Late Hoorjahan Begum, Rep. By Sri Syed ... vs Assessee

These appeals by three different assessees are against separate orders of learned CIT(A)-VI, Hyderabad pertaining to assessment year 2006-07. As facts are 2 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

identical and issues are common, all these appeals are clubbed together and disposed in this consolidated order for the sake of convenience.

2. There is a delay of 136 days in appeals preferred by the assessees. Assessees have filed delay condonation petitions explaining cause of delay supported by affidavits. After considering submissions of the parties, we are of the view that there is reasonable cause for filing the appeals belatedly. Hence, we condone the delay and admit the aforesaid appeals for consideration on merit.

3. The only common issue in the aforesaid appeals is with regard to assessment of long term capital gains arising out of property sold during the year under consideration. Since facts are identical in all the appeals, for the sake of convenience, we will deal with facts as involved in ITA No. 1386/Hyd/2014.

4. Briefly, facts are that assessee is an individual deriving income from salary, share income from M/s. Hansa Overseas Enterprises and also income from other sources. For the assessment year under consideration, assessee filed his return of income on 31.10.2006 declaring income of Rs. 3,34,510. Though the return was initially processed u/s. 143(1), subsequently on the basis of information available on record, Assessing Officer had reason to believe that assessee's income assessable for the year under consideration has escaped assessment. Accordingly, he reopened the assessmnt u/s. 147 of the Act by issuing notice u/s. 148 on 8.9.2011. During the assessment proceedings, Assessing Officer from the 3 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

information available on record noticed that assessee during the relevant previous year has sold a property situated at H. No. 8-2-678, Road No. 12, Banjara Hills, Hyderabad by registered Sale Deed No. 2540/05 dated 23.6.2005 for a consideration of Rs. 1,09,50,000. However, assessee has not offered to tax capital gains arising out of such sale transaction. Accordingly, AO called upon assessee to explain reasons for not disclosing capital gain. Assessee in his reply submitted that capital gain was not declared only because sale proceeds of the property has not come to their hands and the same has been paid to State Bank of India who appropriated sale proceeds towards dues of a company and a partnership firm respectively where assessee is one of the directors and a partner. Thus, it was submitted that the sale transaction will not attract any capital gain tax. Assessing Officer after verifying the facts and materials on record noticed that though assessee claimed that the entire sale consideration was appropriated by the bank towards dues outstanding in the name of M/s Hoe Leather Garments Pvt. Ltd. in which assessee is a director. However, on perusal of the bank account maintained by assessee with State Bank of Hyderabad, it was noticed that assessee has deposited sale consideration of Rs. 1,09,50,000 in the following manner:

S. Amount Bank & Branch Dated Account No. No. (Rs.) 1. SBH Shantinagar Br. 27.06.05 82,31,490 01190015160 2. -do- -do- 27,13,000 -do- 3. -do- -do- 5,510 -do- 1,09,50,000

5. From the pattern of deposits in the bank account, the Assessing Officer was of the view that the assessee 4 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

himself received the sale consideration and after receiving it deposited the same in FDs and earned interest which was also offered as income for assessment year under consideration. Therefore, assessee's claim that he did not receive the sale consideration and the bank had appropriated the entire sale consideration against dues of the company is not correct. Assessing Officer confronted this fact to assessee. Assessee stated that he has made short term deposit with SBH out of the sale proceeds and thereafter had made payment to the bank towards dues of the company. Assessee's claim that since sale proceeds were utilised for clearing debts of the company, no capital gain will arise was rejected by Assessing Officer. He was of the view that as per the statutory provisions loan repayment is not one of the modes which can entitle assessee to claim deduction from chargeability of capital gain. After rejecting submissions of assessee, Assessing Officer proceeded to compute long term capital gains at Rs. 1,00,16,340. Being aggrieved of the assessment order so passed, assessee preferred appeal before the learned CIT(A).

