Kapil Ratan Associates, Mumbai vs Assessee

M/s. Kapil Ratan Associates, The Commissioner of Income 4, Buana Casa, Sir P.M. Road, Tax, -12, Fort, Mumbai - 400 001. Vs. Room No.122, PAN: AAIFK 0106B Aayakar Bhavan, M.K. Road, Mumbai - 400 020 (Appellant) (Respondent)

Assessee by : Ms. Aarti Sathe, A.R. Revenue by : Ms. S. Padmaja, D.R.

Date of Hearing : 25.11.2014 Date of Pronouncement :14.01.2015

ORDER

Per Sanjay Garg, Judicial Member:

The present appeal has been preferred by the assessee against the order dated 27.03.2014 of the Commissioner of Income Tax [(hereinafter referred to as CIT] relevant to assessment year 2009-10 passed under section 263 of the I.T. Act vide which the Ld. CIT has set aside the assessment order dated 26.12.11 passed under section 143(3) of the Income Tax Act (hereinafter referred to as the Act) to the extent of two issues i.e. disallowance under section 40A(2)(b) and section 40A(3) of the Act and thereby directing the Assessing Officer (hereinafter referred to as the AO) to make a fresh assessment on the above stated two issues.

2. The brief facts of the case are that the returned loss of Rs.62,414/- was accepted by the AO while framing assessment under section 143(3) for the ITA No.3521/M/2014 2 M/s. Kapil Ratan Associates

year under consideration. The Ld. CIT, after examination of record, noticed that the assessee firm was constituted vide partnership deed dated 29.05.06 having the following partners:

1. Vrinda Sharad Bal

2. Monroe Impex Pvt. Ltd.

3. Ramnivas Ramratan Gupta

4. Nikhil Ramnivas Gupta

The Ld. CIT further noticed that the assessee firm was reconstituted vide partnership deed dated 09.06.08 vide which the partners Shri Ramnivas Ramratan Gupta and Shri Nikhil Ramnivas Gupta were replaced by Indorigin Electric Ltd. having directors Mr. Sharad D. Bal and Mr. Vrinda Sharad Bal. It was also noticed by him that the assessee firm had purchased land from the erstwhile partners Shri Ramnivas Ramratan Gupta and Shri Nikhil Ramnivas Gupta and made payments to them which were in excess of market rates prevalent and that the above named persons were covered under section 40A(2)(b) being related persons. However, in the tax audit report, the assessee had disclosed such transaction as 'nil'. The Ld. CIT noticed that most of the payments towards the purchase of land were paid to the said partners Shri Ramnivas Ramratan Gupta and Shri Nikhil Ramnivas Gupta or to the persons who sold the land to the assessee via Shri Ramnivas Ramratan Gupta as their constituted attorney. The Ld. CIT further noticed that the assessee firm was reconstituted on 09.06.08 whereas in the body of the deed the date of operation was mentioned as 01.04.08. The original agreement for purchase of land had been entered prior to 09.06.08 which was subsequently revised/renegotiated to enhance the consideration involved. Shri Ramnivas Ramratan Gupta and Shri Nikhil Ramnivas Gupta were partners in the assessee firm as on the date of entering the original agreement. Even some of the payments were made to the purchasers prior to 09.06.08 i.e. prior to the change in the constitution of the ITA No.3521/M/2014

3 M/s. Kapil Ratan Associates

firm. The ld. CIT therefore observed that the payments made prior to the date of reconstitution of the firm would clearly fall under the ambit of provisions of section 40A(2)(b). Though the assessee vide letter dated 05.03.14 had contended that the assessee had not made any payments to any party covered under the provisions of section 40A(2)(b) of the Act, however, the Ld. CIT observed that the payments in excess of market rate totaling Rs.3,44,52,835/- were made by the assessee to the partners covered under section 40A(2)(b) of the Act and hence such expenditure was not allowable as per the provisions of section 40A(2)(a) of the Act. She observed that the AO had not considered this aspect during the assessment proceedings. The ld. CIT further noticed that the assessee had made payment of Rs.7,21,12,077/- through general entries to M/s. Shree Bal Properties & Finance Pvt. Ltd. which was hit by the provisions of section 40A(3) i.e. payment being made otherwise then by banking channel beyond the prescribed limit as provided under section 40A(3) of the Act. The Ld. CIT, accordingly set aside the assessment order to the extent it related to above two issues and directed the AO to examine theses two issues in detail and amend the order under section 143(3) of the Act accordingly after giving opportunity of being heard to the assessee.

