee further contended that the CIT(A) has failed to appreciate that the assessee based on the agreement of sale dated 21.2.2005 had admitted long term capital gains and as such, the alleged undisclosed long term capital gains based on alleged development agreement dated 31.1.2006 is totally unwarranted. Further, the learned Counsel submitted that the CIT(A) also failed to appreciate that so far as the assessee and his wife is concerned, they had acted only upon the agreement of sale dated 21.12.2005 and they have got nothing to do with the development agreement dated 31.01.2006 which was executed at the instance of assessee's friend Sri G. Venkateswara Rao, Proprietor of VNR Constructions who wanted to develop the said property. The learned Counsel for the assessee contended that the CIT(A) failed to appreciate that the so-called development agreement could not have been relied upon in as much as the assessee and his wife already executed agreement of sale pursuant to which they had received consideration. Contrary to this, the CIT(A) ought to have app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistrar's valuation as mentioned in the Encumbrance Certificate, the same is considered as consideration for determining capital gains in the A.Y. 2006-07. Accordingly, capital gains works out to Rs.44,00,000/- (40% of constructed area) minus Rs.2,62,782/-, which comes to Rs.41,37,218/-. Since the assessee and his wife have already disclosed Rs.15,23,221/- the balance of Rs.26,13,997/- is brought to tax in the current assessment year. The share of the assessee is 48.5%. The proportionate income brought to tax in his hands is Rs.12,67,790/-. The balance of Rs.13,46,210/- is brought to tax in the hands of Smt. G. Niveditha Reddy. Accordingly, grounds No. 2 to 4 are dismissed. 36. With respect to short term capital gains, the assessee and her husband had sold the 8 flats for a total sale consideration of Rs.68 lakhs, Rs.43 lakhs pertaining to the Financial Year 2005-06 and Rs.25 lakhs to Financial Year 2006-07. Considering the cost of acquisition for the total construction area of 11,972 square feet being Rs.44 lakhs, value per square foot was worked out at Rs.367.52. Accordingly, the Assessing Officer worked out the Short Term Capital Gain for the Financial Year 2005-06 and 2006- 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out based on the cost of construction to VNR Construction/Developer and doing so the same would be Rs.782 per sq. foot. 5. The CIT(A) erred in sustaining the addition of Rs.15,45,000/- made on account of alleged undisclosed sale of terrace rights. The CIT(A) failed to appreciate that the said sale, if any, pertained to VNR Constructions and had nothing to do with the appellant or his wife. 6. Without prejudice to above, even if it considered that the appellant and his wife owned terrace rights and they have sold it to Charan's Life Devices Pvt. Ltd., still the value of tertrace rights cannot be to the extent of Rs.30 lakhs especially when VNR Constructions has made the construction." 40. The facts are similar to that of assessment year 2006-2007. Ground No.1 is general in nature and it needs no adjudication. As already discussed in assessment year 2006- 2007, the assessee has sold 8 flats for total sale consideration of Rs.68 lakhs. The year-wise bifurcation is Rs.43,25,000/- for financial years 2005-2006 and 2006-2007 respectively. The Assessing Officer computed short term capital gains for financial years 2005-2006 and 2006-2007 relevant to assessment year 2006-2007 and 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the land owners only. Even if it is not permissible under the A.P. Apartments Act to retain the terrace rights by any person other than the prospective purchasers, it is clear that the stipulation in this regard in the Development Agreement had been consciously made, conferring rights upon the appellant and his wife as per the mutual understanding between the parties. It is also a fact that the Developer never questioned such rights of the appellant and his wife. Therefore, it is only logical to hold that when the flat constructed by the appellant and his wife on such terrace, as evidenced by pages 85 to 101 of the above annexure were transferred to M/s. Charan's Life Devices Pvt. Ltd. the short term capital gain arising therefrom were to be brought to tax in the hands of the appellant and his wife only. Since the document shows the consideration t Rs. 9 lakhs only, whereas the consideration shown in the books of CLD was Rs.30 lakhs, the appellant share of Rs.14,55,000/- in such short term capital gains of Rs.30 lakhs has been rightly brought to tax. The grounds raised in this regard are therefore decided against the appellant." 44. The learned Counsel for the assessee submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) failed to appreciate that the transactions of agreement of sale could not fructify into sale as the property in respect of which agreement was entered into were mortgaged with the Citi Bank". 50. The brief facts are that the assessee is one of the Directors of M/s. Charans Life Devices Pvt. Ltd. which is not having any landed property or building of its own. The company is facing hurdles for obtaining the loan and financial assistance from banks from and other financial institutions for the purpose of conducting businesses. For obtaining the financial assistance the Directors were mortgaging their personal properties for obtaining the cash credit facilities/term loans from the Banks and financial institutions for the purpose of conducting business. This process is continuing since the inception of the company. The Director desired to change this process and decided to transfer the personnel assets to the company to obviate these situations for future. The assessee has faced serious problem when they applied for the loan for the investment in its subsidiary PHEPL. The Directors decided to sell their personnel properties to the company. The Directors entered into the agreement to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany's business since the beginning. In order to change the process, the Directors decided to transfer their personal assets to company and entered into an agreement to sell. It was further submitted that in order to consider the loans and advances to Directors/share holders as deemed dividend, it needs to be proved as a beneficial transfer to them. However, in the assessee's case it was not beneficial to the shareholders but was for the purpose of the company and therefore, a non-gratuitous advance, which should not have been treated as deemed dividend. The learned Counsel for the assessee also relied on the decision in the case of CIT vs. Satyanarayana Nuwal (2011) 37 (I) ITCL 0060. The decision in the case of Pradip Kumar Malhotra vs. CIT 338 ITR 538 (Cal.) was also cited. The learned Counsel further submitted the balance sheet and profit and loss account of CLD and the assessee for the accounting year ending on 31.3.2008. It was further submitted by the learned Counsel for the assessee that in the books of the company, the advance paid for the building had been shown and the Directors have also shown the advance received for sale of the property in their books. 52. On appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lder but to protect the business interest of the company. The sum of Rs.20,75,000/- could not be treated as deemed dividend." 57. In the case of the assessee before us the situation is similar. Hence, we are of the opinion that the transaction was for the purpose of business which is a non-gratuitous advance which should not be treated as deemed dividend. 58. Accordingly, we allow grounds No. 2 and 3 of the assessees in ITA.No.376 & 379/Hyd/2013 for the assessment year 2009-2010. Since ground No.1 is general in nature in both the appeals, it need not be adjudicated. 59. In the result, ITA.No.376/Hyd/2013 in the case of Shri G. Radhacharan Reddy and ITA.No. 379/Hyd/2013 in the case of Smt. G. Niveditha Reddy are allowed. 60. To sum-up, ITA.No.162/Hyd/2013 of the assessee is allowed for statistical purposes, ITA.No.163/Hyd/2013 of the assessee is allowed, ITA.No.373/Hyd/2013 is allowed for statistical purposes, ITA.No.374 & 377/Hyd/2013 of the assessee are partly allowed for statistical purposes, ITA.No.375 & 378/Hyd/2013 of the assessee are partly allowed for statistical purposes, ITA.No.376 & 379/Hyd/2013 of the assessee are allowed. Order pronounced in the Open Court on 31.10 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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