6. In course of hearing before the First Appellate Authority, it was submitted by assessee that he along with one Sri Syed Baqar Hasan are directors and shareholders in M/s Hoe Leather Garments Pvt. Ltd. and equal partners in a partnership firm in the name and style of M/s. Hansa Overseas Enterprises. It was submitted that both these concerns availed loan from SBI by hypothecating their residential house bearing H. No. 8-2-678, Road No. 12, Banjara Hills, Hyderabad jointly in the name of assessee, his brother Sri Syed Baqar Hasan and his mother Smt. Hoorjahan Begum. It was submitted, due to recession in 5 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

market from 2002 onwards the loan with the bank became NPA as the company could not even make interest payment and the bank also initiated recovery proceedings by referring matter to Debt Recovery Tribunal, by claiming principal along with interest as on 31.3.2003 at Rs. 3,31,79,343. Similar proceeding was also initiated by bank against the partnership firm M/s. Hansa Overseas Enterprises for recovery of Rs. 4,47,84,511. Thus the total amount due to bank was to the tune of Rs. 7,79,60.854. Proposal for one time settlement was accepted by bank authorities on 28.12.2006 by settling the amount payable at Rs. 3.5 crores i.e., Rs. 2.85 crores for M/s Hoe Leather Garments Pvt. Ltd. and Rs. 75 lakhs for M/s. Hansa Overseas Enterprises which was also accepted by the concerns. It was submitted, in terms with the onetime settlement scheme (OTS) assessee along with his brother and mother made payment through their individual accounts details of which were reflected in books of M/s Hoe Leather Garments Pvt. Ltd. and M/s. Hansa Overseas Enterprises. It was submitted that those two concerns have also offered the amount waived by the bank on OTS as income from other sources. It was also submitted by assessee that in case of M/s Hoe Leather Garments Pvt. Ltd. an addition of Rs. 2,85,00,000 was made by AO by treating the amounts introduced in the names of the two directors through journal entries as unexplained cash credit. Assessee submitted that when cheques are given by assessee's brother and deceased mother from their individual accounts to discharge the debts of the company and partnership firm and when the bank has also confirmed this in the course of investigation made by the Assessing Officer, there cannot be any capital gain. It was 6 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

submitted by the assessee that assessment made in the hands of the company by treating the amounts paid by the director towards one time settlement as unsecured loan and at the same time charging the sale consideration again at the hands of the assessee as capital gain will amount to assessing the same income at two different hands. It was submitted by the assessee that the sale consideration having been utilised for the purpose of discharging the debts of the company that too on a property mortgaged to the bank, the same is allowable u/s. 48(1) of the Act. In this context the assessee relied upon the decision in the case of N. Vajrapanaidu vs. ITO (29 ITR

459) and some other decisions.

7. The learned CIT(A) after considering the submissions of assessee and examining facts and materials on record noted that assessee along with his brother and mother had sold the property jointly owned by them located H. No. 8-2-678, Road No. 12, Banjara Hills, Hyderabad for a consideration of Ra. 1,09,50,000 by Sale Deed dated 23.6.2005. The sale consideration was deposited in bank account held with SBH by the assessee whereas OTS arrived at between the two concerns and bank on 29.12.2005 and 28.12.2005 which indicates that the sale transaction is neither connected nor confined by the fact of mortgage of the said property to bank.

8. He observed that there is no connection between repayment of loan and as to mortgage of the property and holding of sale transaction of property, as it is clear that sale of property has taken place earlier to the OTS. He further found that the entire sale consideration received by the bank was credited to assessee's bank account and 7 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

being used for repayment of loan as per OTS through books of the company, the amount was invested in FDs in the name of the assessee on which interest was also earned. Thus there is no indication that sale consideration was either paid to the bank directly or appropriated by the bank directly so as to make the sale consideration eligible for deduction u/s. 48. The learned CIT(A) observed that unlike the decision relied upon by the assessee in assessee's case sale consideration was not paid directly to the mortgagee bank and more over property was directly sold by the assessee regardless of OTS and the mortgage in force. Hence, assessee's claim that sale consideration received should be allowed as deduction u/s. 48(1) of the Act cannot be accepted. Further, the learned CIT(A) observed, the amount claimed to have been repaid as loan was not the liability of the assessee the liability of the company and firm in which the assessee was a director or partner. Further, the amount used for repayment of loan was credited in the books of the company as loan in the names of directors who were shown as creditors to the company. Thus, the amount paid to bank through the books of those concerns credited in the name of director cannot be treated as expense to the assessee in connection with the transfer of property.