2.1 Aggrieved by the order of the Ld. CIT, the assessee has come in appeal before us.

3. We have heard the rival contentions of the Ld. Representatives of both the parties and have also gone through the records. Ms. Aarti Sathe, Ld. Counsel for the assessee has vehemently argued that the land was purchased by the assessee not from the existing partners of the assessee firm but from the erstwhile partners of the firm. She has further contended that the AO has raised certain queries on this issue which were properly replied. She has relied ITA No.3521/M/2014 4 M/s. Kapil Ratan Associates

on paper book pages A to L in this respect showing the correspondence between the AO and the assessee made during the assessment proceedings. She has further contended that the AO had duly applied his mind on the issue. She has further contended that the partnership deed was reconstituted on 09.06.08 w.e.f. 01.04.08. Though the agreement for the purchase of land was entered into with the above said then partners of the firm on 02.06.06 for a consideration of Rs.1,05,00,000/-; however, neither any payment was made nor the property in question was conveyed to the firm. After the reconstitution of the partnership deed, the said Shri Ramnivas Ramratan Gupta and Shri Nikhil Ramnivas Gupta did not remain the partners of the firm and thereafter the consideration was renegotiated and settled at Rs.5,25,00,000/- and the payment was made to the said persons vide sale deed dated 11.06.08 when the said Shri Ramnivas Ramratan Gupta and Shri Nikhil Ramnivas Gupta were no more partners of the firm and hence the provisions of section 40A(2)(a) read with section 40A(2)(b) were not attracted. She has further contended that so far as the finding of the Ld. CIT that certain payments were made which were hit by the provisions of section 40A(3) is concerned, no such payments were made by the assessee. The amount of Rs.7,21,12,077/- was shown in the balance sheet as receivables on account of the improvements made by the assessee firm on the land which was agreed to be sold to M/s. Shree Bal Properties & Finance Pvt. Ltd. Hence there was no question of applicability of the provisions of section 40A(3) of the Act.

3.1 Ms. S. Padmaja, the Ld. D.R., on the other hand, has relied upon the order of the Ld. CIT and has further contended that the Ld. CIT has given a specific finding that certain payments were made before the reconstitution deed and even the issue relating to the amount of Rs.7,21,12,077/- had not been examined by the AO. She has further contended that there was sufficient ITA No.3521/M/2014 5 M/s. Kapil Ratan Associates

tangible material before the Ld. CIT to arrive at a conclusion that the assessment order was erroneous and prejudicial to the interest of the Revenue, hence the Ld. CIT has rightly set aside the order of the AO on the above said two issues.

4. We have considered the rival submissions of the Ld. Representatives of the parties and have examined the record carefully. It is a fact on the file that the original agreement for the sale of the land in question by Shri Ramnivas Ramratan Gupta and Shri Nikhil Ramnivas Gupta was entered into with the assessee firm on 02.06.06 for a consideration of Rs.1,05,00,000/-. The said persons were partners of the assessee firm at that time and thus were covered under the provisions of section 40A. It is also a fact on the file that the said agreement was duly registered with the office of sub registrar and the stamp duty was duly paid thereupon. It is the case of the assessee that no consideration in pursuance to that agreement was paid by the assessee. The said Shri Ramnivas Ramratan Gupta and Shri Nikhil Ramnivas Gupta did not remain the partners of the firm after the reconstitution of the firm vide reconstitution deed dated 09.06.08 which has been mentioned as effective from 01.04.08. The sale transaction took place on 11.06.08 i.e. two days after the reconstitution of the firm and at that time the said persons were no more the partners of the firm. However, we find that the sale deed in question was transacted in pursuance of the agreement dated 02.06.06. A perusal of the sale deed in question, copy of which has been produced on the file of the assessee, finds mention of this fact in para 12 of the deed. The relevant part of the said para, for the purpose of ready reference, is reproduced as under:

