Kolli Gopi Krishna, Hyd, Hyderabad vs Department Of Income Tax

These two are cross-appeals by Revenue and assessee against the order of the Commissioner of Income Tax (Appeals)-X, Hyderabad dated 29-01-2015, on the issue whether the gain returned by assessee is to be I.T.A. Nos. 307 & 389/Hyd/2015 :- 2 -: Mr. Kolli Gopi Krishna

assessed under the head 'Capital Gains' or under the head 'Business' as an adventure in the nature of trade.

2. Briefly stated, assessee is a non-resident individual. He filed return of income for the impugned assessment year declaring income of Rs. 4,61,77,622/- after claiming deduction u/s. 54F of the Income Tax Act [Act]. The income mainly consists of Long Term Capital Gains on sale of land and Short Term Capital Gains on sale of building. The Assessing Officer (AO) on consideration of the transaction involved was of the opinion that assessee indulged in adventure in nature of trade in constructing a commercial complex and selling the same. Accordingly, he determined the head of income as 'Income from Business/Profession' as against income from capital gains offered by assessee. In doing so, the AO also disallowed construction expenses claimed by assessee to an extent of Rs. 3,32,21,752/- which included an amount of Rs. 45.50 Lakhs paid to M/s. M. Gopal Stone Cutting & Earth Contractors. The main reason for disallowing the expenditure was that AO held that there were cash payments which violated the provisions of Section 40A(3). He also gave an alternate observation that in case the amounts are to be assessed under the head 'Capital Gains' 50% of the expenditure claimed should be disallowed as non-genuine. AO also noticed that there was an amount of Rs. 12.50 Lakhs deposited in the bank account which assessee explained that the source was from the earlier withdrawals of similar amounts. AO disbelieved the same. As against the claim of assessee u/s. 54F amounting to Rs. 6,69,37,700/-, AO noticed that assessee has modified the building to commercial and accordingly, the claim of 54F cannot be allowed. With these disallowances/additions, the total income was determined at Rs. 12,07,24,837/-.

I.T.A. Nos. 307 & 389/Hyd/2015 :- 3 -: Mr. Kolli Gopi Krishna

3. Before the CIT(A), it was contended that AO was not correct in treating the transaction as adventure in nature of trade as assessee is a non-resident and has intended to develop property as a residential house but when building was constructed, loans could not be obtained/NOC could not be obtained in view of the Metro Project which was passing through part of land. Therefore, since he could not finance the full construction, the property was sold along with a structure thereon to M/s. Transtroy India Ltd., and at the instance of the buyer, assessee had to execute 25 sale deeds with value of land and building separately treated. Accordingly, the land cost was offered as Long Term Capital Gain and building sale was offered as Short Term Capital Gain. As against the Canadian Tax Case M.N.R. Vs. Tailor relied on by the AO, assessee relied on the following cases:

a. G. Venkataswamy & Co Vs. CIT [35 ITR 594 (SC)]; b. CIT Vs. Kasturi Estates (P) Ltd., [62 ITR 578 (Madras)]; c. CIT Vs. MIM Mahalingam Chettiar [107 ITR 236 (Madras)]; d. CIT Vs. Delhi Apartments (P) Ltd., [352 ITR 322 (Delhi)];

e. CIT Vs. Suresh Chand Goyal [163 Tamnan 54 (MP) 298 ITR 277 (MP);

f. ITO Ward-21(2) Vs. Sitaram Chamaria [6 SOT 594 (Mum)]; g. B. Venu Madhav Vs. ACIT, Circle-II(1), Hyderabad [41 Taxman 435 (2013)];

h. Barendra Prasad Ray Vs. CIT [6 Taxman 19 (SC)];

i. Bharatiya Janata Party Vs. Dy.CIT [80 ITD 89 (Delhi)] and j. CIT Vs. Thiagarajan [129 ITR 115 (Madras)].

4. After considering the submissions and also accepting the plan dt. 19-11-2005 issued by the Municipal Corporation of Hyderabad, Ld.CIT(A) was of the opinion that assessee's transaction is not in the I.T.A. Nos. 307 & 389/Hyd/2015 :- 4 -: Mr. Kolli Gopi Krishna

nature of adventure in the nature of trade and accordingly, he directed the AO to treat the sale consideration under head 'Capital Gains' and not as 'Business Income'. With reference to expenditure also, he noticed that expenditure was genuinely claimed and directed the AO to allow the same as provisions of Section 40A(3) are not applicable when income was computed under the head 'Capital Gains'. with reference to the cash deposit of Rs. 12.50 Lakhs, CIT(A) accepted assessee's explanation that withdrawal in the month of April was source for amounts re- deposited in June by assessee. However, with reference to claim u/s. 54F, Ld.CIT(A) upheld AO's observation and had not granted exemption u/s. 54F. Hence, both assessee and Revenue are in appeal.