9. Insofar as the contention of the assessee that the amount paid to the bank cannot be treated as unexplained cash credit at the hands of the company and at the same time treated as capital gain at the hands of the assessee, learned CIT(A) observed that assessee's contention is not acceptable because company's failure to explain the source of credit in their books cannot be referred as income as such is assessable at the hands of land owners 8 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

as capital gain. The learned CIT(A) observed that assessee and his brother are independent entities from the concerns which had availed loans. He observed that the properties were also sold independently by their owners irrespective of the fact that there was a mortgage or OTS.

10. The learned CIT(A) held that as the sale consideration has no connection with the repayment of loan consideration received from such transaction is chargeable to tax as capital gain at the hands of assessee and other co-owners. He held that treating the unsecured loans as unexplained cash credits at the hands of those two concerns has absolutely no effect on the chargeability of capital gain at the hands of the individual.

11. The learned CIT(A) relied on the decision of Hon'ble Supreme Court in the case of R.M. Arunachalam vs. CIT (227 ITR 222) and VSNR Jagdish Chandran vs. CIT (227 ITR

240) wherein it was held that discharge of mortgage created after acquisition of property is not deductible from capital gain. Thus, on the above said basis, the learned CIT(A) finally approved the assessment of capital gain at the hands of the assessee and accordingly confirmed the addition made by the Assessing Officer.

12. More or less reiterating the submissions made before the departmental authorities, learned AR submitted before us that the property belonging to the assessee, his brother and their mother, sale consideration of which was subjected to capital gain, was hypothecated to SBI for availing financial limit by M/s Hoe Leather Garments Pvt. Ltd. and M/s. Hansa Overseas Enterprises wherein assessee and his brother respectively are directors and 9 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

partners. It was submitted, as the loan account of both the concerns became NPA and the bank initiated recovery proceedings to meet the situation, assessee and his brother approached the bank to sell the hypothecated property. It was submitted, after negotiations bank accepted the proposal for OTS. Accordingly, the property was sold and the entire sale proceeds of the property were utilised to discharge the debt of the bank as per the OTS. It was submitted, this fact was also confirmed by the bankers. The learned AR submitted that when the total sale consideration was paid to the bank in discharge of the debt, it is an allowable deduction u/s. 48(1) of the Act. In support of such contention, the learned AR relied on the following decisions:

a) N. Vajrapani Naidu vs. ITO, 28 ITD 459

b) Thressiamma Abraham vs. ITO, 38 ITD 53

c) Kanti Swarup Sharma vs. ITO, 41 ITD 246

d) Addl. CIT vs. Glad Investment (P) Ltd., 102 ITD 227

e) Naozar Chenoy vs. CIT, 234 ITR 95

f) CIT vs. Abrar Alvi, 247 ITR 312

13. The learned AR submitted, where two interpretations are possible, the view favourable to the assessee is to be adopted. For such proposition, he relied upon the following decisions:

a) Manish Maheshwari vs. ACIT, 289 ITR 341

b) State of AP vs. CTO & Anr. , 169 ITR 564

14. The learned AR submitted that the accounting treatment in the books of M/s Hoe Leather Garments Pvt. Ltd. and M/s. Hansa Overseas Enterprises would indicate that the repayment of bank loan as per one time settlement were introduced as unsecured loans in the books of the company through a journal entry and as investment in the 10 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

books of the firm. The learned AR submitted that even though in the books of the company and firm amount discharged to credit institution is being shown as receivable to the assessee but when they could not honour their obligation to credit institution, much could not be made of if they become the debtors of the assessee. Therefore, in reality no amount became recoverable either from the company or from the firm. In essence, the assessee lost valuable asset for no consideration or benefit at all. It was submitted, section 73 of Transfer of Property Act, 1882 provides that where the mortgaged property is sold, the mortgagee shall be entitled to claim amount of mortgage money out of sale proceeds and the mortgagee has also prior claim over other creditors.