"12. STAMP DUTY AND REGISTRATION FEE:-

A) ............................... B) As agreed between the parties hereto the agreed consideration of the said

property was Rs.1,05,00,000/- as per Agreement dated 02/06/2006 on which is duly ITA No.3521/M/2014 6 M/s. Kapil Ratan Associates

registered in the office of Sub-Registrar Haveli No.19 at Serial No.3958 on 09/06/2006. The purchaser herein had paid stamp of Rs.1,05,000/- to the aforesaid agreement alongwith maximum registration fee. The present sale deed is executed by the Vendors in favour of the Purchaser herein in pursuance of the aforesaid agreement, subject to revision in consideration as stated in preamble of this instrument which consideration is now Rs.5,25,00,000/- and same is paid by the Purchaser to the Vendors as stated in clause no.1 hereinabove written. The Purchaser herein has paid stamp of Rs.________/- to this instrument alongwith proper registration fee. As per Article 25 Schedule-1 of the Bombay Stamp Act 1958."

(Emphasis supplied)

5. The sale consideration settled vide the said agreement dated 02.06.06 was at Rs.1,05,00,000/-. However, suddenly without assigning any plausible reason, the same was considerably increased to five times at Rs.5,25,00,000/-. The sale deed has been executed on 11.09.08 i.e. just two days after the reconstitution of the firm on 09.06.08. It cannot be presumed that such a transaction took place just at moment. The facts itself speak that the consideration was settled and negotiated prior to the reconstitution of the firm. This fact is further proved from para 1 at page 8 of the sale deed in question which for the sake of convenience is reproduced as under:

"CONSIDERATION :-

As agreed between the parties hereto the agreed consideration of the said property is Rs.5,25,00,000/- (Rupees Five Crores Twenty Five Lacs only). The Vendor No.1 to 4 have requested to the Purchaser that, the Purchaser pay the aforesaid consideration by cheques / demand drafts issued in the name of Vendor No.1 and they will get share the consideration mutually and will not raise any dispute as to the payment and share in consideration and if any dispute is raised by any of them the same will be settled between themselves and effect of such dispute will not affect in any manner on this transaction and against that, they undertake to indemnify and keep indemnified to the Purchaser herein.

On relying upon aforesaid assurances and indemnity of Vendor No.1 to 4 as per the their request the Purchaser has paid aforesaid consideration of Rs.5,25,00,000/- (Rupees Five Crores Twenty Five Lacs only) to the Vendor No.1 to 4 by cheques and demand draft as per the request of the Vendor No1 to 4 all issued in the name of Vendor No.1 being Cheque No.60179 dated 30/05/2008 for amount of Rs.50,00,000/-, Cheque No.60180 dated 30/05/2008 for amount of Rs.50,00,000/-, Cheque No.60181 dated 30/05/2008 for amount of Rs.50,00,000/-

ITA No.3521/M/2014 7 M/s. Kapil Ratan Associates

, Cheque No.60182 dated 30/05/2008 for amount of Rs.50,00,000/- and Cheque No.60183 dated 30/05/2008 for amount of Rs.25,00,000/- all drawn on The Janlaxmi Co-operative Bank, Deccan Gymkhana, Pune and further by Banker Cheque No.33086 dated 07/05/2008 for amount of Rs.1,00,00,000/- and Banker Cheque No.33087 dated 07/05/2008 for amount of Rs.2,00,00,000/- both issued by HDFC Bank Limited, F.C. Road Branch, Pune and receipt of Rs.5,25,00,000/-

(Rupees Five Crores Twenty Five Lacs only) the Vendor No.1 to 4 herein doth hereby admit, accept and acknowledge and of and from the same and every part thereof forever acquit, release and discharge to the Purchaser and its nominee, assignee."