5. As far as assessee's claim u/s. 54F is concerned, there is only one issue raised by assessee in the appeal No. 307/Hyd/2015. The facts leading to the above was that assessee has purchased a residential property at Plot No. 472, Road No. 36, Jubilee Hills amounting to Rs. 9,69,37,700/- on 01-12-2010 ie. within the stipulated time and since a residential property was purchased, claimed deduction u/s. 54F. The Ld.AO and CIT(A) noted that assessee has demolished the existing structure, constructed a commercial property and later on let out. Therefore, provisions of Section 54F do not apply.

6. After considering the rival contentions and perusing the facts on record, we are of the opinion that assessee is not eligible for deduction u/s. 54F as nature of property has turned out to be commercial property and accordingly, provisions of Section 54F do not apply. In view of this, assessee's grounds on this issue are rejected.

7. In the result, assessee's appeal is dismissed.

I.T.A. Nos. 307 & 389/Hyd/2015 :- 5 -: Mr. Kolli Gopi Krishna

8. Coming to the Revenue's appeal in ITA No. 389/Hyd/2015, apart from contesting the action of CIT(A) in treating the transaction of sale of commercial building as of capital gains, Revenue also filed a ground on violation of Rule 46A(3), as CIT(A) admitted additional evidence by way of building permission letter dt. 19-11-2005. Revenue also is in appeal with reference to the addition of Rs. 45.50 Lakhs made u/s. 40A(3) and disallowance of expenditure claimed on the building u/s. 40A(3) and also deletion of addition of Rs. 12.50 Lakhs made towards un-explained cash deposits in bank account.

9. Ld. DR vehemently supported the orders of the AO, whereas Ld. AR supported the order of the CIT(A). One Paper Book containing documents from 1 to 152 were filed in support of the contentions along with case law Paper Book.

10. We have heard detailed submissions and considered rival contentions. The facts indicate that assessee has acquired Plot No. 60 in Road No.5, Banjara Hills to the extent of 1170 Sq. Yds., on 5th July, 2005. His brother Shri K. Arun Krishna bought adjacent plot No.61A to an extent of 465 Sq. Yds on 21st July, 2006. His brother-in-law Shri Nageshwar Rao bought another portion of 61A to the extent of 465 Sq. Yds., on 21st July, 2006. The brother of assessee gifted the property to assessee on 29-11-2006 i.e., just after three months of purchase of property and brother-in-law gifted the property in favour of assessee on 08-08-2008. Assessee has constructed a building, the nature of which is not clear from record. AO gives a finding that what assessee constructed was a commercial building. Assessee furnished a Municipal Corporation permission dt. 19-11-2005 indicating that it has started residential building and therefore, there is no commercial activity I.T.A. Nos. 307 & 389/Hyd/2015 :- 6 -: Mr. Kolli Gopi Krishna

involved in it. This permission of plan was not filed before the AO and admittedly, filed before the CIT(A) only. CIT(A) did not refer it AO under rule 46A and therefore there is violation of said rule. CIT(A) came to the opinion that assessee intended to construct residential building and subsequent problems encountered on building the structure like Metro Corridor coming in the way of plot and non availability of Bank loans has forced assessee to sell the building. Therefore, it is not in the nature of adventure in nature of trade, but only of exploiting the existing asset which should be considered under the head 'Capital Gains' only. Various case law was relied upon by assessee and CIT(A), to come to conclusion that the transactions could not be considered as business but only exploiting the existing asset. We notice that the building permission filed before the CIT(A) is not the building permission required to establish that assessee intended to construct a residential building. As seen from the building permission, the permission was in the name of Shri D. Ram Mohan Rao, who incidentally was the owner of the plot which was purchased by assessee in the year 2005. As can be seen from the permission also the building permission was granted on 19-11-2005 i.e., much before the purchase of adjacent property by assessee's brother and brother-in-law in 2006. Subsequently, only by August, 2008, entire property became property of assessee. Therefore, the building permission granted to the erstwhile owner of the plot No. 60 cannot be considered to be the intention of assessee, in constructing a residential building on the entire property in 2008. There must be some other plans sanctioned by the Municipal authorities for the construction on the above property on Plot No. 60 & 61A. Therefore, we are of the opinion that Ld.CIT(A) wrongly classified the building as that of a residential building as against the observation of the AO, that assessee has constructed a commercial building. Since the later approvals were not placed on record and copies of the 25 sale deeds are also not before I.T.A. Nos. 307 & 389/Hyd/2015 :- 7 -: Mr. Kolli Gopi Krishna