15. The learned AR submitted that only because the payment made by the assessee towards discharging the debt have been shown as unsecured loan in the books of the company and investment in firm, it cannot be said that the sale consideration received was not towards discharge of the debt of the company and the firm. The learned AR submitted that the entries in the books of account are not decisive factor for determining applicability of provisions of law. In this context he relied on a number of decisions as referred to in the written submissions. Thus, in sum and substance, the learned AR submitted that as the entire sale consideration was used for discharging the debt to the bank, no capital gain accrues to the assessee.

16. The learned DR submitted that the property sold was neither in the name of the company nor in the name of the partnership firm but in the name of the individual. It was 11 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

submitted that there is no direct nexus between the receipt of sale consideration and the payment made to the bank towards discharge of the debt of the company and the firm where the assessee and his brother are directors and partners, respectively. The learned DR submitted that there is also no dispute to the fact that the assessee after receiving the sale consideration had kept the same in FDs and also earned income on them. Therefore, it cannot be said that the sale of property was for the purpose of discharging debts of the company and the firm. He, therefore, submitted that as there is a gain accruing to the assessee on sale of capital asset, the same is chargeable to capital gains tax. He further submitted only the expenditures which are allowable as per the provisions contained u/s. 48(1) can be reduced while computing the capital gain from the sale consideration. As amount paid towards discharge of the debt is not a expenditure conceived u/s. 48 of the Act, the assessee will not be able to claim expenditure of the said amount. In this context, the learned DR relied upon the decision of Hon'ble Supreme Court in the case of R.M. Arunachalam vs. CIT (supra) and VSNR Jagdish Chandran vs. CIT (supra).

17. We have considered the submissions of parties, perused orders of the Revenue authorities as well as other materials on record. We have also carefully examined the decisions relied upon by both the parties. Undisputedly during the relevant previous year, assessee along with his brother and mother have sold a house property at Road No. 12, Banjara Hills for a sale consideration of Rs. 1,09,50,000. There is no dispute to the fact that the property sold is a capital asset as defined u/s. 2(14) of the 12 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

Act. Hence the gain derived from sale of such property would normally be assessable to tax under the head capital gain. However, assessee has claimed exemption from chargeability to capital gain by contending that as the entire sale consideration was paid to the bank towards discharge of the debt of a company and firm wherein they are directors/ partners it has to be allowed as an expenditure while computing capital gain. In this context, let us examine whether it can be said that the sale consideration was utilised towards discharge of debt of the concerned company and firm. As can be seen from the facts and materials on record, the sale consideration received by the assessee was deposited into his personal bank account. It is also a fact that the assessee has made FDs out of the sale consideration and also earned interest which were offered to tax in the return of income filed by the assessee. It is also a fact on record that the sale of property took place much earlier to the sanction of OTS by the bank which advanced loan to M/s Hoe Leather Garments Pvt. Ltd. and M/s. Hansa Overseas Enterprises wherein assessee along with his brother are directors/partners. Therefore, as can be seen the sale consideration received on sale of the property was not directly paid to the concerned bank towards discharge of the debt as per OTS as claimed by the assessee. Moreover, it is not in dispute that the amount claimed to have been paid by the company/firm towards OTS originated from the unsecured loan claimed to have been availed through the personal accounts of the directors/partners. In these circumstances, assessee's claim that the bank has appropriated the sale consideration towards discharge of debt as per the OTS, in 13 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