(Emphasis supplied)

6. A perusal of the consideration part as reproduced above reveals that the payment of Rs.5,25,00,000/- was agreed to be paid to the sellers Shri Ramnivas Ramratan Gupta and Shri Nikhil Ramnivas Gupta etc. through cheques and demand drafts out of which an amount of Rs.2.25 crores was paid vide five different cheques of Rs.50 lakhs each dated 30.05.08 i.e. the date prior to the reconstitution of the firm. Further, the demand of Rs.3 crores was made through two banker cheques dated 07.05.08 of Rs.1 crore and Rs.2 crore. The said cheques were also drawn prior to the date of reconstitution of the firm.

7. Now coming to the provisions of section 40A, the relevant part of the said provisions for the sake of convenience is reproduced as under:

"Expenses or payments not deductible in certain circumstances.

40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession".

2(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the [Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom ITA No.3521/M/2014 8 M/s. Kapil Ratan Associates

so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction:

Provided ....................

(b) The persons referred to in clause (a) are the following, namely:-

(i) where the assessee is an any relative of the assessee;

individual (ii) where the assessee is a any director of the company, partner of company, firm, association of the firm, or member of the association persons or Hindu undivided or family, or any relative of such family director, partner or member; ............. .........................." (Emphasis supplied)

8. A perusal of the above said provisions reveals that the expenditure in respect of which payment 'has been made' or 'is to be made' to any person referred to in clause (b), if, the same in the opinion of the AO, is excessive or unreasonable having regard to the market value of the goods services etc. for which the payment is made, then such an expenditure is hit by the provisions of section 40A. Now in this case as we have discussed above, the expenditure had been agreed to be incurred for the purchase of land by the assessee firm before the reconstitution of the firm. Even the cheques/banker cheques were drawn prior to the date of reconstitution of the firm. The sale consideration had been increased five times from that agreed at vide agreement dated 02.06.06. All these facts are enough for forming an opinion by the Ld. CIT that certain expenditure has been made which is hit by the provisions of section 40A and hence, the opinion of the Ld. CIT cannot be said to be wrong to the effect that the assessment order was erroneous and prejudicial to the interest of the Revenue since the AO has not considered this aspect of the matter.

9. So far the contention of the Ld. Counsel for the assessee that the AO had applied his mind, in our view, does not have force so far so the facts of the case ITA No.3521/M/2014 9 M/s. Kapil Ratan Associates

in hand are concerned. A perusal of the correspondence relied upon by the Ld. Counsel as referred to page A to L of the paper book reveals that the AO has not applied his mind on this aspect of the matter. A perusal of letter dated 13.10.11 placed on the paper book at Sl. No.G reveals that the AO had sought details of retiring partners Shri Ramnivas Ramratan Gupta and Shri Nikhil Ramnivas Gupta along with return of income, capital account and balance sheet of last three years. However, the said details had not been submitted by the assessee while replying to the said letter vide letter dated 18.10.11, copy of which has been placed at Sl. No. I of the paper book. Moreover, as observed above, we find that the issue relating to the applicability of section 40A has not been examined by the AO. There was sufficient material available on the file which was enough for the Ld. CIT to form the opinion that the AO had not applied his mind on this aspect of the matter. Hence, we do not find any infirmity in the order of the Ld. CIT while invoking provisions of section 263 on the issue of the application of provisions of section 40A(1) and (2). So far as the contention of the assessee regarding the application of provisions of section 40A(3) is concerned, we find that the said issue has also not been examined by the AO. The Ld. CIT has not made any addition but has only set aside the order of the AO on the above said two issues for examination afresh after giving opportunity of hearing to the assessee. Hence, the assessee will be at liberty to present its case before the AO.

11. In view of our above observations, we do not find any merit in the appeal of the assessee and the same is hereby dismissed. However, before parting with the order, it is pertinent to mention here that our observations made above will not have any bearing on the merits of the assessment proceedings before the AO. The AO will have to decide the above issues afresh on merits without being influenced by our observations made above as ITA No.3521/M/2014 10 M/s. Kapil Ratan Associates

the same are restricted to the finding of the validity of invocation of the provisions of section 263 by the Ld. CIT and not on the merits of the disputed additions.

Order pronounced in the open court on 14.01.2015.

Sd/- Sd/- (R.C. Sharma) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 14.01.2015. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.