us, we are not in a position to give any finding that assessee has intended to construct either a residential property or a commercial property. Since the basic information was not available on record, it is very difficult for this forum to approve either the action of AO who relied on Canadian Case Law as against various principle laid down by the Hon'ble Supreme Court in the case of G. Venkataswamy & Co Vs. CIT (supra). Moreover, there seems to be no examination of plans, investments, correspondence by the AO in coming to a conclusion that it is in the 'nature of business'. At the same time, CIT(A) also wrongly relied on permission from MCH granted to the erstwhile owner, without examining the nature of the building constructed by assessee nor the attendant factors in constructing and selling the property. Therefore, we are of the opinion that the matter can be remitted back to AO to examine the necessary permissions and actions of assessee and examine whether the transaction would come as an adventure in the nature of trade or to be assessed under 'Capital Gains'. AO is directed to examine all the factors and law as relied by assessee, after duly giving an opportunity of hearing to assessee in this regard. Ground Nos. 3 to 8 raised by Revenue were accordingly allowed for statistical purposes.

11. Coming to Ground Nos. 9, 10 & 11 on the cost of construction, we agree with the Ld.CIT(A) that the expenditure which was otherwise held genuine, cannot be disallowed under the provisions of Section 40A(3). As seen from the orders, an amount of Rs. 45.50 Lakhs was disallowed on the reason that assessee has not furnished the details of payments whereas it is on record that assessee has furnished necessary bills and vouchers. Moreover, with reference to Rs. 2,86,71,752/- disallowed u/s. 40A(3), AO gives finding that entire payment was in cash. As seen from the Ledger A/c filed only part of the expenditure was in cash i.e., particularly for labour and purchase of sand etc. AO treated the I.T.A. Nos. 307 & 389/Hyd/2015 :- 8 -: Mr. Kolli Gopi Krishna

payment made to purchase of lift also as that of cash, whereas the bill itself indicate that assessee has paid by various cheques. Since only provisions of 40A(3) are invoked, there is no question of treating the expenditure as 'non-genuine' as no amount was disallowed u/s. 37(1). Provisions of Section 40A(3) can only be invoked on the expenditure which was paid in cash, otherwise not disallowable u/s. 37(1). Since AO has not disallowed anything u/s. 37(1) we are of the opinion that CIT(A) is correct in treating the amount as 'genuine expenditure'. Accordingly, these grounds of Revenue are rejected.

12. Coming to the issue of addition of Rs. 12.50 Lakhs towards unexplained cash deposit, herein also the facts indicate that assessee has withdrawn an amount of Rs. 8.5 Lakhs, 3 Lakhs and 1 Lakh from 05-04-2010 to 24-04-2010 and amounts were deposited in two installments i.e., Rs. 8.5 Lakhs on 10-06-2010 and Rs. 4 Lakhs on 11- 06-2010. As seen from the bank account, there are no other transactions of withdrawal of cash, therefore, assessee's explanation that the deposit of cash was from out of the withdrawals of the cash earlier can be accepted as a genuine explanation. In the absence of any contrary evidence that assessee has utilized these amounts which were earlier withdrawn. Assessee's contentions are to be accepted. In view of this, Revenue's ground No. 12 is rejected. CIT(A)'s order on this issue is confirmed.

13. In the result, Revenue's appeal is partly allowed for statistical purposes.

I.T.A. Nos. 307 & 389/Hyd/2015 :- 9 -: Mr. Kolli Gopi Krishna

14. In the result, assessee's appeal in ITA No. 307/Hyd/2015 is dismissed and Revenue's appeal in ITA No. 389/Hyd/2015 is partly allowed for statistical purposes.

Order pronounced in the open Court on 26th June, 2015.

Sd/- Sd/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 26th June, 2015

TNMM

Copy to :

1. Mr. Kolli Gopi Krishna, D.No. 8-2-293/82/A/43C, Sai Surya, Plot No. 43 C, Road No. 71, Jubilee Hills, Hyderabad. C/o. Shri A. Srihari Rao, Chartered Accountant, SSV & Company, D.No. 8-3-320/1/3/4, G-2, Sai Pariwar Apartments, Sai Saradhi Nagar, Yellareddyguda, Ameerpet, Hyderabad.

2. Deputy Director of Income Tax-I, International Taxation, Hyderabad. / Deputy Commissioner of Income Tax-I, International Taxation, Hyderabad.

3. CIT(Appeals)-X, Hyderabad.

4. CIT-(IT & TP), Hyderabad.

5. D.R. ITAT, Hyderabad.

6. Guard File.