our view, is not acceptable. There is no direct nexus between the receipt of the sale consideration and payment made to the bank towards discharge of the debt. Moreover, it is a fact on record that the unsecured loan of the amount claimed to have been received from the directors has been disbelieved by the Department while completing assessment in case of M/s Hoe Leather Garments Pvt. Ltd. and additions were made u/s. 68 of the Act which also stand confirmed. Therefore, in a sense the claim of unsecured loans from the directors of the amount utilised towards discharge of debt has also not been accepted by the Department. In these circumstances, assessee's claim that since the entire sale consideration was utilised towards discharge of the debt, the same cannot be chargeable to capital gain, in our view, is not acceptable. Even, assuming for arguments sake that the property in question was mortgaged as a security towards the debt availed by the company and the firm, the same cannot exempt the assessee from chargeability of capital gain on the sale of the asset. The Hon'ble Supreme Court in the cases of R.M. Arunachalam vs. CIT (supra) and VSNR Jagdish Chandran vs. CIT (supra) have clearly held that amount paid out of sale proceeds to clear mortgage debt cannot be treated as cost of acquisition or cost of improvement so as to reduce the same from sale consideration while computing capital gain u/s. 48 of the Act. Though the learned AR has relied upon certain decisions to contend that when there are conflicting views, the view favourable to the assessee is to be adopted. However, in the facts of the present case, the AR has not brought to our notice any decision of the Hon'ble Supreme Court contrary to the view expressed by the Hon'ble 14 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

Supreme Court in the aforesaid decisions. Therefore, when the decision relied upon by the learned AR is not of the Hon'ble Supreme Court and there are decisions of the Hon'ble Supreme Court holding that amount paid towards discharge of mortgage debt cannot be treated as expenditure u/s. 48 of the Act, we are bound to follow the decisions of the Hon'ble Supreme Court. In view of the aforesaid, we do not find any infirmity in the order of ld. CIT(A) in upholding the assessment of capital gain at the hands of the assessee. Accordingly, we uphold the order of the learned CIT(A) by dismissing the grounds raised by the assessee.

18. Facts and issues in the other two appeals are more or less identical to the facts and issues in ITA No. 1386/Hyd/2014. In fact, the case of late Noorjahan Begum stands still in a worse position as she was neither a director nor a partner in the concerns in whose case the subject property was allegedly mortgaged for availing loan. She, absolutely had no obligation to discharge the debt of these two concerns. Moreover, in her case also the sale consideration was received and deposited in her bank account and were converted to FDs and not directly appropriated by bank. Therefore, even assuming the claim of the assessee to the effect that sale consideration was utilized for discharging debt of the two concerns to be correct, such payment can only be treated as application of income already accrued to the assessee. In these circumstances claim of deduction u/s 48 cannot be allowed. Therefore, following our decision in ITA No. 1386/Hyd/2014, we uphold the orders of Learned CIT(A) in these two appeals also.

15 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

19. In the result, respective appeals of the assessees are dismissed.

Order pronounced in open court on 14th January, 2015.

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

Hyderabad, dated 14th January, 2015 Tprao/kv

Copy forwarded to:

1. Sri Syed Afsar Hasan, c/o. M/s. Anjaneyulu & Co., Chartered Accountants, 30, Bhagyalakshmi Nagar, Gandhi Nagar, Hyderabad-500 080.

2. Sri Syed Baqar Hasan, c/o. M/s. Anjaneyulu & Co., Chartered Accountants, 30, Bhagyalakshmi Nagar, Gandhi Nagar, Hyderabad-500 080.

3. Late Smt. Hoorjahan Begum, c/o. M/s. Anjaneyulu & Co., Chartered Accountants, 30, Bhagyalakshmi Nagar, Gandhi Nagar, Hyderabad-500 080.

4. The Income Tax Officer, Ward-9(2), Hyderabad.

5. The CIT(A)-VI, Hyderabad.

6. The CIT-VI, Hyderabad.

7. The DR - 'B' Bench, ITAT, Hyderabad 16 ITA No. 1386/Hyd/2014 & Ors. Sri Syed Afsar Hasan &Ors.

=======================

Sr. Particulars Date No. 1. Date of Dictation 18.12.2014

2. Date on which the typed draft is placed before the Dictating Member 22.12.2014

3. Date on which the approved draft comes to the Sr. P.S.

4. Date on which the fair order is placed before the dictating Member

5. Date on which the fair order goes to the Sr. P.S.

6. Date on which the file goes to the Bench Clerk

7. Date on which the file goes to the Head Clerk

8. Date on which the file goes to the Asst. Registrar

9. Date of the despatch of the Tribunal order